J Simmons

Steelerfan, That sounds like the same result as doing the payroll and then having the shareholder-employee loan the pay remaining after payroll taxes to the corporation. Is there some advantage I'm missing that is gained by going to the extra effort of changing accounting methods to accrual over simply doing a loan?

Oh, contrare! Your question, QDROphile, was as good a one as the OP, just a different one.

QDROphile, I think your question is a different one than the OP, which asked if the governmental employer's plan may be extended to the doctors employed by the 501c3 controlled by the governmental unit. Your question/comment is whether a 403b plan properly sponsored by a 501c3 could then be extended to employees of the governmental employer that controls the 501c3. I don't think so. While the EBSA advisory opinion I cited gives analysis of when a 501c3 is sufficiently controlled by a governmental employer so that the 501c3 is itself considered governmental, I don't know of any authority that runs in the other direction. That is, I know of no authority that would suggest that because part of the governmental employer is in the form of a 501c3 all of the governmental employer is considered a 501c3. A few years back, I became involved with a county-owned hospital that had for a time a separate corporate existence that was a 501c3 controlled by the county. While the hospital was a 501c3, it established a 403b for the hospital employees. A few years after that the county terminated the separate corporate existence of the 501c3 hospital, rendering the hospital to be a 'department' of the county government like the road and bridge crew and sheriff's deputies are. But the 403b plan was continued. Many years later when the problem of possible ineligible employer for 403b sponsorship was discovered, we contacted Bob Architect of the IRS and he was of the opinion that the hospital became an ineligible employer with regards to the 403b program. We rectified that through an informal VCP-like process in 2004. While this ineligible employer situation occurred when there was no 501c3 at all--and your question is whether concurrently with the 501c3's existence the other governmental employees could benefit under a 403b--I think the ineligible situation I've related points up how the IRS Nat'l Office views matters. Only while a 501c3 could the hospital be an eligible employer for 403b purposes. I would suspect since there was no 'grandfathering' of that aspect afterwards, even though the 403b plan was proper when set up, the IRS would not view it proper for employees of the governmental unit outside of the 501c3 entity could have a 403b.

In my EGTRRA prototype, all forfeitures--match and non-elective alike--are re-allocated in the same manner, as if additional non-elective contributions from the employer for the plan year after the one in which the benefits are forfeited. The IRS had no problem with this simplification in issuing its opinion letter.

Hi, George, I think you'd have 409A issues. I don't have sample language. You might want to consider making the payroll and then having the CEO/sole shareholder loan the net pay back to the corporation. I realize this causes the payroll taxation currently, but otherwise I think you are in 409A.

ERISA 3(32) defines a governmental plan to be a plan of a political subdivision of a state or of an "agency or instrumentality" of the political subdivision. The question is thus whether the 501c3 owned by the hospital authority is its agency or instrumentality. See EBSA Advisory Opinion Letter No. 2003-16A for criteria looked at by the DoL in what is a facts-and-circumstances determination.

EPCRS doesn't quite require recoupment. Section 2.05 of Appendix B of Rev Proc 2006-27 specifies that an "Overpayment from a defined contribution plan is corrected in accordance with the rules in section 2.04(2)(a)(iii)" which requires the employer take "reasonable steps to have the Overpayment (i.e., the distribution of the §415© excess adjusted for earnings to the date of the distribution), plus appropriate interest from the date of the distribution to the date of the repayment, returned by the employee to the plan. To the extent the amount returned by the employee is less than the Overpayment adjusted for earnings at the plan's earnings rate, then the employer or another person contributes the difference to the plan." EPCRS has a failsafe in the event that that reasonable steps do not result in the employee returning the overpayment (plus interest): the employer or another person contributes the difference to the plan. Great-West and EPCRS are thus reconcilable.

Tom no doubt has some additional reasons, but I fathom that his inquiry about a plan definition of testing comp would have two implications, if the plan gives such a definition. One, the plan administrator would be obligated to use a definition of testing comp if set forth in the plan document. Fiduciary obligation to follow plan document. If so, there might also be a reverberation back on the allocations, which might have to be adjusted for testing to pass using the plan-defined "testing comp" rather than just any comp definition or parameters that would be allowable for testing a plan that does not provide a definition for testing comp.

Send a written letter addressed jointly to the 401k company and your former employer, demanding payout and copies of all documents governing the plan (specified by name and three-digit number, if you have it). I would send it certified mail. The 'plan administrator'--whichever one of them that may be as specified in the plan documents--has 30 days to get you the documents requested. If the employer is the 'plan administrator' it has the obligation to get the payout process going; if the 'plan administrator' is the 401k company, then it has the obligation. You should not be ping-pong'd back and forth.

The only advantage would not be dealing with any mid-cafeteria year increases in premium costs for the insurance, but if that poses no problem or challenge, then I see no need for the year ends to match.

That depends on the agreement and understanding between the employer and the disabled employee about whether the disabled employee will return to work if the disability ends, and whether either has taken action to end the employment arrangement. The mere fact that the individual is on LTD does not mean he/she is yet an employee. Some employers will choose to keep the person on as an "employee" for group health coverage and other benefit purposes. See for example Delcastillo v. Odyssey Resource Management, Inc., No. 04-3676 (Fed. 8th Cir. 12/23/2005) (Fed. 8th Cir., 2005). As for action taken by the employer to end the employment relationship, watch out for ADA issues and perhaps state law protections.

Yes.

Extracting $ under the threat of possible criminal prosecution would meet the definition of extortion or blackmail in many states. Some states however give an affirmative defense to extortion and blackmail if all that is asked, here by the employer, is what was wrongfully taken from the employer. Tread carefully. It would certainly add insult to injury if the employer who was embezzled against ended up facing extortion charges.

I agree. I think you are correct.

Thanks for that insight, mjb.

I agree with your position. In addition to your consistency observation, IRC 104a3 excludes from gross income of the employee amounts received "through accident or health insurance (or through an arrangement having the effect of accident or health insurance)". From the perspective of the employee, whether the amounts received come from a 3rd party insurer or the employer's general assets, they are amounts from a source other than the employee. The employer self-insuring the obligation out of its general assets does not change the dynamics from the employee's tax perspective. The employee is yet paying for the cost of coverage with after-tax dollars and then receiving benefit payments from someone else. If it were from the employer's perspective that the amounts need to be paid to the employee "through accident or health insurance (or through an arrangement having the effect of accident or health insurance)", the employer's self-insuring out of its general assets would be problematic. However, the language suggests that it is from the employee's perspective, and either way the employee is receiving payments from another source, the employer or a 3rd party insurer.

As I understand VIII.A. that you quote, a safe harbor 401k must yet meet the 401k requirements other than the ADP test, such as (A) 410b minimum coverage, (B) non-matching benefits cannot be made contingent on an EE making elective deferrals, © the elective deferrals must be from compensation payable and based on work provided during the plan year and be allocated as of a date during the plan year, (D) all BRFs must be nondiscriminatory, (E) only comp up to $230,000 (for plan years beginning with or in 2008) may be taken into account, (F) elective deferrals must be limited to $15,500 for 2008 (or $20,500 if age 50 or older by 12/31/2008), and (G) total benefits accruing to an EE must be the lesser of considered compensation or $46,000 for plan years ending in or with 2008 (or $51,000 if age 50 or older by 12/31/2008 and $20,500 of which was from elective deferrals). While you can exclude some NHCEs entirely from plan eligibility (provided 410b coverage is nevertheless met) and thereby exclude them from the safe harbor required contribution, I don't see where this lets you exclude just from the safe harbor required contribution NHCEs that are in fact eligible for the 401k. I assume that the phrase that "the group of eligible employees under the section 401(k) plan must satisfy the requirements of section 410(b)" is perhaps what you're looking at. I don't think that lets you exclude any NHCE that is eligible under the 401k plan from the safe harbor required contribution. I think that if you do so exclude any, the entire 401k would have to be tested and pass ADP.

The closest authority on this question that I've been able to find is a mere implication drawn from IRC § 415©(2), flush language, and Treas Reg § 1.415©-1(b)(3)(i). For purposes of 'employee contributions' that are counted towards the 415c limit, excluded by this statute and reg are rollover contributions "(as described in sections 401(a)(31), 402©(1), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16))". If 457 benefit accruals were excluded altogether, there would be no need to have specified in the regs that rollover contributions to a 457b plan need to be excluded.

Assuming you pass 410b, you can exclude a class of employees from a 401k safe harbor plan. Not 98-52, section VII.A.

It would appear to be okay if the "selection of this period [is] made on a reasonably consistent basis from plan year to plan year in a manner that does not discriminate in favor of HCEs". Treas Reg sec 1.401a4-12, Plan Year Compensation (4).

I don't think the plan is 'under examination'. All that the DoL did was identify a missing piecce of the 5500 and request it--which the plan administrator has supplied. There's no extant query or notice of impending examination. Of course, you could asterisk the required representation, explaining what was requested by the DoL and then explain that the independent auditor's report has been provided, and that there is no pending request or question.

George, Is the entire actuarially-determined cost of coverage for the STD required to be paid by the EE through the cafeteria plan? If not, then part of the cost of coverage is being borne by the ER and, I'm assuming, was not added to the taxable incomes of the EEs. That proportion of the STD benefit payments would need to be taxable income, while the portion of STD benefit payments attributable the EE after-tax 'premiums' ought to be as you posit, income tax-free. I would think you'd have to apportion, otherwise a plan could make in essence both the 'premiums' and the benefits tax free by merely requiring a de minimis $1 per year cost to the EEs after-tax.

Are you sure about that? Neither the VCP correction method in Rev.Proc. 2006-27, nor the rules in 1.72(p)-1 Q&A 4 require that the entire loan be corrected. Both address only the loan amount in excess of the stautory maximum. If the entire loan is a PT, the IRS doesn't seem to realize it. IRC sec 72(p)(2)(A) gives an exception from deemed distribution treatment of a loan from a plan to participant "to the extent that such loan ... does not exceed ... ." So it is not surprising that the 1.72(p) regs would give examples that only the excess is deemed a distribution as IRC sec 72(p)(1) provides. Rev Proc 2006-27 addresses methods of how to fix a plan so that remains 401a qualified. The general principles of the fixes are to restore the plan to the situation it should have. That notion would suggest that, for 401a qualification, only the excess would need to be returned. IRC sec 4975 imposes a penalty for engaging in a transaction with a disqualified person that is prohibited, including participant loans per IRC sec 4975©(1)(B). Exempted are loans that meet 6 requirements, one of which is "made in accordance with specific provisions regarding such loans set forth in the plan." IRC sec 4975(d)(1)©. The loan is not exempt to the extent it is so in accord. Simply, the loan is a prohibited transaction unless it meets the 6 exemption requirements. IRC sec 4975(d)(1). Of course, with a loan, the amount involved--the basis against which the penalty tax is factored--is value of the use of the loaned sum until repaid, i.e. the interest.

PB Man, Is your experience that you could provide an adoption agreement but no prototype, or no document at all?

C Corp dividends escape UBTI because the C Corp pays income tax itself. So interjecting a C Corp between the plan and the Costa Rica house (to skirt a requirement Congress imposed on fiduciaries so that US courts would have jurisdiction over assets in order to protect plan beneficiaries) would come at the cost of the C Corp level income taxation. If the entity used is not a C Corp, UBTI generally applies to its income passing through to the plan. The OP posited a 1-person DB. If that 1 person is the owner of the sponsoring employer, Title I of ERISA might not apply. If so, then ERISA sec 404(b) would not apply. Yet you'd be subjecting the investment to C corp level taxation on its income, or risking UBTI if another type of entity is so used. If that 1 person is not the owner (or spouse), ERISA applies. Would you really suggest that the fiduciary of the DB use a corp or other entity in order to skirt the protections for plan beneficiaries that Congress put in ERISA 404(b) to give US courts authority over plan assets? I certainly would not be so advising an ERISA plan sponsor or fiduciary without strong court precedence that such a circumvention of legislated policy may be done with impunity.