jpod

k man: No, it is not merely a question of the participant and his advisors taking a position. The practice group must first decide whether it can legitimately report some of the participant's comp. on a 1099, rather than a W-2. Only if the practice group reports some comp. on a 1099 can the participant then take the next step, which is to consider whether he should adopt and contribute to his own Keogh plan.

wsp: With a caveat, the answer to your question is basically "yes." The instructions to the 941 and W-2 explain what to do. This is my caveat. You say no "plan document," but you don't necessarily have to have a single document that resembles the type of 125 plan document we are accustomed to seeing. Is there a written explanation of how the plan would work that was distributed to employees? Are the rules of the plan described in the election form which was used? Are there Board of Directors resolutions that describe or refer to some set of rules governing the plan? Either one or a combination of the three MAY satisfy the written plan document requirement.

It is rare, but not impossible. I think less rare in the so-called "learned professions." Regardless, I think it is a bit of a dis(service) to the poster to provide a response that is a thinly veiled put-down.

Without spending any brain matter on your question(s), the thought occurs to me that perhaps the transition rules in Notice 2006-79 will allow the Company and its directors to do anything which they would like to do assuming the CC will not occur until 2008.

All kidding aside, it is possible for someone to be both an employee of and independent contractor for the same service reciepient. The devil is in the details (i.e., "facts and circumstances"). In the first instance it is up to the practice group and its legal counsel/tax advisors to determine whether this can work. They shouldn't be bullied into it just because the Dr. whines about it, threatens to quit, provides an indemnifcation, etc. Assuming the facts justify it, the practice group would report some compensation as wages on a W-2 subject to all required tax withholdings, and some compensation on a 1099-Misc., subject to no withholdings. Absent the 1099-Misc. income, the Dr. can forget about the idea of setting up a separate plan.

Exactly how was the $500k moved from the ex-spouse's qualified plans without a QDRO, and what is a "judge's agreement"? In addition to a qualification problem for the qualified plans involved, it would have been an invalid rollover, the ex-spouse would have liable for tax on the $500k (plus a 10% add'l tax if younger than 59-1/2), and then excise taxes attributable to the invalid rollover pyramiding year after year after year. And, perhaps the lack of validity of the rollover creates a problem seeking protection from creditors under the pertinent state law. Possibly I am misunderstanding you, and maybe what happened is that the ex-spouse took the $500k from his plan and rolled it over to his IRA, and then he split the IRA pursuant to the Section 408 divorce rules, for which no QDRO is necessary. But, if that is what happened, what was the distributable event under the ex-spouse's plans?

Client needs to be aware of (a) 990 reporting requirements, and (b) if it is a 501©(3) or (4), the rules for avoiding Section 4958 excise taxes.

I agree with what mjb said, except to note that 457(b) contains some rules limiting the timing of payment. If the intended arrangement will not comply with those rules, you're stuck having to work around 457(f) (and 409A) even for amounts not in excess of the annual dollar limit. Also, you mentioned a select group of "HCEs." Note that the DOL's interpretation of who can be in a "top hat" plan is not the same as the IRC definition of "HCE." In many cases (depending upon the employee population involved and their compensation levels), a "top hat" group is much smaller than the HCE group.

1. I have had experience with the approach I am suggesting. I cannot recall a situation in which the IRS assessed penalties. In the past there used to be some indication in the IRS' Manual (generally available on the IRS website) that a "first time filer" would be treated kindly. I'm not sure that is still in the Manual. And, as indicated, anyone who guarantees that you will avoid penalties by voluntarily filing the late EZs is going out on a limb. 2. You are reading that Q&A incorrectly. I think it is suggesting just the opposite: there is no automatic relief from failure to file EZs or late filing of EZs. However, the answer notes that the IRS can waive penalties if the failure to timely file was due to "reasonable cause." Those are the magic words, and that is why I suggested that your explanation be in the form of a "Statement of Reasonable Cause."

Consider the following approach: Prepare and file the past due EZs. Attach to each EZ a "Statement of Reasonable Cause" explaining that you are a "first time filer" (i.e., you never filed a 5500 before and never had to file before the 2002 year and you only learned recently about your obligation to file - assuming of course that all of that is true). The Statement of Reasonable Cause must be signed by you. Mail all the past due EZs under a single cover letter noting in the letter that a Statement of Reasonable Cause is attached to each EZ. Decent chance IRS will assess no penalties, but there are no guarantees.

Does the plan limit hardships only to the safe harbor circumstances listed in the regulations? If so, no "hardship" yet. Does the plan define hardship according to the general rule in the regulations (i.e., not limited to the safe harbor circumstances)? If so, this sounds like a "hardship" to me, or at least not one which any IRS agent is likely to challenge.

If it's a prototype, an amendment may be necessary; you need to check the adoption agreement. Most individualized plan documents don't specify, but leave it open, in which case all you would need to do is give notice (presumably in advance).

Belgarath: You bring up a very good practical issue. I am not a TPA, but what I have advised clients that are TPAs or otherwise responsible for preparing the 5500 that the burden must be placed back on the employer to answer this question. The nature of the question on the Schedule H or I should be explained in detail to the client (a one-page form should do the trick). Make the client give you the answer(s) to the question in writing. If not, return the forms to the client for signature without answering the question, pointing out to the client that it is blank and needs to be answered, and do not include your name as the "Preparer."

Medusa: After a very careful, line-by-line reading of the question on the Schedule H or I, as the case may be, and then the same careful reading of the instructions, I think one should find it very difficult to interpret the question as referring to the 15-day deadline, rather than the "as soon as administratively feasible" rule. The instructions do not even mention the 15-day deadline, so the "deadline" referred to in the question must be the "as soon as administratively feasible rule," in my opinion. While it would not surprise me that most preparers automatically assume that the question refers to the 15-day deadline, I would not characterize the other interpretation as "too strict."

I have the impression that this is a small plan not subject to the audit requirement. If I'm wrong, perhaps you can tell them that they will never get a clean audit report and that will put the fear of God into them.

Extremely unlikely that the IRS will approve anything in VCP other than the prescribed correction methods. If you want to take a shot proposing something else, I suggest doing it on a john doe basis. I don't know what that something else might be without knowing more facts. What are the numbers of HCEs and NHCEs, roughly?

You might very well be alone (because I've seen it as well), but you are interpreting it in the way in which the DOL expects you to interpret it.

BXO: I was referring to the institutional TPAs, like the Fidelitys and the Principals, which sounded like the kind of organization the OP is involved with. I do see the smaller, "hands-on" pension consulting and administration firms assist with 414 analysis, but in my experience they typically they disclaim responsibility in some fashion and tell the client that the issue must be reviewed by the client's legal counsel.

There is a significant degree of potential liability because you are agreeing/volunteering to undertake work that you are likely to perform incorrectly because you are not being given complete or correct information. If you want to protect yourself a little bit, you can do the work based on the information you are given, and then go back to the ultimate client and say "we can't vouch for this; you need to have your own lawyers review the issue," but then you're back to square one and have accomplished nothing. I've never seen a reputable TPA that undertakes a Section 414 analysis. Am I naive?

I can't answer your question, but I would ask the following questions: Is there an important business reason to your client to continue to treat this individual as an IC (or more than one reason)? Does the associate wish to be treated as an IC? (He may be socking away $42k per year into his own DC plan as a sole proprietor with no employees.) Do they have a written agreement between them that might be relevant? I don't know what type of state auditor you are talking about, but quite often a state agency's determination of employee vs. IC status is made on a knee-jerk basis without any sophisticated analysis. If maintining IC status is important, at least for Federal tax purposes (and that would include SIMPLE eligibility), I would refer the issue to an experienced tax attorney for advice. Generally speaking, and historically, IRS has given physicians a wide berth to be treated as ICs, as opposed to employees, but it depends upon the facts.

I agree with everyone who has said that the issue is more theoretical than real. However, the point I am stuck on is that in reporting year-end assets, whether its the EZ or a Schedule H or a Schedule I, it is simply not right to include a discretionary profit sharing contribution which was not been made before the end of the year. It wasn't made, and it is not a "receivable" under any reasonable defintion of that word. So, if you can't report it as a plan asset as of year end, it seems illogical to me to report it as a contribution for the year.

Let's look at the big picture. The 5500 is designed to fulfill the ERISA "reporting and disclosure" requirements, as well as the IRS "information" reporting requirements. How is it consitent with those goals to report a contribution on the 5500 where the contribution for the year has not been made yet and there is no legal obligation to make a contribution for the year? Many of you seem to be saying, at least implicitly that you cannot or should not file a 5500 until you've made the contribution for the previous year, but if that's true please tell me where that is written because it's the first I've heard of it.

Lori: I think it's a bit of a stretch to say that the "federal law deems an amount to be an accrued contribution." What the federal tax law does is create an exception to the mandatory "cash basis" rule under Section 404 if the contribution is made by the due date of the income tax return. Another point, as mjb already mentioned, is that the 5500 can be filed long before the employer decides how much to contribute to a discretionary profit sharing plan, let alone actually deposits the contribution. Most of us expect that the reverse will occur, but that's not required. Finally, there is no receivable as of 12/31 (or other year-end) for a discretionary profit sharing contribution, at least not under any reasonable interpretation of the word "receivable."

The reason the EZ exists is that it is the 5500 filing for a plan not subject to the ERISA Title I annual reporting requirement. So, the Q you are asking is whether the old DOL regulation that says a plan covering only partners in a partnership also applies to LLCs that are taxed as partnerships. That regulation pre-dated the proliferation of LLCs by many years. Frankly, I don't see how that regulation can be interpreted to apply to an LLC, in which case you can't use the EZ. However, perhaps one of our archivists on this Message Board can point to a statement to the contrary by the DOL.

Without specifically commenting on Bird's thoughts, if you report a contribution made post-year-end on the theory that it was "accrued," or it became a "receivable," make sure it is included as part of the year-end assets (even though it wasn't?!?).