Blinky the 3-eyed Fish

After-tax contributions would call for an ACP test as well.

Correct. However, if she is 50 or over, she can defer another $1,000.

Mike, do you know where, other than Announcement 98-1 1.2.1.1(2), which I believe serves as a guide for the IRS auditors, it states that the FFL is considered? It certainly doesn't reference the FFL in 1.404(a)-14(e).

Mike I don't understand why you say the language I reference in 1.401(a)-14(e) is not a situation that comes up in a flip-flop. Isn't it a situation that comes up in EVERY flip-flop? In a flip-flop you deduct 2 years of DC contributions in one year and 2 years of DB contributions in the next year, and so on. In the year that you deduct 2 DB contributions you are deducting the prior year's DB minimum contribution that was contributed after the tax return was filed, an "includible contribution", and the current year's DB minimum contribution. Isn't the language in 1.404(a)-14(e) what makes it allowable to deduct both DB minimums? As for your example, I don't follow that at all. Maybe it's because it's Monday, but I don't understand any of what you posted.

Archimage brings up some good points. But in the event that corrective distributions still need to be made, the excess contributions still count as annual additions and a top heavy contribution would need to be made. One other thought, can the excess contributions be recharacterized as catch-up contributions or are the HCE affected not age 50 in 2002?

The meaning of your questions is not clear.

I found this language in 1.404(a)-14(e), which does not mention the full funding limit. I guess now I don't understand Announcement 98-1, but I have my answer at least. (e) Special Computation Rules Under Section 404(a)(1)(a)(i) (1) In General. For purposes of determining the deductible limit under section 404(a)(1)(A)(i), the deductible limit with respect to a plan year is the sum of-- (i) The amount required to satisfy the minimum funding standard of section 412(a) (determined without regard to section 412(g)) for the plan year and (ii) An amount equal to the includible employer contributions. The term "includible employer contributions" means employer contributions which were required by section 412 for the plan year immediately preceding such plan year, and which were not deductible under section 404(a) for the prior taxable year of the employer solely because they were not contributed during the prior taxable year (determine with regard to section 404(a)(6)).

Dob, I have only heard of a discriminatory rate of match issue arising when there are excess contributions and a "hanging" matching contribution or if different divisions received different rates of match. I have not heard of a discriminatory rate of match issue arising simply because the plan uses a compensation definition that does not pass the compensation ratio test.

We do not prescribe this ever, nor do I intend to in the future. This question relates to a takeover of a client whose prior actuary got them into it.

Since when did employers start contributing to a cafeteria plan?

Yes.

In using the flip-flop method to get around the deduction limits of 404(a)(7), specifically in the years that 2 years of DB contributions are deducted, how is one able to get around the last sentence of Announcement 98-1 1.2.1.1(2) as follows: "A special rule provides if amounts required under IRC 412 were paid for the preceding year but were not deducted solely because they were not timely paid for IRC 404, they are "includible contributions" and are deductible under the IRC 404(a)(1)(A)(i) rule for the current year. Note, however, that total deductions under IRC 404(a)(1)(A)(i) are subject to the applicable full funding limit." I have never seen the last sentence addressed in any examples of using the flip-flop method, so what am I missing?

I am not sure how many times I will need to say this. IT IS NOT A REASONABLE FUNDING METHOD. Assume that the client goes ahead and funds the PVFNC. When the IRS auditor disallows the deduction, who would be wearing the bullseye now? Frank is indeed excercising professional judgment in questioning the actuary's flawed reasoning.

Keep in mind that the ability to do ignore the requirements for a contribution allocation must be spelled out in your document (410(B) failsafe). If it is not there, then you will need an amendment.

I am not sure what this means. The reason that a spread-gain method is not a reasonable funding method when there are no active participants is because there is no future working lifetime to spread the present value of future normal cost over. Thus, one could argue that the normal cost should be zero or the normal cost is the total amount of the PVFNC. However, either one is not reasonable, the former because you are dividing the PVFNC by zero, and any mathematician will scoff at that, the latter because each year the funding is the amount to shore up the unfunded amount and not spread over any period. This is a nonissue since the work is designed to appease the client. Of course they will agree to the funding method change if it serves their objective.

I am not a QDRO expert by any stretch, but I agree with your ascertainment.

It is the QNEC provided in plans covering pirates.

I agree that the aggregate funding method would not be reasonable without active employees and agree with your recommendation to switch to unit credit, provided it is available to do so under Rev Proc 2000-40. You may also look at switching the actuarial asset definition to one of the smoothing or averaging methods in that same promulgation, as that may end up getting you your zero.

CAVEAT 2 - "the return of the technicality" The top 20% nonexcludable employees (not the same nonexcludables as coverage testing).

I say let the participants eat cake.

If you click that box on the bottom of the first page of the Schedule B, that is worth 100,000 points and most assuredly will bring on the audit.

I would think it would be more likely that the EFAST system would look at it being a final return and question why it was not marked as terminated. In an event the plan was audited, it would be an easy explanation if they questioned why the terminated box was checked and 100% vesting was not provided. Either way, I think there may be a need for explanation, but I don't really think it matters one way or another how it's done.

I think I found my answer in Rev Proc 87-27, which states that automatic approval for plan subject to 412 is not available if a change in plan year has been made in any of the preceding four plan years.

Does anyone know if there are any provisions that would preclude a defined benefit plan from having two short plan years in a row?

An example would be in a one-person plan, career average formula, the participant makes $500,000, and the plan year is 6 months long. The 401(a)(17) limit would be $200,000 prorated 6/12 = $100,000. Then I am asking if the normal cost would be prorated as well for the short plan year. And I am pointing out that in this example if both the compensation limit is prorated and the normal cost is prorated, the end result is a normal cost of 1/4 of what a full plan year's normal cost would be.