Bird

The CYA language is generic to all distributions, i.e. it's on there whether the plan allows Roth contributions or not. If a plan was amended to include Roth provisions we did an SMM.

This is a little off-topic but I believe that's the kind of thing you can permit in operation now and amend before the end of the year. As for the Roth language, we put this at the top of our notices: Caution: Certain parts of this notice have become outdated and inaccurate due to recent changes in tax law. For instance, rollovers of Designated Roth 401(k) contributions to Roth IRAs and/or another qualified retirement plan may be permitted, and rollovers by non-spouse beneficiaries to inherited IRAs may be permitted. We are waiting for revised “safe harbor” language from the IRS; readers are urged to consult a tax advisor for assistance. No it's not my proudest moment and I think I meant to change it by now, but I'm not losing sleep over it.

Any such deposits would be contributions and subject to the terms of the plan's allocation formula as well as testing, if not a safe harbor type allocation. It's not absolutely impossible but highly unlikely given the facts you presented. It boils down to an investment loss.

My understanding of this (and my shop doesn't work with this kind of omnibus account so I don't have direct experience) is that if you agree to monitor each individual participant for frequent trading, and you agree to let Vanguard see your records if they request it, then Vanguard might not impose the restrictions on a plan level. I don't know that they have to offer that to you or not, but it appears that if they are letting trust companies do it then they ought to let you do it. But if you don't agree to monitor participant activity for them and let them see your records, then they have no choice under SEC Rule 22c-2 but to apply their frequent trading policy on a plan-wide basis.

wsp, the "legally enforceable" agreement part of the regs, IMO, is not so much about forcing a participant to repay but about a consequence for not fulfilling the promise to pay and enforcing it - in this case it's a default. I agree that a program that consistently permits loans that are consistently defaulted, especially after no or few payments, is a sham program for in-service distributions. And loan programs, and loans, should be monitored to prevent that from happening. But to say that a loan default is not allowed because then it's a violation of the plan's prohibition on in-service distributions is extreme, IMO. I understand the distinction you're making, that the employer is a party to the agreement to withhold by payroll deduction, but as noted earlier, unless it's irrevocable, I think that's an employer/employee relationship and the employer can't forbid the employee from making a change.

I think that the reasoning behind requiring payroll deductions for loan payments is administrative simplicity, NOT to prevent participants from defaulting. Unless the payroll deduction agreement is irrevocable, which I doubt, I don't see how an employer can prevent an EMPLOYEE (who just happens to be a participant) from changing it. wsp, do you have any basis for your statements? Following your logic, any loan default would be "an impermissable [sic] in-service distribution." Loans default; it's a fact of plan administration.

You can send a separate notice, or supplemental statement or whatever you want to call it. The DOL Field Assistance Bulletin (2006-03) said multiple statements were OK.

When you elected 50% as your Roth contribution that's 50% of your gross. I don't think there's any practical way for a payroll service to do 50% of net. All the numbers look right to me. If that's not what you want just change it to a flat dollar amount ($500 or whatever) or lower percentage (of gross) - e.g. 33%.

The above is the instruction and relevant footnote from the SS-4 instructions. The footnote seems to say you have to have it, period, but the general instruction says "...but is required to show an EIN..." On the one hand it's no big deal to get one; on the other I don't think there's any consequence to not having one if you never* need it. I'd say don't bother; the IRS would probably de-activate it for non-use by the time you needed it anyway. *But keep in mind that you're supposed to file a 5500-EZ for the plan's final year, even if under the dollar threshold, and will need it then.

FWIW I think you could determine that on a cash filing basis a return is not required.

Sorry if this seems picky, but Schwab is NOT administering your plans. They're (happily) holding the money but that's about it. I imagine they gave a document(s) but otherwise you're on your own; of course that's why you're here. Odds are that you have a required contribution; 501 hours is probably the threshold. If you don't care that you have to make the contribution, then just make the merger as of July 31, make the contribution, and July 31, 2007 will be the final plan year. If you do care, well, for the most part that's too bad, because you as a participant have earned the right to a contribution. I think you could freeze the plan and only make contributions for pay earned up to the date of the freeze, but you (the employer) have to give notice to you (the employee), I think it's 15 days now, and you're pretty near the end of the year so that might not do much good.

i.e. if you are truly doing it on a cash basis use $85,000.

I suppose I'm obsessing, but this is not true, unless I misunderstand what you're saying. The max contribution is indeed 42K but that's not the same as the NHCE rate. If the doc's Net Earnings from SE (line 31 of Sched C) after reduction for 1/2 FICA is $215,000, and you give him $42,000, then his compensation (earned income) is 215000-42000 or 172,000. 42,000 is 24.4% of 172,000, so you have a problem. It's not a discrimination, 415 or deduction problem, IMO, it's an allocation problem because you're not following the terms of the document (assuming, again, that the formula is pro-rata). As I've said earlier, the doc's plan compensation is his earned income. Earned income is his net earnings from self-employment, reduced by 1/2 SE tax, FURTHER REDUCED BY HIS OWN CONTRIBUTIONS.

Lori, the owner in the example you cite is NOT getting 20%. He is getting 25% just like everyone else. They're showing an income BEFORE contribution of 85,424 and applying 20% to determine his contribution of 17084. Subtract that from his "gross" income and you get net earned income after all contributions of 68340. THAT is his plan compensation. Multiply it by the same 25% that everyone else received and you get 17,085. As I noted earlier, his (the owner in the example) contribution is NOT 20%, it is 25%. 20% is simply an algabraic shortcut to apply against his "gross" income. Your doc's gross (after all expenses and 1/2 SE tax but before his own contributions) is somewhere around $266,000. Using the shortcut of 16.67%, the equivalence for a 20% contribution, you get a number greater than $42,000. So his contribution is $42,000.

Based on the numbers provided, I don't think there was a problem with the allocations. You want the doc to get 20% of his plan compensation*, since that's what the staff got (again, assuming that this is a pro-rata allocation). Start with 270k, subtract half of SE tax, and subtract the (assumed/desired) plan contribution of 42k and you're over 210,000, so you use 210000 and multiply it by 20% and get 42,000. All is well. *Again, plan comp is net earned income after all contributions have been subtracted. In this case it's capped at 210,000. If his net would have wound up at less than 210, then you'd have to use the 16.67% equivalancy from the pub to calc the contribution, using his "gross" income (i.e. before subtracting his own contribution).

mjb, the Pub is giving a shortcut for people who don't do plan admin for a living. I do, so I don't use it. You're right, you do NOT subtract the contribution if you're going to use their adjusted rates, they came up with those rates by factoring in (algabraically subtracting) the contribution, as I did above. I showed how a 20% contribution rate on "net" earned income (AFTER subtracting the contribution) is equivalent to 16.67% of gross. The IRS Pub agrees.

You need to correct the 945; I think the form is a 941C. If you already have communication I think I'd send the corrected one directly to the office that is raising the question, with an explanation that it was simply prepared in error. If you did a 1099 showing withholding then that needs to be corrected too. No sympathy here if that causes the participant any headaches.

No. You really need to step back and think about this a different way, I think. Forget about 20% as a "maximum." You're not trying to calc a maximum, you're trying to determine 20% of his compensation. I'm guessing that the contribution is pro-rata; you need to say if that's correct or not. You've said that the employee contributions were 20%, and I'm guessing that his net earnings from self-employment, which are over 210,000 but we don't know by how much, have already been reduced by the employee contributions. (I prefer to get net earnings from SE before ANY contributions and then do those calcs myself, FWIW.) We don't have enough information to calculate his contribution, but... if his net earnings from self-employment after SE taxes but before his own contributions are $252,000 or greater, then a contribution of $42,000 is correct. Subtracting $42,000 from $252,000 gives a net compensation of $210,000 or greater, and 20% of that is $42,000. if his net earnings from self-employment after SE taxes but before his own contributions are less than $252,000, then your formula is CONTRIBUTION = (SEINCOME - CONTRIBUTION) X 20%. That boils down to CONTRIBUTION = 16.67% X SEINCOME. If self employment income = 225,000, then the contribution is $37,500. (225000-37500=187500; x 20% = 37500) You seem to want to start with 210000 and then apply 20% to get a "maximum" but that's not right. If his SE income just happened to be 210000, then, yes, the max would be 20% of that. But then as you note, that's really 25%, and the employees didn't get that much. But you can't just give them another 5% because those contributions reduce his SE income. That's why you should start with SE income before ANY contributions and before SE taxes.

mjb, I thought Lori H was saying that reported comp was 210,000 in 2005, and they treated it as if was a salary and allocated 20%. You're right that it needs clarification, because there are a couple of scenarios: -net earnings from self-employment were more than 210,000 but less than (roughly) 252,000 (after contributions for employees). In this case (that's what I assumed, maybe incorrectly) then there was a calculation error because an incorrect figure was used for "compensation." -net earnings from self-employment were more than (roughly) 252,000. In this case, then there's no problem; earned income after contributions is greater than 210,000 and the correct figure was used. I could be wrong, but I don't think the Code states a limit of 20% anywhere. The deduction limit is 25% of compensation, which is earned income (after contributions) for a self-employed person. Mathematically that's 20% but that should never, IMO, be used directly in any calcs, except perhaps for the simplest of one-man plans and then only as a shortcut.

I think a plan can be de facto terminated when substantial and recurring contributions have ceased, but it doesn't mean much except 100% vesting. As long as the plan has assets, it must continue to file returns (which has been done) and maintain a current document (which apparently hasn't). For that matter, a plan which has officially terminated by written resolution (I guess we can call that a de jure termination?) must do the same, as often happens when a plan is "terminated" in one year and completely distributed in a later year. So, no, I don't think this plan can slip quietly into the night.

I'm not going to bother voting but I'll predict the results at something like 99 to 1.

mjb, what you're saying is true but irrelevant to the situation. They allocated contributions under a formula* and used the wrong comp (too high) for the owner because it should have been reduced by the contributions. *I think it was a formula, but it's not stated. If the plan uses group allocations then they could be ok.

I think they want you to take some action terminating the plan. If your business is a corporation, it should be a corporate resolution, if you are a sole proprietor a letter to yourself or certificate of actions or some such thing should suffice. Depending on plan language, you may (probably) have to make a money purchase contribution for the year. That plan's contributions are required, not discretionary. Your plan documents should contain all of the latest required language. If you're using Fidelity prototypes, you'd probably expect that they are current; that may or may not be true. Final tax returns are due 7 months after the end of the year in which you terminate the plans. If you terminate and distribute all assets by June 30, then you effectively have a short year ending June 30 and the returns are due Jan 1 2008. For return purposes, the plans exist until you distribute all assets, so if you terminate now and don't finish distributing until December, then the returns are due July 2008. Good luck. For better or worse this is not really a do-it-yourself job. I can pretty much guarantee that you'll do something wrong; whether the IRS cares or not might depend on what it is. (e.g. if you are married, you need spousal consent for a distribution, at least from the money purchase plan. That is potentially a big deal.)

They're not supposed to get W-2 income at all; it is, after all, a partnership. But it is, apparently, one of those "everybody's doing it" kind of things, and so far I haven't heard that the IRS cares. From a tax standpoint it makes no difference; I think it's just easier to do payroll withholding than estimated quarterly payments. Anyway, we will use both W-2 and K-1 income. It's not all that easy because the W-2 income does NOT need adjustments for SE tax, and the K-1 DOES, and partnership calcs are bad enough without that complication, so you hope that they're over the limit and don't have to worry about it too much.

I think the publication is saying you MAY maintain a SEP on a calendar year basis if you are a fiscal year taxpayer. The more likely scenario, IMO, is that it's maintained on the same (fiscal) year as the business and therefore contributions would be due July 15 unless extended to Dec 15.