stephen

THANK YOU!

Belgarath, This plan is subject to QJSA. The Loan procedures do not require spousal consent. I find it interesting that IRC 417(a)(4), and ERISA 205©(4) would still require spousal consent if the spouse has allowed the beneficiary designation to be someone else. Why would they be required to consent to the loan if they have waived rights to any benefits form the plan? It seems to me that based on your post you feel that the spousal consent is required based on IRC 417(a)(4), and ERISA 205©(4) even in cases where the spouse has agreed to a non-spouse beneficiary. Oh, Great Sorcerer, Thank you for the comments!

Perhaps there are no responses yet because this is one of the many gray areas of the law... I have not been able to find anything that says definitively the spouse must consent to the loan nor have I found anything that says there is no spousal consent requirement since the spouse has signed allowing for a non-spouse beneficiary designation. Therefore, I am letting the client know that I have not found that is is a requirement to get spousal consent for the loan but that it may be a good idea to have the spouse sign the consent form anyway so there are no questions about it later.

Participant balance is greater than $5,000. Standardized Corbel 401(k) Document. Plan has elected distribution option: QJSA 100%. Spouse has signed non-spouse beneficiary designation form. Who (if anyone) needs to consent to the loan?

Christopher, I apologize for my earlier answer. Prior service is generally included for VESTING. The info below is from The ERISA Outline Book page 4.42 of the 2006 edition. What service must be credited for vesting purposes?As a general rule, the plan must count all years of service for vesting purposes, even if the employee is credited with the service before satisfying the plan's eligibility requirements, or is suspended from participation in the plan because of an employment classification. Treas. Reg. §1.411(a)-5(a).

#1 - Yes No (see answer 4/16/07 11:25 am below) #2 - No - The 415 limit applies accross plans of the same employer. There is an incraesed 404 limit available as discussed below. I preseneted the information below at the 2005 ASPPA Conference. There are several items that may be of assistance to you with your questions. Contribution Deduction Limits (IRC §404) 1. For C Corporation and S Corporation ESOPs up to 25% of eligible compensation can be contributed whether leveraged or non-leveraged. 2. For C-Corporations interest above the 25% is also deductible. 3. Elective deferrals to a 401(k) plan are no longer included as employer contributions for this limit. 4. Compensation a. Compensation paid or accrued during the employer’s tax year for participants who benefit under the plan for the year. b. Prior to 2002 compensation excluded pre-tax 401(k) and Section 125 contributions. For plan years beginning after December 31, 2001, compensation includes pre-tax 401(k) and Section 125 Contributions. c. Subject to limits of IRC §404 (a)(17), which was $210,000 for 2005. 5. According to Private Letter Ruling (PLR) 200436015 leveraged C-Corporations can take an additional 25% deduction to pay principal. In the June 9, 2004 ruling the IRS evaluated a request from a company that contributed 12% to a money purchase plan, a 401(k) plan with a match up to 3½ % and the intent to establish an ESOP with a 25% of pay contribution to repay principal. The IRS concluded that “section 404(a)(9)(A) [of the code] allows a separate deduction for contributions applied by an ESOP to the repayment of principal of a loan.” While PLRs only apply to the taxpayer requesting them the definitive language in the ruling suggests a very strong likelihood that the IRS would come to the same conclusion in other cases. a. This does not apply to S-Corporations. b. This only applies to the maximum employer contribution (IRC § 404). c. The individual employee limit (IRC § 415) is still 100% of pay up to $42,000 (2005). Potentially a company could make a principal payment of 25% of eligible compensation, up to 25% of other employer contributions, plus salary deferrals, interest and deductible dividends to achieve a total deduction of more than 50% of eligible compensation. Dividend Deduction (IRC §404(k)) 1. Dividends do not count as employer contributions. Thus, they do not count against an employer’s 404 limit or against a participant’s 415 limit. Thus, the use of cash dividends can permit a corporation to accelerate loan repayment or allow a corporation with small eligible payroll in relation to its outstanding ESOP debt the ability to support its ESOP debt. 2. Dividends on unallocated shares may be allocated to participant’s accounts in proportion to participants’ compensation or as additional income of the ESOP trust. 3. C Corporation employers can deduct certain dividends paid on employer stock held by an ESOP. 4. In order to be deductible, the dividend must be paid in one of the following ways: a. Paid directly to the participants (or beneficiaries) in the plan. b. Paid to the ESOP trust and distributed to the participants (or beneficiaries) within 90 days after the close of the plan year in which the dividend is paid. This is known as a “pass through dividend”. c. Used to repay an exempt loan. (i) If the plan has more than one loan, dividends must be used to make payments on the same ESOP loan used to acquire such employer stock, unless the dividend is paid on employer stock acquired on or before August 4, 1989, in which case the dividend can be used to repay any exempt ESOP loan. (ii) If a dividend paid on allocated stock is used to repay an ESOP loan, each participant’s account must receive an allocation of employer stock, which has a current fair market value not less than the cash dividend that the account would have otherwise received. Example: 1,000 shares Dividend rate of $0.50 per share Cash dividend would be 1,000 x 0.50 = $500.00 If this dividend is used to release 12.5000 shares at $30.00 each = $375.00. In this case the stock release from the dividend is smaller than the cash value of the dividend. Thus, the dividend must be made whole. The share difference 4.1667 shares (500 shares / $30.00 = 16.6667 shares less 12.5000 shares = 4.1667 shares) is often made up by recharacterizing shares released on unallocated shares. d. Dividends voluntarily reinvested in employer stock are deductible (for plans years starting after December 31, 2001). 5. Dividends (earnings distributions) paid by an S Corporation are not deductible under 404(k). 6. S Corporation ESOPs can now use dividends paid on allocated shares for debt payment; provided the rule in 4©(ii) above is followed. 7. C corporation dividends must be reasonable. Allocation Limits (IRC §415©) 1. Plan years beginning after December 31, 2001, the limit on annual additions is the lesser of 100% of gross compensation or $40,000 (indexed). 2. Annual additions consist of contributions and forfeitures (under EGTRRA, elective deferrals to a 401(k) plan are still included as annual additions). 3. All plans of the employer must be aggregated. 4. In C Corporation ESOPs, if no more than one-third of the employer contributions applied to principal and interest payments on an exempt loan are allocated to the highly compensated employees, the 415 limit shall not apply to either forfeitures of employer securities acquired with the proceeds of the loan or employer contributions applied to interest payments on such loan. Example: C Corporation with 401(k) plan providing match equal to 100% up to 6% of the deferral and ESOP contribution of 25% of eligible compensation. Participant age 45 earning $100,000 in 2005 Deferral $14,000 Match $6,000 ESOP Lev Stock Forfeiture $1,000 ESOP Contribution $25,000 including $8,333.33 interest Total Annual Addition $46,000 This fails 415. If the plan passes the 1/3 test, you do not have to include interest or forfeitures of leveraged stock. Deferral $14,000.00 Match $6,000.00 ESOP Lev Stock Forfeiture $0.00 exclude leverage stock forfeiture ESOP Contribution $16,666.67 excluding $8,333.33 interest Total Annual Addition $36,666.67 This allows the participant to pass 415. 5. If the plan allows, current fair market value of stock allocated from the loan suspense account rather than actual contribution dollars used to release such stock may be used to determine the annual addition. What if plan fails 1/3 test? Or ESOP is not leveraged? You may be able to use the current fair market value approach for 415. Example: C-Corporation with 401(k) plan providing match equal to 100% up to 6% of the deferral and ESOP contribution of 25% of eligible compensation. Participant age 45 earning $100,000 in 2005 Deferral $14,000 Match $6,000 ESOP Lev Stock Forfeiture $1,000 ESOP Contribution $25,000 release 200 shares at $100.00/sh. Total Annual Addition $46,000 This fails 415. If the plan document allows you may use the fair market value approach. Deferral $14,000 Match $6,000 ESOP Lev Stock Forfeiture $1,000 ESOP Contribution $20,000 ( = 200 x $100) Total Annual Addition $41,000 This allows the participant to pass 415. 6. To reduce any excess annual additions, the plan document may allow for deferrals to be returned to the participants, reduce the participant’s share of the ESOP contribution and reallocate to other participants, or allocate the excess amount to a suspense account to be allocated in the next plan year. 7. No deduction is allowed with respect to any contribution amounts that result in excess annual additions.

The ASPPA CPC designation will help you learn about the intricacies of the US Retirement Plan Industry, various types of plans, their requirements, etc. and it will help you get a job working with retirement plans. In my opinion the MBA will help you get a job anywhere as it will make you more marketable to all kinds of companies not just those in the retirement plan industry. Perhaps you can get the MBA first and if you decide thatyou wnat o make a career in Retirement Plans then go for the ASPPA designation.

Tom, Shouldn't they still do the top heavy test as it applies to the following year (e.g 2006 Top Heavy test for 2007 plan year)? What if they consider (or actually stop making) safe harbor contributions in 2007? That way they already have the test completed (or perhaps none of your clients ever stop making safe harbor contributions or add provisions to their plan that may nullify the safe-harbor protection from top heavy...) Stephen

... Form 5500, SAR, Top Heavy, depending on provisions maybe ACP, ...

Thornton, Based on the information you provided I believe the answers to your questions are: 1) Yes. Since fixed match based on no more than 6% of compensation and no accrual requirements. 2) Yes. Since match is not safe harbor contribution it is not required to be 100% vested.

I would not suggest funding a benefit before it has accrued. Perhaps the principals would allow you to amend the plan's allocation requirements so the money would not have to be called "excess" and removed. If the "excess" is mingled with vested or partially vested money it seems to me that it would be a pain to track, calculate, keep up with and explain to any affected participant. Maybe this is the cost of allowing the principals to direct their contributions...

yes

Nice work Bird and Archimage!

I agree with Lori's analysis on the 5%. Apparently they were wrong about the one employee never working 1,000 hours and not becoming eligible. Thus, maybe they should revisit the safe harbor suggestion for 2008.

Off the cuff answer, perhaps 5% as in the first year you can assume 3% deferrals for NHCEs. Maybe they should consider safe harbor plan design for 2008.

FWIW, I agree with Becky's comments.

ERSOPs have been discussed before See the above link that was started in July 1993.

Sorry, but if the document says you have to wait well then you have to wait. The participant could contact the Plan Administrator and confirm the $15,000 distribution restriction applies to terminated employees and ask "Why their plan forces these distribution restrictions on participants?".

If memory serves, the plan could say NO DISTRIBUTIONS OF ANY TYPE until the participant meets Normal Retirement Age as defined in the plan. I do not know why a plan sponsor would want to force all participants to keep their money invested in a RETIREMENT plan until they met RETIREMENT as it would be a burden to keep up with all of these participants for such extended periods of time and could cause a plan that may not otherwise become a large plan filer to meet the audit requirement number of participants and such a requirement could be a deterrent to keep people from contributing to the plan. That said, the participant should review their copy of the Summary Plan Description (or request one from the plan sponsor) to confirm what the plan's distribution restrictions are.

#2 Yes. IRC 409(p) needs to be reviewed as if the plan fails this lovely "pension simplification" the penalties are draconian!

Generally, pratictioners do option 2. If you do option 1 what happens if the share value drops? Do you think you can get money back from the participant?

Unless your plan exchanged the terminated participant shares for cash you should expect to receive the buyout price for the ESOP shares. Generally, former employees who still have balances left in the plan during the buyout normally receive the buyout price for the shares. These participants may or may not be granted 100% vesting depending on the plan document and attorney involved. For additional informaiton please see the thread below. Another Thread on this topic

The ERISA Outline book says: Chapter 11: 401(k) and 401(m) Testing - Section VI (Performing the ADP test): Part B (Who are the eligible employees?) page 11.49-50 5.c.1)d) Crossing over plan years (final paycheck issued in subsequent plan year). To complicate matters, suppose the final paycheck is issued in a different plan year from the one in which the individual’s employment terminated. If a terminated employee is eligible to defer from the final paycheck, as described in 5.c.1)c) above, does this make the individual an eligible employee for the plan year in which that paycheck is issued? In the example in 5.c.1)a) above, suppose Elton’s termination date is December 20, 2007, and the final paycheck is issued on January 2, 2008. If Elton is eligible to defer from the January 2, 2008, paycheck, does that make him eligible for the 2008 plan year or does the right to defer from the final paycheck relate to the 2007 plan year? Approach #1: eligibility relates to year of termination. If eligibility to defer from the final paycheck relates to the plan year of termination (2007 plan year, in Elton’s case), then the issuance of the paycheck in the next plan year would not cause the employee to be treated as an eligible employee for the plan year in which the check is issued (2008 plan year, in Elton’s case). Approach #2: eligibility relates to year of final paycheck. If eligibility to defer from the final paycheck relates to the plan year of the final paycheck (2008 plan year, in Elton’s case), then the plan would include the terminated employee as an eligible employee for such plan year for ADP testing purposes. It would be inconsistent, however, to treat the employee as eligible to defer for the plan year of the final paycheck, and then disregard the individual for ADP testing purposes on the basis that he or she performed no services for that plan year, unless the Treasury or IRS create some exceptions in this area.

Questions to ponder: Did he defer into the 401(K) Plan? Will the partnership be reducing his K-1 so he is paying his share of the partnership contribution?

If you feel comfortable that you'll be in a higher tax bracket at retirement you may want to defer most of your contribution as a Roth 401(k) as it will allow you to have tax free withdrawals at retirement as opposed to your pretax withdrawals being taxed at the higher rate than you are cutrrently receiving a deduction for.