Belgarath

Kirk - good point, and I agree with your observation.

FWIW, I understand things a little differently. I don't read the DOL regs (2520.104-46) as requiring a bond purely for purposes of the SPAW requirement. My take is that the audit waiver is independent of the bonding requirement, although they may become interrelated and the normal required 10% bond can assist, as I'll get to in a minute. (b)(1)(i)(B)(2) of that section requires SAR disclosure of the name of the bonding company for purposes of paragraph (b)(1)(i)(A)(2). And the (b)(1)(i)(A)(2) is an "or" if you don't meet the 95% requirement, so if you do meet it, then (A)(2) doesn't apply. If you meet the 95% qualifying asset requirement and the disclosure requirement, then no audit required, and no bond required, for SPAW audit waiver requirement only. Now, assuming plan is subject to Title I, then the normal 10% minimum bonding requirement applies, independent of the audit waiver issue. And if you are bonded for 10%, and your non-qualifying assets are 10% or less, then you are still ok. So assuming you comply with disclosure rules... <or = to 5% in non qualifying assets - no bond required for SPAW purposes. >5% but <or = to 10% in nonqualifying assets - bond would be required. But assuming you have your minimum 10% required bond, still ok. >10% in non qualifying assets, then additional bonding necessary to the extent your existing bond (which might be greater than 10% already) doesn't cover the entire amount of non qualifying assets. Whatcha think?

Kirk - yes, that is my position. 1.72(p)-1, Q&A-17 is pretty clear on this issue. Now, presumably the determination of whether or not there is a bona fide loan is quite subjective and subject to a facts and circumstances determination, but I'm guessing that a loan to a "disqualified person" is likely to be scrutinized more closely than to a regular rank and file employee.

I do not believe it is a prohibited transaction. The PT exemption requires only that the loan be a bona fide loan when made. The fact that it subsequently defaults should not, IMHO, give rise to PT status. Now, if it is to a "disqualified person" I expect it might be scrutinized more carefully to determine if it is a bona fide loan in the first place, particularly if no payments at all were made. And the regulations provide that if it isn't a bona fide loan, it isn't a deemed distribution but an actual distribution, and then the PT comes into play. But, for example, assuming everything clean, and payments made regularly for 2 years, then his business goes sour and he can't pay and defaults on the loan, I don't see that this is a PT. It's funny, because I had this precise question yesterday, so just spent some time looking into it yesterday morning.

I've got a dumb question. Suppose we take this to an extreme, and say that the payroll messes up and the salary deferral never happens for an entire year. So, taking Immangrum's (and others) approach that the employer is liable to make up the whole 18,000 plus interest (cause if the answer is that the employer must make it up, the amount of the make up contribution shouldn't matter) the employee receives a HECK of a windfall. Here's the dumb question: Can the employer sue the employee to get a return of the salary paid to the employee in error? This would produce a much more equitable result - the employee is receiving a plan contribution plus interest to put him in the same position he should be but for the error. And the employer isn't out a whole bunch of money. (I'm purposely ignoring the complications of taxes paid/withheld for the moment) I just can't shake the feeling that there is something inherently wrong with a requirement that unjustly enriches the employee to this extent, yet I don't know the answer as to how to get around it.

Quick edit - it was by attorneys in a law firm named Bryan Cave - I don't know who actually wrote the article.) Veba - I read an article by Bryan Cave on this back in 2003. They, like every other source I've seen who said it was ok to issue 100% life insurance, rely heavily on the word "or" in 1.412(i)-1(b)(2)(i). Which says, "The plan must be funded exclusively by the purchase...of individual annuity OR individual insurance contracts, or a combination thereof." And in -1(b)(ii) of that section, it starts of with, "The individual annuity OR individual insurance contracts issued under the plan..." They read the use of the word "or" to be a clear indication that the drafters of the regulation contemplated 100% to insurance. I was asked about this argument (in general, not specific to the Bryan Cave article as the question predated the article by a year and a half) back in 2002, and here's an excerpt from my response - and please keep in mind I'm not an attorney - this response was merely to a co-worker. "Purely playing Devil's Advocate here, I could read these regs to permit investment only in life insurance if it suited my purpose to do so. I could not in good conscience make this reading as a CORRECT reading, because I simply do not believe it is correct. If a client and/or their legal counsel were to either call the IRS, or request a PLR, I suspect they would get the same answer that I would give - you can't do it!" Not having any notion whatsoever of the twisted legal system requirements, it would nevertheless seem a bit harsh to make the law firm liable for reading the regulation in this manner. Although aggressive, and was in my opinion a wrong reading, I'm still not sure that it rises to the level of pure negligence. But maybe it does. However, it is possible that they warned their clients, for example, that it was an aggressive stance that might be challenged by the IRS, and the clients went ahead anyway. I'm a little hesitant to assume that just because someone spouts off in an article that their specific advice to individual clients is necessarily the same as what is contained in the general article. That said, I suspect some folks will agree with you and the litigation treadmill will start at some point. Hopefully not too many people actually implemented such plans.

Thanks Janet! I didn't remember this at all. Time to go back and reread the regs. That's one of the things I like best about these boards - helps to keep you on your toes.

By the terms of the loan, no. Payments must be made at lest quarterly. From a practical standpoint, and depending upon the specific dates involved, it might be possible to get close to this as a net effect. If there is a "cure period" it cannot extend later than the end of the calendar quarter following the calendar quarter in which the missed payment is due. So if the loan date is January 2, and the first quarterly payment is due, say, April 2, then your cure period could extend no later than September 30, which is the end of the calendar quarter following the calendar quarter in which the default occurred. I'm not advocating this! Especially since it could be determined that this wasn't a bona fide loan, although I'm a little dubious that it would be taken that far unless it was an owner that they (IRS/DOL) wanted to nail for something else. But certainly possible. My answer would simply be "No, you can't do it."

This question is more as an individual looking in from the other end. Is there any principle of law that can force an individual to be a beneficiary of any kind of benefit if he doesn't want it? That just doesn't seem reasonable somehow. Not just for plan money. Is it different if you are a beneficiary under a will? If someone dies intestate? It just doesn't seem "fair" - yes, I know life isn't fair - to be forced to accept something as a beneficiary if you don't want to - plan language notwithstanding. I mean, if the deceased was my brother who murdered my wife or something equally whacko, and I just plan didn't want to receive or be involved with his darned estate or money, isn't there any way out? But I'm no attorney, so I'm interested in the opinions of those who are. The concept of the law forcing someone who doesn't want the money to accept it seems strange to me, although there may well be good reasons for it when it gets to some funky tax manipulations.

I don't know, so this is just conversation. Hopefully the DB wizards will chime in, 'cause I'm curious as to what the answer is. To me, it seems like two separate issues. You have the plan issue, and the minimum distribution issue. And I think your question is more of a plan issue. I see nothing in the RMD regs which indicates that simply multiplying the monthly benefit by 12 and taking it annually is any problem. And maybe they (IRS) didn't even think of this. The plan issue would appear to me to be a potential problem. As a non actuary, it seems like, as you said, the participant would be getting a better "deal" by taking the lifetime monthly benefit (at its higher actuarially increased value, if applicable, over the 1000 accrued as of the freeze date of 2004) as an annual payment. Seems like the present value of 12,000 in hand is higher than the present value of 1,000 per month for 12 months. So it would seem like this would have to be accounted for SOMEHOW - and maybe either the plan language or the actuary would make this adjustment up front so that the annual payment would only be 11,950 or whatever, rather than 12,000. Or perhaps they adjust it on the back end.

Tom, pardon my density (remember "Back to the Future", and the famous line, "You are my density")? I'm not entirely sure what you are asking, so I'll take a stab. Under 1.401(a)(9)-6, Q&A-1©(1), "All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of annuity payments for payment intervals ending on or after the employee's required beginning date." So I take this to mean that the monthly benefit accrued on 12-31-05 must be included when determining the RMD. And if the monthly benefit is 1,000, then yes, I believe you can simply multiply 1,000 by 12 and take 12,000 by 4-1-06. And 12,000 every year thereafter, plus increases if required for whatever reason - additional accruals, vesting, whatever... Probably this isn't what you are asking at all.

Gee, thanks! But to take this a little further, since I think I'm starting to see the source of some of my confusion: I think I was mixing the compensation averaging requirements for a 401(a)(4) safe harbor with the 415 limits. So under 1.401(a)(4)-3(e)(2)(i), ignoring the exception in (ii), this averaging must be at least three years, or period of employment if less. So this MUST include pre-participation compensation in the situation I outlined. But under 415, it will soon switch over to participation compensation. So you'll have different compensation for different purposes. Have I got that right? If so, what a drag. Is there any good reason for this, or is IRS going to change the (a)(4) safe harbor so that the comps will be the same for both purposes?

Thanks Andy. Couple of comments. Re#1, can't argue with that! Re#2, although I agree in principle, some documents, particularly prototypes, specify comp averaging from date of employment. Since it appears that the proposed regs may not be relied upon currently, that would sort of stick you between a rock and a hard place until 1-1-07. 3. Good point. This is why I'm not a DB person. 4. Probably beyond what injections can cure. After all, even the miracles of medern medicine have their limitations.

Depends upon what your document says. All the documents that I have seen contain an automatic proration clause for this purpose, but I don't believe it is a REQUIRED provision for qualification.

Thanks for the response. At this point, I have no idea whatsoever why the plan/fiscal year combination generating the question is being considered. It was just a question that came up. Trying to think it through, I suppose that if you take the approach that # 1 is correct, and the 2006 compensation (for whatever reason) is quite low but is expected to bounce back, that you might use this method to achieve a higher average? Say 2006 is 50,000, and 2007 is going to be 200,000, then if you have to include 2006 as "participation comp" your average will be dragged down substantially? May be other reasons as well...

I'm wrestling with a question here. Suppose you have the following scenario: Plan established 12/31/2006 with a beginning of year valuation date (prior to when the proposed regs become effective) The limitation year is calendar year, so 12-31-2006 valuation is based upon 2006 calendar limitation year. The compensation averaging is based on service. The individual has been in business since January 1, 2000 and their high three year average salary was earned in 2000, 2001 and 2002. Now, the second year valuation comes up - 12/31/07 and the new regs are effective since we are dealing with the 2007 limitation year. When preparing the 12/31/2007 valuation - the compensation averaging would be based on participation rather than service. Do you: 1. Only use compensation for the limitation year 2007, or, 2. Since 364 days of participation from the first plan year were actually in 2007, do you take into account 2006 compensation as "participation comp" since that is the limitation year that applies to the plan year containing, essentially, a year of participation? Or something else? Originally I was leaning towards #2, but after discussing with some colleagues and letting it percolate overnight, I'm not sure why I originally thought that, and # 1 makes more sense. But I thought I'd toss it out to see if you agree and to see what discussion it generates. Thanks.

Sorry, I just realized that I read this incorrectly the first time - I was thinking they were possibly converting to a sole proprietorship, where what you said was a C-corp. So my response made no sense whatsoever!

Only speculating here. You can only use the W-2 income from the S-corp - you cannot use the "pass-through" income for the profit sharing plan. Now, I don't know anything about the mechanics of how the income is determined to be W-2 or pass-through. But if a large share of the income is pass-through and cannot be reclassified to W-2, but could be counted as "earned income" for the sole prop, then that might be a reason.

See DOL reg 2510.103-1. I interpret this as using the participant count for each PLAN that is filing. So, if the other problems of having separate plans can be overcome (coverage, testing, etc., etc., ) and the total cost to do all this hoohah is less than the audit cost, perhaps it is viable. I don't know the sizes of the employers, amounts of money involved, and plan audit cost so I can't even hazard a guess as to whether it is economical, if IF it turns out to be possible.

This is a very interesting post. And I'm having a hard time determining which side I come down on, because there are reasonable points on each side. So I'm going to ramble for a bit. As far as correction - I don't believe tha Plan Administrator can correct this. In other words, withholding, failure to withhold, or an employer "correction" contribution of 4,000 are all things that the employer must authorize. The Plan Administrator can tell the employer that these things must/should/can be done, but cannot do them. And while I recognize that in many small plans the employer and Plan Administrator are one and the same, they do wear different hats for different purposes. So let's suppose for a moment that the Plan Administrator tells the employer that there should be a makeup contribution of 4,000. And the employer refuses. Where does that leave you? The only real "harm" to the employee is that the employee paid taxes (assume combined federal/state rate of, say, 33%) of 1,320. He has the balance of the 4,000 which was paid to him as wages. And this 1,320, if it had been contributed to the plan, is only tax deferred - it will be taxed at a future date. So the only real "loss" would seem to be the potential difference in tax rates, and the effect of tax deferred compounding of interest. On this amount of money, for someone who is at least 50 already, this doesn't seem like a tremendous amount of money. For this, he should receive a 4,000 windfall? That's just my gut feeling on the issue of what is "fair." For you attorneys, does the Plan Administrator have standing to bring suit if the employer refuses to contribute this? If so, is legal action required by the Plan Administrator? If not, the employee must either sue, or sic the DOL on the employer. Does the employee really want to open this can of worms for the money involved? I wouldn't, as the employee, 'cause employment can always be terminated or made so miserable that it is no longer an option. As far as the plan operation itself, is it truly a disqualification issue? The "plan" has operated as well as it is able - this is an employer/payroll issue, I think. I've never seen any specific guidance on this issue - has anyone ever discussed this, even informally, with IRS representatives? Seen it on a plan audit? Might be a very good question to pre-submit for the ASPPA conference this fall, because it seems like a payroll/withholding error can't be all that uncommon. I suspect that most of them get caught early enough, and are small enough, so that they get ignored or finagled somehow and fly under the radar. It does seem that no one would challenge the validity of a fix under the VCR program, but I'm not sure what the outcome would be if the employer refuses. Of course, after all this rambling, I'm also inclined to think that if the IRS ever DID pick this up on audit, that they would be unlikely to simply ignore it and say, "oh yeah, it's ok." It seems the safer approach for the employer to make up the 4,000... Whew! Is there an award for longest post that starts nowhere, says nothing, and ends nowhere? If so, I think I deserve nomination. Mark Twain would designate this the "James Fenimore Cooper" award.

Sounds like cutting edge humor to me.

I certainly have no answer. Without reading the JCT "blue book" on the legislative history it's hard to determine. And I'm only guessing here, but the "Married filing singly" treatment is similar (the zero to 10,000 restriction) on regular IRA's, so that may simply have been carried over to Roths without a lot of thought. Possible it isn't even addressed in the blue book dealing with Roths, so you'd have to delve back into ancient history of 219(g) or whatever. Probably just enough to know that the restriction exists. The "why" might just raise your blood pressure! A useless answer, I know, but it's all I've got.

Cute! I guess this makes you the official "poet lariat..." How about Starkle starkle little twink Who you are the hell I think I can see that 412(i) Like a diamond in the sky. Wrinkled dollars near and far Flowing from the savings jar. And folks, this is HUMOR post - or a feeble attempt. I'm not slamming anyone or anything here, so please don't make it a debate.

JohnG - as someone who knows very little about investing and investments, I always find your posts very informative. (And believe me, you've convinced me) I do have one question that I'd like confirmed about your post. "There was only one year since 1984 when the mutual fund industry did not see positive net cash flows,..." Does a positive net cash flow mean that the funds (collectively) actually posted a gain, or does it mean that the net inflow of new money could produce a positive cash flow even in a down year? Thanks in advance!

It depends upon what you mean by "one investment option available to participants." For example, pick some big fund company - like Fidelity. If the only investment option is a Fidelity common stock fund, then no, this doesn't meet 404© requirements. If on the other hand, Fidelity funds are the sole investment choice, but within that fund family the participant can elect various funds, it could very well be 404© compliant in terms of the investment options allowed.