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A husband and wife each own 50% of Company A and there are no other employees. Company A (not the indivudual owners) owns 56% of Company B which has several employees. To me this looks like a parent-subsidiary group and a controlled group situation does not exist. However, there's been recent evidence that instead of A owning the 56% ownership in B, it's actually one of the 50% owners of A that owns 56% of B. If this is true the two companies would be classified as a brother-sister group and a controlled group situation would exist due to the attribution of spousal ownership (each spouse would be deemed to own 100% of A). Am I interpreting IRC sec. 1563(a) correctly?

I've had similar experiences with CDs held by a couple of the largest, most well-known brokerage firms. Their statements show unrealized gains or losses depending on whether the prevailing CD rate is higher or lower than the rate of the CDs held! Since we feel such gains/losses are not appropriate for CDs, we disregard these adjustments. I have a related question concerning accrued interest on CDs. Some investment firms include accrued interest on CDs in the total year end value and some don't. Do most of you include the accrued interest in your EOY accounting or do you just show what is actually received (the docs we use do not address this issue)?

Two participants in a six-life self-directed 401(K) plan have had the correct amounts deposited to their respective accounts and investment choices, but incorrectly allocated between their deferral and matching subaccounts. There's about $2,000 - $3,000 for each shown as deferrals that should have been allocated to the matching subaccount. The plan does not allow loans or hardship withdrawals and all the matching contributions are safe harbor and 100% vested. Between the hassles involved in getting the investment company to make the adjustments, the employer's reluctance to correct the problem due to his perception of a pr issue with the employees, and the calculations entailed in figuring out the exact transfer amounts and earnings adjustments, we sure are tempted to not fix this. What reasons should be given to the employer to have this fixed? As long as money from this point on goes in correctly, and all previous amounts are in the correct investments in the aggregate for each participant, should this even be an issue? All help is appreciated.

I can't see a reason for filing a 5310 after the fact. Plans sometimes get audited after they file a 5310 in a timely manner and receive an approval letter, so you probably don't want to file one now. Many plan administrators argue that a 5310 should never, ever be filed since the approval letter won't make you bulletproof. Exceptions apply if the plan is absolutely humongous, or unless there are individuals receiving $1M+ in distributions.

Two participants in a six-life self-directed 401(K) plan have had the correct amounts deposited to their respective accounts and investment choices, but incorrectly allocated between their deferral and matching subaccounts. There's about $2,000 - $3,000 for each shown as deferrals that should have been allocated to the matching subaccount. The plan does not allow loans or hardship withdrawals and all the matching contributions are safe harbor and 100% vested. Between the hassles involved in getting the investment company to make the adjustments, the employer's reluctance to correct the problem due to his perception of a pr issue with the employees, and the calculations entailed in figuring out the exact transfer amounts and earnings adjustments, we sure are tempted to not fix this. What reasons should be given to the employer to have this fixed? As long as money from this point on goes in correctly, and all previous amounts are in the correct investments in the aggregate for each participant, should this even be an issue? All help is appreciated.

A client would like to have a new plan set up with an eligibility requirement of 6 months and 500 hours of service. I was previously told that if a plan requires less than 12 months of service, an hours requirement cannot be used. I've also seen volume submitter documents that allow you to specify a number of hours required for each month during the eligibility period (seemingly even if the period was less than 12 months long). Is not having an hours requirement for less than 12 months of service a safe-harbor rule or can you have an hours requirement no matter what the circumstances are and no matter how short the eligibility period is? All help is appreciated.

For the umpteenth time over a period of years, we've been solicited by a firm that claims it can reunite terminated participants with their long-forgotten benefits that are currently held by "government agencies" and are just waiting to be picked up. We figured they're talking about the PBGC. Their literature does mention a hefty fee that will only be paid from the distributed benefit resulting in no "out of pocket cost to the participant". I'm guessing their fee isn't predicated on the participant signing a promise to pay after receiving a distribution, as the cost to chase down non-paying participants would be huge. Would they have a deal with an investment firm that'll pay them the fee once they get the investment? Even if they themselves are some kind of investment firm subject to SEC rules, how can they legally charge a fee that's far in excess of what similar firms charge for fees, commissions, etc.? Of course, their literature doesn't have a phone number.

He can't. The fiduciary is on the hook for everything. And consider how the question on the 5500 will look that asks whether 20% or more of the plan's assets were invested in a single security, etc.

Pax, was that recently?

A DB plan covers only the owner and his wife who each consistently have annual compensations that are less than $10,000. Each has an annual benefit in the plan of $10,000 due to its de minimus provision. They are considering adding a deferral-only 401(k) plan, but I remember somebody mentioning a while back that you can't have more than one plan when your compensation is less than $10,000 and you're getting a de minimus benefit in a DB plan. Is anybody familiar with this? It seems there's not a lot of guidance about this topic available. The employer does not have any other employees. All help is appreciated.

From what I have seen in large metropolitan areas, a multiple of revenue is the main determinant of sales price. At the height of the economy, 3x revenue was possible; at the lowest point, you were lucky if you could get 1x. Informally guestimating current conditions, 1.5x may be possible. I suppose the range may be narrower in smaller communities. I, too, would be curious to hear about what others have experienced.

I don't think the employee should be taxed on interest accrued on an amount that was previously distributed. There are circumstances where the plan must continue to accrue interest on deemed distributions for plan reporting purposes, but when the participant terminates and their net benefit is paid out, the amount accrued on the deemed distribution is negated.

If a 401k plan that uses the 3% NEC safe harbor terminates during the first month or two of the plan year, is it OK to base the 3% contribution on compensation for that short period, or are there a minimum number of months of compensation that must be used?

There wasn't sufficient time to satisfy the notice requirements when the sponsor first mentioned terminating the plan. My question comes down to what period of compensation must you use to calculate the 3% safe harbor NEC. The sponsor wants to make as small a contribution as possible, so if the plan's terminated 1/31/06, would he only be obligated to deposit 3% of the participants' January compensations? I have to think there are exceptions to the 12-month rule in Notice 98-52 when a plan is terminating, making it OK to distribute all of the assets mid-year and file a final return for the pye 12/31/06, similar to non-safe harbor plan terminations?

Plan uses the 3% NEC safe harbor design and client wants to terminate plan asap. It seems that this calendar year plan would have to remain in existence until at least 12/31/06 given that IRS Notice 98-52 requires a safe harbor plan year to be 12 months long. Would making the 3% contribution in October based on estimated total 2006 compensations be allowable so that the plan can distribute all benefits by the end of the year? How is this normally done? All help is greatly appreciated.

It seems to me that if you provide the safe harbor notice, the plan must make the 3% SHNEC contribution. Generally, if the notice requirements are made and the SHNECs are contributed, the plan would be considered safe harbor. The results of the 70% test addresses the allocation method, not whether the plan is safe harbor.

Thanks for the response. What I forgot to ask is whether a participant must always terminate employment before receiving an annual early retirement benefit (if the document doesn't address this). Would it be viewed as a type of prohibited in-service distribution if the owner kept working?

A DB plan covers the owner and several of his employees. The owner borrowed $50,000 in 2003 but the loan went in default during 2004 and was considered a deemed distribution. He now wants to take out another $55,000 from the plan and an early retirement provision is being considered in order to accomodate this intent. The plan is somewhat underfunded but there would be more than enough assets left after taking out this additional amount to pay all of the other participants' benefits. A colleague seems to remember hearing about a rule stating that an HCE cannot receive a distribution that is more than 50% of the plan's assets under certain circumstances. I'm not familiar with this - has anyone heard of this rule? I've looked through many research materials and haven't been able to find a reference. If this rule does apply, and since he would have taken distributions in two different years, would there be no problem if the plan's assets at the time of the $55,000 distribution were at least twice the sum of $55,000 plus the deemed distribution amount (I'm guessing brought up with interest to the date of the $55,000 distribution)? While trying to find this in the regs I stumbled across Treas. Reg. 1.401(a)(4)-5(b) and Rev. Rul. 92-76 which gave me something else to worry about. If I understood them, a restricted employee (as this owner seems to be) cannot be distributed more than what he would receive as a monthly annuity for the year? There were three exceptions to this, but none of them apply in this case. I've spoken to some TPAs who've said they have HCE clients who receive varying partial lump sum distributions every year, sometimes skipping a year or two, with no systematic method. Is the Treas. Reg. and the Rev. Rul. only applicable under certain circumstances? Thanks for any advice.

Also, the plan document may state whether or not it can pay expenses (in conjunction with the DOL conditions). The remaining participants bearing more cost than they ordinarily would have should not pose an operational failure. Although a 50% reduction in the number of participants is significant, there are some plans that charge the administration fees to those who are participants at the beginning of the year, regardless if anyone terminates during the year. If this is a fee that can be paid by the trust and the document gives the administrator the choice of whether or not to charge the participants, the admistrator may consider having the participants pay only a portion of the fee in order to avoid personnel issues. I think that any expenses not paid by the plan can be a business deduction.

I think I've read too many interpretations from too many sources and now need clarification. Regarding the reduction of the $5,000 threshold, I am under the impression that if it's reduced to $1,000 and a missing participant has a vested interest of <$1,000, the trustee does not have to automatically roll it over into an IRA for the participant. In other words, nothing changes in regards to distributions of <$1,000. If this is true, why would a plan consider decreasing the threshold below $1,000 or even bring it down to $0? Eliminating it completely would force terminated participants with vested interests of <$200 to fill out election forms where they previously were not needed. All help is greatly appreciated.

I also believe an amended filing is not necessary. If I remember correctly, the instructions for Form 1099-R even say that a 1099-R should not be filed for a payout consisting entirely of residual earnings.

Although we had many, many conversations and approached them from many different sides, the end result was a $500 reduction. Their "reasoning" was that the MPA would be way over $3K considering the tax liability created by the plan losing its qualified status and the sponsor losing the deductions for contributions, paying taxes on investment earnings, etc., even in this tiny plan. True, but they still showed a lack of perspective. BTW, we were told that $3K is a default amount in most cases. Better than nothing I suppose. And, of course, they said at the end that the main reason for the inflexibility was that the IRS is in a big yank to generate revenue, more than they normally are. Lame. Are you working on one of these currently?

The owner and sole participant/employee of a profit sharing plan that has been filing 5500-EZs every year recently got divorced and now his ex-wife is an alternate payee with a segregated account balance in the plan. A colleague tells me that the plan can still file an EZ. I'm thinking that since the alternate payee is afforded the status of a beneficiary (e.g., getting copies of SPDs, SARs, a certificate showing her balance) a 5500 should be filed until the year after she is paid out. Who is correct?

The owner and sole participant/employee of a profit sharing plan that has been filing 5500-EZs every year recently got divorced and now his ex-wife is an alternate payee with a segregated account balance in the plan. A colleague tells me that the plan can still file an EZ. I'm thinking that since the alternate payee is afforded the status of a beneficiary (e.g., getting copies of SPDs, SARs, a certificate showing her balance) a 5500 should be filed until the year after she is paid out. Who is correct?

Plan was requesting a favorable determination letter from the IRS when they discovered that the CRA amendment from last year was adopted two weeks late. It was forwarded to audit cap for a document failure where they issued a letter stating the sanction to be a non-negotiable amount of $3,000. This was after it was explained to them in writing that the late amendment had absolutely no operational impact on any participant (this a basic profit sharing plan - no transportation fringe bfts.), the total trust assets are only $20,000 and it was amended only 2 weeks late. Rev. Proc. 2003-44 states that the sanction for audit cap is a negotiated percentage of the Maximum Permissable Amount ( MPA seemingly defined as the amount charged if they were to throw the book at you). Also, "Sanctions will not be excessive and will bear a reasonable relationship to the nature, extent, and severity of the failures." Have any of you had any similar experiences? We are the tpa and are taking responsibility for the oversight but we hope there is a way to reduce the amount. The assessment of a non-negotiable sanction of $3,000 on such a small trust for such a minor infraction seems excessive. Is there anything that can be done? Thanks in advance.