mming

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.

First time I've encountered this - the FSA interest rate for a plan is higher than 175% of the federal mid-term rate needed to calculate the 412(m) charge. Does this mean that there is no charge for just making the whole contribution on the minimum funding deadline and not making any quarterly contribuitons? Doing the calculation literally would result in a credit, but I don't suppose it would be appropriate to reduce the contribution by not making quarterly contributions. Does anyone know whether it's acceptable to just show zero for 412(m) charges in this situation? All help is greatly appreciated.

Thanks for the input and the link. I wanted to avoid maintaining two schedules as much as possible, but in this case it makes about a $45K payout difference. Luckily it's a small plan.

A profit sharing plan will maintain two vesting schedules - the old 5-year cliff schedule for pre-2007 contributions and a 2/20 schedule for PPA on contributions for years after 2006. For the 2007 year no contributions were made, however, a forfeiture was reallocated. Section 904©(1) of PPA says that the accelerated vesting requirement is effective for contributions made for plan years beginning after December 31, 2006 and doesn't specifically mention forfeitures. Also, the forfeitures that were reallocated in 2007 were derived from pre-PPA contributions. I'm not entirely sure whether the PPA vesting schedule should be applied but am leaning towards doing so, erring on the side of caution - interpreting sec. 904 to also apply to forfeitures no matter what year the contributions they came from were for. Is this the correct way to handle this situation? All help is greatly appreciated.

Maybe it would be simpler for the TPA to pay the employer and then have the employer make a restorative payment to the plan. I imagine the TPA could be considered a party in interest since it provides services to the plan and a prohibited transaction could be created if they make a deposit. I've seen employers make restorative payments without going through any IRS correction programs, however I'm not sure whether that's OK.

An employee was given a loan from his employer's qualified plan before he became a participant. The Pension Answer Book specifies this scenario as a prohibited transaction since the employee would be considered a party in interest. However, the instructions on Form 5330, though they list most of the definitions of parties in interest, do not reference this situation. I'm thinking this is just an oversight and the loan should still be considered a PT. Would that be the correct approach? BTW, the employee eventually became a participant in the plan from which he borrowed from but I have to think the loan still remains a PT.

No deferrals were made during the first year of a 401(k) plan and now the employer has informed us that he will not be making a profit sharing contribution. Are you still expected to file a 5500 showing zeroes everywhere on the Schedule I including the asset values at the end of the year, or would you just call this first year a mulligan and only start filing 5500s once the plan has actual assets (or at least a receivable contribution at the end of the year)? Since, technically, employees would be considered participants benefitting in this plan because they had the option to defer (and possibly impact their ability to contribute to an IRA if their compensation is high enough), I'm begrudgingly guessing that a filing is needed. Would that be the correct action to take? All help is appreciated.

I, too, have come across such a situation only to find a lack of guidance. The largest consensus that we found was that it would be hard to argue with prorating every part of the calculation according to the applicable compensations from each company, including issues regarding IRC 401(a)(17), 415© and deductibility by company. It may be somewhat unwieldly to do this, especially on the sole prop side, but doing it this way would seem to minimize the possibility of the sponsor being accused of manipulation should the plan be audited.

Regarding eligibility, if a plan requires 1 year of service (defined as 1,000 hours during a 12 consecutive month period) and someone is hired 9/30, they would enter the plan as of 1/1 in the above example if they work at least 167 hours during the short PY?

Withdrawals can be made from traditional IRAs at any time without a penalty since you're over age 59 1/2, however the amount withdrawn will be considered taxable income.

A qualified plan directly purchases an interest in a small start-up business. After this occurs it's discovered that the 100% owner of the plan sponsor is a partial owner in this new company, so it appears the purchase is a prohibited transaction based on these circumstances. My question is at what level of ownership does this become a PT? For example, if the plan were to buy shares of stock in Microsoft and the sponsoring employer also owns Microsoft stock personally, both the plan and the employer would technically be partial owners in Microsoft but the plan wouldn't be considered a party to a PT. Is there an aspect that's being overlooked here or is there just simply a threshold for substantial ownership that must be exceeded before a transaction is deemed a PT? All help is greatly appreciated.

Is there any way for a self-employed individual to make deferrals currently to an existing plan for 2007 since it's only now that their 2007 profit is being determined? I would guess not, but I seem to recall hearing that "accrued compensation paid" up to 2 1/2 months after the close of a year can be used for certain things and wasn't sure if this situation could be construed as such. Is is too late to make '07 deferrals?

Thanks for the input, everyone. It seems like a pretty sweet deal that you can be allocated over 100% of comp. (assuming neither the annual deferral nor the $ limit has been surpassed). THERE OUGHTA BE A LAW! Is this true whether or not catch-up contributions are involved?