J Simmons

Yes.

I think you can have the 403b plan say that for a plan year an employee will be excluded, without violating the universal availability rule, if during the prior plan year that employee had fewer than 1,000 hours of service. You could set the threshold lower, at 500 hours for exclusion that next plan year. However, I wouldn't feel comfortable with using eligibility computation periods that might not coincide with plan years.

Health plan (flex accounts and HRAs) is administered primarily through employer's own IT system. Not all employees agree to and give e-mail for electronic delivery of summaries, notices, etc. TPA would charge $8.50/mo to administer the accounts of employees that do not agree to electronic delivery. May plan specify the $8.50/mo administration charge applies to all accounts, but is waived as to those that agree to and provide e-mail for electronic delivery of summaries, notices, etc.?

You might want to also consider whether there needs to be VFCP submission to the DoL. While the money was in the IRA it was outside the power and control of the plan trustees. Seems like that would be a breach of fiduciary duty, not holding those plan assets in trust, separate and apart from the improper distribution corrected under the EPCRS for IRA and tax purposes.

I agree with Bill Presson.

Ak2ary, My concern is grounded more in allocations that vary significantly between partners, all the while the cross-tested plan is satisfying nondiscrimination with nothing more than 5%-of-pay gateway for non-partners, not a situation where a spike in contributions for a partner will necessitate any greater contribution for the non-partners. Suppose a partnership of A and B. Partner A has earned income of $150k and Partner B has earned income of $150k. The partnership makes a 5%-of-pay gateway contribution for all non-partner employees. Partner A makes a $15,500 401k elective deferral. Partner B makes zero elective deferrals. The partnership makes a contribution of $25k more for Partner A, all of which is deductible by Partner A. Partnership makes no contribution for Partner B. On the demographics, cross-testing passes with no more than the gateway contributed for the staff, so Partner B does not care how much the partnership contributes for Partner A. Are there any practical steps that can be taken to shore up the claim that the partnership, and not just Partner A, made the decision to make the contribution it did for Partner A?

Hey, VebaGuru, I assumed that its an S corp because closely held (H & W) with 100-200 employees. In my experience, a company that is so closely held and has that many employees is nearly always an S corporation to avoid the ravaging affect on profits of the two-tiered taxation. The corporate revenues net of all expenses but compensation to the H & W as employees cannot usually be justified all as 'compensation' to H & W to zero them out when there are so many other employees. 409A has provisions that apply to compensation earned in one year and paid the very next. For example sales bonuses and school teachers being paid over 12 months that spans part of two years rather than over just the 9 months worked. These are NQDC plans, subject to and very easy to bring into compliance with 409A. The key under 409A is to have a written plan and an irrevocable initial election made before period in which earned begins. That is why I chose to use 2009 and 2010 on my example--presuming there is yet time in 2008 to make such an election before 2009 begins. I don't recall the OP giving details of its NQDC that don't permit of 1 year deferral.

On a related note, in one state anyway (Idaho), a single agency of the state government had a pre-1986 401k plan. The IRS ruled earlier this decade that such grandfathered 401k plan could be extended to (a) all agencies of the Idaho state government, and (b) all separate local governments that participate in the state's PERS (a DB plan), provided that the state conditioned a separate, local government's participation in the grandfathered 401k plan on its participation in the state's PERS. It seems that while in 1986, Congress wanted to steer governmental employers into 457b and 403b plans and away from 401ks, the IRS has expansively interpreted the grandfathered 401k plans.

The employer sets the dollar limit when establishing or amending the flex plan. There is a potential loss to the employer with a health flex account; the entire annual amount elected must be available to reimburse for expenses incurred from day 1 of the plan year. If the employment ends mid plan year, then the use of the flex account may exceed the amount recouped by the employer in payroll deductions. There is also a nondiscrimination notion that the benefit must be available to all eligible employees. For example, suppose that extremely lax eligibility rules would allow into the flex plan an employee that earns just $3,000. If the annual flex cap were set higher, this employee is effectively limited to $3,000 anyway. This could be a discrimination problem. Consequently, some employers will set the annual cap on what an employee may elect for a health flex plan at no more than minimum wage multiplied against the minimum hours an employee could work in a year and yet be eligible for the flex plan.

The wife's beef, if she has one, is with the plan (and plan administrator). Whatever her rights to the benefits, they are to have them paid from the plan. Her claim might have no traction. As the wife and your father were married less than a year before he died, the plan may provide that the wife is not treated as your father's "surviving spouse" and will not receive your father's benefits. Treas Reg setion 1.401(a)-20, Q&A-25 and -26. However, I've seen more than one plan that did not take advantage of this one-year rule. The plan documents would need to be reviewed. Yes, but it would likely not be proper in the wife's suit, unless the plan/plan administrator filed a third-party complaint against your grandfather to be repaid the $108k. It would be very unorthodox and probably be dismissed by the court if the wife sued your grandfather directly. If the wife were to prevail over the plan/plan administrator, it would pay benefits twice to the extent the plan/plan administrator could not recover the $108k from your grandfather. She must follow the plan's administrative claims procedures before she can file suit. Those claims procedures no doubt include time frames during which she must avail herself of the first appeal opportunity if the plan administrator initially denies her claim. The state's most analogous statute of limitations (usually limitations period for claims on a written contract) would apply to her claim for benefits. If the plan/plan administrator attempts to recoup the $108k from your grandfather, promptly find an attorney that is well-versed with ERISA.

I don't know off the top of anything that would prevent it. As a greater than 2% shareholder of the S corp, the H & W are treated for many purposes as "partners" and not employees. However, the S corp would have payroll/Form W-2 procedures for compensating personal services, even those rendered by a more than 2% shareholder-employee. I think not having an independent board would belie an assertion later of bona fide dispute (an exception under the 409A regs), but generally both the service provider and service recipient must have very limited latitude when it comes to the timing of payout after the initial election to defer is set. I'll be interested to hear what Everett Moreland, Steelerfan and others have to say about this scenario. Because the H & W 'own' the deduction flowing through from the S corporation for paying employee compensation and would have taxable income of a corresponding amount when the compensation becomes taxable, from an income tax perspective it looks like a wash as to having it later (deferred) rather than contemporaneous with when earned. I'm wondering if the angle is the FICA, as is so often the case with an S corp. For example, if the compensation is $75,000 a year for the W. If paid contemporaneously for 2009 and 2010, all $150,000 is subject to FICA at the 15.3% rate. On the other hand, if the 2009 earnings were all deferred into 2010 and 2010's earnings paid in 2010, there would be no FICA in 2009, and for 2010, the first $102,000 (as COLA'd from 2008) would be subject to FICA at 15.3% but the rest of the $150,000 total paid in 2010 would be subject to FICA at the lower 2.9% rate.

I'm yet waiting for a response to a question I posed Bob A in January and renewed in May! Hope you have better success.

Thanks for your input, Larry.

Thanks, Larry. The plan does have the necessary language as permitted by Rev Rul 77-200 for returns due to mistake of fact. The plan is, however, a profit sharing plan. However, this is an affiliated service group situation, and the contributing ASG member has but one "employee", the SE owner. Thus, what we're looking at for a limitation is 25% of after-contribution SE income, the 404(a)(3) deduction limit. We cannot use any of the unused portion of the 404(a)(3) deduction limit of other members of the ASG.

An office manager misunderstood what was to be taken into account as plan compensation. He added to each partner's earned income his or her share of passive profits in a related entity. He then gave the results as a single sum (not broken out or detailed) for each partner to the TPA, along with staff employees' W-2 info. The TPA computed the plan contributions on the basis of the 'earned income' numbers for the partners as provided by the office manager. After the contributions were made, one of the partners asked for details of the computation and discovered the error made by the office manager. The TPA has recomputed the contributions on the basis of the actual earned income amounts, and there is an overage. I'm interested on what your thoughts may be as to whether this is under PLR 9144041 a mistake of fact that permits the plan to regurgitate the excess to the contributing employer. Thank you.

Note, in Hawkins v Commissioner of Internal Revenue, 86 F3d 982, 998 n5 (10th Cir 1996), quoted approvingly in Hamilton v Washington State Plumbing & Pipefitting Industry Pension Plan, 433 F.3d 1091 (9th Cir 2006), because the QDRO rules are codified both in the labor code and the tax code and "the two parallel provisions were created by the same legislative act and contain precisely the same language, they are interpreted identically."

Larry, One more idea if you are winding down an existing 403b program--or documenting a continuing 403b program. Treas Reg 1.403(b)-11(e)(1) provides pre-2009 issued 403b contracts are excepted from the Treas Reg 1.403(b)-6(b) prohibition against in-service distributions. The new plan document could permit in-service distributions for 403b contracts issued before 2009. That could be added to a frozen plan to accelerate the natural runout of contracts. It could be added to a terminating plan as a fail-safe distribution trigger in case the IRS were later to take a stance that uncooperative vendors defeat the reasonable payout requirement for termination and thus termination was not a proper trigger and thus there were premature payouts. Adding in-service as permissible to the pre-2009 as a trigger would make such an IRS stance a useless enforcement tool for claiming premature distributions are made.

Hey, Larry, Yes, terminating the 403b plan would require distributions, with the employees having the possibility of rolling over to IRAs, QRPs, etc. This would apply to even long-participating employees. This is a consequence of the new regs requiring the ER to have an overarching 403b plan, similar as to what is required of 401k plans. Some 403b vendors view the contract as just between them and the employee. They refuse to cooperate with an ER's efforts to bring those 403b products 'under the tent' of the ER's new 403b plan document. In such situations, the ER cannot force the payout on termination of that 403b plan. Ergo, how can there be a 403b plan termination at all if you have uncooperative 403b vendors, despite the new regs specifying that the 403b plan can be terminated by the ER? Termination and forced payout could in essence force surrender, transfer, exchange, or CDSC charges against the 403b product. However, most 403b vendors also offer IRAs, and in my experience this year, most are willing to reform the product from a 403b one into an IRA with that same vendor without any such charges, presuming the EE chooses to 'rollover' into an IRA with that same vendor his 403b product is now with. Most would impose the charge if the 403b product changes investment types. For example, if it is a 403b annuity and the EE chooses a rollover to an IRA with the same vendor, but to be an investment account, the annuity surrender charges (if any) would apply. But if the rollover was to be an individual retirement annuity with the same vendor, no charge. Also, if there are outstanding loans against the existing 403b products, such cannot be rolled into IRAs. Thus, termination and required distribution would (as to cooperating vendors) require immediate payoff of the loan balance before the rollover to the IRA or will be a deemed distribution at that time.

The initial employment ended. Re-hire starts a new one. Pension rules require immediate re-entry into the plan under certain re-hire situations. It is a re-entry into the plan, not a mere continuation of the old period of participation. Interestingly, there is either in the old or the new cafeteria plan regs an option for a plan to specify that if the re-hire is within 30 days of when the prior employment ended, the re-hired employee's election from the prior employment is resumed for the balance of the plan year of re-hire. However, as I recall that reg required the plan to so specify in order to have the resumption apply. I don't think in the absence of plan language, you could simply choose to continue the prior 401k election. The now re-hired employee was ineligible for the plan for the time he was not an employee. That break is significant.

Hi, Larry, I didn't understand from your first post that they wanted to do rollovers into the 401k. That would require a distribution triggering event. For those yet employed, under age 59 1/2 years and not disabled, that would require a termination of the 403b plan. Termination, per the regs, requires complete payout from the 403b products within a reasonable time. If all the vendors of 403b products to which the ER has remitted $ since 1/1/2005 will cooperate, that's not problematic to accomplish. Each EE would be given a 402f notice and option to roll to the 401k plan. If any such 403b vendor is uncooperative, you cannot effect termination. Thus, termination would not be effective as to any EEs as a distribution trigger. Bob Architect has, to date, not provided any answer or resolution to this dilemma. One work-around I am contemplating is to document two 403b plans by 12/31/2008. They will have identical terms and conditions, but separate three-digit numbers and plan names. One will be for the 403b vendors that are cooperative and one for those that are not. Then terminate the cooperate-vendors plan so that termination of the plan can be a distribution trigger. The plan for the non-cooperative vendors would simply be frozen (no new $) but the plan docs kept up. A copy of that plan's docs would be sent to each uncooperative vendor. The problem with simply ignoring the uncooperative vendors altogether and just doing the 403b plan document for the cooperating vendors (and then terminating it) is that section 8 of Rev Proc 2007-71 explains that a good-faith, reasonable effort that fails with relation to an uncooperative vendor can be ignored by the ER with regards to its 403b plan. But it does not say that's enough in the termination context. One interpretation would be that you are first documenting the plan (and can ignore the uncooperative vendors after making a reasonable, good-faith effort) and then terminating the plan that by then only applies to the cooperative vendors--who cooperate with the distributions-within-a-reasonable-time requirement for terminations. However, it is unclear with the uncooperatives are "part of" your plan are not even after your good-faith, reasonable effort is made.

If no new contributions were made after 2004, the 403b contracts are sort of 'free radicals' and the ER does not need a document under the new regs. If any contributions were remitted from the ER (due to elective deferrals or otherwise) after 2004, then the ER will need a 403b plan document by 1/1/2009. Prior to the new regs, there was no procedure or authority for an employer terminating. Now there is. The new regs do not, however, specify a plan terminating before 1/1/2009 not needing a plan document. You might find that a freeze is easier to deal with than a termination of the 403b, particularly if there are multiple vendors and one or more will not cooperate in distributing the 403b products within a reasonable time of the termination. Freeze too requires a 403b plan document before 1/1/2009. You ought to look at section 8 of Rev Proc 2007-71, as well as Treas Reg sec 1.401(b)-10(a).

As to partnerships and LLCs that sponsor cross-tested plans that do not identify allocation groups, what practical steps are you taking to assure that the employer contributions for partners and LLC members do not rise to the level of a disqualified CODA? I.e., what practical steps are you taking to dispel the notion that partnership contributions that vary in amount among partners is not the result of their individual choice? Treas Reg sec 1.401(k)-1(a)(6)(i). What factors does the IRS look to in this regard on audit? This seems particularly tricky given that the deduction for the employer contributions made for a particular partner or LLC member are allocated to him or her rather than treated as a partnership (entity) expense as is the case for contributions to a DB plan. Treas Reg sec 1.404(e)-1A(f). This takes from the rest of the partners any financial incentive not to allow the individual partner to make the decision of how much will be contributed by the partnership for that partner. I've prepared written partnership and LLC resolutions that state the partnership contributions are decided by the partnership and not the individual partners, but such seem quite self serving (and vulnerable by reason of such).

I think the reality is your client does have a de facto 403b plan that is limiting participation to those that came to the employment with a 403b annuity or mutual fund-only account. I also think that this poses problems for your client with regards to the universal availability requirement. Your client needs to bring its de facto 403b plan into compliance with the new regs by 1/1/2009, and correct the universal availability problem. The IRS is promising to have a VCP route for 403b corrections in place soon.

For those interested, I found this Q&A by Derrin S Watson on this topic http://benefitslink.com/modperl/qa.cgi?db=...loyer&id=36

Thanks, Larry. The situation does not involve a MEP (multiple employer plan). My question pertains to a 'single employer plan' sponsored by members of an ASG. As to a CG, IRC § 414(b) provides "With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary." Treas Reg § 1.414(b)-1(b) provides: "Single plan adopted by two or more members. --If two or more members of a controlled group of corporations adopt a single plan for a plan year, then ... the applicable limitations provided by § 404(a) shall be determined as if such members were a single employer. In such a case, the amount of such items and the allocable portion attributable to each member shall be determined in the manner provided in regulations under §§ 412, 4971, and 404(a)." The reference to Treas Reg § 1.404(a)-9(b) does not answer the question, it begs it. When applying the IRC § 404(a) deduction limits, is the employer (as mentioned in that reg) each business entity or the control group or affiliated service group treated as one employer? When it comes to ASGs, Treas Reg § 1.414(m)-1(b): "Except as provided in paragraph ©, all the employees of the members of an affiliated service group shall be treated as if they were employed by a single employer for purposes of the employee benefit requirements listed in § 1.414(m)-3." Treas Reg § 1.414(m)-3 specifies many of the QRP requirements, but conspicuously absent since it was mentioned in the context of CGs is IRC § 404(a), which is in line with IRC § 414(m)(4) as well. When it comes to a CG, the IRC § 404(a) deduction limit appears to be able to be shared disproportionately by members of the CG to provide benefits to their respective EEs. The question really is whether the lack of mention in IRC § 414(m)(4) and in Treas Reg § 1.414(m)-3 of the IRC § 404(a) deduction limit mean that with an ASG the IRC § 404(a) deduction limit is applied on a business entity-by-business entity basis or in the absence of mention either way, the CG rule would apply by analogy to ASGs?