Dan

A client is due to renew their ERISA bond. The insurance agent called to ask whether the bond could be subject to a deductible. I have never been asked this question before now. My initial thought was no, a deductible is not acceptable. It almost seems that a deductible would defeat the purpose of the bond, at least in some small way. But, I have been unable to find any guidance on this question. Any insights or thoughts would be appreciated. ------------------ Dan Smith

If you did not round up the top 20%, in this situation would you have the top 12.5% instead of the top 20%?

We have a client that operates as a partnership. They asked us to calculate maximum contribution for 1998. They indicated that all four partners should share equally regarding wages for the common law employees. But the K-1 compensation is vastly different for each partner and indicates that partnership percentages are various. I am not an accountant, but this arrangement seems questionable. Is this arrangement strange or normal?

You have two people. This is a situation where you always round up.

Hope that helps. [This message has been edited by Dan (edited 03-18-99).]

RMDs may no longer be required for employees who are not more-than-5%-owners. However participants who are over 70.5 and who have terminated employment or are more than 5% owners are still required to receive a RMD. In-service distibutions permit employed participants (not more than 5% owner) over 70.5 to receive RMDs if they desire. However I am not aware of how In-service distributions negate RMD requirements in any way. This is my understanding of the new RMD rules.

Self employed compensation (SE Comp) is net of contributions, so calculating employer contributions for a self employed is complicated, but certainly possible. You must set up a calculation where SE comp is reduced by SE's deferral amount, company match amount and company profit sharing. After all of these factors are included, the result should allow you to verify deferral percentage and match percentage for the SEs. Since PS is allocated on a compensation basis, the PS allocation is inter-related to matching contribution. Hope this helps. [This message has been edited by Dan (edited 03-17-99).]

First check your document. If plan eligibility is age 21 and one year of service, then anyone who works 1000 hours or more during the determination period (employment year or plan year) in eligible to enter upon arrival at a plan entry date. So, based on above assumption, an employee (age 21 or older) with 1000 hours or more during that determination period (12 month) would be eligible at the next entry date. Full time or part time is irrelevent. One thousand hours during the 12 month period is what matters. If the plan document specifies less than one year of service, say six months, then hours of service are not considered regarding plan entry. Entry would be at next entry date following satisfaction of the six months of service, regardless of hours. [This message has been edited by Dan (edited 03-16-99).]

A non-5% owner is HCE, in determination year, if he received compensation from the employer of more than $80,000, (in look back year) and if the employer elects, was a member of the top-paid group of employees. The compensation amount is not adjusted by deferrals, as you stated. Your code section cite should be sufficient guidance regarding the issue at hand.

That is an interesting interpretation. But this position seems difficult to support, given that plan eligibility is essentially independent of plan year and based solely on employment year. [This message has been edited by Dan (edited 03-16-99).]

COLA is Cost Of Living Adjustment.

Yes, it happens on occasion. Database errors (Quantech uses a mutliple database structure) and Windows operating system errors can all freeze up Quantech. [This message has been edited by Dan (edited 03-13-99).]

It sounds like this new employee is overwhelmed by many new duties on a new job. If caring for the plan is this person's only task, then perhaps they have hired a person not completely qualified. Maybe you could suggest this employee complete the PA1 series from ASPA. If this employee has duties other than the qualified plan, PA1 may still be a good suggestion, but a new office, new procedures, new faces and add qualified plan duties (complicated) could easily be overwhelming for a new person. Good Luck.

The deferral amount in excess of $10,000, plus earnings attributable to the excess deferral, must be distributed by 4/15/99 for 12/31/98 PYE. The same is true for the portion of the match attributable to the excess deferral, except that only the vested portion of the match (plus attributable earnings) should be distributed. The non-vested portion of match plus earnings should be forfeited. If the excess portions are distributed prior to the 4/15/99 deadline it is taxable in the year in which the first deferrals were made to the plan, a first in, first out idea. If excess is distributed after that date, then distribution is taxed in the year which first deferrals were made AND in the year of distribution. Double taxation. [iRC § 401(m)(6)(A); Treas Reg §§ 1.401(m)-1(e)(1)(i), 1.401(m)-1(e)(1)(ii), 1.401(m)-1(e)(3), 1.415-6(B)(6)(iv); Rev Proc 92-93, 1992-2 CB 505] [This message has been edited by Dan (edited 03-11-99).]

Ownership is attributed to a spouse; also lineal ascendants and descendents. In-laws do not receive any ownership by attribution. ------------------ Dan Smith

With regard to eligibility, a short plan year should have no bearing on it. If the eligibility is 1 year and age 21, then if these criteria are satisfied participation begins upon arrival at the next entry date. Deferral limit is indeed based on a calendar year, so a short plan year has no effect on the annual deferral limit. Theoretically, a short plan year that crossed over two calendar years could accept $20,000 in deferred compensation. Vesting is a little more complex to explain. To determine vesting service, service must be counted for a total of 12 months to determine if a year of vesting service is accrued during a short plan year. So the entire short plan year and a portion of a full plan year are required to compute vesting service for the short plan year. The service worked during the full plan year will count towards vesting accrual twice. Once for the plan year actually worked and during the short plan year. Suppose you have a short plan year from July 1, 1998 to December 31, 1998. Previously the plan year was July 1, 1998 to June 30, 1998. You must include service for the July 1, 1998 to December 31, 1998 period but you must also include service for the January 1, 1998 to June 30, 1998 period. If someone works 1000 hours during these two combined periods, they are credited with a year of vesting service during the short plan year. Suppose someone works 950 hours during the short plan year, but did not work during the previous period, then he does not accrue a year of vesting service during the short plan year. I believe break in service rules mirror vesting rules. [This message has been edited by Dan (edited 03-06-99).]

We put system upgrades into a test environment. But we have a LAN with an Oracle server. We typically test by doing all of the routine activities in the test environment. We do discover problems. You may wish to consider waiting to install upgrade for a period of time. That way Quantech can install fixes discovered on initial rollout. They generally good at fixing most things. But like any other complicated system, some issues are never resolved. We just work around them. Good Luck. ------------------ Dan Smith

Thank you for the reply. [This message has been edited by Dan (edited 03-04-99).]

I have a first year 401(k) plan that failed it's ADP test. I am preparing to return excess deferral. Employer wants to send 1998 matching contribution. Is 1998 matching contribution based on actual deferral and subject to excess matching contribution, or is match based on deferral after return of excess? Thanks for any assistance.

I can not answer that question. An accountant or tax attorney would need to answer. I do not do income tax filing.

Employer contributions should be made by the Employer's tax return filing deadline, including filing extensions. For example, a corporation could fund a matching contribution in September 1999 for a 401(k)plan whose plan year ended 12/31/98, and this would be considered a timely matching contribution.

The IRS and Social Security Administration sponsor lost participant programs. There is a article by Amy Cavanaugh entitled "Avoiding and Locating Lost Participants" in The Pension Acutary for January-February 1999. I can fax a copy if you would like.

I can not give you a definative answer. Perhaps an attorney could give one. I am not aware of any ruling that deals with a case like this. A conservative interpretation would be that 1997 was the first plan year for the 401(k). Therefore the prior year would be 0%. However, with that said I would agree with you that 1998 is the first plan year for the 401(k) Plan. Since deferral deposits could not be made prior to signature date of plan, and assuming initial deferral elections could not be effective until 1/1/98 you have a very good case as to why 1998 is a first PYE, therefore you could use the 3% minimum for that test. Hope that helps.

You said that the plan was effective 12/23/97. Was it a 401(k) Plan at that date or did it amend to be a 401(k) effective 1/1/98?