Jed Macy

An officer/shareholder/employee is a greater than 2% shareholder in an S-corporation. In Box 1 of his W-2, health insurance is included which is not considered wages for Social Security and Medicare purposes. The S-corporation has a SEP. Is the correct wage to determine the shareholder’s SEP contribution based on: W-2's Box 1 (Wages, tips other compensation) or Box 5 (Medicare wages)? Or is it Box 1 adjusted by subtracting the included health insurance premiums? Comment: it seems more Simple to use Box 1 as is; however, it seems odd to allow a retirement contribution based on health insurance. Your thoughts? And if you have a citation to authority, that would be appreciated.

What is the IRS requirement to fully correct for mistakenly missing one eligible employee out of about 200 and not allowing him to defer into the 401(k) plan?

ABC, Inc. sponsors a money purchase plan. A participant terminated years ago at age 61. At age 70½, he began being paid just the minimum required by §401(a)(9). Now at age 82, he dies. His spouse (age 66) is the sole beneficiary of his remaining account balance. How long before the plan (to remain qualified) must require her to take her benefits out?

In the Explanation of Provisions - Overview to the 2007 Roth Final Regulations (TR §1.402A-2) is the following from page 22 with my underlining & bold: As noted in the preamble, to the extent that a portion of a distribution is includible in income (determined without regard to the rollover), if any portion of that distribution is rolled over to a designated Roth account by the distributee rather than by direct rollover, the plan administrator of the recipient plan must notify the IRS of its acceptance of the rollover contribution. The final regulations clarify that this reporting is only required to the extent provided in Forms and Instructions. Such Instructions will specify the address to which the notification must be sent and will require the following information: (1) the employee's name and social security number; (2) the amount rolled over; (3) the year in which the rollover contribution was made; and (4) such other information as the Commissioner may prescribe in order to determine that the amount rolled over is a valid rollover contribution. Thus, until relevant Forms and Instructions are released, no reporting is required. Thus, despite what the Rollover Chart indicates, it appears that it is (or at least was) expected that non-direct transfers are allowed; and that someday reporting of them would be required. Has that day arrived?

How does a recipient qualified 401(k) plan report (and thereby comply with TR §1.402A-2 Q&A-3) receipt of a roll-in to its RothK accounts from a new participant's previous employer's RothK account where the rollin was not directly transferred but rather first paid to the participant and then paid in? I didn't find any clues in the 2012 instructions to Forms 1099-R or 5498. Did I miss it? Is it some other form?

Tom, So it seems the best argument for my calculation that produces a total contribution of $9,580 is from §401(a)(4)'s anti-discrimination requirement. It goes like this: every other participant who entered mid-year on July 1, 2011 was a Non-HCE and only got his compensation from entry included; therefore it would (and should?) be impermissibly discriminatory to include a full year's compensation for the HCE who also entered on July 1, 2011. Any more thoughts? Thanks, Jed

Tom, I agree that "there are problems with that". You ask: "so are you saying his contribution would be x% * 245,000 + 5.7% * (245,000 - 1/2 TWB)"? And I say no, I think the "right" answer is: x% * ($245,000 * 50%) + 5.7% * (245,000 * 50%) - 1/2 TWB) Or to put the same equation more specifically: [5% * $122,500] + [5% * ($122,500 - $53,400)] = $9,580 Your thoughts? Jed

Does any one have any experience with a spin-off of about half the participants to a second plan? Let me be clearer. Plan ABC has 150 participants and attaches CPA-audited financial statements to its Form 5500. In mid-2012, about 75 of the participants and their account balances are spun off to new Plan XYZ. For 2012, Plan XYZ would not have to attach CPA-audited financial statements to its Form 5500 although Plan ABC would. For 2013, neither plan would have 100 participants and thus no audit. Does it matter why the spin-off occurred? Could it be only to avoid any audit requirement for 2013? Are there regs or court cases on point?

I get $173,950.94. What am I doing different? SEI = $173,950.94 SET = 17,901.87; half of which is $8,950.94. $173,950.94 minus $8,950.94 = $165,000 x 20% = $33,000 + $17,000 + $5,500 = $55,500.

Tom, Assume that the mid-year new entrant is a new 50% partner (that is, self-employed) and that instead of "hired" in May 2010; that was when he joined as a partner and was never an employee. Let's say his 2011 gross pay was $300,000 but it was really self-employment income. The plan only allows the 5% profit sharing contribution to be based on pay from entry. This partner entered on July 1, 2011. How much "compensation" should his profit sharing be based on? Is it $245,000 because his SEI is considered earned on the last day of the year? Is it $150,000 because his SEI is considered earned for plan purposes evenly through out the year? Is it another amount? Is there guidance on this issue in the Code or Regs? Might using $245,000 run afoul of §414(s)(3)? Thanks for your thoughts, Jed

FACTS: A new employee is hired in May 2010 and becomes eligible to enter the Profit Sharing Plan on July 1, 2011. The plan provides that only his compensation from entry is included in the allocation of profit sharing. The allocation of profit sharing is integrated with social security by allocating 5% of pay above the SSTWB (social security taxable wage base) of $106,800; and then 5% of all pay. During 2011 his total compensation is $400,000 and from July 1 to Dec 31, 2011 it is $200,000. Q1: Is his 2011 plan compensation limited to $122,500 (half the statutory limit)? Q2: If yes, how much is the applicable integration level: $106,800 or half that at $53,400? Unfortunately the plan document doesn't address this. But I assume it isn't a choice and that there is a regulation that does. If you know which one, please let me know. Thanks.

What is required (and when) to change from the prior year testing method to the current year testing method? As I recall from IRS Notice 98-1, this change needed to be amended into the plan before the start of the first year to which it was to apply. Now that they issued Treas. Reg. §1.401(k)-2© which says a plan may change from prior year to current year at anytime, does this mean, for example, that a plan amendment making this change could be signed on March 1, 2007 that is retroactive to the plan year beginning January 1, 2006 after it learns that it could pass using the current year method but not using the prior year method?

Since no one responded, perhaps I should have worded my question to ask if any one agreed instead of "disagree"? Our first choice would be to allow the death beneficiary of a nq plan to have the same flexibility as a qualified plan, but that clearly isn't permissible. Our second choice would be to allow the Plan Administrator or the plan sponsor's Board to decide when and how the death beneficiary would be paid; this is what we believed we could do before §409A was passed. But now we must have an "objectively determinable" structure. So some of my clients have tried to maintain some flexibility after a pre-retirement death by: 1 - Setting the default pay out to be 5 annual installments starting 14 months after death 2 - Allowing the participant to elect any thing else if he does so before he becomes a participant 3 - After a pre-retirement death, allowing the beneficiary to spread the annual installments over more than 5 years if she delays the first installment and does so 12 months in advance of the first installment. My question to you is: if the death beneficiary does not have to delay her first installment for 5 or more years, how long must she? Is one month enough? Sorry, but I did not look at a distribution of employer securities.

Here are some issues related to choices a plan sponsor might need to make when adding Roth to a 401(k) plan: 1 - If roll-ins from other plan's Roth Account are to be allowed, is it permitted to accept them if the participant inherited it from a deceased spouse? From a non-spouse? 2 - Same question as #1 except that spouse didn't die, just became an ex-spouse: can participant roll-in to a Roth Account the amount received pursuant to a QDRO? 3 - Participant terminates employment and receives a distribution from the Roth Account from a 401(k) plan, can his next employer accept it from him into its 401(k) plan's Roth Account? or only if it is directly transferred from the former employer's plan?

ISSUE: What flexibility does Proposed Treasury Regulation §1.409A provide for structuring the payment of death benefits from an account balance NQ plan? BACKGROUND: Preamble page 71: "Where the time of payment is based upon the occurrence of a specified event (such as death), the plan must designate an objectively determinable date or year following the event upon which the payment is to be made." Preamble page 72: "Once an event upon which a payment is to be made has occurred (i.e. death), the designated date generally is treated as the fixed date on which, or the fixed schedule under which, the payment is to be made. Accordingly, the recipient may change the time and form of payment after the event has occurred, provided that the change would otherwise be timely and permissible under these regulations." Prop. Treas. Reg. §1.409A-2(b)(1)(ii) on page 189: "(ii) In the case of an election related to a payment not . . . . on account of death . . . , the plan requires that the payment with respect to which such election is made be deferred for a period of not less than 5 years from the date such payment would otherwise have been paid . . . . MY THOUGHTS: This seems to say the 5 year delay requirement does NOT apply to death-benes. Thus, for example, if the plan said that the death-beneficiary's first payment was to be 14 months after the participant's death, then the death-bene could (within 2 months after the participant's death) elect to delay the start of payments, but not accelerate them (but also not need to delay payment for 5 years as the participant would have to if he were making the change). Does any one disagree with this? Further, it seems that the plan sponsor could continually amend that part of the NQ plan that deals with the time and form of payments to a death-bene as long as the effective date of each amendment was at least 12 months in the future. Does any one disagree with this? Alternatively, the NQ plan document could merely enable the Participant to specify the time and form of payment to his death-bene; provided that any change to it would not be effective for at least 12 months. Does any one disagree with this?