Bird

The new 401(k) regs say that the short year has to be flanked by two full safe harbor years.

I think this is what you want: Basic match - required. 100% of the first 3% plus 50% of the next 2%. Optional match. Not to exceed 4% of pay and not to be calculated using deferrals in excess of 6% of pay. So if the guy you're designing this around earns 200K, and defers 14K in 2005, you can do a discretionary matching contribution of 4% or 8K. As a percentage of his deferrals, this is 66.67% as Tom Poje noted above (you can only consider the first 12K of deferrals, or 6% of pay). So you're going to match everyone to the tune of 66.67% of deferrals, but limit deferrals (in this calculation) to 6% of pay. It needs to be permitted in the document, but it is in fact discretionary.

If the extra match is discretionary it is limited to 4% of pay.

Look at the definitions in the basic plan document - they probably all include "earned income" so it probably doesn't matter. That is, you don't necessarily have to have wages reported on a W-2 to have "W-2 Compensation." If you have any doubts use 415 comp.

You're right that the right advice is to re-file and file new returns for 2003; maybe you could even get the penalties waived. The reality is that the chances of being audited are remote.

You can do general testing on a contributions or benefits basis, so if all participants get the same percentage of pay (you are allowed to impute permitted disparity) then you'll pass on a contributions basis. Whether your current allocation formula lets you get where you want to go is another matter. If your document has groups, then you should have no problem. If it's superintegrated, everyone probably gets the same percent up to a certain level like 3%, so you could make small, equal contributions, but finding a sweet spot above that might be problematic or impossible.

Yes, the extension on returns includes contribution deadlines for deductions.

I agree with Mbozek, but the accumulated PS-58 costs should be tax free as well as the amount at risk. Locust, the plan/trust SHOULD BE the beneficiary of the policy, but the post says the spouse was. I don't think that's relevant to the taxation issue, but it raises questions about the process. Suppose the plan bene and the policy bene aren't the same (and we don't know that that's not the case here). The insurance co. shouldn't pay to the policy bene, but I don't know what you have to do to convince them that their designation on file is invalid.

Yes, whether the result is good, bad or indifferent depends on your perspective. I don't think you'll have perception/morale problems if it is explained properly. You've done a good job of identifying the problem (!). The first part is easy, the amendment just says "notwithstanding anything herein to the contrary, we are making a special contribution in these amounts (list participants and amounts)." All I can say on the issue of taking the plan out of prototype status is that the accumulated weight of this and other situations has convinced me to not use prototypes.

R Butler, I agree that the instructions say that you must file a 5500. I'm not sure that anyone, even the IRS, would care, if by some bizarre set of circumstances this defect came to light, but that is in fact the rule.

I agree with padmin. Treat it as if it had been two steps, a contribution (not earmarked) and then a premium payment from the doc's account.

True, but neither would I want to be involved in an action in which the participant unwittingly relinquishes his ERISA rights.

I'd say a self-employed has one payroll period: 1/1-12/31.

Blinky, I understand. I was thinking that selling it wouldn't cost so much but I don't know...IF it comes up later, and IF he is paying a professional hourly, the hourly charges for dealing with it will come to more than the commission.

He's just postponing the inevitable...he should suck it up and re-register now, or (probably) just sell the stupid thing and get rid of it.

Huh? What exactly did DOL say? Yeah, but if I remember correctly they were told to get a bond and refused to do so. I agree that there's no excuse for not having one though.

I think that's what's needed. But note that the form for an "amended 945" is 941-C.

I think you'll find that for these kind of accounts (I assume you're talking about basic brokerage accounts that are not on a platform) the only electronic statements you'll get are pdf files. Which means the burden of organizing the files, opening them, and printing them is on you. I find it easier to just get the printed statements in the mail, throw out what we don't need, and deal with the rest as needed. It's a horrific waste of paper and postage but much, much easier on us.

If the error occured this year, and both participants are still making contributions, I would just make an offsetting correction with the next deposit. If it was from last year...well, on the couple SIMPLEs that I have the misfortune to be involved with, I get the data pretty quickly after the end of the year so we'd know pretty quickly and would fix it the same way. If for some reason that doesn't appeal to you, you need to contact the financial institution and ask them how to fix it. They'll probably accept a letter of instruction.

Exactly. I don't know the whole story, but it appears that the payment arrangements are better handled without a 1099 and instead with different K-1 numbers for the active partner, perhaps representing guaranteed payments. I'm not saying it's a huge problem, but I wind up with more questions than answers.

Mbozek, I think the 1099 income is the amount which will be used to determine the amount of the retirement contribution which can be contributed...by himself, no (not the partnership). (If the payment arrangements are legitimate.) Aaron, I'm going to pass on further discussion. You need to discuss this with your tax advisor (the one who decided to pay you on both a K-1 and a 1099). I'm guessing this was done to try to separate the "passive" and "active" components. It may or may not be OK, and in fact it probably doesn't matter much from a tax standpoint, but when you start talking about retirement plans and who is the sponsor of the plan(s) it gets ugly.

It's not clear which year you are making the 401(k) contribution for. Any election to defer income for 2004 should have been in place by 12/31/2004. There is some debate about when the contributions are due; theoretically they are being withheld from your "pay" as of 12/31 and should be deposited as soon as possible. If you elected a percentage and don't determine your income until Oct 15, you might argue that it's not due until then. That timing issue aside, I don't see a problem with using your RMDs to fund additional contributions. It's no different from "spending" the RMDs and "saving" some other money instead of "spending" some other money and "saving" the RMDs. (It's not quite that easy if you're not a sole proprietor).

Aaron, I think you need to back up and give specific info on how you receive your compensation. You say you're the managing partner, which implies that you receive a K-1 from a partnership, but then you say that technically you're a consultant and pay your own self-employment taxes, which makes me (and others) wonder if you get a 1099 at the end of the year. A SEP-IRA is a nice easy plan, but there are indeed eligibility rules and non-discrimination issues that need to be addressed. You can't, for instance, give him 10% and yourself 20%...nor can you give him 10% and yourself 5% with this type of plan. I'm also curious about where the SEP money is (financial institution).

Choices: 1. Don't file a Sched P. 2. Name a new trustee and get him/her to sign. Someone might argue that the new trustee can't sign because he wasn't the trustee for the year in question (2004 I assume) but I don't think that's the case...the trustee is just signing something saying he has provided all of the info to the administrator. A new trustee would have access to the information and could provide it. It's not like it's going to be challenged anyway.

I agree. He exceeded an employer-provided limit, and that's one of the applicable limits under the regs that can make a contribution a catch-up.