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?

TWO GAP PERIOD INCOME ISSUES: ISSUE #1: When do the new final 401(k) regulations require the payment of gap period income with corrective distributions? Is it for corrective distributions paid in 2006 (due to 2005 plan year test failures) or for plan years that start in 2006 (the corrective distributions from which will be paid in 2007)? ISSUE #2: The new final 401(k) regulations at §1.401(k)-2(b)(2)(iv)(D) and (E) provide alternative methods to calculate the gap period income. Must the method be elected in the document? or may it be made (and changed) annually?

The definition of an HCE was statutorily revised effective for plan years beginning after 1996. See IRC §414(q)(1) and in particular IRS Notice 97-45's Section V2(b) which is reproduced below: (b) A calendar year data election made by an employer does not apply in determining whether the employer's employees are HCEs under section 414(q)(1)(A) on account of being 5-percent owners. Accordingly, if an employee is a 5-percent owner in either the look-back year or the determination year, then the employee is an HCE, without regard to whether the employee's employer makes a calendar year data election.

A target benefit plan provides for a funding of a benefit of 50% of pay. For the sole owner of the plan sponsor this produces the desired contribution for himself and an acceptably low contribution for his younger employee. Then the employee quits and is replaced by an older employee. In fact the new employee at 68 is 3 years older than the plan's retirement age. It seems to me that her normal cost is going to be several times her annual pay. In years past this was limited to 25% of her pay by §415©. And now it is limited to 100% (since her annual pay is less than $41,000). If he contributes 100% for her and 25% for himself, then it appears to me that 75% of the contribution for her is not tax deductible. And further that he may incur the 10% excise tax on the nondeductible contribution. Hopefully, you can lead me to a different conclusion.

For an employee who was originally hired on 1/1/2002 and was not employed from 3/1/2003 to 2/28/2003, her Period of Service under the elapsed time method on 12/31/2004 is 710 days. The total time elapsed between her original date of hire and the 12/31/04 valuation date is 1095 days but is reduced by the 385 days of her Period of Severance since it exceeds 1 year. How much is she vested on 12/31/2004? It depends on the definition of Period of Service in the document. If the document's definition uses the Rounding Method, then the answer is 2 years, but if the definition uses the Truncate Method, then the answer is 1 year. See Treasury Reg. §1.410(a)-7(d).

AnnieP, Thanks for the straight forward answer to my question. I now agree with your calculation and see the error of my ways. And thanks to Mike Preston et all for the rest of the discussion which is interesting and useful.

An integrated profit sharing plan calls for a 5% contribution of total pay plus 5% of pay in excess of the SSWB. For 2003, an executive participant whose total pay is $224,330.46 gets $15,650; [5% x $200,000 + 5% x ($200,000 - $87,000)]. How much would a sole proprietor get if his SEI were $224,330.46? My calculation which is in the attached acrobat file either gets him an additional $282.50 or has an error in it. Is it correct? If not, why not? Thanks for letting me know. Calc_SP_Cont.pdf

IDEA #1: For those employers that (1) suspect that not all of their employees will be honest and (2) are willing to vest their benefits sooner than statutorily required, you can include in the plan, a BAD BOY clause which merely puts the bad boy on a statutory vesting schedule. This works well for the participant who gets caught in year 4 where the vesting schedule for bad boys is a 5 year cliff. IDEA #2: For contributions not yet allocated during the current year to the bad boy, you should be able to avoid allocation based any compensation that he did not earn, but I'm not sure that doing so would be consistent with their plan document nor ERISA. After all, many employers don't really think that their employees EARN their pay. IDEA #3: After conviction, get the criminal court to include restitution to the employer in the sentence; and be sure to include the unearned, excess benefits in the amount of restitution. IDEA #4: Get a civil judgment, and if there are no assets other than those of the plan, pay them out to the participant's non-IRA account but not until the Sheriff is waiting to attach them.

It is my understand that the IRS' position is that the plan document must authorize deferrals in advance of them occurring. Thus I suspect that they won't recognize a retroactive amendment. I recommend a prospective amendment to your plan that leaves the document silent as to the percentages of pay that are permissibly deferred; and just leave it to the plan's Administrative Committee. Here is the language that I use and for which I have received favorable DLs: The Administrative Committee (1) shall determine a range of deferral percentages from which Participants may elect, (2) may set lower percentages for Highly Compensated Participants, (3) may prescribe the form on which elections are made, and (4) shall set the conditions related to frequency and advance notice for starting, stopping and changing elections.

The issue of hardship pay outs has two distinct aspects to it. First is the hardship withdrawals that are allowed from Deferral Accounts of 401(k) plans to currently employed participants. Second is a hardship distribution to formerly a employed participant from any account (not just their Deferral Account). This is usually found in plans that do not allow benefit distributions immediately upon terminatiom of employment. If the document does not provide for this, then there is no basis to allow a hardship distribution to a terminated participant. When faced with the need to get some benefits paid to a terminated particpant before we know how much to pay from a plan that provides only for total distributions, I have used the "2 check" total distribution method. Pay him $2,500 now and the balance as soon as you know how much.

When you ask: "Can we wait . . . ?" That is a legal question, and a good question. Probably the best answer is yes if to pay it sooner than funded means that you are paying him with other participants benefits. As a practical matter, I usually pay it without waiting because the amount of the accrued contribution for the terminated participant(s) is a low percent of total plan assets. However, if it represents a large percent of assets (because it is a young plan), then you might not have enough funds to do so. The other issue you raised is whether it is "as soon as administratively feasible" to wait. The standard of "as soon as administratively feasible" applies to the plan's Adminstrative Committee and not the plan sponsor. And it is the plan sponsor's right under the plan document to delay funding until the extended due date of its tax return.