John Feldt ERPA CPC QPA

Yes, very lengthy, 397 pages in this pdf file, the actual regulations start on page 186. http://www.treas.gov/press/releases/reports/td9321.pdf Also this came out as well (very short): http://www.irs.gov/pub/irs-drop/n-07-34.pdf

Suppose a business owner (age 29) has 4 years of service by 12/31/2007 and starts a new DC plan (in this year, 2007). No other qualified plan. Suppose one employee (age 28) has just been hired (March 2007). Assume we do not go with 2 YOS for entry, so this ee would enter sometime in 2008. I would like to run the cross-testing for 2008 using a testing age equal to the normal retirment age, and I would like to use a normal retirement age equal to the later of age 30 or 5 years of service. What do you think? Issues?

Ok, after reading through some of 1.401(a)(4), I can see that. Now, suppose the plan covering the HCE contributed 20% of pay for 2005, and the plan covering the NHCEs contributed only 0.00% of pay for 2005. In this case, the 2005 contribution was actually deposited in 2006, so perhaps that amount can be recharacterized as a 2006 allocation/contribution (plus the 2005 tax return gets amended to show no deduction). Assuming they have not made any other contributions in 2006 (so the 415 limits are not exceeded), do you see any pitfalls with doing this, or do you see a better solution?

Here's an interesting prospect: Employer has 2 Profit Sharing Plans (no deferral provisions): Plan 1: Covers only the 1 HCE of the Employer, the document is a vol sub cross-tested doc Plan 2: Covers all NHCEs (7 or 8 ees), the doc is a NS prototype, allocation is uniform pct of pay To pass 410 coverage, plan 1 must be aggregated with plan 2 in order to pass (obviously). Then, for plan 1 to pass 401(a)(4) nondiscrimination, the prior TPA ran a cross-tested 401(a)(4) test including the HCE and all NHCEs. The contribution that is then decided upon for Plan 2 is at least equal to either 5% of pay or 1/3 of the pct given to the HCE in plan 1. 1. Doesn't plan 2 need to have gateway language somewhere in order to be in compliance (in form) so the plan can actually support its position that it really gave a "gateway"? or 2. Is the gateway language somehow not needed in plan 2's doc?

Mike: I think so, however the deadline is now too late for -11g, so it can't be included if contributed now for a 2005 calendar year plan, right? Austin3515 and Dougsbpc: Rev Proc 2006-27 Section 7, 8, and 9, and then Appendix A, section .02

Yes, that is a fine point - thanks!

Right. Benefits accrued under separate employers are not aggregated for 415 purposes. Be careful to understand what it means to be "separate" employers. Generally, if the owner of a business ever earned a DB benefit in a previous business that he also owned, then aggregation would be required to offset the current plan's 415 limit by the previous benefits earned under the old DB plan. When establishing a new DB plan it is important to ask the client if they ever had a prior DB plan or if they owned a business that maintained a DB plan. Then find out the details about how much ownership they had in the old business. In your case, the county was not a business that he owned, so no worries!

Well, thanks everyone for all of the various replies. Mike Preston, if you could expound, that would be great. "... not saying an -11g amendment is precluded" - the double negative here has me hesitating -can you provide a more revealing response? Here's perhaps what we might consider: 1) File an amended Form 5500 for 2005 and revise the 2005 valuation (back out the receivable). Or 2) File a VCP application with the IRS. Ask to allocate a contribution made now for 2005. Or 3) Take a chance and do the contribution and the allocation. Here I would ask the client to sign a hold harmless letter because if audited, the results could be fairly icky (technical pension term). Any comments?

http://benefitslink.com/taxregs/td9319.pdf Looks like the final regs will keep the 401(a)(17) comp limit as an extra limit for 415 as well. This will limit the maximum accrued benefits for older employees so the actuarial increase in the 415(b) limit (post age 65) is also capped at the high 3-year average of the 401(a)(17) comp limit. It allows a grandfathering of accrued benefits earned under plan provisions in place before April 5, 2007. Anyone else looked at this yet? Agree? How do you perceive the grandfather provision working? ak2ary - when do you anticipate being able to present on this topic?

Suppose the employer accrued a discretionary profit sharing contribution for 2005 (showing the contribution on their statements), but failed to make the contribution prior to the tax return deadline and even worse, did not deposit the contribution by 12/31/2006 for the 2005 plan year. Can the employer still deposit and allocate the profit sharing contribution for 2005, even if they cannot deduct it. If yes (however unlikely), should they make up earnings for such a late deposit? My thought is no, a contribution made after the end of the plan year can only be considered as made for the prior year if it is deducted under Section 404(a)(6), or is it is required by the plan document. What do you think?

Yes, what I thought was very interesting (maybe shocked by) was how they did a small discretionary match (which they contributed) in the first year, which was subject to vesting, and then forfeitures were allocated to all eligible participants. The number of people with balances jumped from 70 people (those deferring) to over 150 people with balances, most of them 3 or 4 dollar balances. How many other plans have been designed like this?

RCK: We're driving the 5500 count down by excluding a bunch of people who already have no balance anyway since they've never deferred. We do not expect that action to lower the overall assets of the plan. Our recordkeeping fees are much lower than the asset gatherer was charging. The new platform is designed for assets of this plan's size, unlike the platform of the prior provider. Win-win. Our recordkeeping fees will not be based on plan assets for this client, so balances are not a concern for us admin folks (but the assets will be a concern for the financial advisor/broker so they can get paid adequately for the employee education services that they will provide). In this case, the majority of our admin fees will be based only on the number of participants with balances (instead of being based the number of eligible ppts) - so, much much lower fees overall. ok, end of boring paragraph...

Yes, the desire is to avoid the expensive accountant's opinion in 2008 (they've been paying for the last coupl years and will again for 2007). It's a deferral only plan. The goal of the plan is to allow deferrals for certain rank and file, not for any real benefit to the HCEs. The HCEs barely participate in the plan anyway due to the ADP limitations, the NHCE ADP was under 1%. So, their goal is to provide the option for most of the rank and file to continue to defer, as long as the administration of the plan does not get too costly. They want to be able to say to employment candidates that they do have a 401(k) plan. Why they originally even set this up as they did (this and other oddities) are all issues created by the asset gatherer who originally helped them design their plan (TPA work is a secondary business interest for this asset gatherer and it shows in their lack of design acuity). Those with account balances number well under 100 already, including any HCEs.

An advisor for a prospect of ours is debating that once an employee is eligible to defer into a 401(k) plan, they are always eligible to defer unless the plan is frozen/terminated, or the employee quits. The plan in question is considering excluding all HCEs from future participation in the plan: no more deferrals, no contributions, no forfeiture allocations. They are also considering excluding a fair number NHCEs to get their participant count under 100 (the plan has well under 100 with balances overall, but more than 120 eligible). 1. Assuming the amendment is not considered discriminatory, is their a problem with amending the plan to exclude certain employees from being eligible to make deferrals into the plan? 2. The document we propose is a normal nonstandardized prototype, or we could go the volume submitter route if that's really necessary. If #1 is ok, do you think such an amendment/restatement would damage the reliance on the D-Letter or advisory letter?

Per conversation with Jim, I got the feeling that would be highly doubtful. His solace was that in 2008, PBGC plans don't have to deal with the issue. whoopee. As I'm sure many of us have, we too know of a client that failed to take our initial advice in August 2006, and they went to the maximum 150% of C.L. plus contributed in the DC.

Investment Policy Statements are not required by the law or regulations. However, as I see it, if you plan to take advantage of the relief provided under 404(c ), certain procedures/guidelines must be followed to continue to receive such relief. In order to demonstrate that you are meeting your fiduciary requirements, the investment policy acts as a guideline by which you can measure your actions and the other fiduciaries' actions. Again, it acts a guideline, not a strict requirement. If the IPS is written well, it will say as much and allow flexibility. Also, a good advisor can help you with the drafting of IPS so that they aren't stuck with guidelines that they can't fulfill. Some of the things you may want the IPS to cover would be: 1 How does the fiduciary satisfy is obligation to prudently select investment options? 2 What considerations are made when selecting or adding funds? 3 How does the fiduciary plan to periodically monitor those investment options? 4 Based on such periodic evaluations, how will the fiduciary determine whether or not each investment option should continue to be made available to the participants? 5 For participants who fail to make investment elections, how is the default fund determined? 6 If the plan allows brokerage, what factors are used to select and monitor the appropriate brokerage firm? 7 If the plan offers RIA service, how was the RIA provider selected and how is it monitored? 8 If employer stock is offered in the plan, who will report on its suitability to continue as an investment option? 9 and so on. If you do not have an IPS, will your advisor be doing all of the above (and more)? More importantly, how will you know they have done all that they should? If you, as plan sponsor, do not provide such written expectations, how will you know when the advisor has gone outside of what you would think is prudent? Even though the advisor may be considered a fiduciary, remember that you are on the hook for selecting them and therefore responsible for decisions they make (or fail to make). Having written guidelines (that you review periodically) can be used to make your advisors to do their work. If you periodically ask them about each IPS item when you meet with them, they will be answering to you, needing to prove to you that they have done you have stated should be done. If you have no list of guidelines, then they have done everything you have specified, plus how will you know when it's time to change advisors? As for the number of funds, I have a vague memory of a report years ago (maybe Vanguard?) where the participation rate was only slightly lower when a large number of funds were offered. My memory is not very reliable on this, but I think it might have been after 15 or 16 funds? Do not rely on my memory for this however. Hope this helps. By the way, are you still planning on designing, establishing, and administering this plan in-house, including the plan document and it's requirement to be kept current with laws/regs as they change?

Well, no takers yet. I think the answer is no, no and probably. The March 1, 2007 date has gone by, so no further delay can be elected. Also, the "distribution" has "commenced" even if not actually paid yet, because in a 457(b) sponsored by a tax exempt organization, commencement of the distribution means the date "made available" (constructive receipt). The initial election to delay the distribution seems to be valid, even though it was made while still employed, I see nothing in the 457 regs to indicate otherwise on this last point.

If: 1) an S-Corp is planning to deduct a large DB contribution for 2006, and 2) they file for an extension for their S-Corp return to September 15, 2007, and 2) they plan to contribute on or before September 14, 2007 and then file the S-Corp return, then, are the individual S-Corp shareholders required to extend their individual 2006 tax returns (1040) in order to justify that DB plan deduction against the S-Corp income for 2006 for their tax purposes? I wouldn't think so, but I am not a CPA. The client's CPA asked this question.

I think it does mean that, since it states "the amount deferred". To me that means the total amount in the account that has not been taxed, but upon which taxation has been deferred. Certainly that's not a legal opinion by any means. I'll be happy to hear what anyone else might want to say on this subject.

1.457-10(b)(5): Requirements for post-severance plan-to-plan transfers among eligible plans of tax-exempt entities. --A transfer under paragraph (b)(1) of this section from an eligible plan of a tax-exempt employer to another eligible plan of a tax-exempt employer is permitted if the following conditions are met -- (i) The transferor plan provides for transfers; (ii) The receiving plan provides for the receipt of transfers; (iii) The participant or beneficiary whose amounts deferred are being transferred will have an amount deferred immediately after the transfer at least equal to the amount deferred with respect to that participant or beneficiary immediately before the transfer; and (iv) In the case of a transfer for a participant, the participant has had a severance from employment with the transferring employer and is performing services for the entity maintaining the receiving plan.

Yes, a direct transfer is an option, I'll cite the reg.

SoCal and Penman are correct. We have a large number of DB/DC combo plans where the 401(a)(4) testing is done on a combined plan basis. See §1.401(a)(4)-9(b). One of the more common items that may have a slight tendency to be overlooked is the 401(a)(26) issue that the benefits provided in the cash balance plan would need to be meaniningful for at least 40% of the participants (or 50 if that is less). Paul Schultz's IRS memo, but widely used as if it were part of the legislation itself, would generally indicate that a meaningful benefit would need to be equivalent to an accrual of at least 0.50% of pay per year payable at normal retirement. So in a cash balance plan, the credit to the "account balance" would need to be projected to normal retirement and converted to determine if they are truly participating in the plan in a meaningful fashion. There are mathematical oddities that occur because of the Paul Shultz memo, but that's another topic for another day.

A tax-exempt entity sponsors a 457(b). The plan allows the participant to make an election regarding the form of payment. The participant elects 4 annual installments. The participant left employment in December 2002, but before that, in July 2002, an election was made to delay the distribution until March 1, 2007. The employee is now at another tax-exempt and they are discussing doing a direct 457(b) transfer. Since March 1, 2007 has already gone by, the first installment (of the 4) is "considered to be made available" and is thus taxable in 2007. However, the participant has never utilized their additional election option to further delay distribution. With regard to their remaining 3 installment payments that are due, could the participant make such an election now to delay those distributions? I looked under 1.457-10(b)(6)(ii), "in the case of a transfer between eligible plans of tax-exempt entities ... the transferred amount is subject to §1.457-7©(2) (relating to when amounts are considered to be made available under an eligible plan of a tax-exempt entity) in the same manner as if the elections made by the participant ... under the transferor plan had been made under the receiving plan." Does this section of the regulation lock the 4 installment option into place in such a way that the next 3 installments cannot be delayed? Also, was it ok that the participant made the election to delay payments even before they left their old employer?

Yes, I think "otherwise excludible" gets determined in the plan year being tested. If they meet the age 21 and 1 requirement in 2006, they are not otherwise excludible for 2006 and should be tested together with the HCEs for 2006. If all NHCEs are considered as "otherwise excludable" in 2006, then you pass. If they no longer are "otherwise excludable" in 2007, then the client might consider getting their own plan document (so they can amend) or find a way to amend their plan. Be careful about the statutory exclusion, the IRS has made statements about "21 and 1", saying it should use the plan's entry date definitions, which is not always the maximum a semi-annual definition.

Jim Holland left a message reply that states the first sentence of Q&A 9 only applies to DC plans and the second sentence only applies to DB plans (we can see that). I will try again, but doesn't 404(a)(7) apply to the Employer's overall deduction limit, not to a specific plan, or am I missing something here?