John Feldt ERPA CPC QPA

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?

I think an annual notice is required for each participant who remains defaulted (they've made no election to defer a contrary amount/percent). If the plan is Safe Harbor, we tend to send it along with the Safe Harbor Notice.

It is also possible to bump up everyone who is currently deferring below the automatic enrollment percent, if you want to (your amendment would need to state that). You should give them a notice and enough time to make/sign a contrary election (I would give them a 30-day period) before the automatic percent would otherwise apply.

If the NHCE ADP in 2005 was 2.50%, then under prior year method, the ADP for the HCEs have to be limited to: The lesser of: 2 x NHCE ADP or 2 + NHCE ADP Then, if greater, the NHCE ADP x 1.25 So, in your example, that is the lesser of: 2 x 2.5% = 5% or 2 + 2.5% = 4.5% Then, if greater 2.5% x 1.25 = 3.125% So in 2006, 5% ADP for the HCEs does not pass, 4.5% is their maximum. As for your question about otherwise excludable, I'll have to look into that further.

mjb means the first $97,500

k man, Check the post-egtrra tack-on amendment to the GUST document, or if done separately, the 401(a)(9) tack-on amendment, it should have the language there. We used Sungard and we chose to allow the beneficiary to elect the method, either the 5 year or the life expectancy.

I think that means 36% if they put 6% in the DC and yes, 40% if they put no employer $ in the DC.

I do not agree with the way you described Roth. Step #1: The employee decides how much to defer from salary. Step #2: The employee decides what portion from #1 is pre-tax and the portion that is after-tax Step #3: The employer provides a match based on the amount deferred under step #1. I do not see where adding the Roth enhanced the match. Am I missing something here?

I don't see a problem with adding Roth, it does not change the info in the Safe Harbor notice or in the Safe Harbor provisions. Under 1.401(m)-3(f)(1), the plan provisions that satisfy all of these Safe Harbor rules must be adopted before the first day of the plan year and remain in effect for an entire 12-month period. And a plan which includes provisions that satisfy the Safe Harbor requirements will no longer satisfy them if the plan is amended to change such provisions for that plan year. There are a couple exceptions for a short plan year and the initial year and for the reduction/suspension of the safe harbor match. That may seem overly strict, but it is what it is.

ok, thanks. I'll see if we know anything new by the end of Tuesday then.

Great post Blinky. Somebody needs to ask Jim Holland why he wrote it that way at the end of Q&A 9. I have some spare time on Friday, maybe I'll try to call him.

Well, it initially appeared to me that the 404(a)(7) limit disappears if the employer portion of the contribution to the DC plan is 6% or less. Then I read the second sentence. Then one more time, skipping the long parenthetical. This second sentence of Q&A 9 could mean that the combined plan limit (when a DC plan exists) will limit the DB contribution to the minimum funding requirement or, if greater, the DB maximum deduction limit (but not more than 25% of comp), but I need to look further.

Penman2006: Agree, per Q&A #8