IRC401

Does the hospital have its own 457(B) plan, or does it participate in a plan sponsored by a larger entity (for example, a state wide plan)?

Why would you want to start a 401(k) plan and subject the plan to the ADP test? There is no requirement that 403(B) assets be invested in insurance contracts with undesirable charges.

1. You stated that the #7 HCE had $74,000 of compensation in 1999. Therefore, it doesn't appear that he was a former employee. 2. Check the regulations. I believe that a plan amendment (covering all plans in the controlled group) must be made to use the "20% election". Was a timely amendment made? 3. You didn't discuss 5% owners. Should we assume that they (don't forget relatives) are all in the $100,000+ group? 4. Determining who is an HCE is a very important matter for 401(k0 plans. Perhaps you should consult with someone who has all of the facts in front of him.

Keep in mind that transferring to a related (IRC 414(B)) employer in Canada is NOT a separation from service for purposes of taking a distribution of 401(k) money.

Just a reminder that a proposed regulation is not binding. I wish that DoL auditors recognized that point.

Is the employer an S corp? Will granting options affect its ability to keep or convert to S corp status?

The plan is supposed to have a definitely determinable allocation formula, and under old rev rulings suspense accounts of forfeitures aren't supposed to build up. If you aren't willing to vest everything, and if you can't use the forfeitures to pay expenses (assuming that the document permits the payment of expenses), I think that the forfeitures should be allocated among the accounts of active partipants. From my perspective, you have an active plan with a 0% allocation formula. If you didn't freeze eligiblity, new particpants enter the plan each year. Plan permitting, you could delay allocation of forfeitures until the terminating participant has a five year break in service. If I am wrong, then you could let forfeitures accumulate until only 5% owners are left in the plan, and then allocate them.

Have you considered what your client really needs and have you explained all of the fees? Many people are surprised to learn that there is no ERISA requirement for daily recordkeeping or even participant directed investing. If you don't have participant directed investments, you should be able to find a local actuarial firm or recordkeeper who can handle the plan for a relatively low cost. Of course, you can always reduce fees by sticking the participants with high asset based fees, which appears to be the name of the game these days. My guess is that if you have 15-30 participants and daily recordkeeping, you are sticking most of the particpants with (what should be regarded as) unreasonably high asset based fees in order to accommodate one or two people.

I believe that there are some old regs or rulings that cover this subject.

The only aspect of your prototype that I don't understand is how you can add the 3% reduction back in for purposes of calculating other contributions and benefits. For example, suppose that a new hire has a nominal salary of $1000 per week. The company actually pays him $970 (before withholding) and contributes $30 as a QNEC. For purposes of section 415 (and 404) his compensation is $970. It seems to me that if you want to have a safe harbor definition of compensation, you have to base his 401(k) election, match, DB benefits, etc on $970 of compensation. The company can write a plan that bases benefits on a "benefits compensation" of $1000, but wouldn't the company need to do a 414(s) analysis, and aren't prototypes supposed to use a safe harbor definition of compensation?

In response to Kirk, in PA a corporation is allowed to serve as trustee of its own plan. (Of course, it would not be charging trustee fees.) I don't know about other states.

The logical reading of the statute is that 401(a)(9)is NOT an optional form of benefit; it is a mandatory requirement. The IRS, as is too often the case, is incapable of reading the law and makes up its own rules. In this case, it has invoked the "Commerce Clause" (aka 411(d)(6))in order to afflict plan sponsors with some nonsenical paperwork. Are you willing to litigate? If not, you are stuck with whatever you can't eliminate in the determination letter review process. If you yuse a prototype document, it will have all of the necessary "protections" already in the document (whenever the document is updated).

Using actual investment results does not create any problems. The IRS doesn't want you to be able to set up a formula with a benefit of $10 plus interest at the rate of 10% per week and report only $10 as subject to FICA taxes.

You don't need to defend your position to the IRS or even the DoL. The DoL audit risk is miniscule. On the other hand, the more people in the group, the more likely that someone (including former employees, ex-spouses, and who knows who else) will sue some day asserting that the plan is an ERISA plan. If a court holds that the plan is not a valid top-hat plan, then the assets need to go into a trust, which would be a secular trust, and everything that isn't subject to a substantial risk of forfeiture becomes immediately taxable. My advice is to consider all of the long range litigation possibilities before being that aggressive.

1. Are you able to do something about the width of the posts? They are difficult to read. Thank you. 2. I only skimmed the notice. My impression was that the IRS has exempted state universities from 457(f) for almost anything that they call a severance program while leaving private universities to ignore 457(f) for whatever they want to designate as a severance program. Shouldn't the standard be the same? Are you aware of the IRS asserting in an audit that a severance program was really deferred comp taxable under 457(f). 3. If the IRS takes the position that amounts taxable under 457(f) are not wages under 3401, is it leaving itself open to an attack that amounts taxable under 457(f) aren't really income and can't be taxed?

I'm not certain that I fully understand your problem. If the old entity was merged, it still exists as part of the surving entity. Therefore, the surviving entity is sponsoring the plan. If the old plan provided for the purchase of annuity contracts, just let the money remain in the contracts. If the old money was in mutual funds, it can be moved to new mutual funds with or without the employee's consent.(with all of the usual caveats about fiduciary issues) It may also be possible to purchase annuity contracts from an entity affiliated with the mutual fund company.

Technically, the plan is required to be audited per the regulations, but there is no requirement to submit the audit report to the governement (per the Form 5500 instructions). As a practical matter, audits of 403(B) plans are very rare.

I agree with Mo. The regs are based on prior law and are not applicable. I know that this is a radical notion, but read the law. The law seems very clear that employees with compensation in excess of $85,000 in 1999 are HCEs for 2000. Holland seems to have a knack for aggrevating an entire profession when there is no legal or policy reason to do so.

If the ESOP owns 100% of the Company, how do you get a significant ownership percentage to the next generation of senior managers without major economic and fiduciary issues? Do you want the long term employees on the assembly line owning more shares than the officers? If the ESOP owns 100% of the business, management should start its succession planning immediately.

There is no prohibition that I am aware of against an S Corp making contributions to an ESOP. Indeed, I believe that there is a regulatory requirment that the employer make substantial and recurring contributions. I have never seen a contribution in the range of 25% of compensation described as minimal before. PS: Is your client certain that it wants to be owned 100% by an ESOP? There are strong business reasons why that could be a big mistake.

< to another. >> In whose name is the rollover IRA titled? The beneficiary can change the investments, but he can't escape 401(a)(9).

Unless a change in the law or a court decision overrides a regulation, a regulation overrides a rev. proc. If you missed the deadline, do not make the distribution until you have a distributable event. The participant has double taxation.

It appears that elective transfers of DC accounts to a DB plan are permitted under 1.411(d)-4(B)(1)(iv). [Note: I am not certain that that reg eliminates the issue of whether there is a prohibited transaction under Title I, but I doubt that anyone in the DoL cares.] The reg requires that the DB plan provide a minimum benefit (in exchange for the transferred DC amount) expressed as an annuity payable at NRA that is derived solely on the basis of the amount transferred. It seems to me that the minimum benefit would not be subject to 401(a)(4) under 1.401(a)(4)-11(B). On the other hand, if the participant is credited with a cash balance "account balance" and interest, there could be problems. If interest rates decline there would be an impermissible reduction in the benefit and if interest rates increase, the increase appears to be an accrued benefit subject to 401(a)(4) and 415.

You have relief from 410(B) and 401(a)(26) problems. You do not have relief for ADP/ACP testing or plan document issues. If you need to make plan document changes, make then ASAP! You may need to do multiple ADP/ACP tests, and you may have some screwy results on determining who is an HCE.

You may not make a corrective distribution before the end of the year because you can't fail the test before the end of the year. You may stop deferrals from HCEs IF the plan document so permits. If the plan document permits changes in elections, you may go around and encourage HCEs into reducing their contributions on the grounds that they are going to get refunds anyway.