Lori Friedman

Thank you so much.

AAA and BBB each maintains a single-employer retirement plan. AAA merges into BBB, with BBB as the surviving entity. Surviving organization BBB continues to sponsor both the AAA and BBB retirement plans. The two plans will eventually be merged, but probably not until a year or two from now. 1. When the AAA plan files its Form 5500, it has to use surviving organization BBB's EIN. AAA no longer exists as an entity, and BBB now sponsors the plan. Agreed? 2. What about the plan number? BBB is now sponoring two plans with plan number 001. Can one of the plans automatically, and without Department of Labor approval, change its plan number to 002? I know that a single sponsor can't have two plans with the identical plan number, but I can't find any guidance about the mechanics of making a change.

No problemo, leevena. Now it's my turn to apologize...for misspelling your name in my last post.

leevana, I think you're missing my point. In a medical FSA, the employee doesn't care about when he contributes his election. Whether there's $500, $5,000, or $50,000 sitting in his account, the employee has access to his full election amount throughout the coverage period. There's no similar rule, however, for dependent care assistance. The employee might want to have his contributions withheld early in the year, so he can spend the money sooner.

jmor99, I was unable to find anything related to either Sec. 129 or Sec. 125. Some research guides say that dependent care assistance withholdings are "typically" done prorata throughout the entire period of coverage, but they don't mention any requirement to do so. If you find authority to the contrary, would you please post the information so we'll all have it. Thank you.

There might be a valid reason for having the entire $5,000 withheld during the early months of a year. Under a medical FSA, the entire elected amount must be available throughout the period of coverage. If I elect $6,000 for this year, I'll have paid just $500 into the fund during January. But, I can submit $6,000 of reimbursable expenses during January, and the plan administrator has to pay up. There's no similar rule for dependent care assistance. The plan administrator doesn't have to pay any amounts in excess of the account balance. If someone has child care expenses that greatly exceed the $5,000 maximum, that individual might want to collect his tax-free reimbursements as early as possible during the year, rather than slowly stretch out his reimbursements over 12 months.

This thread touches on one of my pet peeves -- the way the term "qualified" gets thrown around with different definitions and for different purposes. We all know that a "qualified plan" is governed by I.R.C. Sec. 401(a). I wish the terminology were used only for that purpose. It's confusing to people when IRA's, 403(b)'s, and other arrangements get referred to as "qualified" for various purposes. Ok...I'm feeling much better now.

Are you asking about a safe harbor 401(k) plan, or about an "ordinary" QNEC? In general, a QNEC can be limited to individuals who work a minimum number of hours and/or are employed on the last day of the plan year. If your plan's making a safe harbor QNEC, however, it can't condition eligibility on working a minimum number of hours or being employed at year-end.

The proposed regulations make it clear that a FSA can't reimburse premiums paid for health plan coverage [Prop. Reg. Sec. 1.125-2, Q&A 7(b)(4)]. But, you're describing a maintenace contract for medical equipment, not a health insurance plan. I believe that you have to step outside the proposed regulations and look to the general law of I.R.C. Sec. 213. There's a whole collection of Revenue Rulings confirming that the costs maintaining and repairing medical equipment, including equipment for hearing assistance, are deductible under Sec. 213. My vote -- go for it.

The Form W-2, Box 1 computation is correct (based on all the information that we have available to us), because the health benefits are subject to income taxation but not to Medicare taxation.

Bill, only if you'll give us an on-line summary of your first favorite thing to do.

No, Pax...not "Hey you", but "Hey, Your Loveliness".

This message board has participants from all sorts of companies, and at varying levels of experience. I'm curious about what everyone's professional title might be. I'll start this off: my title is "Senior Tax Manager" (although I usually force my colleagues to address me as "Her Loveliness").

Brett,\ I'm no auditor (I avoid audits as if they were infectious diseases), but I recall that you're absolutely correct. The accountant's opinion includes a disclosure note to reconcile any differences between the financial statements and Form 5500. Most often, you see this for welfare benefit plans with "incurred but not reported" claims; the total amount gets added to Form 5500, but it's not a fixed liability for financial statement inclusion. Time to beat up on the audit team. Hey...this will be the first fun thing that I get to do today!

George, I guess you could say that I'm the accountant who prepared the financial statements, because my firm performed the audit. I didn't personally work on the audit -- I spend all my time in the Tax Department -- but the same firm's generating both the financial statements and the Form 5500.

But, Mike, in this situation I'm both an accountant and a 5500 preparer. How do I resolve this inherent conflict? Should I split myself into two distinct personalties that will talk to, and perhaps have heated arguments with, each other? Will I eventually go spinning off into space and land on another planet (preferably a planet with no Form 5500's)? But seriously, I find that nonissues take on great importance at the end of an exhausting week. When I'm mentally fatigued, I start to over-think everything.

Well, I think I've answered at least part of my own question. The Form 5500, Schedule H and Schedule I instructions say to "[r]ound off all amounts reported...to the nearest dollar." The PPC 5500 Deskbook extrapolates a bit: "amounts cannot be rounded to any number above a dollar, such as thousands." So, the rules make me prepare Form 5500 down to the dollar, even though the attached financial statements won't agree. I guess this one will be my client's problem, not mine.

On a qualified trust's financial statements, every number is rounded to the nearest $1,000. For example, interest income of $859,247 gets reported as $859,000. The client wants the related plan's Form 5500 to be prepared using actual, precise dollar amounts (the $859,247 instead of the $859,000). In other words, the financial statements, as attached to the return, won't agree to the numbers disclosed on the return. I've never encountered this situation until now, and I can't find any guidance. Every cell in my body, however, is screaming "foul". I think that the two documents have to be consistent. Or, if the consistency isn't required, surely the inconsistency would raise a flag with DOL? Has anyone ever dealt with this matter? What did you do? I think I'll change my username to "I Hate Benefits".

$42,000 isn't the magic number. That's the Sec. 415 limit -- the maximum additions to a defined contribution plan during the plan's limitation year. Elective deferrals/salary reductions are capped by the Sec. 402(g) limit. Each person gets one limit per calendar year. If someone works for more than one employer, or switches jobs during the year, or has a side business in addition to a regular job, he/she's responsible for making sure that the limit isn't exceeded.

A plan can have just one entry date per year, but that would be a bad design choice with unanticipated results. Employees can begin participating in the plan before they've met the age/service requirement. Example. A plan has one entry date per year -- January 1. A new employee completes his first year of service on 03/01/06. The individual can't be kept out of the plan until 01/01/07 (the "waiting" period can't exceed 6 months), so he'd participate as of 01/01/06. That's why plans are designed with a minimum of 2 entry dates per year. If this same plan had provided entry dates on January 1 and July 1, the employee would have started participating on 07/01/06.

I'm stunned. You're describing a real-life business owner who actually wants to help his employees rather than get the most personal benefit at his staff's expense. Did the earth just tip over on its axis and change its orbital path around the sun?

If there are material changes to the plan's financial information, wouldn't the plan be required to distribute an amended SAR? Otherwise, participants would have false and misleading information about the plan's resources. (Ok, ok...I know that absolutely nobody on the planet actually pays attention to or bothers to read an SAR, but we're talking about rules, not about reality.)

You mention that this is a small company. The smaller a plan's size, the greater the likelihood that it will have ADP and top-heavy issues. In very small plans, ADP failures and top-heavy contributions are almost certainties. Have you recommended a safe harbor contribution, either in the form of a 3% QNEC or a match?

I believe that jmor99's referring to a weird little wrinkle in the law -- A sole proprietor has to include "nanny tax" on the Form 940 and Form 941 filed for the business, using the business's EIN. Unlike other household employers, a sole proprietor (who also has business employees) can't use Form 1040, Schedule H.

I'm guessing that GBurns is referring to the attribution rules or the per-share-per-day calculation. I couldn't agree more -- be very cautious about those rules when you calculate ownership percentages.