John Feldt ERPA CPC QPA

Income taxes: If I read this right, 96.70% of all income taxes (2004) were paid by 50% of income tax payers. http://www.irs.gov/pub/irs-soi/04in06tr.xls

Yes, but at some time, if ever, if more than 50% of the voters are no longer required to pay taxes (or very little tax at all), then we may be surprised how eager many in Congress will be to raise taxes on those who are still paying taxes (to get the votes from the nontaxpaying voter block).

Thanks, we agree. Yes, we could tell right away that the agent was attempting to use the Avg Bft test rules when they were clearly not appropriate. The agent only quoted the code and we will be replying with references to the regulations.

Plan Man, I understand your point, but I must disagree with "the plan cannot be written to only include certain employees". If that is true, then you would be making a ruling based on how the plan's document words are ordered and phrased, not based on what the words mean in total and their end result (the action needed to operate the plan). Here's an example, 2 highly, 2 nonhighly. Suppose we want to benefit only Jill and Bob: Jill (Sales) HCE Joe (Admin) HCE Bob (Sales) NHCE Fred (Admin) NHCE Wording #1 (you say is ok): "Employees who are Administrators are excluded" - thus Jill and Bob are in the plan. Wording #2 (you say is NOT ok): "All Employees other than Salespeople are excluded" - thus Jill and Bob are in the plan - same result. The end result of the wording is to exclude certain employee groups - as you stated "a qualified plan is set up to benefit the employees and can only exclude certain employees". Please look at the regulations in addition to the Code and see what you think. I do not yet see a problem with either number 1 or number 2 above. Anybody else?

jved, that's correct, thanks.

I like what JanetM pointed out. Social Security Benefits are very much like having your social security taxes (that you paid) returned to you. Were those FICA taxes deductible from your gross pay to lower your taxable income? No. The payment of your Social Security Benefit is much like having your own FICA payments returned to your hands - and that is taxable income. That's already double taxation. If Congress adopts a consumption tax or national sales tax (or something like that) then the Roth contributions, having been taxed once, would get taxed again when the funds are used to buy something. Until then, or until Roth acounts or distributions are taxed as Janet mentions, Roth away!

Thanks, that's very helpful. As we looked further at the documentation, it appears that the language to continue the PS vesting schedule for the prior balances was only placed into the Merger Resolution, but it never got into the plan document of the 401(k) plan. This could be a problem then, and cause perhaps one employee to receive an additional distribution.

A prospect is under an IRS Audit. They have asked us to look at the situation. 1. The IRS Agent's review states the merger of a Profit Sharing plan into a 401(k) plan constitutes a plan termination. They use Rev Ruling 2002-42 and they say that because the Profit Sharing plan had a 5-year vesting schedule 20, 40, 60, 80, 100 but the plan it was merged into (the 401(k) plan) had a 6-year graded schedule, 0, 20, 40, 60, 80, 100, that this a complete termination of the PS plan. At the time of the merger, language was added to the 401(k) to maintain the vested percent from the PS plan but only for purposes of the merged PS balances only, so the reports show everyone's prior PS balance continued upward on that old schedule. 2. Also, the PS plan excluded some employees, but still passed the 70% coverage (ratio percent) test. But, the IRS agent writes "there are no provisions under the Code that allow you to include only employees who have certain job titles", stating that we cannot use language that says "The following Employees are not eligible: All employees other than Employees with job title a)___, Employees with job title b)___, and Employees with job title c)___" even though this passed the 70% coverage test. This document is a Age Weighted formula document (volume submitter). Any comments/thoughts would be great.

Non-electing church plans are not subject to IRC Section 417.

In Revenue Procedure 2007-6, section 18: Notice that an application for an advance determination regarding the qualification of a plan that is described in §§ 401, 403(a), 409 and 4975(e)(7) and that is subject to § 410 is to be made must be given to all interested parties... ... Content of notice .03 The notice referred to in section 18.01 shall contain the following information: (1) A brief description identifying the class or classes of interested parties to whom the notice is addressed (e.g., all present employees of the employer, all present employees eligible to participate); (2) The name of the plan, the plan identification number, and the name of the plan administrator; (3) The name and taxpayer identification number of the applicant for a determination; (4) That an application for a determination as to the qualified status of the plan is to be made to the Service at the address in section 6.17, and stating whether the application relates to an initial qualification, a plan amendment, termination, or a partial termination; (5) A description of the class of employees eligible to participate under the plan; (6) Whether or not the Service has issued a previous determination as to the qualified status of the plan; (7) A statement that any person to whom the notice is addressed is entitled to submit, or request the Department of Labor to submit, to EP Determinations, a comment on the question of whether the plan meets the requirements of § 401 or 403(a); that two or more such persons may join in a single comment or request; and that if such persons request the Department of Labor to submit a comment and the Department of Labor declines to do so with respect to one or more matters raised in the request, the persons may still submit a comment to EP Determinations with respect to the matters on which the Department declines to comment. The Pension Benefit Guaranty Corporation (PBGC) may also submit comments. In every instance where there is either a final adverse termination or a distress termination, the Service formally notifies the PBGC for comments; (8) The specific dates by which a comment to EP Determinations or a request to the Department of Labor must be received in order to preserve the right of comment (see section 17 above); (9) The number of interested parties needed in order for the Department of Labor to comment; and (10) Except to the extent that the additional informational material required to be made available by sections 18.05 through 18.09 are included in the notice, a description of a reasonable procedure whereby such additional informational material will be available to interested parties (see section 18.04). (Examples of notices setting forth the above information, in a case in which the additional information required by sections 18.05 through 18.09 will be made available at places accessible to the interested parties, are set forth in the Exhibit attached to this revenue procedure.) This is what the Notice says, not that it helps much, I think your caveat sentence is a good idea.

We wondered the same thing last week, but ran out of time to find the answer. Lacking guidance, we sent the notice anyway. If I find more info, I'll re-post here.

Yes, I read that - let's not start that again!

That's ok, we'll disagree for now. If any of our clients end up in this situation, we'll certainly explain the conservative approach vs the less conservative approach and see what their CPA advises based on this language.

OK, now I see what I've done. I understand where I have confused the issue. 21% in DB, 10% in DC. How much is deductible? Alright, when applying 404(a)(7), the PPA states "this paragraph shall only apply to the extent that such contributions exceed 6 percent of the compensation" I want to stress "to the extent" - it must mean something, but guidance is pending that might clarify it. So, I take the somewhat less conservative approach (pending guidance), that I can ignore the first 6% (thus deduct it) and then only the rest of the DC money counts toward the 25% limit, because only the rest of the DC money is considered to be part of "to the extent". So, in your example, I would deduct the full 31%. We don't have any clients yet in this exact scenario (the DC clients with DBs have over 25% deductions for the DB), so I appreciate your persistence (and patience) with me. I'll add an edit to my previous post (above) to clarify the conservative vs less conservative approach. -Thanks!

OK. Here's the quote: "For clients where at least one participant is a "beneficiary" in both plans, we are taking this approach: 1. the minimum required contribution to the DB plan is deductible, plus 2. the employee deferrals in the 401(k) are ignored (i.e. deducted), plus 3. contributions up to the first 6% of eligible compensation for ER contributions in the DC plan (match, nonelective, etc.) are also ignored (thus deductible), plus 4. anything above 6% in the DC is deductible but only up to the point where DB + (the DC% above 6%) is equal to or less than 25% of elig comp For example, if the DB minimum was 18% of pay, and they somehow goofed by contributing 15% of pay to the DC plan, then the DB contibution is deductible, plus 6% of DC is ignored for purposes of 404(a)(7) under PPA 2006 (thus it's deductible), AND of the remaining 9% (DC money) only the 7% portion is deducted, leaving 2% that cannot be deducted. This becomes a 31% deduction plus a 2% nondeductible contribution." So, I need help seeing how this quote shows a change of position from my comment above, I really didn't intend a change. When I read the PPA, I see the DB minimum as deductible first, then I look to see how much room is left for deducting the Employer DC money, with the opinion that I can always deduct the first 6%. Suppose the DB minimum is 15% of eligible compensation. They can put a contribution of up to 10% Employer money in the DC plan, but any Employer DC money above that is not deductible - I think that's what I agreed to above. Perhaps this is being confused with this example: If the DB minimum was 23% of eligible compensation and if the DC plan wants to put in Employer money of 6% of eligible compensation then are ok, but any Employer DC money above that 6% might not deductible - staying under the 6% is what I call the conservative approach here. If the DB minimum was 23% of eligible compensation and if the DC plan wants to put in Employer money of 8% of eligible compensation then I think they are ok, but any Employer DC money above that 8% is not deductible - this is what I call the less conservative approach, and guidance may clear this up some day.

I agree with AndyH except that I would go for it with the 6% and deduct 6% in the DC, not just 4%, even though it is not entirely clear yet, I'd take the risk.

AndyH and SoCal - I agree, well, that's the approach we have taken so far, absent any written guidance to the contrary.

"Years" beginning after 12/31/2007. PPA section 801: PPA 801 (b) Exception From Limitation on Deduction Where Combination of Defined Contribution and Defined Benefit Plans- Section 404(a)(7)© of such Code, as amended by this Act, is amended by adding at the end the following new clause: `(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.'. ... (e) Effective Dates- (1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to years beginning after December 31, 2007. http://fuguerre.googlepages.com/PPA.htm#ppa801 Also, as you may be aware, you can currently ignore 404(a)(7) if the overall Employer contribution in the DC plan does not exceed 6% of compensation, regardless of whether or not the plan is subject to PBGC, that's in 803(a).

Agreed. Use this link from the IRS site, they update it fairly timely: http://www.irs.gov/retirement/article/0,,id=96450,00.html

We have also filed the 500 before the termination date successfully. In one instance, we filed the 500, provided the Notice of Plan Benefits, and provided the intent to terminate all at the same time, then provided the distribution forms to the participants 60 days later, and the plan was paid out approx 30 days after that. A bit stressful, but do-able.

We started using the CCH online version of the answer books last year. We don't subscribe to all of the answer books online, just a dozen, but that keeps us up-to-date at a much lower price than buying hardbacks. I especially like the hyperlinks embedded in their answers, so I can read the code or reg myself by just clicking on the link. We still subscribe to the ERISA outline as well (books and the CD).

Mike, In this example the original plan effective date is 1-1-2003 (as shown in the original post). Based on that, I still believe the restatement deadline is 01/31/2007, not 2012. I think paperchase is confusing the restatement effective date with the plan's original effective date. The orginal effective date of the plan is 1-1-2003, will the restatement effective date be 1-1-2006?

No replies? Well, I'm going to guess that it should be effective at the beginning of the 2006 plan year, but I'm concerned that the EGTRRA restatement portion has the RMD rules for DB plans perhaps should be effective earlier than that? Maybe someone will take a stab at this question now?

As for the IRS, whenever we include a contribution receivable on the Form 5310, we attach an explanation stating that the plan was underfunded by this amount as of the date shown on the 5310 and that the plan sponsor has made a commitment to contribute whatever amount is necessary to satisfy all plan liabilities at the time actual distributions occur, should the plan still be under funded at that time. We’ve had no problems with the IRS on that so far.

Yes, I was not specific enough - A target plan that does not use a target safe harbor formula is not eligible for the 6-year cycle. But, you are correct that the target plans that use the target safe harbor formulas can and will be done (if any still exist) in a pre-approved prototype, thus using the 6-year cycle. Yes, it does appear to lock you into that provider's document, hopefully you've chosen wisely when you switched to their pre-approved plan. - Thanks!