Gary

I have done quite a bit of calculating regarding non discrimination testing, but am limited in the amount of practical plan admin and communications for 401k plan investing. With that said, below is a situation that I need to research further, but I submit a post to get some feedback as well: A small company - (owner and say 10 eligible employees) implements a 401k profit sharing plan where such plan provides: - elective 401k contributions - 3% 401k safe harbor contributions - discretionary profit sharing contributions w/ 3 year cliff vesting the client wants to have one sub account for each participant that consists of the 401k deferrals and 3% safe harbor contribution - he wants this account self directed where each employee manages their own Schwab account and can invest in whatever they want To my knowledge this approach seems allowed, though not likely a 404c protected situation. is that correct? Or other suggestions? The client than wants a second account for each employee that consists of their profit sharing contributions - he has a few methods he wants to consider for this account: 1) he manages these assets until the employee is vested and then allows for self direction at that time Is this approach allowed or other suggestions? 2) or he would have the account be self directed but with a menu of say 6 investment options or so to keep it more safe and simple for the employee and when the employee is vested he could then transfer the profit sharing account into the 401k account so employee can fully manage all assets. Is this allowed or other suggestions? In conclusion this 401k profit sharing plan investing and self direction can seem a bit awkward or unclear to me. Any suggestions/alternatives in general to handle/respond to these types of client questions/ideas? Thanks.

I understand what Socal is saying. Essentially providing the same offset to the owner and providing a larger gross benefit under DB plan may have no real practical impact except to please the IRS w/r/t a technicality. However, the owner in some instances is set up to receive nothing under DC plan and if her were to receive gateway it could put DC contribution above 6% DC combined plan deductible plan limit. Some food for thought.

I looked at 1.401(a)(26)-5(a)(2)(iii)(2) regarding "The employees who benefit under the formula being tested also benefit under the other plan in a reasonable and uniform basis" My thought is "the employees who benefit under the formula being tested" applies only to the employees who have the offset formula since they are the employees who benefit under the formula. That is, it seems that the participant who does not have an offset is not part of the group "employees who benefit under the formula being tested". His formula (the non offset formula) is not being tested; it's the offset formula that is being tested. Well of course my opinion doesn't necessarily matter if the IRS sees it differently. It doesn't seem to serve any purpose to have the one owner have an offset allocation that is the same as the NHCEs or at all for that matter. The issue is are the NHCEs benefiting under DB plan. Providing more or less to the one owner doesn't seem to change weather the others benefit or not. A uniform offset to those with an offset benefit does make sense though. So if all NHCEs receive gateway that would be reasonable and uniform. Just my opinion. Thanks.

A plan sponsor partiicpant is taking an in service distribution on a quarterly basis. He asked how the withholding should be handled. As far as I see it, the income of course is taxed as ordinary income and with regard to withholding it should be handled just like any W-2 income (except no FICA taxes). I think this is something that is in the domain of their CPA (or payroll provider for that matter) not their pension professional. Does my opinion seem reasonable? Better ideas? Thanks.

I inadvertantly put in an incorrect post and deleted it.

Regardin a26 I thought a unit accrual of 0.5 is considered benefiting under the plan and that the offset did not apply in determining if participant is benefiting? thanks

Below is a section of a DB plan that defines the benefit formula. I just provide the concept in simple terms for purposes of this question. Class A Participants: Owners (say 2 of them) Benefit of 5% per year Class B participants: Employee Smith, Employee Jones, Employee Brown Benefit of 0.5% per year offset by benefit from profit sharing plan Class C participants: all other eligible employees (say 3 other employees) Excluded from plan Without getting into details the plan will be tested with DC plan to pass non discrimination Any problem with having Classes of participants that directly reference names as above? Thanks.

Regarding Andy's comment pertaining to 75k that it is a PT and a disqualifying plan defect. However, if the reality is that the owner/participant cannot pay back plan then it would seem that the partiicpant must be taxed. So then what? I understand that it is a violation of plan terms, i.e. distribution before NRA; so perhaps the sponsor files VCP and tries to obtain some sort of resolution that way to avoid plan disqualification. This question is in connection with a one participant plan. Thanks

Ok I need to get a handle on the excise tax. That creates the question as to how much interest is reasonable to assess on the balance? Perhaps an interest rate consistent with the rate of interest that can be used for a plan loan? Now let me back up a bit. I want to focus on a basic practical view of the concept between DD and PT. 1. Say a plan loan of 50k is properly drafted and if participant fails to make any payment: - than my understanding is that it is a DD only? 2. Say the same situation as 1 above occurs but the loan is instead 75k. - my understanding is that all 75k is a DD and 25k (amount above 50k limit) is balance subject to PT (or maybe none of balance is subject to PT since there was a loan agreement in place)? 3. Say an owner just withdraws 75k with no plan loan in place. - my understanding is that all 75k is DD and all 75k is balance subject to PT? Thank you.

For purposes of this question: It is all a plan loan in the amount of 75k. The individual fails to make any payments. My underestanding of the above is that 50k would be a deemed distribution and 25k would be a PT. Assuming my above comment is correct. My understanding is that it would follow that all 75k would be taxable and subject to a 10% penalty if individual is under 59 1/2. Now re: the 25k PT it would seem that in the tax year it occurs the excise tax would be $3,750 or 15%. In the second year it would be $7,500 since it would be a PT of 25k for the prior year that is uncorrected and a 25k PT in the current year that is not corrected. This would continue until the plan is terminated and the IRS can asses a 1`00% penalty if PT not corrected. Any comments to this analysis of excise taxes on PT? Thanks.

Say we have a one participant plan; i.e. owner/employee. Say he is age 50 (i.e. < NRA) and he withdraws from his DB plan $75,000 and does not make any payments back to plan. Up to 50k (assuming that is the loan limit in t his case) can be deemed distribution subject to income tax and 10% penalty. From a practical perspective it would be easy administratively to treat the additional $25k the same way and report 75k in form 1099r. How are small plan pratcitioners handling this type of situation? I suppose the technical approach is to treat the 25k as a PT. Then how does this work from a tax perspective (provide specific numerical explanation) if employer never pays it back to plan? Thanks.

It is clear from the 2008 FOrm 5500 instructions that a corporate extension (assuming all conditions are met) can automatically extend the 5500 due date until the due date of the corporate tax return. There is a principal at my office (he is a CPA) who is not satisfied that the Form 5500 instructions are sufficient proof to support the availablility of using a corporate extension as an automatic extension. He wants to know of the "law" supporting such an option. Does anyone know of a code section or regulation that provides for the use of a corporate extension as an automatic extension? Thanks. In 2520.104a-5 (a)(2) it states the due date as 7 months after plan year, unless extended. See "when to file" instructions of appropriate annual Return/Report Form. So that may be the extent of info in the law and regulations.

What you say makes sense. However, my point is that in this particiular situation where the person has 22k of compensation and makes a Roth 401k of 22k box 1 of W-2 FOrm is $22,000. On page 8 of the Publication 590 it says in the section "What is Compensation" that the IRS treats as compensation any amount properly shown in box 1 of FOrm W-2 where compensation is used to determine the maximum IRA contribution. So in my example it would follow that since the person has W-2 box of $22,000 why couldn't he make an IRA contribution? I imagine that the prior answer provided (that being that the IRA limit would be $0 in this case) is correct, but if W-2 taxable compensation in box 1 is the deciding factor as it seems to indicate in the publication than following that statement would allow for an IRA contribution be it Roth or traditional. Thanks.

I understand the comment about earned income and salary deferrals reducing earned income, but in this case the deferrals are Roth 401k contributions and they don't reduce the income on W-2, box 1 and I have seen where compensation for IRA contribution purposes is tied to W-2 box 1? Thanks

Say we have a married couple named Jack and Diane Jack earned W-2 compensaiton in 2009 of $22,000 and is age 60. Diane had no W-2 compensation and is age 45. Jack participated in a 401k plan in 2009. They file a joint tax return and have AGI below all applicable limits. Jack made a 401k Roth contribution of 22k (16,500 + 5,500) in 2009. Do we agree that Form W-2, box 1 for Jack would show $22,000 since all contributions are Roth and taxable? Is it true then that he would be able to make a $6,000 Roth IRA contribution for 2009? And is it true that he could make a $5,000 spousal Roth IRA contribution for 2009? This means with W-2 compensation of $22,000 Jack would make retirement plan contributions of $33,000 in total. Is the above accurate? Thanks.

Regarding the comment that "household employees are not part of a trade or business, they are not part of a controlled group"; is information on this fact found in section 414? Somewhere else? Thanks.

I have a client who has his own small business with about 20 employees. I believe it is in the biotech industry. He sent a note saying he has a household employee and will want to discuss how this employee s hould be treated for purposes of his pension plan. The first thing I need to determine is is the employee is an includable or excludable employee for coverage purposes. My initial reaction (before I revisit and research this subject matter) is as follows: 1. if it is a 1099 employee than she would be excludable 2. if it is a W-2 employee than she might be non-excudanble, depending if she met the 21 & 1 and 1000 hours 3. if it is a leased employee than again it may potentially be non excludable, though I believe such an individual does not even become an employee until she completes one year of service as a leased employee. What comments are out there on this matter? Thank you.

Bird, When you say "by source" I assume you mean profit sharing, 401k safe harbor, 401k and so forth. When you reference Hancock and American Funds as a "true platform" I take that to mean a level of sophistcation where the accounts are reported by source and they provide a portfolio of investment options; as compared to Schwab who just sets up an account and lets the participant invest in whatever they want. Assuming my above understanding is correct then if I want to implement a true platform situation would I just contact a retirement plan representative at say Hancock and explain that I want accounts divided by source, with on-line access for participants, and a menu of investment options? Other than Hancock and American Funds what other companies provide a platform? Fidelity? Schwab if a sponsor is willing to incur the higher fees? Thanks much.

Bird Thank you for your response. Regarding plan admin: As you say if there are 25 (actually a bilt less) accounts it can be tedious re: record keeping. The record keeping challenge I see is to determine which portion is profit sharing and subject to vesting and which portion is 401k and 100% vested. Based on weighted averages it doesn't seem too difficult, but still adds work. Is my summary re: admin above in line with what you were referring to? And do you have other suggestions? Perhaps another brokerage firm can handle providing allocations between vested and non vested portions. Of course the brokerage firm (eg. Schwab) is only used as a custodian of assets and not to draft and admin the plan and not for non discrim testing and 5500s etc. Thanks

Can such an investment platform described in my opening post be the basis for 404© protection? If not what are some of the practical deficiencies? The money market default investment may be one. Thanks.

This question is an attempt to coordinate limits for an individual who wants to make 401k roth and roth ira contributions for 2009. Say a 1 employee/participant/owner corporation provides compensation of $24,000 for its one employee/owner. The employee is over age 50. Say individual makes a designated Roth 401k contribution of $22,000 for 2009. $16,500 plus $5,500 catch up. Issue #1 Regarding employer deduction limits and annual addition limits the catch up contribution of $5,500 is not counted. Do we agree? Therefore, a 25% employer contribution of $6,000 is acceptable since the annual addition would be $22,500 ($16,500 plus $6,000) which is less than the 100% compensation limit of $24,000. Now say the employee is below the AGI limits for a Roth IRA contribution. Regarding the 100% of compensation IRA contribution limit; is it equal to $24,000 since the 401k contributions were all Roth contributions? If the 401k contributions were made on a pre-tax basis would the 100% limit be $2,000 ($24,000 less $22,000)? Thank you.

A plan was terminated as of the end of it's 2007 plan year (10/31/2008). Assets were not distributed until October 2009 to the two participants (husband and wife). The plan never adopted the 415 regulations amendment which was to be effective 11/1/2007 and required to be adopted by due date of 2007 tax return or 7/15/09 with extension. The amendment had no impact in plan operation. The plan will not be submitted to IRS for dl for plan termination. In considering remedies, is the only option to file with voluntary compliance program? Just trying to determine a practical way to handle such a situation. Thanks.

Focussing on the 401k aspect again: Say an small closely held entity wants to implement a 401k profit sharing plan prior to 12/31/09. 1) I believe the only way to handle the CODA for the owner is that he must receive compensation in 2009 AFTER the plan is adopted and choose to defer some of that compensation if he wants a 401k deferral for 2009. That is, it is clear that an owner cannot just pay some of his own money into a 401k plan and then reduce his W-2 compensation for 2009, instead of deferring additional compensation for 2009. 2) Is it reasonable for the owner to defer future 2009 compensation into a temporary checking account and then move that money to an actual 401k retirement account if setting up the 401k account prior to 12/31/2009 is not logistically feasible? 3) And finally, my understanding is that a sole proprietor who receives Schedule C earned income (and not W-2 compensation) can actually wait until the due date of their tax return to make their 401k and/or profit sharing contributions; unlike with W-2 comp that requires it be received in cash or deferred at the time it is paid? Thank you for assistance.

We have a client who set up a 401k profit sharing plan. They have about 25 participants. They asked that we assist with establishment of accounts at Schwab. They want each participant to complete an application to establish their own self directed account. The money will likely start in the participant's money market type account and then be available for each of them to invest as they choose (i.e. no menu of investment options) and access on-line just as if they had their own savings account with Schwab. Is this a permissible type of self directed arrangement? Thank you.

We have a client who set up a 401k profit sharing plan. They have about 25 participants. They asked that we assist with establishment of accounts at Schwab. They want each participant to complete an application to establish their own self directed account. The money will likely start in the participant's money market type account and then be available for each of them to invest as they choose (i.e. no menu of investment options) and access on-line just as if they had their own savings account with Schwab. Is this a permissible type of self directed arrangement? Thank you.