jpod

Any suggestions as to the best way to work through this problem would be appreciated. Former employee of X Corp. knows he accrued a deferred vested pension under X Corp.'s db pension plan. (He was a manager and eventually an officer, and he worked there for 23 years, so we're not talking chopped liver here.) He left X Corp. long after ERISA became effective, and db plan was still in existence at that time. Subsequently, X Corp. was acquired, and its acquiror was acquired, and on and on and on. Former employee moved and never notified X Corp. or anyone involved with X Corp.'s db plan that he moved. Former employee knows who the ultimate successor to X Corp. is at this time; it is a very large Fortune 500 Company. Former employee is approaching age 65 very soon, and has contacted the successor company and given them all of the documentation to help them find "him" and his pension, but so far no luck. They claim they are continuing to research this. Based on a quick search through PBGC's website, former employee is not listed as a "missing participant" in a terminated plan. Any ideas as to what the former employee can do on his own, or what "tips" he can give the HR people at the successor company to help them find him and his pension?

The deduction limit is applicable to contribution by employers (although prior to EGTRRA, an employee's pre-tax 401k contribution was counted as an "employer contribution" for this purpose). Your question implies that perhaps an after-tax contribution could be treated as an employer contribution, but I don't see how that would ever be possible. So, unless I'm missing something that's super-technical, the answer to your question is "$250,000."

Before we shoot anyone, I'll give the designer of this plan the benefit of the doubt and ask the question: Why was the plan set up with a 2-year service requirement that did not count past service? Could it be that there was a need to have a plan to receive a rollover or a plan-to-plan transfer? If so, there are missing facts here which would/could change the answer to the 5500 question.

I would have to search through the regulations to find the precise words and phrases, but this certainly seems to be totally inconsistent with the "period of coverage" requirement.

In my experience, very uncommon, but I have seen it. Legally, it accomplishes nothing. Politically, it's probably a good thing, but not at the cost of having people who are not qualified to be effective in helping to carry out the Committee's mission. (Remember, the appointment of committee members is a fiduciary act.) Legally, it accomplishes nothing.

I think it is evident that the three parties are (1) the participant, (2) the plan (i.e., not the plan administrator), and (3) the third party, who can be the employer even if the employer is also the plan administrator.

I seem to recall that the person who must sign the P in order to start the SOL running is the person who is the trustee/custodian (or one of the trustees/custodians) at the time the 5500 is filed. However, I don't know where that is written, if at all.

Has anyone heard anything lately about when the new Form 5310 will be ready?

So, his compensation is $0, yet he is an employee in all other respects(?). I don't think the 401(k) regs. contemplate that an "eligible participant" could have compensation of $0. It seems to me that he has to be ignored, even if "0" divided by "0" is 0%. This is kind of off point, but he should understand that the IRS has a longstanding position that a Sub S owner cannot avoid Social Security taxes by merely taking distributions of profits in lieu of W-2 wages. If he or the corporation is audited, the IRS is likely to recharacterize some/all of the distributions as W-2 wages. Nevertheless, I don't think you can assume that will happen for plan testing purposes.

Is the Company an S corporation? An unincorporated sole proprietorship? Tell us more: how does he get money out of the Company's business?

I agree with SMM; that has been my experience. Also, even if the IRS wished to assess penalties, my bet is that it would assess penalties no greater than the stipulated penalties that would be available under the new DFVC. If IRS initially tries to assess penalties greater than the DFVC penalties, it will never stick; it would be absolutely unconscionalbe to say, on the one hand, that if you're subject to ERISA there will be no IRS penalties if you play the DFVC game, but if you're not subject to ERISA we can stick you with all penalties the Code will allow.

Also, in response to Mike Preston, if you believe that the 97 TAM is limited to its facts, as I do, you can't get around it by setting up a second plan, because you can't set up a profit sharing plan after the close of a tax year and claim a deduction for that tax year.

1. I don't think the permanency rule is implicated when plans are merged. And, even if it is, you could avoid any issue by merging the first plan into the second plan, rather than vice versa (assuming the first plan has been around for a while). 2. Show me where the step-transaction doctrine has been applied in any context analogous to what I was proposing. 3. Regardless, I don't think the 97 TAM applies to an amendment changing the allocation requirements that is adopted prior to the end of the year and prior to any contribution being made for the year.

The 97 TAM is somewhat controversial. Even accepting it as "law," however, I believe that the facts were that the alleged cut-back amendment was made AFTER the end of the year and AFTER the discretionary contribution was already made to the Plan. A rule or interpretation whereby you cannot change the allocation formula or criteria in a discretionary profit sharing plan prior to the end of the year and prior to making any contributions for the year can be avoided, easily, by (1) skipping the profit sharing contribution for the year in question, (2) setting up a second profit sharing that contains the desired allocation requirements and make that year's contribution to the new plan, and (3) merge the two plans before anyone completes 500 hours in the next year and make sure that the surviving plan contains the desired allocation requirements. So, if you're really nervous about the direct approach, you can go for this indirect approach. However, the fact that you could skin the cat through this indirect approach suggests to me that there is no cut-back problem in taking the direct approach.

You can do it, as long as you do it before the end of the plan year. There will be no reduction in anyone's accrued benefit, because nothing in a discretionary profit sharing plan has accrued yet. There would be a problem, I think, in amending the plan in this fashion after the close of the plan year. Not an anti-cutback problem, but a "definite allocation" problem.

The regulation which you cited prescribes a deadline for making matching contributions for a plan year, in order for them to be treated as "matching contributions" for purposes of nondiscrimination testing (i.e., subject to ACP testing rather than general 401(a)(4) testing). The cited regulation does not address tax deduction deadlines, or the timing rules for treating contributions as "annual additions" for a particular limitation year. For example, the due date of the employer's tax return, plus extension, is the deadline for making contributions that are deductible for the employer's tax year covered by that tax return. Yes, it's a bit odd that the two deadlines are not in sync. (BIG SURPRISE!)

mbozek: I know where you're coming from, but would you like to be the attorney who has to explain to a judge why you felt it necessary to burden the court's resources with that type of lawsuit?

Papogi: Are you saying that the employer (with an unfunded plan) CANNOT simply pocket the forfeitures? Again, if the plan is written such that the forfeitures belong to the employer free and clear, I don't understand why the original question needed to be asked.

Doesn't it go without saying that these plans are almost always unfunded, in which case any forfeitures would inure to the employer's benefit anyway? Am I missing something here?

I don't know if there is any IRS or court interpretation backing this up, but perhaps the answer is that neither the 70% test nor the classification test is a "safe harbor;" satisfaction of one of the tests is merely the first step on the road to satisfaction of the rule requiring nondiscrimination in eligibility. If you look at the statute itself, it says in Section 105(h)(2)(A) that a plan must not discriminate in favor of HCEs as to eligibility to participate. It then goes on to say in 105(h)(3)(A) that a plan does not satisfy the nondiscriminatory eligibilty requirement "unless . . ." the plan satisfies either the 70% test or the classification test. The statute does NOT say that a plan "will" satisfy the nondiscriminatory eligiblity requirement if it passes either test. This leaves room for the IRS to argue that a plan that satisfies one or both tests must still be "nondiscriminatory" as to eligility in other respects (i.e., back to the "smell" test). I realize that this is somewhat of a stretch, but I do not see anything in the regulation under Section 105(h) that contradicts this interpretation.

Katherine makes an excellent point. However, I would also advise the fiduciary of the obvious: 1. The choice of a broker for the plan is a fiduciary act. 2. A fiduciary can be held personally liable for any losses of the plan due to the fiduciary's breach of fiduciary duties. 3. Therefore, no matter how thorough the due diligence, and no matter how competent the brother-in-law, if something goes wrong down the road involving the performance of the brother-in-law the fiduciary will be at much greater risk than if he had hired an unrelated broker. As the saying goes, no good deed goes unpunished.

Doesn't the opinion letter contain the usual caveat that the purchase could be a 406(B) pt depending upon the "facts and circumstances?" In any event, the potential self-dealing involved in hiring the brother-in-law is the desire to benefit the brother-in-law because he is the fiduciary's brother-in-law. Substitute "significant other" for "brother-in-law" and maybe the point becomes clearer.

For those of you still stuck on the fact that the brother-in-law is not a statutory party-in-interest, you can find several DOL opinion letters indicating that the purpose of 406(B)(1) is to deter fiduciaries from exercising their authority with respect to their plans when they have interests which may conflict with the interests of the plans. These opinion letters address a variety of scenarios analogous to hiring your brother-in-law to be the plan's broker. For example, there is at least one opinion letter suggesting that it could be a self-dealing prohibited transaction to purchase stock of a corporation in which you have an interest through your IRA, even though that corporation is not a statutory party-in-interest.

Don't get me wrong; I wouldn't hold out too much hope that the plan document permits participation only by those employees who have qualifying individuals as family members. In fact, I would never think of writing a DCAP plan document that way - I wouldn't want my employer-client to have to police those matters.

While it may not be a per se, "party-in-interest" pt, it certainly could be a self-dealing pt under Section 406(B)(1) of ERISA [ or the Internal Revenue Code equivalent, Section 4975©(1)(E)]. Using plan assets to benefit someone in whom the fiduciary has an interest can be a pt, even if that someone is not a party-in-interest.