jquazza

-First, both practices are acceptable as the IRS addresses both in section 72(m)(3) and Treas. Reg. 1.72-16. -Second, unless the PS-58 costs were not properly reported, the death benefits tax exemption of IRC 101(a) apply in either case. So, the only thing you have to consider, IMHO, are administrative issues. -When the Trust is not the beneficiary: -Insurance Company does the tax reporting to the beneficiary. Usually, death benefits are not taxable to the beneficiary under IRC 101(a), however, for those policies that have accumulated reserves/cash values (such as variable life,) the insurance company may not have all the information needed to calculate the proper taxable amount. Most insurance companies will treat the PS58 costs (see PS58 discussion below) as basis in the contract but will not pay attention to other basis (such as premiums paid with after-tax contributions) since they have no way of knowing what source funded the contract resulting in improper tax reporting (usually causing the beneficiary to overpay his/her taxes.) It is only your issue indirectly, since it doesn’t affect your reporting, but affects the beneficiary taxes. -Payments may not conform to plan provisions (e.g. QPSA benefit payments won’t be made in the form of an annuity; vesting provisions are bypassed, if contract was purchased with employer contributions from a source not 100% vested, the non-vested portion of the death benefits and cash value belongs in the plan’s forfeiture account.) -You have to look at who controls the beneficiary designation. If the participant has that control, the beneficiary designation may not be in accordance with the plan document. Also, beneficiary changes can cause problems. A participant may change his/her beneficiary in the plan and forgets to change the beneficiary on the contract, or the participant remarries and doesn’t put his/her new spouse as the beneficiary on the insurance contract, the ex-spouse is the named beneficiary of the policy, the new wife is the beneficiary of the plan etc… these cases usually end up being interpleaded by a court at huge cost. -When the Trust is not the beneficiary: -Participants’ beneficiaries keep portability of qualified funds (not sure about this one.) -Trustee has to calculate the basis for proper reporting on 1099-R (also has to determine which portion of the insurance payment related to death benefit and is exempt from taxation.) It might be a very strenuous task, especially for take-over plans. -Trustee needs to complete all the claim forms which can be delayed and expose the trustee to liability for potential loss of earnings.

Nowhere, it depends on wheter you're using accrual or cash basis, but it seems irrelevant in your case as the lost earnings are not contributions.

Two things that confuse pension laymen: -Taxes: Usually, when you withdraw money from a 401(k) or other qualified plan, you have to pay taxes on the amount you withdraw (as ordinary income, so the taxes depend on your tax bracket.0 If you are under 59 1/2 at the time of the distribution, you are subject to an additional 10% excise tax. -Withholding: This is the portion of your distribution that get sent to the IRS, it may not necessarilly reflect your tax liability (could be more, could be less.) If you do not take the distribution in a direct rollover, you will be subject to a mandatory 20% withholding. As far as ways around the taxes is concerned, there's really no way around it. There are few rules to get out of the 10% penalty, see IRC 72(t). Note not all exception will work from a QP plan. You may have to do a direct rollover to an IRA and take the distribtuion from the IRA.

You assumptions are correct. Systems don't do everything right all the time.

How about: -Direct owners -Owners by attribution -others Also, you have to be careful when an employee meets the condition to get a contribution and end up with nothing, especially if you take it to the avg. ben. test. Blinky can tell you all about it.

Tom, You end up with folks in the same group with different rates. Very seldom do you see plans that are drafted to imput disparity within each group allocation. In most cases, the contribution is allocated comp/total comp within each group, so that if you're going to respect the allocation formula, the 100k & 200k have to receive the same % of comp. If you're testing on a contribution basis, you can take it as far as the HCE in the favored group with the lowest comp will take you (as he will have the highest % of comp.) To answer the original question, I think you can set your rate and test the plan on contribution basis, inputting disparity if you wish, but you cannot input disparity in your allocation calculation unless the dosument specifically says so. So to get the maximum disparity between the groups, you have to set your rate for the least favored group based on the rate the HCE with the lowest comp in the favored group received. If you have an HCE in that favored group who is making less than the TWB, then inputting disparity won't help you one bit in your test. You'll still have to show enough NHCEs benefitting at his rate.

Correct and that's my point. Unless the plan document specifically says your allocation will be done inputting permitted disparity within each group, you have to follow the terms of your plan document and cannot input disparity for allocation calculation, just for testing.

Suppose you have two employees in owners group, one making 200k, the other making 100k. Say the rate for the group is 15%. We're testing on a contribution basis. -EE1- gets $30k. $6,390 of which can be attributable to permitted disparity. So his 15% contribution rate could be comparable to a 11.8% contribution for someone under the TWB. -EE2- gets $15k. Only $689.70 attributable to permitted disparity. You would need a 14.31% to benefit at the same level under the TWB.

I think you have to be careful here. Most of the time, the participants in the same group will receive the same rate of contribution. If their compensation are different, you may end up with different rates when you input disparity.

How do you not violate 415 when you have no comp?

I think you got your self in a catch-22 situation. If the plans only has deferrals and SH match (even enhanced match,) the plan is deemed to be non top heavy, so there are no top heavy minimum contributions to allocate. Now, if the plan provides an additional nonelective contribution, you have to allocate it according to the plan document (key and non-key too, depending on the provisions of the plan) and now, since there are contributions other than the deferrals and SH match, you have to provide TH minimum.

Kirk, I think the issue is not whether you have one or multiple employer, the issue with MTIA is whether you have more than one plan assets in one account (could be for one employer only.) Anyway, filing for a MTIA is not much more complicated than filing one for a regular plan. Just file one 5500 for the MTIA and one for each Participating plans, then add all the participating plans on the schedule D for the MTIA 5500 and a schedule D for each plan 5500 showing assets held in a MTIA. If you're doing a schedule H, the underlying assets are reflected on the schedule H for the MTIA, for all the other plans, the only asset should be the MTIA (maybe part. loans as well.)

it's treas. reg. 1.401(k)-1(a)(6)(i)

NIPA just launched a series of on-line seminars (one of them is on cross-testing) you can take at your own pace in your home or office at an affordable rate.

The deferral 100% limit of pay is one limit you cannot exceed even with catch up. If you are over 50 and make 13k, you could get an allocation of 16k, but at least 3k must come from contributions other than deferrals (and at least 3k must come from deferrals.)

Jeez Blinky, you must have a really big calculator to make these types of computations.... I thought mine was big because it had 12 digits.

Tom, I don't think you have discretion here, if the plan doc says "coinciding with", then you should check the inclusive box.

What Makes 100%? What does it mean to give MORE than 100%? Ever wonder about those people who say they are giving more than 100%? We have all been to those meetings where someone wants you to give over 100%. How about achieving 103%? What makes up 100% in life? Here's a little mathematical formula that might help you answer these questions: If: A B C D E F G H I J K L M N O P Q R S T U V W X Y Z is represented as: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26. Then: H-A-R-D-W-O-R-K 8+1+18+4+23+15+18+11 = 98% And K-N-O-W-L-E-D-G-E 11+14+15+23+12+5+4+7+5 = 96% But, A-T-T-I-T-U-D-E 1+20+20+9+20+21+4+5 = 100% And, B-U-L-L-$-H-I-T 2+21+12+12+19+8! +9+20 = 103% AND, look how far a** kissing will take you. A-$-$-K-I-S-S-I-N-G 1+19+19+11+9+19+19+9+14+7 = 118% So, one can conclude with mathematical certainty that while HARD WORK and KNOWLEDGE will get you close, and ATTITUDE will get you there, it's the B*S* and A** KISSING that will put you over the top.

If think if the sponsor can't make the contribution required under the plan, the only recommendation you should provide him is to apply for a funding waiver. Now, he did contribute 25% for himself (or maybe I missunderstood,) so it would not seem fair in the eyes of the IRS or anyone else that he gets to keep his contribution and not give anything to the employees. Reallocate his share of the contribution to the staff, you get a much better chance of obtaining a waiver if the only one affected by the reduction is the owner of the business. As far as the rest of the comments on fraud and hiding stuff from regulators, that's really a question of ethics. As a service provider, your duty upon finding an error, such as this one, is to notify the client of the error and the proper course of action to correct it. If the client doesn't follow your advice, that's his problem, you've done your part. I personally would not want to keep a client who is playing audit roulette. Now, if you're trustee, you have other fiduciary responsibilities that would prevent you from ignoring such problems and if the sponsor refuses to correct the problem, I don't think you have any other choice but to report him to the DOL.

No, it's just they needed to make a top heavy minimum contribution to all the non-key anyway, so might as well use it in the ADP. What I was trying to do at first was make the top heavy minimum as a QNEC only to those participants who are already 100% vested (we ended going a different way.) What complicated the matter was the fact there were HCEs who were non-key (and HCEs were excluded from QNECs.) We ended up making a reverse QNEC to top heavy minimum (not 415) to few NHCEs to pass ADP. Making the additional top heavy minimum to all other non-key employees (which passed nondiscrim w/o the QNEC by a nudge.) So, no, our clients are not much different from yours, they just don't want to contribute more than they have to. And if you're talking about example, I just did a plan that avoided 30k of refunds with a $63 QNEC (they must be thinking we are absolute geniuses.)

IMHO, you can't pick and choose, unless your document tells you you can (which I doubt it will, otherwise, you wouldn't be asking.) I actually was looking into this just last week, we use the PPD doc which has under the QNEC section language that allows reverse allocation or similar method. We checked with PPD to see what was intended by "similar allocation", and it's definitely not a pick and choose method. An example of what was acceptable was to do a reverse allocation but instead of capping the allocation at the 415 max, we capped it at the top heavy minimum (kill two birds with one stone,) which apparently will still be acceptable post-2005 since the percentage is low enough.

I think what mbozek is saying is if you have a one man plan, you don't need a formula for the allocation of the contribution. Well, why would you? Who else is going to share that contribution? Any other plans, you need an allocation formula that predetermines how the contribution will be allocated amongst all the participants (comp-to-comp, flat-dollar etc..) The contribution doesn't have to be predetermined.

Document has three options: 1-Eligible Participants pro rata compensation. 2-Eligible Participants flat dollar amount. 3-under reverse allocation or similar method. it goes on describing the mechanism of bottom-up QNECs (max permissible contribution to lowest paid participant. My question has to do with the "similar method", as this term is not defined in the document. Here is what I am trying to do: 401(k) is failing ADP and is Top Heavy. Employer does not want to contribute any more than he has to. There were no contributions other that the deferrals this year (and TH minimum obvioulsy.) 2 out of 5 HCEs are non-key EEs (doc excludes HCEs from QNEC allocation.) If I provide a 3% QNEC to all NHCEs, then I have problems with my Top Heavy minimum as on HCEs get it. Would it be acceptable under "similar method" to provide 3% QNEC to 3 lowest paid NHCEs and regular nonelective TH minimum to all other non-key EEs?

It's not the effort of the sponsors. A TPA will do all the work for the sponsors for few thousand dollars and they can realize not only huge savings in terms of cost of employee benefits but also accumulate greater benefits for themselves.

Tom, I agree with you, I don't know what I was thinking when I wrote that.