SteveH

Lots of potential issues here and I'm looking for other's thoughts. A commercial real estate broker contacted me about setting up a 401(k) plan. He is the only employee of the business. He wishes to fund a DC plan with $51,000 (comp is high enough to support the contribution) and then purchase a building with the money in the DC plan from a third party. $51,000 isn't enough to purchase the entire building so the remainder of the purchase will be by him personally. My initial feeling is that this is not a prohibited transaction because he and his plan are each purchasing a portion of the building from a disinterested third party. They will own 100% together once the transaction is completed. Yet I feel a little strange once the purchase is completed and he is now personally an owner of an investment that his plan is also an owner of. Presumably this building will be collecting rents (which I believe there is an exemption for rents with the UBTI issue) Now owning an asset personally that your plan also owns seems ok if it is a publicly traded stock or mutual fund. Is it different with a building that you own 100% of? ----- If the above is a problem then could he just set up an LLC (or must it be a C-Corp and issue shares of stock?) and give partial ownership to the plan in the amount of $51,000? ----- Any other creative solutions?

so you saw the same proposal I did then

Well there is no insurance involved with the plan at all. It is pretty amazing what type of contribution spits out for a 34 year old when you assume a 9 year set back, a 3% interest rate and a retirement age of 44. Maybe I will try to post the Datair print out. I suppose if I black out all the names then there shouldn't be any trouble. I can't imagine there is any way I would get permission to post it. Hell I wouldn't want my work posted for the whole world to critique.

I recevied a proposal for a DB / DC combo plan that to my estimation is horribly incorrect. At the very least it is extremely agressive. I put down my thoughts on what I thought was wrong and now I have received back some explanations of why the person that put it together thinks it is correct. Now I need a little help proving that it is wrong. If anyone wants to help that would be great. I've been in this pension world for a number of years, but I can't recall all the code sections that apply. I typically know the answer, but for some reason I have a hard time remembering what section it actually refers to. - The actuary is assuming increases in the dollar limits of 5% per year form now until forever. - He is using a 3% interest assumption with a -9 setback. - The plan specs lists a retirement age of 65, but he is using a funding assumption that the owners will retire in 10 years. - He claims this is a floor offset where none of the employees need to receive a DB contribution, because they all receive a 5% DC contribution. - He claims the gateway test passes with the 5% DC contribution to the employees. The owners are 34 and 36 and receive over $150,000 in contributions each to the DB plan. The employees receive nothing in the DB plan. He claims the plan passes discrimination testing. There are about 15 employees, 2 of which are yuonger than the owners, but not a whole lot younger. Now I think this plan stinks left right and all over. But we are at the point where I say it doesn't work and he says it does. I think at the ver yleast this is the most aggressive plan I have ever seen that needs at least 7.5% in the DC for gateway, and I think he only tested the DC plan and diregarded any DB contribution that the owners received in his discrimination testing. So any thoughts on what revenue ruling or something I can point to that at least shows you can not assume increases in the dollar limits? I can't tell him he can't use a 3% interest rate assumption or an assumed 44 retirement age. it may be nuts, but I can't tell him he is wrong. At least I don't think I can.

J4FKBC, So in the example I have given above if we assume that the owners make $150,000, if we use Deferral = $15,500 Safe Harbor match of 100% of the first 3% deferred, 50% of the next 2% = $6,000 Fixed Match of 194.4% of the first 6% deferred = $17,500 Discretionary Match of 2/3 of deferrals up to 6% of comp (not to exceed 4% of pay) = $6,000 I am able to effectively get the owners up to $45,000 in contribution each, correct? Is there any limitation on the formula for the fixed match portion or are we only limiting ourselves by the deferrals up to 6% of pay so that we don't have an increasing match formula? I was looking at an example by Sungard and they had the fixed match at 85.19% in order to max out the owner. That seemed arbitrary so is there a reason that I couldn't go up to 194.4%? - Edit - By the way we don't want to have to test this plan, so if I need to scale something back please let mw know

We are looking at a client that is just not a great candidate for a retirement plan from a tax savings persepctive. I've never paid much attention to the triple stack match, but this client may be a candidate. 2 owners in the mid 30s, making approximately $150,000 each. 50+ employees the majority of which are in their 20s making $9-$12 an hour. Currently they have a Simple plan with the 2 owners and 6 employees participating. The best cross tested design I could get was like 38% of the contribution to the owners. If I add any deferrals to the owners I bomb the average benefits test. So any type of cross testing is out. It's just not beneficial enough. With cross testing only providing 38% to the owners, an integrated formula isn't better. Since only a few employees are participating in the Simple plan, I figured trying to max out the match portion of the plan in such a way where we don't have to do any discrimination testing is going to work best. Since the employees typically make $10 an hour I am assuming that participation won't increase dramatically even when implementing a monstrous match. Any thoughts, any concerns about the triple stacked match plan, any other ideas?

Well maybe I am completely misinformed and don't understand the thrust of the notice. Obviously with a new plan there isn't an unfunded liability. I have proposed plans where the sponsor funds 100% of the DB contribution plus 6% in a DC plan. I thought this was pretty clear cut that this was allowed. Now I am confused. The impression I got was that the DB contribution is now limited if you make a DC contribution.

I had already read the ASPPA response, but unfortunately that doesn't do anything in the meantime for the little people in the trenches. I know I am having a pity party for myself today, but I feel like the entire last year I have been spouting DB/DC combo designs. Now I have to change my entire marketing message. Not to mention all of the open proposals I have out in the market place. Do you follow up and disclose that the plan design may no longer be valid? Do you put your head in the sand and hope no one wants to implement one of them? I had made a lot of progress meeting new financial advisors this year in anticipation of a busy year end. Now I don't feel like a client could adopt a plan with the 6% DC contribution unless we can keep the overall deduction under 25% of pay. That puts us right bnack to where we were last spring. Nothing new, nothing innovative. I end up being like all the other advisors talking about automatic enrollment and Roth 401(k). Sorry, just venting a little. GRRRR... I feel a little better.

Has anyone heard any rumblings about a resolution to Notice 2007-28? I guess I should ask what people's experience with this type of thing are. I've done a pretty good job of spending the past year positioning myself and my firm as the DB/DC solution. I know IRS can't make law, just interpret it. We all seem to think that the IRS interpreted this one wrong. Is there any precedence for this type of scenario? I've never met Mr. Holland, but I find it highly unlikely we will see an, "Oops, my bad" letter any time soon. Aer we all going to scramble around and try to terminate DB/DC combo plans or reduce the benefits so low that they are no longer desireable? Do we sit tight and assume that the IRS will come out with further guidance shortly? Do and of the Congress members that drafted the law make a clarification statement? I have always dealt with fairly black and white areas of plan design and I didn't think this was a gray area. Now I am trying to determine how to deal with it. Common sense tells me that allowing the full DB contribution and 6% to a DC plan will be fine. The law seems to be very clear. None of us want to hang our neck out to try and prove that point though. I wold love to hear other people's thougts. Lastly, anyone ever wonder if "people" at the IRS sit around and think, "Boy those ASPPA people are giving me a headache, I'm going to publish this Notice and turn their world upside down!" Why else would things that are so confusing go unanswered and things that seem clear and concise end up becoming muddied?

I'm not an auditor, I'm not involved in retirement plan audits, but I have had someone looking to me for guidance ask a question that I can't answer. This non qual has over 100 participants and is not in a Rabbi trust, but instead part of a secular trust. The plan is meant to operate very simialr to the company's 401(k) plan. The provisions are very similar. The questions is are we going down a path where ERISA has some hooks into this type of plan? A respected person my little world has said that they should file a 5500 and be audited. That sounds crazy to me. I don't know all of the details, but imagine a 401(k) plan that excludes HCE because of ADP issues. Then imagine a non qualified plan that is put in place for these HCE that operates basically the same as the 401(k). Any thoughts?

So an insurance broker asks me to take a look at this client's DB plan. He is a sole prop and has a smallish $200,000 whole life insurance policy in the plan for a number of years. He wants to increase the death benefit and is wondering how high he can go. While playing around, I come across a few sources that indicate an owner-employee can not deduct the current cost of life insurance. **Screeech** (that is me slamming on my imaginary brakes) Ok so I do some thinking about this. Typically a corporation can deduct the entire premium and then the individual pays the taxes on the Table 2001 rate or some other equivalent. In essence the individual is paying the taxes for the insurance coverage for the current year. This gets me thinking that the reason an owner-employee of a sole prop can not deduct the premium is because by paying the Table 2001 rate you are in essence taking a deduction on the schedule C and then paying the tax on the 1040. In essence they are just canceling each other out right? So we are really doing the same thing as the corporation just skipping a step because we aren't taking the deduction on the schedule C for the cost of the current life coverage. If this is correct, it is kind of a pain, because I have to indicate to the client what his total contribution is and then indicate what his deductible amount is. Plus explain the difference. I guess I won't hav eto explain why he is receiving a 1099, but I think his exisiting actuarial firm has been treating this like it was a corp and issuing the 1099 all along. The client wants to do a 1035 exchnage on his current policy into a UL with some no lapse guarantee. I think it stems from a term policy he holds outside the qualified plan that is getting too expensive and he wants to let it lapse, and pick up the death benefit coverage inside the plan for the deduction. The UL policy is fairly inexpensive so I figure the investment part of the policy is minimal. The way I see things, he may only be able to deduct about $4,000 of the $15,000 premium. I guess that is better than nothing though. There may not be enough information here to make a thorough review of the situation, but if someone could concur or disagree with my analysis of the reasoning behind the sole prop losing the deduction for insurance that would be a good start for me. I already started the conversation with the broker and it was going down a bad path. I'll don't mind going there, I just don't want to be proven wrong later.

caddieadmin: Of course being in this business I can see the whole picture of what I think you are attempting to accomplish. I have been there myself. Years ago I worked for a small adminstration firm. We knew the market was shifting from pooled 401(k) plans to internet driven online access. We wanted to move our firm in that direction. We looked around and realized it was going to cost us $100,000 to buy the technology needed from a well known pension firm. So we started playing around with creating it ourselves. It was fun and I might even say a little exciting. But we quickly realized that the $100,000 was a bargain compared to the time and resources we would have to use to build it from scratch. Now I personally have been in this business for just over 10 years now. If I ever decided to change careers and open a sports bar, even I wouldn't try and do it myself. And I think I know everything! What I am saying is, I couldn't write my own plan document. There is no way I could recall and cover all of the legalities. I would have to hire a firm to prepare the legal documents. I would be looking at a cost of $1,000 to $4,000 most likely. Now I might perfrom the calculations myself. But that would only be if I had a very simple straight forward retirement plan. If I ever tried to exclude a group of employees or pay a different % of benefits to people in my firm I would either have to learn actuarial math or buy a software program. I would hope that I don't have enough free time to learn actuarial math, and I wouldn't want to pay 10s of thousands of dollars for pension software, so again I would have to hire a company that already has these resources. I would most likely turn to the same company that prepared my plan document. Last but not least I might prepare the 5500 filing by myself. But then again I don't have software for the form. I would have to go to an IRS office, get their special paper (or order it), and writing device (they don't accept the kind of hand written forms that you would envision printing off the web and filling out). But this would be the task the lends itself to being self prepared the easiest. The IRS provides an instruction manual. If I were to hire an outside firm I would typically be looking at somewhere between $400 and $1,000 for the 5500 preparation. Now I don't know what your company is in the business of doing, but I would think that trying to learn retirement plans on your own is not a cost efficient thing to do. There is a good chance that you have an outside firm providing IT services for you. You probably order your business supplies and have them delivered rather than send someone to go shop for them at the store. You might have someone come in and provide your company with bottled water service so that you don't have to stop by the Water N Ice store when you run low. You probably have an accountant the does your taxes and maybe the bookkeeping. How about a payroll company? You get the picture. Trying to self educate is a wonderful thing. You should always try to keep learning. I just don't think you would want to chance it with something that if you mess up could potentially cost tens of thousands of dollars. The Department of Labor will charge over $1,000 a day for something as simple as a late form, even if you submitted it but in the wrong format! (Yes, I had an out of state client send in a faxed copy of their 5500 form on time and they got nailed with penalties, won't make that msitake again). I wouldn't take the chance. Pay a professional a couple thousand dollars and let them take care of you. OH and don't let someone offer you free administration services either. They will just take the fees out of the plan assets so that it appears free. You will end up broke and penniless in retirement. Whatever you decide, good luck!

A new week, a fresh look, problem solved. Thanks everyone for taking the time to look.

Just when I thought I was nearly finished, we get a curveball. They have an existing DB plan. All other issues aside, if the HCEs are eligble for the DB plan, if we take it over and amend and restate their document can we now classify the HCEs as ineligible for the plan and get around the top heavy issue? I have had this discussion on here before about once a participant always a participant, which may not be true in all circumstances. But now we would have a situation where a HCE with a vested accrued benefit is a participant in the plan, then becomes an excluded class, but not a statutory excluded class. It's not like we are moving people from non-union into a union and can make them ineligible. So ineligible but a participant from previous year? I'm going home. The in laws are coming over for dinner tonight. I'm sure I can find another bottle of wine.

I sometimes tend to over think things and convince myself that something I previously knew to be true, might not be. Thanks for the reinforcement. Also yes, the owner and only key employee is 63 with quite a few 30 somethings in the plan. I am in the same boat as Belgrath, I normally treat HCE and key as the same, because in almost every plan I deal with they are the same. This is just a different type of company. It just seemed like I was doing something slick. If they are eligible the HCE have to get a top heavy allocation. If I just kick em out of the plan they get nothing. If this was acceptable you would think the top heavy rules would just indicate that it is not necessary to allocate a top heavy minimum to higly comp employees. That's really what I am doing here. It's just odd. I can't put them in the plan and give them a 1% accrual, it either 2% or nothing. See how easy it is to convince yourself that that doesn't make sense and it must not be possible? By the way, this group was the most engaging group I have ever presented to before. I am thinking wine is a good pre meeting liquid for all presentations. They actually interupted me to ask questions, and challenged me on some of the possibilities I brought up in plan design. It was quite enjoyable instead of the usual blank stares you get. Although I didn't expect it to run until 10pm. I told my wife I would probably be home around 7:30 or 8:00. Instead I stumble in with wine on my breath at 10:00, and my tie loosened around the neck. Oh well.

I am working on a DB plan design for a client. It's Friday, I had to present to a medical society last night and they kept pouring wine, it's overcast out, and my brain just isn't working. The client has many highly compensated employees. The make up is 1 owner, 9 other highly compensated employees, and 12 non highly compensated employees that have worked their year of service and have reached age 21. The advisor has asked me to make the non owner highly compensated employees receive either no benefits or as little as possible. If I include everyone in the plan, it will not be top heavy. If I exclude all of the highly compensated employees the plan would be top heavy. If I give the HCEs a top heavy minimum then it defeats the plan from a cost perspective. I figure I am looking at going one of two ways. 1) Owner is group 1, NHCE employees are group 2, non owner HCEs are group 3. Group 1 gets an accrual, group 2 gets an accrual that will cause the plan to pass discrimination tests, group 3 gets a top heavy minimum accrual if the plan is top heavy. or 2) Owner is group 1, everyone else is group 2. The elgibility section of the document is worded so that it excludes all non owner HCEs from being eligible in the plan. I am struggling with the concept of eligible and not benefitting compared to ineligible. Can I exclude them via eligibilty and therefore they would not qualify for a top heavy minimum accrual? I can't find anything wrong with it, but yet it seems like I have done something to exclude some non key employees from receiving a benefit. They just happen to all be highly compensated. Am I still drunk, or is this ok?

For many years I have heard the term Section 79 plans. When I do a search on the topic all I see is some blurbs about group term life insurance. I don't even get a google ad in the margin. These can't be very popular if no one is willing to pay a nickel for a targeted ad search. Anyway, I get the impression that the 412(i) crowd is looking around for a new code section. I am meeting with someone Thursday to convince them that their clients don't need to be involved in a Section 79 plan, but I really don't know enough to talk about it. When the financial advisor first asked if I knew about Section 79 plans, I got confused with Section 72(t). I'm sure I am not far off with the 412(i) reference because if you do a search for "Section 79 retirement plan" you will get a 412(i) plan website that is now pitching section 79 plans. From what I can determine Section 79 is not a qualified plan, but they claim to be tax deferred. They have something to do with insurance. I feel like I know where this is heading, but anyone here know if anything is going down?

If all employees are covered by both plans, what minimum benefit must be provided by the Cash Balance plan? I have heard if you are doing a percentage of pay, then 3% is considered a meaningful benefit. I have heard that if you are doing a flat dollar, then $1,000 is a menaningful benefit. I have seen cash balance proposals that are allocating only a 2% of pay contribution to the rank and file employees with a 3.5% allocation to a profit sharing plan. (by the way I beleive this proposal didn't pass the gateway test) I have been told there is an actuarial firm in California that will design a $100 flat cash balance benefit with the remaining required contributions coming in the form of profit sharing allocations. I am concerned about 401(a)(26). In the plan I am desgining, the owner is receiving a large enough allocation that I need to give at least 7.5% to the employees for the gateway, but i would rather give the majority in the form of profit sharing contributions to eliminate as much of the hypothetical interest credits as possible.

Wow crazy. I came to the board to see if anyone knew what the limits were for 1986. I have a client that terminated a DB plan in '86 and is thinking of adopting another one. I doubt I will be able to find paperwork on the distribution from that long ago so assuming they funded the max seems most appropriate. So anyone know?

Nice.

Intersting thought. Maybe for owners over the age of 55 though. Conceptually isn't this like adopting a 0% accrual formula? That's definitely interesting. I always thought people hawking 412(i) plans must have been great salesmen, but I suppose if I could convince someone to adopt a DB plan with a 0% accrual that would be quite an accomplishment. "Yes there is a fee, and no you can not contribute to it this year."

So if I am reading some of the unsaid words, if the SEP was below 6% of total salary that might be ok?

I find very often that prospective clients will tell me that they have funded a SEP already for the year, but are looking for a larger tax deduction. Of course they are just uninformed and don't realize that by funding the SEP prior to year end they have eliminated other planning opportunities. I have heard "people" mention that if the SEP contributions are backed out as a mistaken contribution because the deposits were ineligible, you can then fund a qualified plan. I suppose this is more of a grey area, but I am looking to see what other people are advising clients. The clients aren't looking to deduct contributions to both plans, its just that no one told them they shouldn't fund. In fact their financial advisor is probably telling them should fund as soon as possible to get the assets under management. So what are you guys and gals doing? Is it just tough luck, you have to wait till next year?

I have a slightly different take on this. Not saying what other people have siad is incorrect. 1) If the plan decides to purchase the policy from anyone (as long as it is not the plan sponsor so it is not a prohibited transaction) the policy must be purchased for its Fair Market Value. To determine the fair market value you most likely need to have it appraised by in independent third party. You can most likely get this done for about $750. 2) The ownership of the policy must be changed to the plan and the beneficiary is also the plan. You can not have the plan own the policy and then if the ex husband dies the death benefit is paid to the sister. If she sells the policy she is giving up all rights to the policy. 3) Typically the participant would be able to pay "PS-58" costs, now called table 2001 rates each year and include them in their taxable income for that year. Because this is not on the life of the participant, I do not think this is applicable. All death benefit proceeds received by the plan would be distributed as taxable income. 4) Future premiums due would have to be paid by the plan or by the policy itself. As long as the policy has some cash value the policy can pay its own premium. 5) If the sister ever wanted to buy the policy back from the plan, she could only do so if the plan fidicuary deemed that it was a prudent time to sell the policy. 6) There are rules on IOLI (investor owned life insurance). Make sure you are familiar with it. Problems arise when the investor decides that it would really like to collect on the death benefit and the insured is still healthy!!!! I don't know how much the policy is really worth, but I would think this would be a lot cleaner if the plan participant were to take out a loan from the plan and then buy the policy from her sister outside of the plan. Assumign that the maximum loan allowed would be sufficient to sell it. Are we talking about a situation where the sister needs more than $50,000? Advise the client to keep the policy out of the plan and then she can be real informal about the arrangement. Get the plan involved and you better not screw it up. If the $50,000 max loan doesn't cover the cost of the FMV of the policy, the sister could buy a partial interest in the policy. The sister would need to become owner and then both sisters could be listed as X%beneficiaries if the ex husband dies. hopefully there is a lot of trust between them. People do stupid stuff when they are desperate for money.

I would suggest doing the 3% QNEC if you go that route. I think your argument gets weaker if the owner of the new company puts away $15,000 in the last month of the year, and the rest of the employees have only deferred a couple hundred dollars.