John Feldt ERPA CPC QPA

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 If such application gets withdrawn with no resolution, would the IRS turn over the case to their plan examiners for audit?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.

Regarding the segments: Two EA's who gave out different interpretations on the use of the segment rates for minimum lump sum payout purposes (suppose the plan rate is 8.00%, so ignore that for this discussion): Employee Age 25, NRA = 65 1. Calculate the cash at retirement age 65 retirement using the 3rd segment rate, then discount for 40 years at the 3rd segment rate. 2. Calculate the cash at retirement age 65 retirement using the 1st segment rate, then discount for 5 years at the 1st segment rate, further discount for 15 more years at the second segment rate, and 20 more years at the 3rd segment rate. Did any guidance spell out how they want these used?

The law, under Internal Revenue Code Section 401(a) states REQUIREMENTS FOR QUALIFICATION. --A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section -- (1), ... (2), ... (3), ...; and 401(a)(4) if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C ). IRC 401(a)(4) is interpreted under the Treasury Regulations, one section of which is 1.401(a)(4)-5. §1.401(a)(4)-5. Plan amendments and plan terminations (a) Introduction (1) Overview. --This paragraph (a) provides rules for determining whether the timing of a plan amendment or series of amendments has the effect of discriminating significantly in favor of HCEs or former HCEs. For purposes of this section, a plan amendment includes, for example, the establishment or termination of the plan, and any change in the benefits, rights, or features, benefit formulas, or allocation formulas under the plan. Paragraph (b) of this section sets forth additional requirements that must be satisfied in the case of a plan termination. (2) Facts-and-circumstances determination. --Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs or former HCEs is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances. These include, for example, the relative numbers of current and former HCEs and NHCEs affected by the plan amendment, the relative length of service of current and former HCEs and NHCEs, the length of time the plan or plan provision being amended has been in effect, and the turnover of employees prior to the plan amendment. In addition, the relevant facts and circumstances include the relative accrued benefits of current and former HCEs and NHCEs before and after the plan amendment and any additional benefits provided to current and former HCEs and NHCEs under other plans (including plans of other employers, if relevant). In the case of a plan amendment that provides additional benefits based on an employee's service prior to the amendment, the relevant facts and circumstances also include the benefits that employees and former employees who do not benefit under the amendment would have received had the plan, as amended, been in effect throughout the period on which the additional benefits are based. (3) Safe harbor for certain grants of benefits for past periods. ... (4) Examples. --The following examples illustrate the rules in this paragraph (a): Example 1. Plan A is a defined benefit plan that covered both HCEs and NHCEs for most of its existence. The employer decides to wind up its business. In the process of ceasing operations, but at a time when the plan covers only HCEs, Plan A is amended to increase benefits and thereafter is terminated. The timing of this plan amendment has the effect of discriminating significantly in favor of HCEs. Do you think the amendment has the effect of discriminating significantly in favor of HCEs or former HCEs? It's facts and circumstances, so the IRS has some leeway when they look at something like this. IMHO, I don't know if a foolproof correct answer is truly known until the IRS gets involved. Looking at one side, just exactly how does this discriminate significantly in favor of HCEs? Would that mean the forfeitures of the NHCEs may get allocated to HCEs? Doesn't that happen in lots of plans anyway? Maybe this could be discriminatory only if one of the HCE leaves before they achieve their 6th year of vesting service. If that happened, then it does appear to be discriminatory. But if neither HCE left before their 6th year, again, how would this specific amendment have the effect of significantly discriminating? If they want to be mostly conservative, and if the HCEs only have a couple years of service now, perhaps the plan could be a little safer by adopting a 6-year graded vesting schedule that applies to all new employer contributions, that would impact the vesting of the HCEs too. Still not foolproof though.

Relius (Sungard) announced in the news section of this website that they expect to have one ready by the end of this month.

Under the Final 403(b) regulations, you could terminate a 403(b) plan - I think you'd have to adopt the Final 403(b) regulations though in order to do that. Also, I recall reading that a 401(k) plan would not be considered a successor plan to a terminated 403(b) plan. If the 403(b) terminates, the participants could then vountarity elect to roll over their 403(b) balances into the 401(k). I don't think a merger, requiring the assets to go to the 401(k), would be allowable. "...you cannot directly transfer the assests from a 401(k) plan into a 403(b) plan. Does that hold true for a direct transfer of 403(b) assests to a 403(b) plan?" I think a merger of 403(b) plans is allowable, if that is your question.

You're welcome - much success to you!

Let's go through an example: Bob has been eligible for the 457(b) plan since 2003. Now, in 2007, let's suppose Bob is in the first year of his 3-year period that would end prior to the year he reaches Normal Retirement Age. Starting with his first year, 2003, let's suppose his "annual deferral" amounts were: 2003 10,000 2004 10,000 2005 10,000 2006 12,000 Suppose the maximums for each year were (ignore the 5,000 catchup issue for this example): 2003 12,000 2004 13,000 2005 14,000 2006 15,000 (I did not look those up, it's to late at night, just go with me on this for the illustration) Bob did not use up the whole limit each year, so his underutilized amounts are: 2003 2,000 2004 3,000 2005 4,000 2006 3,000 The total unused amount is the sum of these: $12,000. So, Bob's special catch-up amount for 2007 is the lesser of A) the normal 2007 "annual deferral" limit of $15,500 (or 100% of comp if less) or B) the unused prior amount of $12,000. The lesser amount was $12,000. So, for 2007, Bob's maximum "annual deferral" in the 457(b) plan is $27,500 ($15,500 regular amount, plus $12,000 special catch-up). Remember, "annual deferrals" includes any employee elective deferrals made into the 457(b) plan PLUS any employer contributions allocated to the employee - they all count against the 457(b) limit.

1. The ebar for EE2 will be increased (one extra year for projecting at 8.5%) 2. Based only on birthdate, it would be lower (one less year for projecting at 8.5%) 3. Your demographics will dictate which is better: attained age or nearest age.

The special catch-up (last 3 years prior to Normal Retirement Age), is the lesser of two amounts: 1) the current year's "annual deferral" amount, or if less 2) the "underutilized" amount. The underutilized amount is the difference between the prior annual deferral limits and the amount of actual annual deferral made for each of the previous years that the participant was eligible for the plan. This is explained in the Treasury Regulations at §1.457-4(c )(3) Special section 457 catch-up (i) In general. --Except as provided in paragraph (c )(2)(ii) of this section, an eligible plan may provide that, for one or more of the participant's last three taxable years ending before the participant attains normal retirement age, the plan ceiling is an amount not in excess of the lesser of -- (A) Twice the dollar amount in effect under paragraph (c )(1)(i)(A) of this section; or (B) The underutilized limitation determined under paragraph (c )(3)(ii) of this section. (ii) Underutilized limitation. --The underutilized amount determined under this paragraph (c )(3)(ii) is the sum of -- (A) The plan ceiling established under paragraph (c )(1) of this section for the taxable year; plus (B) The plan ceiling established under paragraph (c )(1) of this section (or under section 457(b)(2) for any year before the applicability date of this section) for any prior taxable year or years, less the amount of annual deferrals under the plan for such prior taxable year or years (disregarding any annual deferrals under the plan permitted under the age 50 catch-up under paragraph (c )(2) of this section). (iii) Determining underutilized limitation under paragraph (c )(3)(ii)(B) of this section. --A prior taxable year is taken into account under paragraph (c )(3)(ii)(B) of this section only if it is a year beginning after December 31, 1978, in which the participant was eligible to participate in the plan, and in which compensation deferred (if any) under the plan during the year was subject to a plan ceiling established under paragraph (c )(1) of this section. This paragraph (c )(3)(iii) is subject to the special rules in paragraph (c )(3)(iv) of this section. (iv) Special rules concerning application of the coordination limit for years prior to 2002 for purposes of determining the underutilized limitation... ...(v) Normal retirement age (A) General rule. --For purposes of the special section 457 catch-up in this paragraph (c )(3), a plan must specify the normal retirement age under the plan. A plan may define normal retirement age as any age that is on or after the earlier of age 65 or the age at which participants have the right to retire and receive, under the basic defined benefit pension plan of the State or tax-exempt entity (or a money purchase pension plan in which the participant also participates if the participant is not eligible to participate in a defined benefit plan), immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age, and that is not later than age 70-1/2. Alternatively, a plan may provide that a participant is allowed to designate a normal retirement age within these ages. For purposes of the special section 457 catch-up in this paragraph (c )(3), an entity sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors. (B) Special rule for eligible plans of qualified police or firefighters. --An eligible plan with participants that include qualified police or firefighters as defined under section 415(b)(2)(H)(ii)(I) may designate a normal retirement age for such qualified police or firefighters that is earlier than the earliest normal retirement age designated under the general rule of paragraph (c )(3)(i)(A) of this section, but in no event may the normal retirement age be earlier than age 40. Alternatively, a plan may allow a qualified police or firefighter participant to designate a normal retirement age that is between age 40 and age 70-1/2. I hope this helps!

bingo!

The company owner took a loan out of their 401(k) account 9 months ago. No loan policy was adopted. The "employer checklist" attached to their document indicates that the plan will NOT provide for participant loans. The IRS talks about discretionary and interim amendments and the deadlines that apply. However, isn't a participant loan more of a DOL issue - what is the timing requirement to adopt a loan policy? I believe it must be done before the loan is made, but I have not found the official cite for that. Any guidance is much appreciated. Oh, just for fun, as I'm sure you've guessed, the loan exceeded $50,000 and no payments have occurred yet. We are currently trying to find out if we could turn this into an in-service distribution, and deal with the tax withholding problem.

Yes.

http://benefitslink.com/boards/index.php?s...mp;hl=undefined

This question was posted twice. Here's a link to the post that has responses: http://benefitslink.com/boards/index.php?s...c=36811&hl=