Lou S.

I hate partnerships. Just needed to say that to start. I've done some seaching but can find anything exactly on point so if this has been covered I'm sorry. We have a smallish partnership where several of the partners are approaching 70 1/2 for purposes of who is a 5% owner and what comp can be used for benefit pursposes how are "semi-retired" partners treated. That is the partner has no more capital interest and no more profits interest. They are recieving guaranteed payments over a somie time period. The payments are reported as ordinary income on a K-1. 1. Since they have no capital interest and no profit interest are they considered 0% partners for purposes of key, HCE and RMD? 2. They are working though limited hours but receiving large (6 figure) guarnteed payments, can all of that be used for plan purposes since it is considered earned income which looks like it meets the plans definition of includable compensation or is it a violation of the exclusive benfit rule, that is are the partners who are receiving only guarnateed payments considered employees of the partnership? I've read what looks like conflicting guidence in the code and frankly this isn't my area of expertise. I know what answer the client would like to hear, I'm just not sure it is the correct one. Any direction would be appreciated.

Lou, It's not just that the contribution has gone up (which it has). It's that the amount we are being advised we owe the Plan participants has gone up substantially too because the actuary is saying that the participants must accrue their benefit faster under PPA. That's what we are questioning. P.S. I appreciate that this stuff is complicated and I appreciate the job the actuary has done. But, I just wanted to get a "second opinion" on his application of PPA. Thanks. As others have said, ask for an expalination from the actuary. Is this a small plan that has had a demographic change? Maybe the formula passed testing with the old demographics but they you got a bunch of new participants that made it diffcult to pass testing without a change in the formual? Without the facts it is all guess work. Also is it the monthly accrued benefits that have gone up or just the PVABs (single sum payout amounts)? Could be a spike due to the low interest rate environment and high 417(e) payouts.

Thanks. That was what I was hoping for. And yes I understand if any descretionary contribution goes to the 401(k) including forf. reallocation the T-H exepmtion is gone Thanks again for the quick respoces guys, really appreciate it from both. Have a great weekend. I'm off to get get my client a buch of docs and notices...

I agree PPA changed the funding rules not the accrual rules. Is it just that required contribution has gone up? That is possible depending on your pre-PPA funding method and probable given the market experience in 2008.

Thanks Andy, I really appreciate your responces here on the board but... Section 416(g)(4)(H) provides that the term "top-heavy plan" does not include a plan that consists solely of (1) a CODA that meets the requirements of §401(k)(12) and (2) matching contributions that meet the requirements of §401(m)(11). Revenue Ruling 2004-13, the IRS explains the exemption from the "top heavy" rules for a plan that consists solely of a safe harbor 401(k) arrangement. Unfortunately RR 2004-13 addresses a single plan and doesn't talk about a frozen DB. I know that odd as it sounds if the 401(k) plan was the only plan and the frozen DB didn't exist it is clear that the non-key HCE can get zero becuase the plan is deemed not T-H under 416(g)(4)(H)

Thanks. Sorry if my facts were unclear my mind is elsewhere today. I realize the frozen DB does not need a T-H min, the question I have is does the SH 401(k) get an automatic pass on the top-heavy expemption even though there will be employer contributions to the frozen DB plan, though no other contributions (other than deferrals and SHNE) to the 401(k)? That is can the company give just the 3% SHNE to the 4-NHCEs and nothing to the the non-key HCE and still be deemed to pass 416 or does the contribution to fund the DB shortfall blow the "no other employer contribution" requirement? Does the answer change if the contribution to the DB is more than the minimum required? The employer doesn't mind giving 3% to the NHCEs so his HCE can make a 401(k) contribution but he doesn't want to give another $4K to the HCE who wants the tax deduction and who he feels is already very well compensated. Does that make more sense?

A small company has an underfunded frozen DB and is thinking of add a 3% non-elective safe harbor 401(k) plan before 10/1. They are funding the frozen DB until it can be terminated at 100% but no new accruals. The aggregation group is T-H as is each plan on its own. The safe harbor 401(k) plan is planning on making only the 3% non-elective employer contribution to NHCEs only. Does this qualify for the top-heavy exemption? The plan has 1 highly compensated non-key employee (the one who wants the 401(k) this year) who would not receive a contribution under the exeption but would get about a $4K T-H min if the exemption does not apply. 401(k) plan will fail testing miserably w/o safe harbor. Not sure if this is better here or the 401(k) section. Any help would be much appreciated.

The plan sponsor will have significant responsibility, no matter what. It's his plan. I find it surprising that anyone would recommend against a DL filing. BTW, JFriedman, you stated that this dentist is your client. It may not be relevant to anyone reading here, but your post does not identify the nature of that relationship, and some responses may have assumed a particular relationship. Attorney, accountant, investment advisor, bookie, real estate agent, etc? (Not being nosy, just a comment.) We advise all of our clients to get a DL upon Plan termination, especially in light of the many required snap on amendments in recent years. That said I do explain to them that it is an expensive and lengthy process and is very a kin to "document insurance". That is you get the letter and the IRS is giving its blessing to the form of your documnet. The general rule of thumb I tell my clients when they as what would I do if it was my Plan is, I would sumbit if any one participant has a balance of $500K or more or if the Plan assets as a whole exceed $1M. I'd would also always request a letter if it was a plan with any non-vanilla options. If the assets are small though, I'm not sure the cost of submission out wieghs the benefit. More and more the DL process is becoming a voluntary audit as someelse noted. Years ago our DL apps would be aproved with just 1 or 2 minor questions and sometimes without even that. These days we often get a list of 15 to 20 questions they want answered at least half of which we have to point out were inculded and labled in the origial submission package and others that we usually only see upon Plan audit.

Roth-401(k) are still 401(k) and subject to the same withdrawal restrictions as traditional-401(k). The only difference is the taxation on distribution.

We have been giving the PPA min and max (with a warning if this might create 415 payout issues) and a "suggested" amount based on the pre-PPA funding method. However, we do mostly small plans so 9 out of 10 clients ignore our suggested amount and make the min because they had a bad year or the max because they want the deduction.

Just a guess but sounds like a small plan that's being restated for EGTRRA that will likely have NHCEs in the near future and they are making it SH pre-emptively so it doesn't need to be amended later. Otherwise, SH seems a bit odd to me as well. Agree notice is required.

Exactly what I meant. Just poorly worded.

I'd agree with the others that 3% would be T-H min in this case. But if you are aggregating for 401(a)(4) are you going to have any gateway issue if they only get 3%?

So the mutual fund company was basically short changing the participants back in 2002 and the DOL's "reasonable approach" is to refuse the money? I like the company cashing the check (provided the amount like here is "small") or donating it to charity ideas better. But thanks for the offical DOL position, it is good to know for the future.

If you have a coverage failure you have to give a meaningful benefit to the participants you bring in to pass test for them to be considered benefiting for 401(a)(4) and 410(b). That is you can't just retroatively say OK now everyone is eligible for the match so we have 100% coverage, they acutally have to receive an allocation to be concidered benefiting.

If you are over 120 you are probably out of luck. A couple ideas is if you are within a few participanst of 120 that may or may not work. 1. Look for ditributions that were satrted in December of 07 but completing in January of 08. Consider filing an amended return for 2007 with those as payables and deem them paid out in December. Not the best idea and no sure it would fly by the IRS but it might work. 2. Look for 0% vested that weren't forfieted to make sure weren't accidently included in the 1/1/08 count. Barring that recomend an inexpensive auditor to the client.

OK, plan failed ADP test and made refunds from all roth-K source on 3/14/2009 for calander year 2008 test failure. Roth - Deferral to correct, $1,000 Loss on Roth Deferral, $200 Check to Participant $800 I get the 1099-R ($800 box 1, $0 box 2a, $1,000 box 5) reporting and that the participant has no taxable income on this distribution because it is 100% Roth-k with no gain. The question is can the participant claim the $200 loss on his/her 2009 tax return? I'm pretty sure the answer is yes they can but if anyone can point me to any specific IRS guidence confirming this I'd be very appreciative.

Thanks. That's what I thought. I'll just have to confirm our EGTRRA laguage is good to go and the cross reference with the DC reads correctly.

In the case where a DB and DC plan cover at least one key in both plans and the DB Plan is frozen, what is the DC TH minimum? I'm a bit confused by this but think the answer should be easy. Assume the DC plan is not a 401(k). Also assume all DB participants are also covered bythe DC plan. Is the TH min in the DC plan now - 0% if no contrbution is made. The highest alloaction rate to any key if key receives 0% - 3% 3% if any key receives 3% or more. 5% because there is a DB? Does the answer change if the DB is underfunded and the employer is making contributions to the DB Plan? I'm pretty sure the 5% no longer applies becuase the DB accruals are frozen which puts us back in the lessor of 3% or highest key rate world; does anybody disagree?

Somebody who has gone through this before may have more experience than me, but my understand is that you have to pay the excise tax and then request a refund when the waiver is approved. I know it sounds dumb but the IRS and PBGC aren't always the most logical entities.

Assuming there is no after tax basis or roth-k refund, $900.

Were the non-owner terms paid out? If not I would think you are still PBGC but once the last non-owner has been paid whether by lump-sum or annuity purchase, our experience is the PBGC is very good about giving a "no longer covered letter." On a related question we have a plan that has always covered just 2 substantial owners. One of the owners, brothers not that that really matters, has just bought out the other but both are still working. When does this plan become PBGC covered? Is the guy who sold out considered a substantial owner for a period of time after the stock sale? I seem to recall a 5-year look back. Am I dreaming or is this plan immediatley PBGC? If no one knows off hand I guess we'll request coverage determination from the PBGC.

You have a 415 excess. Correct through EPCRS.

Unless it is going to create a balckout period of more than 3 days, I'm not aware of any legaly required notices. That said, it is probably best practices to notify particpiants before the change and give them "adaquate" time to move their funds to a different investment than the one the trustee has chosen if they are not happy with the new investment. What represents "adaquate time" would probably vary with the size of plan and sophistication of the participants but I'd think 30 days would be a good guideline though if the trustee thinks the fund is really bad they might want to do it quicker to avoid large losses. Something like a suspected "Madoff type fund".

Don't let people write personal checks to the plan unless they are self-employed. I tell them it needs to run thorugh their payroll and be reflected on the W-2, then of they don't do that way it is their problem not mine. If you let the owner write a check when he/she wants then you have a problem when some non-owner comes in and wants to write a check to the plan and call it a deferral.