Doghouse

OK, I don't want to seem like all of my plans are audited, but I had another one some years ago where there was a frozen profit sharing plan in which only the owner had an account balance. For reasons that pre-dated my involvement, it had like $30 million in it. Of course his prior TPA had him filing an EZ. We filed a regular 5500SF for him which triggered all kinds of problems, including the fact that it was impossible to obtain a fidelity bond covering $30 million of non-qualifying assets. The fact that no employees had a balance in the plan was immaterial in EBSA's analysis. OK, what else you got? I am sure I had an audit addressing it.

A year or so ago, one of my clients had an IRS audit of their 0% money purchase plan. This plan was created primarily as a rollover vehicle for illiquid assets from a terminated profit sharing plan. All but the owner was excluded from participation, primarily so that the plan could file a 5500-EZ and also avoid the Summary Annual Report requirement. The problem was in the rollover provision. Even though the plan had provision for rollovers to be made by any employee, whether otherwise eligible for the plan or not, the ability to roll into the plan wasn't really presented to staff, because it wasn't seen as a desirable option for them. The IRS took the position that this was a benefits, rights and features problem. We appealed the finding on the taxpayer's behalf. Unfortunately, I left the firm at that point, so I'm not sure how or if it was resolved. The point being... you sometimes have to watch out for potential problems on what would seem to be a no-brainer.

Thanks Lou and Your Majesty, what you are suggesting is a possibility, but I'd still like to know the answer to my question. The compensation amount for the 6 days is really low so the QNEC may be preferable to keeping the plan going for an extra 5500.

As I said, it was an asset sale (see first paragraph). The question is not whether they need to do the 3% safe harbor, the question is whether they can count the 3% safe harbor toward ADP testing. What do you think?

We are TPA for a safe harbor nonelective plan that is terminating. The practice was sold (asset sale) on January 6, and all the employees terminated, but the corporation was kept alive and continued to generate income, which resulted in the owner making a full 401k contribution. I believe i am correct in stating that to terminate the plan, the 3% safe harbor contribution must be made AND the plan must be subject to ADP testing. The testing would not go well, as there were no deferrals taken from the 6 days of employee pay. It would seem to me that the best thing to do would be to make a QNEC, since the 6 days of compensation won't be much. Right now, I'm thinking that we need 4% of pay to pass testing. The question is whether we can apply the 3% safe harbor contribution toward testing, such that the employer would only need to fund an additional 1%. i would think so, but want to make sure before we give it the thumbs up. Any assistance during this very busy time is most appreciated! Dog

thanks flyboy - is what the client wants the answer to be relevant?

I have to believe that a similar question has come up before, but if it has, I sure can't find it. For 2011, the plan sponsor had a safe harbor nonelective contribution due. The sponsor also "declared" a profit sharing contribution. The 2011 and subsequent valuation reports were prepared on this basis. Neither the safe harbor contribution nor the profit sharing contribution was ever made, although both were apparently deducted. Since the safe harbor contribution was required, my understanding is that it must be accumulated with interest and deposited, using an EPCRS correction method. However, since the profit sharing contribution was NOT required, it seems to me that there is no making it up at this point, and that the correct action is to revise prior valuations to reflect that it was not made. Or, is the correct action to just make the contribution now and revise the tax return (which should be done anyway)? Any thoughts? There are many positions I could talk myself into. Thanks to anyone who replies! Dog

We (TPA) have taken over a DB plan for 2013. It turns out that the 2012 contribution was funded late, and the 2012 Schedule SB reflects a funding deficiency. However, the sponsor never paid the excise tax. They are now asking whether there is any particular advantage to coming forward and paying the tax at this time, vs. waiting until the IRS asks about it. Can anyone think of anything? Keep in mind that the funding deficiency goes away in 2013. Dog

So, in a word, the answer is "no".

Is there anything in the way a 1099-R for an RMD is completed that would clue the IRS and/or the participant that the distribution was in fact an RMD, and thus not eligible for rollover? Any help appreciated.

The DOL guidance indicates that eligibility for the DFVC program is not available to one person 5500-SF filers who are not covered under Title I. So the beg-for-mercy letter is probably the best approach. DOG

There may be some room to use the constructive ownership rules of 1563 to result in substantial ownership. It's been done. See 1563(e)(1).

We've had many plans with a minimum 2% deferral - which was implemented to limit the expense and HR effort of account maintenance for very small contributions. We have taken the position that thsi can't be done on a safe harbor plan, which has specific rules about restrictions on deferral amounts (that may be what you're thinking of). I also seem to recall that there was an issue about current availability for 410(b) purposes if the minimum is unreasonably high, but I don't recall a specific percentage being mentioned.

I think the issue is whether both the replaced loan and the replacement loan must be treated as outstanding for the purposes of the 72(p) limit. It is obviously not always the case that they are.

Any thoughts on the following situation would be much appreciated. I'm getting a headache. 1/1/2009 participant takes out general purpose loan, term 5 years. 1/1/2010 participant refinances this loan as a principal residence loan, term 10 years. 5/1/2013 participant requests to refinance this loan again, for a new principal residence. Additional principal will be borrowed. The 10 year maturity date from the first refinance will be retained. Some additional facts: Vested account balance including all outstanding loan balances = $80,000 Outstanding loan balance immediately prior to new refinance request = $24,000 Highest outstanding balance in prior 12 months = $26,000 Is this new refinance permissible? I would be a lot more comfortable with it if the original loan hadn't been for a 5 year term. Dog

Everything is taxed in the year distributed, with the exception of 402(g) (excess deferral refunds), in which case the contribution is taxed in the year deferred and the earnings are taxed in the year distributed. Dog

Yup!

If I'm reading the question correctly, taxable in year paid, per Publication 525. Dog

For what it's worth, I had a similar situation a few years ago and spoke with the PBGC about it. Their "unofficial" answer was that a managerment company is not a professional services employer. Their rationale was that it does not require any special certification, education, etc.

What third plan? There were two plans that terminated, and the remaining assets were transferred in kind to the newly established MP.

I am an ERPA representing three plans for a very small professional group. The first two plans (a defined benefit and a profit sharing) terminated and the participants were paid out. The owner was unable to liquidate the remainder of the assets and ended up establishing a 0% money purchase plan to hold those assets. The eligibility for the money purchase plan was limited to the owner, on the basis that no other contributions would be coming in, so why subject it to SAR's and the like. An important point is that the distributions to the staff had already been made at the time the money purchase plan was established. Now all three plans are being audited by the IRS, and they have raised the question of whether the eligibility restriction on the money purchase plan violates nondiscrimination in benefits, rights and features. Has anyone had any experience with this kind of situation? Any thoughts? Dog

Thank you, kevin. Interesting thread. Our document has the same language you quoted relative to 401(a)(4). The crazy thing is, it's under the "New Comparability Allocation" section - and my plan has a pro-rata allocation formula, so I don't see that this section would have been "activated". I think we use the same document provider.

Thanks Kevin. As I've mentioned, with discretionary contributions, your #2 and #3 are more of an art than a science. If you do run across the prior thread with Mike P., it would be very helpful. BG, don't know the answer to your question. My situations are all permanent switches to cross testing, one person per group, and the -11(g) amendment is just a transition thing. Dog

John, the situation is fairly similar. But in my case, the desire is to give one of the participants (albeit an HCE and key) a zero. That's the part that gives me cutback concerns. Of course you could argue to make a very small allocation on a pro-rata basis and then the -11(g) amendment to make the bulk of the contribution on a general tested basis, which wouldn't really be substantially different from what you describe. I don't know, maybe it's all good. It just doesn't feel as right as I wish it did.

The reason I posted it again is because of threads like this one: http://benefitslink.com/boards/index.php?/topic/50781-cross-testing-again/ No one in my particular situation seems to be overly concerned about the loss of prototype status. My concern is, at what point does this become abusive? You could play this game where you allocate something very small, like 1/2 % of pay, pro-rata, and then adopt an 11(g) amendment adding cross-testing, since no failure was necessary to get there. I think this is all in accordance with the letter of the law, but is it in accordance with the spirit... and does that even matter? Dog