Belgarath

You might try looking at 1.415©-1(b)(6)(i)(B), this says that the contribution can be treated as an annual addition for a prior year if it is made no later than the 404(a)(6) period that applies to the taxable year in which the plan year ends. This is the closest thing I know of to giving you a reference that says it is OK.

"What policy goal does that achieve?" I'm not saying this to be sarcastic at all, but I had the good fortune to have my initial mentor in this business, (more years ago than I care to say) tell me, "Don't try to make sense out of it! Just apply the rules, if there are any. If you try to make sense out of it, you'll make yourself crazy." I thought that was good advice, and I've mostly followed it but I'm crazy anyway. Regardless, I have no good answer for what policy goal this achieves, but thankfully for sleeping at night, I honestly don't care. I'm just thankful that the regulations now clearly spell out a rule, which I can show to recalcitrant clients and their advisors who don't believe me!

There was some discussion on this topic just a few weeks ago. http://benefitslink.com/boards/index.php/topic/59219-one-participant-plan-or-not/

I'm shocked, shocked I say, that someone from the IRS would give incorrect information! We could probably all fill volumes about some of these trials and tribulations...

I don't know the answer, but I find the language somewhat puzzling. It appears to say that it is ok to "merge" a DB into a DC, by "converting" the DB to a DC. How does this square with ERISA 4041(e)? I realize you are proposing the opposite, but it makes me wonder...

Agreed. I don't see it in 401(k) plans even for the employer contributions, but I wanted to throw in that possibility...

Ignoring prior service for eligibility purposes under the "rule or parity" would only apply if the rehired employee terminated at zero per cent vesting. Once there is any vesting, all prior service would count upon rehire, and participation would be immediate. Since this person presumably had some level of vesting (?) then entry is immediate. P.S. - I suppose the plan could be using the "one year hold out" rule which would require retroactive re-entry if requirements are satisfied, but I personally never see this in 401(k) plans. (others may have a different opinion) However, you should check your plan document to confirm.

Thanks Bill. Yeah, in addition to just the ownership, Corporation B also gets about 2/3rd of its business from corporation A, so it seems fairly safe.

It depends. If the loan repayment would increase the "hardship" then the loan doesn't have to be taken first. See, for example, 1.401((k)-1(d)(3)(iv)(D).

Thanks. In this case, Corp. A's plan is a large plan requiring audit, so we're also going to ask the auditing firm to see if they have any problem with it.

While I know you "can" have life insurance in an ESOP, I've generally heard the disadvantages outweigh the advantages. I've never seen it myself, so I have no opinion on that. A quick internet search found the following, I think it was from an outfit called ESOP Services, Inc., but I'm not positive - I can't vouch for the accuracy or quality, but it may give you some starting points. Life insurance is commonly used to fund buy-sell agreements in privately-held companies. Life insurance is often considered not only as a funding vehicle for buy-sell agreements but for ESOP repurchase obligation funding as well. The decision as to which entity is to own the insurance, as well as how the insurance proceeds are to be used, must be carefully made. ESOP-owned life insurance is certainly attractive in the short run since the premiums on the insurance will be made with pre-tax dollars, if ERISA limits are complied with. In addition, any potential problem with Alternative Minimum Tax is avoided if the ESOP is the beneficiary. These advantages are almost always outweighed by the following concerns: 1.Contribution limits may not allow the additional contributions needed to pay the premiums. 2.Plan fiduciaries may be locked into continuing the policies long after they are necessary. 3.The payment of life insurance proceeds to the ESOP will actually increase the plan’s repurchase liability in the long-term if they are used to purchase employer securities. 4.The tax-free nature of the insurance death benefit is “wasted” when it is paid to a trust that is already tax-sheltered. 5.Insurance proceeds paid to the ESOP cannot be used to repay ESOP debt. If ESOP-owned life insurance is only held on the lives of key employees, it may be deemed to be a prohibited transaction (by providing a certain market for the stock of key employees, the ESOP may not be operating for the exclusive benefit of all of the ESOP participants), and thus could be deemed a violation of ERISA. The fact that premiums on corporate-owned life insurance may not be deductible or allowable should not dissuade the ESOP Company from utilizing it in the appropriate situations. The advantages of having the corporation own the life insurance are significant: 1.Tax-free cash (subject to the Alternative Minimum Tax) received as death proceeds from the insurance policy by the corporation can be loaned to the ESOP or tax-deductible contributions can be made to the ESOP, enabling it to purchase the stock of the insured. If insurance proceeds are loaned to the ESOP, the company makes tax-deductible contributions to repay itself. 2.Cash value of corporate-owned life insurance (“COLI”) grows on a tax deferred basis. 3.The corporation has unrestricted use of COLI cash values, including the funding of repurchase liability due to retirement or termination. 4.A “waiver of premium” option for disability can be added to most policies. COLI products can be structured with significant cash value investment flexibility. 5.The corporation may wish to retire stock, using insurance proceeds. 6.Premiums on COLI can become “tax deductible”, if contribution limits allow, by having the corporation annually contribute an amount of newly issued shares equal in value to the premiums paid. Dilution to existing shareholders must be considered in this approach. 7.The investment return of highly-rated life insurance companies may be competitive with other conservative investment options. The corporation is cautioned to review with its accountant the potential impact of the alternative minimum tax on the proceeds of corporate-owned life insurance proceeds being paid to the company, and to review the impact the receipt by the corporation of these proceeds may have on the valuation of the company’s stock. In summary, maintaining the insurance with the corporation as owner, premium payer and beneficiary retains a great degree of flexibility for the corporation, maximizes the tax benefits of corporate-owned life insurance, and reduces fiduciary risk. The income provided by a death benefit can be used by the corporation to directly purchase stock, or can be contributed, or loaned, to the ESOP. The amount of insurance to have is a question that must be addressed separately by each ESOP Company and will depend upon the projected account balances of plan participants, the level of “self-insurance” the corporation is willing to accept, and the current and projected cash balance in the plan.

Suppose you have corporation A, which sponsors a plan. Corporation B is formed, and is owned 70% by Corporation A, and 30% by an unrelated investor - no options, etc., so not a controlled group. (nor is it an ASG) Corporation B is very small, and the owners of A want to just include B's employee's in A's plan. Their pre-approved document contains multiple employer provisions, so they can sign on as a participating employer - no problem there. Question is, does a separate 5500 form need to be filed for each? This doesn't appear to be an "open" MEP as discussed under AO 2012-04A, and given the 70% ownership, it seems like this should be sufficient to consider it as one plan for 5500 purposes? Any thoughts? I realize this is a matter for legal counsel to determine, but I'd like to formulate some thoughts before it reaches that stage... Thanks.

Interesting. So you have a document that specifies the effective date of the plan as 1/1/2016. Ignoring audits - let's say there are only 30 employees anyway - when you file the initial 5500, you are putting whatever - say 4/1/16 to 12/31/16 as the plan year? I've never run across this approach, but I have seen documents specify 4/1 as the EFFECTIVE date of the plan in this situation, with 3-month eligibility so they enter the first day of the plan.

"No such thing as having zero participants at the beginning of the year." I'm not sure I understand this. Say you install a new plan, effective 1/1/2016, for a new business with an incorporation date of 1/1/2016. Say you have 3-month eligibility. How is this not zero participants at the beginning of the Plan Year?

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Thanks all. I guess I wasn't so crazy after all, or if so, at least in good company. This was very helpful.

Just to make sure I haven't gone nuts... 4 different companies, A, B, C, D. Let's say we are a TPA for company A. Ownership is such that A, B, and C are part of the same controlled group. D is part of a controlled group with A, but not with B and C. For purposes of administration on A, all three (B, C, and D) are considered part of the controlled group with A, right? This seems like a very basic question, but I'm suddenly doubting myself...

All good, valid points. But if you don't mind, which would YOU choose, again, assuming normal life span? If you prefer to plead the 5th Amendment, I fully understand! Thanks. P.S. if I were in such a situation and had a choice, I think I might lean towards the lump sum. Could of course be a huge mistake...

Thanks Andy. So if a plan doesn't normally offer a lump sum, and is unlikely to terminate in the near future, then it sounds like, "you pays your money and you takes your chances" - could be advantages or disadvantages either way, depending upon lots of factors. Just out of curiosity, it seems to me like with interest rates and inflation at very low levels, if they rise in the future, the purchasing power of the fixed annuity will erode rather badly. For you actuarial types out there, if you were forced to choose which option (lump sum or fixed annuity lifetime payment) would be a "better" general choice for the majority of people (assuming a normal lifespan) based on your best guess/estimate peering into your crystal ball for the next 25 years, which would you choose? That is, which option would produce more money? Caveats by the dozen are already assumed - this is just friendly conversation!

LOL. Thanks.

Personally, I think the distinction between unilateral authority to change providers and unilateral authority to force a change in investment options within the offerings of a single provider is insignificant. The point is, the employer is mandating the change. As I said, I wouldn't want to have to argue this with the DOL when trying to prove non-ERISA status. Adding a new fund, so participants have a choice to stay in existing fund, or move to the new fund? I see no problem with that, of course based upon all "relevant facts and circumstances." If an existing fund closes, then I cannot see any problem, even from the DOL, with adding some new fund option to replace it, again subject to all "relevant facts and circumstances."

Thanks for the responses. In your experience, is there any sort of "general rule" as to whether such things are favorable, unfavorable, or theoretically "neutral" to the participant? It seems like perhaps they would be favorable if one assumed that the interest that could be earned on the lump sum is greater than whatever assumptions are used in the plan? Or unfavorable if interest earned is lower? And life expectancy probably factors in... It just seems like there a lot of these offers out there all of a sudden, and being of a generally cynical mindset, it got me to wondering if such things are generally a bad choice for participants, or no way to say.

Is it possible that the participant has maxed out on deferrals in another plan somewhere, so is eligible for catch-up only?