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A terminated participant was rehired the year after she was paid the vested portion of her account balance. Her nonvested amount was placed in the plan's forfeiture account at the time of her distribution and then used to offset contributions. At the time of her rehire, she had not incurred a 5-year break in service. Regarding rehired participants, the doc only mentions that if the participant pays back the distribution, the earnings and/or forfeitures that would be allocated to the other participants in the year of rehire can be reduced to reclaim the nonvested portion so that she could have her entire balance again, but only if a 5 yr. BIS has been incurred. It seems that since the doc does not address what to do for rehires who either don't have a 5 yr. BIS or agree to repay the distribution, any method can be applied as long as it's reasonable. The issue I see is that since the plan has individually directed accounts, a PR problem may be created by transferring amounts from the other participants to the rehire (who is a participant on the date of rehire). There are only 4 participants with account balances in the plan, and they are all 100% vested, so there won't be any forfeitures to use for this purpose in the foreseeable future. And, of course, the likelihood that the participant will pay back the distribution is practically nonexistent. The amount of the nonvested balance is only about $600, but we would like to have the employer handle this as appropriately as possible - what should be done in this situation?

Maybe I'm wrong but it looks like one of those "can't find anything that prohibits this" kind of things . . . . . A 100% business owner employs, among others, his sister. Since she is not an officer nor an HCE, could the business set up a new comparability-style profit sharing plan where the sister can be isolated by herself in an allocation group (via her compensation level) and get 100% of the contribution (as long as it doesn't exceed $45K)? The owner, along with everyone else, would get nothing and he's OK with that since he's worked out a cash deal with his sister outside of the plan.

I agree that a replacement plan could also work well. I vaguely recall that there's also some relief available under certain circumstances if excess assets are used for health benefits (?) Paying out what the plan calls for, i.e., 12 times the monthly benefit, as an RMD, would reduce the assets while the owner's benefit stays the same. Hopefully the overfunding can at least be reduced somewhat if the payout is greater than both the return on investment and the annual APR decrease.

We've come across a Corbel document that seems to define the years of service to be counted for the top heavy minimum benefit as years while the employee was a participant. It's been a while since I've had to do such a calc, but I seem to recall that all years of service need to be counted for TH min benefits, even those before the employee was a participant - isn't that correct? Also, the actuarial equivalence in this doc is defined as the "applicable mortality table as prescribed by the Secretary of the Treasury" which I believe is the 94GAR table. However, the interest rate is defined as those used for 30-year Treasury securities. Weren't these the interest rates that used to be called the "GATT rates"? I have several bookmarks for referencing these monthly rates, but the rates shown frequently conflict with similarly defined rates published in newsletters. Can anybody recommend a website that reliably reports the rates needed to calculate such lumps sums?

The owner's wife entering the plan will help. But him taking any kind of distribution wouldn't minimize the overfunding. His benefit in the plan would be reduced by the equivalent of what was withdrawn. The plan would have less assets but his remaining benefit would be smaller - essentially a wash. If he's at least 70 1/2 and can take a required minimum distribution, though, that would help since his benefit wouldn't be reduced.

Client has a 401(k) plan using the safe-harbor matching contribution design. Plan also allows for profit sharing contributions allocated using a new-comparability design to participants who satisfy the 1,000 hour, last-day rule. Don't ask why, but, none of the participants have ever made any deferrals - not even the owner. Instead, the owner makes profit sharing contributions every year. Now the situation arises where there are non-key HCEs eligible for a PS contribution. It seems OK to not give them any allocation at all if the cross-testing passes and top-heavy minimums are not required by virtue of the safe-harbor design (the key has >60% of the benefits). Wacky, yes, but is anything being overlooked?

Thank you for your quick replies. So, unless they're taxed as corps. and receive W-2 wages, owners/partners of LLCs, as well as partnerships, (and LLPs, I imagine) get their net income apportioned between plan contributions, 1/2 SE tax and their compensation for plan purposes, similar to how you would handle a sole prop. OK, I think I got it.

What type of compensation does the owner of an LLC usually receive - is it W-2 wages or some other type? Also, are there any quirks to what LLC compensation can be used for qualified plan purposes (in the way, e.g., how sub-s corps. should only use W-2 wages and not the pass-through income for calcs.)?

That would seem to be the safest approach, a good faith effort to make the plan whole. The make up contribution should also include estimated earnings that would have accumulated since the withdrawal.

A professor stood before his philosophy class and had some items in front of him. When the class began , he wordlessly picked up a very large and empty mayonnaise jar and proceeded to fill it with golf balls. He then asked the students if the jar was full. They agreed that it was. The professor then picked up a box of pebbles and poured them into the jar. He shook the jar lightly. The pebbles rolled into the open areas between the golf balls. He then asked the students again if the jar was full. They agreed it was. The professor next picked up a box of sand and poured it into the jar, where it filled up most of the remaining spaces. He asked once more if the jar was full. The students responded with an unanimous "yes." The professor then produced two cups of coffee from under the table and poured them into the jar, effectively filling the empty space between the sand. The students laughed. "Now," said the professor as the laughter subsided, "I want you to recognize that this jar represents your life. The golf balls are the important things - your family, your children, your health, your friends and your favorite passions - and if everything else was lost and only they remained, your life would still be full. The pebbles are the other things that matter like your job, your house and your car. The sand is everything else - the small stuff. "If you put the sand into the jar first," he continued, "there is no room for the pebbles or the golf balls. The same goes for life. If you spend all your time and energy on the small stuff you will never have room for the things that are important to you. "Pay attention to the things that are critical to your happiness. Play with your children. Take time to get medical checkups. Take your spouse out to dinner. Play another 18. There will always be time to clean the house and fix the disposal. Take care of the golf balls first - the things that really matter. Set your priorities. The rest is just sand." One of the students raised her hand and inquired what the coffee represented. The professor smiled. "I'm glad you asked. It just goes to show you that no matter how full your life may seem, there's always room for a couple of cups of coffee with a friend."

We have quite a few profit sharing plans that have 3/20 vesting and were wondering if the plans had to be amended currently to reflect the 2/20 minimum vesting requirement under PPA, or could that change just be made part of the PPA restatement that will happen a couple of years from now as long as the plan operationally uses the 2/20 schedule from now on? All help is appreciated.

Plan sponsor is changing from a C-corp to an S-Corp causing his fiscal year end to switch from 6/30 to 12/31. Their profit sharing plan also has a June year end and the pros and cons of also changing the plan year to a December year end are being considered. They would like to make a contribution and take a deduction for the resulting 6-month shortened fiscal year ending 12/31/06. If the plan year is not changed, I guess the limitation year definition in the plan document would have to be amended to the fiscal year ending within the plan year, and the total contribution for the PYE 6/30/07 would be whatever was contributed/deducted for the short FYE 12/31/06? In this scenario, it would seem that the limits on annual additions and compensation would be unreduced as there would still be a 12-month plan year. If the plan year definition was also changed to coincide with the calendar year fiscal, it seems that the limits would have to prorated to 50% of the maximum for the resulting short plan year. Are these choices accurate and are there any other aspects to be considered? All help is appreciated.

I would think that a dollar amount instead of a percentage shouldn't cause legal problems.

Thanks, everyone, for your responses. We found out that corporate trusteeship would cost significantly more than the $5,000/yr. bond premium. I wish the trustee would rethink the non-qualifying assets, but he's a real estate guy, so you can guess what his favorite type of investment is. He'll probably end up doing as Belgarath suggests - the only people currently participating or who will ever participate are family members and they all seem to get along well. The super-low quote came from one of the biggest, well-known names in the business, and, of course, the rep swears up and down that he's totally familiar with the bonding requirements and the distinctions between qualifying and non-qualifying assets. If the bond correctly specifies the coverage being sought, the insurance company would be on the hook. Realistically, though, a claim would be extremely unlikely.

We're trying to help a client obtain an ERISA fidelity bond for their qualified plan and have found a wide disparity in what insurance firms charge. He needs coverage for $2.5 million in non-qualifying assets and received quotes from two companies, one for $5,000 per year and the other for $300 per year. From your experiences, which one is closer to reality?

A few days ago I received a flyer from Sungard, who acquired Corbel, that they'll be having a three-day PPA seminar in Florida (Orlando?). You can probably access info about that from the website you posted.

Last time I calculated one of these (many years ago), the accepted method was dividing the individual's PVVAB by their life expectancy factor. The general consensus in my office is that you can't do that anymore, yet no one knows what the procedure is since the laws last changed. I may have missed something, but it seems that the 401(a)(9) regs don't specify how an RMD from a DB plan should be calculated. Can somebody please explain the procedure to do this? Thanks everybody and have a happy new year!

I actually found several hundred hits when I googled "TD 9294". The first one, oddly enough, had a link to this very site. Here's the address: benefitslink.com/taxregs/td9294.pdf And, qdrophile, there is more to my previous post than "yup", also - but you would've known that if you'd gotten past the first word. Would you care to expand a little on the topic?

We have quite a few 401(k) plans with profit sharing accounts that have 3/20 vesting and are under the impression that the 2007 safe harbor notices can be given to the participants without the plans being amended to 2/20 vesting as prescribed by PPA. Just wanted to be sure - is this correct, and when would the plans actually need this amendment? Or would it just be part of the inevitable PPA restatement that will happen years from now as long as the plan operationally uses the new schedule? All help is appreciated.

Yup. The IRS just published final regs on this a few days ago (TD 9294, 10/20/06; Reg sec. 1.401(a)-21). It applies to any notice, election or similar communication provided to, or made by, a participant or beneficiary under arrangements pursuant to Code Secs. 401(a), 403(a) and (b), 457(b), 104(a)(3), 105, 125, 127, 132, 220, 223, and 408.

Thanks for the response. Two months later I'm now forced to revisit this issue. I need to produce citations stating how RMDs from a DB plan are calculated. I've pored over 401(a)(9) and couldn't find a passage talking about paying out the annual benefit as the RMD. Does anybody know where something definitive on this topic can be found that has been issued by the government?

100% owner/participant has a DB plan where the only other participants are her husband and her father. Would the plan be required to have PBGC coverage, a fidelity bond and file a 5500, or is the father also deemed to own 100%? Likewise, would the father, who's over age 70-1/2, have to take required minimum distributions while he's still employed? All help is greatly appreciated.

I believe that as long as the document allows for it and the SPD explicitly states so, charges incurred as a result of a participant's actions can be assessed directly to the individual, e.g., the way participants can be made to pay for loan fees. I would imagine that to be nondiscriminatory, a participant who even makes one trade may have to be dinged unless the doc/SPD establishes a threshold for a minimum number of transactions before charges are applied.

Trustee/100% owner/participant wants to take $100K from his plan and either invest it in or lend it to a partnership/joint venture in which he will have a 30% interest. At first I thought he would be a disqualified person but after reading IRC sec. 4975, it seems OK as long as he owns less than 50% of the joint venture and the money is given to the business entity (and less than 50% of the joint venture is owned by the trustee's relatives or anyone providing services to the plan). Am I reading this correctly or would this be a prohibited transaction? Thanks for all help.

Company owner has a DB plan, is a deferred retiree and is taking annual required minimum distributions. RMDs were calculated by the previous TPA using Treas. Reg. 1.72 tables. The amounts paid were usually significantly less than what his annual benefit was. My first question is, aren't those tables only for calculating RMDs for DC plans? I thought that just paying out the annual plan benefit in a situation like this would suffice as the RMD and no actuarial adjustments are needed. If this is correct, would his current benefit have to be actuarially increased to reflect the under-payment of his previous RMDs? All help is appreciated.