JAY21

I haven't seen any discussion of the proposed 415 regs on these boards. Am I alone in thinking that the IRS has taken negative and as far as I can see an unchallenged interpretation on compensation which has the effect of reducing the high-3 average (under prior regs) by now basing it only on years of participation (vs. prior service) and also applying the 401(a)(17) comp limit to it. Isn't it funny that the clarifying and simplifying regs always try to curtail the small business owner which is most likely to be impacted. I presume since these are proposed regs we do have the opportunity to comment on them to the IRS. I would hope ASPA or someone might also take up the cause. I think the loss of pre-participation compensation is especially hurtful since most small business owners don't have the income to both take high compensation and make large DB contributions so it could significantly reduce their contributions (no doubt that's what the IRS is hoping for) since they can't rely upon pre-participation comp to get them up to or near the 415 dollar limit.

Good discussions those threads. They're helpful but since it seems to be issue that has been evolving over the past few years I was wondering if there was anything new or more definite on the subject, including any recent informal guidance from IRS folks. My "sense" of most of the posts from my search are that the majority of posters seem to have evolved towards thinking that 417(e) should be considered in the MVAR, but a healthy minority disagree and can point to IRS determination letters and/or IRS recognition that it's somewhat unclear. Yes, I realize that's why I should go in for an IRS approval letter on the discrimination testing. I'd appreciate if anyone has heard anything new on the subject within the last 6 months or had any experiences on the issue via IRS submissions.

Has it become generally accepted that the 417(e) subsidy on a lump sums must be considered in the MVAR ? I generally do it to be safe but have a case with a proposal using a general tested cash balance plan where I'd like to use A.E. of 8.5% to help my discrimination testing, but if I have to include the 417(e) subsidy (whipsaw) effect it's too expensive to pass the general test. The client can live with the whipsaw effect, but not the additional contributions needed to pass discrimination testing if the 417(e) subsidy must be included in the MVAR. Any practioneers out there that still think this might not be required or at least a grey area ?

That does sound odd. Maybe they had a policy but surrendered it and someone forgot to take it out of the funding equation (software).

It may be best to switch to a non-standardized plan going forward if that meets the client's objectives, but it does nothing to clean up past sins.

It's probably going to be tied to whether the person had a "year of service" as defined in the plan document (including the 415 limit section). With the late-in-the-year term date you showed in your example it's likely a full-time employee would have 1000 hours (assuming that's the criteria) for a "year of service" and therefore you would count it.

Right, I am using permissive aggregation and passing fairly easily before including the previously excluded employee classifications. The previous excluded group really does little to help testing (in general they're not benefiting at a level that satisfies meaningful benefits under 401(a)(26), and they only help the ABPT a little bit), so the question is more of a document design/administrative ease as to how to benefit them at levels roughly equating to $500 each on a present value basis when they're all different ages. If I have to use cash-balance I will, but the initial proposal wasn't based upon a cash-balance plan, so I'd need to go back to the client and explain the new game plan if there isn't any easy way to design this with a traditional plan.

Client is putting in DB plan primarily for owners but with enough employee classifications to pass testing (401(a)(26), 410(b), 401(a)(4)). Now at the last minute the client wants benefit other classes of employees initially designed to be excluded, by giving them a token $500 contribution per year. These other employee classes are already in a generous MP plan but client seems to want them to feel like they are also benefiting under the new proposed DB plan. Is there any way to write this into a DB formula (general tested of course) or do I have to use a cash-balance arrangement to get this type of result. I really don't want to have 10 different token formulas to get each participant of different ages $500 or thereabouts. Any easy way to accomplish this without going to cash-balance ?

Consider amending the plan to a high-3 average if it's currently a career average (including years before plan inception) since there is no additional employee costs to be concerned about.

I think you've hit on the main issues. It seems a certain PT to me as the spouse of an 50% owner of the company sponsoring the plan is a disqualified person (party-in-interest) to be doing business with, even if she only owns half of the house. I also think practically speaking that if they want to "own" the house, then you must be careful not to use it for personal use if it's held in the plan (another PT) which may negate some of the reason for keeping it, along with the tax issues you already mentioned.

In my opinion she has already satisfied both the age and service condition and is now just waiting the entry date. If she remains employed I would say she enters 6/1/2005. I also don't see how they can amend the plan retroactive to 6/1/04 for changes that are more restrictive, though a liberalizing amendment (i.e., more generous) applied retroactively would be ok.

Joel, don't assume that all disability payments are tax-free. In fact most programs associated with retirement plans probably are not. SoCal describes a plan that has obviously tried to structure the plan in a manner that gives them the best "argument" for treating the disability income as tax free. The IRS has taken a pretty narrow view of what qualifies. Other factors for claiming tax-free status are the disability cannot be tied to age or service or retirement benefits under the plan. It has to have been established as a clearly separate accident and health program (although I believe it's ok if its' combined in the same plan doc as a retirement plan if clearly a separate program with different types of benefits than the retirement plan). In short, it needs to be structured properly, and even then be prepared for a fight.

Mbozek (or anyone else), how does it work exactly that most states have opted out from using the federal bankruptcy code exemption list but this federal bankruptcy law appears to still apply to those states opting out (at least for tax-exempt funds purposes). It must supercede the opted-out states bankruptcy codes somehow ? Just trying to understand the mechanics of it.

Thanks. That sounds like a pretty comprehensive firewall for the moment.

mbozek, do you think this effectively fills the "gap" that seemed to exist in the U.S. Supreme Court Case (Shummate vs. Patterson) where only "ERISA Qualified Plans" were protected and since owner only plans were not subject to Title I of ERISA they were still considered vulnerable. I'm just trying to understand how the aforementioned U.S. Supreme court case and the new bankruptcy law mesh and/or overlap and if there are still any gaps in protection now the new bankruptcy law has been passed.

The employer is under no obligation to fund the contribution in one lump sum. Many employers for budgeting purposes may fund in increments during the year and after the plan year end for the prior year. The participants have no legitimate gripe here. The employer is only required to allocate the contributions yearly (unless plan document locks them into something more frequently) but to avoid any issues of unfairness on the timing of contributions to each participants accounts, they may wish to have a general account (unallocated) within the plan which serves as a temporary "clearing" account where deposits can be made and held temporarily until the proper "allocations" for each participant can be determined and the money then moved into the individual participant accounts simultaneously. This would be in contrast to say giving the first contribution installment ALL to one participant and then a few months later giving the next contribution installment ALL to a different participant. In this situation there's sure to be some employee griping although I still don't know that's there's a discrimination issue per se unless the one benefiting most vs. the one harmed most is a Highly Comp Employee and a Non-Highly Comp Employee. Still someone can always sue for anything so keeping it fair is best. However, as far as your current 2004 scenario is concerned it looks fine to me.

I can't say I'm familiar with this "disregarded for tax purposes" issue. I'm still inclined to think the plan should be sponsored by the "legal entity" that exists (presumably the LLC) as the legal entity has to execute the legal plan documents on behalf of the entity. However, I can see where it's hard to know where "disregarded for tax purposes" begins and ends (i.e., does it apply to qualified plans or just income taxes). If I was in a hurry on the issue and was running out of time to research this I might be tempted to use a "shotgun" approach and have both the LLC and Mr. John as a "sole proprietorship" both co-sponsor the plan (via a supplemental participation agreement). Presumably that way you're covered under either scenario and I don't think there are any negative ramifications associated with the fact that either the LLC or the Sole Prop is really not a sponsor (it's really one or the other) you just can't tell which it is. However, that would be in "rush" situation. Perhaps someone else will chime in with some add'l info or opinion.

OK. The plan needs a company sponsor so that would be Mr. John, LLC as the sponsor, not him personally since the business is structured as an LLC, although for tax deduction purposes there isn't much distinction as he'll deduct his retirement contribution on his personal 1040 tax return even though the plan will be sponsored by the LLC. If he had any employees the employees pension expense would be deducted by the LLC. From the facts presented It seems pretty clear he can sponsor a plan under Mr. John, LLC, but some of my questions are trying to get at a different issue that being is there an Affiliated Service Group with one or more outside entities where you might not WANT to sponsor a plan under the LLC as it might require coverage of employees under the other entities (very costly). If none of the other entities he has partial ownership in has any employees, you probably don't care if it's an Affiliated Service group currently, but should have a precautionary 1 or 2 year eligibility waiting period in case employees are hired later in case the relationship between the entities IS considered an Affiliated Service Group which means the employees of the other entities would eventually become eligible. The fact he is a minority partner does not get him out of an Affiliated Service Group (ASG) as all of the 3 possible ASG "traps" require 10% or less ownership (not a high threshold). My "sense" is that it very easily could be an ASG but you might not care (currently) if there are no other employees so you may wish to still proceed with the plan but use the 2-year eligibility. Get some use out of the plan until employees eventually are hired under one of more of the other entities and potentially become eligible after 2 years. At that time you can revisit the ASG issue or just play it conservatively and terminate or freeze the plan at that time.

Are there employees in the Bay Partnership ? (I realize that's not your focus area but helps flush out all the facts).

I'm a little post happy today I guess. I'm having a hard time determining how to decifer and handle the new (2004) k-1 format on line 14 (self-employment earnings) where it has a sub-category A (net earnings from self-employment) and also B (Gross Farming) and C (Gross non-farm income). It's mostly "C" I'm wondering about. If a client has both A and C sub-categories of self-employment income shown on line 14 are both used for the earned income calculation (I realize there's a section 179 expense adj. potential as well). I don't like the term "Gross" income either on the C category as it make me wonder if there are some expenses that need to be subtracted from this figure. Any thoughts/help out there ? thanks.

Has anyone been receiving rejection letters from the IRS on Form 5500 extensions for the 6/30/04 PYE that were timely filed ? We have received a few and would have thought it was just our own issue but now a local CPA who files their own extensions (and does adminstration work on plans) also had a timely 6/30/04 extension rejected. In all cases the rejection letter claims the extension was not timely filed. Just wondering if anyone else has had this happen. Thx.

You probably need to add a few more facts. What exactly is the ownership interest of the LLC in the other partnership (This matters for 1 of the affiliated service group tests) ? Also what "services" are being performed for the partnership and are there any employees in the LLC that help provide the services to the other partnership ? I think you'll find most of these situations are highly dependent on the specific facts-and-circumstances so even if you get a good answer on the specifics of this question you can't apply them to another situation unless it's exactly the same situation.

It does appear to be prohibited transaction since a "spouse" of a direct or indirect owner of 50% of the employer is a "party-in-interest" (disqualified person). To my knowledge there is no PT exemption for this relationship/transaction.

Merlin, you are correct. It was Kurt Piper's 2004 ASPA (D.C.) workshop on DB-DC Combo plans. I listened to that part of the CD this morning and it wasn't that the IRS had clarified anything recently, rather Kurt said the IRS has already ruled on this issue in an old Rev. Ruling 65-295 which deals with who is a "beneficiary" (participant) for purposes of using compensation for the 25% deduction limit under 404(a). His point is that the IRS ruled that "merely" being a beneficiary under a plan (e.g., having an account balance but not being an active participant) is not sufficient to allow use of the compensation of the beneficiary in the 25% deduction limit. Kurt seems to be saying that the IRS is therefore locked into the same def'n for 404(a)(7) purposes in that merely having a DC account balance (e.g., prior PS contributions) is NOT sufficient to make them a beneficiary (participant) under multiple plans (common participants) for 404(a)(7) if they are ONLY getting a contribution/accrual under ONE of the plans for the current year. I'm probably paraphrasing his comments badly, so any clean-up or improvement is welcome.

I would recommend digging into this issue a little further. One of the speakers at the 2004 Washington, D.C. APSA conference stated that during the 2003 ASPA conference the position that Blinky mentioned was considered the rule-of-the-day for the 2003 ASPA conference, but the speaker went on to say this issue needed a correction (for 2004) as the IRS had "clarified" (perhaps not in writing though) that merely being a beneficiary of a plan (i.e, having an account balance in the plan) was no longer by itself considered to be sufficient to trigger the 25% combined plan rule if no common participant received a contribution/accrual for the same year. I listened to about 5 CDs of the 2004 ASPA conference so I can't quickly find who made that statement, so given the lack of exact cite on my part (and the possible informal manner of the IRS comments), I can only suggest looking into this a bit further before giving up on the issue.