Gary

A client has Sch C earned income of 400k for 2009. The client's entity is in a state that has community property rights. The inquiry is even though there is one self employement tax calculation can the income be split between each spouse thus enabling larger pension deduction for the two participants? Conservatively, I would prefer that the spouse receive W-2 from the entity as an employee for services rendered and then be included. Or what about having each spouse have a self emploment tax calculation for each of them? Of course, the spouse would have had to actually earn the income by working for the company. Curious to get any thoughts on this. Thanks.

A client has a SIMPLE plan in 2009. The owner of my firm wants to implement a cross tested plan for client. My understanding is that the SIMPLE plan can only be terminated at the end of 2009 and then in 2010 a cross tested plan can be implemented. That is, a qualified plan cannot be implemented in 2009 where the SIMPLE contributions are applied to a cross tested plan for 2009. Are we in agreement with my interpretation? Are there any other interpretations? Thanks.

That's what I'll suggest. Thanks. Like the Bart Simpson figure ;-)

Much of my time with small plans has been spent determining funding requirements, performing non discrimination testing and plan design for defined benefit plans and defined contribution plans. It also includes plan admin work for defined benefit plans. However, it hasn't consisted of the day to day operation and administration of small 401k profit sharing plans. With that said, I intend to present what I see as a practical approach to handle the implementation of a new 401k profit sharing plan. Of course, in addition to information I receive at this web site I will do my own independant research. I have a client who is a (S Corp) business owner with about 20 or so eligible employees. The client has just adopted a 401k profit sharing plan effective 1/1/09. Below is what I consider a potential way to handle some of the plan implementation aspects. 1. Assistiing client with setting up a master account and participant sub accounts at Schwab. 2. Will provide the eligible employees with i) SPD, ii) salary deferral forms, iii) beneficiary designation forms, iv) Schwab participant account appplications and v) notice to employees for det letter filing 3. For the owner, other than choosing to receive cash or deferring it, are there other methods used to enable the owner to make a deferral? That is, say the owner is scheduled to receive $5k in compensation for the remainder of 2009, this means that she can only defer up to 5k. Given it is a small closely held business I am wondering if there is any flexibility from a practical perspective. Curious to hear observations of the above mehods of implementing the new plan from an operational and practical perspective. Thanks.

A plan that is not covered by the PBGC can make a maximum deductible contribution to the DB plan and a 6% of comp contribution to DC plan. However, if the DB plan is covered by the PBGC the combined plan limit does not apply and then the employer can contribute up to 25% to the DC plan. Can an employer that would be eligible for the PBGC coverage exemption, choose to be covered by PBGC in order to obtain the higher DC plan deduction limit? Eg prof employer w less than 25 participants. Thanks.

Good points. It is a DB plan, but the real estate was not a plan contribution. Yes, there will need to be cash in IRA or pension plan to cover expenses as you say, if the rental income does not suppport the expenses. The plan does have some cash as well, I just didn't address that in my original question. Thanks.

I've never been a fan of real estate as a plan asset for all sorts of reasons, but plan sponsors of one participant plans love to do it. I have a husband and wife plan. They have plan assets of 400k where such value is based on a real estate property. The lump sum value of each of their pensions is 200k if they terminate the plan today. Can they re-title the asset as an IRA asset of 200k (50% of real estate) each for 2 separate IRA accounts? I suppose if a financial institution allows for such an arrangement it might work. And finally what about expenses and rental income; could they go in and out of the IRA account or must that be part of an after tax account? It seems it should be part of the IRA account though it is a little quirky. Of course no one wants to sell their depreciated real estate these days. Like I said, I'm not a fan of real estate in pension plans. Thanks.

Say a volume submitter for a small plan (less than 10 employees) plan has an NRA of 55 and it is left that way. They then apply for a det. letter timely. If the Service determines that the age should be 62 and 55 is not reasonable do they just advise that the NRA be amended prospectively and give 90 days from date of dl letter? Thank you.

Any suggestions on what to charge a single employer DB client for the PPA amendment? DC client? Thanks.

These clients want every angle addressed. So taking the devil's advocate role for the client to completion, the scenario could be: plan sponsor purchases real estate to be used as an office and employer real property in the plan. They terminate plan and the value of the office as an in kind distribution rolled over to an IRA that accepts real estate. Though I will cearly just instruct client not to make this purchase with pension money, curious to hear response to the devil's advocate scenario. The only way I might think it is feasible would be in it were an actual office building. Thank for the feedback.

A two spouse Db plan wants to purchas a condo with pension money. One of the spouses intends to use the property when he is in that town for business. My initial observation is that it is a PT since a party in interest is using (or benefiting from) the property. Does anyone know of any exceptions that might apply? And does it matter if when the property is used it is used as a home or an office? I'm wondering if the property were used as an office and the spouse paid market rate rent to the plan if it would be acceptable as qualifying employer real property. I doubt this could apply if used as a personal residence even if fair market rent is paid to plan. Thanks.

A business owner implements a DB plan. Do we agree that he must obtain an EIN for his pension trust and then when he opens a pension account at say Schwab he should provide plan name and trust EIN? Now let's say the owner merges with another company and the surviving company (not the original owner's company name) sponsors the plan and the plan is amended to be renamed. Regarding that original Schwab retirement account: SHould the plan sponsor now have the name of the account re-titled to the new name of the plan and should they (or is it required) that a new trust ID number is applied for for the renamed plan? Or can they just keep the original trust ID #? Thanks.

Ok, great responses. Now let's say there are 5 members on the Board of Directors and 3 Trustees. Do all members have to sign the resolution and amendment? Not a problem to include all names, but it is a good thing to know. My response would be the resolution might depend on the corporate by-laws and the amendment might depend on what the Plan states. Of course these things may not be spelled out explicitly in those documents. Thanks.

Regarding plan amendments to small closely held companies sponsoring a defined benefit pension plan. Say a company has an owner who is also the President and Trustee and maybe another owner who is also a director and then maybe a few employees in the company (or not). When adopting the plan or a plan amendment is it necessary to have a resolution or consent of the Board even if the Board memebers are going to sign the plan amendment, or is the amendment alone sufficient? Thanks.

I know this is off the beaten path, but this is my home so I thought I would approach the geniuses on this Board. A banker/investor type person approaches me and says he wants an actuary who can provide present values of blocks of bank owned life insurance policies for investors to purchase. I am not sure of all the details of the overall investment strategy, but it is clearly not life settlements. I even have to determine if these policies still require premiums. Well mathematically this isn't hard based on a chosen life table and a discount rate. The skill or challenge would be to arrive at an appropriate life table and appropriate discount rates. Individual health of the policy holders is not to be provided so it really boils down to an appropriate life table. And payments to the investors of course will be over a period beginning now and going perhaps thirty plus years into the future. One thought is to consider the yield curve or some pattern much like we use for our pension obligations. Of course another key point is how the banks will invest the money they receive as payment for the policies as they are the ones setting up the arragnement and need the return on assets to be acceptable. From the investors perspective it is much like a bond where the lower they pay the greater the yield. With that said any thoughts on how to research an appropriate life table and discount rate? Thanks.

Revisiting the QDRO preparation. I prepared the word document that would be presented to the divorce attorneys and spouses and then approved and forwarded to the divorce judge. The document I preared followed all procedures that the plan administrator requires and followed IRS and DOL language in prior Notices. However, it was not in a formal ORDER format. A tax attorney at my firm said that a word document is not an acceptable format to provide to the judge and that it must be stated as a formal ORDER to the judge. All that legalese, etc. The attorney than proceeded to draft an ORDER and disregarded my word document. Any comments on the action by this attorney? Thanks.

Revisiting the QDRO preparation. I prepared the word document that would be presented to the divorce attorneys and spouses and then approved and forwarded to the divorce judge. A tax attorney at my firm said that a word document is not an acceptable format to provide to the judge and that it must be stated as a formal ORDER to the judge. All that legalese, etc. The attorney than proceeded to draft an ORDER and disregarded my word document. Any comments on the action by this attorney? Thanks.

So in trying to come up with an explanation to a client: While there may be associated risks with a pension plan investment in foreign real estate, such as if plan gets disqualified and is subjeect to crediters, etc., is it accurate to say that it is a "prohibited transaction"? When I have read about PTs I don't recall if it explicitly denotes foreign real estate as a PT. If you know otherwise (especially the precise code section) let me know and I will revisit those rules. Thanks.

Thank you, vebaguru for your good explanation. All makes sense. Of course the plan sponsor I am referring to is the only plan participant and will always be the only plan participant, so I am not sure if the participant's rights are so applicable here in this I presume non ERISA one partiicpant plan. Though I suppose the US courts and IRS would not like plan assets that they cannot have access too in the case the plan were disqualified.

So if the IRS audits the plan and sees a foreign real estate investment they may request it be liquidated at that time? As one analysis. It's possible that the foreign real estate is part of a US corporation (private company I presume) that invests in such real estate and the plan would purchase stock of the US corporation investing in the foreign real estate. Not sure if that helps even if it is the situation. Bottom line is it adds risk (if potentially nothing else) to the pension plan is that what you are saying? Thanks.

How is foreign real estate necessarily different from foreign stocks, which most portfolios consist of?

It sounds like it is prudent to not invest in foreign real estate. Is there anything explicit that disallows this? It's a one participant/owner plan. Thanks

A one participant plan wants to invest in out of country real estate. Is this ok? I don't see why not at first blush. Actually owner wants to invest in a corporation (purchase stock) that invests in th is real estate.

I believe unwinding plan will be an option, but not a very good one since the deduction limits will be much less than the actual premiums paid. Thanks and we'll see.

The IRS acknowledges that 74-307 allows for a death benefit where 50% of the total premium is for a whole life policy and the other 50% premium is for an annuity contract. However, at the same tiime they say the death benefit is excessive. They say that the insurance policies provide for an excessive retirement benefit thus the death benefit is excessive. As I mentioned before it is true that the compensation was a little low for the benefits produced by the policies, but by the third year compensation was significantly increased and thus the projected benefit by the end of the fourth year was more than what the policies were guaranteed to provide. The IRS is going to prepare a written report and then we will have to respond to each aspect. If in fact the IRS chooses to disqualify the plan based on the first year compensation being too low than it seems there isn't much to do about it, but if they are willing to look at the big picture it should be clear that the benefits aren't excessive. Any interpretations are welcome. Thank you.