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#3 - The Story of the 2006 Pension Reform Bill #5 - The DOL Auditor Always Rings Twice #36 - Fahrenheit Form 5500

Sponsor has 2 separate 401(k) plans, covering 2 separate groups of employees. In the past, we have aggregated the plans and tested them together for ADP/ACP testing, and they have passed. 2005 was a close call and its likely 2006 will not pass. However, our initial analysis is that if the plans are tested separately (disaggregated), they both would pass ADP/ACP. Of course they would have to also pass 410(b) via disaggregation. The question though, is whether changing from aggregated to disaggregated for testing is a document issue? Does that need to be spelled out in the document, or can we make the switch without any amendments, notices or such?

I know this has been discussed before, but I am having trouble finding the previous posts. Can a 401(k) plan with immediate entry for 401(k) purposes, impose a 1 YOS eligibility requirement before eligibility is met to share in the safe harbor match? Thanks

Only HCEs are employed right now, so there is no problem with discrimination. Question for Belgarath: I'm using an IRS approved prototype document for this plan, and would not normally file for a determination letter. Did you file for a letter solely because of the retro effective date?

Thanks for that informative link; it pretty much covers the exact situation I have. Sounds like the answer it is "probably" OK to have the effective date pre-date the company's existence. Based mostly on IRS conference opinions.

A small company was just started in May, 2006, and damn the torpedos, they want a 401(k) plan up and running by 7/1/06. They want a calendar year plan, but with a 7/1 effective date, which would make their initial plan year a 6 month SPY. The document software does not seem to support having an intial SPY, and as such, there would have to be an amendment before 1/1/07, indicating the plan year as being from 1/1 - 12/31 after the 2006 plan year. This is what they will likely do, but what if we just drafted the document to reflect a 1/1/06 effective date? We would have the "whole plan year we want". The company wasn't around at that time, but would that invalidate the document?

When determining ownership percentages for Key employee (or HCE) determination, do you count just shares owned, or should share options also be considered?

Very gutsy game by Buffalo in game 7, but they came up just short. I give them credit for getting this far with all the injuries on defense. The penalty that lead to the "canes winning goal was unfortunate as well, but I guess the refs had to call it. Great effort, great series.

A plan sponsor's 401(k) plan was badly mismanaged by the the new (and now former) investment agent, complete with money not being invested timely, bad information being given to the participants, etc. A few participants have requested that their current 401(k) contributions cease, at least until this situation is resolved. Can the sponsor temporarily stop all 401(k) contributions, for maybe 4-5 months, until these problems are fixed, and then resume contributions again for all who are interested in re-starting?

With Columbus long out of the stanley cup hunt, I am pulling for Buffalo. Great city that could use the boost of winning a big-time sports championship (for those of us who still consider hockey a major sport:)). I think Carolina may have a slightly better team, but Buffalo just seems to have more "moxie". Either way, the winner of that series should have no problem with Edmonton, who seem to have overachieved in these playoffs.

Having 1 master brokerage accounts instead of individual FBOs is an option. But even with that, the cost to the financial advisor is still significant. Even limiting trades to once a month, you'd still have money deposited from Money market to the 4 funds each month ($80) times 12 months, for $960 annual fee that the advisor will cover. This is a small plan, less than $200,000 in assets so he can't be making that much extra to absorb something like this, at a minimum, every year. And thats not mentioning if someone wants to move their existing money around, which could also happen. Holding the trades and moving money quarterly would probably work fee-wise, but with self-directed accounts, it would be disingenious to tell participants that they have 100% self-direction for their 401(k) money, and then leave some of it sitting in a money market for up to 3 months not invested where they want it. I think that is asking for trouble. Can we get creative with the document and say something like participants having partial self-direction, with a limit of "X" number of times each year they can move money, and current 401(k) money will only be invested on a quarterly basis? That would blow 404© to pieces, but is it still allowable? His motives, I think are what I indicated: That he can offer the lowest fee to the sponsor using this approach and wants hang his hat on that, with everything else falling into place after that.

I wasn't clear in my post; its is the financial advisor and their firm who are paying the costs of executing the trades, and $14,000 - $19,000 estimated transaction fees would be absorbed/paid by their office, not by the plan sponsor. He is seeing only 2 options - either this approach where the financial firm pays all of these extra fees, or the common approach (which I will call Daily Val) without the transaction fees. It is this latter approach which he claims is more expensive for the sponsor and he does not want to use. In other words: Brokerage accounts = lower sponsor fees, but sky high fees paid by the financial firm VS. Daily Val = higher sponsor fees but no fees paid by financial firm. Do these options sound correct and something that most financial pro's confront with most plans, with 99% opting for the daily val approach? My impression is that he wants to stand out from the crowd and show the plan sponsor how his fees will be so much lower than that of "the other guys", who lock you into higher fees by using this daily val arrangement. So he hooks them with that promise, but then wants to limit the number of buys/sells so as to no get killed on transaction fees.

Any thoughts or ideas on this situation are appreciated: Most self-directed 401(k)s and PS that we work are run through a fund or multi-fund family, with all the bells and whistles of web-access, unlimited trades at little to no cost, (within the same family), etc. I am working with a new financial guy who seems to have a problem that no one else does. It appears that he wants to/must use brokerage accounts for the 401(k) prospect. However, with all trades will cost approximately $15-$20 to execute. So, for 10 participants, who have 401(k) money deposited each month, into on average 4 funds each, there would be $1,200 - $1,600 in fees that he would have to pay each month to accomplish all of this. Obviously that is not workable. When I asked about using the more common approach above (big daily val system), he claims that the employer actually ends up paying more in fees using that approach and he wants to avoid doing that. Its really not my problem to solve, but I just wanted to understand this dilemna a little better, as no one seems to have run into this before. Even the few other clients that we have that use brokerage accounts have never mentioned this problem before. One solution would be to no permit self-direction, which would allow the trustee to control things and that would reduce the number of trades. But in allowing self-direction, the trustee is obligated to have the partiicpant's money invested "within a reasonable time period". Could the advisor impose a minimum deposit threshold for the funds, say $1,000? No investments into this fund until there is at least $1,000 to invest into it? Doesn't that violate a BRF if the HCEs are reaching that threshold sooner than the others? Thanks for any comments.

The sponsor of a small PS plan received a letter and forms from the state's child support enforcement office, requesting that a portion of any compensation paid to the employee be paid to the agency for child support. The letter and follow up conversations indicate that a portion of any payments from the PS plan should also be sent to the child support agency. The employee has now terminated employment and wants to take his money. He is aware of the above situation and is OK with receiving an amount less than what has been determined must go for child support. He wants to take a cash distribution. Would he be taxed on the child support portion? If not, who would get the 1099-R? Thanks

So if they are taxed as partners, their "net earnings" on income from service to the LLC will be determined, in part, factoring in any employer contributions to the plan, similar to the "loop calculation" that is prepared for other sole props and partnerships?

That is correct, they have made that election to be taxed as a partnership.

I think the answer is obvious, but I have to ask anyways....does this mean that these 3 members/owners are considered to be self-employed individuals?

I am working with a company that was just created within the past few weeks (May 1) that was established as an LLC. Right now the only "employees" are the 3 members/owners, with other employees expected later this year. They want to start a retirement plan, likely to be a 401(k). But as an LLC, they do not/cannot receive salary and receive no W-2. They can take draws that will be reported on Schedule K-1. Can this form of compensation be used for plan purposes? Are there any potential "issues" that this may involve? Other subsequent employees will receive regular W-2 wages. Thank You.

Just wanted to be clear about 1 thing. If we proceed and start up a 401(k) s/h, the employer indicated that he would like to make the plan effective 1/1/06, with the 401(k) feature effective 7/1/06. If they opt for the 3% non-elective safe harbor, would that 3% be based on 6 months worth of compensation (7/1 - 12/31) or the full 12 months? Also, would the s/h notice would still have to be distributed by 6/1 correct? Thanks

Thanks for replying. After some additional research I arrived at that same conclusion.

Employer currently has a SEP, but now wants to stop funding that plan and start up a safe harbor 401k. To do so right now would mean the plan year (they want calendar year) would be less than 12 months. Since the initial plan was a SEP, does that make a s/h 401(k) a successor plan, and therefore we would have to wait until 1/1/2007 to start the s/h 401(k)? Thanks

Can sponsors of target benefit plans allow participants to self-direct their accounts? Because these are DC plans, I would think yes, but the DB nature of them causes me to doubt if that is the case.

If a sponsor terminates a Target Benefit Plan, and wants to start a PS plan in its place, does the TB have to be terminated or can it be merged/amended into a PS plan? If it terminates then the participant can take distribution of their funds which may not be what the employer wants to do; rather amend it into a PS plan and just keep the assets where they are at.

I guess it doesn't surprise me that an auditor would check on both segragating and final investment destination. Although my question was mainly about hurdle #2, I have to admit about not having completely understood hurdle #1. I thought that the deadline was assets being segregated ASAP in the month following when the 401(k) contributions occured, but no later than the 15th business day of the month following withholding. So, In other words, If the company's payroll is May 5th, the 401(k) contributions have to be segregated ASAP on or after May 5th, but no later than the 15th business day of June. Is that correct? As for depositing those May 5th contributions into the proper investments, that would be anothe ASAP? Thanks to all for the responses.

ERISAnut is correct, I was referrering to 2 separate transactions; #1 segregating the assets, #2 investing according to the participant choices. I understand the timing hurdles for #1, but was checking what the hurdles are for #2. Thanks to all for taking the time to reply.