Gary

Bird, Your comment is very helpful. So then if the QNEC is not used for ADP compliance then can it be applied to meet gateway? From a practical perspective, moving the QNEC (this one time) that is not needed for ADP, to the profit sharing plan to be applied to gateway, has no real impact. Perhaps the QNEC can stay in 401k account, but be considered a non elective PS contribution and be tracked as such (kind of a hassle), to avoid the need to have client move the money out of 401k and into PSP, etc. Thanks.

I mail hard copies of the form 5500 to all our clients (originals and copies). It is extremely tedious. Is anyone out there filing FOrm 5500 electronically? I haven't even had the chance to research that option. If so, how is it going? I believe it becomes mandatory in 2009. ****** What is the concensus re: Form 1099R? Are TPA's doing it for clients or are TPA's leaving it in the hands of the plan sponsor to provide to ditributees? I have a lot of mom and pop plans with very few employees and they may not want to be bothered with this. Curious to hear how others' handle that as well. Thanks.

It doesn't make sense that a QNEC would not apply to the gateway when a non elective PS contribution would count towards gateway. After all the only apparent difference between the QNEC and the PS non elective contribution is that the QNEC is 100% vested immediately. I suppose if QNEC isn't used for ADP then it can apply for gateway, but if used for ADP it cannot apply to gateway. If my understanding is correct. I guess the lawmakers feel if it is used to pass ADP then it shouldn't get the double bang for the buck, unless it were a safe harbor. Thanks.

Thanks I think I got it. So unlike the 401k safe harbor non elective contributions that do not allow for a last day requirement a QNEC can impose a last day requirement.

The QNEC or alleged QNEC was intended to be a profit sharing contribution to meet the 7.5% gateway required. The two plans are combined with a DB plan to pass non discrimination. However, instead of it being a straight profit sharing contribution the client (thinking he had to make a 3% 401k safe harbor contribution) contributed 3% to the 401k accounts of the 4 employees. This left me with the following basic questions: 1. Can a QNEC be made even though not eeded to pass ADP? 2. Can a QNEC (as opposed to a 401k safe harbor) require last day of plan year employment as a requirement to be able to receive the QNEC? Thanks.

The below post was submitted on the 401k board as well. An employer sponsors a 401k plan and a profit sharing plan. The plan has two HCEs and 5 NHCEs. 2007 was the first plan year. No 401k deferrals were made by any employee and no employer contributions were made to the above two plans for the HCEs. 1 of the NHCEs terminated during 2007 after the completion of 1000 hours and had met the plan's eligibility requirements at the time of plan inception (1/1/07). The challenge is addressing the 1 terminated employee. The employer contributed 3% of compensation for the 4 active NHCEs to the 401k accounts and 4.5% of comp for the 4 active NHCEs to the profit sharing account. The profit sharing contribution can clearly exclude the terminated employee due to the last day requirement. The 3% that went into the 401k plan is allegedly a QNEC. Can a QNEC be made even if not needed to pass ADP test? If the answer to the above question is "yes", then the terminated employee would not need a QNEC to pass non discriimination and thus would not receive a contribution. If the answer is "no" then does the 3% QNEC need to be transferred to the profit sharing plan and deemed an additional non elective profit sharing contribution? And finally, can a QNEC impose a last day requirement, like the profit sharing contribution can? Of course a 401k safe harbor non elective contribution cannot impose the last day requirement. Come to think of it I believe the former employee could just be excluded from the plans as long as tests are passed. Thank you.

An employer sponsors a 401k plan and a profit sharing plan. The plan has two HCEs and 5 NHCEs. 2007 was the first plan year. No 401k deferrals were made by any employee and no employer contributions were made to the above two plans for the HCEs. 1 of the NHCEs terminated during 2007 after the completion of 1000 hours and had met the plan's eligibility requirements at the time of plan inception (1/1/07). The challenge is addressing the 1 terminated employee. The employer contributed 3% of compensation for the 4 active NHCEs to the 401k accounts and 4.5% of comp for the 4 active NHCEs to the profit sharing account. The profit sharing contribution can clearly exclude the terminated employee due to the last day requirement. The 3% that went into the 401k plan is allegedly a QNEC. Can a QNEC be made even if not needed to pass ADP test? If the answer to the above question is "yes", then the terminated employee would not need a QNEC to pass non discriimination and thus would not receive a contribution. If the answer is "no" then does the 3% QNEC need to be transferred to the profit sharing plan and deemed an additional non elective profit sharing contribution? And finally, can a QNEC impose a last day requirement, like the profit sharing contribution can? Of course a 401k safe harbor non elective contribution cannot impose the last day requirement. Thank you.

What ak2ary says makes sense based on my current understanding. And I don't dispute anything in his post. Regarding the computation of allocations for 401a4 testing: 1. does it necessarily follow that the allocation must be equal to the actuarial present value (using non discrimination testing assumptions) of the increase in accrued benefit (assuming current year annual testing)? Or could the allocation simply be the contribution credit divided by compensation (which appears to be what is required when using the modified general method under 1.401a4-8c3(iii)©)? 2. And if the allocation could be the credit divided by compensation, then could it follow that the allocation method would not be considered cross testing? I expect that the allocation must be handled the conventional, conservative way, i.e. actuarial PV of increase of AB and thus resulting in the allocation method being deemed as cross testing just like any other DB plan. ***** Bonus question: A plan sponsor raised the question: If a cash balance plan wants to use a retiree's account balance (say 100k at retirement) to purchase an annuity then can the plan provide actuarial equivalence re: the retirement benefit payable as an annuity under the plan, equal to the annuity that the account balance can purchase from a designated insurance company? Or perhaps the greater of the annuity the insurance company would provide and the annuity determined with an interest rate of 0% and some standard mortality table. By doing that "greater of" method provides a minimum definitely determinable benefit and yet always provides the benefit the account balance can obtain from the insurance company as the "greater of" benefit. I realize I am playing devil's advocate and that the above would likely be shot down due to using an unreasonable assumption for actuarial equivalence under the plan, but just trying to get our creative juices flowing. Bottom line is, the plan sponsor does not want to pay the "insurance costs" for the purchase of an annuity through an insurance company.

It seems to me that the accrued benefit can be expressed as the account balance and is not required to be the account balance projected to normal retirement age and converted to an annuity. The projected to NRA stuff seems to be part of the safe harbor under 1.401(a)(4)-8©, but not necessarily a cash balance plan requirement. 411(b)(5)(A)(iv) which falls under the 411(b) accrued benefit rules indicates that "the accrued benefit, may under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee's final average compensation." So the above seems to explicitly say that the accd ben can be the account balance. However, as far as I can see it would be prudent to provide an interest credit that either meets 96-8 or 1.401(a)(4)-8©(3)(iv)©. If the AB is the account balance, it can result in several ramifications: 1. The allocation can be used directly for general test non discrimination testing, instead of converting to an annuity and then determining the present value 2. The allocation can be converted to an accrual for ND testing just like an allocation in a DC plan. 3. If the plan amends the interest credit rate to a lower rate, the entire balance can be increased at the new lower rate and not just the future allocations. Any opinions on the above alleged fact pattern? I almost go as far to say that for minimum funding purposes the PVAB is the account balance, since if the plan terminated that would be the lump sum due to each participant, if it could be assumed that each participant would elect a lump sum. However, I don't see a problem with projecting the account balance to NRA (i.e. assumed decrement ages) and then using the segment rate to discount to current age when computing the funding target. Thanks.

Thanks Effen. Yes, I would be referring to the PPA funding terms, i.e. funding target, target normal cost. And you made it clear that PVAB for determining funding requirement must be projected and discounted as you state. Thanks.

Regarding interest rate I was just focusing on the interest crerditing rate to the account balance. My thoughts were: Pre PPA - the balance at the time of reduction in interest credit rate may still need to be projected at the higher rate since the accd ben was computed by projecting balance to NRA And for actuarial unit credit funding it seemed essential to determine PVAB by projecting at interest credit rate and discounting at valuation rate. Post PPA - it seems if the AB is the balance then it is no problem to change interest credit rate to a lower rate and just increase the entire balance by the lower rate. See the difference between what I would understand for pre PPA and what may be allowed post PPA. And lastly for actuarial funding, it seems if the AB is the account balance then the PVAB could be siimply the account balance; though I believe the official interpretation (not entirely sure) is that you must determine PVAB by projecting balance to NRA using interest credit rate and then discount using the 3 segment rates. In conlusion the aspects in my reply consist of: 1. AB preservation if interest credit rate reduced. 2. PVAB calculation for funding purposes. Any offical opinions, references appreciated. Thanks.

Pror to PPA my understanding of the way the AB needed to be calculated (for practical purposes) was: EE is age 50 NRA is 65 If account bal = 50,000 at age 50 it would be projected at the interest credit rate to 65 and then converted to a life annuity And for example if the interest credit were reduced from say 6% to 4%, the current balance (at the time of change) would need to be projected at 6% to preserve the AB since the AB is based on the balance to NRA, but future allocations could be credited at 4%. Bottom line is that the AB (annuity payable at NRA) must be preserved (which would likely entail the balance at the time of change being projected at 6%). At a minimum there could be substantial wearaway if the entire balance is projected at 4%. Post PPA It seems the above approach is still acceptable. However, as an alternative the AB can simply be the account balance, where the normal form of payout would be a QJSA. Are we in agreement on that? So the following could occur if the acct bal is the AB. 1. No need to project balance to NRA except for informational purposes for providing the projected benefit. 2. The plan can simply determine the benefit payable at the time of ddsitribution, where the payment can be a lump sum equal to the account balance or an equivalent immediate annuity, if the plan provides. 3. If the interest credit were reduced from 6% to 4%, then the balance is simply projected at 4% per year from that point on and thus no need to preserve the 6% interest credit to preserve the AB. Are we in agreement? Any other views? Thanks.

My understanding is that it is a multi-employer plan, simply because this other employer is contributing to the plan on behalf of some of their employees. I don't expect that it would be handled in any other way. Thanks.

An EE is a participant of Co. A DB plan. EE works for Co. B and Co B. pays for the funding requirement to Co. A DB plan for the EE. CO. A and Co. B are unrelated w/r/t ASG and CG purposes. EE used to work for Co. A. While EE was an EE of CO. A , CO. A funded plan on behalf of EE. Once EE worked for CO. B (when it was first formed 10 years ago), Co. B funds plan for EE. Is the 415 limit still 185k (at 65) even though each Co has funded and taken deductions for a part of the pension? Or are they separately calculated 415 limits for each period of service for each employer. Co. A still sponsors the plan. I am not sure, but I think Co. B is taking deductions for these contributions to Co. A's plan. Now Co. B is going to implement a cash balance plan and there will be coordination of two benefits for 415 purposes. In the case of CB plan, 415 limit may be lesser of 1) 415 limit to CB plan alone and 2) 415 limit based on total participation in the other plan while Co. B was funding less the benefit accrued by the EE in the other plan while Co. B was funding. Another thought is to have the CB benefit = Gross CB benefit less the other plan benefit (funded by Co. B) where 415 limit is gross 415 limit in CB plan less benefit in other plan. Thisof course can result in an AB of $0 for several years until the 415 limit in the new plan exceeds the AB in the other plan. Thanks.

To try and make a very long story just long. The IRS proposes that the 412i plan be unwound as follows: 1. Tax corporations for premiums made in each year from 2002 through 2007. 2. Tax individuals finally in 2008 as compensation in an amount equal to total premiums paid to plan 3. Finally in 2008 they would give corporation an equivalent deduction for compensation 4. The IRS claims that a final 5500 terminating plan would be filed with no sanction 5. The IRS also states that there would be no 4972 excise tax for non deductible contributions. From what I understand: disqualifying the plan may be a better alternative then the IRS proposed settlement. My impression of a plan disqualification would entail: 1. All premiums (i.e. plan contributions) taxed as compensation to employee for each year made and correspondingly deducted by corporation. Taxed only once. Perhaps there would be interest and penalties related to the amended individual returns, but atl east taxation only occurs in one instance. 2. I am not sure of what, if any sanction would occur with the final 5500, if the plan were disqualified. 3. I am not sure how there would be any 4972 excise taxes (or how it could apply) for non deductible contributions, since the plan is disqualified and there are no dedductible contributions anyway. My questions are now: 1. Are there other interpretations of the disqualification of a plan? 2. Does anyone know of any sanctions related to a disqualified plan? 3. Does anyone know of any 4972 excise taxes in connection with a disqualified plan? 4. Does anyone recommend a good reference source pertaining to the rules and procedures in connection with the disqualification of a plan? Sorry for the detailed post. Thank you.

Thank you. I agree with John's unwind proposal too. When I presented such a method to the IRS, I proposed it in the context of a disqualified plan, where the contributions would be income to the individual when contributed since they were immediately 100% vested. Essentially the same thing as in John's post. The IRS said that they didn't accept such a proposition saying that they couldn't go back and treat the contributions as income since the Social Security and Medicare taxes were not withheld at that time. The IRS definitely will not the 412i plan be converted to a traditional plan for many reasons including a coverage violation and an excess deduction violation.

The paying of one year of annuity payments and the rest as a lump sum in the same year doesn't seem to cut it, as you would need to measure the sum of the two amounts and ensure that it does not exceed 415. I suppose if he took annuity payments for a few years and then terminated the plan in a few years and received a lump sum he may be able to avoid the surplus. Of course he would need to keep the money in cash (i.e. no investment return). A replacement DC plan may enable 46k to be deducted. Don't think a replacement DB plan would work, since Db 415 limit already reached.

I was asked to review two separate IRS proposal letters for two DB plans (not ones that I put in) that sets forth their procedure for unwinding each plan. They do not consider it a plan disqualification, but instead just an option to go into a closing agreement and agree to unwind the plans. I do not know if there is a specific technique to unwind a plan. The IRS says unwinding the plan would be treating the plan as if it never existed at all or like a non qualified plan. One of the plans is a 412i plan and the other is a tradtional DB plan. Both plans only include the husband and wife as plan participants. In the case of the standard DB plan the IRS proposes that the the trust be distributed and the participants take the proceeds as income. Simple and straight forward and does not remove corporate tax deductions. In the case of the 412i plan, the IRS proposes that all prior plan contributions be treated as income to the corporation for each year and that now the total value of contributions (i.e. premiums) be taken as income to the participants in 2008 and that a corresponding corporate deduction be taken in 2008. This large corporate deduction creates a large loss that will never be able to be offset with income. Clearly the unwinding is much more severe with the 412i plan. With the traditional plan the individuals are only taxed once; for the distribution. With the 412i plan the corporation (i.e. individuals) is taxed and then the same individuals are taxed for receving the distribution. That is, taxed twice in this case. On the one hand the 412i plan sponsor can raise the issue of inconsistency, though it may be futile. And on the other hand, the IRS can just say they can do whatever they want in each case. Any suggestions on what the 412i plan sponsor could propose? The 412i plan sponsor already requested that the IRS just tax the individuals once by means of a taxable distribution and not tax the corporation as well. The IRS rejected the suggestion, but yet seems to offer the same option for the other DB plan. Not a pleasant project to work on, so I can understand any reluctance to give an opinion here. Thanks.

So at this point it seems that the uniform allocation enables all employees to be deemed as participating under 401(a)(26). However, it seems that, aside from the participation aspect, the uniform allocation is not necessary as long as plan meets general test. That is, it of course would not be a safe harbor combined plan, but it can still pass non discrimination. And as long as enough employees participate (i.e. accrual > $0 in the case of non uniform allocation) the plan may be compliant.

The enclosed attachment seems to indicate some flexibility and variation to the uniformity requirement that apparently is part of 401(a)(26) and its regulations. It also seems that if 8 NHCEs receive a 7.5% allocation and 2 NHCEs receive a 10% allocation then an offset plan that only offsets the common base amount of 7.5% for all NHCEs is acceptable. Thanks.

Thanks. I will have to register and then get the attachment at a later time. For example say there is a 0.5 offset plan and the DC plan provides 7.5% for 8 NHCEs and 10% for 2 NHCEs and say that they all have a net AB of $0. Are you saying that none of these employees can be counted for 410(a)(26) or just the two with the 10% allocations? For example if all employees received 7.5% and all had a $0 AB they would all be counted, so it seems to follow that only the two with 10% allocations should be excluded. Thanks.

The 401(a)(26) analysis is very interesting. Is it discussed in 401(a)(26)? Thanks.

Regarding the uniformity offset for the NHCEs. My impression is that the offset should be the same percentage of pay for each NHCE if the plan is to qualify as a safe harbor plan. However, if some NHCEs receive a higher profit sharing contribution than others (say one employee receives 7.5% and another receives 10%) then the plan would not be a safe harbor plan. The profit sharing, 401k and defined benefit plan are all being combined for non discrim testing. So it would seem that if the offset is not uniform for the NHCEs, the plan would not be a safe harbor, but could still pass the general test on a combined basis.

In connection with a challenge by a pension professional I present the following assertions for definitive confirmation. If a DB plan provides say a unit accrual of 0.5% per year of final avg pay with pension payable as life annuity at normal ret this is considered benefitting for purposes of non discrimination and minimum participation. If the above plan is offset by a DC plan benefit and the result is sometimes $0 for an annual accrual, the participant is still deemed to be benefitting and participating as above. Thanks.

I believe Revenue Proc 2005-25 provides instructions with determining the fair market value of a life insurance policy for purposes of a sale and purchase.