Belgarath

Interesting question here. A person is a director of a corporation. As a portion of compensation for that person, stock options are granted. This person receives 1099 income, and files as a self employed using a Schedule C. First, my understanding is that "Qualified" stock options can only be granted to employees, so I'm assuming these are non-qualified stock options. The question is: does the exercise of these stock options produce income includible on a Schedule C, and constitute "earned income" for qualified plan purposes? Director's fees are considered earned income, so it seems to me that it does (although if the options are exercised and the stock is bought and held for more than 1 year, then there could be Sch. C income for plan purposes in the year of exercise, and capital gains on a subsequent sale after more than a year, with the capital gains not being eligible.) Whether the compensation is "reasonable" or not is a separate issue, and I'm not concerned with that, at least at this time. Thoughts?

Thanks - but SCP is available also for 2012, right? The SCP correction period for significant failures is the end of the second plan year following the end of the plan year for the correction period under 401(k)(8) as per RP 2013-12, Section 9 .02(1) - so for 2012, that period ends 12/31/2013, giving until 12/31/2015 for SCP. However, since any proposed correction that falls outside of the pre-approved Appendix A or B corrections is questionable, it seems to me that VCP would be a necessity regardless of the timing - unless I felt totally confident with another "fix" - which I don't. Whatcha think?

New client - previously had testing done by a large, well-known payroll company who shall remain nameless. Said company incorrectly performed ADP test for several years. Test failed for those years, but no refunds were made within the normal allowable correction period. Small plan - 20-30 eligible employees overall. So, we've given them the option of a QNEC in an amount sufficient to pass testing (very expensive) or the "one to one" correction method which involves a much smaller contribution. They don't like this either, and want to know if there is another VCP correction that can be done. Aside from the expense and uncertainty involved in any such filing, I have a hard time imagining that the IRS would accept a proposal that allows a lower correction amount than the one to one correction amount for a small plan like this. But I just thought I'd ask if anyone has successfully proposed a different solution, and what that solution might have been?

Our local A&W (closed about 40 years ago) was run by a dirty old man (or perhaps an astute businessman) who hired only the hottest, sexiest, most beautiful college girls you could find in a day's drive, and had them wear the shortest shorts imaginable. Sort of a Hooter's before its time. Needless to say, it was inundated by a horde of slobbering geeks who spent scads of money just for the eye candy. I expect the dirty old man retired wealthy. It was also actually a good place for drive-in food, and gave you a free root beer if you were in Little League and hit a home run, so it brought in a lot of families as well.

Yes, I'm agreeing - sorry I didn't specify that - I was just providing the reference. The transfer treatment under Q&A-8 is different than a distribution and subsequent rollover (or rollover attempt) since an actual distribution would fall under Q&A-4 of 1.408-8.

Thanks George. Turns out this client is in Florida - don't know if that makes any difference. This isn't something I deal with, so I know very little about it - probably not even enough to be dangerous. The person asking about it isn't a client, so we have no involvement other than trying to point him in the right direction. It seems that he would like to ditch his group health insurance (as of January will have only 3 employees) and set up an HRA instead, but we're under the impression that it is an idea that won't fly.

SEP Plan Fix-It Guide - You haven't updated your SEP plan document for current law Mistake Find the Mistake Fix the Mistake Avoid the Mistake 1) You haven't updated your SEP plan document for current law Determine if your Form 5305-SEP is the current revision (December 2004) Adopt revised Form 5305-SEP Maintain regular contact with the company that sold you the plan Laws related to retirement plans change frequently. There are statutory deadlines for which many provisions must become effective. The IRS generally establishes a firm deadline for adopting these changes. Also, these law changes might mean you can simplify some areas of plan administration or improve benefits. You'll need to change plan language and operation to keep the plan within the law and to take advantage of increased benefit limits. How to find the mistake: At some point in the plan’s existence, you may be asked to demonstrate your plan has been in compliance with the law. This request may come from a financial institution, third-party administrator or other plan service provider, or it may come from the IRS during an audit. They may ask you to demonstrate the plan has complied with all current and prior law, sometimes reaching back several years. You may have a plan document that is a model SEP (Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement) or a pre-approved plan. The IRS has already favorably reviewed both model SEPs and pre-approved plans. If your plan is a Form 5305-SEP that is the current revision (December 2004), you can be assured that it complies with the law. If your plan is a pre-approved plan, you have a level of assurance that the plan is written in compliance with the law even if you do not apply for a determination letter. Individually designed SEPs must be updated for law changes. If you have this situation, consult your tax advisor. How to fix the mistake: Corrective action: If you haven't amended your plan timely for law changes, you should adopt the latest revision of Form 5305-SEP (December 2004) or adopt the latest revised document (approved for EGTRRA) provided by your financial institution. You'll need to confirm that the plan operation is consistent with the plan’s terms. Example: Employer Y established a SEP in 1995 using a prototype plan and hasn’t amended the plan document for any subsequent tax law changes. The Economic Growth and Tax Relief Reconciliation Act of 2001 changed many of the Internal Revenue Code requirements and limits for qualified plans and IRAs. To benefit under these new provisions, employers must amend their SEP prototype and individually designed plans for current law. For employers with model SEP plans to avail themselves of the latest law changes, they must adopt the latest model Form 5305-SEP (for EGTRRA it must have a revision date of March 2002 or later). Correction programs available: Self-Correction Program: This mistake cannot be corrected under SCP. Voluntary Correction Program: Employer Y didn’t adopt an updated plan document timely and the plan isn’t under audit, so Y may make a VCP submission to the IRS under Revenue Procedure 2013-12. Y is encouraged to make its VCP submission using the model documents in Appendix C, including Forms 8950 and 8951. The fee for the VCP submission is $250. Audit Closing Agreement Program: If this mistake is discovered on audit, it may be corrected under Audit CAP. Correction of the mistake under Audit CAP should be very similar to correction under VCP. The sanction under Audit CAP is a percentage of the maximum payment amount. How to avoid the mistake: If you’re using an IRS SEP model plan (Form 5305-SEP), visit the IRS website before the end of each calendar year to see if the IRS has updated the model plan. If there’s a newer version of the form, read the instructions to determine if it’s necessary to adopt it. If you’re using a financial institution’s SEP prototype, check with that financial institution to ensure that there are proper procedures in place ensuring that they send any required updates you need to sign in a timely manner. Keep signed and dated copies of your plan document and any amendments for your records.

From 1.408-8 Q-8. What rules apply in the case of a transfer (including a recharacterization) from one IRA to another? A-8. (a) General rule. In the case of a trustee-to-trustee transfer from one IRA to another IRA that is not a distribution and rollover, the transfer is not treated as a distribution by the transferor IRA for purposes of section 401(a)(9). Accordingly, the minimum distribution requirement with respect to the transferor IRA must still be satisfied. Except as provided in paragraph (b) of this A-8 for recharacterizations, after the transfer the employee's account balance and the required minimum distribution under the transferee IRA are determined in the same manner as an account balance and required minimum distribution are determined under an IRA receiving a rollover contribution under A-7 of this section.

Yeah, who advised you and what is their motivation/reasoning for such advice? It may be excellent, perfectly legitimate advice, or it may be someone who wants to generate a commission. Or someone who doesn't know what they are talking about. I make no judgment - just be cautious.

Re HRAs without a group health insurance plan; is that allowed under the Affordable Care Act (ACA)? My (limited) understanding is that standalone HRAs were not permitted under ACA. Are there exceptions for complying with ACA; e.g., employers with fewer than 10 employees are not required to comply with Regulations under ACA and; therefore, could sponsor a standalone HRA? This question came up, and I wasn't sure if perhaps the answer might vary by state? Thanks.

Thanks. Yes, when I said it would be required for "certain" of the missed deferrals, I was referring only to those beyond the 3-month period. But I didn't make it very clear...

I was wondering about something on this Revenue Procedure. It seems odd to me that the rules are more favorable for ACA failures than non-ACA failures. For example, in the ACA plan, a participant makes an affirmative election to defer 10% in 2015. As long as corrected by 9-1/2 months following 2015, and in accordance with the other requirements, no QNEC required. Same situation, except a non-ACA plan. Now, you have the rolling 3-month period, and will have to do a QNEC of 25% for certain of the "missed deferrals" - which in this case would be 2.5%. Any idea why the discrepancy? Ultimately the "why" doesn't matter - the rules are the rules, but I was just curious if anyone had any insights on this.

Please don't waste any time doing research if you don't know this off the top of your head, as I don't work with these forms and my question is purely for my own general information. For a small (<50) employer who has an INSURED plan - does the insurance company file both the 1094-B transmittal and 1095-B forms, so that the employer has no filing responsibility, or does the insurance company just PREPARE the 1095-B forms, and the employer still has the responsibility to actually prepare and submit the 1094-B transmittal and the 1095-B forms that the insurance company prepared? Same basic question for a large (ALE) employer? In other words, what responsibilities does the EMPLOYER have for insured plans? Thanks for any information - or do you know of a good, concise source/summary on this?

Not sure - are you talking about a "discretionary" match that does not exceed the regular safe harbor matching formula? If so, then yes, it can be done. SunGard's new pre-approved PPA docs have a specific election in the adoption agreement that allows you to exclude the HC's from the Safe Harbor contribution, while allowing a "discretionary" safe harbor contribution, as long as that amount doesn't exceed the safe harbor contribution provided to the NHCE's. And you don't lose your top heavy exemption solely by making this "discretionary" safe harbor contribution.

A lot of IRS pre-approved documents have an exclusion for part time, temporary, seasonal, etc., BUT, they also have "fail-safe" language that says if any such employee actually completes a year of service, they will no longer be part of this excluded class. I would check the document language VERY carefully to see if you have some similar provision that will take them out of the excluded class.

Well, hard to know not knowing facts and circumstances, but presumably the employees are notified of the ACA at hire, or in the employee benefits manual, or upon plan eligibility, or SOMETHING like that, so perhaps the argument might e along the lines (stated more nicely, perhaps) of the following: "We're an employer, not a babysitter. We tell them (whenever - at date of hire, etc.) and it is their responsibility thereafter. Any employee who doesn't want it can make a new election - either to stop deferrals, or change to a different deferral amount. Not going to waste time and taxpayer dollars doing needless notices that aren't legally required."

Right, and IRS Notice 98-4 is very clear that rollovers don't count as a "contribution" for purposes of violating the "only plan" rule.

Following up on this. So, suppose we assign FSO status to the partnership "x", and make all the individual doctors participating employers at some as yet unspecified point. Has anyone actually processed a VCP correction submission, where each of the partners currently sponsors a plan independently but there is no plan for the FSO, or if they have one it is a SIMPLE or a SEP? This could turn out to be a pretty off-the-wall correction process, and I'm wondering if anyone has a methodology that they have submitted and gotten approved. Since all the plans have different provisions, how do you reconcile these? For example, trying to be "reasonable" - do you think the IRS would approve something where each Doctor's plan, for prior years, would be allowed to stand alone, while the "most favorable" provisions would be applied to the Partnership X retroactively, and going forward all the plans would be merged into one plan sponsored by the FSO (the partnership X) as of (for example) 1/1/2016? Or are you aware of another suggested methodology? Thanks!

Not discussing the relative merits of one vs. the other, as there are folks here far better qualified to do so, but a cash balance plan IS a defined benefit plan.

Is this a profit sharing account? If so, perhaps you could just use a stated age, such as age 21? 1.401-1(b)(1)(ii) permits distributions due to stated age.

I'm confused - not an uncommon problem. Key employee status is determined for a plan year based upon the plan year that contains the determination date. So for 2015, you aren't a key employee unless you satisfied one of the key employee tests for 2014, because 2014 is the plan year containing the determination date. So this person didn't satisfy one of the key employee tests in 2014, hence for 2015 is non-key. In 2015, the person then acquired ownership and therefore passes one of the key employee tests, so for 2016, is now key. How are you reaching the conclusion that this person is key for the 2015 valuation, and ineligible for a TH contribution (if the plan is top heavy and plan doesn't allocate TH to keys)? If it is because you think the rules require that you must count his ownership with DOG because CAT credits prior service with DOG for eligibility/vesting in CAT, (the OP's question) then if you are right, I'd agree. Off the cuff, I'm not aware that such a rule applies in the situation given, but perhaps it does. Otherwise, I'm still confused. If you do believe you must count the DOG ownership, do you have a cite? Thanks.

I'm probably missing something, but I can't find anything in 414(q) or the 414(q) regs addressing this. S-corporation, new leveraged ESOP has the two head honchos irrevocably waiving participation, as the plan would otherwise fail 409 testing. The plan document utilizes the top 20% election to determine the HC. Question is this - when determining the top 20%, are these two INCLUDED or EXCLUDED from the determination process? Since I find nothing that says you can or must exclude them, it would seem that they should be included. On the other hand, this doesn't seem reasonable, similar to doing 401k testing where someone has zero comp for the year, so you exclude them entirely from the testing. Of course, following the coverage testing rules, these people are treated as non-excluded and not benefiting, so maybe that is the more reasonable interpretation, in fact, that's where I lean. Anyone ever encountered this, or have an opinion?

I'm assuming this is not a controlled group/affiliated services group? Without doing any research for confirmation, assuming no CG/ASG, I'd say he is non-key until 2016.

When you say "non-profit" do you mean governmental, or non-governmental? In either case, you may exclude employees who normally work less than 20 hours per week - see 1.403(b)-5(b)(4)(ii)(E). However, if this is a non-governmental ERISA 403(b), be careful that your language has some sort of "fail-safe" provision so that if you are using the 20 hour exclusion, anyone who works 1,000 hours will be eligible, and will remain eligible for all future years. And in either case, the document must provide for the 20 hour exclusion in the first place - some documents do not. It'll be interesting to see what language the IRS approves in 403(b) prototypes regarding this issue, once they approve them.

Thanks Mike.