Belgarath

Sole prop (with employees) wants to terminate a safe harbor (3% nonelective) plan. The part that's bugging me is, how do you handle this for determining the compensation on which to base the 3% for the sole prop himself? Let's say the plan term date is 6-30-07. Since a sole prop doesn't technically "earn" income until 12-31-2007, how does this work? Do you: 1. Give the sole prop a zero contribution? 2. Give the sole prop a contribution based upon 50% of the 2007 income? 3. Give the sole prop a contribution based upon 100% of income? 4. Other I think I could argue for either 1 or 2, but I incline toward 1 as more technically accurate, IMHO. Any thoughts?

"The agent explains that whenever P dies, the death benefits will be paid to the plan with no tax, and that when S withdraws those Roth benefits there will be no tax due, not even on the interim investment earnings on the death benefits." This is the only potential upside, as well as the potential drainhole (do you hear a giant sucking sound?) which makes the entire house of cards come crashing down. First, the client is forgoing the current tax deduction. Second, in general, the advantage to a Roth is the potential for income tax free earnings on the investments. Let me start by saying that I'm not anti-life insurance. I am, however, anti-crapola. And this arrangement doesn't smell like roses. If the participant lives to retirement, he has made an absolutely terrible choice. He has lost the current tax deduction, to purchase a policy whose INVESTMENT RETURN stinks as compared to other investments available, particularly when the potential upside of successful INCOME TAX FREE investment return on the Roth basis is lost. Now let's look at the only potential upside as proposed. Participant dies while a participant. (So the gamble is that the participant must die in the next 12 years for this to be successful. If they are that convinced that death is imminent, they should load up on 10 times the insurance available in the plan, with term insurance outside the plan!!!) The life insurance agent, who naturally only has the client's best interests at heart, says that any income earned on the death benefits retained in the plan, as long as it remains in the plan, is not taxable income when withdrawn. Well, I'm not even so sure about this "advantage." I'm not a tax attorney, but I'm dubious that this is settled tax law or regulation, and that if the client applied for a PLR that this would be the conclusion that the IRS would reach. I'm suspicious that the IRS might conclude that any earnings on the pure life insurance proceeds (the "net amount at risk" - that is, the death benefit minus the cash value at the time of death) would indeed be taxable. I rather doubt that there was Congressional intent in the law to arrive at the same conclusion that the life insurance agent posits. So at the very least, no client should even consider this without an opinion from a reputable tax attorney who is also familiar with qualified plan rules. That's my two cents worth for the day.

The problem is that the reg I cited was written before the affiliated service group regulations. I've always taken the interpretation that ASG's should be treated no differently for these purposes than a CG.

If they are an ASG, then this isn't a "multiple employer plan" under IRC 413©. See 1.413-2.

Generally speaking, you would use cash surrender value for trust accounting purposes. When it comes to distributions, then you are looking at FAIR MARKET VALUE. Be very careful, as some policies have a FMV which is different (higher) than CSV. I'd encourage you to look at past threads, as well as IRS regulations and other guidance, including Rev. Proc 2004-16, Rev. Rul. 2004-20, and Rev. Rul. 2004-21.

Thanks! Consider it your pre-Easter miracle. About 5 minutes. Something meaningless and trivial, I'm quick. Ask me something on 1.401(a)(4) and it's more like 5 hours...

Yes, this would normally be 50%, assuming no forfeitures, nothing unusual etc. See 1.410(b)(3), and 1.401(a)(4)-2©(2)(ii). And yes, you are looking at two separate issues. The definition of "benefitting" for 410(b) and 401(a)(4) purposes is separate from the "active participant" rules for IRA deduction purposes. P.S. there was just a thread on the "active participant" issue a day or two ago that you might find very helpful. Or you could just look at IRS Notice 87-16, but the thread will probably be quicker for your purposes.

Oh, I don't know about that. Some of us are far more interested in having the snow melt off so we can hit a few golf balls, and dream about being Tiger Woods when we finally grow up... But on a more serious note, was just mentioning this to our actuary yesterday, who also hasn't heard anything of substance.

For a very feeble attempt at Friday morning humor... 1. Radiation Therapist Translation - Visiting Nurses Association positions in Russia. 2. Nurse Paralegal Translation - working for a health insurance company, manufacturing reasons to deny claims. 3. Genetic Counselor Translation - newest pick up tactic for losers in Bars - "Want some help fertilizing those eggs?" 4. Legal Nurse Consultant Translation - a particularly obnoxious form of #2 above. 5. Art Therapist Translation - Oh, please! Drawing dirty pictures is therapy? Get a real job! 6. Computer Forensic Expert Translation - disassembles computers and sells the junk parts to China. 7. Medical Illustrator Translation - draws higher quality dirty pictures than an Art Therapist. 8. Veterinary Physical Therapist Translation - dog walker. 9. Animal Defense Lawyer Translation - Sues farmers for keeping cows in barns, rather than million acre air conditioned domes on the prairies. Encourages car bombs to be placed in any vehicle bearing the bumper sticker "Vegetarian - another term for unsuccessful hunter." 10. Animal Assisted Therapist Translation - walks dogs while riding a horse.

This is just one of those situations where I think you are trying to hard, and it is hard to believe the answer is as simple as it is. "It's a confusing solution to what should not be a tough decision to make. Employee A made 401k contributions totaling $1000 in 2006, but her W-2 says she put in $1050. Rather than fix the W-2, the employer wants to make a deposit of $50 into her 401(k) account, call it a 2006 401(k) contribution, and say "see, now her 2006 401(k) contributions equal $1,050, which is what the W-2 states". Do this for the other 200 or so participants and that is what is being proposed." Simple answer - no, this cannot be done. End of answer. "To me, this solves 1 problem by creating another (and I'm not sure it really solves the first problem either). If the employer makes this extra contribution and shows it as a deductible employer contribution, then it should be allocated as called for in the plan document. Instead, it is just going to a select group of employees, namely only those who made 401k contributions, and in varying amounts." You are correct that this doesn't solve the first problem. You are also correct that that it must be allocated as per the plan document. What the employer wants to do as a correction will not correct the problem. There isn't really anything more that I can say that I haven't already, so I wish you good luck in your dealings with this employer! Sounds like a fun one...

Blinky, I agree that this should be acceptable. I think your position is supported by the second condition in the Rev. Ruling, which states that, "the offset to the benefit otherwise payable is equal to the amount deemed provided on the determination date by the vested portion of the account balance in the profit-sharing plan (plus the additional amount that would have been provided by any prior distribution from the account balance)." The fact that this refers to account balance rather than annual contribution seems to agree with your approach. I do note that the Revenue Ruling states, "In particular, the defined benefit plan must provide the actuarial basis that will be employed to determine the benefit deemed to be provided by the profit sharing plan." Is this language common? Just curious.

Now you've really got me confused. The employer makes an additional contribution. This must be allocated according to the plan document, which will specify the allocation method for an employer discretionary contribution. Whoever gets it, gets it, in whatever amount. The document language should prevent any discriminatory allocation. This has no effect on the W-2's whatsoever. They are already wrong no matter what the employer does with a discretionary contribution, and a discretionary contribution doesn't alter the W-2's. If the employer reads the instructions for W-2's, I would think that the potential penalties might cause a change of heart on the decision not to correct them, but again, that's not your problem. All you have to do is make sure the employer contribution is allocated correctly. I'm just not understanding the problem here. As a TPA, I certainly don't care if the employer gets screwed due to an affirmative decision to ignore the incorrect W-2's. If I've done my duty by notifying the employer and suggesting that this be discussed with tax/legal counsel, then I'm happy!

I agree with Tom. I am dubious that the IRS would give this a "pass" if they looked at it, and it was basically the HC who were the only ones receiving the higher match. I believe this qualifies as an "other right" under 1.401(a)(4)-4(e)(3)(iii)(G), and as Tom mentions, the test under 1.401(a)(4)-4© is facts and circumstances.

IMHO... This really needs to be separated into two things - one is the plan, and the second is the employer and the liability for incorrect W-2's. As far as the plan goes, there is no problem here. The deferrals were made, testing done, etc. and presumably passed. The additional contribution is presumably witin applicable limits, and whether the employer chooses to claim it as a deduction is irrelevant to the operation of the plan. As far as the employer is concerned, it isn't smart to knowingly have sent incorrect W-2's, and then not bother to fix them. The employees have now been credited with incorrect larger deferrals on their W-2's, resulting in under reported taxable income. The IRS frowns upon this practice. Making an additional employer contribution, whether deducted or not, makes no difference here. As a TPA, it isn't really your problem, although I agree that you should tell the employer (in writing) to discuss with tax counsel as to how to handle it. This way, you have done your duty, and the employer can suffer the consequences if and when this ever appears upon audit.

"It would appear from the language of the Code and the regs that if you become a 5% or more owner after this year you would not be a 5% owner and would not have to begin taking distributions." I agree. Whether this was truly intentional or not I can't say, but your conclusion is the same one that we reached. (Doesn't really happen all that much, but just often enough to be disconcerting!)

This sort of screams (if the dollars involved are high enough) for the advice of an estate planning attorney. For example, why does the son want to buy this? Seems like setting up a trust might be possible, where the mother is the beneficiary, or mother and son jointly or whatever they have in mind, and then the trust could purchase it directly from the plan? Now if I could just find some way of getting paid Dice-K's salary for sitting here tossing out vague and largely useless opinions and questions, my life would be perfect. Maybe if I start calling them "gyropinions" they will be worth more!

Andy - I'd strongly recommend that you run this by the insurance company. There is a doctrine called "transfer for value" that may come into play here. There are exceptions, and I know very, very little about the subject. But the little I know would lead me to believe that the subsequent sale to the son would likely be a "transfer for value." The ramifications are pretty severe - the death benefit in excess of the consideration would no longer be treated as income tax free. But as I said, this is way out of my area of knowledge, so I'd recommend contacting the insurance company (or someone on these boards likely knows this like the back of their hand.)

Mike/Blinky or whoever - would this perhaps have come up at an ASPPA conference where there's a specific Q&A that we could refer to? It would certainly be helpful if someone questions it. I'll be honest - I hadn't heard this before, but also have never looked into it because no one has ever asked! So we've only used it to correct a failure. I'd appreciate your opinion on sort of an extension of this question. Say you have a traditional DB plan. Only employees are HC. One of them terminates employment in 2006 at zero% vesting. The remaining owners (naturally all family members) want to make this person 100% vested, so they want to retroactively amend the plan to provide for 100% immediate vesting. Can they do this? I don't believe this could work in a profit sharing where forfeitures are reallocated, because this would result in an illegal cutback. In the DB plan, maybe possible? Does this raise any questions about deductibility of some amount of future contributions, since the forfeitures would otherwise become plan assets? Thanks in advance.

Of course this may vary by state, but my friend in the State Police said that if you reported it to the State Police, they would investigate to see if there was "probable cause" (whatever that is) and if so, they would turn it over to the State's Attorney. So this isn't necessarily a lot a help. If 'twere me, the first thing I would do is contact a lawyer who handles civil cases, and have that attorney give you a road map of what you should do, and in what order, to be most beneficial to your civil suit. There are likely certain steps you can take to strengthen your suit, and increase the liklihood of a judgement against the dirty SOB.

I left a message with a friend who is a member of the State Police force. I'll let you know what he says. (basically I asked him, if this were reported to the State Police, what if anything would they do, and would they just refer it to the FBI or recommend that the complaint be filed with the FBI, etc.)

See 1.401(a)(9)-5, A-5©(1).

I'd start with the FBI. If it turns out that they are not the proper authority, they will at least tell you where to report the crime. I'd also contact a good attorney to discuss the civil suit you intend to bring against the forger. I'd be out for blood in a case like this. Good luck!

Because I believe the standard correction language was designed for a situation with a terminated participant where there are group funds, and without an employer replacement of funds, other participants suffer a reduction in their benefit. Somehow, this seems like a whole different level than replacing the money where no one else is harmed and ONLY the participant receives the replaced money, which he already received once in the first place. I can justify the first situation better than I can the latter. Thoughts?

I've tried several searches, but was unable to locate this specific circumstance, so here goes. Participant requests a hardship withdrawal. The Trustee signs the withdrawal form and sends it to the funding institution/broker, who processes the withdrawal, withholds 20%, and sends the balance on. This raises all kinds of problems. First, the participant was only eligible for a hardship withdrawal of $1,200, but the withdrawal was $2,500. So there's an impermissible distribution of $1,300. Then, 20% withholding was done on the whole amount, which is also wrong. And while we don't know, the reporting by the funding institution is almost certainly incorrect. The fix under Revenue Procedure 2006-27 is fine. My question is: since this participant has (apparently) no money whatsoever, what happens when the participant refuses to repay the plan? The standard language in the Rev. Proc. would require the sponsor to repay whatever the participant does not. However, this contemplates a different situation, and I don't believe it is appropriate to give the participant a windfall. Whether the employer can require withholding this from the participant's pay is probably a matter of state law. Just wondered if anyone had encountered a similar situation, and if so, how did you handle? I've seen no IRS guidance on this. Thanks!

That bad, eh? Ok, I think I'm groping toward an understanding. So how do you determine the "level" for the most expensive HC? Wouldn't you have to convert that premium into a percentage benefit? You can't really use face amount if using the 2/3 rule, can you, since the HC will presumably have a much larger premium available. These are the kinds of plans that seem to appear in promotional pieces with artificially massaged census, compensation, ages, formula, etc., and that would never work properly in the real world.