John Feldt ERPA CPC QPA

Thanks Tom, that is exactly the focus of my question. I was much more concerned with the ongoing plans and the potential need to amend every one of them before their 2008 plan year. With your comments in mind, I hope to see forthcoming guidance to assure the transition from GATT to PPA rates without scrambling to amend right now. For plans paying lump sums after their 2007 plan years, I assume the PBGC would require the largest lump sum payout under GATT or PPA until an amendment is adopted (if GATT would ever be a higher lump sum).

According to the Form 8717 instructions: "The exemption from the user fee applies to all eligible employers (defined below) who request a determination letter within the first five plan years or, if later, the end of the remedial amendment period that begins within the first five plan years with respect to a plan. Under section 620 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), an application for a defined contribution plan from an eligible employer for a plan that was first effective on or after January 2, 1997, will automatically meet this requirement. An application for a defined benefit plan from an eligible employer for a plan that was first effective on or after January 3, 1996, will automatically meet this requirement. See Notice 2002-1, 2002-1 C.B. 283 as amplified by Notice 2003-49, 2003-2 C.B. 294."

If the true final net earned income (after business expenses, after reduction for DB and DC contributions, after 1/2 SE tax, etc) ends up at $225,000 or above, then your answer is $225,000 for 2007, not 211,500.

And to avoid the potential problem, an amendment to adopt the new 417(e) rates and mortality for the 2008 plan year seems to be solution, before the 2008 plan year begins?

A calendar year Safe Harbor 401(k) plan provides a 3% SH contribution and has a discretionary profit sharing provision. The client wants to keep the eligibility for deferrals the same. The client wants to keep the eligibility for Safe Harbor contributions the same. The client wants to change the eligibility for only the Profit Sharing portion (e.g. lower the 1 year requirement to 6 months). They are having a great year and want more NHCEs to receive some of the year's profits via the plan. I have made the attempt by looking at 1.401(k)-3(e) and its reference to 1.401(k)-1(b). Is this an allowable change in this plan year, or must the provisions become effective no sooner than the beginning of the next plan year? If this is not allowable, which section prohibits this change? What if they want to only change the Entry Dates for only the profit sharing portion, from 2 entry dates per year to 4 entry dates per year, can that be effective during the year? What if they also want to improve the vesting for the profit sharing portion only (move the schedule to 5-year graded from 6-year graded), can that be effective for this year? This does not affect the HCEs, they are already vested. Please tell me an employer can provide a better vesting schedule?

The plan has no deferral provisions now? Then they need to execute an amendment to add deferral options and to adopt safe harbor provisions, and it must be signed no later than November 1st. The safe harbor notice must be provided no later than November 1st (give it when they execute the amendment/restatement).

"My question is should we report them to the IRS." Maybe I'm skimming the post too much and missing something, but doesn't the 5500 do just that - isn't one of the questions going to point out the late deferral deposits? edit: typo

Yep. The PS piece should designed to cover that, with an explanation to the client that the 3% will be a basic minimum PS in 2007. So, if designed properly, TH is easily handled as well. Especially if they have already been thinking about the 3% SH contribution, then the 3% TH contribution sounds doable (especially with vesting) - just different alphabet letters, right?

"higher if you've been using weaker funding assumptions than the anticipated PPA rates/mortality table." The vast majority of our small plans (under 50 lives) will see their minimum funding requirements go down. I suppose that was not the intent of Congress? or, of the economists who wrote these rules for them? Our somewhat larger small plans (over 100 lives) are looking at what amount it will take to reach the funding target of 92%. "can't use the new accrual for HCEs in the max funding (if plan unfrozen in late 08), and if the 150% of the UCL at beginning of year (12/31/07) isn't large enough to produce a higher max contribution than the minimum funding." Yes, if the formula is increased, I think you could be stuck near the 412 minimum if you only have small benefits for your NHCEs.

Thank you Carol and George!

Yes, in this case would be age 61. Both (1) and (2) must be met: (1) Five-year taxable period must have ended (2) A qualifying event must have occurred (death, disability, reached age 59.5). The five year clock begins with the January 1 of the first calendar year that a Roth contribution is made. If the first contribution goes in October 1, 2006 when the participant had his 56th birthday, then: 2006 = year 1 (age 56) 2007 = year 2 (age 57) 2008 = year 3 (age 58) 2009 = year 4 (age 59) 2010 = year 5 (age 60) Any withdrawal before 12/31/2010 would be too early. The five-year clock ends 12/31/2010. A withdrawal on January 1, 2011 has met the five year rule (even though that is technically only 4.25 years after the first contribution was made).

Can the compensation of the associates be used to determine the combined deductible limit of 25% + 6% of compensation? I have not taken the time to look at the regulations, so FWIW, I agree with Blinky and mming. Does 404(a)(7) apply to the deferral only plan? Look at 404(a)(7)(C )(i) below. I would think their compensation is not included under the 404(a)(7) calculations for purposes of determining the percentage limit. But with 2 DC plans in play, I am not 100% in this response. IRC 404(a)(7)(A) IN GENERAL. --If amounts are deductible ... in connection with 1 or more defined contribution plans and 1 or more defined benefit plans ... the total amount deductible in a taxable year under such plans shall not exceed the greater of -- 404(a)(7)(A)(i) 25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under such plans, or 404(a)(7)(A)(ii) the amount of contributions made to or under the defined benefit plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding standard provided by section 412 with respect to any such defined benefit plans for the plan year which ends with or within such taxable year (or for any prior plan year). ... IRC 404(a)(7)(C ) PARAGRAPH NOT TO APPLY IN CERTAIN CASES. -- 404(a)(7)(C )(i) BENEFICIARY TEST. --This paragraph shall not have the effect of reducing the amount otherwise deductible under paragraphs (1), (2), and (3), if no employee is a beneficiary under more than 1 trust or under a trust... 404(a)(7)(C )(ii) ELECTIVE DEFERRALS. --If, in connection with 1 or more defined contribution plans and 1 or more defined benefit plans, no amounts (other than elective deferrals (as defined in section 402(g)(3))) are contributed to any of the defined contribution plans for the taxable year, then subparagraph (A) shall not apply with respect to any of such defined contribution plans and defined benefit plans. 404(a)(7)(C )(iii) LIMITATION. --In the case of employer contributions to 1 or more defined contribution plans, this paragraph shall only apply to the extent that such contributions exceed 6 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries under such plans. For purposes of this clause, amounts carried over from preceding taxable years under subparagraph (B) shall be treated as employer contributions to 1 or more defined contributions to the extent attributable to employer contributions to such plans in such preceding taxable years. 404(a)(7)(C )(iv) GUARANTEED PLANS. --In applying this paragraph, any single-employer plan covered under section 4021 of the Employee Retirement Income Security Act of 1974 shall not be taken into account.

I've seen a PBGC audit sting people before with regard to the changes from pre-GATT to GATT rates. This looks similar to me, thus the question. I think Mike's guess is as good as any until we see some other official guidance. We'll adopt as needed for terminating plans as Andy sugggested. Thanks for the comments!

Since it's the first year for this 401(k) plan, why not allow deferrals for the last little bit of 2007? Elect to use the prior year method for 2007, which gives you 3% for the NHCE's prior year ADP, thus allowing your HCEs the option to get 5% avg deferrals for '07. If your HCE makes $225,000, hey, that's $11,250 assuming they will be paid that much for 2007 after the date you adopt the plan and before 12/31/2007. If they are catch-up eligible, then you could get them another $5,000 in deferrals too. Just be careful about the special effective dates, and that should work fine.

Ah, the nicer, friendly IRS. If private plans could receive just one-tenth of such generosity that these government plans are granted.

masteff's response is good. I see this is under 'church' plans. The same board or council, or whatever group has the authority to make such a change in pay will need to weigh in all of the facts and circumstances. I personally would avoid thinking along the lines of what is fair or not fair. IMHO, when it comes to wages, fairness may not be relevant (I had to explain to my oldest son (age 6): if there's only one day of school left, would it be fair for your friend to be first in line to get on the bus instead of you? His original answer was no, because he would want to go first). Sometimes no true fair answer can be found using our puny human wisdom. If this is a church, perhaps an honest discussion about the budget and it's strain on your organization (I assume that's the case) shouldn't be too difficult, perhaps the nice coverage that the spouse was able to obtain was the work of the powers above (as all good things are anyway). If that results in a relief from the budget strain that your organization is having, then all is well! If the individual has a problem after that, then they are truly overpaid.

I think Everett has a decent option. But, perhaps under Rev Proc. 2006-27, you could submit a VCP application proposing the fix you'd like to make and see if the IRS will go for it. If not, negotiate as best you can to get close to what you want. If that fails, the IRS will allow you to withdraw the VCP filing. If such application gets withdrawn with no resolution, would the IRS turn over the case to their plan examiners for audit? Well, according to IRS officials at a conference about a year ago, they want to keep the integrity of the EPCRS program in tact. The only time they would ever turn over a closed unresolved VCP case to their auditors would be for an egregious case. They also stated that (as of the date of that conference) they only had a few (less than a dozen?) cases that were closed as unresolved, and none of those were turned over to their auditors.

Suppose a DB plan currently has defined the plan's interest rate and mortality as the GATT applicable rate and mortality. The plan goes on to define the Section 417 interest rates which shall be used as a minimum: the applicable mortality is the commissioner's standard table from Code Section 807(d)(5)(A) and the applicable interest rate from the 30-year Treasury securities as specified by the Commissioner for the lookback month(s) prior to the stability period. In the 2008 plan year, if the plan is not yet amended for the 417 change from PPA, must the plan compare the lump sum determined by using the old GATT mortality and full 30-year treasury interest rates (the existing terms of the plan), to the lump sum determined from the new required 417(e) blended rates and its new mortality? Or can we just switch immediately in the 2008 plan year to just use the new blended rates and mortality with any 411(d)(6) worry, even if no amendment is in place describing these new rates and mortality?

Suppose a new DB plan has a formula where the accrual will provide 1/10 of 415 dollar limit for one of the employees (the maximum accrual in year #1). Suppose the plan starts 1-1-2008. When determining the maximum allowed for funding purposes, is that employee's maximum cushion actually limited to the 415 limit at the end of that first year, thus not truly allowed fund (for that ee) the 50% cushion?

Same plan? Same Participant? Then no, as far as I can tell, the 5-year Roth clock does not start over.

Different rules do apply to government employers. However, the requirement to follow the terms of the written plan document is still required in order to keep the plan's tax-favored treatment.

many thanks!

Thanks for your response, Tom. So, if my example changes where the 2 highest paid NHCEs both are managers, and they both had longer service, then this design would not be allowed in a pre-approved EGTRRA document? If that's done in an individually designed plan, how would that change anything, other than the document language being compliant - would the IRS be able to say the design is not allowable once they review the facts and circumstances? Back to basics: Same example as above (exclude 2 mgrs with long service and high pay), suppose the class is 'EGTRRA plan document restatement managers who are not HCEs' and the business reason is: to retain and/or attract that employee, the pay level is the driver, not the retirement plan benefits, would that possibly be an acceptable classification that could be excluded from the plan if 410(b) and 401(a)(4) are satisfied, or will any such excluded class now be subject to the whim of the IRS to say "eez alright" or "eez no good" ?

I was about to set up a plan to cover 2 owners and about 10 NHCEs, excluding 2 NHCEs, when I read something from the Relius website yesterday, and I became troubled. These 2 excluded NHCEs are the 2 highest paid NHCEs, even though they were both hired in 2007. What I read, under a paragraph entitled "Volume Submitter Plans" said that the IRS is approving the EGTRRA documents with some warnings, and, I quote "In addition, in designing a classification, the employer must not limit participation to only the shortest service and lowest paid NHCEs while excluding the other NHCEs." Then, to really make me stand up and yelp, it said further "... even if the plan can pass coverage and pass the general nondiscrimination test." And as if I hadn't had enough already, it further stated "... such a design under a prototype would not be 'reasonable' under the reasonable classification requirement. Thus the IRS did not require a similar 'warning' in the prototype." Wimper ... please stop ... Uncle. Has the IRS put a full Nelson (wrestling term) hold on our necks here? Can we even set up a plan like I describe anymore?

Agree.