shERPA

Stuff happens, sounds like it was reasonably corrected, so they should look at it as a permissible self-correction. As Bird says, document it well. Also be prepared to show them the employer's new procedure to avoid this in the future.

Tell him to bump is W-2 up to $134K and he can do the 415 maximum 401(k)/PS of $51,000.

We are getting these too. IRS has made a total mess out of the 5558 process - what is so hard about an AUTOMATIC extension? Sheesh.

I agree with BG5150.

What is the employer trying to accomplish? If it is truly a hardship situation, then the employee by definition doesn't have the money to payback the loan FIRST, so the effect of this policy would be to prevent these ees from taking a hardship. If that's the objective why not just amend the plan to eliminate hardship distributions? The plan already has up to 1/2 the account balance as collateral, so loan security is not an issue. If the plan only allowed hardships to participants with no outstanding loans this could create run afoul of the "reasonably equivalent basis" criteria. Hard to see how this is a good idea without understanding what the employer is after.

Well, as an individual partner, he is considered an employee of the partnership under IRC 401©(4), not treated as a separate business organization. So there is no controlled group between the individual (as an employee) and his sole proprietorship. There is clearly ownership between the individual as a sole prop and the individual as a partner in the firm that could make his sole prop and the firm an ASG if the two practices are "regularly associated" in providing services to clients or if there are services provided between the sole prop (not the individual employee partner) and firm. So if comes down to facts and circumstances, as to what, if any relationship the individual (as a sole prop, not as an employee) and the firm have with each other. In theory, if they have absolutely nothing to do with each other, then they are not an ASG. Note, some believe this is too fine a distinction to draw between the individual as an employee/partner of the firm vs the individual as a sole prop. I have read different opinions on the subject over the years, so the attorney should probably obtain legal advice on this, or point him to the issue and relevant code sections and let him make the determination for himself. The fact that they are both law practices, and that a lawyer pretty much works by name and reputation makes it a bit more cloudy. If his sole prop as an entirely different type of business it would be cleaner.

Maybe. Is this attorney an individual partner in the law firm, or does he have a professional corporation that is a partner in the firm and he's employed by his P.C.? When did he become a partner in the firm?

Sponsor should obtain legal advice. If Y pursues this, perhaps the plan should file an interpleader.

Well the DC is $50K, which, combined with the DB MRC is $50,001, which is less than 31%, so all is well in your example, right? Say comp is $200K. DC max (25%) is $50K, assume that's deposited and deducted. The DB deduction could be as much as $12,000, even if the MRC is zero, assuming the DB max with cushion is something more than $12K. So the ER deducts $62K. The first 6% of pay to the DC plan is disregarded under 404(a)(7), so for this purpose the considered DC deduction is $50,000 - [.06*$200,000] = $38,000. The DB is $12,000, so the combined contribution for 404(a)(7) is $38,000 + $12,000 = $50,000 = 25%*200,000 and the limit is not exceeded, even though the total deduction is $62K.

I think (3) should read: (3) Contribution to DC can exceed 6% (without penalty) so long as DC+DB contributions <= 31% of compensation. since the first 6% of pay to the DC is disregarded for 404(a)(7). Back this 6% out from 31% and you're at the 25% limit.

Yes, the DC 25% limit still applies, I overlooked that backing into a number for your (a)(7) question, sorry 'bout that. Rather than back into numbers, what's the available comp? Basically the employer doesn't really have the option, whether they include it as a deduction or not, if it is deductible for the 2012 tax year then that's when it is deductible, regardless of whether it is actually deducted on the return. So whatever the combined plan deductible limit is for 2012, that's what he can deduct. Not deducting the DB doesn't make it not "deductible" and doesn't affect the calculation of the deductible limit IMO. The DC plan is not limited to a 6% deduction, it is just that the first 6% of the DC is ignored in looking at 404(a)(7) limit.

From reading the code, 404(a)(7) limits the amount that is deductible, not the amount deducted. The deductible limit is the greater of 25% of comp or the DB MRC. Since the DB is just $10K, presumably the 25% limit is the greater. Then it is really 31% since the first 6% of DC is ignored. How much comp is there? If it is $193,548 or more, no worries, as 31% = $60K. Deduct $60K, the first 6% of DC is ignored, $11,613, leaving $48,347 which is 25% of comp. If comp is less, then the full amount of the combined contributions is not deductible.

Yes, engage a good attorney. You may also want to consult with various consultants to the TPA world first to get some ideas about valuation and types of deals being done. They are out there. Basically everything, including stock or asset purchase, is negotiable. There are differing tax implications for these that also impact the sales price. Of course the time period for you and the seller is critical, both in terms of structuring a buyout but also in transitioning client and referral relationships. You also should have a "vision" on what you want your company to be once it is yours. It is this vision that will sustain and drive you to move ahead when obstacles present themselves and will help you motivate your employees to work toward a common goal. Are you good at business development? I've seen good adminstrators and managers hang out their own shingle and not prosper because they don't develop new relationships well. Have you thought about owning your own firm before? This may be a great opportunity, but it is a good time for an honest self-evaluation to determine if this is a good fit for you. Good luck.

That's a useful cite, thanks masteff.

Is the IRS' issue that the values used were not fair market value? Or is it that there was no 3rd party appraisal? FMV can be a range, not necessarily a single number. Did the trustee use any sort of comps or other basis for assigning the values used, or did they just carry them at some clearly outdated value? AFAIK there is no requirement that the trustee obtain a 3rd party appraisal.

Since the impermissible rollover is now being distributed, it seems to me this will properly correct the operational error under EPCRS self-correction within the permissible two-year period. All's well that ends well, but recommend to the employer that the plan be amended to accept rollovers now so it doesn't happen again.

The level amortization requirement is a minimum requirement. Paying down principal in advance doesn't change the required payment it just accelerates the payoff date. Not a problem at all. Nice to see a vendor has a process in place to make it easy.

I'm not a fan of plan loans generally, as they do introduce "leakage" into the retirement system. But for participants who are 30 - 40 years from retirement, I appreciate from their end it looks like a long time to "tie up" their money. Yes it is in their interest to do so, and all that time is on their side in terms of accumulating retirement savings, but that's not the perspective of most younger employees. And it is their money after all. From a policy perspective a loan program is probably a reasonable compromise to help encourage retirement savings while still providing access that is not heavily penalized by taxes (assuming it is paid back timely).

To MoJo's point, lenders won't make such loans becuase they can't collateralize the account balance - exactly right. But the plan can do so and foreclose on it with a distribution offset - just as a bank can do with a loan fully secured by a savings account. Which is why I think savings account secured loans are the most comparable for determining rates pursuant to the regs' "similar circumstances" requirement.

I don't think mortgages are at all comparable to plan loans. Lenders have to jump through a lot of hoops and incur significant costs to foreclose on a home, and then they still bear the risk of actually selling the home for enough to make their money back. Compare this to how the plan deals with a default. The loan is an offset against the distribution. That's it. No lawyers, no delays due to borrower banruptcy filings, no notices, no evictions, no realtors, no trashing of the property, no risk that the collateral will be worth less than the loan - IOW no risk of loss to the plan at all, zip, zero, nada. Just offset and be done with it. And plan loans are typically for 5 years, and in the mortgage world short term mortgages get lower rates than 30 year mortgages. Looking at the link you posted, looks like conventional mortgages are currently just under 4%. So even if we accept mortgage rates as a proper comparison, prime (at 3.25%) plus 1 is still too much. I googled for loans secured by passbook accounts and found this link: http://www.bankrate.com/finance/savings/passbook-loans-paying-to-borrow-your-own-money-1.aspx It says such a loan is typically 3% over the rate paid on the savings account. Checking Wells Fargo, the highest rate on a savings account right now is 0.05%. A 26 month CD is 0.20%. So add 3% and you get a range of 3.05% to 3.20%. Prime is currently 3.25%. So maybe our plan loan programs should provide for a loan rate of prime LESS 0.05%! In any case it is difficult to see how IRS can justify a prime plus 2 standard (except they have guns and the color of authority).

Prime rate may be for banks "best customers" only, and indeed "very rare". But what does a bank charge for a loan FULLY SECURED by the balance of a savings account held at that bank? This is akin to what a plan loan is like, the plan has NO RISK, just like the bank making a passbook secured loan has no risk. Prime+2 seems high.

Definitely would not want to roll the stock out to an IRA, even if he can find a custodian to hold it. Then the recent Peek v. Commissioner case would be directly applicable. If the IRA owner guarantees any company debt to a lender (a virtual requirement for a small business to get a loan), this extension of credit will be a PT and the IRA will cease to be an IRA and be fully taxable. There is at least an argument that Peek doesn't apply to qualified plans.

Also before terminating the plan he should be sure that there have been "recurring and substantial" contributions made to it, not just the original rollover contribution.

Presumably if it is a true ROBS, the plan owns the stock of the company. So, if he terminates the plan he will take a distribution of the stock and have to pay ordinary income taxes on the fair market value of it (plus penalty if under 59-1/2). Seems straightforward enough from the plan side, but where is he going to get the money to pay the taxes if he needed his retirement money to capitalize the business in the first place? Why is he asking you instead of the folks who set up the ROBS for him?

1. If I had become and enrolled actuary, I would have saved a lot of money in outside actuarial fees. 2. Most important, how are you going to get new business? It is a relationship business and you or someone has to be great at this end of it. 3. All you list are challenges you will face, which is the "biggest" will vary depending on what's going on at the time. When times are good, attracting and retaining good employees is a challenge while the business rolls in. When times are slow, bringing in new business is paramount. 4. Best things about being an owner - get to do it your way, it makes you a better pension consultant to other business owners as you will share the same experiences. You should make more money than as an employee and hopefully you are building equity that you can eventually convert to cash. You end up on the good side of the tiered gateway allocation. 5. I would do it again in the time period I did it. I don't know if I would do it again now. The race to the bottom on fees is making this a much tougher business. Other - if you do own the business, remember it is an investment from which you should derive an appropriate risk-adjusted return. You should budget for a profit in addition to a compensation for yourself that is equivalent to what it would cost you to hire yourself in the market. We targeted a 20% profit - but it took us a number of years to get there. Be sure to go to the NIPA BMC every January. There are other organizations such as Vistage that provide support for business owners. You can hire technical help, but you need to define the vision for your firm and drive to fulfill that vision. Try not to borrow a lot of money otherwise the lenders own you and control you. Design your fees and billing such that you get paid as the work is done, not after the fact. Enforce a strict policy on collections and stop providing additional services when a client is in arrears. Always carry E&O insurance, it is a cost of doing business so budget for it.