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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?

Thanks Austin for the speedy reply. I assume 'coverage' refers to the % of nhce's benefiting being at least 70% of the % of hce's benefiting. This is a great point you bring up because it's a small employer and it looks like it'll be a problem. They have one hce and 4 nhce's, of which 3 may waive participation. The 3 want to waive because they're maxing out in a 401k plan at another company where they work. You only get one 415©/402(g) limit per year no matter how many different employers' 401k plans you participate in, right? I suppose using a safe harbor match design in this plan instead of the 3% QNEC design would avoid their need to waive participation while still being included in the coverage test as long as they don't defer anything.

Perhaps I'm overly concerned that 'safe harbor' sometimes means give an allocation no matter what, but I was wondering what the consensus is on the following: If a plan uses the 3% QNEC safe harbor design, would the sponsor still be obligated to provide it to a participant who would prefer to waive their participation in the plan when they become eligible? Also, I know that catch-up contributions can be in addition to the 402(g) limit and the dollar limit on annual additions, but could they also be in addition to the 100% of compensation limit on annual additions (e.g., when a profit sharing contribution added to a participant's deferrals exceed 100% of their compensation? Thanks in advance for all help.

Since the entity applying for the ID# is the plan and not the sponsor, check the 'trust' option in the first screen instead of 'sole prop'. The inconsistency I find is that the application sometimes won't go through unless you answer the questions regarding 'principal activity of business' and 'line of merchandise sold; specific construction work done; products produced; or services provided', which technically are n/a.

Employer's DB plan has a 10/31 YE whose limitation year is defined as the calendar year that ends within the plan year. Because the plan is fully funded and no contribution can be made, they are considering adding a DC plan so that something can be contributed. Assumedly, the new plan would also have a 10/31 YE. If the limitation year in the new DC plan is defined the same way as the DB's, it appears that there wouldn't be a problem if only profit sharing contributions were made. However, if they opt for a 401k plan, wouldn't the deferrals have to come out of the compensation that was paid only during the two month overlap between the PY and the limitation year? If this is true, defining the limitation year the same as the plan year would seem more practical, but I was wondering if there was anything in the law that prevents an employer from having two plans with different limitation years. I know this would be difficult to keep track of, and I can't say I'm sure how their CPA would take deductions if contributions to both plans would be allowed some time in the future, but we're trying to find the simplest way for them to make contributions while their DB plan is fully funded. All help is greatly appreciated.

Does mandatory income tax withholding apply when a total distribution amount that's less than $1,000 (but more than $200) from a profit sharing plan is made due to a participant's death? Also, can the beneficiary roll over the amount (directly or otherwise) to an IRA, even if the document doesn't specify so? All help is greatly appreciated.

Client wants to establish a new 401(k) plan with a matching contribution and a profit sharing option. Deferrals would begin in 2008 but he would like to make a profit sharing contribution for 2007. Would it be acceptable to have the plan's effective date be 1/1/07 even though the doc won't be signed until the end of the year? In other words, can the adoption date be later than the plan entry dates (1/1/07 and 7/1/07) even if all of the employees have been asked on several occasions over the past year and have indicated that they would not defer given the chance? The opportunity for a match was explained to them. He and the few employees he has would all be eligible for a 2007 PS allocation. Although it can't be considered a safe harbor plan for 2007 since a SH notice wasn't issued, could the plan be considered safe harbor for 2008 if it's drafted effective 1/1/07 to contain a regular matching contribution provision in the same amount as a safe harbor contribution, and a 2008 safe harbor notice is currenlty issued? Can this work without a safe harbor amendment since there weren't any deferrals for 2007?

I believe that the limit is based on the compensations of only those eligible for the respective plans.

A terminated participant was rehired the year after she was paid the vested portion of her account balance. Her nonvested amount was placed in the plan's forfeiture account at the time of her distribution and then used to offset contributions. At the time of her rehire, she had not incurred a 5-year break in service. Regarding rehired participants, the doc only mentions that if the participant pays back the distribution, the earnings and/or forfeitures that would be allocated to the other participants in the year of rehire can be reduced to reclaim the nonvested portion so that she could have her entire balance again, but only if a 5 yr. BIS has been incurred. It seems that since the doc does not address what to do for rehires who either don't have a 5 yr. BIS or agree to repay the distribution, any method can be applied as long as it's reasonable. The issue I see is that since the plan has individually directed accounts, a PR problem may be created by transferring amounts from the other participants to the rehire (who is a participant on the date of rehire). There are only 4 participants with account balances in the plan, and they are all 100% vested, so there won't be any forfeitures to use for this purpose in the foreseeable future. And, of course, the likelihood that the participant will pay back the distribution is practically nonexistent. The amount of the nonvested balance is only about $600, but we would like to have the employer handle this as appropriately as possible - what should be done in this situation?

Maybe I'm wrong but it looks like one of those "can't find anything that prohibits this" kind of things . . . . . A 100% business owner employs, among others, his sister. Since she is not an officer nor an HCE, could the business set up a new comparability-style profit sharing plan where the sister can be isolated by herself in an allocation group (via her compensation level) and get 100% of the contribution (as long as it doesn't exceed $45K)? The owner, along with everyone else, would get nothing and he's OK with that since he's worked out a cash deal with his sister outside of the plan.

I agree that a replacement plan could also work well. I vaguely recall that there's also some relief available under certain circumstances if excess assets are used for health benefits (?) Paying out what the plan calls for, i.e., 12 times the monthly benefit, as an RMD, would reduce the assets while the owner's benefit stays the same. Hopefully the overfunding can at least be reduced somewhat if the payout is greater than both the return on investment and the annual APR decrease.

We've come across a Corbel document that seems to define the years of service to be counted for the top heavy minimum benefit as years while the employee was a participant. It's been a while since I've had to do such a calc, but I seem to recall that all years of service need to be counted for TH min benefits, even those before the employee was a participant - isn't that correct? Also, the actuarial equivalence in this doc is defined as the "applicable mortality table as prescribed by the Secretary of the Treasury" which I believe is the 94GAR table. However, the interest rate is defined as those used for 30-year Treasury securities. Weren't these the interest rates that used to be called the "GATT rates"? I have several bookmarks for referencing these monthly rates, but the rates shown frequently conflict with similarly defined rates published in newsletters. Can anybody recommend a website that reliably reports the rates needed to calculate such lumps sums?

The owner's wife entering the plan will help. But him taking any kind of distribution wouldn't minimize the overfunding. His benefit in the plan would be reduced by the equivalent of what was withdrawn. The plan would have less assets but his remaining benefit would be smaller - essentially a wash. If he's at least 70 1/2 and can take a required minimum distribution, though, that would help since his benefit wouldn't be reduced.

Client has a 401(k) plan using the safe-harbor matching contribution design. Plan also allows for profit sharing contributions allocated using a new-comparability design to participants who satisfy the 1,000 hour, last-day rule. Don't ask why, but, none of the participants have ever made any deferrals - not even the owner. Instead, the owner makes profit sharing contributions every year. Now the situation arises where there are non-key HCEs eligible for a PS contribution. It seems OK to not give them any allocation at all if the cross-testing passes and top-heavy minimums are not required by virtue of the safe-harbor design (the key has >60% of the benefits). Wacky, yes, but is anything being overlooked?