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Not sure if I have this right. A top heavy 401k plan uses matching contributions to satisfy the SH requirements. A PS contribution will be made with the owner getting over a 15% allocation, so a 5% gateway applies to the NHCEs. The SH match can be used towards both the gateway amount for the NHCEs and the 3% top heavy contribution for the non-key HCEs. The matches and PS allocations are combined for each participant to calculate the EBARs/rate groups, and the deferrals are then added to those totals for the average benefit testing. Is this correct? Thanks in advance for all assistance.

A husband and wife fully own a business that sponsors a profit sharing plan. Both of them and their 2 adult children are the only participants and there are no other employees. The husband and wife are the only ones who have an account balance. I have read that a bond is required when a plan covers participants other than the owner and spouse, but what if these other participants do not have account balances?

Add Raymond James to the list.

From a design standpoint, would it be wrong to say that all PS plan docs should be drafted to have a new comparability allocation method and not specify on what basis the testing should be done, that way you could always use an integrated allocation as a worst case scenario?

Each participant in this case is their own allocation group. The document doesn't address how the testing should be done (it's an FT William doc). Just in case we're using different terms for the same thing, let me describe how the testing has been done in the past. The annual testing is solely based on the current year's allocations. This year, if all participants receive let's say 5%, the owner has the largest EBAR, so the "rate group" test fails, and the average benefits test also fails. The only way to make both tests pass (a necessity?) would be to reduce the owner to 3.5%. I suppose the lack of testing guidance in the document gives you maximum flexibility on how you can test, making it OK if everyone received the 5% - is this a correct interpretation?

So, it sounds like unless the employer amends their allocation method in their document to either a pro-rata method, or one that's integrated with the SS wage base, for example, the owner would be forced to allocate to everyone a greater percentage of pay than what he himself would receive. Thank you for your reply.

A profit sharing plan is originally set up with a new comparability allocation method and works fine for a few years until the employer's demographics change drastically - many of the younger employees were replaced with workers who are older than the owner. The plan now cannot pass the cross-testing even when everyone (including the owner) receives the same percentage of compensation as an allocation. I remember hearing a while back that in a scenario like this you can always "default" to a pro-rata allocation and not have to worry about cross-testing, even if the document does not specifically state this - has anyone else heard of this?

Perhaps this language should be included in termination amendments going forward. However, in this case there was no such amendment prior to the 1/1/10 plan entry date - does this mean the plan will have new participants to be included in the participant count on the 5500? How have you handled plan terminations a year after their effective date? All help is greatly appreciated.

We have a few calendar-year DC plans that terminated in mid-2009 whose trustees didn't pay out all of the benefits by 12/31/09. Since 1/1/10 is a plan entry date, do employees who meet the eligiblity requirements become participants or can there never be new participants entering a plan after its termination date? Also, I can envision a couple of the trustees dragging their feet on the payouts to where a full year could elapse from their plan's date of termination. I remember some time ago hearing that a termination goes away after a year if the assets have not been distributed, making the plan an active plan again - is this accurate? BTW, the plan terminations were done via board resolution, so waiting for IRS approval of the terminations is not the reason for the delay.

Thank you for your reply. I, too, would rather they not go through with this, at least until it's been established that it's not a PT. The problem is the owner has already lent herself $50K, so that's not an option. It seems that it all comes down to how "joint venturer" is interpreted.

The sole owner of a plan sponsor, who also participates in the plan and is the trustee, would like to lend her sister money from the plan. The sister is not involved at all with the sponsor or the plan, however, the concern is whether she would be considered a "joint venturer" under the party-in-interest/disqualified person definitions because she and the trustee are 50/50 owners of a rental property. The rental property has nothing to do with the sponsor or the plan. Is "joint venturer" meant to be only in relation to the company sponsoring the plan, or does it apply to anything they're both invested in? All help is greatly appreciated.

I don't believe so, as the instructions don't state that the exemption is conditional on how or if prior filings were made.

A husband owns company X and his wife owns company Y. They are a contolled group, as Y manages X. Although it was explained to them that they would only need one plan to cover all employees in both companies, they insist on having a plan for each company and not covering the other company's employees, preferring a new comparability 401k/PS plan with every provision identical. X has many NHCEs while Y only has the owner and will never have NHCEs. I'm thinking that the maximum PS contribution (and perhaps the deferrals and match) to plan Y would be determined by including all participants from both plans in one general test with the wife being considered an HCE. Is there a way for each plan to be tested separately so that larger contributions can be made to plan Y? X and Y are leaning towards having both plans use a matching contribution safe-harbor design, which I understand will have to be tested for meeting the top heavy requirements if a PS contribution is made (presumably with both plans once again tested together). For good measure, X and Y have different FYEs, but I assume having different PYEs won't make things worse if the plans are tested in a consistenct manner every year. Are there any other complications that may arise out of this type of arrangement? Thanks in advance.

I don't believe there is any relief for a plan with no active participants. Even if the plan was terminated and paid out by 12/31/09, an amendment accounting for PPA would still be needed before distributions occur. Just make sure the plan is terminated and paid out by 4/30/10 or I think it would need a full-blown EGTRRA restatement, if one hasn't been done yet.

The owners of a company were the only employees eligible to participate in the first year of the plan. During this first year they invested their account balances in 100% of the company's qualifying employer securities (which the doc allows). Ancillary employees enter the plan during the second year and can choose to invest from a menu of mutual funds, but do not have the choice of QES since there are no shares available. Is there a way to construe the plan as not being disciminatory due to the literal unavailability of the company stock? Thanks in advance.

I've seen this situation handled a little differently. The provision in the doc regarding the timing of distributions could be considered the latest that a payout can occur. If someone is paid sooner that that it's considered a precedent and not an operational or doc failure since the plan is being less restrictive. The precedent establishes, however, that all future distributions must occur at least as quickly as the first early distribution occurred, but it sounds like most successive distributions didn't in this case and that may put you back where you started regarding the audit. Of course, this methodology assumes that only ancillary employees were paid early and not HCEs or keys to create discim issues. I'm also guessing that the audit is general in nature at this point and has not targeted specific distribution issues.

The testing in a new comparability plan works out to where the 5% gateway for all NHCEs would be OK. There are only 2 allocation groups - the HCEs and the NHCEs. Although the document defines compensation as the amount paid while an employee is a participant, it's my understanding that for top heavy purposes you must allocate 3% of the participant's compensation for the entire year. There are a couple of NHCEs who enter the plan mid-year whose TH min would exceed 5% of comp for 6 months. I'm wondering if I'm looking at this the right way - for testing purposes, their TH min allocation would be about 6% of their 6 month comp. Is this acceptable when all other NHCEs are getting 5%, or would you have to bump them all up to 6%? All help is greatly appreciated.

I would have the participants sign either a new loan agreement or an addendum to their existing agreement to be on the safe side. Another concern would be whether this new fee would violate what the plan's SPD says regarding specific loan fees that get deducted from a participant's account - an SMM may be in order.

Right. The memo states that one of the main ways they're going to track these plans down is through their FDL program, though I'm not sure how that will show evidence of the stock purchase. Other than sales, it would be interesting to know how the ROBS scheme was first justified.

GBurns, I took it for granted that at some point in the past ROBS have been OK'd by the IRS, given the abundance of companies pushing this design. After much research, I had tentatively arrived at the same conclusion you did - no evidence of specific IRS approval - and just wanted to make sure something wasn't overlooked on my part. MSN, we are in the very early stages of talking to the employer and determining whether or not we will take them on as a client, so formal counsel hasn't been brought in just yet. However, it looks like it will be soon. I agree that at this point the best option would be to get rid of the plan and start anew. Supposedly, the IRS has put together a list of 9 companies that are marketing these arrangements slated for investigation so far. None of my colleagues have ever heard of ROBS so it was good to see this issue addressed. Thank you both for your assistance.

We're considering taking over a plan that has had a ROBS transaction in the recent past and were reviewing the memo released by the IRS on 10/1/08 regarding their guidelines on this matter. It details the many possible design flaws that ROBS plans have, as well as the IRS' intention of intensifying their investigations of these types of plans. It seems that the IRS is now backtracking on an idea that they originally approved of, (kind of like the 412i plans)? The employer's attorney, who sold them the plan, is also backtracking. The plan's approved prototype document allows the plan to invest up to 100% of its assets in qualifying employer securities; the plan appears to have been operated as the document dictates in every respect. The IRS memo makes it hard to believe that even if everything was done right, the employer may still not escape unscathed from an investigation. What would be the best way to insulate the employer in this situation - a private letter ruling, EPCRS - or is there nothing that can be done after the ROBS transaction has occurred? All help is greatly appreciated.

An EZ can be used if the owner is the only one who has a benefit in the plan, as long as the sponsor is not a member of a controlled group or affiliated service group. The 2nd page of the EZ instructions has the complete list of conditions.

Thank you all for the responses. I was hoping there would be some kind of exception to 404(o)(4)(A) for 1-man plans, but that doesn't seem to be the case. So, since we can use the benefit increases and COLA adjustments for 412 purposes but not for 404, it may be a common occurrence for small plans to have the min. contribution exceed the max. when benefits are increased - another twist in the DB roller coaster ride.

I remember reading something about this and now I cannot locate the cite to double check. A plan amended their benefit formula from 2% per year to 6%, effective for the 2008 year. I seem to recall that when something like this happens, you cannot use the extra 50% of the funding target for the maximum contribution for the year following the change, i.e., 2009 - is this accurate? Are there any other considerations due to the new rules when the formula is increased? All help is greatly appreciated.

Our only exposure to the audit cap program occurred several years ago and was not a good one. Let me first say that the defect in our client's case involved a document failure, which, operationally as well as monetarily, had no impact on the plan - hopefully they'll show more flexibility when large numbers are involved. The client was slapped with a minimum sanction amount and the IRS made it clear early on that there will be no negotiation (their thorough disregard of the "facts and circumstances" was quite impressive). After much kvetching they decreased the sanction amount slightly, but the end result was still rather ridiculous. Again, maybe they draw a harder line on the small stuff, or maybe they're more lenient on operational failures. Wish I had a better experience to relay. Best of luck and please let us know how things turn out.