mwyatt

Consider the following: Company sponsors two plans: Plan A) Money Purchase Plan with 2-year eligibility, end of year requirement. Flat % of Comp is over 5%. Plan B) 401(k) Profit Sharing Plan; PS component has 1-year eligibility, end of year requirement, and is cross-tested with two Classes (Partners and non Partners). 401(k) component has immediate entry. Oh, and by the way, these plans are top heavy. Client has been "topping up" the PS contribution for those participants who haven't yet satisfied eligibility for Plan A by making additional PS deposit for them under Plan B's PS component. My question concerns the Gateway for 2002. Ignoring the Gateway requirement, the desired result to get partners to $40k is a Profit Sharing contribution of approximately 6% for Partners and 1% for non-Partners. If Plan A didn't exist, clearly the non-Partner PS contribution would have to be 2% to the non-Partner class. How does the Plan A contribution fit in to satisfying the Gateway (if even allowed)? I'm a little concerned in that there exists a certain segment (non-Partners with 1, but not 2 years of service) that isn't getting the MP contribution. Document just states that the contribution is allocated among classes by compensation; don't see where there would be flexibility to "top up" this segment to 2%. Any suggestions?

Well, it is a reporter speaking (you know those english majors who don't know how to use a calculator), but I think what the person meant is that higher PBGC premiums could be a contributing factor for healthier companies to either a) freeze accruals to avoid variable rate premiums or b) terminate their plans outright. Neither of these outcomes are socially desirable objectives from the participants' point of view.

I think I could infer that since this is a 1-man plan, the projected life expectancy of this plan is pretty short. I'd pose the question to your client "what do you do with this asset when you terminate the plan in the near future, given that you can't roll it over to an IRA or sell it to a Party in Interest?" If that doesn't get his attention, may want to think about comparing capital gains rates v. ordinary income to talk him out of this proposed investment. He may also want to consider the fact (especially since you're talking mortgage here) that what makes real estate work for most of us, either residential or for investment, is the ability to deduct interest costs and if an investment, expenses. How do you deduct these costs in a tax-exempt vehicle? Answer is you can't; therefore he may want to reanalyze this investment before proceeding. He may very well find out that he'd be ahead of the game using after-tax money for this investment.

Are you sure that cite wasn't from the Onion?

Well, that's a very impressive letter. However, my (limited) exposure to 419 plans has been with plan proposals that are trying to bend the rules as far as they can go (and hence the reason why the IRS has taken such an interest in cutting out the abuses). Skipping legal issues, the real premise of the IRS's position is that a company should be allowed a deduction for the reasonable costs of providing the welfare benefit in question for the year (and not future funding). I've seen plan proposals using two types of "term" insurance issued; what we would all refer to as honest to god term insurance for the rank and file, and a "special term" insurance issued on the owners (with "term" premiums 10 to 15 times higher than term). Supposedly this "term" insurance at the end has no value, so the owner "buys" the policy for $0, throws in some nominal premiums for a couple of years, and then surprise, the policy now has a monstrous value, which he can get through either "tax-free" loans or through increased death benefit coverage. The funny thing is that this term policy no longer requires premiums to be paid... When this gambit obviously wasn't going to fly, they switched to "paid up term" (whatever the heck that animal is; don't really remember that from the actuarial exams). You can call an animal whatever you want, but if walks like a duck, talks like a duck... Just waiting for the other shoe to drop now on the abusive 412i schemes being pitched. Now presumably your firm is not one that is bending the law, and is offering only real term insurance in the plan. Good for you if that's the case. As an aside, you could see the groundwork being laid by the IRS a couple of years ago to detect abusive death benefit plans with the revised PS-58 tables for group term. This gives the IRS a fairly handy tool to discern abuse (you know when the sum of the PS-58s is about a tenth of the premium paid for term insurance that something isn't quite right).

Ah, but be careful. You say "23 employees"; how many participants (including terminated vesteds, etc.). Once you cross over the 25 participant (active OR inactive) you are subject to PBGC coverage.

An interesting question. In the situation where a plan had been maintaining one form of plan year, then created a short plan year in transitioning to another basis, you could get an overlap under the DOL's rules. Say you had a plan that was 11/1-10/31 basis, then created a short year 11/1/99-12/31/99 in transitioning to a calendar year basis for 2002. In this case, you would get prior service measured on 11/1-10/31 basis up to 10/31/99, Potential year on 11/1/99-10/31/00 basis, and year on basis 1/1/2000-12/31/2000 (hence leading up to a short year). Hence, you would get an "overlap" credit for two years of service for the 14 month period 11/1/99-12/31/00. Past discussion on vesting service under a short plan year Now of course in your situation, there really wasn't a "change" in the plan year; rather just had a short initial plan year. This may argue for measuring entirely on a calendar year basis for vesting, in which case your answer of 5 years is correct.

Here's the opening salvo from the IRS taking out 419 plans: Final 419 regs We'll see what the following days bring on 412i plans...

Final 419 Regs Actually, after reading through the examples, bye bye any death benefit 419 plan unless it is pure term only (with no level term period allowed and no bogus "special term" insurance to get around the rules). Aftermessage: BTW, Dave's edit only steered the URL link to a cleaner version of the regs (provided by the Congressional Register through Benefitslink) than the one I originally posted through Relius. No "big brother" action by our fearless leader for anyone wondering why there was a message for awhile that said "edited by Dave Baker"

Actually, I think you're misreading the EGTRRA changes. A "safe harbor" 401(k) plan is no longer deemed a top heavy plan (of course you're giving the same 3% one so the difference in cost is less valuable than it appears); however, a pure deferral only 401(k) is still subject to 416 requirements.

Assuming you're not subject to quarterly contribution requirements, trad DB plans really only face the 8 1/2 month after plan year end deadline to get the money in to satisfy 412 (and in the small plan market, especially with one man plans, the quarterly contribution requirements are academic, as missing them only serves to increase your deductible contribution). I would say premium bills from an insurance company are much more inflexible than a traditional DB plan's funding requirements.

One other point, adding to Blinky's reply. Unlike the ACM, where you discount contributions at the variable premium rate, under General Test you discount contributions at your pre-retirement FSA rate.

Actually, we just had a plan that we filed for an application last December, and the IRS indicated that they were not inclined to grant a waiver (I guess the client wasn't hurting bad enough). After a few conferences, the client came to the conclusion that it was going to be less costly, especially given prevailing interest rates, to tap into a line of credit rather than have the same loan effectively granted if the waiver was approved at the higher valuation rate. We then asked for the application to be withdrawn (of course the user fee was down the drain). Probably better to withdraw the application than to have a disapproved application on the books.

OK, a couple of points. Plans can now pay out RMDs to non-spouse beneficiaries; see the updates to the Relius checklists if you disagree. If your high-end clients haven't expressed interest in this type of tax minimization technique, they will. Of course as you say it'd be best to have this happen in an IRA; however one can't typically foresee the time of one's demise. We aren't talking about $2,500 death benefit distributions here, we're talking about one-man plans with 6 or 7 figure balances (and this is also that same deceased person who has been paying your invoice over time). So you may want to just pay out the plan and be done with it, but the beneficiaries may have different ideas other than paying taxes immediately on the distribution, especially if there are methods available to lessen the tax bite.

Thanks Mbozek for your comments. The issue of course is some sort of deferral of taxes to the beneficiaries. If this account was part of ACME Co., wouldn't be quite the problem, especially after clarification of rules that non-spouse beneficiaries can receive minimum distributions (hence sidestepping the 5-year rule). However, this all falls apart in the case of a small plan that has its life expectancy tied to the plan sponsor. Rule of thumb is to never die before rolling your balance to an IRA, I guess...

It has been clarified that non-spouse beneficiaries have the same right to get minimum distributions over their lifetime from the account of a deceased participant in a qualified pension plan as they would as if the money was in an IRA. However: This is all well and good if the participant was in a large plan expected to continue in the future. What about the non-spouse beneficiaries of a one-man plan? Obviously, for the benefits to be paid well into the future, the plan itself must continue. However, the plan sponsor (as well as the sole participant) is no longer with us. How to handle this? A situation that has been posed to us is a self-employed Keogh PS plan where the 2 adult children are the named beneficiaries (no spouse involved). The 2 kids are both self-employed, therefore there is a basis for establishing a new qualified plan and/or taking over from the prior sponsor (namely their mother). Any thoughts out there? The brokerage firm who handled the plan has been giving some obtuse advise (first response was to establish trusts under the plan's name for each kid - didn't think you could continue plans too long without a sponsor).

Well, assuming this was a small plan and your owner was the one subject to 70 1/2, I would think that you would want to take advantage of the improved life expectancy tables effective for 2003 (to minimize the amount that actually had to be recognized at income). As I stated before, the IRS has been asking for the EGTRRA amendments on cases with pre-2002 termination dates. Best not to "rock the boat" (especially when you're not filing for a DL) and make sure that you have all conceivable amendments in a row, even if not relevant, in case of future audit.

Actually, I could see the reviewer's point for the 401(a)(9) amendment. Even though your plan terminated prior to 1/1/2003, you probably haven't distributed funds yet. Therefore, distributions could fall under the new '03 final regs (at least hypothetically if you had someone over 70 1/2).

If not submitting, then definitely have your client sign the latest, greatest amendments available to you from the VS provider. As Everett said, you need to cover required language even after the termination date (we had a DB plan that terminated in 2001 that the IRS reviewer came back and required the EGTRRA amendment, even though it didn't affect benefits).

Hey Blink: I'll give you a "practical" answer (maybe not to the letter of the law). You did state VS document; I'm assuming your provider has approval on the GUST document language and then provides you with the ability to generate a separate EGTRRA/et al catch-up amendment (and if they didn't and weaved the new language into the approved document, they just hosed their VS letter). Submit the signed GUST document, your 2002 orignal EGTRRA amendment, and an unsigned proposed final catchup amendment and let the reviewer tell you what he wants in order to get the DL.

Well, if this guy was a doctor, he probably would like to keep these funds in a qualified plan rather than an IRA for protection against creditors. Going along with EIKH's thought, is another plan which is being funded that this old plan could be merged into by chance?

Short answer: no. You file 5500 and face the bonding requirement. Longer answer: This plan, although only one participant has an account balance, has 4 participants. Therefore you're not able to meet the requirements to file Form 5500-EZ and have to file Form 5500 (and hence Schedule I) where the question concerning the fidelity bond is asked, and you are therefore required to get a bond. Note that a "no" response to the fidelity bond will raise your chances of audit (and for whatever reason, the fidelity bond has been one of the principal focuses in the audits I've been involved with over the past few years). I know that all of the assets belong solely to the one participant (who I'm assuming is also wearing all of the hats) and getting a bond to insure against you stealing from yourself doesn't make a tremendous amount of sense, but not much you can do.

Just got off the phone with EBSA over a bounced return. We filed a 2000 Form 5500 for a defined benefit pension plan on a timely basis back in 2001. We then had to amend the Schedule I to reflect corrected asset information received by the client. This only affected Schedule I, so we filed an amended Form 5500 (only change was to check the box that this was an amended return) and the amended Schedule I with corrected items circled in red. Client just received a letter from EBSA stating that the Schedule B was not filed. After discussion with EBSA representative, the following was concluded: Form was bounced because the amended Form 5500 did not have a Schedule B attached, based on responses to item 10 (which indicates which schedules are enclosed with return). He did verify that Schedule B was received and in the system. What you should do on an amended Form 5500 is blank out your prior responses to item 10 and then only complete the amended schedules that are attached (which seems a little counterintuitive to me since one could argue that you are then "amending" item 10 to show that these unaffected schedules are not part of the filing). Just a word for the wise (not sure why the EBSA software didn't also issue a letter that schedules P, R, and T weren't included - but who knows).

I have a target benefit plan to do which recently created a short plan year. Prior to 4/1/2002, plan ran on basis of 4/1-3/31. Short plan year was created for 4/1/02-12/31/02 (which is the year which I'm trying to calculate). Plan uses the "safe harbor" (theoretical reserve method) to determine funding. Without getting too crazy about this, proposing to do the following: 1) Use annualized compensation (comp paid in 4/1-12/31/02 basis multiplied by 12/9) to determine the target benefit under plan. 2) Theoretical Reserve as of 12/31/2002 equals Theoretical Reserve as of 3/31/2002 plus lesser of TB contribution and 415 limit for YE 3/31/2002, both increased by interest rate for 9 months. Plan specifies 8.5% as rate; propose to use (1 + .085*9/12) as increase. 3) Present Value = Target Benefit * Annuity Factor, discounted using Nearest Age and Retirement Age period (not sure how picky to get with fractions, as have always used whole year discount in past); 4) Target Benefit Contribution = (PVTB - TR)/TAF (TAF again calculated using Ret Age - Att Age +1), then prorated by 9/12 to reflect short plan year. Figure the "shortfall" will be made up in future years due to fact that the TR next year won't be reflecting the 3/12 piece. 5) Determine 415 limit by actual comp paid in short plan year for 100% limit, and $30,000 as dollar limit. 6) Top Heavy minimum obviously based on 3% of actual comp. Does this sound like a reasonable approach for this situation?

Glad to help (as others have helped me along the way via this board and other sites).