Belgarath

Gosh, it seems simple enough. Take 1 eye of lizard, 4 ears of swine, some chicken gizzards soaked in wine, mix with 4 moonbeams and an alembic of essence of pixie dust, and stir with a frozen dead rat. The result is IRS clarification.

Perhaps IRC 4975(d)(5)? I must say I don't quite understand how an insurance company would receive commissions for policies in its own plan. So you are saying, for example, that Prudential sponsors a plan, and as one of the investments in that plan, there are life insurance policies on the individual participants? And that commissions are paid on the "sales" of these policies? To whom are they paid? Does sound pretty weird if that's what is happening...

$65K for "ladies of the evening?" Wow, he must have been in cahoots with Eliot Spitzer.

I suppose I really shouldn't ask, but why in the world is there such a screwy plan year?

One option that the IRS has frequently been allowing is to "unwind" the 412(e)(3) plan, retroactive to the starting date, and treat as a regular DB plan. Have they offered this as an acceptable solution? Even if you have an approved prototype, and did everything right, it's still a rare client who is willing to pay the legal fees to fight even a stupid or incorrect auditor (and I'm not saying the auditor is wrong in this case - may be right, may not be) so unwinding it is often more palatable then the remaining choices, which are rarely good.

On a somewhat related question - if the participant is prevented from receiving a lump sum payment due to AFTAP being too low, so receives an annuity payment in the interim, and the AFTAP subsequently gets back up to where it needs to be, the participant should be able to receive a lump sum equivalent to the remaining benefit?

John - could you please clarify your response? It sounds like you might be saying the death benefit, when paid from the plan to the participant's plan beneficiary, is taxable, but I suspect that's not what you meant to say at all?

Well, I'll take a stab. I'm not aware of anything prohibiting the life insurance policy to have a beneficiary other than the plan. However, I don't think any PLAN would/should allow this, as the plans have specific beneficiary payment provisions in accordance with ERISA and the IRC - QPSA requirements, for example. Consider what happens if the policy names the participant's mother, or participant's child, as beneficiary, rather than the plan, without a valid spousal waiver. The PLAN will be required to pay a specified death benefit to the spouse, but will not necessarily have the funds to do it as contemplated when purchasing the life insurance. The legal fraternity would have to chime in here, but this seems to have Fiduciary breach written all over it. I don't think any responsible Trustee/Plan Administrator would ever consent to the purchase of a life policy by the plan where the beneficiary on the POLICY is other than the plan. Each individual should have a beneficiary designation on file with the Plan Administrator which covers all plan benefits, which would include the life insurance. I think you will also find that most plans have language that specifies that the PLAN will be the beneficiary. If so, and the beneficiary is other than the plan, then you have an operational violation which must be corrected. Additionally, and you'd have to check with some insurance companies on this, but it would seem prudent that they might refuse to issue a policy in a qualified plan where the beneficiary is other than the plan. But I dunno on this. Maybe they don't care, or monitor this.

Agree. I was assuming termination was taking place.

They can't "waive" a benefit. What they do now, which is currently allowed, is "forego receipt" of the benefit. A common sense solution to a stupid requirement. Semantics indeed.

Now, wait just a minute. "Readable by the average Senator?" Sally, Dick, and Jane are too complex for the average Senator. All they know how to do is recite scripts written for them by their staffers, who, however misguided their thinking may be, are generally far more intelligent than the Senators. They are probably mostly JD's....

Thanks Bird. Precisely the same answers I came up with, but the forms/instructions are sufficiently confusing so that I started to wonder if I was missing something crucial.

Going in circles on the tax forms. We've been having a little conversation. Suppose you have an unincorporated partnership. Let's make it easier - no common law employees. No partnership contribution to the Profit Sharing account. A partner has income, assuming all other income/expenses have been taken into account other than the deferral, of $100,000. Partner defers $15,000. 1. It appears that this deferral would be listed on Line 13 of the K-1. Yes or no? 2. Does this reduce the K-1 income to $85,000 as reported on the Schedule E which is used on Line 17 of the 1040, or does it remain at $100,000? 3. When completing the 1040, is the deferral listed on Line 28? Yes or no? (This will depend upon the answer to #2 above, since you obviously wouldn't deduct it twice) Any other thoughts/observations? Thanks!

Well, hang on a second. I didn't say they could avoid top heavy. Just that portion of the match attributable to the deferral that is being refunded. In this particular case, plan isn't top heavy anyway. Figuring this stuff out makes me think of that scene in "Marathon Man" where Laurence Olivier is torturing Dustin Hoffman in the dentist's chair with dental instruments. I think Dustin had it easy compared to dealing with qualified plan regs.

In the "real world" in the small plan market particularly, I'm guessing that the common approach is that maximum loan values are quoted when the loan application is signed/delivered to the Plan Administrator, and is not re-checked when the loan disbursement actually takes place. I think that to be safe, you should use the most recent values as you have suggested. It would be nice if the IRS/DOL issued some reasonable "safe harbor" on this - the only guidance I recall for the IRS was way back in the, let's see... 1980's. I don't have the citation handy, just some notes.

Hey Tom - "I am not sure about your comments on "matching contributions that will cause the ACP failure are based purely upon the already reduced deferrals" If I am matching $ for $ and the person defers $1000 then the match would be $1000 according to the terms of the document, even if the person had to take $50 for excess contributions - or at least how I see it." What I was trying to say was that the match is based upon the deferrals remaining after the ADP correction. So to use your dollar for dollar example, person defers $1,000. ADP test fails, and $500 must be refunded. Required match is now $500, not $1,000. The plan (IRS approved prototype) specifically provides that the Employer shall not make the otherwise fixed matching contribution on a deferral that must be distributed in a corrective distribution. That isn't the exact language - I'm paraphrasing here, but that's the result. Anyway, thanks to all for the input.

Tom, just to amplify a bit, the ADP test failed, and the matching contributions that will cause the ACP failure are based purely upon the already reduced deferrals. 12/31/08 plan year end.

Of course you are right on the citation. Brain cramp on my part. Actually, the ADP failed, but I didn't get into that issue, just wanted to confirm whether I was cracked on the excise tax.

If I'm reading the regs correctly, this seems an unfortunate result, so I hope I'm missing something. Client has matching formula of 50% of first 8%. Employees are 100% vested. The match for 2008 has not yet been contributed. When contributed, it will cause an ACP failure, necessitating a refund of some of the match. According to 1.401(k)-2©(5)(i), if it isn't corrected within 2-1/2 months after the close of the year FOR WHICH the excess contributions are made, then employer is liable for the 10% excise tax under 4979. And 4979(f) provides no relief. Is there something I'm missing, or is the employer just stuck? The way I read it, they are stuck. I've never happened to run into this situation before. Thanks.

Sounds rather odd. It should be considered as an employer contribution to the plan, and will therefore be allocated according to the plan language for allocating employer contributions. As Mr. Rigby has already suggested, the plan will have language for allocating an employer contribution. You may not like the results, however.

I never thought to look, but here's the IRS LRM language for anyone who is interested. While I didn't make the leap from a rollover account to it automatically being considered a 414(k), at least the language is there when you reach that stage. 2.3 Forms of Distribution. Unless the participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with sections 3, 4 and 5 of this article. If the participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of § 401(a)(9) of the Code and § 1.401(a)(9) of the regulations. Any part of the participant’s interest which is in the form of an individual account described in § 414(k) of the Code will be distributed in a manner satisfying the requirements of § 401(a)(9) of the Code and § 1.401(a)(9) of the regulations that apply to individual accounts.

Interesting. I'll buy that. Thanks for the info! So this is going to require (and not be optional) separate RMD calculations for the accrued benefit, right? One using the annuity method for DB, and one using the account balance method for the rollover portion?

The answer seems very obvious to me, to the point that this seems like a stupid question, but sometimes I question my sanity so here goes. Corporation A and Corporaion B form a controlled group. Corporation A sponsors a 401(k) plan, and Corporation B signs on as a participating employer. Plan # is 001. Now Corporation B wants to set up a new plan, for reasons which have not been presented to me. So say they set up a PS plan - to which Corporation A will sign on as a participating employer. Should the plan # be 001, or 002? I'd say 001, because this is the first plan that B will formally "sponsor" under their own id#. Any votes for 002?

I agree with the fish. Had this question the other day, and I couldn't find any authority permitting the account balance calculation method for the rollover money. I imagine this makes the RMD calculations more difficult in a situation where someone makes an in-service withdrawal of part of the rollover funds. Fortunately, our actuary calculates these RMD's!

PTE 92-5.