Belgarath

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.

Question has come up for two situations, and should these people who terminated during the plan year be included on Line 7h. 1. 0% vested with an account balance. 2. partially vested with no account balance. The instructions are not, to me at least, as clear on this as I'd like. # 1 seems pretty clear that the answer is yes, should be included. # 2 seems a little more debatable. I'd still answer yes, but wondered what other people thought/did on this? Thanks.

Solely for purposes of providing some starting point for discussion on this (because I'm probably way off base): I THINK this is addressed in 1.401(a)(4)-9(b)(2)(iv). It seems to me that this follows the common sense logic that a consistent interest rate must be used ("nonstandard not allowed") because to do otherwise "...would inevitably result in inconsistent determinations under the defined contribution and defined benefit portions of the plan." So you'd have to use the 7-1/2% to 8-1/2% on the DB as well. Second, with regards to the BRF issues - if your aggregation is SOLELY to pass the ABR portion of the general test, then I think you can test the plans separately for BRF's. But if you can't pass either the Ratio test, or the Nondiscriminatory Classification test portion of the Average Benefits test, then they must be aggregated. So under 1.401(a)(4)-9(a), if the plans are aggregated for coverage testing under 1.410(b)-7(d), then you must aggregate them for BRF testing, subject to the special rules in (b) for combined DB/DC plans. Under the (b)(3) optional rules, the deemed satisfaction of BRF's applies to benefits OTHER THAN an ...ancillary benefit... Well, guess what, life insurance is an ancillary benefit. So I think you are stuck.

Ah, got it now. Thanks. I was missing the point.

Maybe they think the extra 6% to the HC is worth the extra cost to administer a separate plan? And maybe it is...philosophically I'm in Tom's camp, but I suppose if I were the employer, and someone came up with a legal way for me to get an extra 13,000 in my account by spending a thousand bucks to administer a separate plan, I might listen.

Ah, the old "carve out" approach. Ignoring the potential pitfalls and concentrating on your question: Yes, for vesting purposes the service with the employer prior to the establishment of the DB plan may be ignored. Watch out, however, if the DC plan is terminated within 5 years - it then becomes a predecessor plan, and then you have to count the service. 1.411(a)-5(b)(3)(v)(B).

Is he a more than 5% owner? If not, then the RBD hasn't occurred yet. If more than 5% owner, then I'd say technically the RBD is 4-1-02. However, since the RMD is calculated on the vested benefit, your calculation will produce a RMD of zero until such time as there is some percentage of vesting to apply to your calculation dates each year. You'd have to look at 1.401(a)(9)-5 or -6 as applicable depending upon whether DB or DC to determine the proper calculation based upon your plan year - don't knnow if you have a calendar year plan or not.

Yes.

Well, hard to say without knowing the precise plan language. Generally, I'd say you allocate based upon the language to the extent you don't exceed 415 limits. If after the allocation up to 415 max you still have some left over, then it stays in a suspense account until it can be allocated for 2006. And he pays the excise tax, and hopefully listens to you this year! And of course, reduces his contribution for 2006 to the extent there are nondeductible contribution from 2005 to be used up, so he doesn't run into the same pickle again. (We have the same problems now and then - you tell them until you run out of breath, and they plow right on ahead and do it anyway.)

It's a very common plan provision to waive the hours requirement in the case of disability, but it isn't always specifically stated that "you don't need 1,000 hours if you are disabled." For example: A Participant shall be eligible to share in the regular allocation of the Employer contribution for a Plan Year to the Plan and, if applicable, Forfeitures, if he was an Active Participant during the Plan Year and if he satisfies any additional criteria specified in section C of the Adoption Agreement. However, a Participant who retired, died or became totally disabled during the Plan Year meets the requirements to be eligible for a regular allocation if he was an Active Participant in the Plan Year. So you have to dig a little sometimes. I agree with Qdrophile and Pax - I'd just recommend that you scrutinize the document carefully before a confrontation with your manager. Maybe you can ask the manager to show you the document provision that authorizes the waiver if you can't find it? (Maybe it simply isn't authorized by the document, but hopefully a manager would know something this basic. I think I've just been fortunate to have managers who 'know what they don't know' and don't argue those issues with those who do know.) Good luck!

See 402A(d)(3). There's nothing I saw that changes this.

Although watch out for an excess Roth deferral that isn't distributed until after April 15th of the following calendar year. As I read things, this IS taxable - therefore double taxation sice it was already taxed prior to deferral. (Just realized that the term "excess deferral" means different things to different people, so to clarify, I mean a 402(g) excess - dollar amount exceeded.)

I don't have any recollection of the formal date, but I do recall generally 1994 and later. As I recollect, 1994 was the year the final 401(a)(4) regs kicked in, but I'm not sure all that many people started generally doing cross tested plans until later on. The IRS was really a PIA on the "definitely determinable" issue for quite some time on those early plans.

That's where I saw it! Thanks Bob - it was driving me crazy - knew I had seen it, but couldn't remember where.

Just wanted to confirm something: If you have a plan year beginning in 2005, say, 10-1-2005, can it be amended to allow Roth deferrals starting 1-1-2006? I initially thought it could, but the excerpt from the proposed regs below says otherwise, and couldn't start until the plan year beginning 10-1-06. Wanted to make sure I'm not missing anything. Thanks! Effective Date Section 402A is effective for taxable years beginning after December 31, 2005. These regulations are proposed to apply to plan years beginning on or after January 1, 2006.

If it turns out that it is incorrect, then presumably the employer will have to issue a corrected W-2. Since your plan will be using W-2 compensation then you have to count it, unless your plan has allowable categories of compensation excluded, such as overtime or bonuses, and this is legitimately reclassified into one of those classifications. But that doesn't sound like what you are doing here.