TBob

#18 - Close Encounters of the 3rd kind. #13 - Nightmare on Elm Street

Locust - Good guess! Trustee= Administrator= Owner= Problem....

We realize that the SHNEC should have been submitted within 12 months of the end of the plan year in order to maintain the SH status. That aside, we also understand that the employer still needs to make the contribution even though it won't satisfy the ADP. Our biggest concern at this point is the employees that were let go when he shut down the company that want their money and are aware that they have not received their 2004 SHNEC yet. Some of them are not pleased to say the least. They aren't going to be very happy either if their distributions are held up for several more months waiting for the determination letter. We can't even start the application process until the SHNEC has been contributed. Austin - Do the plan's inservice withdrawal provisions really come into play here? Since the owner has shut down the company, wouldn't he be able to take the money as a result of "termination"? Can you do an in-service distribution once a participant is no longer in service? Also, there is no "post-tax" money in the plan. It is all deferrals and employer contriutions (SHNEC and P/S).

A 401(k) plan was using the SHNEC up through 2004. For 2005 they amended the SH out of the plan. The 2003 SHNEC was deposited in early 2005 (obviously late) with lost earnings calculated and deposited as well. The owner of the company has refused to pay the 2004 SHNEC that is owed to the participants despite our repeated and well documented attempts to get the $ from him. Recently, he shut down the company and wants to terminate the plan. We finally convinced him that he needs to deposit the SHNEC before he can terminate the plan (or things are going to get ugly, very soon for him). He would now like to take the money out of his own account in the plan to pay for the missing SHNEC and lost earnings (he has pleanty of money in the plan to cover this amount). My initial thought was to let him take a taxable cash distribution from his account. He could then turn around and pay it back to the plan. One concern of course is allowing the owner to take a distribution prior to receiving the final determination letter. Particularly, when the plan does have the late/missing SH contributions that will affect qualification. Would you allow the distribution? Other alternatives or concerns?

I agree that we can switch to Current Year any time BUT... On an outside chance, has anything in recent guidance changed to allow a plan to switch back and forth from current to prior without having been on the current year method for 5 years....or is the ole 5 year rule still in place?

A participant terminates from employment prior to age 59.5 but does not take a distribution from the employer's 401(k) plan. Several years later, the participant becomes disabled and would meet the definition under 72(m)(7). He has requested a lump sum distribution of his 401(k). Assume that none of the other exceptions to the 10% penalty apply to his situation. Which distribution code should we use on his 1099R? Would we use code 3 for a disability or would we use code 1 since the participant was not disabled at the time of termination. I am inclined to use the code that applies at the time of the distribution rather than the code that applied at the time of the distributable event. Your thoughts?

I apologize if my head is just too thick to grasp this and I appreciate the help so far. However, I am not sure that I am convinced yet. I have read the code sections and regulations referenced above and am coming to a different conclusion. Here's my interpretation of things. When a participant dies before RBD with a spousal bene, the bene has two distribution options: 1. 5 year rule under 401(a)(9)(B)(ii) 2. Life expectancy rule in section 401(a)(9)(B)(iii) The exception under 401(a)(9)(B)(iv) allows a spousal beneficiary to delay the comencement of payments under option number 2 above until the participant would have been 70.5. It does not appear to allow you to delay the cash payment under the 5 year rule under option number 1 at all. Also, 401(a)(9)(B)(iii)(II) appears to say that the payment must be in the form of annuity payments. "such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), So, since the bene in my example blew it on the 5 year option, it would appear that the only option available to him is the life expectancy option. It would also seem to me that payment of the entire account this year would not be a payment over his life expectancy. By the way, I am hoping that you can prove me wrong. I really want to get this money out of the plan and not have to worry about making annual payments to the bene. Please tell me where my brain is going off the track. If you need to just throw a heavy book at my head, I have a copy of the 2004 Erisa Outline in my office that will do quite nicely. Thanks Again!

Bird - Thanks for the response. If we processed a full distribution now, wouldn't the IRS look at this as a lump sum payment that missed the 5 year cash out option and therefore be subject to penalties? If that is not the case, is the distribution eligible for rollover to an IRA?

Participant died in 2000 prior to their RBD at age 60. The spouse is the sole beneficiary. The spouse did not elect to take a full distribution prior to the end of the 5th year following the participants death. They would now like to take a distribution of the full amount. Generally, they should be taking payments over their life expectancy which can begin at or before the participant would have been 70.5. Is there any way to accelerate the payments and get the $ out of the plan now or are they stuck with annuity payments?

Name...Yes, one of the doctors needs more compensation. The other two doctors make well more than the compensation limit but the third doctor does not. Ideally, he would like to include the compensation from the second partnership to bring him up to the comp limit so he can receive the same contribution as his partners. Locust...I don't disagree with you regarding the "earned income" not actually being earned when it is coming from rental revenue. However, I am wondering if there is a distinction made on the k-1 between these types of income. I am not a tax expert in any way so I am looking for any helpful information here. In all of the partnerships that sponsor plans that I have been involved with, we simply took the Partnership income from the k-1 and, after adjustments, used it for plan purposes. I have never looked at the K-1 to determine where the income was derived.

I have a small medical group consisting of 3 doctors and their staff. The three doctors are equal partners. The partnership sponsors a Safe Harbor 401(k) Plan using the SH Match and a SS Integrated Profit Sharing Allocation. We are obtaining K-1 information from this partnership to calculate the earned income for the doctors. We have just discovered that the doctors all own equal shares (33.3%) of another partnership. The second partnership owns the building that their practice is in. The doctors each receive additional k-1 income from this partnership from the rental of the space in the building. The question at hand is...can the doctors include their compensation from the second partnership for plan allocation purposes. My thinking is that this is a control group so they could use their compensation from the second partnership if that partnership signed on as a participating employer to the plan sponsored by partnership #1. Your Thoughts...what am I missing?

Would W-2 and K-1 income make sense in this scenario? Partnership X, the plan sponsor, is owned 50/50 by two doctors. The Partnership owns 100% of two corporations for which the doctors work. Under the corporations, the doctors receive a set salary reported on a W-2. From the partnership, they receive additional K-1 income. There may be a reason why this doesn't work but an accountant once explained this set up as a possible means of receiving both types of income. Anyone care to disagree because I am curious of he was correct.

The Background... I have a 401(k) plan that uses a standard 6year vesting schedule for the employer contributions. Service is credited based on "elapsed time" rather than actual hours worked using the employment anniversary for the measurement period. The plan was established effective 1/1/2000. The plan excludes service prior to the plan establishment. The problem/question... A participant was hired in September of 1997 and terminated in July of 2005. I want to be certain that the vesting is correct before we process a distribution and the elapsed time thing is confusing me. My thoughts are that this participant's service begins to count as of 1/1/2000 so her vesting computation year is essentially the plan year and we need to ignore the employment anniversary. She is credited with a year of service for 2000, 2001, 2002, 2003, and 2004 but not for 2005 and is, therefore, 80% vested. 1. Am I correct that her vesting measurement period is the plan year? 2. Am I correct that she does not get credit for 2005 since she did not work the full 12 months? 3. Am I correc that she should be 80% vested? Thanks in advance!

I have encountered the same situation. The HCE's were only going to defer the "catch-up" amount so as to avoid the testing issue but since things were established too late in December, the NHCE's did not have a chance to make an election to defer. We pushed off the establishment of the 401(k) until 1/1/2006 and just did P/S for 2005 to avoid a possible BRF issue.

Thanks!

Belgarath - Can you elaborate on how you came to that conclusion. I read through the regulations but did see anything that would lead me to that conculsion. Is this one of those "it's what they didn't say that counts" situations?

You guys are all showing your age...er...uh...experience! Thank you all!

I am curious as to when cross-testing became available or at least, when did it become widely used in the industry as a plan design format. I am looking at an existing profit sharing plan and trying to determine if the plan design was appropriate at it's inception since it is clearly inappropriate now. This may be due to changes in demographics of the sponsor's workforce but I am not certain. Any thoughts from the EB veterans out there?

If by saying "401(k) age" you mean 59 1/2, then your answer is yes. The participant in question can roll the in-service distribution over as long as it is not a "hardship" distribution.

Belgarath - I am not sure if it was my haphazard inclusion of punctuation that confused you or if it was actually the classifications themselves. Sorry for the confusion. What I meant to say was... Classification #1 = Direct Owners Classification #2 = Owners by attribution. Classification #3 = Any Others. The point is that grouping "owners" together can cause you to include children or spouses where you did not intend. The solution, however you want to word it, is to be more specific in your definition. I like what Earl posted which is much more specific than my method. Either way, I agree with you that there is no magical solution. You have to look at each clients structure and the goals they have for their plan and set up the classifications to meet those goals. The fun part comes when your client (the owner) gives his son 5% of the company stock as a wedding present and messes up all your hard work!

I have seen documents written with the classifications of "Direct Owners / Owners by Attribution" in order to avoid this problem.

Good point about the SHNEC. The plan came over to us with the SHNEC already in place. The plan did have an HCE but he passed away this year. We are looking at plan design changes for the future given the lack of HCE's.

So, just to make sure that I am understanding correctly....I can create several groups within my NHCE's. I can max out group #1 at 42,000 for the year (assuming other limits aren't an issue). I can give group #2 some lesser amount. Group #3 gets stuck with a SHNEC and no other profit sharing. You don't see any problems with this since there are no HCE's. Sounds too good to be true!

We have a plan that wants to use a cross tested formula in order to benefit several of the company managers. The employees that they would like to benefit are older so cross testing seems logical. None of the employees in the plan are HCE's. No one has enough compensation to make them an HCE and none of the owners of the company are currently employed. I am not sure how to go about testing this plan. Without HCE's does it automatically pass? Is it even possible to use cross testing when there are no HCE's?

I took two witches and a green fairy out trick or treating. I proudly sported my #4 Brett Favre jersey. I love the Packers and always will (however, they may as well take this season and flush it down pmacduff's "water closet"!) One of my daughters is allergic to nuts so I dutifully ate all of the snickers collected this year plus all of those left over after the neighborhoods goblins and ghouls raided our house. Just doing my part to keep my kid safe!