Lame Duck

I believe Earl is correct that only W-2 income may be used from an S-corporation. This may be from the IRS Audit Guidelines, but is definitely from the IRS The reasoning behind the IRS position seems to be that the plan is supported at the corporate level, not the individual level, so only income paid by the corporation is eligible for benefits. Dividends distributed on the K-1 are not compensation paid at the corporate level. The issue was discussed by the IRS in PLR8716060 and Rev. Rul. 59-221

It is considered an excess contribution to the Roth. It can be removed (along with any earnings attributable to it), or possibly recharacterized as a traditional IRA, without penalty, by the due date for filing your income tax return, including extensions). If it is not removed or recharacterized by that date, it will be subject to a 6% excise tax. The 6% excise tax is charged each year that the excess remains in your IRA. The earnings may remain in the Roth if it is not corrected by the due date for your tax return, including extensions.

This issue has been discussed here before, but you should also be aware of 1563(e)(6) which provides that the ownership of a parent is attributable to a minor child. Your post doesn't say whether the clients have any minor children, but, if they do, there may be a controlled group through attribution of the mother's ownership and father's ownership to the child.

I believe the term "Defined Benefit Scheme" may be apropos in the 412(i) market.

Mona, what I meant to say was that you cannot convert if your MAGI is greater than $100,000. sorry for the confusion; poor editing on my part.

since John G. is traveling, I'll see if I can help answer some of your subsequent questions. 1. All of your IRA accounts (deductible, non-deductible, and rollover) can be converted to a Roth. If you are still participating in the keogh plan, that could not be converted until you are eligible to receive a distribution under the plan and first roll it into a traditional IRA. 2. A partial conversion can be all of the assets in one of the accounts, some of the assets in all of the accounts or some of the assets in one account. What you convert and how much you convert is dependent on your tax situation and where the money is coming from to pay the taxes on the converted amount. Of course, the contributions to the non-deductible account have already been taxed so converting that account will result in less tax liability, since only the gains would be taxable in the conversion. In order to have a lower tax bite, you might want to convert your accounts over a period of years, however, you can only convert in years in which your modified adjusted gross income is more than $100,000. 3. The earlier the retirement age, the less valuable the conversion, since the account has less time to recoup the amount paid in taxes, if you are paying the taxes out of the distributable amounts. There are a number of Roth conversion calculators available on line that you may wish to look at before you make your decision to convert. However, I will also reiterate what John said - you should discuss the conversion with your tax advisor before you make any decisons.

How about amending the plan document to exclude all HCEs who are HCEs solely as a result of attribution?

If you work on Defined Benefit plans, a possible source of business referrals that is usually neglected is the family law attorney. Most are looking for an independent actuarial review of benefits in DB plans and cash balance plans for purposes of division in a divorce proceeeding. Call the family law division of your local bar association and arrange to speak before them on valuing DB plans. It may also lead to their own plans. You can also try presentations before the local medical society, rotary clubs, etc. All of these are usually interested in speakers and you can generate a lot of business from them.

What affect does 404(a)(1)(D)(iv) have on the funding?

If the plan is underfunded, it might be to tyhe participant's benefit to fund the balance. He will receive a current tax deduction for the contribution and the amount contributed would also be rolled into the IRA where it would continue to enjoy tax advantaged status.

You should consult a local attorney who is familiar with New Jersey's laws. The information I have from 199 indicates that New Jersey does have at least some protections for IRAs, but only a local attorney would be conversant with the actual protections.

PensionNewbee, I agree with Blinky. I don't think anyone was implying anything. it's great to want to know how the rules work, but the warning wasn't just for you, it was for all of us who get dragged into this kind of situation. I've been doing retirement plan work for 25 years, and have come across little that is as complex and confusing as the controlled roup and ASG rules. Over the years, I've probably performed hundreds of controlled group/ASG analysis and I dread every time a new one is presented to me.

I'm with WDIK. If the compensations cannot be aggregated, the plan compensation for Plan 1 is $45,000, and the 3% NEC would be $1,350. For Plan 2, with a compensation of $400,000 ($200,000 eligible) the 3% NEC would be $6,000. The total NEC for both plans would be $7,350, not $12,000.

Publication 560 defines earned income as net earnings from self employment. Code Section 1402(a) defines net earnings from self employment as the gross earnings derived by an individual from any trade or business carried on by such individual, less the deductions ... which are attributable to such trade or business. Whether you can make a contribution based on the income you've earned would depend on whether you consider it to be income from a trade or business. How do you declare the income when you file your tax return? Do you file a Schedule C on the income?

Contributions to a non-deductible traditional IRA are always permissible. Whether the client can make a contribution to a Roth IRA depends on his, hers or their MAGI for the year. It is unlikely that a client receiving a maximum allocation in a defined contribution plan would be below the MAGI threshhold for a deductible traditional IRA.

I don't think you could consider lobbyists as providing a product, unless it's the inflation of a hot air balloon. Proposed Reg. Sec. 1.414(m)-2(f) defines a service organization as an organization in which capital is not a material income producing factor for the organization. This would appear to apply to lobbyists.

For what it's worth - my firm entered into negotiations with a major insurance company to provide administrative service to a 412(i) program that we would jointly develop. In those negotiations, it was revealed to us that the commission payable to the agent in the first year of the plan is 90% of the premium. When a 412(i) plan is shown to be the best, who is it really the best for?

While the term "Keogh Plan" continues to be used, the plan as seperate and distinct disappeared with the passage of TEFRA in 1982. Prior to that time, self-employed individuals were not permitted to adopt the standard qualified plan (PS, MPP, DB) but were permitted to establish a special plan that had different contribution limits and coverage rules than corporate qualified plans. it has always been a plan for self-employed individuals only (sole proprietorships and partnerships) and has never been available to a corporate plan sponsor. I'm not positive about this, but I believe the term derivied from the last name of the congressman who introduced the legislation. They are also often referred to as HR-10 plans, as that was the bill number assigned.

I was going to say something along the same lines but WDIK beat me to it.

I've always heard that you can't use a master or prototype plan for a multiple employer plan, but doesn't 1.413-2(a)(2)(ii) say differently? It's my understanding that a multiple employer plan is a 413© plan and the reg specifically says that a "master or prototype plan is not a section 413© plan unless such plan is described in this subparagraph. From that, it would appear that a master or prototype plan, in theory, can be used for a multiple employer plan if it meets the requirements of 1.413-2(a)(2). I think I'm as confused as jgordon.

Yes, he can establish the 401(k) plan. Code Section 408(p)(2)(D) provides that (An arrangment shall not be treated as a qualified salary reduction arrangement for any year if the employer maintained a qualified plan with respect to which contributions were made, or benefits accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made." In more understandable terms, the law prevents the employer from maintaining a SIMPLE in any year in which he maintains another qualified plan. It does not mean you cannot adopt another plan in any year in which you have a SIMPLE. There is a good discussion with an appropriate example in Q14:50 of the SIMPLE, SEP and SARSEP Answer Book, Sixth Edition. It says "All SIMPLE contributions become excess contirbutions and should be treated as wages by the employer on the Form W-2." I believe this question has been addressed by Gary Lesser before in these posts. You might try searching for additional information.

414© provides that "all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer." My plan document provides that Employer means the employer maintaining the plan or any other employer required to be aggregated under 414©. I think this language is consistent with most plans. My document goes further to define compensation for self-employed individuals as the net earnings from the trade or business with respect to which the plan is established. This is also consistent with most plan documents I've seen. If your plan contains similar definitions, I believe you would need to aggregate the income form all members of the controlled group who are participating in the plan, including any negative amounts. You would start with the NET of all K-1s. You'll want to check the definitions of compensation and employer in your plan to make a final determination.

Does the plan specifically limit rollovers to participants or to those who meet the age and service requirements? What are the plan entry dates? From your post, I couldn't tell if the rollovers were made prior to meeting the eligibility requirements or prior to an entry date, or both. If the rollovers occurred after the eligibility requirements were met but before the entry date, there might not be any conflict, depending on the exact terms of the plan. Assuming (always a mistake) that the employees were not eligible to make rollovers, Maverick's solution is a good one. It might be possible to make an administrative decision to allow the rollovers that resulted from administrative error without amending the plan, but I really don't like operating a plan outside it's specific terms.

Sorry, Blinky, I just reread my post and that "Any comments?" sounded pretty snide, which isn't wnat I intended, at all. I really wanted your thoughts on part two, which you gave.

I was just catching up on this and I agree with you, Blinky, that a plan could use vesting from the effective date to postpone RMDs. We just received approval from the IRs for an amendment to our standardized prototype to permit the exclusion of vesting service prior to the effective date. However, it seems to me that this is only permitted when there is no predecessor plan, which seems to include any plan that was terminated within five years of the establishment of the new plan. (Reg. 1.411(a)-5(b)(3)(v)). Also, I think the IRS might raise the issue that the business owner is effectively 100% vested at all times, since he or she controls the vesting schedule in the plan, thus requiring RMDs to be paid even though the owner is not vested under the terms of the plan. Any comments?