Jim Norman

Of course I should also point out that with a one year eligibility, the employee hired in 2006 isn't eligible to defer in 06. So the 07 ADP would pass with no NHCEs eligible and prior year testing. This just furthers Mike Preston's comment that any simplified explanation will be incomplete.

Yes. Right - to a point. The HCEs would have their $15K contributions refunded and taxed. But it is not so simple. If your 4 employees hired in 2002 are all HCEs, this is true. But they don't necessarily have to be HCEs. An often overlooked aspect of the HCE determination is the "top paid group" election. In your example for 2007, the HCEs are generally those who earned over $100K in 2006. However you are permitted to limit the number of HCEs to just the top 20% when ranked on total pay. Given your small company, 20% would be 1. If you are the highest paid, that is you. If you are not the highest paid, you are still an HCE by ownership and the highest paid employee would also be an HCE. But, this top paid group election must be specified in the plan document. The others, even though over $100K, would be NHCEs, they could defer the max, the HCEs could probably defer the max or close to it even if the new employee does nothing. You can lead the horse to water but can't make him drink. This is where a "simple" plan done without good advice gets real expensive. Without the top paid group election or a safe harbor plan, if your new employee doesn't defer, all 4 HCEs are limited to zero. So, 4 * $15K = $60K lost contribution = $20K - $25K of additional income tax liability. Other plan design considerations. You are in a unique situation in years where all your employees are HCE and you are not top heavy. With a tiered plan you could add additional profit sharing contributions for yourself as owner without having to make contributions to other employees, throw in another $29K for yourself, plus the 401(k) to total $44K. Has to be monitored year by year for the new hire NHCE and to watch top heavy. Again, the plan document has to allow for this. This approach would not use the top paid group election. Complicated? Yes. Worth a couple grand a year in fees? That's up to you to make that judgement, but you can't make the decision without the information. "easy" or "simple" 401(k)s are often the most expensive plans because of the lost opportunities to do something better. You can't roll the clock back and get those prior years missed opportunities back.

You can put them in their own plan, but if you test Plan 1 separately, it will fail coverage. To pass coverage Plan 1 will have to be aggregated with Plan 2. Since they are aggregated for 410, you test them together for 401(a)(4). So you are right back to where you started with 1 plan.

No, you cannot. Plans cannot have a service-based exclusion other than the "Year of Service" as permitted in 410(a).

Didn't see, did you check the 404 25% limit? Who are the excluded HCEs? If family or otherwise "friendly", OK. If they are the company management, and they are excluded from benefits that their direct reports get, may create unfortunate "personnel issues".

Sorry, guess I'll have to go back to being paranoid!

I agree with WDIK. Plan amendment is the way to go. The waiver is asking for trouble under IRS deemed CODA theory, and making the offer contingent on employment comes dangerously close to raising ERISA 510 issues.

Yeah, what JAY21 said. PEO/staffing companies report the employees on their W-2s, but W-2s alone do not make someone a common law employee. Read Rev Procs 2002-21, 2003-86, read all the employee leasing related Q&As here on BenefitsLink under Derrin's "Who's the Employer" column here.

Look at Rev Proc 2003-86. Seems this gives a PEO almost a safe harbor to treat the leased out employees as worksite employees as under 2002-21 (treat as employees of the recipient). Of course the facts and circumstances have to support this. Reverse the situation, if ABC wanted to set up a plan and cover all those employees, the risk would be that they are worksite employees and IRS could challenge the plan on exclusive benefit. Probably a good idea to get a DL on it.

Reasons to keep: - Can't set up a new one, - inexpensive - if employees like it, good benefit - with no turnover, vesting not an issue. - Compliance - I've never yet encountered a compliant SARSEP, but maybe this is the one exception. But even if not, no worries, compliance enforcement is nonexistent. Reason to terminates - no one wants to contribute. - if TH or deemed TH, firm does not want to make minimum contribution.

It certainly opens the door for abuse. As a TPA I can't imagine queuing up and dealing with several years valuations at once, way too difficult and time consuming. With the exception of attaching the signed B to the filing copy of the EZ, we won't change anything. But there are all kinds. I was once brought in to look at a DB plan that had been "administered" by the client's bookkeeper. As it was explained to me, each year they contributed the corporate profit to the plan, whatever it was, sometimes 0, sometimes 6 figures. The bookkeeper did the 5500 and even attached a Sch B she prepared. The signature section was blank. The Funding Standard Account section was all blank except she had typed across the top "N/A - all cash". No, IRS had not audited either.

Why voluntarily provide more information than is required?

Good point. I'm right in the middle of one of these and was concerned following the IRS valuation might blow the PTE. Reading from the opinion, it says: 'PTE 92-6 requires that “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had it retained the contract, surrendered it and made any distribution owing to the participant of his vested interest under the plan.”' I think the phrase "at least equal" pretty clearly implies it could be more and still comply with the exemption. I wonder how the IRS would look at a situation where their FMV is less than the CSV? An employee after-tax contribution to the plan? We're waiting on the insurance co to provide the numbers right now (another long story), hopefully I won't have to go there.

DOL Opines that the purchase of a policy from the plan by the participant for its cash surrender value meets the PTE 92-6 class exemption. Nothing new here. However, DOL goes on to mention recent IRS guidance regarding the fair market value of such policies in Rev Proc 2005-25, and that if the 2005-25 FMV is greater than the CSV, such amount is a taxable distribution. DOL then goes on to say: "This amendment to the IRS regulations provides for different tax consequences than those described in the preamble to PTE 77-8,(7) the predecessor of PTE 92-6. In this regard, it is the view of the Department that this amendment to the IRS regulations does not affect the relief described in PTE 92-6, or any of the conditions contained therein." What does this mean? If the IRS changes do not affect "any of the conditions" in PTE 92-6, does that mean that to comply with the class exemption the policy transfer must be done at CSV? And if the 2005-25 FMV is greater the participant is stuck with a taxable distribution? If so, then such could only be done when the participant is due a distribution under the plan. So, for example a DB plan could not do this as in-service distribution are not permissible unless the participant was at NRD or otherwise eligible for a current distribution. If so, this is going to make it a lot more difficult to unwind 412(i) plans, as the only choice would apparently be to surrender the policy.

I'm not sure what you mean by "deconvert", but as a corporate officer, you are likely a fiduciary to the plan, so don't "walk away", whatever you do. There are steps to terminate the plan. A board action, amendments for any new laws or regulations effective as of the date of termination, IRS submission and a determination letter is advisable but not required, and distribution of all benefits to participants. Until all is done, the plan is ongoing and must file 5500s. You have a 5500 requirement for 2005 and 2006 will be the final assuming the final distributions are made this year. Do not let the 2 remaining participants hold up the termination of the plan, you can distribute without their consent if you meet the requirements of 1.411(a)-11(e)(1). If the plan was not already amended to make an IRA rollover the default distribution, amend it for such now, then set up IRA accounts for them, transfer their accounts to the IRAs and get it wrapped up.

Sounds like the plan is frozen, but not terminated at this point. yes, there is a Sch B issue. Hopefully the corp still active so there is a plan sponsor. Advise him of what must be done to properly terminate the plan, advise him what information you need to accomplish this and that until it is provided the plan is ongoing and must meet all operational, document and funding requirements. Set a deadline by which you need the information, followup once, then resign.

Do the 5500 ASAP and file it under the DOL DFVC program. Max penalty is $750. Don't think there are any other good options.

Of course we agree on the Roth, ours is the only sensible position!<g> Frankly, I think the 5500 instructions go the other way and would support looking at each plan separately even if the assets are combined in a single trust. The Sch H/I instructions clearly state that if two or more plans are maintained in one fund to report the allocable portion of the specific plan on the 5500. Of course we have the opinion you quote to the contrary, and which I agree makes sense given the relevance of the financial aspects to the participants of both plans. I agree the plan aggregation for coverage and non-discrimination is a non-starter. I'm comfortable with a 414(l) approach and think it would be consistent with the Advisory Opinion. In that case the assets were pooled and any part of the asset pool could be available to any participant of any plan in the pool. This would be consistent with 1.414(l)-1(b)(1). Of course this implies in the situation I describe where the plan assets are physically separate and held under separate trusts, the assets of plan A are not available to a participant in plan B, therefore the participant count would be just that of each separate plan, so no audit required.

Hi Kirk, long time since we've spoken. This opinion seems to address multiple plans with a single pool of commingled assets. Let's assume a company with two locations and 70 employees at each location. Two separate but identical plans, one for each location, same employer contribution to each plan, and identical, but totally separate investment contracts such that the "financial information" of one plan would not be "relevant" to the participants of the other plan. Do you think this situation would require an audit? BTW I'm not crazy about this strategy, I actually prefer the larger plans have an auditor looking over our shoulder. Better for them to find a problem when it can be fixed. But client perception is the audit fee is 3 to 4 times the plan administration fee, so we get a lot of pushback from clients when we advise them of the audit requirement. Jim