JRN

Am I reading this right? Is the new IRS User Fee for Form 5300 Application for Determination Letter now $2,500? We are getting ready to submit some Cycle A individually designed plans (e.g., ESOPs). I am shocked the fee is so high. I am hoping against hope that I am misreading this. Thanks.

With respect to the RMD, why not distribute an undivided interest in the real estate to the Participant. Example: If the market value of the real estate is $500K, and the RMD is $10K, distribute an undivided 2% interest in the real estate to the IRA owner. New deed in the name of the IRA owner -- individually -- as to undivided 2% interest. IRA and IRA owner are now co-investors in the real estate, but co-investment is not in and of itself a PT. Re how to pay the property taxes -- that one's a little harder.

Employer is a property management firm. 401(k) Plan covers two employee groups: Group 1 consists of corporate employees (i.e., employees who work in the corporate office) and Group 2 consists of employees who work on site at the various property locations. Goal is to provide employer match for Group 1 employees only; Group 2 employees would be salary deferral only. If we were to exclude Group 2 employees from eligiblity under the Plan, the Plan -- covering only Group 1 employees -- will pass Average Benefits Test. And, we could then presumably apply ADP and ACP tests to Group 1 employees only. Same result (I think) if we set up two separate plans -- one plan covering Group 1 and one plan covering Group 2. Can we accomplish the same result with one plan? If Group 1 and Group 2 separately pass 410(b) coverage requirements, can I test Group 1 and Group 2 separately for ADP and ACP? Thanks.

Owner-Participant is required to take a Required Minimum Distribution this year from Defined Benefit Pension Plan. Owner-Participant's accrued benefit, as determined under the Plan's benefit formula, is $850,000. But, because of the Plan's investment losses during 2007-2008, if the Plan were terminated today, the Plan could pay the Owner-Participant only about $450,000. Generally, the RMD is calculated based on the participant's accrued benefit. Is there a reasonable argument for basing the RMD calculation on what the Owner-Participant would actually receive at this time, i.e., the $450,000?

Reasons not to use Plan assets: a. Debt-financed income rules – A portion of the income earned will likely be taxable as “deft-financed income”. But, see IRC § 514©(9) exception. b. Deductions such as interest, depreciation, operating expenses, etc. can’t be used by individuals. Can be used by Plan to reduce otherwise taxable income (but depreciation is limited to straight line only). c. Ownership by Plan may complicate financing – because participant may be asked by lender to personally guarantee the debt – which he/she can’t do. e. At some point, you will likely want to get the Property out of the Plan. Distribute fractional interests – taxable income. Gain is taxed as ordinary income (compare if owned individually, gain would be taxed at more favorable capital gains rates). Participant can’t purchase the Property from the Plan – that’d be a PT. f. Are there any other participants in the 401(k) Plan? If so, they arguably must also be given the right to self-direct. g. Will likely need annual valuation of Property for the Form 5500 filing.

There are several ways for the Employer to get cash into the Plan so that the Plan can make cash distributions. All assume that the Company has cash. Your note indicates that the ESOP does not have cash, but I think presumes that the Company does have cash. First, of course, the Company can make a cash contribution. The cash contribution is allocated among all active participants (i.e., current employees) in proportion to compensation (presumably). Cash and shares can then be "reshuffled" (to use IRS terminology) among current and former emloyees so that cash distributions can be made to former employees. Second, the Company can redeem shares from the ESOP. Redemption must be structured to meet ERISA 408(e) exemption. The third option -- assuming the Plan permits distribution of Company stock (e.g., not an S corp ESOP, no prohibition of outside ownership in Company bylaws) -- is to distribute shares to the former employees and then have the Company purchase the shares back under the Plan's put option provisions. Leveraging the ESOP is, as you've noted, an option too. Caveat: Loan proceeds must be used to acquire shares. ESOP already owns the shares. You'll need to work thru that procedurally. Also, leveraging allows you to allocate these shares over time -- while options 1 and 2 would require allocation of the shares in current year. Need to weigh this.

Forfeitures certainly count as "annual additions". Dividends are "earnings" and, as such, do not count as "annual additions". But, I question whether you can have unallocated dividends? Presumably, you are referring to dividends that were paid to the ESOP on unallocated shares held by the ESOP in the suspense account. But, I think these dividends are "earnings" that have to be allocated in the year paid.

Can the participant terminate the Pension Plan and roll his account balance to a traditional IRA. Then, convert that IRA to a Roth IRA. Then set up a Profit Sharing Plan with a Roth 401(k) feature, and then roll his Roth IRA into the Profit Sharing Plan. End result -- he has converted his Pension Plan money into Roth money and the assets are held under a qualified plan. The participant's goal is to convert his existing account balance to Roth money and be able to invest that money in real property. He would prefer to invest in the real property through a qualified plan, of which he can be trustee, rather than a self-directed IRA that will charge fees (custodial, transaction, etc.). Thanks.

This sounds okay to me. Where did the old assets come from -- presumably prior plan that was converted into an ESOP? If prior plan was a money purchase pension plan, you may have restriction on making in service withdrawals from that source. Otherwise, this seems okay. You could also consider charging the participants with the old assets their pro-rata share of the management fee, to perhaps encourage them to withdraw the old assets.

Can a participant -- sole participant in a money purchase pension plan -- convert his account balance under the money purchase pension plan directly to a Roth 401(k) plan? In other words, can he terminate his money purchase pension plan and transfer his account directly to a Roth 401(k) plan?

Lou, It's not just that the contribution has gone up (which it has). It's that the amount we are being advised we owe the Plan participants has gone up substantially too because the actuary is saying that the participants must accrue their benefit faster under PPA. That's what we are questioning. P.S. I appreciate that this stuff is complicated and I appreciate the job the actuary has done. But, I just wanted to get a "second opinion" on his application of PPA. Thanks.

Our DB Plan provides that the accrued benefit as of the close the plan year is equal to the participant's projected retirement benefit multiplied by a fraction: numerator = years of participation, and denominator = total years of participation at NRA. We are now seeing the accrued benefits of several participants increase substantially from year-to-year. Our actuary advises that the reason for the increase is because under PPA the accrued benefit must now be accrued over no more than 10 years. In other words, the denominator in the accrual fraction cannot exceed 10. Is this correct? I certainly understand that PPA changed the manner in which benefits must be funded. But, did PPA also change the manner in which benefits can be accrued? This is important now because we are considering terminating our Plan and we need to know how much we owe Plan participants. Thank you.

Once the DOL has granted an exemption from the prohibited transaction provisions, how long after does the applicant have to complete the transaction? For example, let's say the DOL approves the proposed sale of property from the Plan to a participant for all cash. As a condition of the exemption, the applicant agrees that the purchase price will be updated to fair market value as of the date of the sale. Once the exemption has been granted, can the applicant in a sense sit on the exemption for some period of time (say, 2 years) before consumating the transaction -- provided of course that none of the facts described in the application have changed?

Belgrath, Sieve -- Thanks for your comments. I expect this issue to come up repeatedly this year as employers deal with the economic downturn. I would hate to have to advise client(s) facing this situation that they have to terminate the whole plan. I'd much rather advise them to (1) fund the SH 3% through the date of plan amendment, (2) allow those participants who want to make new elections to make new elections, (3) keep the 401(k) feature in place so participants can continue to save, and (4) consider moving to a match or discretionary contribution for the balance of the year. This is, in my view, a much better result. And, where is the harm or potential for tax abuse -- I just don't see it.

It seems to me that the Employer should be able to terminate the 3% safe harbor contribution at anytime during the plan year, with the following caveats: (1) Termination must be prospective only, e.g., if employer deletes safe harbor provision from Plan effective February 28, 2009, the Employer must still fund the 3% contibution for compensation paid through February 28, 2009; (2) The Plan must be tested for ADP compliance for entire plan year. This just seems correct to me. I know there is not express authority under regs. providing for this treatment. But, is there any IRS authority saying that this treatment is NOT allowed? Thanks.

Is the ESOP repurchase liability a "future obligation of pension benefits" item that should be disclosed on the Employer/Plan Sponsor audited financial statements? My initial thought is no -- the ESOP is not a defined benefit pension plan where the employer is obligated to contribute sufficient cash to fund future promised pension benefits. The ESOP is, of course, a defined contribution plan with individual accounts and each participant's retirement benefit simply equals what has accumulated in his or her account. But, the unique nature of the Employer's obligation to at some point convert the participants' interests in company stock into cash makes me think my initial conclusion might not be right. Thanks.

The definition of "matching contribution" is a contribution made on account of an "elective contribution" or an "employee contribution". See Reg sec 1.401(m)-1(f)(12). The mandatory deferral is not an "elective contribution", but it seems to me it is an "employee contribution". (After all, the mandatory contribution is still subject to payroll tax withholding.) Thus, I think the employer contribution is a matching contribution and should be tested under IRC sec 401(m).

Can a 403(b) Plan impose a minimum age and/or service condition for eligibility to make salary deferral contributions without running afoul of the universal availability rule? For example, could the Plan provide that an eligible employee must complete a short probationary period of employment, such as 30 days, before becoming eligible to make salary deferral contributions to the plan? And, can a 403(b) Plan provide for entry dates, such as the first day of the next calendar month or first day of next calendar quarter without violating universal availability, or must otherwise eligible employees be permitted to commence salary deferral contributions immediately on their date of hire? Are these types of administrative provisions permissible? Thanks.

I think that simply amending the Plan is not enough. I think the Plan Sponsor also has to submit the amendment to IRS as part of a determination letter request in order to correct under App B. I wish you could self-correct by just doing the amendment, but I don't think that's the case.

100% owner intends to sell 30% of shares to the ESOP and elect 1042 treatment with respect to the sale. Owner's son is an officer of the Company and part of the "next generation" management team. Allocation to owner's son would be less than 5% of the 1042 shares held by the ESOP. The owner's son is an individual described under IRC section 409(n)(1)(A) -- he is an individual related to the taxpayer under IRC section 267(b). My question is: Is the owner's son also a person under section 409(n)(1)(B)? Under the attribution rules of section 318(a), the son would be considered to own his father's shares, so he would be a "person who owns more than 25%" of the Company. But, and maybe this is just semantics, IRC section 409(n)(1)(B) starts out by including "any other person", which I think pretty clearly is referring back to 409(n)(1)(A). In other words, the restriction under subparagraph (B) is picking up persons who are not described in (A). Because son is described under subparagraph (A), he is not included again under (B). Anyone else read this the same way? Thanks.

Thanks SoCal Actuary.

If I aggregate a DB and DC Plan for 401(a)(4) testing, must distribution options be the same for both plans. For example, the DB Plan provides for QJSA and lump sum. Must the DC Plan also provide QJSA form of distribution? I need help understanding Reg. 1.401(a)(4)-4(d)(4) Permissive aggregation of certain benefits, rights or features. I think this reg says that if a BRF is "inherently equal" in value to another BRF, then the two BRFs may be treated as a single BRF. In the DB/DC Combo plans we work with, I think that the QJSA and the lump sum form of benefit are equal in value, e.g., there are no subsidies for the QJSA and there are no discounts for the lump sum; the plan benefit payable as an annuity is equal to the actuarial value of the lump sum. I think I am missing something here because I think the general consensus is that the DC Plan has to have the QJSA option. But why? Thanks.

Similar question: Cash balance plan includes QJSA and lump sum option, profit sharing plan offers lump sum only. Plans are being aggregated for (a)(4) test. Does profit sharing plan have to be amended to include QJSA? Certainly the QJSA in the cash balance plan is a "benefit right or feature". But, it seems to me that as long as the QJSA and the lump sum option are of equal value (which I think means "actuarially equivalent"), profit sharing plan should not have to add the QJSA. Thoughts appreciated.

Is a 412(i) plan subject to 401(a)(26)?

Yes, there are big fiduciary and securities law issues here. On the fiduciary side, someone (the Plan Trustee?) made an investment decision to take existing plan assets and invest those assets in Company stock. Was that investment decision prudent? On the securities side, whenever you invest employee contributions in Company stock, you have a "sale" of securities that must be registered or qualify under an exemption. Possible remedy is that participants can sue to "undo" the sale, i.e., get their money back.