mming

Thanks Austin for the speedy reply. I assume 'coverage' refers to the % of nhce's benefiting being at least 70% of the % of hce's benefiting. This is a great point you bring up because it's a small employer and it looks like it'll be a problem. They have one hce and 4 nhce's, of which 3 may waive participation. The 3 want to waive because they're maxing out in a 401k plan at another company where they work. You only get one 415©/402(g) limit per year no matter how many different employers' 401k plans you participate in, right? I suppose using a safe harbor match design in this plan instead of the 3% QNEC design would avoid their need to waive participation while still being included in the coverage test as long as they don't defer anything.

Perhaps I'm overly concerned that 'safe harbor' sometimes means give an allocation no matter what, but I was wondering what the consensus is on the following: If a plan uses the 3% QNEC safe harbor design, would the sponsor still be obligated to provide it to a participant who would prefer to waive their participation in the plan when they become eligible? Also, I know that catch-up contributions can be in addition to the 402(g) limit and the dollar limit on annual additions, but could they also be in addition to the 100% of compensation limit on annual additions (e.g., when a profit sharing contribution added to a participant's deferrals exceed 100% of their compensation? Thanks in advance for all help.

Since the entity applying for the ID# is the plan and not the sponsor, check the 'trust' option in the first screen instead of 'sole prop'. The inconsistency I find is that the application sometimes won't go through unless you answer the questions regarding 'principal activity of business' and 'line of merchandise sold; specific construction work done; products produced; or services provided', which technically are n/a.

Employer's DB plan has a 10/31 YE whose limitation year is defined as the calendar year that ends within the plan year. Because the plan is fully funded and no contribution can be made, they are considering adding a DC plan so that something can be contributed. Assumedly, the new plan would also have a 10/31 YE. If the limitation year in the new DC plan is defined the same way as the DB's, it appears that there wouldn't be a problem if only profit sharing contributions were made. However, if they opt for a 401k plan, wouldn't the deferrals have to come out of the compensation that was paid only during the two month overlap between the PY and the limitation year? If this is true, defining the limitation year the same as the plan year would seem more practical, but I was wondering if there was anything in the law that prevents an employer from having two plans with different limitation years. I know this would be difficult to keep track of, and I can't say I'm sure how their CPA would take deductions if contributions to both plans would be allowed some time in the future, but we're trying to find the simplest way for them to make contributions while their DB plan is fully funded. All help is greatly appreciated.

Does mandatory income tax withholding apply when a total distribution amount that's less than $1,000 (but more than $200) from a profit sharing plan is made due to a participant's death? Also, can the beneficiary roll over the amount (directly or otherwise) to an IRA, even if the document doesn't specify so? All help is greatly appreciated.

Client wants to establish a new 401(k) plan with a matching contribution and a profit sharing option. Deferrals would begin in 2008 but he would like to make a profit sharing contribution for 2007. Would it be acceptable to have the plan's effective date be 1/1/07 even though the doc won't be signed until the end of the year? In other words, can the adoption date be later than the plan entry dates (1/1/07 and 7/1/07) even if all of the employees have been asked on several occasions over the past year and have indicated that they would not defer given the chance? The opportunity for a match was explained to them. He and the few employees he has would all be eligible for a 2007 PS allocation. Although it can't be considered a safe harbor plan for 2007 since a SH notice wasn't issued, could the plan be considered safe harbor for 2008 if it's drafted effective 1/1/07 to contain a regular matching contribution provision in the same amount as a safe harbor contribution, and a 2008 safe harbor notice is currenlty issued? Can this work without a safe harbor amendment since there weren't any deferrals for 2007?

I believe that the limit is based on the compensations of only those eligible for the respective plans.

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?