Belgarath

You seem a bit testy on this considering folks are merely attempting to respond to your question. But I'll give it a shot. Under 1.411(d)-2(b)(1), the general rule is that it is indeed a facts and circumstances determination. If you have one NHC and you lay them off, is this a PPT? Well, probably yes. The "more than 20%" rule alluded to earlier can be found in Revenue Ruling 94-101. Also, this same ruling in the audit guidelines mentions the assumption that all employee terminations are involuntary unless the employer can prove otherwise. There was a court case which I cannot remember back in the 1980's, as well as GCM 39344 which set forth the fact that voluntary employee terminations do not count (except in "constructive discharge cases" - there was another court decision for this which I also cannot remember). Hence all the discussion of facts and circumstances, as hard and fast rules are few and far between in this arena. And the back and forth with the courts in the Matz case is a good example of the lack of clarity that as TPA's we would like to see. You can apply for a determination letter on a 5300 if you think it is questionable and that the IRS should consider mitigating circumstances where the termination percentage is higher than 20%. I've never done this myself, so have no opinion on how likely you would be to succeed on such a request.

Lori - I'm a little confused as to the reference. What Schedule C are you talking about? I was assuming the 5500 Schedule C, but Line 2 part (b) is simply asking for an employer ID number. Can you clarify? Thanks.

First, I'll start by saying that I am by no means an expert in the CG arena, and I'd recommend that you place this question before experienced ERISA counsel. Getting that out of the way, I'm finding this a bit confusing. Although under 1.414©-4(b)(3) there is attribution from ESOP's, it also appears that this may be trumped by the excluded stock rules under 1.414©-3©(2). So it almost appears that while there is attribution in general, it is nevertheless excluded. (I agree, by the way, that the 318 is for HC and the 1563 rules govern controlled group). So it is a least possible that the CPA is correct, but for the wrong reasons. I know this isn't much of an answer, but I'm honestly not sure where I come down on this without a lot of thought. I haven't had a chance to check Derrin Watson's book to see if he addresses this issue.

Yes, it was a 1977 Taylor-Fladgate port! Opened it for our 25th wedding anniversary - bought a bottle while just out of college back in 1981, (and almost completely broke,) and stuck it in the cellar. Wish I could have bought more...as I recall it was around $30.00, which was a lot of money back then. But we had a very few dollars left over from wedding presents, and said, "what the heck." Good choice.

If you are offended by irreverent humor, please stop reading now. While drinking a 1977 Taylor-Fladgate Port, I saw God last night. I have determined that it is only possible to see God while drinking a vintage Port from a great year. For those of you who haven't had the good fortune to experience this, let me describe Him to you. He's apparently in His mid-50's, with a short, grizzled beard. He wears sandals, faded and comfortable looking blue jeans, and a fisherman's hat festooned with corkscrews. He also wears a Taylor-Fladgate T-shirt that on the front says, "Starboard, Hell - head to the Port!" and on the back says," A Port in any storm." He also has the best looking wife I've ever seen - mid-30's, 5'-10"; glorious red hair; long, beautiful legs in REALLY short cut-off jean shorts, and a skin tight Hooters T-shirt. Sort of a taller Marilu Henner type. I've seen Jesus through an occasional Rhone, Zinfandel, and on one notable occasion through the last of several brandy snifters of The Macallan 18 year old Scotch, but if you want to see God, you've got to drink the good port!

Sure - since stock attribution for H/C purposes is IRC 318 attribution, and 318(a)(2)(B)(i) excludes stock under an employees' trust described in 401(a) which is exempt from tax under 501(a), and an ESOP is such a trust, then I don't see that the attribution applies here. I didn't go any further than this, as it didn't seem necessary.

My initial guess would have been to agree with you. However, I looked into it, and I agree with Kirk.

I assume the 5500 forms will be prepared showing the prohibited transaction? And the PT tax will be paid?

1.402©-2, Q&A-12(b).

Here's the original qustion: "Employer runs a SEP on a calendar year and funds the SEP in 2006 for the calendar year 2005 .For which year is a person considered an active participant for IRA deductibility purposes, 2005 or 2006?" No other contributions whatsoever are mentioned or contemplated. In this situation, (d)(2) simply does not apply. (d)(1) is the applicable citation for this situation. And...87-16. I'm sorry, but we'll have to agree to disagree, as you'll never convince me it doesn't apply to this situation.

I would say yes.

MJB - see 1.219-2(d). There's a special rule for profit sharing plans. Given that a SEP contribution is completely discretionary, one would reasonably assume that the same treatment applies. Plus, of course, the IRS Notice 87-16. Excerpt below. CB-NOTICE, PEN-RUL 17,100M, Notice 87-16, I.R.B. 1987-5. A special rule applies to certain plans in which it is impossible to determine whether or not an amount (other than earnings) will be allocated to an individual's account for a given plan year. If, with respect to a particular plan year, no amount attributable to forfeitures, employer contributions or employee contributions has been allocated to an individual's account by the last day of the plan year, and contributions to the plan are purely discretionary for the plan year, such individual shall not be an active participant for the taxable year in which such plan year ends. If, however, after the end of such plan year, the employer contributes an amount for such plan year, an individual to whose account an allocation is made shall be an active participant for the taxable year in which the contribution is made. Contributions shall be treated as purely discretionary for the plan year if, as of the end of the plan year, the employer is not obligated under the law or terms of the plan to make a contribution for the plan year, and whether or not contributions are made to the plan is ultimately dependent upon the employer's decision or factors within the control of the employer.

I believe this is a protected "optional form of benefit" and as such, may only be eliminated prospectively for benefits that accrue in the future. For current accrued benefits, can't be eliminated.

I'll just toss out a guess that a TPA "normal" range for a basic 5 person 401(K) plan will be somewhere between $1,000 and $2,000. Undoubtedly there will be amounts that are both higher and lower, depending upon a myriad of factors. A word to the wise on "lowball" fees - you know the old saying that you can't get something for nothing - usually the lowball fee either requires a specific funding arrangement that may have high costs, or may not cover essential services. You sound pretty sharp on this stuff, but the compliance and plan document end is so detailed, and worse yet, changes so rapidly, that it is easy to get hung. I'm probably not the most objective source on this subject, but I'd second the motion to look into hiring a reputable TPA.

I'm assuming you have a calendar year SEP. Under the situation initially proposed, where no other contribution is made, I think you have an active participant status for 2006 only. Not for 2005, or 2007.

Also see 401©(2)(A)(iii) which supports your position as well.

A really unfortunate situation. I'm truly sympathetic that you don't feel you can afford to decline the business, and I'm not trying to sound sanctimonius, but I've always felt that you need to do it right or not at all. It is, as someone mentioned, a slippery slope. Once you compromise your principles on this case - where does it end? Do you allow a backdated amendment that reduces benefits improperly, as long as the client says in writing that you won't be responsible? etc.? I don't have any answers for you, other than to consider seeking legal counsel before you decide to administer the plan on the basis outlined. At the very least, you need to protect yourself from liability - whether this makes you liable as party to a known fiduciary breach, or criminal action with submission of incorrect 5500 forms, etc., I can't say. I can say that in similar situations, we have terminated services. Best of luck with a tough situation, however it goes.

Santo - nope - this was back in the days before IRS Announcement 2001-77 was issued, and we applied for determination letters on everything. We wouldn't file for a determination letter on a prototype or VS because of this issue now, given that it has always been approved with no problem. Clarification - we always leave the final decision up to the client, and if they choose to file for a determination letter, then of course that is fine.

Here's the Q&A-26 referred to earlier. CB-NOTICE, PEN-RUL 17,100M, Notice 87-16, I.R.B. 1987-5. A26: A profit sharing plan has a July 1 to June 30 plan year. Under the terms of the plan, employer contributions, if any, are made at the sole discretion of the Board of Directors. As of June 30, 1987, no employee or employer contributions have been made and no amounts have been forfeited for the plan year ending June 30, 1987. Moreover, it is impossible to determine whether a contribution will be made for the plan year ending on June 30, 1987. On January 15, 1988, the employer makes a contribution for the plan year ending on June 30, 1987. On November 30, 1988, the employer makes a contribution for the plan year ending June 30, 1988. On June 30, 1989 it is again impossible to determine whether a contribution will be made for the plan year ending on that date, and no contribution is made by December 31, 1989. Will a participant in the plan described above be an active participant only for the 1988 taxable year? A: No. In such a situation, when contributions to a discretionary defined contribution plan for two plan years are made in one calendar year, solely for the purposes of determining active participant status, the contributions for the later plan year are deemed to be made in the next taxable year. In the fact pattern described above, the contribution made on November 30, 1988 is deemed to be made in taxable year 1989. Thus, the individual is an active participant in both the 1988 and 1989 taxable year.

Agree with Rbutler. Andy - Sal gives an example of this very subject on page 2.43 if it helps any.

It is true that IRS commentary from the podium at conferences is unofficial, but it can be useful. We have had a few plans set up in the general circumstances described (plan effective date prior to the formation of the corporation) and have expressly noted this in the determination letter requests. In every instance, approval received without any question whatsoever. So while this may not be necessary in your particular 401(k) situation, if it cures a problem that would otherwise exist, then I wouldn't hesitate to use it. While I grant you that the whole concept seems counter-intuitive, at least to me, I was taught long ago that when dealing with the IRS, accept what is, and not what you think makes sense.

Sorry, I was in a hurry, and was assuming this was a corporation. I just saw the 95/5 and thought "corporation."

Not eligible for EZ. See page 3 of the 2005 5500 instructions.

Beautiful!

"The Impossible Dream" "The Procrustean 401(k) Blues"