John Feldt ERPA CPC QPA

A friend of ours turns 70.5 next year. They want to know if they will be able to make a direct payment from their IRA to a religious charity. Was that rule extended? If so, was it only temporary? How does it work or benefit the IRA holder?

If they failed to adopt a restated/amended written 403(b) plan that covers the Final 403(b) regulations, before you submit under VCP, is the new written plan, as signed now, adopted with a retroactive effective date of 1-1-2009 or do you adopt the restated plan with a prospective date or 1-1-2010 date instead?

Look at 1.401(a)(4)-8(b)(1)(vi)(A) and (B) - note the difference where in (B), the 5% allocation, it refers to 415 compensation.

A fair number of deferral-only plans that cover 120+ participants will benefit by being non-ERISA plans since they avoid the expensive accountant's opinion required by the Form 5500. For example, if the opinion (audit) is $9,000 divided by 125 participants, that's a cost of over $70 per person, more if it's charged only to those with balances in the plan.

Other than cash balance plans...

Each participant could be considered as a separate and distinct allocation group. And if all the employees are NHCEs, then it's a buffet for the employer. edited for a typo.

I think they're called a solicitor there, instead of a notary.

Excellent, thanks!

Can a 403(b) plan be established for a non-profit corporation under 501©(3), but only allow employer contributions (nonelectives) - thus allowing no salary deferrals? The employer has no other plan (no 457 etc). Is this a universal availability problem? The reason for the question is because 415 compensation continues 5 years after separation and the director (a NHCE) would like to set up a plan to provide nonelective ER contributions (which would continue after separation), but they are not interested in allowing salary deferrals.

We saw something like this last year, but they did not sign the two plans and had us take a look because they were confused by the documents and because TIAA was really impressing upon them to have a independent consultant review it for them. It was rather puzzling reviewing the contracts/plan documents - the language really did not spell it out as you described, but that is what the employer was thinking it said, but we gave deference to that interpretation, but after reviewing everything they could provide on it, they really only had one 403(b) plan overall.

Perhaps the plan document is written so that it slightly shortens the normal maximum length of time allowed under the elapsed time method for vesting. For example, an employee hired on March 1, 2009 normally does not have a year of vesting under the elapsed time method until they are employed through February 28, 2010. If the plan is written as you suggest, then perhaps it's indicating that they would have a year of service for vesting on Decemebr 31, 2009 (a little earlier)? Also, employment is not necessarily 'being there' on that day. Employment is a relationship between employer and employee. For example, if the plan year ends June 30 and you did not show up for work on June 30, does that mean that you were not employed on the last day of the plan year? Contrast this to the employer ending your employment on June 29th. In each case, you weren't at work on June 30, but your employment relationship is the true question that needs to be answered.

Let's assume a deferral-only plan satisfies all of the requirements to be considered exempt from ERISA. If they decide to allow participant loans for specific purposes, such as medical reasons, can they still be a non-ERISA plan? If so, what should they be careful to do (or not to do) so they are not considered to be "maintaining a plan"?

Q. "To correct the test, can I give each employee the addtional amount needed to get them to 5% of 415 comp? Which would mean each employee would receive a different percentage, it would not be pro-rata?" A. The plan document spells out how amounts are allocated. If the plan document states that each person is a separate rate group, then yes, the employer can allocate disparate amounts to each person in that division. If the plan document indicates that employees in division A are allocated an amount that is prorated by compensation, then you will need to bump up eveyone until the lowest allocation rate for that group is 5% of 415 compensation. Q "and in this group there are highly compensated employees. Since they are HCEs, do they have to receive an additional amount to get to 5% of 415 comp?" A. Same answer as above - if division A has some HCEs, the document will spell out how they are affected.

Uunder the elapsed time method, no minimum hours are required each year to earn a year of service for vesting, they simply must remain employed. If the plan has a 3-year cliff vesting schedule and uses elapsed time vesting, then anyone who stays employed until the 3rd anniversary of their initial employment, regardless of hours worked, has become 100% vested. This assumes no breaks in service occur during that time.

Correct, the bonding is required for ERISA covered plans.

Not really. In your example, Safe Harbor contributions for 2009 must be made by December 31, 2010 - that's required by the safe harbor regulations. However, if you expect to approach the 415 limits (or get within 3% of pay of that limit) for any participant for 2010, then you should make the 2009 contribution by October 15, 2010 (I think).

A) Was the participant's account reduced to pay your fee, or B) was the full account paid and then you tyracked down the participant to get the fee from their funds after distribution? Since A) is likely the case, then your fee should not be reported as paid out to the particpant on the 1099-R (since it was never paid to them).

Bryan, I think this may help. Suppose a government university 403(b) plan covers the rugby coach and the plan provides that employer contributions of $24,000 per year will continue for 5 years after severance from employement (assume he makes more than that in pay before he severs employment). Does Treasury Regulation 1.403(b)-3(b)(4) mean these allocations for the 5 extra years are taxable to the coach each year even though they were contributed to the plan? No, it does not. Regulation 1.403(b)-3(b)(4) says that "except as provided . . . in §1.403(b)-4(d)", the exclusion from gross income does not apply. Therefore, you must also look at §1.403(b)-4(d), which indicates that nonelective contributions may be made for former employees based on their deemed includible compensation through the end of the year of termination and the next 5 years. Those nonelective contributions would be excludable from compensation, the same as any nonelective contribution to a 403(b) plan. §1.403(b)-4 Contribution limitations. (d) Employer contributions for former employees--(1) Includible compensation deemed to continue for nonelective contributions. For purposes of applying paragraph (b) of this section, a former employee is deemed to have monthly includible compensation for the period through the end of the taxable year of the employee in which he or she ceases to be an employee and through the end of each of the next five taxable years. The amount of the monthly includible compensation is equal to one twelfth of the former employee’s includible compensation during the former employee’s most recent year of service. Accordingly, nonelective employer contributions for a former employee must not exceed the limitation of section 415©(1) up to the lesser of the dollar amount in section 415©(1)(A) or the former employee’s annual includible compensation based on the former employee’s average monthly compensation during his or her most recent year of service. §1.403(b)-3 Exclusion for contributions to purchase section 403(b) contracts. (b) Application of requirements-- (4) Exclusion limited for former employees--(i) General rule. Except as provided in paragraph (b)(4)(ii) of this section and in §1.403(b)-4(d), the exclusion from gross income provided by section 403(b) does not apply to contributions made for former employees. For this purpose, a contribution is not made for a former employee if the contribution is with respect to compensation that would otherwise be paid for a payroll period that begins before severance from employment. (ii) Exceptions. The exclusion from gross income provided by section 403(b) applies to contributions made for former employees with respect to compensation described in §1.415©-2(e)(3)(i) (relating to certain compensation paid by the later of 2 ½ months after severance from employment or the end of the limitation year that includes the date of severance from employment), and compensation described in §1.415©-2(e)(4), §1.415©-2(g)(4), or §1.415©-2(g)(7) (relating to compensation paid to participants who are permanently and totally disabled or relating to qualified military service under section 414(u)). You can call me if you want to discuss. -John

I do not see how the 403(b) plan can be merged with the profit sharing plan. Rollovers, yes, but not a merger. They should adopt a document for their 403(b) plan and submit under VCP as a nonamender - you may want to wait just a while longer for the new EPCRS Rev Proc to come out - rumor is that many 403(b) issues are addressed in the upcoming Rev. Proc.

Yes it can apply, but only if the 403(b) plan is subject to ERISA.

Well, okay, "need to" = no, but "want to" = yes. The actuary's firm does no DC administration. So, when a plan sponsor has both DB and DC, our firm is heavily involved due to additional hand-holding for the DC plan - such that the sponsor sees us as the overall guide (quarterback) for retirement plan issues both DB and DC (regardless of the written service agreements that we have). Yes, we are safe due to these agreements, but no one wants the appearance of having egg on their face especially when you had the opportunity to stop the egg in the first place. In this case, this particular EA had a plan termination concept that was outside the known envelope of our comfort based on other DB plan termination cases we've dealt with in the past. So, we will engage them to support their position asking that they supply some guidance or at least give us some informal comment that we can reseach further ...

Yes - and now to convince the EA . . .

Well, that's the issue. We both agree the amendment can be considered for funding. The amendment freezes and terminates the plan. However, the agreement to sign a 'forego receipt of benefits' waiver is not an amendment. Suppose it is signed by the participant and their spouse by June 20, 2010. How does that waiver become considered as includable in the July 1, 2009 valuation?

Suppose a small employer wants to terminate their DB plan ($750,000 in the plan). The current plan year began July 1, 2009. They will freeze now and terminate the plan before June 30. The plan is not subject to PBGC. The July 1, 2009 minimum contribution is $100,000, but no contribution has been made yet for this plan year. The 100% owner has 90% of all the plan benefits and wants to sign a "waiver" to forego receipt of any of their own benefits that do not get fully funded. They want to put in $50,000 into the plan and waive the rest. According to one enrolled actuary, the affects of the plan termination and any signed "waiver" of benefits by a majority owner, if done by the end of the plan year, can be reflected on the schedule B and thus a new actuarial valuation can be done to show a July 1, 2009 minimum of $0, even though benefits accrued for the year (the waiver undoes the accrual). If that's true, wouldn't that also affect the maximum deduction as well? The EA hesitated on this but thought the plan could always deduct up to an amount needed to fund lump sums, even if the owner's benefits were waived. 1. Can the July 1, 2009 truly be modified as described to now show a minimum of zero? 2. If so, would the employer be able to contribute and deduct an amount to partly fund the final benefits?

I agree with you 100% - no tests are needed and you cannot get a 'pass' to avoid the contribution by testing - I concur that the contribution must be made. However, maybe I'm overly pessimistic on this: I think that perhaps under plan audit or under VCP the IRS would consider that the HCEs should not get the benefits of being safe harbor because the SH contribution deadline was missed. In order to take away any extra HCE benefits that are only available when the plan really operates as a safe harbor 401(k) plan, it may stand to reason that an ADP/ACP test could be run to see how much "unfounded" benefit may have been allowed to the HCEs, then possibly requiring refunds and/or recharacterizations. "Unfounded" since the plan's SH requirements weren't met. The only late SH plan that we've submitted was a client in complete bankruptcy where the situation for the NHCEs was dire and the IRS allowed the HCE-owner to forfeit a portion of their account (yes, even though that violates 411). They allowed that amount to be taken away to allocate to the NHCEs for the receivable SH contribution - no ADP/ACP issues would have occurred even if the plan was not SH because the HCE-owner had not been deferring during that year anyway. Do you think the IRS would not be as heavy-handed as described in the second paragraph above? If so, I welcome that!