imchipbrown

Had an audit today of a one-man MP Plan in the SF Bay area. Never had an EZ audited. Anyway, the auditor (nice lady, like all SF auditors) raised, to me, a really curious issue. My client is 65+ and has begun distributions. She wanted to know where in the plan it said that he could begin to receive distributions, unless he was "retired". My initial reaction was "What the hell are you talking about?" except, the document really doesn't address (by my cursory reading) the issue flat out. It talks about when terminated people get their benefits, disabled people, dead people, etc., but doesn't specifically say a person, still employed past Normal Retirement Age may elect to begin receiving benefits. It felt like arguing "Show me the air, and I'll believe it's keeping me alive". I mean, it's a retirement plan, but "retirement" isn't defined, but Normal Retirement Age and Date are (or course). Anyone else feel that you actually have to quit working and shut down your business to begin receiving benefits? Can you imagine trying to defend a practice of not paying a rank-and-file guy against the DOL unless he quits? We never did agree on the subject (closing letter will be some weeks) but, I argued, the whole document is about getting benefits, and only the special cases when they can be delayed are addressed. BTW, it's a prototype from a big Illinois company with some smart people working for them.

Allow me to show my ignorance to the world. The Plan you describe goes something like this: There are 2 or more classes of employees, which are non-discriminatorily described. Maybe shareholders as class 1, everyone else as class 2. Each year, employer will make a contribution for class 1, allocated according to some allocation formula (salary ratio, perhaps) and a contribution for class 2 to be allocated in some manner. Obviously, this sounds too good to be true, but through some math that I vaguely understand (see, ignorance!) it can be proved the plan is non-discriminatory, usually on a benefits(as opposed to contibutions) basis. Perhaps some of the geniuses on this board can step you through the math involved. As for documents, I think I heard (in a dream, perhaps) that the Volume Submitter program was openned up to these plans. I know Datair (www.datair.com) has a document to accomodate these types of plans. In addition, you'll want some software to be able to determine the amount of contribution "Class 2" must get in order for "Class 1" to be able to get what they want. How'd I do guys?

These accounts are usually small. I don't know about anyone else, but if I have a $5,000 account somewhere, I want my money. I have a client who mimimally funded his PS Plan for years, and people have also accumulated funds through forfeitures. The problem became, terminees with < $100 wouldn't bother to respond and fell off the face of the earth. The plan was approaching 100 participants, and these dead accounts could eventually push the plan into audited financial land. So, after the IRS forwarding program for the most part failed, we withheld 100% of distributions and sent them to the IRS with 1099-Rs to the last known address.

Brother-in-law loan sounds like a dodge around not being able to borrow yourself (auditor's mindset). If I hit the nail, think twice! Why are sole-p and S-corpers second class citizens in this loan fandango? Besides the regs, of course. This is another part of pension planning that needs fixing. [This message has been edited by Chip Brown (edited 01-20-99).]

Child is Highly Compensated, not by family aggregation, but by Code Section 318 (if parents are 5% shareholders, so is he/she/it).

This doesn't sound, on the face of it, as "Earned Income".

This was in response to BPS re: Divorce calculations. I must have hit the wrong button to post the reply. Use what the document says to use. You might throw on a "GATT" provision (making the document individually designed, if its not already) if it saves your client money. I had one case where the plan was underfunded. In the divorce negotiation, my client said "Take out my employees' lump-sums and we'll divide what's left in two". This was accepted by opposing council. [This message has been edited by Chip Brown (edited 10-07-98).]

Make sure you understand what Dawn has written. Doc has had to be the ONLY participant both years AND assets had to be under 100K (most likely, if only one participant for two years). If so and assets are still under 100k and Doc is only participant, NO returns are yet due. If any other participants, a 5500-C/R is due (overdue without an extension).

They become 100% vested, because a "forfeitable event" hasn't happened. Your plan doc should spell out when a forfeiture occurs. Usually, once paid, the non-vested portion is forfeited. Otherwise, five years, or years of service, if LONGER, applies. Something tricky to watch out for.... There is a reg out there (sorry, I'm home, no cites) that says when a plan is terminated, any 0% vested participant with a seperation date less than 5 years ago becomes 100% vested. This has been overcome by plan document language stating that any terminee that's 0% vested is DEEMED to have received a distribution of $0 (the deemed cash-out rule). If your doc doesn't have this provision, oh oh.

It's gonna be great. Whether match or across the board will probably depend on the participation levels and demographics. I met with an employer yesterday who said (brilliantly, I thought) that an across the board allocation would get the fence-sitters more interested in the plan. He has a lot of low paid employees who probably can't afford to participate at any level. Once they start getting benefit statements (they have individual accounts) and start making investment decisions, they may just ante up a couple of bucks to watch their accounts grow.

I had a client insist that she wanted a 401(k) for her employees. We installed it in year one, and no one deferred. To be on the safe side, I filed a 5500-C with all zeros. Next year, people deferred. We filed a 5500-R. IRS came back stating that they wanted a 5500-C, since it was the first year! So, I'd file this year, but file a 5500-C next year. That is, unless you've missed your filing deadline already. Then you have to argue "No corpus, no plan".

I haven't done any of these yet (don't quite understand the rules), but had this thought. I'd like to have some holes shot through it. Why not adopt two non-standardized prototypes and exclude group 1 from plan 1 and group 2 from plan two. Then fund each plan separately, backing into the amount of contribution required to pass the general test? I would think you could do away with the need for individual designs and use off-the-shelf documents with $125 fees.

I do one for an Arby's and one for a bunch of "name" hotels. The common thread is that they are run by corporations 100% owned by my clients. No affiliations with the franchisor except they share a common name.