Gary

Thanks for the responses. So my understanding is that the plan can favor one or two NHCEs over others, but do we need to try and put them (or him) in a certain class, like certain administrative-type employees or something to officially make it appear to not be benefitting a person by name? Regarding the 3-month aspect for 401(k) plans, it seems we can wait until 1/1/2006 or amend the profit sharing plan to 1) implement the 401(k) safe harbor feature and 2) amend the plan year to be from say 9/1/2005 to 12/31/2005 and then revert back to the calendar year plan year for 2006?

Considering a plan that provides 3% 401(k) SH, and 2% profit sharing for total of 5% (which meets TH) for NHCEs. Cash balance plan is to provide 3% (with a minimum dollar amount of Employer dollars to pass non discrimination) for NHCEs. Much more provided for several owners. 7.5% gateway is met, so plans are cross-tested for non-discrimination. In the plan design consideration, in order to pass ND tests it required one NHCE getting a larger cash balance credit. 1. Is there a problem with one or say a few NHCEs getting more than the rest of the NHCEs? That is, does some classification of employment need to be created to avoid the effect of name enumeration? 2. I need to check this point out further myself, but to what extent can the above design be implemented for 2005 calendar (plan) year? Do we have to wait until 2006 for the SH plan structure? What can be done for 2005? Thanks.

Even if this transaction did not violate the PTs, which it presumably does via an indirect sale. If the plan were to purchase it for $1, then clearly the plan would have an immediate investment gain based on the appraised value of this lot and thus lose the opportunity to make future deductible contributions and possibly deal with surplus assets, excise taxes, etc. at plan termination, in addition to eventual ordinary income from the IRA (where a future distribution is rolled) at 70+.

A guy wanted to purchase real estate from himself using pension assets from the plan he sponsored. Told him PT, no direct sales with interested party and plan. He then offerred to sell the real estate to a separate party for $1 then to have the plan purchase it for $1, thus avoiding the direct sale. It does not seem reasonable. Perhaps it would be considered a PT by means of an indirect sale or some other reason. Curious to hear them. And finally, if the plan purchased this real estate for $1 then the plan would likely be severely overfunded for the remainder of the plan with surplus assets at termination if the real estate is worth say $500,000 for example, thus an insane high return on investment.

With that said, then perhaps an administrator can take either position as long as they are consistent. I have a small plan (one participant) that actually says that the accrued benefit should never decrease. Which to me is reasonable to say that the accrued benefit should be at least as much as the end of the prior year's accd ben. However, it can produce funky results for eg. A participant begins a business at age 45, starts a DB plan at age 55 and has NRA as age 62. And he provides for a pension of 100% of avg comp (3-year) pro-rata on service where service commences at age 45 for accrual purposes. He uses compensation beginning with the eff date of age 55 for benefit accrual purposes. Say he earns $25,000 in the first year, then the AB would be 25,000 * (11/17) or 16,176 after one year (415 limit is 1/10 of 170,000). In the 2nd year he has compensation of $0. His AB would be 12/17 * 12,500 or 8,824, but since his prior year AB was 16,176 it would remain at that higher number. A bit funky!

The issue of whether an accrued benefit can decrease due to a decrease in average compensation continues to be a perplexing one. In question 9:25 of the 2005 Pension Answer Book, Stephen Krass addresses the issue of "can an accrued benefit decrease because of increasing age or service". Then goes on to give an example of a plan where the formula is 3% of AAC times years of service, where AAC is defined during the 3 consecutive plan years over the last ten that produces the highest average. And then says "IRS representatives have opined that, if the definition of AAC causes a reduction of accrued benefit, the prohibition against reduction WILL be violated.

A plan has its first plan year-end on 8/31/04. Therefore, the minimum funding is due 8 1/2 months after that date. Their corp tax return is due 5/16/05 since 5/15 is a Sunday. They make their contribution on 5/16/05. Is this a funding deficiency requiring a 10% excise tax? My recollection is yes, but perhaps there is an exception someone knows of. How does one prepare the Sch B in this case?

Plan has aggregate funding method normal cost (minimum funding) of $40,000. 412 full funding limit for 90% RPA and ERISA are less than zero. 404 Unfunded RPA is $60,000. Client wants to and plans on funding $40,000. So if client pays $40,000 then the quesion is: Does the FSA show a year-end balance of zero (no FFC) or is there a credit balance of $40,000 equal to $40,000 FFC + $40,000 contribution - $40,000 AFD?

I don't see a problem with this situation. Say the termination date is 7/1/2005. First I would check if a year of service is credited based on plan terms. Next I would compute accrued benefit based on plan terms for compensation and average compensation. I don't know terms of the plan, but I don't see why you couldn't use net earned income through 6/30/05 for the calculation of accrued benefit? A plan term of 7/1/05 is no different then an employee teminating at 7/1/05, so why not just compute it as if the individual terminated at that time if that helps.

After substantial review of pension plan loans I have uncertainty as to how to administer the plan in relation to the affected plan participant after the loan is considered a deemed distribution. Say a participant takes a $50,000 loan on 7/1/2002 and does not pay off the loan in compliance with the level amortization payment by not making his first required payment(s). Therefore, as of 7/1/2002 the participant should be charged with a deemed distribution for $50,000. After this occurs and the participant decides to pay back the loan say at 6/1/2005, then it would seem that the amount to pay back would be $50,000 plus interest at the loan interest rate. Say it turns out to be $75,000. Then it would appear that the participant would have basis in the benefit in the amount of $75,000. So that if say the participant were to take a lump sum of $200,000 at termination date of 1/1/2008, then $75,000 would not be subject to tax and not be eligible for rollover, but the remaining $125,000 would be subject to tax and eligible for a direct rollover. Is this analysis correct? And finally say the participant never pays back the loan and terminates at 1/1/2008 with a lump sum value of his accrued benefit of $200,000. How would this transaction be handled? SHould the value of the deemed distribution be increased with interest until 1/1/2008 (to say an amount like $100,000 for example purposes) and then such amount be basis that is offset to the $200,000, where then $100,000 is either distributed or rolled over? Thanks.

Questions regarding the allowance of pre-participation past service credit have been raised and I need some assistance to supplement what I have found. For purposes of this email, we will assume the corp sponsoring the pension is either a 1 participant plan or a plan with 2 employees. 1. If a corp forms a pension it seems clear that service prior to the plan inception can be included for accrual purposes 2. If a sole prop changes to a corp (and then forms a pension at the same time), it also seems that service with the sole prop prior to plan inception can be included for accrual purposes. The next few situations are to uncover potential limitations on this matter. 3. Say a person forms his own corp (and plan), can past service be counted from another company he owned if a) same line of work? b) different line of work? 4. Say a person owns a corp and establishes a plan, can he provide his past service with the same corp if it is in another line of work? 5. Say a person has a company that provides a service, then he is an employee of a newly created company (in addition to the other company just mentioned) that he runs and manages in its entirety (president), but does not own, can past service from the original company be counted for accrual purposes? Items 3 and 5 seem a little dicey to me, but curious to hear opinions. Thanks

My feeling is as follows: I'll assume that the funding meets the incidental death benefit requirements. It would be funded based on level premiums until normal retirement such that you are targeting an accumulated (or cash value) at normal retirement that would provide for his pension at NRA. So if the person quits after one year thenhis accrued benefit is equal to the cash value of the policy, subject to 415. Of course plan provisions would determine distribution options such as: 1. lump sum 2. policy itself 3. use cash value to purchase an immediate or deferred annuity.

A one participant 5500EZ filing (non Title IV) plan was converted from a DB to a Profit sharing plan eff 1/1/05. Title IV plans are considered terminated when a plan is converted from DB to profit sharing, as long as PBGC termination procedures are carried out. How would one consider and administer the example above? It seems the DB plan could be considered terminated at 12/31/2004 and the accrued benefits rolled into the PS plan. A problem would occur if assets exceeded 415 limits (or at least excess asset issues). And a final 5500EZ subsequently filed. Any thoughts?

Say a client has a 1-participant DB plan and at year-end plan assets are $50,000 and the client says he does not want to file the 5500EZ with the DOL since assets are less than $100,000. In this situation do some of you prepare the Schedule B and Form 5500EZ to deliver to the client for their records or do you just prepare such forms for your internal records or do you take another approach? One of the dilemmas is that we may prepare the forms and deliver them to the client and the client will say they do not want the forms nor do they want to pay for them, since they do not intend to file them with the DOL. Thus we are looking for ways of handling this administrative situation. Of course I realize that our communications on this situation need be addressed at the onset of our services. At least in the future. Thanks.

I am new to Welfare benefit plan administration. Our firm set up a life insurance only WBP using a whole life policy with cash value build up, with deductions in accordance with the limitations of 419(e). Regarding the Schedule A s/ info be entered on p. 3 much like an investment or s/ info be entered on p.4 for WBP info. If it s/b on p.4 what info s/b provided or how s it be presented? Since it seems much like an insurance investment with an increase in value for gains and decreases for expenses it appears like it s/b entered on p.3 where the beginning and end of year values are reconciled. Any input would be appreciated. Thanks. Gary

The director fees are reported on the personal return, I believe as 1099 and on the Schedule C, but definitely not W-2. But it is still income from the corporation to the officer, husband and director (though not owner) of the company that is run by just the husband and wife.

A corporation has 2 employees. One of the employees is also on the board of directors. Say the employee receives $100,000 as an employee and $30,000 as a director. Based on the 414(s) statutory definitions of compensation would the director fees be part of pension compensation? It seems since the employer is compensating the employee for services on behalf of the employer it would be part of compensation. I presume the plan can actually include it or exclude it (based on the plan provisions) as long as there is no discrimination based on applying the statutory definition for testing purposes. Logically, if the director fees were NOT part of the statutory definition of compensation then if the director is a HCE it only serves to help the NHCEs, since we would be using a lower comp for the HCE for testing purposes and thus result in potentially a higher ABP for the HCE. Thanks.

The husband and wife are the only employees/participants, but a 204(h) will be provided prior to plan freeze (if such amendment is done).

Thank you for the responses. My response to your responses follows. For purposes of this post, the plan year is 1/1/2004 through 12/31/2004 and we will assume that the adoption date is 3/1/2005. Regarding 412©(8) we are dealing with retroactive plan amendments that are adopted after the end of the plan year. So when © states that the AB cannot be reduced prior to the date of adoption, and the date of adoption is after the plan year beginning, I don't see the relevance of (B) (referring to the beginning of the plan year) My understanding from your responses is that if a 412©(8) amendment were to freeze the AB at 1/1/04 (or reduce it further), it would require filing with the Secretary and it would only apply to funding. That is, it would not and could not reduce the accrued benefit as of the date the amendment were adopted (3/1/05) per 411(d)(6). Of course if 411(d)(6) does not allow the reduction at all, then the freeze as of say 1/1/04 is basically fictitious, just to lower the funding requirement? Of course if an amendment freezes plan benefits effective as of the date of adoption has no application to 412©(8) since it is not retroactive and does not violate 411(d)(6). The point of the question is to establish a proper interpretation of the application of 412©(8), to know the options available and how to implement them. And lastly, it were after the 2 1/2 month period, the only option to minimize costs would be to freeze benefits as of the current date (or I should say after the 15 day advance notice), since 412©(8) relief is no longer an option and one must adhere to 411(d)(6).

Say a plan sponsor cannot meet their funding requirement for a plan year that just ended. My understanding is that 412©(8) allows for a retroactive amendment to the beginning of a plan year made within 2 1/2 months after the close of such plan year. It also seems that 412©(8)(B) allows for an amendment that can in effect freeze the accrued benefit as of the beginning of such plan year, thus meeting the criteria of "does not reduce the accrued benefit of any participant determined as of the beginning of the plan year to which the amendment applies" However, 412©(8)© seems to contradict (B) where it says "does not reduce the accrued benefit of any participant determined as of the time of adoption", since the adoption occurs AFTER the close of the plan year as compared to (B) above which refers to the BEGINNING of the plan year. If, for example the plan is frozen as of the beginning of the plan year, it seems that a notice need not be filed with the Secretary. It seems that a notice s/b filed if the accrued benefit is reduced even lower than what the accrued benefit was as of the beginning of the plan year. So for eg. if the AB were 1,000 as of the beginning of the plan year, it would be ok to freeze it at that time and amount, but it would require filing with the Secretary if the accrued benefit were reduced below $1,000. I intentially make an aggressive interpretation. Are there other interpretations? Any that have been supported with practical experience? Thanks.

Thanks again. I just had a telephone conversation with someone and he raised another issue. The issue was whether returned elective 401(k) contributions due to failing the ADP test must be included in the ABP test. I believe that the IRS opines that they s/b included, but I am not sure if it is explicitly in the regs. While I realize that elective contributions are included in the ABP test, I did not see anything in the regs that is expilcit on that issue. Thanks.

Thanks for your response wmyer. The plan is not a safe harbor PSP. So if I got this right. 401(k) deferrals as you say are tested under the ADP test only. And the 401(a)(4) test for the PSP: - does not 401(k) deferrals in determining rate groups for the ratio test, but - DOES include 401(k) deferrals in determining rates in the ABP test? So in other words, the plan may fail the ratio test for the one rate group, could have presumably passed the ABP test if 401(k) deferrals were ignored (i.e. using the same rates used in the ratio test), but yet fail the ABP test after using 401(k) deferrals due to the fact that the 1 HCE would defer the maximum? So in conclusion, the 401(k) deferrals play a role in both the ADP test AND the 401(a)(4) test (iff the ABP test is required)? Thank you.

My experience is almost primarily with DB plans to this point, but have a couple of fundamental points I would like to verify regarding a 401(k) plan that I am working with. Background - This plan has only provided profit sharing allocations and 401(k) elective deferrals. The plan has 1 owner/HCE and 18 NHCEs. Questions for verification - 1. Is it correct that the profit sharing allocations are tested for non-discrimination under 401(a)(4) and the 401(k) elective deferrals are tested under the ADP test? That is tested separately and independently of one another based on their respective testing procedures. 2. Can the profit sharing allocations section be amended to provide an allocation to a few groups where one of the groups has the names of 3 specific NHCE individuals? Thanks.

A friend called me and asked about self-insuring his company’s (180 employees) workman’s comp program. He wanted me to determine some sort of funding schedule. Does anyone know much about this subject? A simple perspective would be to get a pertinent body of data based on the claims, amount of claims, coverage, etc. do an analysis and arrive at a funding plan. And put in caveats explaining the breadth of the study and its limitations. Curious to know thoughts. Thanks. Gary

Say a plan pays $150,000 in cash from the plan to purchase a piece of land. However, there are closing costs, commissions, taxes, utilities, association dues, etc. The plan sponsor isn't sure if this chould be paid out of corporate funds, pension assets or both. My impression is that if no party-in-interest is benefiting from these payments, then it appears that these payments could be made out of corporate funds, since the pension is supposed to pay for reasonable administrative expenses only. Any thoughts?