Blinky the 3-eyed Fish

If the refunded amounts are considered annual additions, then of course you must count them in determining the DC 415 limit. So, here is the last part of 1.415-6(b)(1)(i): "Contributions do not fail to be annual additions merely because they are excess deferrals, excess contributions, or excess aggregate contributions or merely because excess contributions or excess aggregate contributions are corrected through distribution or recharacterization. Excess deferrals that are distributed in accordance with section 1.402(g)-1(e)(2) or (3) are not annual additions."

An interesting question. I agree the short plan year NC prorating concept is akin to Rev. Rul 79-237. Where you can have additional questions is when a person is also at the 401(a)(17) limit and the compensation period is the plan year. In that instance you have to prorate the compensation and seemingly prorate the NC, which has the effect of double proration, a nonsensical result. This is a case where I would not prorate the compensation limit, but keep the NC proration. But back to your question - I would chalk up the loss that would generate by the pop up in liabilities in a similar manner to a final average pay formula situation where the compensation increased. You could classify it as a plan year length increase or whatever. The point is that I don't think it throws off the reasonableness of the funding method.

Andy, you are referring to the rule in 412(m)(7)(B) that requires you to recompute the 2003 numbers for determining if 2004 is subject to 412(m). This same stipulation does not apply (that I can see at least) to 412(l). I see Mike posted too. The content of which is something I cannot agree or disagree as I have never researched it, although chances are good it's correct.

An excise tax applies to failure to meet minimum funding requirements (DB, MP and TB plans). This is not the case here.

I am not sure what consus is nor why you are looking for it. Anyway, with DB and DC alike, you can't earn a benefit/get an allocation if you never entered the plan. So, did this person enter the plan? If your document is like most, where the employee does not meet the YOS requirement until the first 12 months are up (no matter when the 1,000 hours is completed), then this employee isn't employed on the entry date of 7/1/03 and never enters the plan.

Andy is right.

You do not have to recompute the past years' RPA numbers. Thus, because your current year is > 80% and your second and third years are > 90%, 412(l) is $0 for 2004. As noted in 412(l)(6)©, there is no stipulation that certain DB plans are excluded, so count the union plans/participants.

Being a sole proprietor he very well may not have an EIN at this point. If he is a sole proprietor, he will report that income on Schedule C to his Form 1040. Have you tried discussing this with his accountant? Because if the accountant is comfortable enough with the income to report it on the Schedule C, then that is all the proof you need to have him sponsor a retirement plan.

Thanks. I also emailed Paul Shultz and will let you know if I hear anything different.

This is a recurring question here. First, in discussing the nonelective portion of the plan, anyone who receives a nonelective contribution is considered benefiting under this portion of the plan. Sources of nonelective contributions are PS, top heavy minimums, safe harbor nonelectives, QNEC's. So under that thought, all are benefiting in your case. But, now with the NHCE's getting 3% and the owner getting much more, what you have is a allocation that is not a safe harbor. There is a special rule that allows you to treat those receiving only the TH minimum as not benefiting. This rule is designed to preserve the safe harbor status of the allocation formula. In this case though, it would just mean that you fail coverage testing miserably. Your document may have language on this that REQUIRES you to do this, so check it. So back to if you are able to treat them as benefiting, then you don't have a safe harbor formula and must pass general testing, which will then require you to give at least the gateway amount, or more depending on how the testing works out.

I wanted to reprise this to again bring up the OBRA liabilities. I can't think of a reason to calculate them, but am worried if they still show up on the Schedule B, that if I don't do it now, I will have a lot of recalculations to do. Anyone have an inside track that knows if their reporting will not be required on the B?

I am betting that since the 5% figure was questioned, that Giovanni is trying to determine if the son is an HCE, which leads us back to Stephen's answer on that topic.

I don't disagree if this was the criteria of the assumption at the time. My point is that in my opinion this criteria is not met with a blanket assumption of the person retiring every year at the end of the year.

Under that criteria then after a few years of continually assuming retirement at the end of the year you would have to say to yourself that your best estimate ability is in question. Also, for an end-of-the-year valuation, being that you are performing the valuation after the end of the year, you would already be wrong in assuming retirement at the end of the year.

By pay-as-you-go, I was referring to funding the unfunded amount each year. My mistake for wrong terminology. I see now rcline meant something entirely different. But I think the difference in the 64 year-old versus the 71 year-old you reference is that the 64 year-old's period is 1 year for the first time, not each year again and again. From a funding method standpoint (disregard the plan permanency issue), do you think it would be permissible to set up a new plan and assume the retirement age was the end of the plan year? Mathematically, it doesn't seem to be much of a funding method to have to fund the unfunded each year. The pre-retirement interest assumption would be inconsequential for an end-of-the-year valuation and nearly insignificant for a beginning-of-the-year valuation. I believe the IRS has commented on this before, but I can't recall when or where.

My understanding is that this is not reasonable for the reasons stated by rcline, in that it is a pay-as-you go method that is constantly funding the unfunded assets.

To the original post, I think you are asking about using the average benefits test for nondiscrimination purposes. You have no issues there, because the reasonable classification test doesn't apply for average benefits for nondiscrimination. However, what you need to be concerned about is coverage. If by not benefiting enough of the terminees, you fail to pass coverage using the ratio test, then you may not be able pass using the average benefits test. The thought is that by having these classes, you are effectively excluding persons from the plan and that exclusion may not pass the reasonable classification test. How does the document language determine as to when the participants are assigned to the classes? It seems you could have situations where active participants are in one class and then switch to another class during the year when terminated. I am just curious since I have never seen a design like this. Why not just have a last day requirement?

Personally, I don't see the rationale in saying IA is not reasonable for a frozen plan. If you still have active employees and they have earned benefits, then using IA simply means you are funding the difference between the benefits earned and the assets in the plan over the working lifetimes of the active participants. What is unit credit doing, but funding this difference over 10 years when the funding method is changed? What is the reasoning for saying 10 years is appropriate, but the future working lifetimes of the active participants is not?

You don't say if there are other participants or not. If not, then I don't think using the IA funding method is reasonable for any option. Option 1 means you have no working lifetime. How would you determine a contribution, other than to say the NC is zero each year? Flogger, you say that the difference would be the NC, but how do you arrive at that without a working lifetime to spread the costs over? Option 2 means you are continually funding the unfunded amount each year, which is not allowable. Option 3 with 1 person is really the same as option 1, except you are assuming a lump sum. Now if there are other participants, I think any of the 3 options are reasonable to use. When you presume someone past retirement age will retire is simply a valuation assumption.

You can take it one step farther even if the plans are permissively aggregated. If the company B participants are not receiving a nonelective contribution allocation in any way (i.e. no forfeitures, top heavy minimums, QNEC, SH NEC, PS), they are not benefiting in that portion of the plan and would not need to receive the gateway amount.

There is one other time I can think of when a 412(i) has some merit. That time is when the corporation needs a larger deduction for just a few years, but will not need the deduction past that time. The 412(i) can be converted to a traditional DB and the plan kept alive until the years of participation accumulate enough to allow the plan to terminate and lump sums be paid. I realize this is a relatively uncommon situation. I wouldn't use life insurance products at all for this model, just annuity products.

Gary, the $41,000 annual addition limitation applies to limitation years ending in 2004. The $205,000 401(a)(17) limit applies to compensation periods beginning in 2004. So I think you are 1 year off. [Thanks Blinky. I have corrected my adjacent post by replacing 2003 with 2004. It should be pointed out that many/most plans use the plan year to determine compensation. If a plan determines compensation used in determining allocations or benefit accruals for a plan year based on compensation for the plan year, then the annual compensation limit that applies to the compensation for the plan year is the limit in effect for the calendar year in which the plan year begins. Alternatively (as you point out), the compensation period method (nice phrase, thanks ) may be used.--gsl]

414(s) includes compensation from related employers. So, since you are effectively excluding some of the pay from the other entity, you have to run the compensation ratio test to see if your modified definition satisfies 414(s).

Pot to kettle: "You are black."

Rmwright, your understanding of how component plans works is incorrect. It is not breaking in components the safe harbor nonelective and profit sharing. As I said before, it can't help you here so I would forget about it for now and learn it another day. Tom, as for fail-safe language, you must be taking the position that the safe-harbor nonelective only recipients can be treated as not benefiting in order to keep a safe harbor formula akin to top heavy minimums. Of course, this in an interpretation of what is reasonable, but not in the regs. Rmwright, to simplify it, why not just go look in the doc and see if fail-safe language exists?