Blinky the 3-eyed Fish

I don't think you are getting the component plan concept. If done as I suggested, both component plans would pass coverage. But now that you mention the wife will not get a PS contribution (did she get a safe harbor nonelective?), component plans won't help you anyway. You just need to run the general testing and give the husband an amount that will pass. If the amount to the husband is above 9%, then you definitely will have to increase the NHCE's to a higher amount, at least, to meet gateway. In other words, this has turned into a simple cross-testing example. Of course, heed Tom's advice to ensure your document language is appropriate.

I copied a bit of what I wrote in that post referenced because I wanted to add a little. Here: If someone receives ONLY a top heavy minimum, you are still allowed to treat the plan as having a safe harbor formula if you can pass coverage by treating the person as not benefiting. See 1.401(a)(4)-2(b)(4)(vi)(D)(3). But if you treat the people receiving the TH only as benefiting, then you must run the general test as you mention, and if you pass, then you are done. Now what you need to be careful about is how your document reads. Being a safe harbor formula, it very well may require you to treat those receiving a TH minimum as not benefiting in order to maintain the safe harbor formula. It also, then may require you to pass the ratio test for this purpose.

Brenda, you have it incorrect concerning the top heavy minimum. Is someone receives ONLY a top heavy minimum, you are still allowed to treat the plan as having a safe harbor formula if you can pass coverage by treating the person as not benefiting. See 1.401(a)(4)-2(b)(4)(vi)(D)(3). That is purely a nondiscrimination provision. For actual coverage testing, everyone who benefits under the nonelective portion of the plan is benefiting. Rmwright, you can use component plan testing to pass nondiscrimination. In your case, the husband and a staff employee would be in one component plan and the wife and the other staff employee would be in the other. This is needed so each component plan passes coverage. Your last question is moot. The profit sharing component does pass coverage. You just need it to pass nondiscrimination.

No.

I don't think the talks of unethical insurance salesmen are innuedos at all, but downright accusations. I wholely realize that a few bad apples are spoiling the bunch here, but I happen to feel there are a few more bad apples in the bunch of insurance salesman than there are in the actuarial field. Money corrupts and there was a lot of money to be made with 412(i) plans loaded with life insurance. I have seen too many of the marketing materials to think these are isolated incidents. Does that mean I think you are a bad apple Dom? No. But I certainly don't think you can defend the actions of some of your colleagues to the point of being combative when their integrity is questioned. Their integrity should have been questioned. It's not just ASPA, but the IRS representatives and everyone in the pension field doing the questioning. My mortgage broker fully admits there are "shady characters" in his business. My father-in-law, who is a used car salesman, admits the same. Again, that doesn't mean they are bad folks, but in a business that has some bad people. Your industry is no different Dom. The reputation has been earned. So be a bright light in a dark place Dom. Like a beacon of light, go forth and make honest disciples.

I hadn't heard the comments you reference and am aware of nothing that states there is any possibility of making any kind of waiver for funding purposes. It sure would make my life easier if some clients could do that though, so am open to any new information.

Waivers for funding purposes are not allowed. Since the assets dropped, have you tried switching to one of smoothed funding methods in Rev. Proc. 2000-40?

Here is the following from Notice 87-21 Q&A 7: "For purposes of determining a participant's years of participation for the adjustment required by section 415(b)(5)(A) to the dollar limitation of section 415(b)(1)(A), the participant shall be credited with a year of participation (computed to fractional parts of a year) for each accrual computation period for which the following conditions are met: (1) the participant is credited with at least the number of hours of service, or period of service if the elapsed time method is used for benefit accrual purposes, required under the terms of the plan in order to accrue a benefit for the accrual computation period, and (2) the participant is included as a plan participant under the eligibility provisions of the plan for at least one day of the accrual computation period. If these two conditions are met, the portion of a year of participation credited to the participant shall equal the amount of benefit accrual service credited to the participant for such accrual computation period." So, if you are able to adjust the YOP requirement under the formula, you certainly count that for a YOP for 415. Interestingly, my document provider has an option to choose a lesser hour requirement for 415 than for the benefit formula, which is contrary to the above notice.

So the lesson here is to always trust an actuary. BTW, if the plan was set up correctly, it would be with cliff-vesting and excluding years of service before the effective date for vesting. That way the vested accrued benefit would remain zero for a few more years and minimum distributions would be delayed.

I still think that attribution from minor children to the parents is appropriate to avoid, as you mentioned, the transfer of ownership to them. However, the specific spousal exception I mentioned is what I am saying should not be affected by a minor child. However, as you state, I would not tell a client that the exception applied if they had a minor child, but would rather inform them of the details in writing and have them decide how to proceed.

The smell test works both ways Mr. Duck. Playing devil's advocate that it is not a controlled group, do you honestly think the intent was to make couples with under age 21 children controlled groups in this case and couples without under age 21 children not controlled groups? We are talking about children under 21. It could be an infant. What impact could an infant have on the business? What possible logic is there is saying an infant should affect controlled group status? I can hear the discussion now, "Dr. Husband, let's have a baby." "Dr. Wife, are you kidding? Do you know that little bundle of joy will bring our corporations into controlled group status?" BTW, these comments are the opinions of devil's advocate and not necessarily the opinions of the poster or his management.

Stickler time - I get line 2 to be 5,068.62 and line 4 has an incorrect formula, but the overall result is close to what I get of $13,335.28. Back to your first post though, I am not an accountant, but my understanding is that the PS contribution attributable to the sole proprietor will go on the 1040, not the Sch C.

This takes me back to junior high. Dom, push out the hate and bring in the love! You have to admit you are a bit combative.

If you aren't testing nonelective contributions on a benefits basis, then you don't need to consider the gateway. Gateway is synonymous with testing nonelectives. Gatelectives. Nonelateway. Of the notion that the gateway applies to other than nonelectives, BFree!

Yes. Why don't you post your calculation and someone will check it for you?

First, you don't say what state to which this applies. If it's a community property state and special division of assets has not been done, then yes, it is a controlled group. Now it also sounds to me that you Karlin have looked at the spousal exception rules of 1563(e)(5), but because they have minor children you are saying that the attribution rules make them a controlled group. On that last issue, I think you will get some different opinions. While the strict reading of the law would lead to the conclusion that it is a controlled group, others will argue that the intent is being misapplied and the minor children alone do not make it a controlled group.

See 401©(2)(A)(i) and see if you think it qualifies.

Jquazza, again, I think we are talking semantics, but I am not sure. Do you agree that the QNEC needs to bring the NHCE ADP to 3.83%?

Yes, you have it exactly.

I follow your train of thought now. But why would giving a QNEC to bring the NHCE's to 5.5% even be a consideration? Does the employer want to give away money? Bringing the QNEC to 3.83% means that the HCE recharacterizes $2,000 in catch-ups. I know this is semantics, but the plan does not fail the ADP test. So I am not sure of the dispute why just giving a QNEC to bring the NHCE % to 3.83% is not the plan here.

What is the 5.5% from? As you state below, his new percentage is 5.83% after recharacterization. Huh? If the QNEC brings the NHCE average to 3.83% how do you fail? I don't know what this means.

Running a valuation using just one entity could in many situations give you a false result for the deduction attributable to that entity. Your next step is to try and figure out how the total contribution is being generated. Is it purely from normal cost, did the plan hit a full funding limit, are there bases or a credit balance? Based on that answer, you need to come up with a reasonable way to allocate costs between the entities. Then set up a spreadsheet to work with your valuation system to arrive at the answer. Unfortunately, it's tough to provide specific help over these message boards.

To include LLC B's income, LLC B would have to adopt the plan. To see who can be excluded depends on the demographics. If there are only the 4 employees of LLC A and LLC B, and both of LLC A's owners are in the DB plan, then you pass 401(a)(26) even if you exclude LLC B's owners. If there are other employees besides the owners in LLC B, then you have some obvious complexities.

Is there going to be a fight at recess?

Before I try and explain further, do you understand the concept that with a sole proprietor or partnership, the earned income is based on the deduction and the deduction is based on the earned income. In other words, you have a circular calculation that requires iteration? If so, can you set up a spreadsheet to perform the iterations? BTW, I knew someone named Sunny once and I have heard of people named Rain.