Blinky the 3-eyed Fish

To qualify as income you need it to come from a situation where "...personal services of the taxpayer are a material income-producing factor." 401©(2)(A)(i). So, are the royalties from the person's personal services?

1.415-6(b)(7)(ii)

It can be an annual addition in 2003 if the contribution is made within 30 days of the tax return deadline, 10/15/04 in this case. I am not sure what you want to continue doing. I am assuming your fiscal and plan years are the same here for simplicity. So the rule then is that any contribution made after the plan year but before the tax return due date (including extensions if the return is extended) can be considered for the prior or current plan year. So for 2004 you will make a contribution for that year before 9/15/05 (assuming again the taxes are extended). You will then total the 2003 contribution and the 2004 contribution and deduct up to 25% of compensation in the 2004 fiscal year. If the total of both years' contributions exceeded this limit, then continue the process in future years.

Again one of the pitfalls, one recommendation is to have a cash balance plan or regular DB plan with the actuarial equivalents equal to the 417(e) rate. That takes away one of the variables at least. However, like you said, there is still the matter of the asset performance not matching up to the accrual rates. If the attorney or anyone comes up with a solution to that, I would be interested to hear it. You can try and limit fluctuations with investment choices that mirror 417(e) returns as close as possible, but of course, it can't be exact.

Quick thoughts: Performing decently now does not mean they will perform decently in the future. What if interest rates rise? Then your plan is in the crapper. Regarding your 401(k), is there a match? If so, you need to contribute enough to get the maximum match. If anyone could tell you the right funds to pick, then we would be sitting around counting our money. Diverisify!

No, don't run, just make sure they understand everything in advance. From a tax perspective it's still a good deal.

My mistake on the nonstandardized prototypes. We only deal with these on takeover situations and I realized that while cross-testing on some of the plans was set up using these documents, they were submitted for individual letters.

It sounds as if your language is general enough, but it's up to the IRS. Try it and if they don't like it, they will ask for a revised POA.

Quick comments 1. You can't impute permitted disparity on the SHNEC, but it doesn't say you can't impute permitted disparity on other contributions just because you have SHNEC. 2. Nonstandardized prototypes don't have to be safe harbors. Now I don't work with standardized DC prototypes, but it sounds like there is something missing. I'm not sure what you mean by the CODA comment. If you are saying SHNEC should be classified as a deferral and not a nonelective contribution, well then I disagree.

Regarding that rule, I have had to analyze it when the DC plan has rate groups and the owners get a higher percentage in it. So that means for the DB plan, the owners have a LARGER offset. I don't believe this to violate that rule as I feel one can certainly argue that the DC benefits are reasonable and uniform on a benefits basis and, again, the offset is greater. I have determination letters on plans with this scenario, but the (a)(26) inspection is questionable. It's under the umbrella of the coverage ruling and they don't seem to ask the right questions to make a proper ruling. I am going to submit a plan where the owner's benefit is not offset at all, while the staff is. I have no plans like this, so we will see. In light of the IRS' quest, I doubt it will get through, but the net effect is minimal if it doesn't.

I don't think your proposed solution resolves anything. You still have the only person above the TWB is an HCE. You ran through the math to show that the people below the TWB have a lower contribution percentage imputing permitted disparity. So that leaves your restructuring to mandate that the HCE is the only one in his restructured plan. That doesn't pass coverage though.

Andy, I will update you if I learn more. We just submitted our response to the IRS agent. SoCal, it is not a safe harbor floor-offset design. It is aggregated with the DC plan and general tested.

I found the discussion and it was started by you Frank http://benefitslink.com/boards/index.php?s...t=0entry62150 Here's another one http://benefitslink.com/boards/index.php?showtopic=12988 Did the question get answered in the Gray Book pax?

It's been too long to remember the terminology, but for older plans there was the unused deduction available up to 25% of compensation. When was this plan effective originally?

They are related entities, so my understanding (and keep in mind I am not a CPA) is that they can contribute or deduct it however they want and the two don't even have to match up.

I stink at using the search feature. There was a past discussion where the assets lost money in a similar situation. I would be curious to find it if I knew the right keyword.

I will add my two cents. There is no reason why Dr. X's corporations can't jointly sponsor one plan. Each person's salary will be what they earn in total between the corporations, limited to $205,000 in total. No prorating between corporations. The wife's company may or may not be part of the controlled group. Factors to consider are IRC 1563(e)(5), whether there are minor children and whether or not it's a community property state. You really need a legal opinion to make this determination before putting in any plans.

There is some that will get that line, while others will not. The first to respond correctly to the meaning of the reference wins nothing.

While Tom is right, this too could be a document issue. The document must allow, or specifically not preclude, the use of the QNEC for the ACP test. While this should be a no-brainer for a document to have this flexibility, I have seen documents that are restrictive.

Yes, it keeps me up at night. But seriously, I agree, but that is why it is important to know the rules, otherwise many aspects of plan administration can be treacherous, like the jagged cliffs of Acapulco.

First, never say never. Second, the person with the highest comp could be an NHCE. Third, I didn't say absent cross-testing. Fourth, purple monkey dishwasher.

It's not a safe harbor, but that doesn't mean it doesn't "work".

If so, it's a wide and misguided extension. 1.401(a)(26)-5(a)(2) clearly deems those to accrue a meaningful benefit if they would have accrued a meaningful benefit if the offset were disregarded.

The solution is for you to run for Congress, get on a committee and pursuade your fellow legislators to enact changes to this perceived injustice. But you better get cracking or your crusade will be delayed for 2 years. Your slogan: Pensions for All! Yeah Baby!

After speaking with an IRS auditor, it appears they have on their radar to look at specific DB offset plans where HCE's have a higher benefit formula and NHCE's a lower benefit formula. It seems as if more than 60% of the nonexcludables have less than the 0.5% benefit AFTER the offset, then they are ruling that it doesn't meet the requirements of 401(a)(26). I am being somewhat general here because I got my first question from the IRS on this today and haven't gleaned some of the specifics. Has anyone had a similar experience or heard anything more specific from the IRS?