Belgarath

It is because under 1563(a)(2) - and by the way, read the (f)(5) modifications to (a)(2) for RETIREMENT PLAN purposes or you will really get in trouble - when calculating the ownership percentages, you only take into account the stock ownership "of each such person only to the extent such stock ownership is identical with respect to each such corporation." In english, this means you only count the lesser percentage of stock owned. For example, if you own 10% of corp A and 60% of corp B, then your "identical" ownership is 10%. You then apply these percentages to the CG tests. I'd highly recommend Derrin Watson's "Who's the Employer", or Sal Tripodi's "Erisa Outline Book" for further reference. It is a dauntingly complex subject, or can be, and we ALWAYS recommend they consult their ERISA attorney to make the determination - by the time you get through attribution from family, stock options, etc., etc., even a seemingly simple situation often isn't! (I had to edit - I misspelled Derrin's book title)

No, it isn't a stupid question, and yes, you would include it.

The JCT explanation doesn't provide a lot of insight. I'm wondering, however, if the whole thing is an attempt to coordinate the deduction limit with the excise tax provisions of IRC 4972©(6)(A). The 6% figure seems like too much of a coincidence. I have always read this provision in 4972 to mean that if you had, say, a 10% nondeductible contribution to the DC plan due to the 404 combined plan deduction limitation, that you would pay excise tax ONLY on 4%. I think that IF this coordination is deliberate, it would support the argument that your DC contribution would be deductible up to 6%, and nondeductible only to the extent it exceeds 6%. But whether deliberate or concidence, I still personally believe the correct reading of 404 is that the DC contribution up to 6% is deductible, and if you go over 6%, only that excess is not deductible - you don't lose the whole DC deduction.

Pax - your reply brings up an interesting point. Are you allowed not to count employees who were terminated for cause? Let's take your example of sleeping on the job - 5 out of 10 employees were caught sleeping on the job, and got fired. Any reasonable person would conclude that they should not be rewarded by becoming 100% vested. Has there been any guidance, ruling, PLR, etc., that addresses this? I've never seen any, and although this particular issue has thankfully never come up in one of our cases, I've often wondered. Would you simply take the approach that they shouldn't be counted in determining if a PPT has taken place, or would you apply for a determination letter? Have any of you out there ever applied for a determination letter in this circumstance, and if so, with what result?

I think what David is saying is that there are other options that may reduce the amount - say if his annuity distribution method is annual, then he'll only need one payment in 2007. For example, starts his annual annuity payments on March 15th, 2007. Next annual payment will be March of 2008, etc. Or depending upon the options allowed, might be only, say, 9 monthly annuity payments in 2007 if the monthly option is chosen and payment commences on 4-1-07. Take a look at 1.401(a)(9)-6 for details. It'll tell you more than you ever wanted to know. While the IRS sometimes actually works with the benefits community to make things easier and more rational, this was not one of their finer efforts.

So let's say in September of 2005, a participant takes a hardship withdrawal. However, the employer fails to suspend deferrals. This is not discovered until July of 2006. An apparently acceptable fix is to treat the deferrals for the 6 month suspension period as discontinued, and the participant will forfeit the deferral and any match. The employer will then make the participant "whole" in his paycheck currently, and use the forfeited deferrals/match as a current employer contribution. Question - I would assume such a fix requires going back to re-run the ADP testing for 2005? It seems unlikely that it could be avoided if they are being treated as never made, but sometimes truth is stranger than fiction... Thanks.

So what does this really mean? Let's say the S-corporation dissolves. Ignoring the extra pension contribution for the moment, there is "basis" of $200,000. For 3 years, the required DB contribution was $30,000 more than the W-2 income of the shareholder, for a total of $90,000. Was the $30,000 currently deductible on the shareholder's 1040 for each of the last 3 years when the contribution was made, and the basis was correspondingly reduced? Or something else altogether?

Reviving this old discussion. Just got a call from an advisor for a current client - the question involves one of HIS advisor's clients! Apparently the situation is this: PS plan participant terminated employment about 20 years ago, with a vested account balance of around $2,000. Supposedly, they performed diligent searches, etc., and could never locate the person, so after some unknown # of years, they treated the account as a forfeiture and reallocated it to other participants. (This was in the old days - now you would just do a mandatory rollover.) The plan was TERMINATED 10 years ago. Lo and behold, the participant has now shown up and wants his money. With interest, this would be quite a fair amount now. The employer that sponsored the plan does still exist. What would you advise the employer here? Our documents used to allow such a forfeiture for a missing participant, but also specified that if they subsequently requested their money, that the employer would have to contribute it. I don't know what the document for this plan specified, and neither does anyone else, apparently. Since there is no longer a plan, how can a contribution be made? Or should they tell the participant to take a hike, recognizing, of course, that a lawsuit is a possibility? I realize this is a matter for legal counsel, but I'm just curious as to what y'all think.

Lawrence - your reply is worded such that I'm not certain if you are stating that spousal consent is required (other than for cash out distributions) or not. For a plan not subject to QJSA (and as this is a 401(k) plan, generally not subject to QJSA) then spousal consent is not required. My emphasis below. But maybe that is what you are saying. Q–24: What are the rules under sections 401(a)(11) and 417 applicable to plan loans? A–24: (a) Consent rules. (1) A plan does not satisfy the survivor annuity requirements of sections 401(a)(11) and 417 unless the plan provides that, at the time the participant's accrued benefit is used as security for a loan, spousal consent to such use is obtained. Consent is required even if the accrued benefit is not the primary security for the loan. No spousal consent is necessary if, at the time the loan is secured, no consent would be required for a distribution under section 417(a)(2)(B). Spousal consent is not required if the plan or the participant is not subject to section 401(a)(11) at the time the accrued benefit is used as security, or if the total accrued benefit subject to the security is not in excess of the cash-out limit in effect under §1.411(a)–11©(3)(ii). The spousal consent must be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent is subject to the requirements of section 417(a)(2). Therefore, the consent must be in writing, must acknowledge the effect of the loan and must be witnessed by a plan representative or a notary public.

Is their SEP a prototype, or an IRS model SEP? If an IRS model SEP, then contributions to another plan aren't permissible for the same year for which contributions have been made to the SEP.

Not generally required by law, but the plan may require it.

While it is always good advice to read the document, (for example, the compensation definition might possibly EXCLUDE royalties) it may not help much here. If, for example, the person is self employed, the document definition usually refers to "earned income." The problem is for determining what constitutes the net earnings from self employment derived from the trade or business for which the personal services of the individual are a material income producing factor. Which gets you back to some potentially complex and difficult choices with regard to royalties and how they are classified.

I don't know, I think a young spouse could solve ALL of your problems. Or at least make you forget them. Now, excuse my ignorance, but if we take the more realistic assumption that the spouses are somewhat similar in age. If they start taking an annual payment, can they later increase it as 415 limits rise, or are they locked into it once they start? And if they can increase it, can they tkae the "balance" of the increased lump sum minus previous annuity payments, all adjusted through your actuarial wizardry, or must they just continue to receive higher annuity payments?

Maybe. This is so dependent upon facts and circumstances... I'd STRONGLY recommend you take the specific circumstances to a CPA who is familiar with the issue. But, for example, an author probably can have earned income from royalties - see IRC 401©(2)©.

Gosh Andy, it's way better than that. You buy gold coins, then store them in your vault at work. Then you take them, open up a secret Swiss Bank Safe Deposit Box and deposit them all there. THEN you go back home and report the assets (coins) as being STOLEN from your office. Or, you could buy shares in Red Sox pitching - an investment guaranteed to lose. Of course, you might have a hard time proving fiduciary prudence. On a slightly more serious note - in a overfunded DB plan, can't they take an annual payment instead of a lump sum? Does this help the situation, or exacerbate it further?

Fake, fake, fake, and more fake. But amusing nevertheless.

For some of you DB people who have my undying admiration because you actually understand numbers... Maybe this will also largely result in the demise of the (formerly) 412(i) plan now renamed as 412(e)(3)? It would seem to me that perhaps with the new, higher front end cost available under a traditional DB, that the higher deduction formerly available under a 412(i) plan will be largely negated? Andy, if you aren't home watching the Red Sox, you must have thought of this! What's your opinion?

I agree that is reasonable to not include the SIMPLE-IRA rollover in the TH determination. Sal Tripodi makes reference to an ASPPA conference in 2001 (Q&A-31) where the IRS representative said it should be treated as an unrelated rollover. I'm not aware of any additional guidance on this subject.

A lot of plans (especially the really small plans) don't do it via payroll withholding.

Back to the variable rate premium. I finally got this through my thick head - it has been bugging the heck out of me how the variable rate premium example in the JCT explanation could come up so high. But it is right - I was just not looking at the statutory wording correctly. Looked at it again today after reading one of the summaries, and like most of these things, once you "get it" it becomes very simple. My emphasis below. So for a 10 person plan, you have 5 dollars x 10 = 50 as the variable rate premium for EACH participant. Somehow I just kept glossing over that word "each." Then times 10 = 500. Duh. Sometimes, when you start down the wrong path on a first reading, you just can't get back. [PPA §405] (a) Small Plans- Paragraph (3) of section 4006(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)) is amended-- (1) by striking `The additional' in subparagraph (E)(i) and inserting `Except as provided in subparagraph (H), the additional', and (2) by inserting after subparagraph (G) the following new subparagraph: `(H)(i) In the case of an employer who has 25 or fewer employees on the first day of the plan year, the additional premium determined under subparagraph (E) for each participant shall not exceed $5 multiplied by the number of participants in the plan as of the close of the preceding plan year.

Getting warm in here. I don't have the answers, but FWIW I'll go through my thought process, such as it is. I started off leaning in the direction Blinky espouses, but I'm now leaning toward Moe's interpretation, ONLY FOR A NON-PENSION Plan. I want to emphasize that, as the original question is regarding a 401(k), and I think the results are perhaps different for a pension plan. First, I went to 414(b), which says that for a controlled group, the limitations under 404(a)...will be allocated to each employer in accordance with regulations prescribed by the Secretary. Great, except that I can't find any such regulations. Are there any? Assuming not, then I'm left with 404(a), which allows a deduction only if it would "otherwise be deductible." And this appears to be governed by IRC Sections 162 and 212. See PLR 8032079, and Revenue Rulings 69-525, 70-316, 70-532. I'm therefore inclined to say that absent special circumstances (such as termination liability - see 404(g)) for a non-pension plan it probably is only deductible as properly allocated to each employer. But I'm by no means certain that this is ironclad, and probably subject to reasonable interpretation and disagreement. Again, I think for pension plans there is a different result.

No, last I heard, it was to be Aug. 17th or 18th. Or thereabouts...

Sorry, I had sent a reply without thinking, which I immediately deleted. If anyone saw it, just chalk it up to brain cramp after a hard day...

I'd like to go back to the variable premium cap if I may. After reading and re-reading the statutory language, and the JCT explanation excerpt below, I simply don't see how the two can be reconciled absent additional guidance. I mean, if you look at the first and last sentence of the JCT expanation, how do you possibly get from point A to point B? While the last sentence may well have been congressional intent, I guess I'll wait for additional clarification. Is there some simple explanation I'm missing? "In the case of a plan of a small employer, the per participant variable-rate premium is no more than $5 multiplied by the number of plan participants in the plan at the end of the preceding plan year. For purposes of the provision, a small employer is a contributing sponsor that, on the first day of the plan year, has 25 or fewer employees. For this purpose, all employees of the members of the controlled group of the contributing sponsor are to be taken into account. In the case of a plan to which more than one unrelated contributing sponsor contributed, employees of all contributing sponsors (and their controlled group members) are to be taken into account in determining whether the plan was a plan of a small employer. For example, under the provision, in the case of a plan with 20 participants, the total variable rate premium is not more than $2,000, that is, (20 x $5) x 20."

I'm guessing that the target plan was implemented to produce a higher percentage of a given allocation going to the older, highly compensated owners/employees. These were quite popular back in the days before "cross tested" profit sharing plans. In a very general way, I'd guess that if those same employees who were to receive the lion's share of the benefits under the original plan are no longer there, or have a reduced contribution, that it would make a great deal of sense to look into some alternate plan design, such as a PS plan as you mention. Results are very "facts and circumstances" specific, so I have no guess as to the plan design that will ultimately prove most appealing to the plan sponsor.