Gary

The plan hasn't been implemented and we will likely implement a cash balance plan. I don't expect them to be too keen on adjusting the equity and having the partners absorb the actuarial loss. So I presume that the partner paying the shortfall for his pension may be the only alternative. Thank you.

So let's say the partner's lump sum is 200k and his book account is 180k. Instead of having the partner pony up the additional 20k to the pension plan, you suggest that he receive 200k from the pension and that they reduce his partnership equity by 20k?

Say we have a partnership that includes 3 partners and 10 employees. The partnership implements a DB plan where the formula is 2% of avg pay per year for the employees and each partner has their own chosen benefit formula based on the amount each wants to contribute to the plan. For purposes of this topic, we will assume the plan passes coverage and non discrimination. The client has no problem combining plan assets in one trust for the employees. However, the client is concerned and wants assurance that each partner funds his own pension. Of course the plan can be funded using individual aggregate based on the earned income for each partner. The challenge comes with regard to asset allocation. FOr example if after five years the partner terminates and wants to receive a distribution. Say the partner has a benefit with a lump sum value of 200k, but an asset allocation of 175k. The client wants the partner to come up with the additional 25k not the partnership. So the question is: how is this type of situation related to partnerships handled? DO you just typically have the partner make the 25k contribution? Don't think partner can forfeit the pension. Thanks.

Ok, so I'll presume that this technique is also allowed in DB plans and not just DC plans. Does this mean that we cannot exclude employees from the DB plan, unless they are part of a reasonable employee class (i.e. hourly employees) and not just a select few individuals? That is, I cannot have the plan provide a 0% formula for a few named individuals because 410(b) prohibits this? Any suggestions as to how to exclude select employees, while, of course passing coverage and non discrimination? Must I come up with an employee group classifcation? Thanks.

Say a plan sponsor wants to draft a DBP that provides different benefit formulas as follows: 10% unit accrual for Employees A and B 2% unit accrual for employees C, D, and E 0% for EEs F and G 1% offset formula for EEs H, I, J, and K. The above is hypothetical, and endless variations can apply. We'll assume that the above formula, combined with the DC plan passes non discrimination and coverage. The question is: How could or should the DB plan be drafted in terms of who gets what formula? Should it explicitly say who (by name) gets what formula? Must employee classes be created that includes specific employees by name? Even if there is no real criteria except to pass non discrimination? This is a pet peeve of mine. Thanks.

I had thought that the term more than one employer meant that more than one company (where each company was an employer) constituted more than one employer. My understanding of the previous response is that more than one company within the same controlled group constitutes only one employer. I will check into those definitions and if there is a specific cite to reference that you know of that would be appreciated. Thanks.

We have an individual who wholly owns two corporations. The two corporations co sponsor a pension plan. The owner is the only person who is an employee of both corporations. Say the owner earns 50,000 in one corporation (the one in which he is the only employee) and $25,000 in the other, which has all the employees. The pension formula will use the entire 75k when computing the pension benefit and for non discrimination testing. Let's assume we are dealing with the 2007 plan year. Is there a required way in which the minimum funding and/or maximum deduction must be allocated? That is, would the funding for the corp with the owner and his 50k be based on just the 50k and the funding for the other corp be based on the additional 25k of owner comp and the comp and benefits of the employees? Or can the total deduction be allocated in other ways, if desired? The only statutory knowledge I have observed is in 413©(4)(A), where it indicates that each employer shall be treated as separately maintaining the plan. Curious to hear other views and related statutory or regulatory cites. Thank you.

A small plan is implementing a cross tested plan. It provides for immediate eligibliety for 401k deferrals and 21&1 for the 3% 401k safe harbor, and Profit Sharing plan. The plan is effective 1/1/07. An employee enters the SH, and PS plan on 7/1/07 (i.e. the 1/1 or 7/1 on or following 21&1). The employee has $50,000 in compensation for 2007 and $25,000 in compensation from 7/1/07 through 12/31/07. Say a total employer contribution of $10,000 is made for the above employee. For his non discrimination testing compensation is it acceptable to use $25,000? As a result his allocation percent would be 10,000/25,000 or 40% and not 10,000/50,000 or 20%. Of course it would apply this way for all employees. It seems 1.401(a)(4)-12 allows for this. I also would then apply the 25k with regard to the covered compensation for computing the maximum deduction. Thank you.

In 2008 pension plans are subject to the new minimum funding requirements. I have not had to apply the new rules yet and I have a client that once a maximum pension deduction estimate for 2008 for a plan they are considering to implement. Does an estimate that is essentially the first year-end unfunded current liability (of course $0 assets) serve as a conservative estimate (i.e. not overstate) for the maximum deduction sound reasonable? It's a situation where the estimate is for doctors (actual data not yet provided) that will accrue the 415 limit in their first year of participation. A more detailed calculation with actual data and applying 2008 law will follow later. Thanks.

Another issue was raised to me that relates to this thread. A pension attorney came to me and said "according to an actuary, combined plans cross tested plans with a defined benefit plan component must use a cash balance plan and cannot use a traditional defined benefit plan". According to the attorney the actuary says it will vilate some accrual rules. I presume he may mean accrual rules under 411 or accrued to date non discrimination testing. In any event, I don't see a problem with using a traditional defined benefit plan, combined with a profit sharing and 401k plan and testing them on a combined basis. Any comments on the allegation made by the "mystery actuary"?

Mike Ok. That is how I had been doing it, but then I thought that you could not use the account balance approach. I know you use account balance for top heavy testing, but was not sure if it could be used for ND testing. That means investment returns are factored in? Of course with a new combined DC/DB plan it works out as accrued to date for PSP is only based on the one year, where the DB plan can be based on past service at inception. Do you have a cite that supports the accrued to date method for PS plans? I will dig for it, but in case you readily knew. Thank you. Gary

Is accrued to date for a PS plan allowed? Otherwise, how can you use accrued to date for a DB plan when combining plans for non discrimination testing?

Two spouses are the two partners of an LLC. They each receive separate Schedules K-1 reporting their self-employment income subject to SE taxes. Say the net SE income (after 50% SE tax deduction) is equal to 200k for the husband and 100k for the wife. So we are left with a total of 300k of net SE income. Should (or could) the 300k be split between the husband and wife in total between pension and pension compensation? Should (or could) the 200k for the husband be split between pension and pension comp and the 100k for the wife separately? Other approaches? Obviously, if we work with the total 300k it enables more flexibility. All of the above ok, if spelled out in partnership agreement? It may also depend on if they file jointly or separately. Thanks.

A company sponsors a 401k plan. They want to terminate their current plan and distribute plan assets. Is there a time frame (eg. 12 months) before they can implement a new plan? Does anyone know a specific citation on t his issue? Thanks.

A combined plan design I have used includes: - safe harbor 401k - profit sharing plan - defined benefit plan (not cash balance) I then combine all three plans for non discrimination testing on an accrual basis. I convert the current year PS allocation to an accrual rate and I determine the DB accrual using either the accrued to date method (i.e. inclusive of past service) or the annual method. I meet the gateway based on the annual allocation of the highest HCE. Does anyone see any problem with the above approach?

I intend to get more details regarding that. I believe the key employees received employer contributions when it was a money purchase plan. I am not sure yet if the key employees have made 401k deferrals since it became a PS/401k plan. Thanks.

This post was submitted to the 401k plans and retirement plans boards with no response, thus the reason for the post on the spirited DB plans board. An employer sponsors a defined contribution plan. It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature. For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004. The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions. The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years. It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed. Any other views? If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

An employer sponsors a defined contribution plan. It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature. For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004. The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions. The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years. It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed. Any other views? If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

An employer sponsors a defined contribution plan. It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature. For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004. The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions. The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years. It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed. Any other views? If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

Thanks. Another related aspect that I have wrestled with is: Say a person has K-1 earned income of 200k. Can the person use this 200k to divide between notional compensation for him, notional compensation for his spouse, 50% SE tax deduction, and the remaining amount as a pension contribution. For eg. Husband notional comp =25k Wife notional comp = 25k Approx. 50% SE deduction = 10k Pension cont = 140k Therefore, 25k + 25k + 10k + 140k = 200k That is, can earned income f be split between husband and wife or is a separate k-1 of earned income for the wife necessary?

I agree with your response. Playing devil's advocate. What if instead the spouse were treated as an employee, where the 20k was w-2 salary from the LLC and the 80k profit remained in the LLC and was used to fund pension benefits for the employees? i.e. the spouse. Then it seems that the income could be used for a pension deduction.

A husband and wife are the only partners of an LLC. Say they each receive separate Schedules K-1 of 100k each. For the husband the entire k-1 of 100k is subject to SE taxes. For the wife 20k is subject to SE taxes and 80k is not subject to SE taxes, presumably passive income. As a result there is a total of 200k of k-1 net income. It would appear that the 120k that is subject to SE taxes, i.e. earned income would be eligible for pension purposes where a total of 120k could be deducted. Is there a rational (any interpretations) for providing that all 200k can be deducted? That is, where 50% SE taxes plus imputed pension compensation plus the pension deduction add up to 200k? Or are we still limited to the 120k portion and the 80k cannot be considered in the equation at all. Thanks.

Curious to know what people do in practice. Regarding year-end plan assets for form 5500 reporting do you allow a client to provide the amount of plan assets or do you require that the client also provide brokerage statements, etc. to support the values they report? Thanks.

Thnk you, though a husband and wife pplan where they wholly own the business is a one participant plan. Per instructions to Form 5500EZ.

I didn't realize that a divorce settlement can qualify as a QDRO. Playing devil's advocate: In a one participant plan (husband and wife only) can benefits be assigned since Plan is not an ERISA plan (i.e. no employees)? That is, since it is a one participant plan can benefits be assigned informally, without having to follow QDRO technicalities. etc.? I have no knowledge of such a liberty, but wondered if anyone had come across anything re: a one participant plan. Thanks.