John Feldt ERPA CPC QPA

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.