mming

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?

I'm with jpod - go for the good karma. And besides, that money will probably never be associated with the plan seeing how most investment accounts in qualified plans are registered with the employer's ID and/or name, but that's a whole other discussion..........

The participant count for a calendar-year plan as of 12/31/06 was 86. On 1/1/07 and 12/31/07 the counts jumped to 105 and 121, respectively, the first time the plan ever had a count of over 100. The plan was considered a small plan due to the BOY nature of the 80-120 rule for 2007. The participant count as of 1/1/08 remained slightly over 120 but dropped to 71 by 12/31/08 and probably will never go over 100 again. The sudden and significant increase and decrease in the participant count was due to the fact that the employer has high turnover and it seems the TPA failed to process distributions for about a year or so, and then the new TPA cleaned everything up in 2008. I could not find anything that would justify allowing the plan to file as a small plan for 2008 and I would like to be sure before I tell the client they have to get an audit for the plan just because the payables piled up due to the TPA's neglect - I'm sure many of you know that the audits are not cheap. Is the employer forced to file as a large plan and get an audit just for this one year? All help is greatly appreciated.

I would imagine that's discriminatory. Your best bet may be to change the PS allocation to new comparability and have each participant defined as their own allocation group, then try to limit the NHCEs to 5% of comp (or 1/3 of what the HCEs get as a percentage). I suppose if the ones to be excluded are very young and the owner is very old and gets max comp, the employer could set up a DB/401k combo. The 401k could get very specific about who's eligible while the owner and the excluded ones receive benefits in the DB that pass cross-testing, but, again, the demographics would have to be just about perfect for this arrangement to be more favorable. It would be preferable, however, if the select NHCEs would be set in stone to avoid having to amend annually how the eligible class of employees is defined.

The sponsor is a construction firm who keeps many employees "on call" , sometimes for over a year, until their services are needed. They are reported as employees with zero compensation and no hours worked during these periods, but not terminated. Many of these employees became participants in the PS plan during the previous year, but will not be receiving an allocation for this year due to their lack of compensation. If they had a compensation, they would get an allocation since the plan uses new comparability and they would be eligible for a gateway allocation (plan is top heavy). If they are considered not benefitting, 410(b) fails. I suppose one way to avoid this is to have the employer consider them terminated during the year so they wouldn't be entitled to the gateway amount, but if the only reason they're not getting an allocation is a lack of compensation, can one say they are "benefitting" in a twisted, yet legal, way? Has anyone seen this type of situation before?

I believe you are. According to the test, the most he could have deferred normally is $12,500 and he would still be afforded an additional $5,000 catch up.

The sole owner/employee of LLC #1, which sponsors a DB plan, also owns 50% of LLC#2. The DB plan has paid LLC #2 to assign his 50% ownership in LLC #2 to the plan. I'm guessing that both LLCs are a controlled group due to the effective control rule since the owner of #1 would still be considered owning the 50% interest in #2 since he's the only participant in the plan, not to mention that the "assignment" was probably a prohibited transaction. As a result, the employees of #2 could be eligible for benefits under the plan due to the CG situation. Is all this a correct interpretation? Another issue (that may be very small compared to the PT and CG ones) is whether this assignment runs afoul of the rules regarding how much of an employer a plan can own. It's my understanding that a plan can hold qualifying employer securities if their value doesn't exceed 10% of the plan's assets at the time of the transaction (assignment was more than 10%). But since qualifying employer securities are defined as either stocks, marketable obligations or public partnership interests and both LLCs are small, privately-held firms, does this rule not apply here? Thanks in advance for all help.

This week it was discovered that a participant in a profit sharing plan was paid in 2008 a small distribution (approx. $300) from the sponsor's corp. account by mistake. Would filing a 1099R now showing the plan paying the benefit in 2008 be appropriate? Or would showing the corp. on the 1099R as the payer be better? Should the trust reimburse the corp. account now, and if so, how would it affect 1099R reporting?Given the small amount of the distribution, the sponsor is leaning towards the first option without making a reimbursement because he would just explain it was taken out of the corp. account in error should it ever become an issue. There will also be the issue of whether or not to report it as a distribution for 2008 on Schedule I and whether to show the participant as paid out on the 5500. Payment was made as a taxable distribution directly to the participant. What would be the best way to handle this? All help is greatly appreciated.