Kevin C

Here is the definition. Even if the LLC is the right type of entity, I would be surprised if you can successfully argue that a K-1 reports the fair market value of the investment. 2520.104-46(b)(1) (ii) For purposes of paragraph (b)(1), the term "qualifying plan assets" means: (A) Qualifying employer securities, as defined in section 407(d)(5) of the Act and the regulations issued thereunder; (B) Any loan meeting the requirements of section 408(b)(1) of the Act and the regulations issued thereunder; © Any assets held by any of the following institutions: (1) A bank or similar financial institution as defined in Sec. 2550.408b-4©; (2) An insurance company qualified to do business under the laws of a state; (3) An organization registered as a broker-dealer under the Securities Exchange Act of 1934; or (4) Any other organization authorized to act as a trustee for individual retirement accounts under section 408 of the Internal Revenue Code. (D) Shares issued by an investment company registered under the Investment Company Act of 1940; (E) Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state; and, (F) In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution referred to in paragraphs (b)(1)(ii)©, (D) or (E) of this section describing the assets held (or issued) by such institution and the amount of such assets.

That type of provision is pretty common. Our GUST prototype has the following included in the salary deferral contribution section:

It is possible to have $0 of regular deferrals and $5,000 of catch-up. For example, if you defer $5,000 and receive a $46,000 profit sharing contribution for 2008. But, I don't think you can limit deferrals to $0 and cause catch-ups. Look at the definition of catch-up eligible in 1.414(v)-1(g)(3): If you limit deferrals to $0, how is that employee eligible to defer without regard to catch-ups? As Bird mentioned, you can satisfy the universal availability requirement by prorating the catch-up limit over each payroll. But, that doesn't necessarily mean those amounts are catch-ups.

That sounds like part of the SAR requirements for the small plan exemption from the audit requirement. 2520.104-46(B) The summary annual report, described in Sec. 2520.104b-10, includes, in addition to any other required information: (1) Except for qualifying plan assets described in paragraph (b)(1)(ii)(A), (B) and (F) of this section, the name of each regulated financial institution holding (or issuing) qualifying plan assets and the amount of such assets reported by the institution as of the end of the plan year; (2) The name of the surety company issuing the bond, if the plan has more than 5% of its assets in non-qualifying plan assets; (3) A notice indicating that participants and beneficiaries may, upon request and without charge, examine, or receive copies of, evidence of the required bond and statements received from the regulated financial institutions describing the qualifying plan assets; and (4) A notice stating that participants and beneficiaries should contact the Regional Office of the U.S. Department of Labor's Employee Benefits Security Administration if they are unable to examine or obtain copies of the regulated financial institution statements or evidence of the required bond, if applicable; and [EBSA technical correction, 68 FR 16399 (April 3, 2003).]

What does the document say? It should specify who receives the QNEC. You will also want to make sure it doesn't limit the QNEC to an amount necessary to pass the ADP/ACP test.

I would not be comfortable treating the funds as an expense. What services justify the fee if there are no account balances? Only reasonable fees can be paid by the plan. We had a similar situation come up recently during an IRS audit of a terminated plan. The final 5500 was filed for 2006 and the later distributions were paid in 2008. They did not make us amend the final 5500 or file any later ones. The IRS's concern was that the participants were paid the correct amounts. The amounts will be reported on 1099-R, etc. Of course, this was done with IRS blessing, which you won't have. I wonder if a call to the IRS would be helpful?

If all of the cash is rolled over, there is no withholding on the loan offset. If any cash is distributed to the participant, the loan is included in the withholding calculation. 1.72(p)-1 Q&A 15

We've had a couple of similar cases. The employers offered the participant the chance to endorse the distribution check and give it back to the employer as partial payment towards the amount stolen. The employers agreed to take the payment into consideration when deciding how aggressively to push the local DA for criminal charges. One particpant accepted the offer and the other one skipped town without claiming the check.

The IRS DC Q&A session at the 2006 ASPPA annual conference had a similar question. In the second part of Q 14, they add a discretionary matching contribution that satisfies the ACP SH limitations to an example that was top-heavy exempt. My notes say the IRS representative said it was not top-heavy exempt. The updated session handout available on the ASPPA website says "Plan is top heavy (?) maybe. Further discussion on the issue is needed someday." I will point out that the IRS representative in this session had some controversial opinions that made for a very lively session. Austin, have you seen anything on this more recent than October 2006?

I did some digging. This type of loan problem is also covered by the DOL's VFCP. It looks like a VCP correction is the main step to correction with the DOL under VFCP. There is language in the preamble that is more clear that only the excess is required to be corrected. It looks like you would need to do both VCP and VFCP. http://www.dol.gov/ebsa/regs/fedreg/notices/2006003674a.htm 7.3 Participant Loans (a) Loans Failing to Comply With Plan Provisions for Amount, Duration or Level Amortization (1) Description of Transaction. A plan extended a loan to a plan participant who is a party in interest with respect to the plan based solely on his or her status as an employee of any employer whose employees are covered by the plan, as defined in section 3(14)(H) of ERISA. The loan was a prohibited transaction that failed to qualify for ERISA's statutory exemption for plan loan programs because the loan terms did not comply with applicable plan provisions, which incorporated the requirements of section 72(p) of the Code concerning: (i) The amount of the loan, (ii) The duration of the loan, or (iii) The level amortization of the loan repayment. (2) Correction of Transaction. Plan Officials must make a voluntary correction of the loan with IRS approval under the Voluntary Correction Program of the IRS' Employee Plans Compliance Resolution System (EPCRS). (3) Documentation. The applicant is not required to submit any of the supporting documentation listed in section 6(e), except that the applicant must provide (i) proof of payment, as described in paragraph (e)(6) of section 6, and (ii) a copy of the IRS compliance statement.

If the plan has already been adopted, it's too late to change any safe harbor provisions for this plan year. The match changes would have to wait until next year.

If all the nonkeys really opted out of the plan, I think you would have a coverage problem. I don't see opting out listed as a class of excludable employees under 410(b). Has the plan already been adopted? If the nonkeys have already made their elections, I would expect the plan to have already been adopted.

Are you sure about that? Neither the VCP correction method in Rev.Proc. 2006-27, nor the rules in 1.72(p)-1 Q&A 4 require that the entire loan be corrected. Both address only the loan amount in excess of the stautory maximum. If the entire loan is a PT, the IRS doesn't seem to realize it.

I would also look carefully to see if the forfeitures for partially vested terminated participants were handled properly. Once the non-vested portion of their accounts reaches the forfeiture account, how do you track when the amount is supposed to be forfeited?

Sorry, but you are right about the proration of the limits for the short year. The other part of (ii) is that the plan termination is in connection with a transaction described in section 410(b)(6)©. Is this the case? 1.410(b)-2(f) Certain acquisitions or dispositions. --Section 410(b)(6)© (relating to certain acquisitions or dispositions) provides a special rule whereby a plan may be treated as satisfying section 410(b) for a limited period of time after an acquisition or disposition if it satisfies section 410(b) (without regard to the special rule) immediately before the acquisition or disposition and there is no significant change in the plan or in the coverage of the plan other than the acquisition or disposition. For purposes of section 410(b)(6)© and this paragraph (f), the terms "acquisition" and "disposition" refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business.

More information is needed to determine if the plan remains safe harbor for the short 2008 plan year. See 1.401(k)-3(e)(4):

I was reading the first sentence in the cite I posted as the authority for excluding the potential 7/1/2008 new participant from the determination. 1.401(a)(4)-5(a)(2) Facts-and-circumstances determination. --Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs or former HCEs is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances. In this case, the determination is made as of the June effective date of the amendment. The potential 7/1/2008 entrant is not a participant in June. How can he be affected by an amendment before he becomes a participant?

Were there any NHCE participants who terminated before 6/30/2008? If so, you may have a problem with the amendment. It does not look like you have to consider the 7/1/2008 entrant in the determination. As mentioned, there may be reasons outside of the plan to include the 7/1/2008 entrant in the 100% vesting.

The safe harbor notice goes to all "eligible employees". That term is defined in 1.401(k)-6 to be an employee who is directly or indirectly eligible to make a cash or deferred election under the plan for all or a portion of the plan year. The amendment you are talking about doesn't allow the added Company B employees to make a cash or deferred election for the plan year in question, they get a QNEC, so I don't see why they would be required to receive the SH notice. Also, 1.401(a)(4)-11(g)(3)(vii)(A) says the employees receiving the QNEC must be NHCE nonexcludable employees who were not eligible employees for the plan year.

You are looking at the rule for determining how many officers to count as key employees. That limit only applies to the officer portion of the key employee definition, not the other parts. If the sons are sons of the owners, you have four key employees. The sons are attributed ownership from their fathers, so all four are more than 5% owners.

The safe harbor contribution is required to be given to everyone the plan document says will receive it. Failure to follow the terms of the plan is a qualification issue. I would look at the IRS correction programs for guidance. That's an interesting idea that failure to deposit the HCE safe harbor contributions might not ruin the safe harbor. But, wouldn't you be violating the SH notice content requirement if the HCE's don't get their safe harbor contributions? Each eligible employee has to receive a notice that accurately describes the contributions under the plan. If the SH actual contributions don't follow what was described in the notice, I don't see how you could argue that the notice language accurately described the safe harbor contribution.

I think your answer is in Rev. Proc 2007-71. SECTION 6. DATE AMENDMENTS ARE ADOPTED Pursuant to this revenue procedure, a §403(b) plan will be treated as having been amended timely to reflect a requirement of the 2007 regulations if an amendment that satisfies that requirement (such as the model language in the Appendix of this revenue procedure that reflects that requirement) is adopted no later than the first day of the first taxable year beginning after December 31, 2008, the amendment is effective as of the applicable effective date of the requirement under the 2007 regulations, and the written plan is operated as if that amendment is in effect. This section 6 applies to the requirement to have a written plan. However, for a special rule with respect to amendments made pursuant to the Pension Protection Act of 2006, Public Law 109-280 (PPA '06), see section 1107 of the PPA '06.

I disagree. The schedule H instructions say to report corrective distributions paid during the plan year. There is a separate line for reporting corrective distributions. I would not net it out of the EE contributions amount. Show the CPA a copy of the 5500 instructions. From page 40 of the 5500 instructions: and: I would complete the Form 5500 based on the instructions. If accounting standards require different treatment of the corrective distributions for the audit, the CPA can note that in the audit report.

1.401(a)(31)-4, Q&A 14 addresses what the receiving plan needs to do to verify that the rollover is coming from a qualified plan. It's too long to post here, but here is an example from the Q&A addressing a plan that does not have a determination letter. One of my plans had a rollover recently where the receiving plan asked for a determination letter. The distributing plan uses a volume submitter document and did not submit for a determination letter. The receiving plan accepted a letter from the plan sponsor that the plan is intended to be a qualified plan. Good luck with your presentation.

Austin, There is a proration requirement for short plan years. Payroll by payroll allocation is also addressed in the regs. Reg. §1.401(a)(17)-1(b)(3)(iii)(B), below, as amended by T.D. 9169, updates cross references to final regulations under 401(k) and 401(m) that were amended by T.D. 9169, applicable generally for plan years beginning on or after January 1, 2006. (B) No proration required for participation for less than a full plan year. --Notwithstanding paragraph (b)(3)(iii)(A) of this section, a plan is not treated as using compensation for less than 12 months for a plan year merely because the plan formula provides that the allocation or accrual for each employee is based on compensation for the portion of the plan year during which the employee is a participant in the plan. In addition, no proration is required merely because an employee is covered under a plan for less than a full plan year, provided that allocations or benefit accruals are otherwise determined using compensation for a period of at least 12 months. Finally, notwithstanding paragraph (b)(3)(iii)(A) of this section, no proration is required merely because the amount of elective contributions (within the meaning of §1.401(k)-6), matching contributions (within the meaning of §1.401(m)-5), or employee contributions (within the meaning of §1.401(m)-5) that is contributed for each pay period during a plan year is determined separately using compensation for that pay period.