Dennis Povloski

Does an 11(g) amendment need all the same disclosures as ordinary amendments (such as a summary of material modifications)?

I would like to combine two plans for coverage and non-discrim. One is the existing cash balance plan that runs for the full calendar year. The other is a new 401(k) profit sharing plan which also uses the calendar year, but because it is a new plan, there is a short plan year. 2 questions: 1. I know that in order to permissively aggregate, plans must have the same plan year. Does the short year in the 401k mean that I cannot combine the two plans? 2. If I can combine the two plans, what period is the compensation measured over? The cash balance plan uses the full year's comp, and the 401(k) uses the short year's comp.

I posted this question to TAG, but I'd like to hear what other people think... Balance Forward Plan. A participant turned in distribution request to the employer in 2008. The most recent valuation date was 12/31/2007. The employer paid out the distribution from his corporate account in error. Jump to 2009. In reconciling the 2008 assets, we noticed that no distributions were paid from the trust account, which is how we discovered the error. We've now passed another valuation date, and during 2008, the participant's account lost 40% due to investment losses. We understand that the plan still needs to pay her a distribution, and that the owner essentially paid her a bonus by paying her out of the corporate account. My question is how much do we distribute now? The current value of the account? or the amount she was quoted back when she filled out her distribution forms? Thanks!

Yes. That is referring to a cash balance plan. I'm curious as to what kind of client people think this type of plan might be great for. I'm in the small plan market, and it seems that it's not really something that I could run out and say "hey, you really need to do this!" Any thoughts?

Do you have to do an adjustment for earnings? If so, what method would you use? If the extra contributions were put in for multiple payrolls, would you pro-rate earnings?

I was talking to a CPA that asked if I had ever seen a "life settlement" strategy used in a pension plan. I'm actually unfamiliar with that technique with life insurance, but as I understand it, after a policy has passed it's contestability period, the owner of the policy has the ability to sell the policy to someone else. The owner receives a larger than expected amount for selling the policy, and the third party collects on the death benefit at the insured's demise. Does anyone have any idea how this works or would work or would be forbidden in a defined benefit plan? Thanks!

Cramming at the last minute for C-3 tomorrow...This is actually a sample question from the C-3 study guide, but since there hasn't been a post in the C-3 board since 2005, I thought I might get a better response here...The question does involve a QDRO, but my concern doesn't involve the QDRO piece of it. Question: "Participant A's interest in the plan as of December 31, 2001, is $800,000. The administrator received a QDRO that awards 25% of Participant A's interest in the plan as of December 31, 2001, to Participant A's child. Participant A's interest in the plan consists of $700,000 attributable to employer contributions and $100,000 attributable to after tax contributions. Participant A's child elects to receive a cash distribution of $200,000. How much must Participant A include in income?" Answer: $200,000 I understand that since the QDRO awards payment to the child that the distribution is included in the participant's income. BUT, I thought that there must be some kind of recovery of basis since the account contains after tax contributions. Shouldn't part of the $200,000 distribution be a return of after tax contribution, and therefore not included? Am I on the right track?

That's the one. Thanks!

I read an article on quarterly contribution requirements that came to me through an e-mail newsletter (BenefitsLink or TAG, I think), but I can't seem to find it again. I wanted to go back and read it again to see if I correctly understood what I read. The article had a discussion on unexpected consequences due to the use the credit balance to satisfy quarterly contribution requirements. If I remember correctly, it said that an election to use the credit balance to satisfy the quarterly would satisfy the quarterly requirement, but not count towards any minimum funding. Over simplified example, if your minimum was $100,000, your quarterly was $25,000, and your credit balance was $25,000. You elect to use your credit balance to satisfy your first quarterly installment, so the first quarterly is deemed to have been made even though you didn't deposit a contribution to satisfy it. At the end of the year, you are still required to put in the full $100,000 adjusted for interest due to missed quarterly 2,3 & 4 and whatever other interest may apply. Does anyone recall seeing this or have any insight on how this works? Thanks!

I'm not sure what the whole story is, but I got a call from a broker asking if a company can put in a plan to cover its employees if 100% of the employees are leased. If they meet the definition of leased employee under 414(n), then they are basically treated as employees of the recipient for plan purposes, right? The employer wants to cover the employees under the plan. Are there any issues?

What happens when someone makes larger payments to their participant loan than what the amortization schedule calls for? Let's say that a loan is amortized over 5 years with quarterly installments, and the participant manages to pay off 50% of the loan in the first year. Do you re-amortize the balance over the remaining period? I'm good on loan basics, but need a little advice when things fall out of the regular pattern. Thanks!

It's a construction company, but now that I think about it, a significant portion of their business is derived from contracts from the state. I suppose it could be that this is the state's form of due diligence for their contractors.

I'm a Northeast Florida boy, and I'm looking at a PS valuation for a prospect in Southern Georgia. The cover letter on the 5500 from the prior administrator says that the forms need to be mailed to the EBSA, and a second complete set must be mailed to the Georgia Income Tax Division, Tax Exempt Organizations. I didn't know that the 5500 needed to be mailed to anyone except for the EBSA. Is this a special rule for certain types organizations? Is it a special rule for Georgia? Thanks!

The plan and fiscal year are both calendar. All contributions were deposited during the year, and the contributions were maxed out in the prior year, so I don't think there's any way to attribute the contributions to any other year.

If a plan sponsor erroneously contributes to much to their plan. What are the acceptable methods of getting the money back out. In this case, the max deductible contribution is $37,000, and the client put in $78,000. There was no error in the actuarial calculation, so I don't know what prompted the larger amount to be contributed. Can it be removed as a Mistake in Fact? I always thought that if the amount exceeded $25,000 that you had to apply to the IRS to get them to disallow the deduction, which would allow a removal of the contribution. Thanks!

Plan's normal retirement age is 55, under the new NRA rules, the plan must increase NRA from 55 to 62 (there is nothing to base the earlier retirement age on). The plan has a flat benefit formula with fractional accrual. It would make sense to me that you have to preserve the accrued benefit, so actuarially increase the age 55 accrued benefit to age 62. The part that's a little harder for me to wrap my brain around is how to deal with the fractional accrual. Now that there are more years to retirement, the denominator in my accrual fraction is larger, which means that each year a smaller piece of benefit is accrued. It seems to me that the accrued benefit is now larger than what it would be if I just did a straight calculation using the new accrual fraction, so the accrued benefit would remain unchanged until the point where the new accrual fraction causes the accrued benefit to increase. Am I on the right track? If so, is there any problem with this "wear-away" type affect? It has been suggested to me that in conjunction with the change in NRA, that the plan formula also be changed to a unit accrual-type formula. Thanks! Dennis

Does the client also get taxed personally on the distribution of his benefits?

I'm still trying to untangle the whole mess, but the way I understand it, the two dentists are 50/50 owners of their practice. Each dentist initially, had a sole proprietorship that sponsored their individual DB & 401k. The sole proprietorship's income was derived from personal loans and consulting fees paid from the practice. In the second year, the younger dentist set up an s-corp which owned office equipment that was leased to the dental practice (the S-corp's only source of income). The S-corp became the sponsor of his individual plans for the younger dentist. I suspect that something similar happened for the older dentist but need confirmation.

I've come across a case where a dental practice has a 401k plan for it's staff, and each dentist was told by an Attorney/CPA/TPA that they could set up outside entities (the dentist being the only employee in each entity), and that these outside entities could have their own DB & 401(k) plans. Everything that the client is telling me screams affiliated service group. I have no idea what basis the prior consultant justified these plans. I explained that the clients should approach the IRS through one of the correction programs to see how to resolve this, and explained about adding back employees, making up contributions, and paying excise taxes. Then, one of the dentists asked if it would be better to just have the plans disqualified. The practice has about 25 employees in it. One of the dentists is in his early 40's and is about the same age as most of the employees. The other dentist is in his late 50's. The younger dentist has about $600k in his DB plan, and the older one has just over $1M in his plan. By the way, the "individual plans" were effective 1/1/2004. Has anyone seriously had to weigh plan disqualification as an option? I know that the right answer is to call in the help of an ERISA attorney, but I'm still arming myself for the conversation I'm going to have to have with these guys. Thanks!

I'm reading proposed regs for cash balance plans, and they have a list of options for acceptable Market Rates of Return. They were nice enough to reserve sections for Equity-based rates and fixed interest rates, so basically we have the 3rd segment rate, various treasury yields, and eligible cost of living indices. I'm trying to wrap my brain around how these interact with the PPA funding rules, and just speaking in very gross generalities: *If we use the 3rd segment rates, our target normal cost can be higher than the contribution credits because contributions are projected at the 3rd segment rate, and discounted using potentially all 3 segment rates (assuming 1st and 2nd segments are lower). *If we use any of the treasury yields, our target normal cost can be lower (project out at a low treasury rate and discount at higher segment rates). *I'm assuming that the eligible cost of living indices are along the lines of many of the treasury yields, so same problem. Would anyone be willing to give your thoughts on how you are selecting interest credit rates for your new cash balance plans? At first, I leaned towards using the 3rd segment rate because it seems to produce a target normal cost that is close to the contribution credit, although it seem silly to have a funding cost larger than the contribution credit. If I use a treasury rate, the target normal cost seems to come out extremely low because there is a large disparity between the treasury rates and the segment rates. I suppose that as time progresses, you have enough range in the maximum to make up for any shortfall, so maybe that's the way to go. Anyway, thanks for humoring my ramblings.

If a prohibited transaction occurs, and the plan terminates but the PT has not been corrected, is there any effect on the PT or correction method?

The ERISA Outline book says that the taxable period for determining the amount of the excise tax on a PT is the first of the following dates: 1. The date the IRS issues a notice of deficiency for the excise tax, 2. The date the tax is assessed, or 3. the date the transaction is corrected I understand the corrected part, but what triggers the first two? My example, a client has land in their 401(k), and they want to buy the land from the plan. If they buy the land and pay the excise tax, the transaction is not corrected, so the taxable period continues. What would cause the issuance of Notice of Deficiency, or cause the IRS to assess the tax? I'm not an expert on PT's, but I want to give the client some things to consider with their attorney when they start considering this. Any pointers would be greatly appreciated.

I was brushing up on audit requirements, so that I could address a CPA's concerns about skyrocketing audit costs for one of his clients, and in the ERISA Outline book, it says that if the employer sponsors two separate plans, that the participant counts are not aggregated in determining whether the plan is a large plan or a small plan for purposes of the 5500 filing requirement. So if a portion of the plan is spun off, such that the participant counts to both plans are less than 100, then they file as small plans and avoid the audit if they meet the other small plan exemption requirements? I'm generally a small plan guy, so I just wanted to make sure that I was understanding this right. Did I miss anything? Thanks! Dennis

This is an extension from a post in the plan termination board. I've come across a plan that has been terminated. It did have a safe harbor provision though I'm not sure if it was the match or non-elective. Now the client wants to rescind the termination. From what I understand, the distribution forms have been delivered to the participants, but no distributions have commenced. I'm pretty sure that we can unterminate the plan, but if we do that, the safe harbor falls apart. If I have to test the plan, I'm pretty sure it will fail at this point. If the safe harbor is the non-elective, and they make the full non-elective, is there any way to salvage the safe harbor?

Thanks for the info. That helps a great deal!