Lori Foresz

I need a bit of help digesting how a frozen plan is able to pass the prior benefit structure test under 401(a)(26). DB plan covers only owner and wife for many years. Over time, one employee sticks around long enough to meet the plans 2-year eligibility so the plan is frozen and amended to bar new entrants. Wouldn't this plan fail the prior benefit structure test since only HCEs have accrued benefits? Thanks for any help.

My thoughts are that Company B's plan would not pass coverage so it would need to be aggregated with Company A's plan for 401(a)(4). If the solo is deferral only, why not just have one plan covering the 3 ees, Dave, and Dave's wife? However, if Plan B also has the maximim PS feature (i.e. 28k to Dave) then you would have to run the general test under 401(a)(4) on an aggregated basis and I think Company A's employees would need to get a least the gateway and maybe more. More comments would be great.

Any insight is greatly appreciated. DB plan is very overfunded. Sole participant is no longer accruing additional benefits. A suggestion has been made to purposefully disqualify the plan by adding plan language to raise/remove the 415 limit and then pay out all plan assets as taxalbe income to the sole participant to avoid the reversion/tax issue. Thoughts?

I realize there may not be too much guidance on this one, but thought I would get some thoughts. Small company has leveraged ESOP and all employees are terminated upon sale of the company. Plan has last day of year rule in order to share in contribution. All employees terminated, therefore no eligible participants as of year end. It seems that the ESOP would have to default on the note payment since the company can't make a contribution that can't be allocated nor deducted. In that case the stock would revert back to the original sellers (the owners), participants would be cashed out, and the plan would be terminated. I assume we will need a stock valuation. Am I missing anything besides the fact that they should obtain legal counsel and preferrably file for a determination letter. Is my thinking in line?

Does the indepepent value really need to be an end of plan year value? The instructions to the Form 5500 say enter the value of assets that were not independently valued IN the plan year. So, if an appraisal was done as of 3/1/03, and the plan year is 1/1-9/30/03, then it would appear that you could still answer this question no since they were appraised IN the plan year. Also, the ERISA attorney told us that the allocation of the released stock to the participants does not necessarily mean the plan would require a valuation. I guess he takes the position that a cash contribution is allocated and then shares are purchased at the leverage price. Just a thought. Thanks for all your comments.

I found the answer to my own question, I think. For coverage, you combine the SHNEC and the additonal nonelective (so all NHCEs benefit) but the two contribtions have to be tested together for 401(a)(4). Not a problem if same accrual requirements apply. More of a problem if they don't- may require cross-testing to pass.

I am having a harder than expected time trying to figure out how a safe harbor plan with additional nonelective contributions completes the Schedule T. If the 3% safe harbor is treated like any other nonelective contribution how would you test if 1) all employees are eligible for the safe harbor but 2) only employees with 2 YOS, 1000 hours and employed on last day of year are eligible for the additional nonelective. The coverage percentages is quite different under 2) than 1) Please help. Thanks

Hi, Agreed. I will ask the attorney. On a side note. By reading the definition of activities for which an independent appraisal is required, one of the activities is the allocation of assets to participants' accounts. If shares are allocated to participants accounts each year (based on compensation), does that then require an annual appraisal, am I reading too much into that, or what does that really mean. Any help is appreciated.

Hi, I'm hoping to get this thread started again because I can't seem to find a good research source for ESOPs. Small company established a leverage ESOP in 2003 and to date has made 2 principal payments on a three year note. An initial valation was done at the time of the note issuance. The first plan year has ended (9/30/03) and we're not sure if we really need to pay for another valuation. The company is dissolving this year, all employees will be terminated next month, and the company is now worthless due to loss of a management contract. I'm wondering what the steps are. Can we use the original stock value for the Form 5500 for the PYE 9/30/03 and then file a final return with a zero value, zero distribution, and a large loss? Or do we only need a final valuation reporting zero value and pass on the 9/30/03 val? If anyone can help me sort through this, I would greatly appreciate it.

Thanks so much Tom. In the paragraph that starts "the nonelective-profit sharing" did you mean to say that deferrals are excluded? You say only NONELECTIVES are included and then say deferrals are included. I presume this is the rate group test and deferrals are excluded here???? Thanks again.

Thanks! Tom, just to clarify. The 401(k) is not being included in the calculation of the EBARs and the rate group analysis. But, it is being included in the ABT if the rate groups cannot pass the RPT. What do you mean by nondiscriminatory classification test? I want to make sure I have this right. Thanks

Hi, Can someone please confirm that when running a cross-test for a 401(k) profit sharing plan, if the rate groups do not pass on the ratio percentage test so that the ABT is used, are the 401(k) contribuitons included in the ABT? Please help. Thanks!!

Thanks Appleby. It's amazing how many advisors overlook controlled group rules when setting up plans for clients. I appreciate your response. Thanks!

It was my understanding that ER contributions to a leveraged ESOP were subject to the same deductibility rules (25% of eligible compensation) but that this amount could be exceeded if the excess amount is required interest payments on a note. I want to make sure my understanding is correct. Scenario: ER contributions and corresponding note payments for the year were $350,000. $50,000 is interest and $300k is principal payments on the note. Does eligible partcipant compensation need to be at least $1,200,000 in order for the company to deduct the full $350,000 on their tax return? If it is not, then do they have a nondeductible contribution subject to excise tax? Or is it that if schedule note payments are $350k and the ER has to make at least this amount of contributions to prevent the ESOP from defaulting on the note, then it is fully deductible regardless of eligible compensation? Doesn't seem right but just want to make sure. Thanks

Doctor is 100% owner of medical corp with one employee. Doctor's wife has a trade or business that operates as a sole proprietor that established a DB plan and covers the doctors (husband) as an EE. My reading seems to imply that the group is a common controll group and that the spousal exception rule does not apply (since the spouse is an EE). So, both businesses would be 100% owned by the the doctor (he is deemed to own 100% of his wife's sole prop) and failing to cover the EE of the doctor's corp would be a problem. Does anyone see this analysis as wrong? If so, please tell. Thanks

Hi, I just want to clarify what I think this thread is saying. If a leveraged ESOP allocates shares via the contribution/note payment for the year and pays no distributions or otherwise contributes stock to the plan for the plan year, then a valuation would not be required solely for purposes of participant statements and Form 5500. We could just use the price as initially valued at the note date. However, the quesiton on the Form 5500 asks if the plan HOLDS any assets whose value was not set by a third party appraiser. In that case, it would seem that if no valuation was done for the year, we would have to answer YES and enter the most recently appraised value of the stock (both unallocated and allocated) held by the ESOP. Or does the initital valuation cover us? Many thanks!

Hi, Does a non-ERISA 403(b) account that let's participants invest in custodial accounts need a plan document or does each employee just fill out a custodial agreement and that is it? Having a hard time finding the answer. Any help is greatly appreciated. Thanks!

Hi, I am trying to understand the Form 5500 filing requirements for medical and dependent care reimbursement plans. Is is correct that a Form 5500 would be required only if more than 100 participants actually participate in the medical or dependent care reimbursement program (i.e. have at leaast $1 withheld) for the plan year AND the plan is fully insured/general assets? Also, if less than 100 participate, would the plan be required to file because assets are held in trust? It doesn't seem that flex plans would have trusts, but some TPAs say that sending them the pre-tax contributions is establishing a trust which is then subject to a Schedule I. I called the 125 TPA and they admitted they were unclear of the rules but couldn't offer much guidance. I'm concerned about missing a deadline. Can anyone shed some light?? thanks

Thanks. So it sounds like as long as the two plans are not aggregated to pass coverage, than one plan can be safe harbor and the other a non-safe harbor plan subject to ADP testing. Thanks again!

This is a great thread! Tom, you said the if a NHCE is excluded from the plan, then the 401(k) safe harbor status is lost. This is something I have failed to really pick up on and I'm glad you brought it to my attention. How would that work if the employer is a member of a controlled group that excludes employees in one of the companies? Does that essentially mean that the plan could not be a safe harbor 401(k) plan because the SH contribution is not provided to all NHCEs of the controlled group? Thanks for your help.

Thank you so much. What confuses me is that money can only get into the plan via employer contributions at this point (i.e. no dividends and no cash accont generating income). So, if the ESOP is to make the note payment via employer contribuitons the employer contribution has to include the interest due on the note for the year (around $110,000) correct? So I am thinking that we have to somehow reflect the interest portion of the employer contribution and then the interest payment to the bank. I presume that would run through their OIA account. The Form 5500 will show an ER contribution in the amount of the total note payment, so I presume that also has to agree to the employer contribution allocation reflected on participant statements. Am I making this too difficult? Thanks again for your help.

Hi, It's been a while since I've done a leveraged ESOP allocation and I was hoping someone could confirm how the allocation is run. Company makes contribution to the Plan to cover the note payment for the year. ESOP makes scheduled note payment consisting of principal and interest. Encumbered shares are released based on prin/total principal at the encumbered price. Participants receive cash contribuition then purchase stock at the encumbered price? The encumbered price is higher than the current market value, so they pay more for the stock then it is currently worth. Is this correct? The interest payments on the note go out of each participant's account as an interest expense? Is that correct? No one was paid so there is no stock to buy back from terms. Any help is greatly appreciated.

Hi, If a plan covers a 100% owner of a corporation and his daughter, is the plan subject to PBGC coverage? If stock attribution rules apply, then the daughter would be treated as a substantial owner, but I can't find information on whether stock attribution rules apply for this purpose. Can anyone help? Many thanks

Hi, I am trying to figure out if a plan that covers the 100% owner of a corporation and his daughter can file an EZ. If 318 stock attribution rules apply, then the daughter is also a 100% owner and the plan would only covers owners. Is that incorrect thinking? Help! Thanks

Hi, Thanks all. The plan covered employees, so I do not think an exception applies unless there is some other exception I am not aware of. I actually spoke to a PBGC agent and we would need to file all back forms and pay a 1% per month penalty on the past due amounts until paid. He also told me that he cannot supply me with the PBGC forms from 1980-1996 unless I can come into his office in DC and copy them. We are also in a prime summer vacation spot that is quite a bit away from DC. Right now we're scratching our head wondering why the government makes things so difficult. Other than the smoke there appears to be no fire. The plan has filed all Forms 5500, had all valuations performed, and paid benefits correctly. It is a small repair shop and has always had advisors who appeard competent. Why the "competent" advisors stopped filing forms in 1980 is unclear to me. Thanks much.