Bird

Well, I'd be curious to know how the successor custodian coded the deposits. If they were coded as regular IRA contributions, or rollover IRA contributionsI guess I'd be at least a little concerned. But, at the end of the day, a SEP is just a vehicle to get money into an IRA, and if that's what happened, I'm not so sure there is a problem.

Given the facts in this case, I would not be concerned.

I think you have to figure out how the stock should have been allocated back when it was received in 1981 (pro rata based on cash values at the time?) and track it from there. It's definitely an asset of the plan and should not be used to offset contributions.

I have a client who made some voluntary contributions, non-deductible, way back in the '70s and '70s. He's still in the plan, but now receiving minimum distributions. I think that if he takes systematic withdrawals, he recovers the basis pro-rata, and if he took it all in a lump sum he would recover the basis all at once. So the question is (if I have that right), are the RMDs systematic and subject to a pro-rata basis recovery? I'm thinking yes... Thanks.

I draw the line somewhere north of $.14. Exactly where, I'm not sure.

Thanks to both of you; that makes sense.

I'm not sure what that notice was and don't have access to resource materials but isn't your submission for GUST? I had a submission with similar facts and when I looked it up they were right; the client was entitled to the refund. The bottom line is I wouldn't argue with them. Make like Harry Chapin: "I stuffed the bill in my shirt."

From an operational standpoint I don't think there is a difference. From a compliance standpoint, if the plan didn't have the mandatory cashout language removed or the limit lowered by 3/28, then it will have to be amended to include the automatic rollover language, even if it never processes an automatic rollover because the mandatory cashout language is removed.

I don't know if this is obvious or not, maybe for some it's the whole point of the thread, but if you have mandatory cashout provisions, and amend to remove them or limit the threshold AFTER 3/28, you're going to have to adopt an amendment (presumably the sample amendment), even if you don't have any terminations in the meantime. i.e. it's not just a processing issue, it's a document compliance issue - a plan that has mandatory cashout provisions after 3/28 must have the IRA rollover language, even if no cashouts occur, and even if the mandatory cashout language is removed at a later date.

I think BJ stated it quite accurately; I'll try to expand. If your plan calls for mandatory distributions... You can postpone mandatory distributions until you establish procedures etc until 12/31/05, but you still have to do a rollover. If you have a terminated participant on 3/28/05 (or any date thereafter) and you haven't amended the plan, you must process the mandatory distribution(s) (as a rollover(s)). Q&A 12 says that you can eliminate mandatory distributions. I don't see that there's a time limit on that; i.e. you should be able to do it whenever you want, prospectively. But if you have a termination after 3/28/05 and before you amend, you have to comply with the rollover rules. Therefore, if you want to assure yourself that you won't have to process a rollover, you had better amend by 3/28/05.

The 1099-R instructions indicate that a permissable additional code for "1" is "L" and for "L" it is "1". It doesn't say that we can combine 7 and L - I don't see why not - what do you think?

It's not about non-discrimination, it's about prohibited cutbacks. I believe that the original post was about a plan with a formula, not one with groups, which is a different matter, although similar logic ultimately prevails with regard to (not) being able to change groups. If you have a pro-rata formula, and two NHCEs, each earned $50,000, and (after the end of the year to avoid other distractions) the employer says "let's make a 2% contribution"; then each will get $1,000. If the employer then says, "oh, and I want to give an extra $1,000 to #2" then that is a cutback to #1. Why? Because the plan has no provision for multiple contributions; the plan says the employer can make an optional contribution, and it is allocated under the terms of the document. In this case, the contribution is $3,000, and each should get $1,500. (Unless, as noted, the plan has a cap of 2%, but let's face it, it doesn't.) If you disagree, you are effectively saying that the employer can make a $3,000 contribution, and allocate $2,000 according to the terms of the document and $1,000 according to its whim. You could take that to an extreme and say that the first $.02 are allocated according to the terms of the document ($.01 each) and the next $2,999.98 goes to #2. (Frankly, that does nothing to support my argument but I hope that the result defies common sense.) Addressing your example: Because the contribution is somewhere between 2% and 5% of total compensation; let's say you add it up and it is 4% of total compensation. In this plan, everyone should get 4% of compensation. You have taken 2% from the accounts of some who would have gotten 4% had the total contribution been allocated according to the terms of the document (pro-rata) by arbitrarily amending the formula (to "2% for everyone and an extra 3% for certain participants").

Yes. I can see asking people to fill out new forms but to declare prior designations invalid is bizarre.

Yes, you can do it, but you have to make sure you allocate the contribution in accordance with the document. As WDIK notes, you can have a plan with "groups" in which different contribution levels are permitted for each group. You could also simply exclude the HCEs, and yes, you could amend the plan later to include them. You have to be careful on the timing of the later amendment so that you're not effectively reducing the NHCE allocations after they are earned (if the plan requires employment on the last day of the year, then the right to an alllocation is generally earned on the last day of the year, so in that case you could amend as late as the day before the end of the year).

I wondered how this could possibly go on for two pages...what is this, April Fool's? To the original poster: no, you don't file. Period.

I don't understand the concept of an "extra" contribution to a PS plan (unless, as noted earlier, there is a limit of 2% or whatever). PS contributions are, generally, optional, so it would be arbitrary to say "the basic contribution is 3%, and we're making an extra contribution of (whatever) to certain people." It is a cutback for participants if they would have received more had the total allocation been allocated under the existing formula. You are allowed discretion in the AMOUNT of the contribution. How that contribution is allocated is determined under the 4 corners of the document. I don't see how you can reach any other conclusion.

I should have added that if the brokerage firm really can't (or won't) write the check to the payee as desired, and there is withholding, then you should ask them to write two checks - one for the net amount, which can then be endorsed and given to the participant, and one for the taxes, which can be endorsed and deposited to the business account; then the business writes an identical check to the bank and makes its tax deposit.

The custodian SHOULD be able to write a check to the participant, or whomever the trustee wants, under a properly drafted letter of instruction; you may have to add language that holds them harmless from any tax, reporting or other issues arising from the distribution. If there is a custodial agreement that says otherwise, so be it; I'd file that away in my memory bank and steer future clients away from that firm if possible, or charge extra for the hassle of dealing with them. Also, I wouldn't necessarily accept the first answer I get, especially if it's from the broker. FWIW.

I think that if the plan existed and there were eligible participants who simply chose not to defer, then a 5500 is required. I've heard it argued the other way, that the underlying trust doesn't exist until it has money in it. I don't think that's relevant, especially in this case where participants were eligible for deferrals. FWIW, I'm pretty sure that if you decided NOT to file, and then used 12/1/04 as the effective date when you file for the 2005 year, it will get kicked out.

If he's willing to set up another plan for the other business, and eat the expenses associated with it, then he could simply have one plan for him in his practice and one for everyone else. All provisions are the same so you don't have discrimination issues, and each is trustee directed; he just happens to be the only participant in the one where he wants to play around. It's hard to believe this is better (in terms of expenses) than simply allowing self-direction in one plan, but there it is.

My recollection is that a conduit IRA is a rollover IRA that holds only money rolled from a qualified plan. Back in the old days when you couldn't roll regular IRA money into a plan, you had to keep any prior plan money in a separate (conduit) IRA if you ever wanted to roll it back into a plan. I've heard the term "beneficiary payout IRA" which is an IRA that is really the decedent's for RMD purposes but has the beneficiary's name on it for reporting purposes. I think it would be possible to set up 5 payout IRAs and let each bene dictate how rapidly s/he wants to pull it out...all subject to required minimums. I don't think a Roth IRA is relevant to this case except that the distributions might provide funds for each beneficiary to fund his or her own Roth.

I think you might want to look at an end-of-year entry date (12/31) and count comp for the whole year. That might bring in future employees sooner than you want but solves the immediate problem.

Austin, I think he's saying that 25% of net = 20% of gross. Of course it's not quite that simple with the self-employment tax adjustment. And yes, I think it is $20,500 if over age 50. Just to expand a bit on the comp needed to max out, you don't have to pay $112,000 each since the individual limit is 100% as you noted. (In a corporate setting) you could pay the wife $41,000 (well, a little more for SS taxes) and $183,000 to husband (or vice versa!). Still a total of $224,000 (2 X $112,000). PS contribution is $56,000 or 25%; allocate pro-rata until husband is maxed at $28,000 ($41,000 total); wife gets the rest ($28,000 total PS; $41,000 overall). You save on some SS taxes this way.

Maybe/maybe not. First, you have to pay your wife a salary from which she defers $16,000. You'll have to pay her about $17,500 or so because she still has to pay SS taxes on those wages. ...unless you're organized as a partnership with her, which doesn't sound like the case. Second, you can forgot about matching contributions. They just complicate things in this situation where there are no other employees (is that correct?). You can make profit sharing contributions up to 25% of total covered payroll, but no individual participant can get more than 100% of covered pay. Your own "pay" is determined by subtracting plan contributions from your gross profit, and there's an adjustment that has to be made for paying self-employment taxes. Third, when you fill out the adoption agreement, you need to make sure your wife is eligible. It's probably more complicated than you thought, and you can screw things up pretty badly quite innocently. I hope you're working closely with that ERISA lawyer or some other professional to make sure everything is set up and done properly.

I don't see any problem with it. I assume it wasn't set up on payroll deduction, and even if it was, as long as prepayments are permitted, it's OK.