mming

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.

I recently found something from the IRS that specifically addresses this issue. In their fall '07 edition of Retirement News for Employers, they wrote that in the instance of an employer's failure to execute an employee's election to defer, the employer can make a QNEC for the employee and go through EPCRS (going through EPCRS for a small amount seems nuts, but what else are they going to say?). The article goes on to say the QNEC should be 50% of the missed deferral adjusted for earnings.

AndyH, thank you for your response. If a participant is 40% vested at the time the plan is frozen, keeps working full time afterwards while no key employee benefits, does the participant's vesting keep increasing or is it frozen at 40%? I always thought vesting keeps increasing but 416© seems to contradict that.

After reading IRC Sec. 416©(1)©(iii) I understand that the TH min benefit stops accruing once a plan is frozen, but it also seems that vesting also stops since years of service are to be disregarded - is that correct? Going on to 416©(1)(D), even though it appears that YOS may be disregarded under subsec. ©, comp from such disregarded years can still be used for the high-5 average. So, it would be possible for a frozen benefit to actually increase due to a new, larger high-5 that occurs after the plan's benefits are frozen? This can't be right, can it? All help is greatly appreciated.

I would say both, although it may be viewed as one infraction since it's a cause and effect kind of thing. Although, as a safe harbor rule, deferrals are expected to be deposited within a week after they've been segregated from an employee's paycheck (which may have occurred here once the money was actually taken from the paycheck), I believe that, given extenuating circumstances, a deposit is technically allowed up to the 15th day following the month in which the deferral was made. Depending on the time of the month it occurred, that can be as long as 45 days after the money is deferred. Also, I think that there is some relief for plans with <100 participants in that they have easier justification regarding 'extenuating circumstances' than large plans do.

A new comparability plan is not top-heavy and each participant is their own rate group. The owners are getting maximum allocations, the NHCEs are getting 5%, and certain non-owner HCEs are not getting any allocations. I'm thinking this is OK if all the testing passes but wanted to ask since it looks kind of strange. In the same vein, if the plan were top-heavy, these HCEs could be allocated only 3% and not be subject to the gateway rules, correct? All help is greatly appreciated.

Whether or not the trustee accepts responsibility, couldn't the plan's fidelity bond reimburse this amount? I've never seen a plan make a claim on a bond - what would the repercussions be? I imagine any premium increase as a result of the claim would be much less than reimbursing the lost amount outright. Would the trustee's responsibilities be curtailed in any way after a claim?

I'm not sure how to interpret IRS Sec. 318 as it pertains to Sec. 416 regarding the treatment of family members. A plan covers a 10% owner, his wife and her mother. No question the wife is considered having the same ownership as the 10% owner and is, therefore, deemed to be a key employee. Is the mother-in-law also considered to be a key employee? All help is greatly appreciated.

Unless the plan document specifies otherwise, I would play it safe and distribute no more than $6,000 so that the loan balance is no more than 50% of the remaining vested amount. I see many documents that invoke the 2-year accumualtion rule for in-service distributions - this may support limiting the amount of the distribution if the plan has this provision.

Yes - is this permissible? He will soon own 100% of B.

Thank you both for your responses. I should've given more detail - no controlled group exists currently, prior to the proposed merger. I was given add'l info this morning - the family actually has 3 DB plans with only family members employed. Joe owns 100% of co. A which sponsors plan A - Joe, his daughter and her husband are the only employees and they all participate. Joe also owns 60% of co. B which sponsors plan B - this is the overfunded 1-man plan previously mentioned and he is the sole employee. The other 40% is owned by his sister who will now be selling her interest to him - this is what prompted the discussion about what, if anything, would change regarding the plans and should they be merged. Joe's daughter owns 100% of co. C which sponsors plan C. She participates in the plan along with her husband, her adult daughter and Joe. Previous discussions indicate that there was no sec. 1563 attribution. The 3 cos. have no dealings whatsoever with each other or with mutual clients, so no ASG exists. All participants have accrued benefits at the 415 limit in each respective plan - some capped by the $ limit, others by the high-3 limit. This may be another issue as I was under the impression that after adding up the benefits an individual has in all of the plans they participate in, the total cannot exceed the 415 limit - am I mistaken or is this only the case in controlled group and ASG situations? Whether this is right or wrong, I'm thinking that merging plans A and B would cause Joe to have two max. benefits in the remaining plan A - not legal. However, terminating plan B would cause a reversion - is there a solution? Thanks again for helping me navigate through this mess.

Two DB plans are sponsored by different businesses owned by the same family. All participants of both plans are family members and they insist that there are no controlled group or attribution issues. If one plan is an overfunded 1-man plan, can it be merged with the other plan (which is not overfunded) in order to eliminate a potential employer reversion, i.e., use the excess assets from the 1-man plan to help fund the other plan? All help is greatly appreciated.

If the plan is the type where each participant has control of how their account balance is invested, and stock in the corporation is one of the investments allowed, a participant may be able to accomplish this without a prohibited transaction occuring. I would recommend the particpant refer to the plan's Summary Plan Description to see if these conditions apply.

The Sierra Club once asked if I knew how many forests I've single-handedly wiped out over the years. I gave them a copy of the Paperwork Reduction Act. Still haven't heard back.............

I'm preparing my first SB and was hoping to get an answer to what may be an obvious question. Regarding the weighted average retirement age (line 22), in a small plan where both participants' NRAs are 65 (the document defines NRA as age 65), is the attachment described in the instructions needed? Are the instructions implying that it's only needed if particpants retire at different ages? All help is greatly appreciated.

That would be a safe approach, to contribute whatever is necessary in order to have the participants be in the position they would have been in if the error had never occurred. What may complicate this is if the matches would've been invested in equities if they were done in a timely manner - should you reflect market losses? Probably 'yes'.

DB plan is terminating and all benefits are being paid out in June. Elderly owner/participant who has been taking required minimum distributions from the plan has elected to directly roll over her lump sum payout to an IRA. If I remember correctly, the 2009 RMD exemption applies to both DC plans and IRAs; does this mean that she is not required to take an RMD this year even though the benefit was in a DB plan for part of the year? All help is greatly appreciated.

I agree that it would be prudent to err on the side of caution and assume that notices do not have the option to extend their deadlines like forms can. How about the deadline for 401(k) testing? March 15th fell on a Sunday this year. I couldn't find any indication that it's OK to refund excess amounts on Monday the 16th and I would guess that it's another deadline that should be handled like those of notices.

I've always been in the habit of filing a final schedule B along with a plan's final return. In the case where the plan had an EOY valuation date, the B would be all zeroes (except for the BOY RPA entries) since the plan would be fully distributed before the last day of the year. For plans with BOY valuations, I would do a regular valuation just like every other year except the projected benefits would equal the accrued benefits with 100% vesting. The half dozen or so actuaries that I've worked with over the years never indicated any problem with either of these approaches, regardless of whether the plan termination date was in the final year or the prior year. Recently, a well-respected peer with 20+ years of experience pointed out that it's never a good idea to file a B with all zeroes, so a plan with an EOY val date should change it to BOY. With a BOY val, if the plan termination date occurs during the final year, a B should be filed. However, if the term date was in the prior year, a B should not be filed. Incidentally, I'm hoping this approach is OK since I have a plan that would "work out" if this was the case (barring keeping the EOY val date). My concern, other than filing a 5500 for a DB plan without a B, is, wouldn't one have to do a val just because a val date has elapsed? Is it not necessary because a val is being done within a year of the distributions? Using actual dates for a plan with a 12/31 PYE, consider a plan term date of 11/15/08 and a val being done as of 12/31/08. A val is then not done on 1/1/09 (after change to BOY), all assets are distributed 6/1/09 and a final return is filed without a B. Has anyone on this board handled a terminating DB plan this way?