Gary

Thanks. Your comments help very much. For purposes of my comments and example we are treating the plans separately and there are no HCEs in the Associates Plan. I know I indicated that the general test rate group calculations are used based on plan participants of the one plan being tested. And we agreed on that. I may be overthinking now, but when doing the general test rate group calculation for the partners plan, I'm thinking (actually wondering) we still use the non excludable employees that are not in that plan for rate group testing ratios. That is, include all non excudable employees in the test? Or is it or must it be based on ratios of only the plan participants? However, on second thought (or at least one whould hope), including the non excludable NHCEs not participating in the partners plan would only hurt the chances of passing ND tests and thus are not needed to be in the ND rate group tests. Thanks and hope I am not adding confusion to the mix.

I know this is a DB board, but wanted to submit this here, since many DB practioners/actuaries also administer DC plans. A law firm has two plans. One for Associates - 401k only One for Partners and support staff and some other attorneys - 401k, 401m and PS Under the ABT for the partners plan (for eg.) when computing the allocation (or benefit accrual for cross testing) my understanding is that all non-excudable employees, are given an employee benefit percentage and included in the ABT test, as opposed to just the participants in the partners plan, even if the partners plan is to perform the general test on an individual plan basis? And furthermore, all allocations (or benefits) are combined from both plans, including elective deferrals? And that the rate groups for PS non discrim testing are based on just the participants in the partners plan and exclude elective deferrals (just PS allocations included)? For coverage testing the 401k, the 401m and the PS portions of the partners plan are all tested separately and must each pass? Thanks and interested in any differences of opinion (if they exist).

Say a self-employed individual files a Schedule C on his 1040 and sponsors a DBPP. We know that the salaries and pension expense for his employees (not counting the owner/employee) are deductions on the Schedule C and the remaining net earned income flows to the 1040 and then any pension deduction for the owner/employee is taken from the earned income that flowed through to the 1040 and shows as a qualified plan deduction on his 1040 on behalf of himself. The questions is, can his spouse in this case be considered a Schedule C employee where her salary and pension contribution is a deduction on the Schedule C or does she have to have her pension deduction from the earned income that flowed through to the owner(and spouse)/employee's 1040? Thanks.

Gary, I am confused. How could there be earned income in the prior year if you couldn't take the deduction in the first place because of the limited earned income? In other words, you were limited in the deduction to the NEI in year 1 in the first place. There isn't going to be a magical increase in the earned income in year 1 after the fact. The situation I referred to was for a plan that was in its first plan and the client apparently wanted to take a carryover from the first year and offset a prior year's earned income (when there was no plan).

The responses are good. I agree that we need to be careful with the issue that we are addressing. So with that said, if the earned income (after SS tax deduction) is 150,000, then the total deduction pension plus pension earnings is of course limited to 150,000 and of course no NOL can be created for a sole prop. Now we established the situation where a contribution in excess of earned income in the amount of 50,000 was made. And yes, this would be a carryover, and not deducted in that tax year. The consensus is that we cannot apply this carryover in a prior year if it was before the plan was established. That sounds reasonable. What if this were the plan's second plan year and there was earned income from the prior year that was not fully deducted. Maybe (or maybe not) in this case a deduction could be retroactively taken in that prior year to offset some or all of the remaining earned income? Though, I too have never seen an explicit situation that allows for this. Thanks for the help.

In the case I describe, it is a first plan year and the client is wishing, hoping that the 50,000 excess could be used to reduce a prior year's taxable compensation. If it were a corporation then it would be easy. The entity could have a NOL of 50,000 and perhaps apply it to a prior year. It is a bit dicey on an individual tax return. The thought and hope for the client would be that they could reduce the prior year's 1040 business income by the 50,000, thus lowering the tax bill. Yes, I suppose the CPA's have to decide the feasibility of this. Of course if it were a corporation the 50,000 would be within the 404 limits. But as a general question can a carryover be applied retrospectiviely, instead of prospectively? Especially for a tax year that is prior to the year the plan was put in existance?

Say a self-employed has net earned income of 150,000 (after 50% SE reduction). Say he bases his contribution on earned income of 50,000 and the computed maximum deduction is 150,000. Say he contributes 150,000. Then 100,000 (150,000 - 50,000) is deducted on that year's 1040 and 50,000 is not deducted and is a carry over. Assume that he is not subject to excise tax. We know carryover's can be applied to future year's as a deduction, but does anyone know if such carryover can be applied to a prior year's tax return, instead, to reduce a prior year's tax bill? Thanks.

We have a pension client that informed us that their plan had 120k in it after it's first plan year that ended 12/31/2004. We never prepared a valuation for 2004 and it appeared that the 120k may have been a rollover after the plan year. We later learned that the 120k was actually made or reported to be made on 12/31/2004 (though it may have actually been made after 12/31/2004) and that even though we never did a valuation they took it as a pension deduction on their tax return, thus indicating that it was on behalf of their pension plan. They went on to contribute 185k for the 2005 plan year. We are now preparing the 2005 5500EZ. Any suggestions as to how to file this return given that it is the first return being filed and there should have been a return for 2004? Thanks. Gary

Review the demographics in the second year and if necessary amend the plan to include an additional employee or as many as needed to pass the tests. Thanks.

An owner of a small company says he wants a retirement plan with a large amount going to him and as little as possible to his employees. Below is the story and any observations would be appreciated. Company: One owner and 13 other employees HCEs: One owner and 3 other employees Plan proposal: Combined DB/ 401(k) 3% safe harbor plan Both plans exclude the 3 HCEs. 401(k) plan includes only 2 NHCEs and passes ND on its own as follows: Coverage: NHCE % = 2/9 = .22 HCE % = 1/4 = .25 Passes ratio test ND: HCE accrual = 2.4% One NHCE > 2.4% Ratio = 1/9 divided by 1/4 = .44 NHCE concentration = 9/13 = 69%, thus mid point = 38.25% and safe harbor = 43.25% HCE ABP accrual = 3.08% (combining PS contribution, DB accrual, 401(k) deferral, and 3% safe harbor) NHCE ABP accrual = 4.3% Passes ABT DB plan includes 5 NHCEs and the owner and passes ND on its own as follows: Participation: 6/13 = 46% Passes 40% test Coverage: NHCE % = 5/9 = .56 HCE % = 1/4 = .25 Passes ratio test ND: HCE accrual = 8% one NHCE accrual =8% Ratio = 1/9 divided by 1/4 = .44 NHCE concentration = 9/13 = 69%, thus mid point = 38.25% and safe harbor = 43.25% HCE ABP accrual = 3.08% (combining PS contribution, DB accrual, 401(k) deferral, and 3% safe harbor) NHCE ABP accrual = 4.3% Passes ABT As a result it appears that both plans are in compliance and provides a significant amount to the owner and little to the employees. It seems that it might be best to assign employee groups or classes to avoid the need to specify employees by name in the plan document. Any observations from a practical perspective regarding the above analysis and its credibility would be appreciated. Thank you.

My understanding is that: - 401(k) elective deferrals are disregarded when determining non-discrimination rate groups - catch-up deferrals are disregarded w/r/t non-discrimination testing - 401(k) elective deferrals are included in determining the actual benefit percentage for the average benefit percent test. Does anyone know where these aspects are explicitly stated? Thanks.

An employer is to implement a defined benefit and defined contribution plan. The employer has 10 NHCE and 4 HCE (including owner). An eligible employee is defined as 21 & 1. And the above 14 employees are all eligible employees. The employer would like to include himself and 5 NHCEs in the DB plan. This would result in the minimum participation requirement of 40% being met (6/14 = 43%). The employer would like to include himself and all 10NHCEs in his 401(k) 3% safe harbor plan. The above plans have no problem passing coverage since only 25% of HCEs participate. And assume for purposes of this illustration that the non discrimination tests are passed as well. For employees in both plans they will meet TH requiement with 3% DC and 2% DB offset benefit. For employees in the DC plan only, they will receive DC TH requirement of 3%. 1. My understanding is that ALL ELIGIBLE NHCEs (i.e. all 10) must receive 3% SH contribution from 401(k) plan. That is, none of those employees can be excluded from the DC plan. Is that correct, or can some NHCEs be excluded from DC plan and not receive 3% SH? 2. Otherwise, are there any problems with excluding the HCEs all together? And excluding 4 NHCEs from the DB plan? Thanks.

As another alternative payment. If provided in the terms of the plan, is an annuity option defined as being an annuity where such payments are made annually in an amount that is at least as much as the RMD and no more than the single payment lump sum amount at such date. So in other words a person with an annuity of say $50,000 (assume the plan is frozen for purposes of this exampple) begins receiving this amount at his RBD and then subsequently receives say 50,000 again the next year then 70,000 the following year and then say a lump sum of his remaining pension of 250,000. Anything wrong with this type of payment stream, assuming, of course it doesn't violate 415? Where this funky payment stream is in accordance with a very flexible payment option allowed and provided for by the plan. Thanks.

The plan provides for the RMDs if over 70 1/2. The plan is a one participant plan, where the participant is the owner. The plan can be amended to provide for the desired payout. So I am interested in the legality of the payout I presented above.

An owner of a company has been receiving an RMD for several years and is now age 77. He is still actively employed by his company. He is interested in receiving a lump sum now. To my knowledge, he would either have to retire or terminate his plan in order to do so. This is set forth in 1.401(a)(9)-6 Q&A 13. Does anyone know of a way he can receive his pension as a lump sum and remain an employee? Conceptually it does not seem like a radical payment form, as long as he takes at least the RMD and rolls over the rest to an IRA. Any thoughts? Thanks.

A plan with two active participants is implemented on 1/1/2004. The plan is not considered a one-participant plan and thus is not eligible to file a 5500EZ, so must file a 5500. In the first plan year the corporation has no profits and pays no compensation and thus no benefits accrue and there is no funding requirement for 2004. However, one of the participant's rolls $50,000 into the plan during 2004. The client just now provides us this information regarding a rollover and never filed a 5500 for 2004. Any suggestions on a strategy for this situation? Thanks.

I don't administer the DC plan, but yes I agree, the aggregate contribution for that plan cannot exceed 25%, though for one person it can be as much as 100%. Thanks.

Say a participant rolls $150,000 from a 401(k) plan into a DBPP and the present value of his pension plan (excluding rollover) accrued benefit is $50,000. What are the loan limits in this case? Is it the maximum plan limit of $50,000 in total? Or is it $25,000 (50% of pension value) plus the entire $150,000 rollover? Or something else? Thanks.

Say there is a plan for 6 partners/doctors and their employees. Presumably the partnership makes the defined contribution plan contributions (as a company expense) along with other expenses to arrive at net income for the partnership and such net income is allocated on a Schedule K-1 for each partner. In looking at a client's (one of the partners) 1040 return, it has generated some questions. One expectation is that the pension contributions are deductible to the entire partnership and not shown or don't appear on the individual return. However, this client/partner showed $110,000 of income from the K-1 passed to the 1040 and a qualified contribution of $41,000 for 2004. The impression is that the $41,000 does not exceed 100% of the partner's compensation and in the aggregate, based on the entire plan, the $41,000 plus all other contributions did not exceed the aggregate limit of 25%. Question is: Is this a correct way of handling this from a tax return perspective or should no contribution show up on the 1040? Thanks

In a specific situation the plan loaned the money in cash directly to the corporation. It has not yet been corrected (i.e. reimbursed by the corp.)

Say a plan sponsor makes a PT of $100,000 to the corporation on 7/1/04 (calendar year plan year/tax year). Say the corporation pays the plan the $100,000 on 12/31/2005. Is the PT for 2004 = .15 * 100,000 * 1/2 = 7,500? And the PT for 2005 = .15*100,000 = 15,000? Or would it be based on just the use of the money, thus using some rate of interest like 1% per month, resulting in a PT for 2004 of: .15*.01*100,000*6 (6 months in 2004) = $750 for 2004 And $1,500 for 2005 since for 12 months? Or lastly, perhaps it is based on the first set of calculations until the plan is reimbursed and then it is recalculated based on the second set of calculations? Any knowledge out there on this calculation? The Pension Answer Book was somewhat misleading to me on this.

The person has not reached normal retirment and is still an employee. Yes he's married, but I want to consider the aspects outside of the spousal consent. That is, the points I raised in my post. Thanks.

A one person corporation with a DBPP with one participant withdraws money on a regular basis from DB plan. No actual plan loans taken and no apparent intent to reimburse the plan. It appears that this would be: 1. actual taxable distributions (not deemed distributions) 2. prohibited transactions subject to excise taxes. Any comments on the above? Also, if the amounts aren't refunded to the plan then the excise tax would be on-going year after year? And lastly say a person makes a PT in the amoun of $10,000 on say 7/1/05. Say the loan is repaid on 12/31/2006. What is the excise tax for 2005? 2006? Thanks.

It is clear that a one-participant plan sponsor can be exempt from filing the 5500EZ if plan assets are and always have been under 100k. However, such a sponsor always has the option to file. The question is: If say a plan sponsor files a 5500EZ in its first year, does that sponsor have to file the 5500EZ in the 2nd year if plan assets have always been < 100k? That is, could the sponsor elect to not file the return in the 2nd year? I do not see any explicit reason that would preclude a plan sponsor from choosing to NOT file, but wanted to get other thoughts and experiences. Thanks.

Regarding the pre and post retirement interest assumption. If you have say two separate accounts, where both are part of the same plan, then why can't each account (say one for one couple and the other for the other couple) be invested in accordance with each particular couple's funding goals, and thus potentially use different interest assumptions? Of course two separate plans of 2 participants each (meeting 401(a)(26)) is another way to skin the cat, but looking for a way to do it under one plan. Thanks.