JAY21

A client personally owns 100% of two different types of entities (one medical related and one in unrelated consulting) which is clearly a brother-sister Controlled Group. IRC 414(b) states that the controlled group rules apply to IRC 415, but make no mention of IRC 404 (deductions). I take this to mean that with only one 415 limit that only one entity could sponsor a DB plan with one 415(b) limit. However, could the other entity sponsor a DC plan simultaneous with the other entity sponsoring a DB plan and fund them both to the invididual plan maximums (i.e, over 25% of pay when combined) without violating the combined DB-DC deduction limits under 404(a)(7) ? I guess the question comes down to whether Controlled Group rules treat both entities as "one" employer for deduction purposes. Any thoughts/opinions are appreciated.

For what it's worth I've filed 2 similar requests (to buy land out of the plan) on behalf of clients in the last year and both were rejected quite adamantly by the DOL (whose ruling also covers the IRS I believe). One client even had a very long and passionate talk with the DOL reviewer to no avail. I had told my clients that rejection was likely but they wanted to proceed anyway. In one case it took 3 months and the other more recent request took only 1.5 months. In my opinion you don't have much of a chance even if the reasons seem noble and/or harmless to anyone (both arguments of my clients that were rejected). Still I realize some clients may still want to try.

Hopefully you'll get a more definitive answer than mine, but I would think if the person is in the business that generated the royalties that the royalties would flow through the business and therefore likely be considered earned income.

SoCalActuary; are you able to still get favorable IRS determination letters on new cash balance plans ? if so how long is the average wait for a FDL ?

Andy, how's the report writer in DB Val ? Is it client ready and looks decent or do you pretty much need to dump the data into your own customized report ? THx.

Is Wystar DB Val the same system known (or formerly known) as PFPC DB Val ?

Glen, great comparison and thanks for sharing. Does ASC and Relius really charge $7500 and $7630 per month in upfront fees ? That's much higher than Lynchval ($3,000 per mo.) which I always thought was at the top of the fee structure.

I don't see why the IRS can't define the terms of what it will consider a Controlled Group without having to recognize state marital ownership laws. The Controlled Group rules cited are under the Tax Code so it would seem to me if the IRS wants to ignore community property issues then it has the ability to write the rules of the game whatever way they want to. I realize the IRS did not directly address community property issues in the tax code cited, but to me the language sounds like a universal standard to be applied to all persons and companies and I don't believe they have a strong history of applying state laws (except marraige). I don't disagree that Darrin Watson is the guru, I just wonder if practically speaking we're not living up to a higher standard than the IRS is trying to impose. I understand that informal comments from the IRS has been "we're aware there is an issue there". That's pretty non-committal and probably supports neither side. I tend to advise clients of the issue, suggest counsel involvement, and leave it up to the client.

Since the HCE restricted benefit distribution calc uses the IRC 412(l)(7) rates - current liability rates, and I believe these rates were modified (temporarily) for certain funding purposes to use a Corporate Bond Idex rate, can we use these higher Coporate Bond Index rates for the restricted HCE distribution calcs under the (a)(4) regs ? Thanks for any opinions.

I've gleaned what I can on restructuring under the (a)(4) regs, plus reviewed some good prior threads on this service (benefitslink). Does anyone know of any seminar articles or other sources that might also help illuminate the rules and scenarios where restructuring can be helpful ? Thx.

mbozek, couldn't he use a Normal Retirement Def'n equal to say the later of (a) age 65 or (b) 5 Years of participation which effectively pushes his retirement age to age 76 ? I agree that doesn't get him out of 70.5 distribution issues though on vested benefits, but at least he could fund the bucket (plan) with a small hole in the bucket (70.5 distributions). Also I think his 415 limit gets an actuarial increase beyond age 65 so it would be larger than the 16.5k per year. I take it the big disappointment is not being able to deduct more than the Schedule C income (minus 1/2 of S.E. Tax) to wipe out the RMD income. Robbie, it's a good thing you don't get into this business full-time or you might put the rest of us out of the business with your quick study.

Thanks Lori. I just needed to know that more time and research is warranted and "could" prove fruitful. Thanks for the good example.

Kirk, how about a response (if you know) of "yes" there are some scenarios that debt-financed property with rental income "might" not trigger UBIT, or "no" UBIT is always triggered in this situation. That's a general call but presumably is not putting anyone on the hook too much. I just want to know whether I need to spend more time on fact specific scenarios or if I can just blanket state to client "it can't be done under any circumstances whatsoever without triggering UBIT".

Reading examples of what constitutes UBIT makes my head spin. Can anyone opine whether ALL debt-financed property (within a qualified plan) that generates rental income constitues UBIT ? or is it somewhat dependent upon how the debt (loan) is structured ?

If I aggregate a DB and DC plan for 410(b) & 401(a)(4) testing, what benefits, rights and features must be common to both plans ? I believe distribution options would need to be the same (e.g., lump sum, J&S) but would vesting schedules have to be the same ? any other categories I need to be concerned about ? Thanks for any thoughts.

A participant is in a state sponsored contributory DB plan that qualifies as a "government pick-up plan", therefore employee contributions are pre-tax. If the same employee also benefits under a private employer 401(k) plan I would assume that the 402(g) limit under the plan (13k for 2004) is not affect by pre-tax contributions under the gov't DB plan, is that correct ?

I used ASC a few years back and would agree with the comment that ASC needs a lot of customization and overrides for what they are claim are unique benefit formulas and designs. It seemed that 80% of our benefit formulas (small DB design) fell into the "unique" category, even though I didn't think we were doing anything that unique or special. Perhaps they've improved since then though, but I'd definitely run some demos using various types of formulas and funding methods that you commonly use and make sure you don't have to override a lot of things.

Lynn, in your situation mentioned you can file an exemption request with the PBGC stating the new facts (owner only plan now) and they will give you a PBGC exemption letter that you can rely on. I don't think you can short-cut the process and just stop filing PBGC premiums without getting such an exemption letter. This process may not be available for professional firms with over 25 participants, I'm not sure on that one, so I'll leave that to people who might know for sure.

I would agree that this sounds "unique" (maybe more). You can get a pro-rated accrual if the plan requires a higher hours of service threshold than 1000 hours (e.g., 2000), however, from your comments it sounds like someone working a full 12-months need only 1000 hours for a full (vs. pro-rated) accrual not 2000 hours. Some of your comments hint at an "elapsed time" method (not hours of service counting) when you commented that someone on leave gets a full accrual (although a plan could credit Hours of Service for certain approved leaves). Under an elapsed time method 8/12ths might be the correct accrual portion for 8 months of employment, but I don't see how it can also be combined with a 1000 hour requirement. I agree that it seems from your comments that your plan has dual approach of accruals; Hours-of-Service accrual and perhaps Elapsed Time Accruals (using partial years). I don't think you can have it both ways. Maybe our discussion will attract more definitive comments from other benefitslink commentators. I think you're right to question this. At the very least it's not a structure that I've ever seen.

Ted, it's a little hard to answer your question without seeing your company's legal plan document for more details. However, I believe there are probably some combinations of legal plan provisions that could produce the results you mentioned without raising a red flag. For example, if your initial eligibility waiting period requires 1000 hours, but then your actual accrual requirement was based upon a different criteria than 1000 hours (e.g., perhaps a liberal "elapsed time" method of accrual where a leave of absence does not reduce your accrual since you're technically still employed as of the end of the accrual measurement period). This combination, and probably some other combinations, may produce the results you mentioned where a leave of absence legitimately produces different results than a termination of employment. I'd suggest confirming what the criteria is for an accrual vs. the initial eligibility requirements since they do not necessarily have to be the same.

Normally I believe life insurance would be a benefits, rights & feature subject to being offered on a non-discriminatory basis under Treas. Reg. 1.401(a)(4). However, since the plan is the beneficiary, with no pass through of proceeds to any particular participant, perhaps these regs wouldn't apply in this situation.

I know that a qualified retirement plan contribution can put an S-Corp. into a loss position without question, but whether the loss can be used to offset other current unrelated 1040 income vs. just being a carried forward or back against other years corporation income I'm not sure about.

That's true on the plan doc issue but this client appears to be using an investment prototype SEP doc and not the IRS model SEP doc.

Does anyone see a problem with aggregating a SEP with a DB plan for 410(b)/401(a)(4) testing ? Can you do that ? I realize I'll have the 404(a)(7) deduction limits since I have a common participant, but assuming that isn't too restrictive can I do this ? Thank for any input.

SoCal: Is that still true even if the 2003 tax deduction deadline has not passed ? The 2003 tax return is on extension until 9/15/04, but they just happened to file the tax return in early June before client discovered he had more money to contribute, but CPA & client does not want to file an amended 2003 tax return. They want to report the 2003 contribution as a 2004 tax deduction. It's just a one man employee/owner plan. Just want to make sure I can still take advantage of the one-year kick back on deductions you mentioned if we're still within the 2003 deadline (since I believe the deadline is tied to the extended tax return deadline not the date the tax return was actually filed).