Blinky the 3-eyed Fish

NHCE rate, not HCE rate.

I was distracted by the multiple fish. But to answer your question, if the person truly no longer worked for the corporation before the last day of the plan year, then he didn't meet the accrual requirements and there would be no funding. Your client should be prepared to back this up somehow if the IRS ever challenges that the owner of a 1-man corp is no longer employed by it. I would think relevant factors are how quickly the corporation dissolved and if the person ever worked there in the future. Otherwise, I could see them ruling that it was not a termination of employment, but a vacation and that the guy is trying to skirt the minimum funding rules. BTW, why is this still an MP plan and not a PS plan?

Fred, good info on 410(b). Not to often would it come up but good to keep in mind. I haven't read Rev. Proc. 2003-44 in a bit, but I do recall a preferred correction method for a 401(k) coverage failure was to provide the average of the NHCE deferral rate to the participant added back to pass coverage because they didn't get a chance to defer. The corresponding match would then apply. I will let Tom handle any safe-harbor related questions. Also, why is rate group testing being brought up? I didn't see that we were getting into nondiscrimination testing.

Very interesting, though it's still clear as mud.

Why aren't those hired after the effective date excludable because they don't meet the plan's eligibility requirements? I have a feeling the coverage testing is being done incorrectly.

No, the ownership change does not restart the 415 limit. It is the same entity. If they had started a new entity then I see a different story. I can tell you if an ownership change did cause for a 415 limit restart, then there would be thousands of doctors and lawyers doing a happy dance upon each partner change.

The answer as to what to do with the money depends on when it was contributed. If made before 1/31/04 it must be allocated to someone in accordance with the document for the PYE 1/31/04. In this case, it went to this one person erroneously so it should be redistributed as the document allocates the contribution. But chances are that it was deposited after the plan year end, and in that case you effectively have pre-funded the 1/31/05 contribution. That raises the discrimination issue Brian mentions, so it has to be treated as being deposited to the wrong account and moved. Either to a main account as Appleby mentions or in a manner than is not discriminatory (i.e. only NHCE's or everyone). Of course that last solution could be a problem if there were accrual requirements and the receivers of the contribution ultimately did not meet those requirements.

Your logic is correct. No valuation in 2003, no MRD for 2004. The vesting issue WDIK mentions is the use of cliff vesting and excluding YOS for vesting prior to the plan's effective date. That way the vested balance is 0 for a few years and you further delay the RMD's. Of course watch out for those pesky predecessor plans.

I don't understand your 1 and 2 points. You state in 1 that you would have to aggregate for 401(a)(4) and 410(b), but then you state in 2 that you wish to test the 401(k) separately. Do both plans pass coverage on their own or don't they? It sounds like both have HCE's, so they might. The answer to your last question is yes, they are considered HCE's. To what degree they are included in tests depends what test is being run.

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." This cite spells out that your arrangement is not okay. You are making a nonelective contribution to the DC plan. Note that the cite doesn't state that 404(a)(7) is not triggered if the DC contribution only goes to the non-DB participants. Because your DB participants are deferring and because they have account balances (as cited in the PLR by Belgarath) making that nonelective contribution is what triggers 404(a)(7). Seemingly you would need an additional 401(k) plan to accomplish what you want. Transfer the balances from the existing DC for the DB participants and allow the DB participants to defer into the new 401(k) plan. It sounds silly that you can accomplish what you want by just starting a new plan, but there are plenty of other examples where a new plan is what is needed to work around the rules.

George, the first post is asking if plans need to be amended by 3/05. Of course the plan will eventually have to be amended. I assumed you read the first post and were responding to the question posed, and that you were arguing that the plan had to be amended by 3/05 because the plan had to operate within the terms of the plan document. I understand now you were just saying the plan eventually had to be amended.

No, that is not what I was implying. I was stating that plans have in the past often temporarily operated outside of the written terms of the plan and that that is not an argument for stating in this case that plans need to be amended by 3/05.

One could ask those questions of the many provisions affected by GUST or previous legislative changes where the plan was required to be operated in accordance with current law, yet the plan document did not reflect those provisions.

KB, I can see the thought behind your reasoning, but in the first year the change took effect there was no limit published for the lookback year. The IRS has consistenly opined that the indexed limit applies for determining the HCE for the year at hand, i.e. for determining a 2005 HCE you look at the 2004 limit of $90K, not $95K.

The plan document will have a hierarchy of beneficiaries in absence of a completed beneficiary designation form, so that will dictate to whom the money goes. Now you just need to find out the hierarchy and find out who and where that beneficiary is. At least this guy got a day off before he went.

My opinion is that the related employer rules would be applied here. In this case if the 50/50 partners are unrelated, then clearly it is not a controlled group. It would then not be a successor plan for consideration of the distribution restrictions because it's a "new" employer.

I think I understand your question but I am not 100% sure, so let me recap. Are you asking if the plan passes coverage under 410(b) even though, say a class of employees are excluded, then does the excluded class count in the 401(a)(4) nondiscrimination testing? If so, then the answer depends on what nondiscrimination test you are running. For ADP and ACP testing, if the person doesn't benefit, then they are excluded from the nondiscrimination testing. An excluded class would of course not benefit, so they don't count in the nondiscrimination testing at all. For general testing the nonelective contribution it is different and the excluded people count as participants with no benefit.

I guess my stature went down from right on the mark to spewing endless drivel because I objected to being called full of crap. (I apologize in advance as I realize this is one of those meaningless messages.)

In short, the Hi-3 does factor into the calculation of the lump sum limit.

All Bird was saying is that with $277,000 in comp and only a few people, that after the reductions for the contribution to both the ancillaries, the sole proprietor and 1/2 of the SE tax, that it would be unlikely that the final EI would go below $200,000 because there were only a few people in the example. That is all that was being said and I understand what was referenced was Tom's spreadsheet. Is that not true Moe? So calling people full of crap when you don't understand the comment is not wrong? Wow!

It was crap by association. If all I am doing is seeing Bird's point and so is R. Butler, then you can't call me full of crap without calling them full of crap too. I didn't add any new comment, you just didn't like how I said it. When you get some experience and see the point, I will accept your apology. I think I better go Dom on the rest of this post or I may get in trouble. (That was for you Andy.)

After-tax contributions are annual additions.

More explanation is warranted to that last post. First, the Sch T reports coverage, not nondiscrimination, but the same concept applies. Testing every three years is only allowable where there have been no significant changes to the workforce or plan. It is designed for larger plans as even a one person change in a smaller plan could alter the nondiscrimination testing results, so to rely on the 3-year cycle in a small plan is unwise.

Where's Mike Preston? I need a wow! So Bird, Butler and I are full of crap? You sure you want to get so aggressive when you really don't understand this simplistic calculation and you really don't understand Bird's point. I would explain it to you, but I really don't want to. I will leave you to your ignorance. Oh, by the way, when you do discover the error of your comments, ask yourself the question if you like apples.

No, Moe, what Bird says makes sense. It is you that needs to become more familiar so you understand his/her point.