Blinky the 3-eyed Fish

This does not answer the question as to whether or not the use of service is discriminatory. That is a facts and circumstances test. For example, you have an owner of the company that has been been employed for 30 years, and all the while the company has had nonhighly compensated employees. But all his current employees have only been there for 1 year. In this case you certainly cannot use all 30 years of the owner as his testing service. Again, I am giving you a quick answer devoid of cites, but perhaps someone (Mike Preston) can spend the time to look them up in 1.401(a)(4) somewhere or provide some specifics of how the IRS looks at the facts and circumstances issue. Quick find is 1.401(a)(4)-11(d)(2)(i).

While I agree that the testing service can use service that differs from that taken into account for the benefit formula, that service still cannot discriminate in favor of HCE's. (I didn't research a cite.) You didn't address whether that is an issue in your case. As for your last paragraph, can you recreate it without using more than 5-years of past service? If not, have you determined whether or not this consideration of service is discriminatory? Your example you quote as seeing in seminars was interesting. I wonder what the circumstances were to allow for such a formula to pass testing.

I will recommunicate. The company, Fred's Tire World and Spa, sponsors the plan and covers the employees that work for it through the leasing organization. I can make the document say whatever I want through an amendment, so while I do agree this is important, it is not the issue I am concerned with. I suppose my concern is that typically a sole proprietor's compensation is his split NEI. Removing the leasing organization for a minute, it is my understanding he couldn't pay himself a W-2 wage and count that as compensation. But, because he is being paid through a leasing organization, this is okay? My concern is that it is not a substantive difference, but could be construed as a sham arrangement to generate compensation when there is none.

The unfunded accrued liability should not go below 0. There are many prior discussions on this board with details regarding that. That would mean that the remaining outstanding bases would equal 35,000 in your example.

The plan sponsors the employees that are paid by the leasing organization. In no way are they being excluded, so this is not a plan issue. Rather, my focus is on the owner only and the determination of his compensation. I am thinking it is one of three ways: 1) Count his W-2, limit his NEI to 0 and total the two. 2) Count his W-2, do not limit his NEI to 0 and total the two. 3) Do not consider his W-2, but rather just count his NEI. I want the answer to be 1).

You would answer "no" for 2 reasons. One, because to do this you are taking the position that the benefit protected is only that earned to 1/15/04. Two, because you cannot eliminate the QJSA with regard to MP dollars. The last cite you quote is not applicable because the optional forms regarding accrued dollars are not being altered.

How is that applicable?

IMHO, I would administer the situation as such if there were no accrual requirements. Say the 204(h) notice was dispersed today for a small plan, so the freeze could be effective January 15, 2004. The contribution to the MP plan is 10% of compensation. So, all participants have accrued a right to 10% of compensation from the period of 9/1/03 - 1/15/04. For one specific person, let's say that is $1,500. Amend the MP plan into a PS plan effective 9/1/03, include some additional language in the allocation section of the document to reflect the fact that participants have earned the right to some contributions ($1,500 for the example participant above). Now allocate the contribution based on the restated PS document, but make sure that each participant gets no less than what they earned in the MP plan before it was frozen. I know some will argue that this is aggressive and that the contribution formula to the plan cannot be changed because the participants have satisfied the right to the allocation under the MP formula. However, the exact situation could be accomplished by just freezing the money purchase plan and starting an new profit sharing plan. I know this is not the criteria to ultimately rely on, but it produces a good argument on why it is allowable.

A sole proprietor sponsors a DB plan. All of his employees, including himself, are paid through a leasing organization, thus the sole proprietor is receiving a W-2 wage. His net earned income for the business will most likely result in a negative amount for 2003. So, how is his compensation determined for 2003? BTW, I am only concerned with the answer for benefit accrual purposes. There is no contribution being made to the plan.

The 5500 instructions are quite clear. Direct the accountant to them. It sounds as if he is trying to protect some business.

Mike, I am surprised the marketers didn't get a "wow".

The deadline for having a certification signed was the later of February 28, 2002 or the last day of the plan year that began in 2001. Of course if the plan already had a document that qualified for the extended RAP, then no certification was necessary. As for your last question, if you restated the plan prior to February 28, 2002, then you don't need the extended RAP and I am not sure for what purpose you need to produce evidence.

Your 411(d)(6) concerns are valid, but the the criteria is when the right to the allocation is earned, not just if there is a last day requirement. For example if there was a 1,000 hours requirement, that would not have been satisfied either by this time. Also, even if there was no allocation requirement, the MP allocation could be limited to the compensation paid to the effective date of the amendment, as allowed by 204(h), arguably.

I vote for I don't know the answer because it depends on your document. 401k is right that there appears to not be a related employer issue so the prior medical practice won't affect the current plan. However, you do have a short plan year and the document often defines the limitation year as the plan year. Thus, the $40,000 annual addition limitation would be pro rated if that were the case. Go forth and amend if necessary!

Harwood, thanks, you win the prize. I believe I can calculate the unrounded pre-EGTRRA limits from the information provided.

Andy, I see the 2003 post-EGTRRA unrounded limits but not pre-EGTRRA.

Can someone point me to where I can locate the pre-EGTRRA unrounded limits for 2003? I specifically want to view the 401(a)(17) and DB 415 amounts.

Yes, but you must keep in effect the distribution restrictions and J&S requirements attached to MP dollars.

Of course you do not say what the change in groups is or what it is designed to do. Based on that answer you may have other options. Andy, I added the missing word and removed the extra one.

Yeah, you and Mike are both right.

Pax, my apologies. I see there is some related discussion in that link.

Mike, I was confused by your example, so let me present mine and I will let you point out the flaws. Roth IRA 72,400 income - 10,860 taxes = 61,540 Let's just say they spend 55,540 and put the 6,000 into a Roth 6,000 after 10 years at 6% grows to 10,745 Regular IRA 72,400 income - 6,000 IRA contribution leaves 66,400 66,400 - 9,960 taxes = 56,440 Again they spend 55,540 leaving 900 remaining 10,745 after 10 years is taxable leaving 9,133 left The 900 they had saved is invested and is 1,612 after 10 yrs and is also taxable leaving 1,370 Total 10,503, which means they are 242 worse off than with the Roth or the difference in taxes in the money invested outside of either plan. Mike, as I work through the example, I see now that your numbers are correct only if the excess money can be invested in the regular IRA 72,400 - 7,058.82 IRA contribution (assuming the limits went up) leaves 65,341 65,341 - 9,801 = 55,540 7058.82 at 6% for 10 years is 12,641.27 (same number) 12,641.27 - 1,896.19 = 10,745

Pax, both your links refer to discussions when there are no active employees. This is a bit different than the topic at hand.

My radioactivity gives me super powers, except when I say something stupid or incorrect. That is the fish in me talking.

1.401(a)(4)-11(g) is screaming for you to read it and give just what you have to to one or both of the terminees, rather than a blanket removal of the last day requirement and the potential additional cost that mechanism may add.