Bill Berke

I agree with the comments above. Unless an employer wishes to pass off as much of the start up fees as it can to the employees (a still unaddressed fiduciary issue), an annuity is rarely the best way to go. And, sadly and commonly and despite the disclosure regulations, the insurance agent does not and will not disclose all the fees, charges, costs and restrictions. The emplyer must ask and better ask. Because the contracts are written obscurely, it is always difficult to figure out all the ways the insurance company makes a profit. Which is the point to remember - these products are very lucrative for the insurance companies and their sales people. Considering that the profit must come from somewhere, it is the participants who always suffer. Furthermore, there is no way to check to see if the insurance company is crediting investment earinings correctly. They are not under the mutual fund distribution rules so the insurance companies do not have to pay out all the investment earnings. They only have to pay the portion of the investment earnings that the company determines is appropriate under the contract. And the performance, generally, stinks. It should be obvious that I am opposed to these contracts because all I have ever seen in 30 years of being a TPA is the massive rip-off insurance companies get away with. The DOL won't touch this because of the lobbying power of the insurance industry. And the new Ass't Secy of DOL PWBA comes from the insurance industry. The Florida insurance commissioner fined Met and Pru millions for their deceptive sales practices, no other state or federal agency I know has ever repeated the courage Fla. showed. There are better alternatives (fees and performance) - Schwab and MFS - are two examples of investment companies that compete with the insurance companies in the small market. Many insurance companies will provide more of a paperwork turnkey operation for the employer - but that does not overcome the negatives. I believe that soon we will see a fiduciary suit against an employer who doesn't (and probably can't) understand what the employer bought. I'm also waiting for some insurance company to invoke the "six month hold" provision that is in annuity contracts. Boy will that be a fiduciary case - most likely stopping at the employer's door because the employer fulfilled its fiduciary obligation of complete investigation and understanding. Yeah, right!!

No. A SEP is a certain type of IRA and this type may not rollover money to a 401(k) plan.

I don't believe so. That law requires contributions to be deposited by the due date of the return including extensions and it sounds like the sponsor did not go on extension. You already filed so, I believe, the opportunity is lost. And you also have the corporate governance requirement (if sponsor is a corp) that the Board must declare the contribution - which probably didn't happen timely - but that is a state law issue. I have heard some practitioners argue that if a sponsor files its return before the extension runs out, the balance of the extension time is still available for the deposit.

If I may I'd like to continue this discussion and add more controversy to a controversial issue: What is "excercises control" (in the law) and "informed decision" (in the reg's)? All that I have read in this thread focuses on what I call the "mechanical portion" of the reg's - that is; what do you deliver, to whom and when? And look at the differing opinions. And 404© is not a compliance reg it is a disclosure defense claim that the fiduciaries can raise regarding the results of an individual's investment choices turning out poorly. As you all know, the fiduciary always maintains the liability for, among other chores, selecting/reviewing "appropriate investment choices made available to the participants". So to get back to my question -what is excercises control/informed decision? Is it merely the fiduciary's complying with the disclosure/delivery requirements of the 404© reg's? Does it imply that the employer must take extra actions to educate the participants? Or does it mean the the employer must assess each participant to see if it is appropriate to let that person have a choice? Or something else altogether? And what if the employee on the witness stand is a legally competent, mentally retarded mail room clerk (they exist!!)? Or the more common situation of an employee who has no investment knowledge or experience? Can either of these participants excercise control or make an informed decision? If not, what are the implications for the sponsor? Any thoughts would be welcomed

I agree with rcline - no pay=no play. But in the fact situation we have here, at least one owner has a guaranteed payment. As I remember (vaguely) my income tax rules, the guarantee is treated more like a salary/paid compensation (as opposed to "earned income") for partnership return purposes. I don't think we can dismiss the guarantee out of hand - it does have special rules attached to it and it may be considered income to the owner(s), albeit with a net taxable of zero because of the off-setting K-1 loss described in the facts. I think this is the area that needs to be looked at. If there was no guarantee, then clearly no pay=no play.

A question regarding whether to prorate. Suppose we are dealing with a NHCE because we use top 20% - (bear with me and ignore ownership HCE in MR's case) - with comp of 75,000 and 170,000. Using MR's proration logic, I would not be using/including all that NHCEs comp (75,000) in the first plan because of the proration calculation. While I do not know who/what is correct, it is because of this situation (and we have a few) that I do not prorate unless I have the really unique (never encountered) situation where both sources of comp (as stand alone issues) would result in problem, e.g. 130,000 and 170,000. All thoughts are welcomed.

I think you have to count the deferrals. I think the guaranteed payment is the comp you count. The problem, as you know, is that a self employed individual may not deduct more then his/her earned income. And aren't you really saying that the loss wiped out the guaranteed payment for income tax purposes? So, perhaps there is compensation for plan purposes, but then you get into the deduction quagmire. And I'm just guessing, partially using the logic of the "count the total deferral despite refund rule".

I agree with MR. If we used Richard's analysis (170,000 and 75,000) I would/could be using comp in excess of the limit. This is a controlled group - the plans are treated as one plan for all 401(a) limitation purposes. I agree with MR that using Richard's analysis could get you to the 7.2% TOTAL contribution even though each plan was at 5% because you would be using too much comp (170,000 plus 75,000=$245,000). 5% of 245,000 ($12,250) is 7.2% of the $170,000 limit - the accidental result of Richard's analysis

From your question , it seems you are dealing with a 401(k) plan. If this is true, Charles Schwab has small plan arrangement where they will tie in all the separate accounts to the identified trustee. Check with your local Schwab office (and make sure you get a Schwab One retirement account which has a free checking account for the trustee to write checks). Thus, the TPA does its normal admin/compliance and the employees can direct/change investments, but only the trustee can authorize/make distributions (or direct account transfers). Although, Schwab does not have enrollers/support, etc. like the insurance companies/mutual fund outfits. Then the only issue is whether each participant has accumulated enough money to do meet the requirements of the desired purchase e.g. $1000 or $2500 for some mutual funds (or park in money market account temporarily). You can also allow the employees to pick from the full range of options, including individual stocks. And I don't work for Schwab (I am a shareholder - I am also a TPA who doesn't sell any products nor do I have any alliances). We have found this to be a great and inexpensive way for small plans to have excellent, quality 401(k) choices.

He's treated as employed by one company, so I would say he has 170,000 of income - 95,000 from one and 75,000 from the other.

If the insurance is not needed and this is a part.-directed acount, then you could cancel as RCK and rcline46 have stated. Another thought is to have the cash value remain in the plan (the plan borrows the cash value) and then the policy (net cash value) gets distributed (with a policy loan). This works in a number of situations depending upon the facts. But as RCK said - plan carefully. If the fiduciary wants to get rid of the insurance as part of the investment policy, this is acceptable, but the insurance must be first offered to the insured. There is a formal proceedure to follow in this instance.

To FREE 401k: Which tests is the plan using to pass? I can envision passing ADP/ACP but that is not the issue. What about 401(a)(4)? Thanks

You could do the rollover into the plan and have the plan buy the stock. Your lawyer can do this under your state laws. ERISA contemplates exactly this and there is a specific statutory PT exemption (ERISA 408(e)) for eligible individual account plans that have the "magic" language. A profit sharing paln is one type of eligible individual account plan. This language requirement is crucial and I have never seen it in a prototype document. If you do this then, depending upon the number of shareholders, you may have state or federal securities law issues. And you must value the stock annually - the appraisal must withstand IRS microscopic scrutiny. The other issues are all fiduciary issues if you currently have employees or hire employees in the near future. And in my experience it is the fiduciary issues which are the difficult ones to comply with especially the unstated requirement that competent second line management must be in place.

I think that the Plan Administrator/sponsor has the obligation to inform the employees that they can elect under the new rules even though the plan has not been amended. We have circuit court cases that say that once an amendement is under serious consideration, the affected employees must be informed even though the plan has not yet formally adopted it. And what plan wouldn't adopt this amendment at least retroactively, if not currently? What emplyee would turn down the recalculation if properly informed? We are throwing it into all our GUST restatements

The mpp freeze only works if a) no one has accrued 1000 hours, or b) there is a "last day" clause in the plan. And you must consider if the mpp was top-heavy without a "last day" clause.

The rules for all qualified plans are essentially the same. There is no special breakout for ESOPS. The issues unique to ESOPS are the stock, the put options and whether or not the ESOP is leveraged. I srongly suggest you get with the lawyer who set the ESOP up - or with another qualified benefits lawyer

I think that your answer will be found in the definition of "nonresident alien" in the Treas. reg's which, I believe, is a foreign citizen physically working in the U.S., but paid from another country.

I agree no top-heavy test for SIMPLEs. You may want to consider using the IRS forms/documents IRS forms 5305 and 5304 are the numbers and include the announcementa nd payroll deduction forms. There may be another number for 401(k) SIMPLE. However, as Fred Reish (respected pension lawyer) once correctly said, recommending a SIMPLE 401(k) instead of a SIMPLE IRA is malpractice. You are far better off installing a SIMPLE IRA - you can limit the plan to just the match and deferrals (same as 401(k)), you eliminate the 5500 requirement and, if you use the 5304, federal law exempts sponsor from all fiduciary liablity. Some time ago American Society of Pension Actuaries (ASPA) published a comparison. You may want to look at it.

From your question it seems the sole-prop adopted a 401(k) plan. Why not have the corp adopt the same plan (it is a member of a controlled group) thus ending all the questions. If the corp is initally adopting 401(k) plan, then sole-prop can adopt and, again, all the protential issues go away. And the only thing that I remember that gets prorated is 415 number, so it seems that if you are limited to 10500, you are well under the 415 limit and can dedust on corp return.

RCK If the forfeiture routine is stated within the document and IRS approves, as you know you're safe. So my question is -Is the forfeiure allocation routine in the document or is it an operational feature? I suspect from your comments that it is in the doc. Thanks for being patient.. This type of forfeiture allocation structure is novel to me.

As a general rule, employer paid LTD means benefits are taxable upon receipt. If the employer pays the premium as a convenience to the employee and charges the employee with the premium as additional income to the employee in the same tax year, then I think you have a case for claiming employee paid LTD, thus no taxable benefits.

To QDROphile. I did some IRA PT research as you suggested - thanks for the prodding. As BeckyMiller said sometimes yes, sometimes no. I guess I've been lucky with the situations and lawyers I've dealt with in that the IRA investments were not considered PTs. And sometimes they could be as I now have discovered. I love "gray" when I'm giving advice .

I seem to remember that this is against the law. I would immediately check with a lawyer.

It would behoove you to read the DOL pronouncements (opinions and letters) about which plan related charges must be paid by the sponsor or the plan and which can be allocated to the particpant. Generally, those expenses required by law, such as QDRO preparation and processing, cannot be charged to a particpant. The DOL distinguishes charges between "settlor" (sponsor) functons, plan functions and voluntary benefits. Voluntary benefit expenses (those expenses not reguired by law), such as costs for loans or directed accounts, can be charged to the participant. If there is a question, it is always safer to not charge a participant. And the plan documents must permit these charges to be paid by the plan or charged to the participant.

To RCK: I am troubled by the forfeiture allocation and its implications. I really think you have one plan and have had one plan for as long as this foreiture routine has been happening. And I know high profile recordkeepers who have been doing things wrong for a long time - until some plan got auditted. And I have also done things wrong - let me not be hypocritical. The issue is that if these plans are deemed one plan, the earnings (unless everyone had separate accounts and the same investment choices from day one), forfeitures, contributions (if not prorata or strictly match based) could have been allocated incorrectly - especially the forfeitures. I can't imagine that these sized plans would have a 401(a)(4) problem, but who knows what an IRS auditor, DOL investigator or participant litigator could dream up. And then there are the general fiduciary issues of not operating a plan properly. When you get this figured out, I sure would like to know. Thanks. To Jon: The are longstanding IRS reg's and positions regarding the availability of one plan's assets to the participants of another plan and whether the plans are deemed one or separate plans. The asset trustee-to-trustee transfer from the union plan to the managemant plan is okay. But the forfeiture transfer from the management plan back to the union plan means that the management plan's assets are available to everyone. This is what bothers me. I make the analogy to many pension court cases where the holder of the money (where the money is parked upon the event) controls the tax effects. For example, once money is moved from a conduit IRA into an ERISA-quilified plan, the creditor protection again applies to the money because it is within the trust at the time the employee files for bankruptcy. The terminated mamgement employee is a participant in the management plan at the time of termination so how can I transfer money to a "separate" plan?