flosfur

Employer X with rank & file employees had a DB plan. Employer sold the business to Y on November 7, 2003, say, and also terminated the DB plan effective Nov 7, 03. Plan assets will be distributed to the participants asap. The rank and file employees have continued working with Y. Y now wants to adopt a DB plan. Is the new DB plan required to recognize service for vesting/eligibility etc prior to the business purchase date?

Facts and circumstances is a subjective test. Whereas the each rate group and the average ben % tests are objective tests and are supposed to get us past the subjective facts and circumstances test? If that was not so then we are stuck with using the safe harbor designs only since a non-safe harbor plan design will always be vulnerbale and would be at the mercy of a reviewer's whims and his/her subjective opinion, at the time, of the fact and circumstances!? What happens when the facts & circumstances change or the reviwer change? That's generally the rule than the exception in small plans. Where does it say that one cannot use all 30 years for the owner - that's what I am trying to find out. Remember, we are not talking about a "safe harbor" plan design. Using that logic one could argue that one cannot use the permitted disparity plan design in circumstances where only the owner is likely to have compensation above the integration level e.g. when all employees are at the minimum wage level. That refers to how a Year of Sevice is defined (actual hours or lapsed time method) and using comparable definition for all classes of employees.

Using all service as the testing service, the plan passes the general test - the each rate group test and the average benefit % test. The plan is non-safe harbor and as such is designed to provide higher benefit accruals to (discriminates in favor of) HCEs. The question is whether the discrimination is permitted discrimination - as is the case with the integrated plans as well as the DC cross tested (new Comparability) plans.

A non-safe harbor plan's projected and accrued benefits are based on Years of Participation (YOP). The plan is tested using the Accrued-to-Date method using all Years of Service (YOS) to date with the employer. The plan was submitted to the IRS for a determination letter and the reviewer does not agree with the use of YOS for testing citing the general rule of 1.401(a)(4)-3(d)(1)(iv), namely, Testing service means an employee's years of service as defined in the plan for purposes of applying the benefit formula under the plan ..... However, 1.401(a)(4)-3(d)(1)(iv) continues with "Alternatively, testing service means service determined for all employees in a reasonable manner... " and goes on to refer to 1.401(a)(4)-11(d)(3) for additional rules. 1.401(a)(4)-11(d)(3)(i)(B) & © clearly permits taking into account Past & Pre-participation service. In view of the above, am I OK in using all service as testing service? Are there any other cites/references for using all service that I can give the reviewer? If this is not true then the formulas of the type "250% for the owner and $100 for others with the fractional accrued based on YOP" I have seen presented at conferences, have no chance of passing the general test! As an aside, I can easily get the same end result by using non-safe formulas using all service but that can (& does) create past service liability, Unfunded accrued & vested benefits, PBGC's variable premiums and so on! So I rather not do that.

Found the answer. One of of Volume Submitter documents (selected at random) I looked at allows an option of selecting between "415 Comp" and W-2 for Top Heavy benefits (I did not research other Volume docs I have access to). So, I would say, yes, W-2 comp can be used for Top Heavy benefits.

For computing TH benefits, does the compsenstion "have to" include 401(k) deferrals (specifically 401(k) deferrals)? For TH rules, compensation is defined in Q&A T-21 of Reg 1.416-1 as: ..... Compensation used is as defined in 1.415-2(d).... [1.415-2(d)(2)(i)] excludes ....... amounts contributed to a plan of deferred compensation. Alternatively, Compensation that would be stated on an employee's Form W-2... ____________________ Although, S415 was changed to include 401(k) deferrals from 1997 (?) or so, the regs 1.415-2(d) and 1.416-1 Q&A T-21 have not been amended. Also, S415 changes had no impact on W-2 compensation in this respect or did it? The question is, if desired, can one exclude 401(k) deferrals from Comp when defining Comp for TH benefits (or define it as W-2 compoensation)?

My question was: How does one satisfy the 15/45 days advance ....? Do you just mention the effective date (which is in the past) of the new benefit formula and leave it at that or do you add the fact that benefits will continue to accrue under the prior formula until 15/45 days after the notice date ...?

How does one satisfy the 15/45 days advance (of amendment effective day), notice requirement when a DB plan is amended (to reduce future accruals, of course) after BOY or worst yet, per S412©(8), within 2-1/2 month after the PYE and the amendment is made effective BOY (so it can be taken into account for the full year for funding cost computations)? If a plan amendment is not made effective BOY, then per Rev Rul 77-2 the Charges and Credits for the PY are computed under the Old and New formula and prorated for portion of the year after BOY etc. (or the change can be ignored if the effective date is after the val date).

For tax withholding purposes, are the 70-1/2 distributions considered periodic or no-periodic? Since they are required to be made every year, that should qualifies them as periodic? Different tax withholding rules aplply to periodic vs. non-periodic pension payments.

Sorry - I meant to say 4.01 (.02 happens to be the item right after 4.01(5)). Because the frozen plan is separately mentioned, I concluded that a change to UC method is the only change permissible! If a frozen plan could use any of the other 16 method changes, why would the UC method would be singled out? But reading on .. Section 6.02(5) states that the approvals 3.02 thru 3.09 do not apply to a frozen plan, which would imply that the approvals 3.10 thru 3.17 (assets method & val date changes) are permissible. Given Section 6.02(5), isn't Section 4.01(5) redundunt? Or does 4.01(5) cover a situation not covered in 6.02(5) or elsewhere? Confusioning

Need to clarify my understanding: Under Section 4.02 of Rev Proc. 2002-40, the only approved change is the change to the Unit Credit method. This means, under the Procedue, a change in assets valuation method and/or Val date to BOY cannot made for a frozen plan!?

Thanks for the link. Its not that I can't find "a" copy of RR 98-1 (I subscribe to a service) - I can't find my copy of it with notes and articles related to it. I worked through the examples in the ruling and made copious notes. I moved my office a while back and non-client files are still not in order.

I wasn't been able find (I only looked once) my copy of RR 98-1 which is annotated my notes and many others articles related to it . The topic is still on my "to do list".

The plan has the typical language - "any person who is employed by the employer or affiliated employer, including leased employee under S414... unless such leased employee is covered by a plan described in S414(n)(5)....". I have not seen a plan language which defines employee by reference to a person being paid ....

Perhaps I am reading it wrong - Do you mean the other way around? Those "not" at the S415 limit do get the benefit of higher lump sum factors under Section 417.

Hi 3 limit is based on Years of Service and not Years of Participation which is the case for $Max.

After many years of a plan's existence, suddenly the spouse is put forward as an employee to be included in the plan with his/her DOH well in the past with no compensation history! The explanation given - well he/she always worked in the business but did not take any compensation in the past! Changing the plan's service requirement for eligibility to zero may not be a good option, as a DOH in the past may be a factor in maximizing the plan contribution. So who is an Employee for pension plan participation purposes?

There would have to be some deadline for making the contribution so it is deemed made for a particular year for Form 5500 and S415!? Consier a one person profit sharing plan. Sponsor contributes $40k on 10/12/2003 and designates it for 2002. Can that be shown as receivable for 2002 on Form 5500? Can it be considered annual addition for 2002 for S415. If it cannot be considered annual addition for 2002 then it will become annual additon for 2003. If that's the case, the sponsor cannot contribute anything for 2003 since maximum of $40k has been allocated already!

In my opinion, the Maximum Lump Sum is the GATT lump sum $676,000 ($5k times 135.2). Once the maximum monhtly benefit is deteremined, S415 lump sum Equivalent is independent of the plan's assumptions (unless it is grandfathered under pre-GATT rules etc). Plan's interest rate comes into play only when computing the equivalent monthly $Max limit before 62 or after 65.

Based on the intentions of a PSP sponsor to contribute $X for 2002, say, Form 5500 and participant account statements were prepared and mailed to the sponsor with the express instructions to file those forms only after the $X contributions have been deposited which should be no later than 9/15/03. The CPA also prepared the corporate tax returns on the same understanding. In November of 2003, it transpired that the PSP contribution was made in mid-October 2003, a month after the 8-1/2 month deadline for the 2002 contribution. Other than the tax deduction issue (that is for the CPA to worry about) what are the various implications for Form 5500 and employee account balances @ 2002 as well as the contributions planned by the employer for 2003.

Except for Self-Employeds, expenses paid by the employer under a self-insured non-discriminatory Section 105 plan are not taxable to the employees. Section 105 & the Regs thereto do not say anything about taxability of these employer paid expenses for the owners of S-Corp. However, instructions to line 18 of Form 1120S state that payments for Employment benefits programs for more than 2% owners should be included on line 7 or 8 (Compensation for officers/Salaries & Wages for others)!? Where does that come from in the Code? There is no such distinction for similar benefits (line 25) on Form 1120 (for C-Corp). Is it correct to conclude that S-Corp's 2% or more owners are treated same as Self-Employeds? Is there a way to provide an S-Corp owner non-taxable medical benefits with a self-insured plan? Can an insured plan provide these benefits?

Thanks guys. Simply put, in applying the Max of: S404 charges less credits and S412 Minimum rule ("Max of S404 and S412 rule"), the S412 minimum for a PY is: Charges less Credits for the yr ignoring the BOY deficiency (and contributions for the yr). Some follow up questions. Consider the PY 2001 in my example with a pre-ret funding interest rate of 5%. There is a funding deficiency of 20k @ BOY. At 5%, the interest charge on this will be 1k @ EOY. Part I. Q1. For the "Max of S404 and S412 rule", will the 1k interest charge on the deficiency be part of the 2001 charges? Q2. If answer to Q1 is yes, should this be reduced by the interest credit on the late contribution of 20k for '00 made on 9/28/01 for the period thru 12/31/01? I am leaning towards "yes" on both. Part II. For computing the 2001 minimum funding requirement (MFR) to determine the Quarterly contributions, the funding deficiency would be ignored (?) since that would have been part of the 2000 MFR. Q1. Should the interest charge of 1k also be ignore for computing the 2001 MFR? Q2. Should the interest credit on the 20k late contribution for 2000 made on 9/28/01 be ignored for computing the 2001 MFR? My answer would be "no" on both. Thanks for your input.

Mike, here is the message reformatted (I guess the tables don't work here!). Some numbers have been changed to simplify calcs & illustration even further. ------------------------------------------ A DB plan’s Plan Year & Sponsor’s Tax Year are Calendar Year. Sponsor is on extension (2nd extension) for tax returns until 10/15 for the years considered below - so deadline for filing tax returns & to make the contributions to the plan for S404 deduction purposes is 10/15. Individual Agg funding method and to simplify illustration, 0% interest assumption. Year 2000. S412 NC: 50k. S404 NC: 50k. Deductible Amount: 50k. Contributions made: 20k on 08/17/01 10k on 09/10/01 20k on 09/28/01 => late for 2000 Sch B, so goes to next yr Sch B but deductible under S404(a)(6) since made on/before 10/15 tax filing extension date. Amount deducted: 50k. 2000 Sch B shows a deficiency of 20k. Year 2001. S412 NC: 55k; S412 Min: 75k (=NC+Prior Yr Definciency+int(=0)). S404 NC: 55k. Deductible Amount: 75k? (Greater of S412 Min & S404 Cost). Contributions made: 35k on 06/15/02 20k on 08/27/02 20k on 10/05/02 => late for 2001 Sch B, so goes to next yr Sch B but deductible under S404(a)(6) since made on/before 10/15 tax flinig extension. Amount deducted: 75k. 2001 Sch B shows a deficiency of 20k. Year 2002. S412 NC: 55k; S412 Min: 75,000 (=NC+Prior Yr Definciency). S404 NC: 55k. Deductible Amount: 75k? (Greater of S412 Min & S404 Cost). Contributions made: 35k on 05/21/03 20k on 06/25/03 20k on 08/10/03. Amount deducted: 75k. 2002 Sch B shows a Credit Balance of 20k!! (total charges 75k, Credits 95k - 20k contrib made on 10/05/02 & 75k made during '03). Since the total of S412 Min for 2000, 2001 & 2002 equals the total amounts contributed, common sense tells me there is something wrong with having a Credit Balance of $ 20k. Where did the calculations or logic go wrong?

A DB plan’s Plan Year & Sponsor’s Tax Year are Calendar Year. Sponsor is on extension (2nd extension) for tax returns until 10/15 for the years considered below - so deadline for filing tax returns & to make the contributions to the plan for S404 deduction purposes is 10/15. Year 2000: Deductible Contributions made Amount S412 Min S404 Cost Amount Amount Date Deducted 50,000 50,000 50,000 20,000 08/17/01 50,000 10,000 09/10/01 20,000 09/28/01=> goes to next yr Sch B. 2000 Sch B shows a deficiency of 20,000. -------------------------------- Year 2001 S404 Deductible Contributions made Amount S412 Min Computed Cost Amount Amount Date Deducted 76,000 55,000 76,000?? 35,000 06/15/02 76,000 21,000 08/27/02 20,000 10/05/02=> goes to next yr Sch B. S412 Min = NC ($55,000) plus Prior Yr Deficiency + interest (=21,000). 2001 Sch B shows a deficiency of 20,000. --------------------------------- Year 2002 S404 Deductible Contributions made Amount S412 Min Computed Cost Amount Amount Date Deducted 76,000 55,000 76,000?? 35,000 05/27/03 76,000 21,000 06/25/03 20,000 08/10/03 S412 Min = Prior Yr Deficiency + interest (=21,000) plus NC (=$55,000) 2002 Sch B: Total charges = $76k; Total credits (all contributions) = $96k (20k made on 10/05/02 & 76k made during 2003 by 9/15/03). Sch B shows a credit balance of 20k!!? Since the total of S412 Min for 2000, 2001 & 2002 equals the total amounts contributed, common sense tells me there is something wrong with having a Credit Balance of $ 21k!!?? Numbers are rounded to make the math easier to follow.

Mike, the only thing I could find closest to thos name was Plastic Engineering & Technical Sertvices, Inc. and that tax case was about Capitalizing Patent Royalty payments. Can you give the year etc, post it here or possibly give a linkage where it could be found.