John Feldt ERPA CPC QPA

I posted this in the ESOP section, but perhaps the question leans more toward cross-testing? http://benefitslink.com/boards/index.php?s...st&p=181920 An calendar year ESOP plan has 2 valuations per year, June 30 and December 31. The allocation condition is that you must be actively employed on the last day of the valuation period. An employee who is active on June 30 gets a June 30 allocation, but if they quit December 15, they do not get an additional allocation for the 6-month period ending December 31. The plan uses a definition of compensation that passes 414(s). The plan uses a pro-rata allocation method for each 6-month allocation period based on compensation paid during that 6-month period. Assume all 3 are true: some employees get no allocations for the June 30 period because they left before June 30, and some other employees get allocations only for their compensation paid through June 30th because they left before the end of the plan year but after June 30, and some other employees get allocations based on full year pay because they were active on December 31. Based on the assumptions listed, does this plan design require 401(a)(4) testing?

An calendar year ESOP plan has 2 valuations per year, June 30 and December 31. The allocation condition is that you must be actively employed on the last day of the valuation period. An employee who is active on June 30 gets a June 30 allocation, but if they quit December 15, they do not get an additional allocation for the 6-month period ending December 31. The plan uses a definition of compensation that passes 414(s). The plan uses a pro-rata allocation method for each 6-month allocation period based on compensation paid during that 6-month period. Assume all 3 are true: some employees get no allocations for the June 30 period because they left before June 30, and some other employees get allocations only for their compensation paid through June 30th because they left before the end of the plan year but after June 30, and some other employees get allocations based on full year pay because they were active on December 31. Based on the assumptions listed, does this plan design require 401(a)(4) testing?

Thanks very much. I agree that the temporary relief allows the plan to delay the effective date of this regulation to the first day of the first plan year starting after June 30, 2008. I will attempt to argue first that the regulation's effective date (under Notice 2007-69) is after the plan termination date and therefore does not affect the plan. If that fails, then we'll just do the amendment with a 1-1-2009 effective date.

A Form 5310 was filed for a DB plan with a plan termination date of Feb 29, 2008. Normal retirement Age is 58 (or 5 years if later). Plan Year end 12/31. The IRS reviewer asks: "Please demonstrate that the plan's definition of normal retirement age satisfies Regulation 1.401(a)-1(b)(2). Or, alternatively, amend the plan's definition of normal retirement age." We understand that under 1.401(a)-1(b)(2), the Normal retirement age must not be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry. But, (iii) states that in the case of a normal retirement age that is not earlier than age 55 and is earlier than age 62, whether the age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry is based on all of the relevant facts and circumstances. Does anyone have insight regarding what the IRS will consider in this "relevant facts and circumstances". The employer is a PC that does dermatology work. Alternatively, if we amend the plan now to have the NRA become 62 with an unreduced ERB at age 58, would that cause the IRS to invalidate any prior actuarial valuations that calculated the plan's contributions? Not sure what to do with this one - any comments appreciated.

Maybe the OP is just 401k-ing around... can we actually post that kind of language here?

"One partner decided to defer" Is the person truly a partner, as in a partnership or LLP? If so, then do we know what percentage of earned income that partner has at the time of the deferral, or do we find out at the end of the year when earned income is calculated? The question is perhaps: what is the "pay period" for a partner?

Thanks you. I knew the Treasury would not have let that happen.

Would the 10% penalty only apply to the earnings? 1. Roll from plan to Roth IRA at age 50. 2. Pay income tax, no the 10% penalty. 3. Distribute from Roth IRA to self at age 51. 4. Pay 10% penalty on the earnings only?

No it does not. But has this issue ever been in court in your state? It's still the employee's money, regardless of where it went. So I don't think any state enforcement branch would care to spend any time on the issue of auto-enroll, regardless of their stated law (I could be wrong though).

I'll check, but I think electronic filing authority was provided to the CPA to file the return. edited to add: yes, the CPA firm filed electronically without confirming if the accrued contributions had been made yet.

Thanks. I was under the impression that 404(a)(6) would not even allow an allocation for 2008. Are you saying that it simply does not allow a deduction for 2008? As for point #4, the client is happy with us. We have informed them each year that they need to file a corporate extension if they intend to make the contribution after the March 15 deadline (we are not a CPA firm, we don't prepare corporate tax returns).

An S-corp employer (calendar tax year) has a 401(k) plan (calendar year) that allows for a discretionary match. For 2008, they intend to make a matching contribution, funding it sometime this spring/summer. Their speedy tax return prep firm got everything done before March 15, 2009 and filed the corporation's tax return on time without filing an extension (the client has never had their returns completed by the March 15 deadline for any of the prior 10 years. The tax return included a deduction for the 2008 match ($80,000) to 50 employees, which has not yet been contributed. Under 404(a)(6), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof). I think it is too late to contribute a discretionary match now for 2008 since the extension was not filed? Could they contribute and allocate for 2008 and then file under EPCRS to get the match allocated for 2008? Even if filing under EPCRS, no deduction for 2008 would be allowed anyway, or could EPCRS also allow that? No 415 limit issues and no 404 limitation issue would occur even if 2008 and 2009 both get deducted in the same year. To the client, this is mainly an employee relations issue, since the employees were verbally told that they can expect a match for 2008 based on their deferrals (the plan is clearly written as a discretionary employer amount).

In case anyone is curious, the rules changed for plan years after 2000 as described in the previous posts, such that plans that do not grant any past-service (thus having no benefit liability on the plan's effective date) will have a PBGC participant count of zero for the first year. This would also affect more than just the first year of the plan. A new participant entering on the first day of a future plan year, assuming they have no benefit liability (e.g. plan credits accruals based on participation), would also be excluded from the PBGC participant count for that year. edit: typo

But MRDs for DB plans were not suspended.

b7 and b9 do not differ in that regard. If the sponsor is truly a church, then a lot of things do not apply. One of the many things to note is found in Notice 2001-46, article I: "I. PURPOSE This notice provides relief from the application of the nondiscrimination requirements of the Internal Revenue Code for certain church and governmental plans. In particular, this notice extends the effective date of regulations under §§401(a)(4), 401(a)(5), 401(l), and 414(s) of the Internal Revenue Code for nonelecting church plans until further notice, but in no case earlier than the first plan year beginning on or after January 1, 2003." I have not seen "further notice" in this regard from the IRS yet.

The same contribution limits apply. The other difference is the document. A church plan sponsor that only provides mutual funds and annuities as investment options [b(7)] is not required to executed a written plan. If they offer investments under b(9), (retirement income accounts), then they must execute a written plan that conforms with the final 403(b) regulations.

No, not required. I read Derrin Watson's comments (SunGard) on this topic too. Basically, Derrin states that a plan that terminates and submits the 5310 to the IRS should just adopt any interim required amendments that are needed and send it to the IRS for their review - they'll tell you if any other language is needed or if any changes are required. However, if a decision is made to NOT submit a 5310 to the IRS, then an EGTRRA restatement (under a pre-approved EGTRRA document) provides you with a D letter for all of the interim amendments up through the Final 401(k) regulations (that's quite a few amendments). Thus the IRS can't pick those apart, they have reliance from the document's letter. They can really only question the language for anything not already covered by the EGTRRA document's letter, like the 415 amendment, the HEART Act amendment, and the WRERA amendment. added upon edit: (or any discretionary employer amendment).

Okay. We'll see how the IRS responds.

Are you an employee of the company? If so, ask the people who provide the administration services to your plan.

So, if an employer allows employees to enter the plan immediately on date of hire, would you seriously say that they must complete an election on their hire date in order to allow a full deferral from their first paycheck (which might be actually paid a few weeks later)? Any election made after their hire date would not be early enough to satisfy the IRS? I know it differs from the original post, but I think the same principle applies. added on edit: Look at 1.401(k)-1(a)©(1).

If you are asking about an IRS required amendment, for HEART or otherwise, then only if you submit a Form 5310 will the remedial amendment period continue until the IRS review is over. Otherwise, your RAP ended on the plan termination date.

"Getting paid if quitting is as important as getting paid by demanding." If an employee enters a plan January 1, 2009, gets paid monthly at the end of the month, they sign their first salary deferral election on January 27, 2009 (the payroll cutoff date for January 31st), then does the IRS agent argue that they can only defer on 5 days worth of pay for January? They could have been paid on the 26th if they had quit on the 25th. How do you see this? edited to add: ok - I see KJohnson's reply

I'll see if I can find more information about the nature of the compensation and if it could have been demanded at an earlier time without having to quit to get paid.

Some participants who were eligible to defer into a 401(k) plan made no salary deferral elections until late in the plan year - mid-to-late December. At that time they elected to defer from their end of year bonus/commission (a large percentage of their pay for the year). The IRS auditor stated something like this "Deferral elections must be made prior to the time the employee earned the compensation. Employees A, B and C earned all but a few days worth of their bonus/commission compensation prior to the date the election to defer was signed. Deferring wages to the end of the year does not mean that you had not already earned the compensation. Thus it appears that Employees A, B, and C are not entitled to a deferral or match for the year. The deferrals, matching, and earnings need to be distributed. This will be subject to a closing agreement program..." Any suggestions? I am especially curious as to just what code or reg the IRS auditor may be using to back up their assertion - I assume they must back up their comments with something official, right?

Thanks. Mike, how do your clients generally approach this? If your client's tax year-end is June 30, 2009, and if you set up a brand new plan now with an April 1, 2009 effective date (first PYE 3/31/2010), and you provide a beginning of year valuation so they know their full contribution requirement now - do you have a majority of those clients that will take the deduction of the entire amount on their June 30, 2009 return? Or are they a minority, where the majority prorates?