AndyH

I suggest you do a search. There are several discussions related to this. I believe that the general consensus is NO, a SEP may not be aggregated for 401(a)(4) testing because it does not meet the definition of a "plan" under 401(a)(4).

Interesting comments, thank you. I work on DB plans mostly as well, and the data correction issues are obviously much different there. Nobody is harmed by less than 100% accurate information because there are no account balances to build on, no contributions to divy up, and no assets to individually allocate (precisely). But I would submit that if a cross tested DC plan is within the 11-(g) period, then use of a wrong date of birth is not a disqualifying failure. In the small plan world, census is often completed by people named "Bambi" who have trouble grasping the concept of census. Sorry to any Bambi's out there, but I could not resist because that is a true current story.

In the situation that prompted this question, the proprietor lost a major business contract, so his Schedule C drops substantially, to possibly $0 after deducting employee costs. If he has substantial investment or other taxable income, it might be worthwhile for him to continue the plan covering his wife only. Even though the resulting contribution would create a net operating loss, this loss would then be available to offset other taxable income. Or so it would appear. I suppose one complication might be that the business must exist for the purpose of creating positive income. Maybe the wife's contribution would not qualify as an ordinary and necessary business expense? Thanks for the feedback.

Agreed.

I'm not sure I follow this logic. It seems to me that if a test fails, a test fails, and you have until the following 10/15 to correct it, provided that you correct it by providing something extra, and fully vest it. What does the reason for a data error have to do with this? Under what circumstances would you not correct it if you are within the 11-(g) period?

But you would deduct the pension cost attributable to the spouse on Schedule C, just like as if it were wages, albeit on a different line, right?

I'll give this a shot. ERISA permits numerous funding methods, assumptions, and techniques for purposes of determining cash contribution requirements. This caused one company's financial statement pension disclosures to be difficult to compare to another because the methodologies might be apples versus oranges. It could also be difficult to determine for solvency/lending purposes if a plan was well funded or if in fact a sponsor had a huge debt. FAS#87 was a way of standardizing such reporting so as to allow comparisons, and to theoretically allow someone to determine whether or not a plan sponsor had a huge debt related to the pension plan. Since the FASB was not in a position to alter ERISA, it required a second computation using a more rigid and standard method and assumption set.

I was trying to determine if the prohibibition on a pension contribution on behalf of a sole proprieter creating a net operating loss could be sidestepped by shifting wages and thus pension accrual to a spouse. And if they are filing a joint return, could it then be used to offset other income that would otherwise be taxable? Or, to put it another way, if a DB contribution is not fully deductible because it exceeds Schedule C income, can the spouse's contribution be effectively deductible by creating a loss and offsetting other income? The second situation might occur accidentally.

Because of all the effort already expended upon this issue, I am appending my question instead of starting anew. DB plan for self employed person includes his wife (W-2) employee and a regular employee. Assume DB minumum contribution is $300,000, $150,000 "on behalf of" the proprietor, $100,000 on behalf of the wife, and $50,000 on behalf of the employee. Question #1: Is the contribution on behalf of the spouse treated like the contribution on behalf of the employee (Schedule C expense) or is the cost of the spouse treated as an addition to the cost for the proprietor? Example, Ignoring the SECA tax, if the net Schedule C income after deducting the employee's and wife's cost is negative, is this loss permitted or does it become $0? Thanks for any help.

There is not a single Effen actuary on the list. (I could not resist on a Friday afternoon preceding vacation).

And don't forget that the guy could be calling himself an EA which also means Enrolled Agent. I've seen people get confused over that before.

Non-integrated safe harbor unit accrual DB plan is being amended to provide a second tier solely to 10 HCEs. Plan might change from 1.50% x all YOS to 1.50% x all YOS plus (1.25% of comp exceeding $90,000) x YOS on or after 1/1/2004 Plan has been around for 40 years or so. Is there anything we're overlooking that would prohibit testing the entire benefit over all years of benefit service, i.e. taking advantage of all the safe harbor years now? And I mean anything other than the 35 year cumulative permitted disparity limit. I think this is fine but would prefer second and third opinions just in case. Thanks.

Well, of course the document does not address these matters, but I decided that your approach is the fairest. There are actually two things happening in a DB loan default, a deemed distributution of the loan balance, then the offset at the time of payment. The offset does not take place until there is a distributable event so it seems to me that 417(e) is applied to the entire accrued benefit at the time of offset, then the deemed distribution and interim interest is debited from the lump sum (assuming such a choice is made). Thanks for the feedback.

This is not what you asked for, but I think you will find this useful: http://benefitslink.com/boards/index.php?showtopic=25021

But just to elaborate, the Average Benefits Test might pass, for example, if there were 401(k) deferrals aggregated with it, or if one or more of the NHCEs were old and the plan was tested on a contributions basis. That might be a bad design, but it is possible.

2 points for Belgarath. The document may be more restrictive than the regulations. Thanks. i.e., WDTDS?

1. Yes 2. Wrong. You can still try to pass the Average Benefits Test. You have not failed coverage until you've flunked both tests. Your ratios will pass the Nondiscrimination Classification Test. It comes down to the Average Benefits Percentage Test. Those are the two components. 3. No difference. 4 and 5. Yes, nonexcludable NHCEs must always be in the general test regardless of coverage results.

I think that 95% of us (or more) do not think that the groups need to be reasonable. But they need to be defined.

Well, if that is true then I'll fold my cards. The example I was thinking of relates to hours crediting for time paid while not performing services. But I'll add that the ERISA Outline Book (at least an old edition that I am looking at) appears to support my argument that if pay is not determined on an hourly rate, but on a unit of time, then the number of hours "regularly scheduled" is relevant. But I don't see this in the DOL reg except under credit for time not worked.

Thanks, Harwood. Interesting. But if someone salaried is expected to work 37.5 hours but is a workaholic, under what category (1), (2), or (3) would that be credited? It is not paid, therefore it is not required to be credited, it seems to me. And I do think I can find a counter Q&A that I read somewhere.

Sure, provided that it was clearly specified in the plan document in a manner that precludes employer discretion (now I'm sounding like the IRS),

Yeah, a thought or three. Wording of 3 (1)leaves excessive discretion to the Plan Administrator, (2) Calls into question whether benefits are "definitely determinable" , and (3) abuses the rules that the IRS has thus far not yet challenged. I think such a design would be unethical. You might get away with it. That does not make it right.

MGB, thank you for that fascinating comment (as usual). I find the word "lost" within that context quite ironic given recent financial reporting irregularities. I wonder if the FASB properly defines "lost". (Just a little sarcasm towards the FASB there.) Where can I find similar "lost" stock values? Hmmm. Read the (footnotes to the) financial statements I suppose. So AA bond rates go up and stock values double???? They didn't teach me that in Economics or Math. So, (stretching a bit I admit) if the Fed raises rates a couple of times pension professionals should all buy large Caps?

Here is the regulation to which I refer, as a starting point. I submit that the empoyer's stated requirements for the position govern for a salaried person. Where does it say that 40 hours a week is inappropriate for a salaried person, even if such person happens to work 50 hours per week "voluntarily"? Section Number: 2530.200b-2 Section Name: Hour of service. -------------------------------------------------------------------------------- (a) General rule. An hour of service which must, as a minimum, be counted for the purposes of determining a year of service, a year of participation for benefit accrual, a break in service and employment commencement date (or reemployment commencement date) under sections 202, 203 and 204 of the Act and sections 410 and 411 of the Code, is an hour of service as defined in paragraphs (a)(1), (2) and (3) of this section. The employer may round up hours at the end of a computation period or more frequently. (1) An hour of service is each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer during the applicable computation period. (2) An hour of service is each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence, (i) No more than 501 hours of service are required to be credited under this paragraph (a)(2) to an employee on account of any single continuous period during which the employee performs no duties (whether or not such period occurs in a single computation period); (ii) An hour for which an employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workmen's compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of service are not required to be credited for a payment which solely reimburses an employee for medical or medically related expenses incurred by the employee. For purposes of this paragraph (a)(2), a payment shall be deemed to be made by or due from an employer regardless of whether such payment is made by or due from the employer directly, or indirectly through, among others, a trust fund, or insurer, to which the employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer or other entity are for the benefit of particular employees or are on behalf of a group of employees in the aggregate. (3) An hour of service is each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the employer. The same hours of service shall not be credited both under paragraph (a)(1) or paragraph (a)(2), as the case may be, and under this paragraph (a)(3). Thus, for example, an employee who receives a back pay award following a determination that he or she was paid at an unlawful rate for hours of service previously credited will not be entitled to additional credit for the same hours of service. Crediting of hours of service for back pay awarded or agreed to with respect to periods described in paragraph (a)(2) shall be subject to the limitations set forth in that paragraph. For example, no more than 501 hours of service are required to be credited for payments of back pay, to the extent that such back pay is agreed to or awarded for a period of time during which an employee did not or would not have performed duties. (b) Special rule for determining hours of service for reasons other than the performance of duties. In the case of a payment which is made or due on account of a period during which an employee performs no duties, and which results in the crediting of hours of service under paragraph (a)(2) of this section, or in the case of an award or agreement for back pay, to the extent that such award or agreement is made with respect to a period described in paragraph (a)(2) of this section, the number of hours of service to be credited shall be determined as follows:

DB plan has outstanding loan which is being treated as defaulted in year of distribution. PVAB way over $5,000, so distribution cannot be forced. Loan is not going to be paid back. Plan has a lump sum option which will almost certainly be taken. Participant is below NRD, is agreeing to the distribution. One approach might be to take the outstanding loan balance, project that to NRD using actuarial equivalence, determine the accrued benefit equivalent and subtract that from the accrued benefit. That would cause the participant to lose the benefit of the 417(e) rate on the accrued benefit presuming that the 417(e) interest rate is below the AEQ rate. One might instead argue that the lump sum should be the PVAB of the total accrued benefit and the outstanding loan balance should be debited from that. Opinions (other than that loans in DB plans are bad ideas for this reason!)?