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This was discussed only a few months ago: http://benefitslink.com/boards/index.php?showtopic=37535.

You may enjoy this PLR: Private Letter Ruling 200205050 (8 Nov 2001) UIL: 401.00-00 Date: November 8, 2001 Refer Reply To: T:EP:RA:TI Attn: * * * LEGEND: Company A = * * * Company B = * * * State D = * * * Country C = * * * Plan X = * * * Dear * * * This is in response to a letter dated August 22, 2000, as supplemented by additional correspondence dated January 17, 2001, filed on your behalf by your authorized representative regarding a ruling under sections 401(a) and 4975(e)(7) of the Internal Revenue Code (the "Code"). The following facts and representations were submitted in support of your request. Company A is a domestic closely held C corporation incorporated under the laws of State D. Company A wholly owns several subsidiaries, including Company B, a foreign corporation organized under the laws of Country C. Company B has two employees ("Employees") who are US citizens working for Company B and who receive compensation that is considered "foreign earned income" under section 911 of the Internal Revenue Code (the "Code"). Company A maintains Plan X, an ESOP qualified under sections 401(a) and 4975(e)(7) for eligible employees of Company A and its subsidiaries. These Employees may participate in Plan X pursuant to the plan's eligibility provisions. Plan X invests primarily in employer securities as defined under section 409(1)(2). Section 2 of Plan X defines "Employer" as Company A and any Affiliate which elects to cover its employees under the plan. "Affiliate" is defined as Company A and any other corporation which is a member of a controlled group of corporations within the meaning of Code section 414(b) of which Company A is also a member, and other entities required to be aggregated under sections 414©, 414(m), and 414(o). This section of Plan X also defines "participant" generally to mean a common law employee of an Employer who has met certain eligibility requirements as provided in the plan. Section 2 defines "compensation" as the total cash compensation paid to an Employee by Company A or an Affiliate during the Plan year excluding any amount in excess of $160,000 (as adjusted for COLAs under section 401(a)(17)). Based on the above facts and representations, you request a ruling that during the time that the Employees are employed by Company B and receiving "foreign earned income" as defined under Code section 911, the Employees may participate in Plan X without adversely affecting the qualified status of the plan and its underlying trust under sections 401(a), 501(a) and 4975(e)(7). The Employee Plans Technical office does not ordinarily issue rulings on matters involving plan qualification. However, since we have determined that the taxpayer has met the criteria set forth in Section 6.03 of Rev. Proc. 2001-4, 2001-1 I.R.B. 121, our office has decided to provide a ruling in response to the taxpayer's request. Code section 414(b) provides that for purposes of sections 401, 408(k), 408(p), 410, 411, 415 and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)© are treated as employed by a single employer. Section 1.414(b) of the federal Income Tax Regulations (the "regulations") provides that for purposes of Code section 414(b), the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a)(1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b). Code section 1563(a) defines a parent-subsidiary controlled group as any group of one or more chains of corporations connected through stock ownership with a common parent corporation if certain stock ownership tests involving, at least 80 percent of the total value of shares of all classes, in relation to the parent and other corporations, are satisfied. Code section 1563(b)(2)© excludes from the definition of a "component member of a controlled group" a foreign corporation subject to tax under section 881 for such taxable year. Section 1.415-2(d)(2) of the regulations provides that for purposes of paragraph (d)(2)(i), which describes compensation for testing purposes under Code section 415 as including wages and salary, foreign earned income under section 911(b) (whether or not excludable under section 911) is also included. As indicated above, under Code section 1563(b), a foreign corporation subject to tax under section 881 is not treated as a member of a controlled group for purposes of section 1563. This exclusion, however, does not apply for purposes of section 414(b). Under section 414(b), any corporation that is a member of a parent-subsidiary group is aggregated, whether or not the corporation is considered a component member of a controlled group under section 1563(b). Applying these principles, Company A and Company B are considered to be members of a controlled group for purposes of 414(b). We further note that there exists a controlled group of corporations for purposes of section 409(l). See 1.46- 8(b)(4)(i) of the regulations. Accordingly, we rule that the Employees' mere participation in Plan X and receipt of foreign earned income under section 911 while employed with Company B will not adversely affect the qualified status of Plan X under sections 401(a), 501(a), and 4975(e)(7). This ruling is based on the assumption that Plan X remains otherwise qualified under Code sections 401(a), 409 and 4975(e)(7) and its related trust is tax exempt under section 501(a) at all relevant times. This ruling is directed only to the taxpayer who requested it. Code section 6110(k)(3) provides that it may not be used or cited by others as precedent. A copy of this ruling has been sent to your authorized representative in accordance with a power of attorney on file with this office. Should you have any concerns regarding this letter, please contact * * * . Sincerely yours, John Swieca, Manager Employee Technical Group 1 Tax Exempt and Government Entities Division cc: Enclosures: Deleted copy of ruling Notice 437

Yes, loans have been permitted to owner-employees in SIMPLE 401(k) plans since 1/1/2002.

Does anyone have ideas on the Excel formula to be input in the cell for calculating the sole proprietor's integrated contribution, i.e. splitting the earned income between plan compensation and plan contribution after deductions for employee contribution and self-employment taxes have been applied?

1) If she is at least age 50 she may be able to defer $5,000 as catchup over the 6% limit depending on the employer's policies. 2) Talk to your tax professional about the possibility of deferring some retirement funds in an IRA. Or use the worksheet related to line 32 of Form 1040 to figure out eligibility for IRA deductions.

Yes, they seem to be a controlled group based on the information you presented. You may find some relief under the QSLOB rules (qualified separate lines of business). Best wishes.

I see. Then when your determining earned income by substracting off 1/2 SSE, what do you subtract???? The SE tax calculation is not directly and completely related to the plan compensation. Here is a real life example. We had a doctor whose profession on his tax form was "doctor/farmer." He had a ($110,000) net loss on his Schedule F, and a $150,000 net profit on his Schedule C. We netted his income for SE tax calculation, because as per Schedule SE instructions, you use profit or loss from Schedule F on line 1, and profit or loss from Schedule C on line 2 of Schedule SE. For plan compensation, we used his net Schedule C profit of $150,000 only and subtracted the SE tax calculated as per instruction for Schedule SE (i.e. netting the compensation). The administration software was not able to handle this without hand holding. Even though we were dealing with a Schedule C and Schedule F, I believe the logic would apply with multiple Schedule C's.

The short answer is that I believe you aggregate earnings for calculation of SE tax. However, for plan compensation purpose, you do not aggregate.

For whatever it is worth, here is what the ERISA Outline Book says, "If a self-employed individual is engaged in more than one trade or business, the earned income of each trade or business is determined separately, according to Treas. Reg. 1.401-10(b)(2). For example, if one business produces earned income of $50,000 and the other business produces a loss of $60,000, the individual does not net the earned income of the two businesses. The $50,000 of earned income from the first business may be used to support a qualified plan contribution ... "IRS apparently agrees with interpretation ... "Note that some commentators take the position that a net loss must be offset against the net gain, so that a self-employed individual has less earned income taken into account under the qualified plan ... we feel that IRC section 401(d) and Treas. Reg. 1.401-10(b)(2) support the conclusion that a net loss should be treated as "zero" compensation, not as negative compensation." This perspective seems to be contrary to the consensus on this forum. I hope someone can chip in and clarify.

If the participant is eligible to receive a distribution of the account balance, Roth 401(k) funds can be rolled over to a Roth IRA. Pre-tax 401(k) funds can be rolled over to a Roth IRA as long as the conditions regarding AGI limits and filing status (married filing separately not eligible) are met. The distribution must be included in the participant's income for tax purposes. The 10% premature withdrawal penalty does not apply. See IRS Publications 575 and 590 for more information.

Davis-Bacon employer fringe benefit contributions are not 401(k) employee deferrals, and are therefore not subject to the same depositing timing rules. However, Davis Bacon fringe benefit payments must be made to the plan "not less often than quarterly." 29 CFR 5.5 (a)(1).

There are two options the way I see it: 1) There is no 5500 filing requirement, since there are no assets in the trust, despite the fact that the 401(k) plan was effective during the year. 2) A 5500 is required to be filed, because the instructions state that "the return/report is due ... even if ... contributions were not made this plan year." I would go with option 1, since option 2 seems to be talking about a plan with assets, but not making contributions for a particular year. Either way, the DOL computer may generate some queries.

With the limited info available, I would say the client and the prison officials need to come to an agreement on whether to include the work release employees. 1) if the consensus is to exclude, amend plan document to make work release employees an excluded class. Make sure you pass 410b. 2) if the consensus is to include, then include them.

A profit sharing plan is co-sponsored by a 100%-owned corporation and sole proprietor (the same person is the owner and the sole proprietor). The corporation has about 10 common law employees, and there are no common law employees in the sole proprietorship. The owner makes $150,000 in W-2 from the corporation, and about $170,000 in earned income prior to any deductions from the sole proprietorship. Is there any guidance as to what percentage of the owner's contribution of $45,000 can be or should be deducted by the sole proprietorship? Or can I deduct the max 404 from the sole proprietorship, and the remaining from the corporation? Or put another way is there any regulatory restriction on how to aggregate compensation? I appreciate your input.

Non-resident aliens with no US source income are considered excludible employees. IRC Sec. 410(b)(3)(B) and Treasury Reg. 1.410(b)-6© or thereabouts. Depending on the applicable tax treaty, certain non-resident aliens with US source income may be excludible. Resident aliens, H-1B, etc. may be excluded, but they are included in coverage testing.

We use a Corbel VS document for a profit sharing plan that allows cross-testing and has each participant in a separate group. In certain years, is it permissible to use design-based safe harbor allocations and not utilize the cross-testing feature. Specifically, comp-to-comp allocations or TWB-integrated allocations. Unfortunately, younger employees terminate employment when you least expect them. Thanks for your insight!

We have a plan that fails the compensation test. The plan only has 401(k) deferrals and employer matching contributions. Can we still run the rate group test to prove nondiscrimination?

Let's say the plan passes the ABT on an aggregate basis (ABPT > 70%), and the component plans pass the 410(b) ratio percentage test. Since the reasonable classification test is part of the ABT, are we required to apply and pass the ABT to the individual component plans in order to use the lower midpoint for the rate group test? Or are we required to apply only the reasonable classification test to the component plans? Thanks so much for helping us navigate these choppy waters!