John Feldt ERPA CPC QPA

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!

So you contribute late and just add missed earnings - the SH status for that year was not jeopardized?

and (or perhaps: but)

If you truly believe that the IRS would agree this error is insignificant, then go ahead and self-correct. You may want the client to state that in writing that this is really their opinion, including the method to correct. Since the safe harbor status of the plan for 2008 was conditioned upon the contribution being made by the end of the 2009 plan year, exactly what steps are required to correct? Do you take away the testing benefits provided under the safe harbor provisions for 2008? Maybe, maybe not, this is unclear to me. Do you merely make a contribution of the SH amount plus missed earnings? I like that idea the most, but again, it's unclear to me. If there is a true method spelled out in 2008-50 that explains how to self-correct for this, then I have missed it. I'm just not sure a self-correction method has much reliance; so Eileen (or Ilene?) toward submitting to the IRS under VCP.

Absolutely. You must have the good-faith amendments adopted by their deadlines. Any deficiency within any of those amendments can still be corrected during the D letter review, but the complete absence of the amendment does not allow you to claim that it was adopted in good-faith, and is instead called a "late amender" or "non-amender" which is specifically handled via VCP under EPCRS. If an amendment deadline has not yet occurred, for example the 12/31/2010 deadline for some of the HEART stuff, you could submit a proposed amendment that has not yet been adopted, but be careful about that deadline - I prefer to have those amendments adopted before the date of plan termination anyway. If a good-faith amendment was required but not adopted by the deadline, and it's discovered by the IRS during the D letter application process, the IRS "fee" is less than the sanction they would charge if it was discovered instead during an IRS plan audit. Sometimes the IRS has a special discount sales price when those are found during the D letter review, but don't count on it.

Under 411(d)(3)(B), discontinuance of contributions. Not much guidance to officially tell us exactly what that means, however.

Neither. I would not restate because the purpose of a restatement is to benefit from the IRS reliance that is provided within a pre-approved restated plan document. Since you intend to submit to the IRS (Form 5310) for a determination, then you will get that reliance regardless of whether or not you restate. They will look at the plan and tell you if any additional language is needed or if any good-faith amendments need to have language corrections. If you restated this DB plan to an EGTRRA prototype or Volume Submitter document, that document's reliance only covers the LRMs from about 2006 - meaning all amendment language done after that is still open for IRS scrutiny anyway, so there's no reason to restate the plan now. Plans are not required to restate, ever, if IRS reliance on the plan language is not being sought. Shocking?

"If we submit for a DL, must we restate the document for EGTRRA first?" No, you are not required to restate. However, you must adopt all remaining good-faith amendments needed to comply with current law (such as HEART and WRERA, etc., including IRS Notice 2010-15). I would not recommend doing a restatement as long as you are submitting a Form 5310 to get a final D letter.

I recommend VCP.

Talk to the plan's actuary. Keep in mind that the 404 limit for deduction purposes might need to be coordinated with the DC plan, if they have one. They may be able to contribute an amount that would fully fund the lump sum values of the plan, assuming the plan allows for a lump sum distribution upon termination of employment, but you need to involve the Enrolled Actuary.

As a TPA, if you do not have a signed plan document from a plan spnsor, what do you base your annual valuation reports on? I think you are better to have signed documents on file and you should continue to follow up to get them, IMHO.

Even still, even with employer contributions and a document, they can still be considered a non-ERISA church plan, right?

DC plan I assume. If the date of termination is today or earlier, then they only need to adopt all current law to update the plan to terminate. Restating from GUST to EGTRRA, if using a pre-approved document, would provide IRS reliance for the EGTRA, post EGTRRA, 401(a)(9), 401(a)(31)(B), and Final 401(k)/401(m) regulations amendments. Meaning, the IRS can't pick those apart for review if you restated for EGTRRA. That would only leave the Final 415 Regs amendment, the PPA amendment, the WRERA Amendment, the HEART amendment, and Notice 2010-15 amendment that they can pick apart upon review (if they audit the plan).

I know of a very old large plan with 17,000+ participants that used 95% for all Joint and 50% conversions and 90% for all joint and 100% conversions. These are subsidies and the actuary took that into account in the funding assumptions.

You asked "What type of document are you using for Governmental plans where Employees make the salary reduction contributions through a 457 Plan and the Employer makes contributions through a 401(a) plan; Profit Sharing, Match or both?" As for the 457(b) document, there is no D letter program so it is not filed and it's an IDP document. For the 401(a) plans we are using IDP documents updated for the cycle E LRMs and we plan to file for D letters by January 31, 2011 (or maybe a couple weeks before that). You also asked "If using a Volume Submitter are you relying on the Opinion Letter or filing for LOD by 04/30/2010?" I thought a government plan sponsor could not rely on the opinion letter issued to the Volume Submitter document and therefore had no reliance without submitting for an individual D letter. Are government plan sponsors eligible for the 6-year cycle?

You have entered a maze of twisty passages. The Form 8905 does not apply to plans in cycle E - see Rev. Proc. 2005-66, Section 17.04 which states "If the employer’s five-year remedial amendment cycle ends with or after the applicable six-year remedial amendment cycle, the employer must adopt the current pre-approved plan rather than execute Form 8905." Now look at the improved version of 2005-66, which is 2007-44, section 17.04: However, if the employer’s five-year remedial amendment cycle ends during or after the announced adoption period described in section 16.03 and 16.04 associated with the applicable six-year cycle, rather than execute Form 8905, the employer should instead adopt the newly approved version of a pre-approved plan (and will be treated as a new adopter under section 17.03). Section 17.03(3) confuses me: An employer may only adopt an interim or an existing pre-approved plan that is not the newly approved version of the plan if the employer adopts such plan before the beginning of the adoption period described in section 16.03 and 16.04 during the applicable six-year cycle. Such an employer must re-adopt either the newly approved version of the same plan or a newly approved version of a different pre-approved plan during the adoption period. Any employer whose five-year cycle has not ended may adopt a plan during or after the adoption period, but such employer must adopt the newly approved version of a preapproved plan. And sections 16.03 and 16.04: .03 When the review of a cycle for pre-approved plans has neared completion (after approximately a two-year review process), the Service will publish an announcement providing the date by which adopting employers must adopt the newly approved plans. This will be a uniform date that will apply to all adopting employers. Depending upon the length of the review process, it is expected that this date will give virtually all employers approximately a two-year window to adopt their updated plans. For purposes of this revenue procedure, an adopting employer means an employer who satisfies the requirements described under section 17 of this revenue procedure. .04 An adopting employer that adopts the approved M&P or VS plan by the announced deadline will have adopted the plan within the employer’s six-year remedial amendment cycle. The announced deadline will be the end of the plan’s remedial amendment cycle with respect to all disqualifying provisions for which the remedial amendment period would otherwise end during the cycle. I think April 30, 2010 is your deadline because that's when the RAP ends for these pre-approved plans. I could be wrong, in haste we might have entered a twisty maze of passages instead of a maze of twisty passages, reaching a twisted conclusion.

The amendment must be executed by the end of the plan year for which the amendment applies, as long as it does not create a cutback of benefits that might have been earned prior to the amendment.

Thanks, I think the argument Sal poses is sound. TAG would only cite official guidance. Excerpts from the 2009 ERISA Outline Book (EOB), Chapter 11, Part I, 2.b.2): Timing of the amendment to change the plan year. At the 2005 ASPPA Annual Conference, a representative from the Treasury indicated that the amendment in the prior example would have to occur before the short plan year begins (i.e., by July 1, 2006, in that example, if the short year is to end December 31, 2006). Why? The argument raised was that, as of July 1, 2006, employees have an expectation that their matching contribution for the plan year (i.e., July 1, 2006, through June 30, 2007) would be matched on the basis of the entire year’s compensation. Consider the following example. Suppose an employee’s compensation for the period July 1, 2006, through June 30, 2007, is $60,000, with $30,000 earned in the first six months and $30,000 in the second six months. Further assume the employee defers at a rate of 10% and the plan uses the basic matching formula under IRC §401(k)(12)(B). If the short year is created as of January 1, 2007, then the matching contribution formula would yield a match of 5% of compensation under the basic formula, for a match of 5% x $30,000, or $1,500. Had the plan year gone the full 12 months, the match would have been 5% x $60,000, or $3,000. The Treasury official was suggesting that this could be a violation of the safe harbor rules because the safe harbor notice given for the plan year beginning July 1, 2006, would have suggested that the match for that year would be based on compensation for a 12-month period ending June 30, 2007. This argument fails to consider that this type of amendment is allowed only if the plan remains a safe harbor 401(k) plan for the 12-month period following the close of the short plan year. Thus, the safe harbor formula will apply for the 6-month period running through June 30, 2007, it’s just that the 6-month period is now part of the first half of the calendar plan year starting January 1, 2007, rather than the second half of the plan year that started on July 1, 2006. It also could be argued, if the plan’s matching formula is determined on a payroll period basis, rather than a plan year basis, that the change in the plan year period is irrelevant anyway to the expectation of safe harbor contributions. If the IRS actually would raise an issue here (remember, the comments of the official at the ASPPA conference do not necessarily represent the official position of the agency), it seems to create an unfortunate trap for the unwary. It is the exception to the rule that a change in a plan year would be planned ahead in sufficient time to adopt an amendment to the plan year (or at least provide a safe harbor notice that would alert employees to the pending change) before the beginning of what will become the short plan year. To take a position like this would render meaningless the option to amend a safe harbor 401(k) plan to a different plan year period.

A safe harbor 401(k) plan has a December 31 Plan Year end. A change is desired to have the plan year end to match the fiscal year end (September 30). They intend to keep the plan as a safe harbor 401(k) for future plan years. Can they: A) adopt an amendment now to make this plan year a short year, ending on September 30, 2010? or B) the earliest plan year end they can change is the next plan year, starting 1-1-2011, must be amended before 1-1-2011?

We project the account to NRA using the crediting rate and convert to an accrued benefit, and calculate the PVAB at the testing rate. Seems to go against reason to come up with a PVAB amount much lower than the cash balance credit, but that seems to be what is supposed to happen inside these regs for now, maybe they'll rewrite them sometime (that may not be a good thing though).

For a 457(b) plan sponsored by a government, excess deferrals must be distributed as soon as administratively practicable (isn't that a nice deadline?) For a 457(b) plan sponsored by a tax-exempt organization, excess deferrals must be distributed by April 15 of following year (today)

No. They were required to adopt (sign by 12/31/2009) written language that complied with the final 403(b) regulations with an effective date no later than January 1, 2009.

Is the partner merely an investor, thus investment income is on the K-1, or are they a working employee?

That's good. As you probably know, the IRS is asking for data to prove any normal retirement age less than 62 was typical for the industry. Having that amendment done eliminates that headache. If your NRA is under 65, then they are also asking if the plan coordinates the actuarial increase (for working past age 62) with the limits under section 415 (since the 415 limit generally does not get bigger after age 62). It seems like they're asking you to pick which one applies: the plan violates 411, or does it violate 415? So be prepared for that question too.