John Feldt ERPA CPC QPA

A couple of ERSOP links, I am neither claiming agreement nor disagreement to these type of arrangements at this time: http://www.businessweek.com/smallbiz/conte..._0799_sb006.htm http://www.rainwatercpa.com/links/ersop.pdf

Go for it. Thanks for asking! -John

I agree with Carol's point. If your plans do not contain language, however, then you should try to administer it in the same way it started out. However, the regulations talk about aggregating plans where the determination dates fall within the same calendar year: 1.416-1, T-6 Q&A: "the required aggregation group includes each plan of the employer in which a key employee participates in the plan year containing the determination date". 1.416-1, T-22 Q&A: "The determination date with respect to a plan year is defined in section 416(g)(4)© as (1) the last day of the preceding plan year, or (2) in the case of the first plan year, the last day of such plan year." 1.416-1, T-23 Q&A: "When two or more plans constitute an aggregation group in accordance with section 416(g)(2), the following procedures are used to determine whether the plans are top-heavy for a particular plan year. First, the present value of the accrued benefits (including distributions for key employees and all employees) is determined separately for each plan as of each plan's determination date. The plans are then aggregated by adding together the results for each plan as of the determination dates for such plans that fall within the same calendar year." OK, so at this point, we've put the two plans together to run the TH test, and let's say the result is top heavy. If this was the first year for both plans, (and they are required to be aggregated) then there is no question about the TH minimum: if one plan says that it will provide it, then that first plan year must provide a TH minimum. If both plans say they will provide it, then they both provide the TH minimum in the first year (and a search for a new plan design consultant is initiated - just kidding). With that in mind, follow to the next year. What must happen if the second TH test shows the plans are top heavy? Follow this langauge again, and so on until you reach your current year. Even if the plans were not set up at the same time, then the same approach applies, by using the determination dates that end in the same calendar year for the aggregation. For example, a 6/30/2005 determination date and a 12/31/2005 determination date are used for testing Top heavy. If the result is TH, that means the 7/1/2005 plan year and the 1/1/2006 plan years are top heavy. The plan language will then dictate which plan (or plans) have to giev a TH minimum for that plan year. Well, that's what I think should work. I hope this helps. -John

In Nate's scenario, the Safe Harbor Match means that the Top Heavy minimum is deemed to be handled - that's one of the benefits of using safe harbor provisions. If some non-key employees do not defer, and thus they get no employer contribution, it does not matter because the plan is deemed to satisfy top heavy under the safe harbor plan regulations (assuming all NHCEs deferring get a Safe Harbor Match). I first saw the Triple-Stacked Match design at a SunGard Corbel conference (Steve Forbes happened to speak at the one I attended). This type of arrangement allows the maximum deferral for the HCEs and gives them the ability to control their own costs (by choosing to defer or not) and it gets them to the maximum $44,000 limit with the match if designed properly (and if the HCE pay is high enough). If the NHCEs are doing jobs that are low paid (usually due to the skills required), then it is possible to see some lower costs due to lack of employee deferral (but it won't always end up that way because of households having more than one income producing source). If the cross-tested safe harbor does not work due to demographics and the integrated plan does not fit their goals either, then this might be an option to show. Mr. Forbes suggested that you show both the average deferral scenario and the worst-case scenario (where each employee defers enough to get the maximum match). In our firm we have discussed this design with less than 1 percent of our prospects. For example, one prospect was a feed mill with a lot of older workers (15 or so out of 60 people) with low wages - the cross-testing would not work and the integration was too expensive. However, an additional problem was that the HCEs were not earning the $220,000 limit - that made it impossible to get to the $44,000 limit in this design. They ended up offering no retirement plan to the employees (their industry does not compete for employees anyway, so any plan would have to justify itself on a tax-savings vs. employee cost basis). I hope this helps! -John

Well, maybe I read this wrong from the current regulations: "A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment." If the plan language currently provides for a distribution option to be paid as soon as administratively feasible after termination of employment (regardless of whether or not anyone was ever paid out), then the right to be paid according to that timing still exists in the plan language. Thus, every accrued benefit so far gets to retain that right as it relates to the timing of the distribution, with a single 2-month exception. So, it appears to be permissible to adopt an amendment that changes the timing to say something like "benefits are to be paid as soon as administratively feasible two months after a participant's date of termination." Just make sure the plan does not get amended again for purposes of those accrued benefits that are affected by that amendment. Alternatively, the plan could be amended for future accruals only (administratively impractical though) to move the payment timing for future accruals to be as administratively feasible after the calendar year-end following the participant's termination. Or, the plan could be amended to affect only new participants (let's hope some new participants will be HCEs soon so this looks like it is not discriminatory). Any amendment would have to prove to be nondiscriminatory. With all of that said, are you just trying to change the month(s) that are used for purposes of determining the GATT interest rate for calculating the lump sum? That would be a diferent answer.

Yup. OK - thanks!

Another reason to have a TPA is to keep the form of the plan qualified. Most TPAs provide a plan document service to keep the plan up-to-date with all laws and regulations. Has your plan been amended for the automatic rollover rules? This was required under 401(a)(31)(B) and is due no later than the filing deadline for your corporate tax return that contains March 28, 2005, or if later 12/31/2005. This includes any extension, if your filed an extension for your coprorate return. Perhaps you have a standardized or nonstandardized plan and the amendments are done by your document provider automatically. If it has been done, then a Summary of Material Modifications should be prepared and provided to your employees - that will be due no later than 210 days after the plan year in which the amendment was adopted. Was the plan amended for 401(a)(9) by the end of 2003 (or thereabouts depending on your plan year)? The next amendment will be for the Final 401(k)/401(m) regulations - this will generally be due no later than the filing deadline for your 2006 corporate tax return plus any extension, if you file an extension for your coprorate return.

My question is concerning the combination of the DB ebars with the DC ebars for the general test when the DC plan provides the combo plan gateway of 7.5% of pay, but where the DC plan is only based on 7 months of pay in the first year. The client is adopting 2 new plans this year, they've never had qualified plans before and their fiscal year is a calendar year. If the DC plan is a short plan year, say June 1, 2006 to 12/31/2006, but the DB plan is the full 2006 year, when we convert the DC contributions and divide by DC comp for the DC ebar, are we OK to use the short year DC compensation to achieve the DC ebar? The DB ebars will be based on full 2006 compensation - so when we add the two sets of ebars together, I'm concerned that we are adding apples to oranges to arrive at an invalid result, or is this legitimate thing to do? PS, yes I know we could lower the 7.5% a bit because of the DB accruals, but we are just concerned over the short plan year DC here. I did not find guidance, but I could have looked harder I suppose.

Here's what I've found under current regulations, in §1.411(d)-4, Q&A-2(b)(2)(ix): De minimis change in the timing of an optional form of benefit. A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment. To the extent the optional form of benefit is available prior to termination of employment, six months may be substituted for two months in the prior sentence. Thus, for example, a plan that makes in-service distributions available to employees once every month may be amended to make such in-service distributions available only once every six months. This exception to section 411(d)(6) relates only to the timing of the availability of the optional form of benefit. Other aspects of an optional form of benefit may not be modified and the value of such optional form may not be reduced merely because of an amendment permitted by this exception. I hope this helps, although I don't really like the 2 month restriction.

Tom and E, Thanks for the info. We had already drafted the warning to the client about this and it's good to see our own conclusions were the same as yours.

Under 1.401(a)(4)-5(a), a plan cannot be amended in a way that discriminates significantly in favor of the HCEs. THis is based on relavant facts and circumstances. Does anyone have any guidance or opinion with what the IRS would view as significant or insignificant here? Here's the situation: the plan requires 1000 hours for a year of vesting service, they have 5 HCE doctors and 9 or 10 NHCEs. They usually have 1 to 3 NHCES leave each year and they are replaced by rehires. This year, 1 doctor left with under 1000 hours and was only 80% vested, the 20% nonvested portion is over $40,000. Two of the other 4 HCEs are still not yet 100% vested either, but they're still working. Some of the NHCEs are fully vested, some are not. Would it be a significant favor to the HCEs if the plan is amended to only require 200 hours for vesting only for 2006? (Assuming 1 or 2 nonvested NHCEs also leave with over 200 but under 1000 hours) Or would it be a significant favor to the HCEs if all participants' vesting was bumped up by one year (this would now increase 3 HCEs, not just one, but it would help several NHCEs). Any other ideas?

Corbel released a good faith amendment in early December (no IRS model found yet). If you are on their prototype maintenance plan you should have free access to that. If not, there should be a location where that language can be purchased. The dozen or so of our clients have heeded our advice to not allow loans to be made from the Roth accounts (but to utilize the Roth account when determining the 50% limit - giving the loan as the lesser of A) 50% of all accounts or B) the non-Roth account) or C) $50,000). However, they have all decided to allow Roth to be made available for hardship and for in-service. We are hoping to see final Roth distribution regs by year-end. So far none have actually taken a hardship or in-service with Roth . One other item, one of our clients had automatic enrollment, so we added another paragraph to the Corbel Roth amendment to specify that negative elections would be contributed as Pre-tax elections, not Roth.

Company X has an employee who became disabled and has been so now for more than 6 months (most of 2005). Company X pays for a disability policy with an insurance company to cover its employees. The insurance company had Company X act as the payor and they told Company X to also pay and withhold FICA for the first 6 months and to report the payment on the Form W-2 (box 1). After 6 months, the insurance company explained that the FICA tax no longer needs to be paid, but that Company X must still report the amount paid on the W-2 (box 1). Company X has a nonstandardized prototype Safe Harbor 401(k) plan that defines compensation as W-2 wages for allocation purposes. As you know, the 3% nonelective Safe Harbor contribution has no allocation conditions. Company X has reviewed the rules for reporting the sick pay on the W-2. Company X explained to us that unless they have an agreement in place with the insurance company to act as their agent, the insurance company must provide Company X with a notice of sick pay payments (meaning the insurance company will not act as the payor for tax reporting purposes). Company X will see if it is possible to make the insurance company the payor. However, for 2005, Company X believes that they still in an employer-employee relationship with the disabled participant (this individual is still covered as an employee in their medical insurance plan). Company X believes that they must continue to include these payments on the employee's W-2, including the payments made after six months disability. Company X has asked us if the Safe Harbor contribution should be allocated to the participant for 2005 based on all of their W-2 pay, or just the portion before they were paid before they became disabled, or just the portion before the 6 months expired. Is there a way to exclude this participant from getting allocation based on these disability payments that are being paid by the insurance company?

Yep, that's what we found, but we hoped there was another solution that we missed. Reg. §1.411(d)-4, Q&A-2(b)(2)(ix) (ix) De minimis change in the timing of an optional form of benefit. A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment. To the extent the optional form of benefit is available prior to termination of employment, six months may be substituted for two months in the prior sentence. Thus, for example, a plan that makes in-service distributions available to employees once every month may be amended to make such in-service distributions available only once every six months. This exception to section 411(d)(6) relates only to the timing of the availability of the optional form of benefit. Other aspects of an optional form of benefit may not be modified and the value of such optional form may not be reduced merely because of an amendment permitted by this exception.

A 401(k) plan has an immediate distribution option for terminated participants, regardless of any other factor. To be eligible for a distribution, they are hoping to change the plan: A. to require 5 one-year breaks in service, with the exception of reaching Normal Retirement and mandatory cashouts. But, if that is not an option, then instead: B. to require the payment to be delayed until the first quarter after the plan year in which the participant terminates, again with the same NRD and cashout exceptions. Can (A) be done to affect all accounts of all participants now (actives and term vesteds alike)? What about (B) instead? Or would current accounts retain a right for immediate distribution upon termination of employment?

It appears that the overlapping plan year is causing a problem then - can you provide some cites that back the statement above?

yes, to clarify, we are talking about an amendment that has a retroactive effective date, 11-1-2005 in this example. Thanks!

Can you confirm then, that in this example, if the first plan year is November 1, 2005 to October 31, 2006, then we have until January 15, 2007 to amend the plan, and that formula is then deemed to have been in place as of November 1, 2005 and therefore allows the 12/31/2005 tax return deduction?

A client with just 2 employees, both owners, has a corporate tax year equal to the calendar year and they set up a defined benefit plan as follows: 1. The effective date of the plan is November 1, 2005 2. The plan document was signed before 12/31/2005 3. That plan document contains a formula of 0.50% x avg pay x participation 4. The only other plan they have is a deferral-only 401(k) A design is done and it is determined that the formula that suits the client best, based on their goals, is 4.00% x avg pay x participation ($380,000 contribution). The client wants to deduct this entire $380,000 contribution on their 2005 tax return. By what date must this amendment to the formula be signed in order to deduct the entire $380,000 on their 2005 tax return?

I must change my mind regarding the father, since the corps. are not a controlled group, then I believe he can also have two 415 limits. But if the father lowers his ownership in Corp. A by a percent or more and it's bought by one of his kids, then it becomes a controlled group (I think), then the cool two 415 limit thingy goes away and becomes one 415 limit? ("cool" and "thingy" are just technical terms, don't worry about those)

A father owns 100% of his corporation A, and he employs his 3 kids there now (all over age 21). He plans to start another corporation with his 3 kids - Corporation B. The kids will own none of Corp. A, but will each own 17% of Corp. B, with their father owning the rest of Corp. B. The father and the kids will work for both Corps, receiving compensation from both. I think the father does not have two 415 limits due to having direct ownership in both corps, but what about the kids? Do the attribution rules also prevent them from having two 415 limits?

A client with a Defined Benefit Plan wants to amend their plan to exclude an employee by name effective prospectively. This employee had entered the plan in 2001. The Plan started in 2000 and has always been top-heavy (and will continue to be top heavy). If the employee is excluded, we believe that the plan will still pass the 410 ratio percentage test for coverage, and they will pass 401(a)(26) for participation. Can you think of any plan qualification problems that might occur doing an amendment like this? Will this employee no longer be eligible to accrue any future top heavy minimum benefits? Can his future compensation be excluded when considering his average pay for top heavy purposes? Since the plan passes ratio percent, is it ok to exclude him by name, or does that not even matter? Should the plan provide a 204(h) notice to this employee?

An Employer has an existing 401(k) plan that currently covers everyone who meets the age and service requirements. They decide to add a defined benefit plan. When the DB plan is started, they decide to cover only half of the HCEs and half of the NHCEs in the DB plan. At the same time, the 401(k) plan is changed to cover only the employees who are not covered by the DB plan (the other halves). Can the DB plan exclude service prior to the plan's effective date for vesting purposes?

A client has an existing 401(k) plan (3% Safe Harbor Nonelective). The corporate year ends January 31 and so does the plan year. In December 2005, they gave a maybe notice because they might change their retirement plan structure. We are about to propose that they adopt a defined benefit plan to cover 2 HCEs, leaving the 2 other HCEs in the 401(k) plan. 3 NHCEs will be covered in the DB plan and 3 other NHCEs will remain eligible for the 401(k) plan. This makes two plans that do not actively cover any of the same employees. We plan to have the amendment to this effect executed by January 31, 2006. We are concerned by what is considered as being a beneficiary in both plans for deduction limitation purposes - if they can no longer defer or receive any allocation in the 401(k) plan, we are hoping this means that they are not considered to be 'covered' by the 401(k) plan after 01-31-2006. If we set up the DB plan (executed by 1-31-2006) with an effective date of 12-1-2005, a small portion of the 2005 DB plan year would cover some of the same cross-section of participants, so the deduction limit for the corporate year ending 01-31-2006 be equal to 25% of the overall eligible payroll. Now how about the next year, for their deductions for their 01/31/2007 corporate year, will the deduction limit be the DB minimum required contribution plus 25% of the covered payroll for the 401(k) eligible participants plus the 401(k) deferrals (think yes)? Or are we limited to 25% of both plans payroll overall (think no)? If no, how do we get out of the 25% limit? Note: Sal Tripodi's ERISA Outline indicates that the IRS has stated two opposite positions on this, but that they have not ever reiterated their original position (from PLR 8743096) in any later PLRs.

A client has an existing 401(k) plan (3% Safe Harbor Nonelective). The corporate year ends January 31 and so does the plan year. In December 2005, they gave a maybe notice because they might change their retirement plan structure. We are about to propose that they adopt a defined benefit plan to cover 2 HCEs, leaving the 2 other HCEs in the 401(k) plan. 3 NHCEs will be covered in the DB plan and 3 other NHCEs will remain eligible for the 401(k) plan. This makes two plans that do not actively cover any of the same employees. We plan to have the amendment to this effect executed by January 31, 2006. We are concerned by what is considered as being a beneficiary in both plans for deduction limitation purposes - if they can no longer defer or receive any allocation in the 401(k) plan, we are hoping this means that they are not considered to be 'covered' by the 401(k) plan after 01-31-2006. If we set up the DB plan (executed by 1-31-2006) with an effective date of 12-1-2005, a small portion of the 2005 DB plan year would cover some of the same cross-section of participants, so the deduction limit for the corporate year ending 01-31-2006 be equal to 25% of the overall eligible payroll. Now how about the next year, for their deductions for their 01/31/2007 corporate year, will the deduction limit be the DB minimum required contribution plus 25% of the covered payroll for the 401(k) eligible participants plus the 401(k) deferrals (think yes)? Or are we limited to 25% of both plans payroll overall (think no)? If no, how do we get out of the 25% limit? Note: Sal Tripodi's ERISA Outline indicates that the IRS has stated two opposite positions on this, but that they have not ever reiterated their original position (from PLR 8743096) in any later PLRs.