wmyer

Everyone is an HCE, so there is no 401(k) testing. However, there is a filing requirement. The employer must file the full 5500 (not the EZ) because this is NOT a one-participant plan. A one-participant plan covers only the owner and spouse, or in an (unincorporated) partnership, multiple owners and their spouses. Because the owner's children are eligible, this is not a one-participant plan, despite any attribution rules.

Should question 5(a) on Schedule I, has a resolution to terminate the plan been adopted Y/N, be checked "Y" if you are merging your money purchase pension plan into your profit sharing plan? Technically, it's not a plan termination because we're not vesting everyone 100%. However, this will be the final 5500 for the plan, and we have checked the final box. It seems to me that since the final box is checked, the DOL probably expects the plan to be terminated. What are others doing?

well perhaps forfeiture reallocation could be used to reduce match.

freeerisa has some sort of edit check, so that you must wait 10 minutes after logging out, before you can log back in. i think this is to prevent multiple users from utilizing the same log-on, even though it is after all free. so, simply wait 10-15 minutes before logging back on. in the meantime, check out planeterisa.

It sounds to me like you don't have a Safe Harbor Plan. The participants have to be given an annual notice 30-90 days before the plan year begins stating the contribution to be made. Did your plan give such a notice prior to the beginning of the 2001 year? If not, then you have a traditional 401(k) that must pass the ADP/ACP tests.

Yes, but the aggregate limit is still $3,000 (plus an additional $500 if 50 or over). So you could contribute $1,000 to a Roth, for example, and $2,000 to a Traditional IRA. Or $500 to a Roth and $2,500 to a Traditional IRA. Of course, there are income and age limitations (if you earn too much you can't contribute to a Roth).

When dividing an account with after-tax basis pursuant to a QDRO, what happens to the tax basis. Does the QDRO need to, or can the QDRO, specify this? If the QDRO is silent, is the basis split pro-rata? For example, say you have a 50%/50% split and the participant has $8000 in basis. After the split, does the alternate payee have $4000 in basis and the original participant also have $4000 in basis?

I believe you will have to run the ratio test. Did any HCEs receive the top-heavy contribution? If not, you can probably put Exception Code "D" for the 401(k) component (if all non-excludable NHCEs were permitted to defer); and Exception Code "B" for the Non-elective component (if no HCEs got a top-heavy contribution). So you won't really need to work any numbers.

My understanding is that the SEP IRA contributions, as well as SIMPLE IRA contributions, should be reported based on the calendar year during which the contributions are received, regardless of which fiscal year they are designated for. That eliminates the problem of filing amended 5498s in the situation you describe, Randy. The instructions I have for the 5498 box 7 say "Show the SEP contributions made in current tax year." ("In" means "during," regardless of the fiscal year for which those contributions are deducted by the employer.)

After-tax contributions are not subject to 402(g), as PAX said. They are subject to the 415 limit (40,000 for 2002) and to ACP testing.

I agree that it is okay to do this. However, if the plan has a matching formula and it applies the match on a payroll-period basis, the HCE may be missing out on potential matching contributions.

To clarify, the 25% limit that BPicker is talking about is the 25% deductible limit (404a limit). There is, in addition, a 100% limit or $40,000 for total contributions (415c limit). Here's how it works: If you are self-employed with no employees and your net earned income is $100,000, you can contribute $25,000 to a pension plan; or $25,000 to a profit-sharing; or $25,000 to the two combined. Many companies now are doing a "uni-401k" for sole-proprietors because salary deferral contributions do not count towards the deductible limit starting in 2002. So, if you have a profit-sharing plan with 401(k), then in the scenario above, you can contribute $25,000 in profit-sharing contributions PLUS $11,000 in salary deferral contributions for a total of $36,000.

I agree with both replies. In the example given, you would report 10,000 as the gross distribution amount, 2,000 as the taxable amount, and 8,000 as employee contribution, distribution code 1. A participant under age 59 1/2 would generally have to pay a 10% penalty on the 2,000 earnings (Form 5329), but no penalty on the 8,000 basis. The 2,000 earnings could be rolled over within 60 days to an IRA or another qualified plan, to avoid penalty and taxes. However, there would be 20% mandatory withholding on the 2,000 earnings (federal) plus possible state withholding. There would of course be no federal withholding on the 8,000 basis.

In a SIMPLE IRA, $7,000 in salary reduction contributions (for 2002) and the 3% match is the maximum that can be contributed. If the employer wants to make additional discretionary contributions, consider having a profit-sharing plan with 401(k) instead.

I'm not sure if the above was a question or a statement, but if it was a question, here's the answer. The employer elects annually in the notice to employees on Form 5304, Form 5305, or a similar form, whether they will make a 3% match, a lesser match or a 2% nonelective contribution. Let's say the employer elects the 3% match. Then, if an employee contributes 1% to a SIMPLE IRA, the employee would get a 1% match, not 3%. If the employee contributes 3%, he would get 3%. If the employee contributes 4%, he would still get only 3%.

I am not a tax expert, but here's what I think -- distribute the salary deferral amount at market value. If there are gains, the entire amount of the distribution is taxable in the year of distribution. If there are losses, the participant is also taxed only on the amount distributed. For example, the participant deferred $1,000 in 2000 and had income of $50,000 less $1,000 deferred. He's only taxed on $49,000 at the federal level in 2000, even though he was not eligible for the 401k plan. Now in 2001, let's say his account is only worth $800. So he's going to get a 1099-R for $800, which is the amount he will pay taxes on for 2001. However, let me emphasize again that I am not a tax expert. So take my response for what it's worth. Maybe someone out there who is a tax expert should respond to this question.

Yes, maverick, I'd use code 7.

Another fix would be to distribute the salary deferral from the plan, make it taxable for 2002, issue a 1099-R for 2002 by 1/31/2003, and forfeit any match the participant was given.

Does anyone have an opinion on this? Suppose a standardized (master) plan has maintained a prior standardized plan that covered some of the same participants. Under old rules, a plan in this situation had to file for a determination letter and, of course, provide a notice to interested parties. Under new guidance, such a plan no longer has to file for a determination letter. However, suppose the plan chooses to file for a determination letter after the master plan receives its opinion letter or GUST. Does the standardized plan have to provide a notice to interested parties?

This exact question is answered in IRS Notice 2000-3 Q-6. Yes, the plan can stop the Safe Harbor and discontinue the Match mid-year, but it must give 30 days notice prior to stopping the match; it must match deferrals up to the effective date of stopping the match; and it must pass the ADP and ACP tests for the full year using current year testing.

This was also not raised, but if the plan is top-heavy and key employees make 401k contributions, a profit-sharing contribution may be required. You may not be getting rid of profit-sharing after all.

Cathy, regarding reporting on the W-2, see IRS Announcement 2001-93: "For employees' qualified catch-up distributions after 2001, employers must report the elective deferral catch-up contributions in the totals reported for Codes D through H and S." So the aggregate amount of deferrals (including 414(v) contributions) will be in box 13 of the W-2. As a side note, my company is not separately sourcing catch-up and regular 401(k) deferrals.

I agree with Medusa. See 98-52 V.B.1.c.ii ("Restrictions on Amounts of Elective Contributions") and 2000-3 Q-3 & A3. The only minimum deferral % allowed to be required in a Safe Harbor 401(k) is 1%.

Your Keogh (profit-sharing plan, right?) would generally just be amended to add a 401(k) feature. It would not generally be terminated.

A 401(k) plan can't be rolled over to a Roth. It must first be rolled over to a traditional IRA, and then converted to the Roth, which is a taxable event. Yes, starting in 2002, after-tax contributions can be rolled over to a traditional IRA. The IRA, including the after-tax contributions, can be converted to a Roth.