John Feldt ERPA CPC QPA

Okay, we are looking at the general test. The plans cover a fairly large number of NHCEs and let's say 3 HCEs (2 owners and an owner's child). On the DC side, all 3 HCEs are eligible. The owner's child is eligible but does not defer, is excluded from the safe harbor allocation, and is in a classification that receives no profit sharing allocation. The DB plan is arranged to provide 0.50% to the NHCEs, zero accrual to the owner's child, and a larger accrual rate for the owners. If we count this owner's child in the test, we divide by 3 HCEs then our average benefit percentage looks good and we can pass. If for some reason we cannot, then the test fails. I think this HCE child gets counted so we can divide by 3, but a recent conversation with another actuary has me in doubt. This HCE has zero benefit in both plans, can we count them in the general test for our HCE count?

http://www.irs.gov/pub/irs-drop/rp-07-49.pdf Main item to note (for me): For failure to adopt required amendments timely, they really want the appendix F used "as is" (Appendix F) from Revenue Procedure 2006-27.

Thanks, tax esquire, good point.

Well, on the question of "Anyone have an idea where to look for guidance on same" - I have found none. Okay, if you have a labor agreement already in place that indicates that you will provide the 3% nonelective and an agreement that you will also provide the Davis Bacon requirements, these agreements need to be reviewed to see if they allow each other to offset. Or, perhaps AnyH is alluding to something more than even this? Perhaps laws exist that would not allow to offset at all?

I have seen this language in some IRS-approved prototype plan documents. Perhaps another option would be to offset the Davis Bacon requirement by any amounts already allocated as a safe harbor nonelective. Since both sources (Davis Bacon and Safe Harbor nonelective) are 100% vested and neither has any allocation conditions, there's ultimately no difference in the end. If you have an IRS-approved prototype that allows this, I see no worries in doing exactly that.

Use code 3 if you really truly know the participant meets the IRS definition for disability. Otherwise, do not. If you do not, and the participant believes they are exempt from the penalty, they attach Form 5329 to their Form 1040 and add the code there to explain their exemption from the 10% penalty tax.

AndyH Are you saying that after landing on the moon first, we failed to properly file this as a US property? Man.

Hmmm. I didn't think a US qualified plan could directly own foreign real estate, with an exception for Canada but only as long as the participants were citizens of the Canada. Perhaps this recollection is out-dated?

Yes, depending on the plan's terms. Participants who terminated pre-REA who wanted their spouse to have a death benefit could have made an election to have the cost of the death benefit deducted from their accrued benefit during the time they were deferred vested terminated (and married). Some plans added this with no charge against the accrued benefit to avoid having to send out a bunch of elections. So this may differ by plan. It is also possible for some plans to have allowed terminating married participants post-REA to elect (with spousal consent) to not have a death benefit (to avoid the cost of the death benefit from lowering their Accrued Benefit at retirement). This is old stuff, and kinda sketchy to me, but that's my best recollection. One database I worked on years ago had a table to handle the dates when marriages started and the dates that they ended so the system could correctly determine the "survivorship protection cost" which would be charged against the accrued benefit. It actually got it right once in a while.

No. Governmental plans must have a formal written plan document and use the plan assets exclusively for the benefit of participants and beneficiaries. Generally, governmental plans must satisfy the following: Code Section 401(a)(1) Code Section 401(a)(2) Code Section 401(a)(3) (but under the pre-ERISA rules) Code Section 401(a)(4) Code Sections 401(a)(5) and 401(l) Code Section 401(a)(7) (but under the pre-ERISA rules) Code Section 401(a)(8) Code Section 401(a)(9) Code Sections 401(a)(16) and 415 (under the pre-TRA 1986 rules for limits for early and late retirement) Code Section 401(a)(17) Code Section 401(a)(25) Code Section 401(a)(26) (some exceptions apply) Code Section 401(a)(31) Code Section 401(b) Code Sections 402 and 72 Code Section 3405 Code Section 6652(i) Governmental plans are generally exempt from the following: Code Sections 401(a)(10) and 416 Code Sections 401(a)(11) and 417 Code Sections 401(a)(12) and 414(l) Code Section 401(a)(13) Code Section 401(a)(14) Code Section 401(a)(15) Code Section 401(a)(19) Code Section 401(a)(20) Code Section 401(a)(29) Code Section 410 (pre-ERISA) Code Section 411 (pre-ERISA) Code Section 412 Code Section 414(p) Code Section 4975 Code Section 4980 Code Sections 6057, 6058, and 6059; IRS Form 5500; Schedule B; Schedule SSA ERISA Section 4(b)(1) exempts governmental plans from all of ERISA Title I. The participant protection provisions don't apply. A governmental plan can even reduce accrued benefits. The fiduciary responsibility requirements, reporting and disclosure requirements, and antialienation requirements do not apply to governmental plans. Best of success to you.

Also, your plan document should have language already in it that may help.

So far so good, but I think there's more. If the year begins in 2006 or later, then to avoid the ACP you cannot have last day or 1000 hour conditions for that discretionary match. I may be in error, but that's how I read the final 401(k) regs.

If there is enough actual money in the account, then the full hardship can be withdrawn (I also do not see how a loan balance can be distributed as a hardship distribution, no cash gets paid). But, be careful to see if your plan document unnecessarily limits the hardhip withdrawal to the 401(k) source account only. The regs limit the amount of hardship, not the source from which it is withdrawn. Does this help you with your question?

Our prototypes and volume submitter documents are through a major provider. This provider offers two prototype versions. The version that we subscribe to does not require the plan to allow a participant to revoke at any time (it's not in the adoption agreement nor in the basic document). Instead, it is an administrative election (which is not part of the plan document). All (but one) of our clients allow revocation at any time. I'm not sure why the one chose the way they did years ago, but they only allow deferrals to be revoked at the end of June and at the end of December.

Not to my knowledge. I find nothing that requires a 401(k) plan to allow employees to stop their deferrals at any time. The 2004 final regulations provide that a 401(k) plan must provide employees with an effective opportunity to make or change their cash or deferred election at least once each plan year. See Treasury Regulation §1.401(k)-1(e)(2)(ii). However, after the employees receive the Safe Harbor notice for a Safe Harbor 401(k) plan, the plan must provide employees a reasonable opportunity (includes a reasonable period of time) to make or change a cash or deferred election for the plan year, a 30-day period is deemed to be a reasonable period.

We also came across a 5% deferral requirement for a 403(b) plan for a propect (now a client). This situation is probably different than yours. The plan language looked like it was mandatory, but upon discussion, the client was only allowing employees to defer into the 403(b) plan if they deferred at least 5% of pay. I believe that provision could violate the universal availability requirements (the deferral minimum being high enough so some employees just cannot afford the deferral - maybe). And without spending the time to look this up again, my memory seems to recall that the 403(b) rules allow you to establish something like a $200 annual deferral minimum, so the 5% minimum deferral violated that as well. Any match in a 403(b) plan must be tested (the usual ACP test), unless it's a nonelecting church plan (or church school plan) or somehow exempt from those usual rules. If you have no HCEs, then the only problems would be the universal availability and the requirement of an annual minimum being above the $200. But, being a DB guy, what could I really know about this? (So, take the above comments with caution).

Your client wants to take the deduction for the tax year in which the plan year begins, right? Well, if they actually made the contribution by March 15th, then I think an amended return could be filed. Otherwise, I think you are left with the option under 404 where the deduction is made on the tax return in which the plan year ends. Since the first plan year ends in the 2007 tax year, then the 2007 tax return can take the deduction. That won't be good for planning purposes. As you know it's certainly better for the plan's future to be able to freeze a plan (if it's a business necessity) after a bad year before the participants accrue another benefit toward that tax year's minimum required contribution. The other 404 option, to prorate, is probably not available now either. I'm no CPA, so let's see what the other folks here say too.

Financial Advisors and CPAs have worked okay for us. One thing we've done is given state-approved seminars for continuing education for financial advisors and CPAs. When we show them the illustrations of real-life cases of how a plan looked before we got involved, to how it looked after we got involved, after their initial shock, they start wondering if we could review some of their clients' plans. They bring clients to us, and we never shop their plan to another advisor. Nor do we disclose the names of any of our other clients to them. With enough contacts like this, you'll easily grow your business. We disclose all fees to the client as well, so no surprises pop up later when they wonder how that advisor is getting paid the most from the plan. This also helps to protect the advisor, by usually keeping their fees competitive. We have come across a few bad advisors and/or CPAs that we simply had to stop doing business with though. Our goal is to work with the CPA's (or advisor's) client to see if the design can be improved. For new plans, we work with the advisor or CPA to find out what the decision maker's true goals are so the correct design can be built. Many times they think "I want an ABC plan", not knowing that an "XYZ" plan would actually help them reach their goal more effectively. Many TPAs build cookie cutter plans based on the "I want an ABC plan" statement. We take over those kinds of plans later on. The best way to start with that client is to spend the time asking the deeper questions. Sometimes they want the largest possible deduction you can come up with. Of course, then you tell them $500,000 and they are surprised that's even possible when they were really only looking for about $100,000 - well that's a totally different plan design then. You get the picture. After the CPA's (or advisor's) initial success with their first client using your services, they feel comfortable bringing more. Keep in mind, our average client size is only about 30 participants. These advisors and CPAs might only bring you 1 client in the first year, then maybe 2 to 4 per year thereafter, then less after a few years when their client list is tapped out. So, under our model, we have a lot of CPAs and advisors as contacts, which brings in about 100 plans per year. Our sales folks rarely do a cold call anymore. We should not discuss fees in this forum. You may wish to attend a Technical Answer Group conference for business owners sometime.

You should be able to charge the fee to another source. Unless the document states otherwise, your plan does not have to limit the withdrawal to the deferral source, it only needs to limit the actual withdrawal amount so the amount withdrawn does not exceed the deferral contributions made. If your plan truly does limit the withdrawal at the source level, then it imposes an unnecessary restriction, but it's good that you are checking with the terms of the plan.

Perhaps the reason for this bifurcation is in case the plan terminates before 1/1? In that case, I think that the new dollar limit is not available?

We also do not prefer the manner in which Hancock (Manulife) handles plan terminations (rather inconveniently). It sure would be nice if they could offer payout services for a fee at a minimum, but so far we've only seen one option: one large check for all plan assets written to the trustees fbo the plan.

Okay, no takers, even TAG didn't want this one!

It's now officially okay to add Roth provisions any time during the plan year, even if the plan is a Safe Harbor 401(k) plan. http://www.irs.gov/pub/irs-drop/a-07-59.pdf You can also amend a Safe Harbor plan's existing hardship provisions during the year and not lose Safe Harbor status. This would be to allow the plan to treat a participant's beneficiary the same way as a participant's spouse or dependent for purposes of being eligible to receive a hardship distribution. This is an optional provision.

Suppose an Employer maintains a Safe Harbor (3% nonelective) 401(k) plan, calendar year. The 100% owner of the plan sponsor (a P.C.) is the Trustee of the plan and is Plan Administrator. Now suppose that the State took him to court for fraud (for allegedly de-frauding insurance companies about something insurance-related), NOT related to the 401(k) plan at all. He loses in court and his sentence begins in a couple weeks. Suppose he has not yet made the 3% nonelective Safe Harbor contribution for 2006 (about $20,000) and that another one will be due for 2007 (a smaller amount since the employees are now fleeing the office). Suppose a decision is made to declare bankruptcy and these 401(k) safe harbor contributions are still not paid (but deferrals are all timely met). Under bankruptcy, do required contributions to a DC plan have priority over the claims of other creditors? Or, is the pecking order determined by the bankruptcy judge? (for claims). Would the participants have to actually file a claim in order to formally be in line to get this? Do know of a place this information might be found?

I would argue that under the final 401(k) regulations, changes that affect the safe harbor contributions are not permitted after the start of the plan year for 12 months, unless it falls into the exceptions category for an initial plan year, a change in plan year, or a final plan year, or as described in Treasury Regulation 1.401(k)-3(g). Look at Treasury Regulation 1.401(k)-3(e).