Dennis Povloski

Good thought! I'm doing a DB/DC combo proposal, and just have plan specs from the DC valuation report. The plan does allow for catch up becuase other participants are deferring up to $22k. Just for the sake of discussion, let's say we didn't have the ability to recharactarize the deferrals as catch ups. What would happen then?

Participant with low compensation makes a large salary deferral and is entitled to safe harbor match. The plan is also cross-tested, and the participant is entitled to a gateway contribution, but because of the large deferral, hits his 415 limit before all of the gateway contribution can be allocated. For example: Comp = $10,000 Deferral = $9,000 SH Match = $400 7.5% Gateway = $750 Only $600 of the gateway contribution can be allocated before hitting the 415 limit. How do these requirements interact with each other?

The plan does not allow for any in service distributions. The plan is at John Hancock. A participant terminated employment, and elected a lump sum distribution in December of 2010. The participant was rehired in September 2011, and 2 days afterwards the company made a contribution receivable for 2010. The terminated participant received an allocation of that contribution, and John Hancock paid out a second distribution using the instructions on file. Of course, I find out about this after the distribution is paid. The second distribution was just over $200. I'm thinking that she shouldn't have received the second distribution since she had become an active plan participant immediately upon rehire. Anyone have any thoughts they'd be willing to share?

To be more specific, when does the actuary need to date the Schedule SB... ...The date that the form is filed? ...The due date of the 5500 (even if it was actually filed previously)? ...Doesn't matter as long as there is one in the file if the plan is audited?

I've always waited until I have the schedule SB from the actuary before sending out a 5500-EZ for a client to sign. When I look at the instructions, it actually says: "If the plan is a defined benefit plan, the enrolled actuary must complete and sign the 2010 Schedule SB...and forward it no later than the filing due date to the person responsible for filing the Form 5500-EZ..." Does that mean you can go ahead and file the Form 5500-EZ early as long as you end up getting a copy of the Schedule SB by the filing due date (including extensions)? The line item just asks if the plan is a DB subject to the minimum funding requirements. It doesn't actually ask if the minimum funding standard has been certified. Thanks!

Agreed! Now back to the original question. In order to pass 401(a)(26), at least 40% must receive a benefit. The amount of the benefit is never defined in the Code or the Regulations, other than 1.410(b)-3 that states “in the case of a defined benefit plan, the employee has an increase in a benefit accrued or treated as an accrued benefit under section 411(d)(6)”. Since very bad people were designing plans that provided benefits of $1 or less in order to pass a(26), the IRS wrote an internal memo that told the agents to challenge any plan that didn’t provide at least a .5% accrual. This was done because the IRS knew it wasn’t worth the taxpayers effort to go to court over such a small benefit and because of this, people started designing plan’s around the .5%. So, if you provide a reasonable benefit and the IRS accepts it, you are good. If you want to be safe, you can use the .5%. I have seen many plans with approval letters that don’t provide a .5% accrual. Either way, the IRS doesn't want non-PBGC covered frozen plans hanging around, so why is your plan still hanging around? Why not just terminate it and avoid this whole issue? The plan not that old, and the owner no longer wants to contribute. I generally recommend keeping the plan around for at least 5 years to help satisfy the permanency requirements unless they have a really good business reason for terminating. The client just needs to keep it for 1 more year.....

Owner only DB is frozen. He is considering hiring an employee for 2012. I think this means he will fail minimum participation when you look at prior benefits structure. How much does he need to give the employee if there is a 401(a)(26) failure based on prior benefit structure? Just the 1/2%? Based on the prior benefit structure? Thanks!

I thought I remembered seeing a good discussion somewhere (I think on BenefitsLink) that went over the issue of Participant loan payments being made with after tax money, and then the interest being paid back into the plan is taxed again when the funds are distributed at retirement. So in essence, the participant pays taxes on the funds twice. Maybe it was an article in the newsletter instead of a posting on the message board. Anyone recall that, or anything like that? Thanks! Dennis

Normally when we process a distribution, we charge a processing fee directly to the participant's account. The plan sponsor has a number of terminees who's whereabouts are unknown. If we use some sort of locator service, can we deduct those fees from the participant's account as well?

A participant in a plan was working on a land deal, and he needed money fast to make a down payment. He took a participant loan of $50,000. One week later, the land deal fell through, so he doesn't need the $50,000 after all. If he repays the loan early, it is my understanding that he will not be able to take another participant loan in the next 12 months because his highest outstanding balance was $50,000. Is there any way for him to undo the loan so that he can put the money back without having the 12 month restriction? or is he just better off keeping the funds and making loan payments so that he has some cash available in the event that another deal pops up?

An insurance agent sold a profit sharing plan to a Dr. group. The group has 6 participants (2 doctors, and 4 staff). The insurance agent set up each participant in an individual variable annuity. The annuities have sub accounts that the employees can direct. The plan document says the employees can direct their investments. The plan's new advisor wants to ultimately get out of these annuities for the employees, but because of surrender fees, he doesn't want to move them right away. For the two doctors, the annuities make sense, and they want to keep them. Since 90% of the money in the plan belongs to the doctors, the advisor is at a loss as to what to do with the employees. Since the employees don't have enough money to be up on a platform, I suggested that he open individual brokerage accounts for them, and they could invest the funds however they wanted to. He's concerned about costs. He feels that if he pools the employee money, he can take advantage of cost savings because they will his some sort of breakpoint at the mutual fund company. The pooled account would be directed by the trustee. If they set up this pooled account and give the employees the option to invest in this or in annuities, does it still count as participant directed? It kind of makes me think of the pooled account as a "fund of funds" type option, but it makes me nervous that the trustee is directing the funds. Any thoughts?

That's where it comes from. Thanks for all your help!

Does the one year wait only apply when you terminate a 401k plan and want to set up another DC plan?

Having brain freeze this morning..... Are you allowed to terminate a money purchase plan and then immediately start up a 401k? Or is that one of those situations where you have to wait a year after terminating the money purchase before you can set up the 401k?

Takeover plan from a payroll company. Plan was originally designed to have 3 month elapsed time eligiblity. An employee enters the plan immediately after 3 months. The plan also says that if you work 500 hours or less, you have a break in service. What do you do with employees that are active and enter the plan after 3 months, but never work 500 hours?

Just in case anyone is interested....Wachovia was the bank that started my frustration. Then I went to Bank of America, who told us that in order to open a trust account, they would have to open it as a personal account, not a business account (ie - "Dr. Smith ttee for the Dr. Smith trust"). So we finally went to SunTrust who knew exactly what we needed, how it should be titled and could help us out. So I think this case is finally closed. I didn't think about using Penchecks because distributions in this plan will be quite few and far between. I always thought of Pencecks as recurring distributions or handling auto rollovers. Are they really appropriate if the participants are not missing and we'll only be making distributions once every couple years?

I have a profit sharing plan with 4 participants that was sold to the client by an insurance guy. Each participant's account is invested his or her own variable annuity. The annuity will only cut a check to the trustee, and they do not process withholdings on distributions. So the plan is needing to set up a trust checking account to deposit the distribution into so that the trustee can cut a check to the participant and process the withholdings on the distribution. They are trying to set up the checking account, and the legal department at the bank is saying that they can't do it because the signatures on the plan were not notarized, and trusts have to be notarized when executed. All of the plans I've ever worked with have the trust provisions contained within the plan, and I've never, EVER, seen a plan document notarized when exectuted. Has anyone out there had this problem with a bank before?

We did send out a letter informing the participant of the error, and amount not eligible for rollover. Is there a special code on the 1099r that should identify the amount not eligible for rollover? I thumbed through the instructions, and didn't really see one that seemed to fit.

A distribution was processed based on incorrect vesting, and the participant received a little over $400 too much as a result. For various reasons, the employer will not try to get the money back from the participant. Instead, the employer will be making a contribution to the plan for the excess amount. So the participant is keeping everything that she got. Is there any affect on her 1099 as a result of this since she got something she shouldn't have?

Got it. Thanks!

Are you saying that even though these people have met the current eligibility requirements and entered the plan, that if I change the eligibility requirements, I can kick them out? Or are you saying the change would take place prospectively and only apply to new short serviced people?

Calendar year plan has 1 hour wait for eligibility (entry on the next 1/1 or 7/1). Profit Sharing only requires that a participant is employed on the last day of the year. I get a payroll report from the client and there are several employees with a very small number of hours during the year. For example, date of hire 4/15/2009 and total hours = 16. Another has DOH = 2/3/2010 and total hours = 8.17. No date of termination for either. The office manager says that these people are like independent contractors, and just work when they are needed, and that they shouldn't be eligible for the plan. Since they're W-2 employees, I don't think independent contractor really fits. Probably something more like temp workers. There is no termination date in the payroll records, so from my reading, they should enter the plan and get a profit sharing contribution. That would get them something like a $5 profit sharing contribution. Even though there's no official term date, could it be argued that they are really terminated after they work their hours and are rehired the next time they work so that they are not included?

I ran into a slightly different situation, but related to the original post. Client terminated a 412i plan and rolled an insurance policy and an annuity from the 412i into a profit sharing plan. The intention was to use distributions from the annuity to pay for the insurance policy premiums. I posted the question as to whether this would violate the incidental benefit rules, to ASPPA for submission as an IRS Q&A, and the ASPPA folks handling the Q&As were nice enough to respond to the question for me. It was decided that since the Annuity and Insurance policy were both rollover assets, that it was ok to use the annuity to pay the insurance premiums. If new contributions to the plan were used to pay premiums, there would be an issue. Don't know if that helps, but that's what we did.

That helped a great deal. Thanks all!

Two doctors each have their own P.A. The PAs are not in any kind of partnership or anything like that, so no controlled group. They happen to work in the same office. PA #1 has all of the employees on its payroll. Some of these employees provide services for PA #1 exclusively. Some employees work exclusively for PA #2. Some employees provide services to both PA #1 and PA #2. PA #2 reimburses PA #1 for the payroll attributed to employees providing services to PA #2. The only people that get a W-2 from PA #2 are the owner and his wife. Both PAs are part of a multiple employer plan, so I'm trying to figure out who the employees belong to (since coverage, non-discrim, and top heavy are applied separately). They all get their W-2 from PA #1. Since PA #2 reimburses PA #1 for its payroll expense, is there anything that somehow makes them employees of PA #2? Or are they strictly just employees of PA #1 because that's where their W-2 comes from?? If anyone can point me in the right direction, I'd appreciate it!