Blinky the 3-eyed Fish

It has to be in the doc and would require an amendment. Here is a prior discussion on the timing issue. http://benefitslink.com/boards/index.php?s...626&hl=top+paid

You have a strong concern of a 404(a)(7) issue. Personally, I would not set up plans that way because of the concern. I think a third plan where only 401(k) deferrals are allowed for the owner and anyone else in the DB plan is warranted until a more concrete opinion from the IRS is generated. This would be a good Gray Book question to give to pax, unless it was answered recently.

Penman, this scenario is entirely different than your original post. You ARE making a nonelective contribution to the DC plan and are correct that there is some confusion concerning C(i). Tread carefully, if you intend to disregard the opinion from the old PLR.

This is not stated properly. If no contributions other than employee deferrals are made to the DC plan, then 404(a)(7) DOES NOT APPLY. I am not sure if you meant that or not because certainly the maximum deductible contribution to the DB plan could exceed 25% of compensation and be perfectly fine in such a situation. As for your scenario, that is the exact one that the PLR cited applies to and is a situation where 404(a)(7) appears to still apply. Their tax counsel made a wise decision.

1. No, that is not correct. You NEED to have a DC ER contribution in that year. Think of all the DB/401(k) arangements that are becoming popular because of the JCWAA law change. I went and found what Sal has on it in the 2004 ERISA Outline Book pg. 7.338. Exception if only contributions to DC plan are elective deferrals. If there is an overlapping plan situation between a defined benefit plan and a defined contribution plan, but for the taxable year the only contributions made under the defined contribution plan are elective deferrals under a 401(k) arrangement, the IRC §404(a)(7) limit does not apply. See IRC §404(a)(7)©(ii), as amended by the Job Creation and Worker Assistance Act of 2002.

I don't have access to it so those referencing Q&A 5 of the 2003 ASPA Conference, are you sure it's the same situation? It sounds like the question is addressing a situation where participants are in the DC and DB plan and no participants in the DB plan get an employer contribution in the DC plan, but there is an employer contribution being made. That is not the same as if no employer contribution is being made to the DC plan for anyone. In those situations, which is the situation of the original question, I don't see how you argue with 404(a)(7)©(ii). This provision is an addition to the code within the last few years, but I couldn't track when exactly. I tracked it down and the code was amended by the JCWAA, so it's a recent change.

Here is the proper cite. It clearly spells out that you have to make a DC contribution to trigger 404(a)(7). Reallocating forfeitures is not a contribution in my opinion, so I am not sure why he said that. 404(a)(7)©(ii) "If, in connection with 1 or more defined contribution plans and 1 or more defined benefit plans, no amounts (other than elective deferrals (as defined in section 402(g)(3))) are contributed to any of the defined contribution plans for the taxable year, then subparagraph (A) shall not apply with respect to any of such defined contribution plans and defined benefit plans."

How did you determine it passes the facts and circumstances portion? Is the coverage ratio not above the safe harbor percentage?

Based on this opinion alone, can I disagree with this statement? Let's get back to this message when all is said and done. I think this horse is beat.

I heard he wrestles alligators but applies mathematical probability models to only picks those alligators that will give him no resistence. I used to have a rubber alligator that would make a nice gift, but I lost it.

Kman, it seems from your question that the money was loaned to a completely unrelated person who happens to own 10+% of a completely unrelated entity. If that is right, of course this guy isn't a party-in-interest.

No, that's not correct. When you say average benefits test, it appears you are talking about coverage testing under 410(b). As Andy said, there are no rate groups in the average benefits test for coverage. First you must pass reasonable classification, then your benefiting percentage of NHCE's versus HCE's needs to be above the safe harbor percentage, and then you need to pass the average benefits test comparing benefits of NHCE's versus HCE's and that needs to be above 70%. Of course my response is to dmb, but Tom jumped ahead.

I don't know for sure but I haven't noticed a difference. For an unscientific sampling, my last CB took 6 months to get a letter. Mbozek, I understand the concept, but I am just not always sure what you mean by your posts. Now I haven't followed these CB cases closely, but while the IBM case had one view, didn't the Eaton v. Onan case have another? You say that you think that the courts will find CB discriminatory on the path of least resistence. I however, think they will take the path of least stupidity. Sure there is 204(b)(1)(H)(i), but there is also the existence of cash balance plans through the regs, justifying their existence. But to get back to the basics, a CB plan works just like a DC plan. In the end, whether it be through the passage of additional regulations or attaining a grip on reality, CB plans will prevail to be nondiscriminatory. We'll just have to wait and see though.

Not correct. The IRS continues to issue determination letters on all CB plans other than those considered to be conversions. Mbozek, can you elaborate? Unless I am thinking about something different that you are, how does this differ from the earnings in a DC plan, other that the fact that the rate is guaranteed?

It appears that if a DB plan were to terminate now that a PFEA amendment regarding the 415 limit would be required. Agree?

I agree. Because we are talking about ADP/ACP testing here, the only people in the separate test are those that benefit under that plan being tested.

You have the right idea. You could divide the groups into component plans and see if each group could pass coverage separately. If so, then you have 2 safe harbor formulas within each component and no general testing is required. If you can't accomplish that, like you said, the general test is needed.

I can say it doesn't work on just a Sch C because you can't deduct any more than the SE income. With no positive Sch C income your deduction would be $0. I don't know enough about the scheme proposed to comment, other than it seems suspicious. Alf, what is the significance of $42k? Remember the deduction rules will require higher compensation to get to that level of contributions.

Mbozek, I don't understand this comment. Being a nonamender does not necessarily mean the plan is disqualified. In fact, I have never seen the plan be disqualified for this, especially when the plan sponsor is bringing it to the IRS' attention voluntarily. It's really a matter of paying a fee and bringing the plan up to snuff.

Mbozek, I am curious and can't tell from your posts, do you personally think all CB plans are discriminatory? Forget any court cases, I am asking for your opinion.

By arguing that CB plans discriminate against older workers, please tell me how DC plans do not discriminate against these same folks. To say that an equal percentage of pay contribution is discriminatory is just insane to me. It would be like saying that gas cost $2.00 a gallon for younger people, so older people need to pay $1.00 a gallon. Frankly, I just don't understand how the conclusion can be drawn that it is discriminatory. It may be worse than a traditional DB plan for older workers, but you can't say it's discriminatory. The company could have no plan at all or terminate a plan at any time. I understand that many older workers got the hose when traditional DB plans were converted to CB plans and while I don't think that is necessarily discriminatory, I agree with their plight because of the way some of these conversions were handled. I wouldn't touch a cash balance conversion. But a new CB plan is a completely different story. Maybe if we just called it a Super DC plan, then people would get off this anti-CB kick.

So there is no confusion, some (most) of the stated CB advantages in the last 2 posts can also be part of traditional DB plan designs.

I find it disconcerting that they are spewing these letters so quickly. I hope they aren't trying to act if the deficiency is not corrected. See the recent post by AndyH, because a funding deficiency can certainly be reduced by the sheer basis of the next year's valuation. If the IRS demanded correction now, they could actually cause a nondeductible contribution. I had 2 clients with funding deficiencies for 2003 but haven't received letters (yet).

That EGTRRA switch confused the issue a bit when for 2002 it was the limitation year beginning in 2002 for which the increased EGTRRA limits applied. That of course switched back to when the limitation year ends as Tom and Stephen indicated.

Personally, I wouldn't be too worried about establishing a new cash balance plan even in light of recent court cases. But perhaps I am being overly optimistic that people aren't stupid enough to take a plan that conceptually works exactly like a DC plan and deem it discriminatory. As for the advantages, you are correct that participant communication is one of them. People understand an account balance. They don't understand the value of an accrued benefit. Additional advantages relate to the small plan world. In these situations a cash balance plan can provide a way to "equalize" groups of individuals, especially in multiple owner situations. This also works well to controll DB costs for older individuals versus younger ones (ah, the ADEA police will get me for that). Also, a cash balance plan can be good at controlling escalating costs that occur within the unit credit funding method as time passes. If someone is adopting this type of plan to be trendy, tell them to by an IPod instead because that's just silly.