Jed Macy

If the employment relationship was terminated when the employee was laid off, then they are not still employed at year end. But if the employment relationship did not end (i.e., they were on a leave of absence or stand down), then they were not terminated and are entitled to an allocation from a plan with an end of year requirement.

As I recall, the IRS said that is okay to calculate the safe harbor match on a payroll-by-payroll basis. Thus, you not only need not true up the match, but doing so might be inconsistent with your plan document. See IRS Notice 2000-3's Q&A-2 on page 415 of Internal Revenue Bulletin 2000-4 published 1/24/2000.

A corporation without a board is not a corporation and is out of existence. But a corporation that has a board, even though nothing else besides a qualified plan and former employees, exists.

Yes if the plan document says so. Otherwise not.

Isn't there a difference between "being out of business" and "being out of existence"? An existing corporation that no longer has a business can still sponsor a qualified plan, and its board of directors can amend it as needed, and appoint new members to the Administrative Committee as needed, etc.

FundeK, thanks for the quote from Sal. He has a very experienced eye. Neither I nor the company want to amend the plan as we prefer the flexibility of having such limits be set as needed by the Administrative Committee. But if that is the only way to do it, then we would.

FundeK, Thank you for your thorough and thoughtful response, especially the citations. Yours is the interpretation that I expected. But my goal is merely to be sure that she gets $3,000 into the plan that is not at risk of being correctively distributed. The obvious solution is to (1) have the Administrative Committee increase the maximum deferral from 25% to at least 40%, (2) have her defer $16,000 [40% x $40,000], (3) run the ADP test including her at 32.5% [$13,000 ÷ $40,000]; and (4) make the necessary corrective distributions. Or is there a way to accomplish the goal of her getting to make the full catch-up contribution without any risk of corrective distribution and yet have her defer only $10,000? QDROphile, yours is also a very much appreciated and thought provoking response. When the regulation says: "that is contained in the terms of the plan", I assumed that it really means that the deferral percentage limit must be "in the document". However, your interpretation that it is "contained in the terms of the plan" when the document authorizes the Administrative Committee to set limits, should be the IRS's position and would probably be the Tax Court's position. But my client does not want to sponsor the litigation on this issue especially if there is a simpler solution. Any additional thoughts would be appreciated.

Subject: Catch-up contributions permitted by §414(v) Assume that a single employer with only one 401(k) plan allows each participant to defer up to the lesser of 25% of pay or the §402(g) limit of $13,000 during 2004; or to $16,000 if age 50 or more. [Note that the 25% limit is not in the plan document, but rather an Administrative Committee decision.] Assume a 50 year old HCE-owner whose 2004 gross pay is $40,000 who defers $10,000 which is 25% of her pay. When doing the 401(k) test, how much of her deferrals are included? Is it all $10,000 or just $7,000? If, based on the above facts, the answer is that $10,000 needs to be included in the test, would it change the result if the Administrative Committee imposed a limit on HCEs only of 17.5%? The authority to impose such a limit is in the plan document, but the actual amount (i.e., 17.5%) is not.

I had a similar factual situation with a sister and a wife. The sister claimed that the "wife" was merely a girl friend and that no marriage took place. Since the wife could not produce a marriage certificate (nor even a joint tax return), I had the plan administrator deny both claims and sent them to court. The result was that the judge issued an order to the effect that the alleged girl friend was in fact a wife. Then the plan paid her the death benefits. Note that the plan was not a party to the court action. In short, you could send both wives to state court for an order as to which one was his wife when he died.

Does anyone have any actual experience with the DoL examining a plan that has not bought a fiduciary bond? What can the DoL do? What has the DoL done?

FACTS: Sole Proprietor ("SP") has 1 employee ("EE"). SP makes about $120,000 of self-employment income and EE is paid $20,000 per year. SP is 52 and EE is 40. ISSUE: Can SP set up a Defined Benefit Plan for 2002 that provides for the maximum benefit and also set up a safe harbor 401(k) plan, and deduct all of the contributions? MY DISCUSSION: Assume that the DB funding is about $60,000 for SP and $5,000 for EE which is clearly more than the 25% limit imposed by §404(a)(7). (Also assume that the DB plan satisfies the top heavy minimum.) If EE elects to defer 8% to a 401(k) plan, then SP can defer $12,000. But if EE does not defer any, then SP can't defer unless he makes a safe harbor contribution of 3% for EE. It seems to me that deduction of this 3% safe harbor contribution would be prevented by §404(a)(7), but the deferrals (SP's and EE's) would be deductible under §404(n) that was added to the IRC by EGTRRA. Can SP defer the $1,000 catch up regardless of any deferral by EE? Can the safe harbor plan use a matching contribution instead, and if EE does not defer, then have deferrals by SP as the only contributions (since the DB plan is satisfying the top heavy minimum)? Thanks for your thoughts on these issues.

The employer I have in mind for this plan design is one doc and 5 nurses. The doc wants to cover all 5 nurses, but wants the flexibility to allocate differently in different years without amending the document. For now he has an employee much older than himself and therefore an age-weighted allocation is too costly; but when she retires, it will most likely be his preferred allocation method. I figured that putting both allocation methods in the document now as alternate contribution types would meet his need. If I understand what you propose, it would involve defining at least 2 groups of participants to get allocations based on different methods. However, both groups would be the same participants in the case of this employer. Thanks for your thoughts.

Will this plan design be qualified? It has 5 possible sources of contributions. 1 - Safe harbor 401(k) deferrals 2 - 3% nonforfeitable employer contribution to a Profit Sharing A Account 3 - Discretionary employer contribution to Profit Sharing B Account allocated solely on pay 4 - Discretionary employer contribution to Profit Sharing C Account allocated solely on pay but integrated 5 - Discretionary employer contribution to Profit Sharing D Account allocated based on age and pay, not integrated For each year, the employer might declare contributions to any one or more of Profit Sharing B, C or D Accounts.

Here is my list of distributions that will NOT legally be rollable into a qualified plan after 2001. Distributions from: 1- a non qualified plan; 2- a qualified plan that has lost its qualification (whether its sponsor knows it or not); 3- an employee's after-tax contributions in a traditional IRA; 4- a qualified plan in the form of periodic payments that are expected to last for the participant's lifetime, or for the participant's lifetime and that of his or her beneficiary, or for a period of 10 years or more; 5- a qualified plan that was a death benefit from other than the participant's spouse; 6- a qualified plan that was to an alternate payee other than from the participant's spouse or ex-spouse's plan as part of a divorce; 7- a qualified plan so that it satisfies the minimum distribution requirements of §401(a)(9); 8- a qualified plan that was a loan deemed to be a distribution under §72(p); 9- a qualified plan that is payment of dividends on employer securities under §404(k); 10- a qualified plan that is a corrective distribution under §402(g), §401(k), §401(m) or §415; 11- a non-governmental §457 plan; and 12- a Roth IRA. Please let us know of any additions or subtractions that need to be made to this list.

FACTS: ABC, Inc. sponsors only one qualified plan which is a 25% mppp for the benefit of all of its employees. ISSUE: Does §414(v) allow the mppp to be amended effective 1/1/2002 to accept catch-up contributions from those participants who are 50 or older? DISCUSSION: §414(v)(6)(A)(i) defines "applicable employer plan" to include all qualified plans including mppp. But the catch-up contribution is described in §414(v)(1) as an "additional elective deferral". I have read many descriptions of this new plan feature that use 401(k) plans as the example but do not state that it is limited to 401(k) plans. I have also read that "any qualified plan can allow catch-up contributions" on this message board without citation. So which way is it? Can the ABC, INC. MPPP allow catch-up contributions and continue to be a mppp?

Dear MGB, The first paragraph in your response appears to be correct. However, your second paragraph merely contradicts your first paragraph as the issue that I raised was specifically whether an existing Roth IRA can be transferred into a QP. Note that the 2003 "Deemed IRA" (whether traditional or Roth) is the contribution of new money. As your first paragraph states, I see no statutory authority for an existing Roth IRA to be transferred into a QP -- ever; not in 2002 when traditional IRAs can be transferred in, nor in 2003 when a Deemed Roth IRA contribution will be allowed, nor in 2006 when Roth Deferral Contributions will be allowed. Does anyone interpret this differently?

In 2003, participants in qualified defined contribution plans may make their IRA contributions to a qualified plan as a Deemed IRA if allowed by the plan. These IRA contributions can be traditional and/or Roth up to the new $3,000 limit. In 2006, participants in 401(k) plans can make Roth Contributions up to $15,000 if allowed by the plan. In 2002, participants can roll their traditional IRA to an employer sponsored qualified plan that allows it. My questions is: does EGTRRA allow a participant to roll his Roth IRA into a qualified plan? If so, as of when?

Can a 2001 mppp be convert as of 1/1/2002 to be 401(k) plan and take advantage of the catch-up contribution in the following case: Plan sponsor is an over 50 sole proprietor, 2002 compensation = $200,000; employer contribution is 20% (i.e., $40,000). Can he make the $1,000 catch contribution (for a total of $41,000) for 2002? First assume he has no employees. Then assume that he does have employees who do not defer any amount since they are also getting an employer contribution of 20% and are eligible to make a catch-up contribution.

I did not mean that the plan would say the limit applied only to Non-HCEs. It would apply to all participants, but the result could be that it applies only to Non-HCEs because the HCEs' normal cost is under the plan sponsor imposed percentage limit. For example, HCE's normal cost is 24% of pay, Non-HCE's normal cost is 40% of pay and plan document says limit is 25% (after law has raised the §415 % limit to 100%) for all participants. Would this comply with the safe harbor? Literally, it appears to do so, but it seems to violate the spirit of the safe harbor regulation for a target benefit plan. I would like to read that you disagree.

While I like the result that literally comes from Treas. Reg. §1.401(a)(4)-2(B)(4)(iv) about allowing a plan to limit a participant's allocation to a percent of compensation without violating the safe harbor, it nevertheless does not seem consistent with the basic idea of a target benefit plan (i.e., to fund enough to get every one to a targeted amount of retirement income). When the limit is imposed by statute (i.e., §415©), you have to comply with it. But the above regulation was issued before the §415© percentage limit was raised to 100% and it seems that a plan sponsor imposed limit which only limits Non-HCEs might not get the same "safe harbor" status in these regulations if issued in 2002.

In 2002 the §415© percentage limit will increase to 100%, but the §404 deduction limit for target benefit plans will remain 25%. Assume a target benefit plan where there are several participants who have been limited to 25% due to §415©; but without the application of the §415© percentage limit, their normal cost could be much higher (even higher than 100%). In 2002, if the normal cost is allowed to go up to 100%, and as a result the total cost exceeds the §404 25% deduction limit, what do you do? Or should I ask what should you have done? Does the existing plan language limiting total cost to that which is deductible prevent the nondeductible contribution? If yes, how should the document allocate this limitation amongst participants? Can you leave the §415© percentage limit at 25% even though the law allows it to be 100%? (Or is it required to be raised?) Can you raise the §415© percentage limit to 100% but specifically limit each participant's normal cost to 25%? If you do so but the only participants who are limited to 25% are Non-HCEs does the plan violate §401(a)(4)?

You won't find any qualified plan that authorizes the forfeiture of deminus amounts because to do so would prevent the plan from being qualified. And therefore to do so and get caught could lead to disqualification. To say it yet another way: there is no statutory support for such a forfeiture.

To be qualified, a plan must be for the exclusive benefit of EMPLOYEES. Therefore independent contractors must be excluded.

With the increase of the 415 dollar limit to $35,000 for 2001 and the compensation limit remaining at $170,000, it appears that the most a self-employed participant can have allocated to him in a DC plan is $34,000. If anyone knows a way to get more than $34,000 allocated to a self-employed participant in a DC plan, I would like to know about it.

Alf, thanks for your response. Please let me know how you come up with $2,000 as I figured at best the participant could be limited to $10,000. Also what do you have in mind when you say "drafted properly"? While I appreciate and like your opinion, do you have a citation to authority for your position? ------------------