Belgarath

Sorry, but I'm not sure what you are saying when you maintain it is debatable. Are you maintaining that the exclusion under 410(b)(6)© overrides a specific document language requirement that says otherwise? When the companies are, in fact, a CG/ASG, and the document specifically requires that they they be covered (absent a specific exclusion of such employees ELECTED in the adoption agreement) and provides the mathematical methodology to determine that coverage, I don't see a lot of leeway there. Would you feel comfortable ignoring the document language and instead rely on the exclusion available? (I grant you that it is very possible that an IRS reviewer wouldn't even check the document language where someone relied on the exclusion, but I wouldn't want to count on that myself.) If the document were either silent or ambiguous on this issue, then yes, I'd feel comfortable relying on the statutory language. Whatcha think?

One other caution: some plans are drafted such that for coverage and nondiscrimination, all employees of a CG/ASG are automatically considered unless you ELECT to exclude them under the 410(b)(6)© exclusion you mention. So if you have, for example, a 401(k) with immediate eligibility, you can get burned. IMHO, a better document option is where the exclusion is the default, and they are only covered if you elect to cover them. Less likely for a client to get whacked with an unexpected problem, since they never tell you about the merger until about a year after it happens!

Interesting. I have no real opinion on this (other than the comment that it seems rather unreasonable for the IRS NOT to extend it to the next business day). But for anyone who cares, here's a link to the RR. http://www.taxlinks.com/rulings/1983/revrul83-116.htm

MJB - we'll just have to agree to disagree. Certainly, you may be right and I'm wrong. I most definitely agree that this question should be specifically addressed by the IRS. I just don't read the reg as contradicting the statute. 402(A)(b)(1), as you mention, refers to a program under which an employee may elect to make "designated Roth contributions..." 402A©(1) defines a designated contribution. And 1.401(k)-1(f) further defines or clarifies (or maybe confuses) what a "designated contribution" is. I don't read the "all or nothing" approach as being inconsistent with the regulation - that is, IF THE PLAN PERMITS a split election, then the employee can designate all or a portion to Roth or pre-tax. I read the only specific requirement to be that a plan cannot offer only Roth. Anyway, will be interesting to see what the IRS says on this. Perhaps I'll be lunching on crow - a longtime favorite of mine.

I interpret it exactly opposite. Since the statute and regs do not specify that the employer must allow a split election, then the plan can be written to restrict it. 1.401(k)-1(f)(1) provides that a designated Roth contribution is an elective contribution that, to the extent permitted by the plan ....etc. I take this to mean that since there is no specific overriding requirement to allow a split election, that an all or nothing restriction is perfectly permissible. I'll be interested to see what others think on this subject.

I agree with the lawyer. The plan must offer both pre-tax and Roth in order to offer Roth, but the plan may require an election of 100% to one or the other, or may choose to allow a split. FWIW - most folks I've talked to who are going to handle Roth K plans are going to have the split option available, and most of them think their clients will choose this option.

See IRS Notice 2005-87 which extends the 5-31-05 date to a date not earlier than when the final regs are published. (Copied below from CCH) Of course, this only defers whatever problems you may have, so it probably isn't any real help at all. CB-NOTICE, PEN-RUL 17,132G, Notice 2005-87, I.R.B. 2005-50, December 12, 2005. Notice 2005-87, I.R.B. 2005-50, December 12, 2005. Proposed regulations: Grandfather rule: Limitations on benefits: Annual additions: Preexisting plans The IRS has stated that the grandfather rule for preexisting benefits in qualified plans that is currently in proposed regulations addressing the limitations of Code Sec. 415 (see ¶20,261N) will be expanded from May 31, 2005, to a date that is not earlier than the publication date of the final regulations. Plan sponsors adopting new plans and plan amendments during the interim period before the final regulations are published will not be subject to the interpretations set forth in the final regulations regarding benefits accrued prior to the effective date of the final regulations, assuming that the plan provisions are in accordance with statutory provisions and other IRS guidance in effect at the time the new plan or amendment is adopted. Back references: ¶1561, ¶1645, ¶7527, and ¶8210. Part III —Administrative, Procedural and Miscellaneous Section 415 Regulations and Preexisting Plans Notice 2005-87 Purpose This notice provides that when the final regulations under §415 of the Internal Revenue Code are published, the grandfather rule of §1.415(a)-1(g)(3) of the proposed regulations for preexisting benefits in defined benefit plans will be expanded. Background Section 415 of the Code provides various limitations on benefits under qualified defined benefit plans and annual additions under qualified defined contribution plans. The proposed regulations under §415, issued May 31, 2005, provide comprehensive guidance regarding the limitations of §415, including updates to the regulations for numerous statutory changes. The regulations are proposed to apply to limitation years beginning on or after January 1, 2007. Section 1.415(a)-1(g)(3) of the proposed regulations provides a grandfather rule for preexisting benefits under which a defined benefit plan will be considered to satisfy the limitations of §415(b) for a participant with respect to benefits accrued or payable under the plan as of the effective date of the final regulations. This grandfather rule applies only to benefits accrued pursuant to plan provisions that were adopted and in effect on May 31, 2005, and only if such plan provisions meet the requirements of statutory provisions, regulations, and other published guidance in effect on May 31, 2005. Commentators have expressed concerns about the grandfather provision of the proposed regulations. Commentators asserted that plan sponsors should not be required to apply the final regulations before their effective date and noted that the May 31, 2005, date would effectively require them to apply the final regulations retroactively (since any benefit provided by a defined benefit plan adopted after May 31, 2005, or benefits attributable to a post-May 31, 2005, amendment will not be covered by the grandfather rule). Expansion of Grandfather Rule for Preexisting Plans The Treasury and Service intend that, when the regulations under §415 are finalized, the May 31, 2005, date that is in the grandfather rule in §1.415(a)-1(g)(3) will be replaced with a date that is not earlier than the date of publication of the final regulations. Thus, in the interim period before final regulations are published, plan sponsors who adopt new plans and plan amendments will not be subject to the interpretations set forth in the final regulations with respect to benefits accrued prior to the effective date of the final regulations, if the plan provisions relating to §415(b) meet the requirements of statutory provisions, final regulations and other published guidance in effect when the new plan or the new amendment is adopted. Additionally, in the interim period before final regulations are published, plan provisions will not be treated as failing to satisfy the requirements of §415 merely because the plan's definition of compensation for a limitation year that is used for purposes of applying the limitations of section 415 reflects compensation for a plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year. Drafting Information The principal author of this notice is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday Through Friday. Ms. Herrmann can be reached at (202) 283-9888 (not a toll-free number).

Does anyone know if the IRS is planning to release a model 402(f) notice updated for Roth(k) deferrals? I was just starting to draft one, and it's rather a bore. Would be a lot easier to wait if they are going to be doing one!

S - As a non-actuary, I have no opinion on the Schedule B issue. However, as far as the contribution being non-deductible, I'm inclined to disagree, although it seems like one of those dreaded gray areas. Although you have a bizarre plan/fiscal year combination which muddies the waters, it seems to me that deductibility vs. nondeductibility under 404 is based upon fiscal years, and the plan years associated with those fiscal years. In your example, the contribution that was made during December is being considered for the 2004 FISCAL year which ends with or within the PLAN year 12/31/04 to 12-30-05. So even though in this very unusual situation the contribution is being made prior to the beginning of the plan year for which it will be associated, it is made within the proper fiscal year. 404(a)(1)(A) says that generally the deduction is for the taxable year when paid, so I think there's some statutory support for this being a deductible contribution. So I think from a deduction point of view, this shouldn't be considered nondeductible and subject to penalty tax. Unless of course the contribution exceeds the amount that will be deductible for the plan year beginning 12-31-04.

I think we may possibly be looking at this the same, or getting the same results but saying it differently. Maybe a small example will help to clarify my thought process on this. Suppose due to the ADP testing failure, it is determined that a QNEC of 4% must be allocated to all NHC. And the document provides that all NHC receive exactly the same percentage - no "targeted" or "bottom up" QNECS. The employer makes an additional discretionary profit sharing contribution, allocated on a cross-tested basis. So now you have to do your (a)(4) testing, and you must pass both with and without considering the QNEC. Situation 1: You test without the QNEC. The employer discretionary contribution, tested by itself, passes the rate group testing and gateway. If that is the case, and all NHC receive an additional 4%, it would seem like there's no way that testing could fail when you now test WITH the QNEC. Agree/disagree? Situation 2: So now let's assume that the the employer contribution does not, on its own, pass gateway. First you test without the QNEC. You fail. So the employer must make an additional contribution sufficient to pass gateway. Now, you test WITH the QNEC. Again, if you already pass without the QNEC, and the QNEC is allocated equally to all NHC, I don't see how you can fail testing WITH the QNEC. Agree/disagree? Even if you agree with my conclusions in the above situations, there may be holes in this methodology where it WON'T work, and if so I'd greatly appreciate having it pointed out. Thanks again!

Tom - I'm finding this a bit challenging. If I test without including the QNEC, and there are no other nonelectives or contributions, then I would think the result is exactly the opposite - that now gateway contribution IS required because for testing purposes, the NHC are getting zero, which cannot possibly satisfy gateway. But if there were other contributions that get the NHC's to 5% (I like to use 5% for conversation because it is easier for me), then assuming the QNEC's are allocated in an equal percentage to all NHC, then how could the (a)(4) testing fail, and no additional gateway contribution required. Where am I going wrong on this? Thanks!

My understanding is that under 1.401(k)-2(a)(6)(ii), the testing must be passed both with and without the QNEC's being taken into account. I take this to mean that for gateway purposes, you can't count the QNEC. Seems like a valid shortcut would simply be to test without taking the QNEC into account - if you pass, then I have a hard time seeing how you would then fail if you include it, since the QNEC is going just to the NHC. But I'm undoubtedly missing some crucial point.

While I'm not a big fan of the Roth 401(k) option on an overall basis, if you are really getting 30-60% investment return, then you should be on your knees begging your employer to add a Roth feature as well. 'Cause that would turn your gains into tax free returns, as opposed to tax deferred. Of course, I'm of the old "risk/reward" school where you will also lose big at some point, but that's a separate issue. My experience is that your employer won't be thrilled about switching providers just to accommodate one employee, (particularly if the employer is currently reasonably happy with the plan administration/fees) so you may need to enlist some other employees aid you in your cause.

FL - thanks for the response. But tell me - when you have a client who comes to you with a combined plan and a deduction question where, depending upon how 404(a)(7) is interpreted, the deduction COULD be limited - do you honestly not care what the IRS "thinks or says?" If your position (and maybe the "correct" position) is that there is no deduction limitation, but you KNOW or have reason to believe that the IRS will fight you on this, isn't it rather cavalier to simply ignore the IRS position? I know that the IRS frequently loses in court, but my non-attorney impression is that the courts are apt to grant a great deal of deference to the IRS opinions. Isn't there always the possibility that your client could lose? I can certainly understand that you might advise a client that in your professional opinion, the deduction is valid, defensible, and likely to be upheld in court, but I find it hard to imagine that you wouldn't at least warn them that the IRS will/might challenge it upon audit. At any rate, as TPA's, we don't have the luxury of not caring about what the IRS thinks or says, since you attorneys will help your clients to sue us if we are wrong! Hence, all the discussion on this issue which shouldn't be as confusing as it is. Enjoy the beach! (We got snow here in Red Sox Nation yesterday, so we're boycotting anyone currently enjoying sun and warmth)

FL - if I understand what you are saying, (and perhaps I don't) I think you are missing the point of what most TPA's, accountants, and especially clients are really concerned about. While I believe your theoretical point is valid (again, assuming I'm understanding it) it has little practical application. I agree that if an employer is contributing to a plan and not taking a deduction, that the deduction limitation under © doesn't come into play. But who the heck contributes to qualified plans and doesn't bother with taking the deductions? If it weren't for the deductions, almost no employer would sponsor qualified plans in the first place. So I think the question on the IRS interpretation of whether "benefitting" or a "beneficiary" is the governing factor is a valid question. And even if an employer might prevail in a given situation if they go to court, many employers have neither the inclination, time, nor finances to fight in court if the IRS disagrees with whatever position they take. Everybody "runs to" © BECAUSE they want to take a deduction, and therefore have to attempt to interpret whether said deduction is limited by © or not. And then that's where the confusion about the IRS position sets in. Assuming for the moment that the employer DOES contribute to both plans, (DB cost is in excess of 25% of covered payroll, and PS plan contribution is 25%) with no potential overlapping participants except Participant A, and wants to take a full deduction for all contributions, what then is your reading on © if: 1. No contribution on behalf of Participant A in the PS plan, but Participant A is receiving an additional accrual in the DB plan. Is total deduction limited or not? (I would say the logical answer is no limitation as the participant isn't "benefitting" for 410(b) purposes in the PS plan.) 2. Participant A receives a contribution in PS plan, no additional ACCRUAL in DB plan, but there is a required cost to fund the benefits already accrued. (I would say that © would limit the deduction in this case.) Finally, regardless of what you or I think is the correct interpretation, what do you think the IRS position will be in these two scenarios? Thanks!

Tom - what if a non-key HC gets a TH contribution? Sal has some discussion of this TH uniformity requirement on pages 9.20 and 9.21, and see specifically page 9.21, 5.d.5) of his 2006 edition. How do you read this? Still no worries, or do you think general testing might be required in certain circumstances?

Here's a link. http://www.dol.gov/ebsa/regs/aos/ao2006-03a.html I agree that purchasing it for the FMV if greater than the CSV is fine. Hard for me to understand how a FMV could be LESS than the CSV.

Ah. Now I know what you are talking about. We have a 17 year old son who is addicted to the blasted show. I retreat to the bedroom to read whenever it comes on.

Is it a calendar year plan? If not, be careful... I ask because I've been seeing a lot of non-calendar year plans lately, so I'm jumpy on these types of questions.

I'll probably regret asking, but who is Jack Bauer? Did the Red Sox get him in a trade?

Issued yesterday, by the way. Of all the stuff I discuss with colleagues in the business, this is the one where I find the fewest clearcut, confident opinions. Understandable, because even the actuaries I've talked to find this a struggle, so for us poor saps who are not so mathematically inclined, it's worse yet. Here's a question that we've been kicking around, that I'll toss out for discussion. Suppose you have a plain vanilla DB plan. No subsidized benefits whatsoever, and all distribution options are actuarially equivalent. And the lump sum using plan assumptions is, say, $100,000. However, due to 417(e)(3), the lump sum actually payable is $120,000. For purposes of the regulation only, is this considered "approximately equal" to the QJSA? On my untutored level, it would seem that this should be disclosed as being 120% of the QJSA. But is that what is required by the regs? Let's say you are using the general disclosure method, with a "chart" that shows the lump sum based upon plan assumptions, and the chart shows, (accurately) that based upon the plan assumptions (which are stated on the chart) that the lump sum is equal to all the other forms of benefit. But there's also an asterisk that says the actual lump sum may be higher depending upon interest rates - would this satisfy the disclosure requirements? Or must there be a specific statement somewhere that the lump sum available under 417(e)(3) is relatively worth 120% of the other benefits? (P.S. the employee benefit statement for a terminated participant that shows a lump sum distribution amount shows the actual, higher, 417(e)(3) lump sum.) It seems to me that the final regs give a corridor of 95% to 105%, and anything outside of this cannot be considered approximately equal to the QJSA. 1. Do you agree that I'm reading this correctly and that this would apply to a lump sum under 417(e)(3)? 2. Am I correct in general, but the 417(e)(3) doesn't fall under this requirement? 3. Am I wrong altogether? 4. If # 1 is correct, then is the general disclosure I outlined acceptable, or must it be more explicit? Thanks in advance - our actuary is going to be discussing this garbage with cohorts at some conference in June, I believe, but I'm just trying to get a handle on it in the meantime for my own edification.

See attached post, which you may find helpful. Andy pointed out that you can still use pre-participation comp averaging, it's just 415 limits that will require the participation comp, once the regs are effective. I have found this subject confusing, as you'll see... http://benefitslink.com/boards/index.php?s...97entry129297

Andy - I'm unsure if your response means you believe the grandfathering applies to 2006 and 2007 and beyond? Could you clarify? As you know, I have a lot of trouble with this new 415 reg... Also, FWIW, see IRS Notice 2005-87 which extends the 5-31-05 date to a date not earlier than when the final regs are published. (Copied below from CCH) CB-NOTICE, PEN-RUL 17,132G, Notice 2005-87, I.R.B. 2005-50, December 12, 2005. Notice 2005-87, I.R.B. 2005-50, December 12, 2005. Proposed regulations: Grandfather rule: Limitations on benefits: Annual additions: Preexisting plans The IRS has stated that the grandfather rule for preexisting benefits in qualified plans that is currently in proposed regulations addressing the limitations of Code Sec. 415 (see ¶20,261N) will be expanded from May 31, 2005, to a date that is not earlier than the publication date of the final regulations. Plan sponsors adopting new plans and plan amendments during the interim period before the final regulations are published will not be subject to the interpretations set forth in the final regulations regarding benefits accrued prior to the effective date of the final regulations, assuming that the plan provisions are in accordance with statutory provisions and other IRS guidance in effect at the time the new plan or amendment is adopted. Back references: ¶1561, ¶1645, ¶7527, and ¶8210. Part III —Administrative, Procedural and Miscellaneous Section 415 Regulations and Preexisting Plans Notice 2005-87 Purpose This notice provides that when the final regulations under §415 of the Internal Revenue Code are published, the grandfather rule of §1.415(a)-1(g)(3) of the proposed regulations for preexisting benefits in defined benefit plans will be expanded. Background Section 415 of the Code provides various limitations on benefits under qualified defined benefit plans and annual additions under qualified defined contribution plans. The proposed regulations under §415, issued May 31, 2005, provide comprehensive guidance regarding the limitations of §415, including updates to the regulations for numerous statutory changes. The regulations are proposed to apply to limitation years beginning on or after January 1, 2007. Section 1.415(a)-1(g)(3) of the proposed regulations provides a grandfather rule for preexisting benefits under which a defined benefit plan will be considered to satisfy the limitations of §415(b) for a participant with respect to benefits accrued or payable under the plan as of the effective date of the final regulations. This grandfather rule applies only to benefits accrued pursuant to plan provisions that were adopted and in effect on May 31, 2005, and only if such plan provisions meet the requirements of statutory provisions, regulations, and other published guidance in effect on May 31, 2005. Commentators have expressed concerns about the grandfather provision of the proposed regulations. Commentators asserted that plan sponsors should not be required to apply the final regulations before their effective date and noted that the May 31, 2005, date would effectively require them to apply the final regulations retroactively (since any benefit provided by a defined benefit plan adopted after May 31, 2005, or benefits attributable to a post-May 31, 2005, amendment will not be covered by the grandfather rule). Expansion of Grandfather Rule for Preexisting Plans The Treasury and Service intend that, when the regulations under §415 are finalized, the May 31, 2005, date that is in the grandfather rule in §1.415(a)-1(g)(3) will be replaced with a date that is not earlier than the date of publication of the final regulations. Thus, in the interim period before final regulations are published, plan sponsors who adopt new plans and plan amendments will not be subject to the interpretations set forth in the final regulations with respect to benefits accrued prior to the effective date of the final regulations, if the plan provisions relating to §415(b) meet the requirements of statutory provisions, final regulations and other published guidance in effect when the new plan or the new amendment is adopted. Additionally, in the interim period before final regulations are published, plan provisions will not be treated as failing to satisfy the requirements of §415 merely because the plan's definition of compensation for a limitation year that is used for purposes of applying the limitations of section 415 reflects compensation for a plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year. Drafting Information The principal author of this notice is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday Through Friday. Ms. Herrmann can be reached at (202) 283-9888 (not a toll-free number).

This should get you started. Once you digest this, I expect there are a bunch of websites that will give a lot of information. http://www.irs.ustreas.gov/pub/irs-pdf/p560.pdf

And I might add that ERISA Section 3 already referenced by WDIK also in (6) says, "The term "employee" means any individual employed by an employer." But heck, if they won't listen to you, invite them to retain ERISA counsel to confirm your opinion. Usually when they have to start paying for advice, they shut up in a hurry.