austin3515

LLC Makes a retroactive S Corp election in March of 2003, retroactive to January 1 of 2003. The IRS allows you until March 15, 2003 to make such an election. The question is what do you do with member contributions contributed before the member was treated as a W-2 employee? Because the S-Election is retroactive to 1/1/03, there is no self employment income. Similarly, there is no W-2 compensation because the member simply did not know during the first two months that they would in fact be a regular W-2 employee. The literal interpretation would be, no earned income, no compensation, no contributions. The contributions made before the employee became an employee should be refunded. But this outcome is ridiculous in so many ways. Would it be reasonable to make some assumptions and estimates about compensation prior to the election? Any help on this cunnundrum (sp?) would be greatly appreciated.

As of January 1, 2003, taxpayer “Smith” is a member of an LLC – “Smith, Jones & Co.” The LLC is classified for federal income tax purposes as a partnership, and Mr. Smith as a partner. Mr. Smith’s “earnings” (made up of “draw” or “guaranteed payments” and his share of LLC profits) constitutes self-employment income. On February 28, 2003, Smith, Jones & Co. files Form 8832 (Entity Classification Election), electing to be treated as an association taxable as a corporation, and on March 1, 2003, Smith, Jones & Co. files Form 2553 ( Election by a Small Business Corporation). Both of these elections are to be effective retroactively to January 1, 2003. For calendar year 2003, Mr. Smith expects to make $120,000 ($10,000 per month), and wants to contribute $12,000 ($1,000 per month) to their 401-K plan. During January and February, Mr. Smith took a total “draw” of $24,000, and wrote his personal checks to the 401-K plan totaling $2,000. Beginning March 1, 2003, Mr. Smith receives a salary of $10,000 per month, and has $1,000 per month withheld and paid into the 401-K plan. At December 31, 2003, Mr. Smith’s total wages are $100,000, and the total 401-K contribution on his W-2 Form is $10,000. Mr. Smith also receives a Schedule K-1 (Form 1120S) for 2003, showing the $20,000 of “draw” for January and February, as well as any additional profits for the year. None of these K-1 profits are self-employment income, since Smith, Jones & Co. is retroactively treated as an S corporation for the entire year. How can Mr. Smith qualify the $2,000 paid into the 401-K plan during January and February for deductible 401-K contribution treatment? Is there any support for “grossing-up” his Form W-2 to include either the $20,000 paid to him during January and February, or the $2,000 paid into the 401-K period out of this January/February income? Does Mr. Smith need to withdraw this $2,000 (plus earnings), and recontribute it out of March – December wages, in order to perfect the 2003 contribution deduction/deferral?

Actually, I think your answer was exactly what I was looking for, which is that the timing of the amendment depends on the amendment desired. I was looking for a chapter entitled Plan Amendments which I was hoping would say when I can and can't do certain amendment (some very simple guidelines). Your point is well taken that it depends on the amendment... nothing is ever straightforward in this world... I am glad to know that there is more latitude regarding amendments after the Plan Year has ended... Thanks,

Now I know I'm confused... I just realized that if a plan fails coverage they would be required to amend the plan retroactively in order to pass coverage. Does someone have somthing they can point me to that is a good resource on when certain plan amendments are required? I have the ERISA outline book (2003) byut I couldn't specifically find anything that clarified things for me. Wasn't there anything that had to be adopted by year end? I think it was EGTRRA amendments, right? IF you wanted to add catch-up contributions or whatever else, you had to amend before the end of the year (i.e., goodfaith amendments). I know this was extended until the end of the GUST remedial amendment period... What amendments must be done before the plan year ends (i.e, adding a new 401(k)? What can be done after the year ends (i.e., amendment to correct coverage violations or 401(a)(4) violations). Can I amend the plan in March of 2004, effective 1/1/03 to accellerate the vesting schedule? Hopefully this demonstrates the source of my confusion adequately! Thanks,

I thought the "remedial amendment period" ended on the last day of the plan year. I don't have time to fish out a reference (i think its 401(b)), but I'm definitely interested to know if amendments can be processed after year end. Can I amend a plan year ended two years ago? Where's the cut-off?

I was thinking along the lines of an amendment has to be adopted by the last day of the plan year?? Is there a loophole that will let you adopt an amendment today for a 12/31/03 plan year?

That's correct. That would only work if the match provision never existed and the match was all of a sudden added. I'm not sure who designed the plan but we've just discussed is why you should never ERVER use PY testing with a discretionary match. However, as Blinky the Three Eyed Fish brilliantly points out you can always switch to current year testing whenever you like (there's restrictions and complications on changing from CY to PY.), provided the amendments are made in a timely manner (a plan amendment is required to switch testing methods). So if you're testing a 12/31/03 plan, it may be too late (in fact it probably is), and you're back to the orignal problem. Also, you do not need to use the same method (i.e., CY/PY) for match and deferrals. So you can switch the match to CY, and leave the deferrals on PY testing.

In a multiple employer plan, must one employer provide a contribution to an employee transferred to another employer during the year if the Plan has a last day rule? Similarly, if a plan has an annual 1,000 hour of service requirement, must each employer consider hours of service with all employers. The only guidance I have found relates to service within 410(a), which relates exclusively to initial eligibility. That indicates that employers are treated as one employer with respect to 410(a). No such information on allocation conditions though. Specific sites would be terrific. I know that the Plan document should be specific, however, I'm wondering if there is a specific rule on this matter. Thanks for your help!

I have a client that is a temporary staffing service and has a profit sharing plan with a decent amount of money. That plan covers all employees including the temps (if they meet the eligibility requirements). Effective 1/1/04 they are adding a 401(k) Plan which will exclude all of the temps and any HCE’s. They needed to do a separate plan because they didn’t want the temps to know about the 401(k) Plan. For a multitude of reasons (primarily communication) they really couldn’t roll it out for them. All of the 401(k) money will be employer directed. They want to invest all of the money in the existing brokerage account (i.e. for the profit sharing plan) to obtain “economies of scale” on the investment side. Page 36 of the Schedule H instructions reads as follows: “If the assets of two or more plans are maintained in a fund or account that is not a DFE, a registered investment company, or the general account of an insurance company under an unallocated contract, complete parts of I and II of Schedule H by entering the Plan’s allocable part of each line item.” An ERISA attorney pointed that out to me, and said that doing what we want is okay. My question is this: The profit sharing plan has an audit requirement while the 401(k) plan does not. The 401(k) Plan will be a very small portion of the assets. Are there any insurmountable complications with respect to the audit? My assumption is that limited procedures would need to be performed on the 401(k) Plan, since the commingling necessarily has implications for both plans. Anyone seen this before? Anyone have any thoughts? The TPA will be tracking everything as if it was one plan anyway, so all of the information will be segregated at least in total, and then the investments and investment income can be allocated out pro-rata based on ending balances. All other amounts will obviously relate specifically to one of the Plans. Any help on this would be greatly appreciated!

WDIK - With respect to your first provisions, the "last day" simply refers to WHEN the year of service will be creditted. It does not specify that employment is required on that date in order for a YOS to be creditted.

With a name like qualified plan, how can you dispute? I mean it's not even his middle name, it's his full name!

Rather, these determinations generally must be made solely with reference to the number of hours (or other units of service) which are credited to the employee during the applicable computation period. This right after the first bolded excerpt. What exactly is the DOL saying here then? When I see words like "MUST" and "SOLELY..." I don't know... Also, I've looked at a few documents and NONE require employment at the end of the 12 month period. They only say the computation period commences on the first day of employment.

http://www.dol.gov/dol/allcfr/Title_29/Par...2530.200b-1.htm (b) Rules generally applicable to computation periods. In general, employment at the beginning or the end of an applicable computation period or on any particular date during the computation period is not determinative of whether the employee is credited with a year of service or a partial year of participation, or incurs a break in service, for the computation period. Rather, these determinations generally must be made solely with reference to the number of hours (or other units of service) which are credited to the employee during the applicable computation period. For example, an employee who is credited with 1000 hours of service during any portion of a vesting computation period must be credited with a year of service for that computation period regardless of whether the employee is employed by the employer on the first or the last day of the computation period. It should be noted, however, that in certain circumstances, a plan may provide that certain consequences follow from an employee's failure to be employed on a particular date. For example, under section 202(a)(4) of the Act and section 410(a)(4) of the Code, a plan may provide that an individual otherwise entitled to commence participation in the plan on a specified date does not commence participation on that date if he or she was separated from the service before that date. Similary, under section 204(b)(1) of the Act and section 411(b)(1) of the Code, a plan which is not a defined benefit plan is not subject to section 204 (b)(1) and (b)(3) of the Act and section 411 (b)(1) and (b)(3) of the Code. Such a plan, therefore, may provide that an individual who has been a participant in the plan, but who has separated from service before the date on which the employer's contributions to the plan or forfeitures are allocated among participant's accounts or before the last day of the vesting computation period, does not share in the allocation of such contributions or forfeitures even though the individual is credited with 1000 or more hours of service for the applicable vesting computation period. Under certain circumstances, however, such a plan provision may result in discrimination prohibited under section 401(a)(4) of the Code. See Revenue Ruling 76-250, I.R.B. 1976-27. With respect to the latter bolded item, this is why I contend that retroactive effective date demands the participant became a participant on 1/1/03 (ie., this section does not apply because he was employed on the day he was able to enter the Plan).

'If you have the ERISA Outline Book, see Chapter 2, Section 3, Part III., 3c. (2002 edition). Probably didn't move in the 2003 edition. Sal says "In fact, the employee does not even have to be employed on the last day of the computation period to receive credit for the year of service."

Not a 401(k). I'm basing the question on what I read in the ERISA Outline Book (and in the DOL Regs as follow up). Both indicate that you do not need to be employed at the end of the computation period. In fact, both indicate that you cannot consider whther or not they were employed at the end of the computation period. Ordinarily this is not an issue because the entry date is typically AFTER meeting the eligiblity requirements. If the employee is not employed on the entry date, the Plan can provide that the employee never becomes a participant. But alas, in this case, there are retroactive entry dates. Therefore, the employee is creditted with a year of service on November 14, 2003. Plan Entry is retroactive to January 1, 2003, and he WAS employed on that date! Please rebut as I always thought you both are saying was the case. Thanks!

Calendar year Plan requires one year of service with 1,000 hours of service for eligibility, and 1,000 hours each plan year for an allocation. There is no last day requirement. Entry Date is retroactive to first day of plan year in which eligibility requirements are satisfied. Hire Date = November 15, 2002. Termination Date = September 30, 2003 Employee works more than 1,000 hours total for the employer (and so during the 12 consecutive month period beginning on his hire date). Am I threfore correct in saying that the employee became a participant on January 1, 2003? Also, the employee worked more than 1,000 of his total hours during calendar 2003, and so he should therefore get an allocation? Am I mistaken anywhere?

Effective date of the Plan is 1/1/00. Employer executed an "ad hoc" amendment to provide a one time contribution to all participants employed on 12/31/99, provided they have met the Plan's eligibility requirements as 12/31/99. The contribution is based on compensation as of 12/31/99. Can a plan have such a contribution before the effective date of a plan? It seems to me that this is an effort to circumvent the requirement that a plan must be executed before the end of the year. Has anyone seen this before? Are there any PLR's either for or against this, or regulations? I did find this: §1.401(b)-1. Certain retroactive changes in plan See the last sentence. (a) ... Section 401(b) does not permit a plan to be made retroactively effective, for qualification purposes, for a taxable year prior to the taxable year of the employer in which the plan was adopted by such employer.

That;s exactly where I saw it too!! That's why I love thse boards!

Can anyone tell me if the DOL was quoted anywhere as saying that the fact that certain TPA's or investment companies refuse to accept (or charge additional fees for) more than 1 deposit per month should not factor into the analysis of when participant contributions can be segregated. I think they also said that the fiduciary should reevaluate a relationship with a company that precludes the ficuciary from fulfilling his or her responsibilities. Any help would be great.

Three separate controlled groups in one Plan. The entities are related only through a common ancestry--i.e., a portion of a company was acquired, and two other divisions were spun off and are ownd by two totally unrelated parties. Does each of the 3 separate employers need a fidelity bond covering the Plan?

How long should records be retained related to the 401(k) Plan? I'm not asking about the reporting stuff, which I know is 6 years, but the information used to calculate contribuions: 1) Payroll records 2) Employee Election Forms 3) Quarterly valuation reports 4) You get the idea. Thanks,

You can always terminate the Plan, just not retroactively. (I suppose unless there are no withholdings from 10/1 until the day the resolution/ammendment is effective.) But the match from the first nine months is already accrued so you can't eliminate that. Don't forget all employer contriubitons are 100% vested if terminated.

If a client agrees to pay employees the cost that would have been incurred under a health insurance plan, had the employee elected to be covered by the employer, can that compensation be excluded from compensation for purposes of benefit accruals? I know the definition of compensation can be anything, as long as not discriminatory, but is this something that has been seen by other people? I don't see any direct references in the plan document to such a provision. Thanks

Shoudl a sponsor obtain a board resolution for its profit sharing contribution? Are there any requirements out there regarding how to prove the intended contriubion, other than looking at the actual deposit.

That makes a lot of sense. Thanks!