davef

There is a somewhat obscure regulation (1.401-12©) which may have an impact on this situation. Basically, what it says is that a plan covering an owner-employee must be have a bank trustee (unless certain exceptions apply). Even though the reg is fairly old, from what I can tell, it has not been superceded. Based on this, there should at least be a bank trustee during the part of the year he was a sole proprietor. This may be an issue that the IRS doesn't look too closely at, but I thought I'd raise it for consideration.

It has always been my understanding that only corporations with trust powers and individuals can serve as trustees. So, unless the LLC has trust powers, I don't think it can serve as trustee of the plan.

A few other things to keep in mind when merging a MP plan into a 401(k) plan: 1. Depending on when the merger occurs and the terms of the MP document, would there still be a contribution due under the MP plan? 2. If there are outstanding loans under the MP plan, you may need to re-do the loan documents to show the 401(k) plan as the payee. 3. Although you alluded to keeping the J&S requirements, you would still need to preserve all other 411(d)(6) protected benefits, if any.

I have never seen any rules that look to when the dollars were deposited in determining how much can be loaned. I think you only look at the type of entity at the time the loan is made and the ownership status at the time the loan is made. For example, turning the facts around, if a corp went from a C corp to an S corp and there was an outstanding loan to a shareholder-employee, there would be an "instant" prohibited transaction created unless the loan was repaid prior to the conversion. In that case, the prior loan would not be permissible in the future, even though it was OK at the time it was made. Also, future loans under the S corp to a shareholder-employee could not be made from deposits made while a C corp.

sacobb -- I agree that the IRS probably isn't expecting standardized plans (especially ongoing ones) to file for determination letters, and the Sch. Q instructions are evidence of that. However, if you terminate and don't file, the IRS still has no way of knowing from the final 5500 that the plan was standardized, and you can still get audited and will have to explain at that time why you chose not to file. At least by filing, you hopefully avoid the issue (and the hassle) entirely.

For purposes of determining the T-H minimum contribution, there is no need to be concerned with HCEs, just key and non-key employees. The T-H minimum contribution will be less than 3% if the largest contribution for a key employee is less than 3% (see Reg. Sec. 1.416-1, M-7). I would ask to see any Code/Reg. authority for his position re HCEs.

Acouple of reasons for requesting a determination letter on a terminating plan with a standardized document: 1. On the final 5500, you are asked whether a determination letter was requested for the termination. It is my understanding that the IRS has stated that they are more likely to audit a terminated plan that answered "no." 2. The IRS has not issued opinion letters on GUST amendments, which will need to be adopted by any terminating plans. So, in the interim, it would be advisable to have the IRS sign off on these amendments. 3. A standardized plan's ability to rely on the sponsor's opinion letter is only valid if the adoption agreement was filled out properly. Before deciding not to request a determ. letter upon termination, I would want to closely review the AA to make sure that there aren't any strange provisions that have been added which would make it nonstandardized. This happens more often than you would like to see.

If this is a one-person plan, how can there be ADP problems? If there are common law employees, you will need to be concerned about the DOl plan asset regulations on how soon contibution deposits need to be put in trust.

The IRS has addressed this issue with respect to the amendment of a profit sharing plan prior to the date a participant becomes entitled to an allocation. In the "Gray Book" (Q #44) from the 1996 Enrolled Actuaries Meeting, the IRS said that the deadline for changing an allocation formula under a profit sharing plan was prior to the date when rights to an allocation accrue. According to the IRS, "the date rights to an allocation accrue is based on all the terms of the Plan, including ... the minimum hours of service required to receive an allocation or a "last day" requirement." At first blush, it seems that the MPP could be merged into the PSP prior to 12/31 without a contribution having to be made. But I think an argument can be made that you just accelerated the last day of the MPP's plan year to the date of the merger, in which case a contribution would be required for anyone who met the hours requirement. One way around this would be to amend the contribution formula under the MPP to 0% prior to the merger, assuming the 204(h) notice was timely given.

Many times when corporations set up "on-site" credit unions, they transfer some of their own employees to the CU and initially continue those people on the corporate payroll and cover them under the corporation's employee benefit programs. There is usually a charge back of expenses to the CU. Seems like a logical thing to do, but you can run into the issue of covering employees of an unrelated employer under the corporation's plans. To avoid a multiple employer plan situation, you may want to consider setting up a separate (but identical) benefits program for the CU employees.

Is it common for state retirement systems to allow non-governmental employers to participate in the system? For example, I am working with a credit union (covering state employees) that is currently covered under a state retirement system. The credit union is not funded or otherwise controlled by the state. The credit union wants to withdraw from the system, but cannot (according to the state retirement board). Aren't there controlled group or ERISA issues? Otherwise, what would prevent a state retirement system from covering any employer within the state?

To follow up on Kirk's comment, see Reg. 1.410(a)-3(e)(2), Example (2).

It is important to note that the legislation limits rollovers from 457 plans to only those maintained by governmental employers. Tax-exempt employers with 457 plans will be out of luck if the legislation passes as is.

DOL Reg. 2520.103-1(d) says that "If a plan has between 80 and 120 participants (inclusive) as of the beginning of the plan year, the plan may elect to file the same category of form (i.e., either Form 5500 and attachments or Form 5500-C, or R) that is filed the previous year." So, if a plan goes over 100 but stays below 120, I believe that a 5500-C/R can continue to be filed, and no auditors report would be required. I checked with a large CPA firm and they are doing 5500's this way. Also, for what it's worth, the ERISA Outline Book takes this position.

An employer allows for immediate distributions when a participant quits. Its plan also reallocates forfeitures to participants, rather than using them to reduce employer contributions. This results in forfeiture allocations to former employees after the end of the plan year and many times the forfeitures are less than $5.00. Rather than issuing checks for such small amounts, the employer would like to establish a policy where it would not reallocate "de minimis" forfeitures (e.g., less than $5.00) to former employees. Can this be done? Has anyone had to deal with this issue?

I don't believe that the CUSO and the CU will be part of an affiliated service group. Looking at the "A-Org" rules, the CUSO (as the A-Org) would not have an ownership interest in the First Service Organization (the CU). Also, both the A-Org and the FSO must be service organizations. A bank or other financial institution is not considered a service organization. So, then you look at the "B-Org" rules. A B-Org must be owned at least 10% by persons who are HCEs of the FSO or an A-Org. Generally, a CUSO will not be owned by individual HCEs of the CU, so the ownership rule probably would not be met. Also, the FSO must be a service organization, which it is not. The only other type of ASG left is one involving management functions. In this case, you need to decide whether the CUSO's principal business is to perform managment functions for the CU. In the absence of regs it's hard to tell. Personally, I would consider a CUSO to be performing services which are non-management related. But all CUSOs are different. Also, depending on how many CUs own a CUSO, it may be difficult to prove that the CUSO's principal business related to a particular CU. If you really want to make sure, you can ask for an IRS ruling. Hope this helps

I'm not sure if establishing a new 401(k) plan prior to the plan termination would necessarily help. The successor plan rules also state (albeit in the negative) that if, at all times during the 24-month period beginning 12 months before the termination, fewer than 2% of the employees eligible under the current 401(k)are eligible under the other defined contribution plan, the other defined contribution plan will not be considered a "successor plan." I would interpret this to mean that if the same group of employees was eligible under both plans (i.e., the 2% rule would not be met), then the later established plan would be considered a "successor plan" if it was set up within the 12-month period prior to the termination. If this is not the case, what would prevent an employer from setting up another 401(k) plan one day prior to the termination date of the other plan?

What is the name/address of this service? We've run into this issue on numerous occasions and this might help us with this problem.

Has anyone had the chance to review the recent (3/22/99) ruling in Lyons v. Georgia-Pacific Corp. Salaried Employees Retirement Plan? It seems to contradict everything I've ever thought about calculating lump sum benefits under 417(e). In a nutshell, the court has said that 417(e) must be followed only in involuntary cashout situations -- it does not have to be followed if the participant has a choice between an annuity and a lump sum. Any reactions out there? Is anyone taking this ruling seriously?

The Department of Labor has issued a number of Advisory Opinions which have addressed the reimbursement of internal company expenses where these in-house services related to plan administration. It is important to note that in each advisory opinion the DOL has declined to rule as to whether a service is necessary, a contract or arrangment is reasonable, or compensation is reasonable, because these questions are inherently factual. You may want to look at Advis. Ops. 83-20A, 86-001A, 89-09A and 83-020A. They give you a good idea of how other employers are justifying and documenting the costs charged for the in-house services.

Based on the current 415©(3) definition of compensation (i.e., adding back in deferrals), can someone confirm that you cannot back out 457(B) or (f) deferrals to bring someone below $80,000.

I can't remember where I read it but I recall that Carol Gold (IRS) recently spoke at a conference where she indicated that they were looking into extending the deadline for prototype plans. Sponsors would supposedly have an extension to get M&P plans approved; once the IRS approves the document, employers would have a year or so to sign a new adoption agreement. It's not clear how those with individually designed plans will be treated. Folks at Corbel are of the same thinking.

Has the SS integration rate for DC plans increased above 5.7%? I've had several people tell me it is 6.2%, which corresponds the the OASDI rate, not the OA rate called for in the Code. I'm assuming they are looking at the wrong rate, but thought I would first check with others.

If a DB plan requires, as a condition of employment, that employees contribute 5% of pay, can this contribution be made on a pre-tax basis? It seems that this could perhaps fall under the "one-time irrevocable election" exception contained in the 401(k) regs.

Notice 96-64 extended the TRA-86 remedial amendment period for plans of tax-exempt employers to the last day of the first plan year beginning on or after 10/1/97. For calendar year plans, this means that the RAP ends on 12/31/98. Has this deadline been extended by Rev. Proc. 97-41, which generally deals with the RAP for SBJPA, etc. amendments? Specifically, Sec. 6.05 of the Rev. Proc. reads as follows: "The remedial amendment period with respect to all disqualifying provisions of new plans adopted or effective after December 7, 1994, and all disqualifying provisions of existing plans arising from a plan amendments adopted after December 7, 1994, that causes the plan to fail to satisfy the requirements of Sec. 401(a) as of the date the amendment is adopted or effective (whichever is earlier), will not expire earlier than the last day of the first plan year beginning on or after January 1, 1999." Many tax-exempt employers set up new 401(k) plans in 1997. This Rev. Proc. appears to say that those plans can be submitted the the IRS by the end of the 1999 plan year. Because this language applies to ALL disqualifying provisions, it appears that it could cover also TRA-86 provisions under existing tax-emempt employer plans that are now being restated. Am I missing something?