Dawn Hafner

Did any othe employees become eligible for the plan? If not, and the assets of each plan were less than $100,000 he should still be under the 5500 EZ exception. Since this plan has been in existence I am assuming other participants have become eligible. In that case, you can use the Delinquent Filer Voluntary Compliance Program to reduce the penalties. (DFVC) If a report is filed within 12 months after the required date, the penalty is $50/day up to a maximum of $1,000 for a 5500 C. If filed more than 12 months after the required date, the penalty for a 5500 C is $2,000. Note that these penalties can not be paid from plan assets. This program is sponsored by the DOL, but the IRS has indicated they will not impose penalties if DFVC is used. Another option you could try is the reasonable cause. The IRS and DOL may waive the penalties if the plan administrator can show its failure was due to reasonable cause. This is based on a facts & circumstances test. For example, I have had penalties waived for a plan that filed one year late due to the fact their prior accountant told them it was not required. Good Luck! You may also want to review his prior contribution calculations. I would be suprised if he did the self-employed contribution calculation right. [This message has been edited by Dawn Hafner (edited 10-02-98).]

Yes, the allocation amount would be the same regardless. I just don't know if I have to continue to track this money purchase money separate from the profit sharing money due to the annuity rules, or if the character of the funds being money purchase funds is lost once the first participant forfeits the money.

Who are the partners in the partnership? Do these partners have any ownership in the holding company or does the holding company have ownership in the partnership? Controlled groups (CG) are defined in Code Sec 414(b) & ©. To be a controlled group there generally has to be a certain level of common ownership. There are brother-sister controlled groups and parent-sub controlled groups. Each involves a specific test being applied to the ownership percentages. The trick though is that ownership is not just direct ownership. Code Section 1563(e) determines who is deemed to be an owner for these tests. An individual can be attributed stock from his/her spouse, children, corporations, partnerships, estates, trusts or options. The rules for whether certain interests are or are not attributed are very specific and also can depend on the individual's direct ownership percentage level. Controlled group situations can also apply to tax-exempt organizations by determining if control exists through common directors or trustees. There are also rules concerning Affiliated Service Groups to be aware of in Code Sec. 414(m). A group of companies can be considered an ASG without any common ownership. These rules generally apply to service organizations that have a separate company performing services for or with them. Being an ASG can have the same effect as being a CG. There are also very specific tests to apply for ASG rules. As you can tell, this is a very complex area, that requires careful examination of all ownership relationships that exist.

The only problem with using the percent of total compensation is that n% of total compensation might meet my goal this year, but next year may not. The goal this year is $500/participant. The goal next year is??? I suspose they could amend this provision, but if they amend it after the participants have earned the right to that contribution, and they are going to reduce the contribution amount, that will cause a problem. The answer may be to go on a document that has more flexibility if they want this to be a part of their plan design. Thanks for your comments.

I agree you could do this. I have also used a situation like this in the same way. You should check your plan document though to ensure that it allows for the matching contributions not used in the ACP test to be used for the top heavy. For example, the PPD document has language that allows for this situation for the nonstandardized plans, but not if the plan is on the standardized document. If it is a PPD standardized plan, it states that the top heavy minimum contribution will be calculated without regard to any matching contributions. Section 3.04(B)(5)

From reading Notice 98-1, it states that an employer can make a change in method (from current year method to prior) during the remedial amendment period. I take this to mean I can switch from current to prior during 1998 or during 1999, but if I am on current year for 1999, I am locked in for five years. Is this correct? What about the anti-abuse provision in Section VIII? Does this provision also apply to switching methods during the remedial amendment period? What if a plan used 1997-prior, 1998-current, 1999-prior? Is this acceptable?

No, the percent of comp selection does not have this choice. It is just a percent of compensation.

I have a client that wants to contribute a fixed dollar amount per employee $500, regardless of compensation. Because they also have a hard time passing their ADP test, they also want to designate this as a QNEC. The selections available in their prototype document read to allow the employer to contribute QNECs as a percentage of total compensation of all participants, a percentage of profits, or an amount needed to met the ADP test. It will allow for language to then allocate that amount on the basis of compensation limited to $1.00 per participant, which will enable me to end up with the same dollar amount per participant. My problem is: Am I violating plan terms then becasue I am not limiting my QNEC to what is actually needed to pass the ADP test? Another alternative may be to allocate only what is needed as a QNEC as such, and the remainder as a traditional nonelective contribution. It may be difficult to explain to employees why some employer contributions are 100% vested, and other employer contributions are subject to vesting though? Any suggestions? Thanks.

A money purchase plan can be amended into a profit sharing plan. When this is done, there is a potential for reversion to the employer if full vesting is not applied. Specificaly, if the plan provides for the employer to use the forfeitures to reduce contributions, and full vesting is not applied, a reversion will occur. If a money purchase plan is first amended to allocate forfeitures to avoid this reversion issue, and participants continue to earn vesting credit under the same schedule in the profit sharing plan, do these dollars retain their money purchase character after forfeiutre. For example, if an employee later has a forfeiture of $2,000, and this is to reallocated to eligible participants under the plan, is this $2,000 reallocated still as a money purchase type of money, subject to the distribution restrictions, or does this money lose its money purchase distinction when the participant forfeits it. If it does not have to be retained as money purchase, it could be added to other forfeitures from profit sharing or match, and allocated as one. If it retains its money purchase character, then I will continue to allocate these money purchase forfeitures until the last 100% vested participant finally leaves the plan. Any experience with this type of situation? Thanks.

When gathering documents for a takeover client, we discovered that their copy of the adoption agreement was not signed. So, we contacted the prior recordkeeper (an insurance company) and asked for a signed copy from their files of the most recent plan document. Well, when we receive the document, it is a more recent restatement date than the client's copy. This more recent document has been signed by one person who is both the trustee and an officer of the company. The problem is that there are two drafting differences between the two documents. 1) the money purchase formula was changed to read 0% (.001%) 2) the forfeitures were changed from using them to reduce contributions to allocating them to participants According to the client, they never initiated any changes to their document, and have no board resolutions authorizing any changes. They have had one plan year end since this restatement, and they contributed at the prior formula under the plan, and used forfeitures to reduce the employer contribution. We are completing the current plan year end now. Do we have any options here? I feel that the change to a 0% formula is an obvious error in computer entry that was never intended. By continuing to make the money purchase contributions they are only benefiting the participants. This appears to be an obvious oversight in computer entry because the entry was defaulted to .001% by the system. The change in use of forfeitures I have a problem with though. This change was actually to the benefit of the participants, so in my opinion must be followed regardless of the intent of the employer. From the employer's perspective, these drafting errors are going to cost them thousands due to losing the forfeitures, and insist the officer did not understand or recognize the changes. Obviously, that argument will have no merit with the IRS. Any suggestions? Does the lack of board approval account for anything? My initial recomendation would be to continue contributing under the plan as under the prior formula. Immediately adopt an amendment to correct the 0% contribution level. Do not use forfeitures to reduce, but rather allocate to participants for this year. Also, correct under APRCS to contribute the forfeitures used last year plus any earnings to last year's eligible participants. I guess I do not think it is necessary to go through CAP just to contunue the formula as it has been for years, just due to an input error. Actually, due to the lack of 204(h) notice, the change would be ineffective anyway. Does the remedial amendment period help me any? The restatement date was in the January of 1996. Any other thoughts or suggestions? Thanks! [This message has been edited by Dawn Hafner (edited 09-17-98).]

It will not matter if this nonkey person takes her distribution or not. When calculating the top heavy pecentage, all prior distributions within 5 years of the determination date must be added back to current balances. IRC 416(g)(3)

There is a good discussion of this same issue under the topic "Employee deferrals in excess of plan limiation" under this message board. There is currently no prescribed fix for this situation by the IRS. The IRS is supposed to be working on some sample correction procedures for employers to correct under APRSC. Pension Publications of Denver wrote the IRS with a list of suggested corrections for certain errors. The correction they suggested the IRS consider for an employee that defers an amount in excess of the plan's deferral limitation was included in the letter as follows: " The plan may distribute the excess amount to the employee, with earnings. Alternatively, if the employee is an NHCE, the plan may retain the excess amount in the NHCE's account". Obviously, there is not one safe method to use, but PPD's suggested method may be as good as any.

Does anyone have a summary of the law changes affecting cafeteria plans? Thanks.

See DOL Opinion Letter 89-30A. It is the DOL's position that "to the extent that loans are made available to participants and beneficiaries who are parties in interest, (i.e. current employees)loans must be made available to all participants and beneficiaries who are parties in interst on a reasonable equivalent basis". Therefore, a loan program that exludes all former employees would not meet this requirement. Usually, most loan policies state that current participants and all parties in interest are eligible to apply for a loan. This shouldn't cause much of a problem though, as there will be very few former employees who are parties in interst.

Can someone summarize for me the amendment requirements for cafeteria plans? Will all cafeteria plans have to be restated by 12/31/98 for the "change in family status" regulations? What if the plan refers to "any other event as listed in the regulations" as a life event, then would amendment be necessary? What other law changes have an effect on cafeteria plan documents - SBJPA, USSERA, TRA '97, GATT? Thanks. [This message has been edited by Dawn Hafner (edited 09-04-98).]

Dividends are not generally not considered to be annual additions or employer contributions, so therefore could in theory exceed 25% of covered compensation. BUT, if the dividend is viewed as extraordinary and evasive by IRS it can be recharacterized as an employer contribution, which could cause violations of Section 415, which in turn would be a plan qualification issue.

Dave, I am not sure on this, but is the 204(h) notice required if the change in interest rates is only amended with relation to lump sums? See Reg 1.411(d)-6T Q-5, Example 2. They give an exampe of a plan that was amended to modify the assumptions used to convert the annuity form of distribution to a single lump sum. Beacuse the amendment did not affect the annual benefit commencing at NRA, no 204(h) notice is required. If a plan only adopted GATT rates for lump sum conversions then it would appear no notice is required.