Belgarath

I'd appreciate confirmation if I've got this right. Suppose you have a plan year 7-1-04 to 6-30-05. You have a highly compensated employee (not eligible for catchup) who deferred 13,000 from 7-1-04 to 12-31-04, then deferred 14,000 from 1-1-05 to 6-30-05. While this is permissible for 402(g) limits, as you might expect, it failed the ADP test, and some amount must be refunded - let's say 10,000. All set with tax issues, etc. The question posed was - since this 10,000 is being distributed, can the employee defer another 10,000 between now and the end of 2005? In other words, does a refund of deferrals due to ADP failure "reduce" the deferrals counted towards the 402(g) limit? I believe the answer is no. The deferral stands, and this person cannot defer anything more in 2005. Possible I missed it, but I didn't see anything in the regs to allow otherwise in this situation. Thanks!

I agree. Specifically, see 1563(f)(5) which addresses this question.

That's a tough one. Did the employee lose any match or employer contribution because of this? If not, then I'm inclined to think no correction is made. The employee did receive the salary, so if the employer made a corrective contribution plus earnings, the employee would actually be receiving a windfall. The employee should share some responsibility for determining if the payroll deductions are the correct amount.

Looks like a girl I used to date in high school. She was a lot better looking than I am...

Ok, thanks for the response. I'd like to delve into this a bit further, due to a question that was asked - the answer to which I have no clue. We're just a TPA, not a Trustee. The plan has, say, 150 participants. If all the assets are with a registered Trust company, bank, insurance company - can the auditor perform a limited scope audit? The second question is then, apparently, WILL the auditing company perform a limited scope audit if there's no SAS 70? What I think I'm hearing is that the SAS 70 isn't necessarily a legal requirement, but some auditing firms would still require it in order to do a limited scope audit? If there isn't one, does it require more work/expense on your part as an audit firm? Thanks!

Ok, then what, if any, certification does the auditing company need from the Insurance/Bank/Trust company? Is there some general statement/form/certicication? I've heard of an SAS 70, but I don't really know what it is, or if it is really required by the auditing company. My impression was that if the SAS 70 (whatever it is) was done, that it made the audit easier if a limited scope audit was not otherwise available, but I'm way into the realm of pure guesswork here.

KFM - there are lots of folks who are aware of the RR you mention, but instead choose to interpret 410(b)-3 to modify the RR. Aggressive, but a lot of the industry does it this way. Personally, I prefer your approach as more technically accurate. Have any of you applied for a determination letter using the 410(b)-3 approach? If so, success or failure?

Hi Tom - glad to hear it went well. Could you, once you catch up on the pile undoubtedly awaiting you, please elaborate a bit on your first paragraph? I'm not certain I'm understanding what you are saying. Suppose you have 10 people, each with compensation of 10,000, deferring. 2 of them are not eligible to receive a discretionary employer contribution, due to, say, less than 1,000 hours. This would give you a maximum of 20,000 for a deductible discretionary employer contribution (80,000 x .25). Is that what you are saying, or are you saying something else? Thanks.

Hmmm - can the attorney for the ex-wife somehow take into account the higher lump-sum when negotiating the terms of the divorce and the QDRO? Not that this makes any difference as far as your question is concerned, I don't think. But if was working for the ex wife's mother rather than his own mother, she'd probably feel a lot happier if some of this excess was going to her daughter...

Wow - this is a beauty. I'll go out on a limb and agree with your analysis. I didn't want to, but after wading through the regs and drawing myself little diagrams, I came to the same conclusion. Seems to me like the 410(a) issue isn't a problem. They ARE eligible to participate - if they don't get an allocation because of an otherwise permissible definition of compensation for plan allocation purposes, I don't think this causes a 410(a) violation. Did you really encounter this, or is it an academic question from someone trying to stick you?

Calvin Coolidge would have been proud of that response! I'm impressed that you could even dream up this scenario. (Seriously, I'm not being sarcastic when I say that) I'm always jealous of people with creative minds. Certainly could be a neat marketing ploy - "The December/April Marriage Ultimate Defined Benefit Plan." Now, there are other benefits that I see besides the lump sum. If I were 65 with a 20 year old wife, I'd think it was a pretty good plan. I believe this would be considered an "ancillary benefit" but I'm not sure about the implications of 401(a)(4) testing. Would you have to provide a young spouse to enough of the rank and file employees to pass testing? Think of the boost in morale, and productivity (and maybe even reproductivity.)

I read 1.416-1, T-24, to require that these be included for the initial plan year. However, the wording isn't quite as clear as I would like.

While the attached may possibly be of some use to you, you've already received the best answer: seek legal counsel! (Of course, the employer could just pay the legal fees, but then this question wouldn't be coming up...) http://www.dol.gov/ebsa/regs/aos/ao2001-01a.html

Blinky - I have a question about this. Why is the 100,000 considered "nondeductible" for 2005? Or to put it another way, it seems like the language in 4972©(1)(A)(ii) refers to the amount "allowable" as a deduction under 404. Now the 100,000 is clearly allowable as a deduction - the employer just chooses not to. Is there additional guidance where the IRS clarifies this? It just seems to me that there shouldn't be an excise tax for a contribution that is otherwise allowable as a deduction (it didn't exceed the 404 allowable deductible amount). I saw nothing in Notice 87-27 that helps, as the examples were all concerned with having an actual previous "nondeductible" amount already in the plan. Thanks.

First, for the 15% "first tier" tax, yes, it is 15% for each year. The second tier tax is an additional tax. The second tier tax is abated if correction is made within the 90 day period commencing on the date the IRS issues a notice of deficiency for the tax. See IRC 4961. I don't know if the IRS can or will negotiate a settlement on the first tier tax. For the amount of money involved, I'd strongly recommend experienced ERISA counsel. It appears to me, on a cursory reading, that it is sometimes possible to get the first tier tax abated (see IRC 4962 and 4963) but again, I'd check with ERISA counsel. Good luck.

After reading the debate, I throw this out to add fuel to the fire. Let me first add that I have no choice but to take the word of my betters when it comes to mathematics, as I can't count my toes twice and get the same number. Fortunately, our daughter is a math whiz, so she can usually explain things to her mathematically challenged parents. (I'm fine with numbers, it's just abstract concepts where the rot sets in...) Why can't you divide by 0? Why is 0/0 "indeterminate" and 1/0 "undefined"? Why is dividing by zero "illegal"? Here, in their own words, are some explanations by our 'math doctors'. Follow the links to read the full answers in the Dr. Math archives. -------------------------------------------------------------------------------- Division by zero Division by zero is an operation for which you cannot find an answer, so it is disallowed. You can understand why if you think about how division and multiplication are related. 12 divided by 6 is 2 because 6 times 2 is 12 12 divided by 0 is x would mean that 0 times x = 12 But no value would work for x because 0 times any number is 0. So division by zero doesn't work. - Doctor Robert -------------------------------------------------------------------------------- My teacher says you can't divide a number by zero. Why? Let's look at some examples of dividing other numbers. 10/2 = 5 This means that if you had ten blocks, you could separate them into five groups of two. 9/3 = 3 This means that if you had nine blocks, you could separate them into three groups of three. 5/1 = 5 Five blocks could be separated into five groups of one. 5/0 = ? Into how many groups of zero could you separate five blocks? It doesn't matter how many groups of zero you have, because they would never add up to five since 0+0+0+0+0+0 = 0. You could even have one million groups of zero blocks, and they would still add up to zero. So, it doesn't make sense to divide by zero since there is not a good answer. If you know a little bit about multiplication, you could look at it this way: 10/2 = 5 This means that 5 x 2 = 10 9/3 = 3 This means that 3 x 3 = 9 5/1 = 5 This means that 5 x 1 = 5 5/0 = ? This would mean that the answer x 0 = 5, but anything times 0 is always zero. So there isn't an answer. - Dr. Margaret -------------------------------------------------------------------------------- Why can't you divide a number by 0? For one thing, when you divide one number by another, you expect the result to be another number. Look at the sequence of numbers 1/(1/2), 1/(1/3), 1/(1/4), ... . Notice that the bottoms of the fractions are 1/2, 1/3, 1/4, ..., and that they're going to zero. If there's a limit to this sequence, we would take that number and call it 1/0, so let's see if there is. Well, the sequence turns out to be 2, 3, 4, ..., and that goes to infinity. Since infinity isn't a real number, we don't assign any value to 1/0. We just say it's undefined. But let's say we did assign a value. Let's say that infinity is a real number, and 1/0 is infinity. Then look at the sequence 1/(-1/2), 1/(-1/3), 1/(-1/4), ..., and notice again that the denominators -1/2, -1/3, -1/4, ..., are going to zero. So again, we would want the limit of this sequence to be 1/0. But looking at the sequence, it simplifies to -2, -3, -4, ..., and it goes to negative infinity. So which would we assign to 1/0? Negative infinity or positive infinity? Instead of just assigning one willy nilly, we say that infinity isn't a number, and that 1/0 is undefined. - Dr. Ken -------------------------------------------------------------------------------- When something is divided by 0, why is the answer undefined? The reason is related to the associated multiplication question. If you divide 6 by 3 the answer is 2 because 2 times 3 IS 6. If you divide 6 by zero, then you are asking the question, "What number times zero gives 6?" The answer to that one, of course, is no number, for we know that zero times any real number is zero not 6. So we say that division by zero is undefined, for it is not consistent with division by other numbers. - Dr. Robert Because there's just no sensible way to define it. For example, we could say that 1/0 = 5. But there's a rule in arithmetic that a(b/a) = b, and if 1/0 = 5, 0(1/0) = 0*5 = 0 doesn't work, so you could never use the rule. If you changed every rule to specifically say that it doesn't work for zero in the denominator, what's the point of making 1/0 = 5 in the first place? You can't use any rules on it. But maybe you're thinking of saying that 1/0 = infinity. Well then, what's "infinity"? How does it work in all the other equations? Does infinity - infinity = 0? Does 1 + infinity = infinity? If so, the associative rule doesn't work, since (a+b)+c = a+(b+c) will not always work: 1 + (infinity - infinity) = 1 + 0 = 1, but (1 + infinity) - infinity = infinity - infinity = 0. You can try to make up a good set of rules, but it always leads to nonsense, so to avoid all the trouble we just say that it doesn't make sense to divide by zero. What happens if you add apples to oranges? It just doesn't make sense, so the easiest thing is just to say that it doesn't make sense, or, as a mathematician would say, "it is undefined." Maybe that's the best way to look at it. When, in mathematics, you see a statement like "operation XYZ is undefined", you should translate it in your head to "operation XYZ doesn't make sense." - Dr. Tom -------------------------------------------------------------------------------- What is the value of 0/0? (Is it really undefined or are there an infinite number of values?) There's a special word for stuff like this, where you could conceivably give it any number of values. That word is "indeterminate." It's not the same as undefined. It essentially means that if it pops up somewhere, you don't know what its value will be in your case. For instance, if you have the limit as x->0 of x/x and of 7x/x, the expression will have a value of 1 in the first case and 7 in the second case. Indeterminate. - Dr. Robert

Wmyer - yes, you assume correctly! 100% limit, not 25%.

Agreed. I should have made that clearer, but didn't think about it. Was just focusing on applying current limits to pre-2002 years - and apparently you agree with #1, subject to your modification?

We're having a bit of discussion on this subject, and there are two opposing viewpoints (at least). Assuming you have a 2005 plan year, and you are determining the benefit accrual, and that accrual is based in part on pre-2002 compensation: 1. You can use 200,000 for all years prior to 2002, and the limit as adjusted for COLA's for years after 2002, but you cannot apply the current increased limit to years prior to 2002. (This happens to be the side I fall into) 2. You can take the current limit as adjusted, and apply it to all years, including years prior to 2002. Opinions? Thanks in advance.

Depends upon your plan document. Such an opt out could be generally permissible in a volume submitter plan if the plan was drafted to allow it, but not generally in a prototype. The IRS "prototype group" in the last round of the GUST docs wouldn't let us have an opt out in a prototype after eligibility had been satisfied. But they said it was fine in a VS. Assuming of course that it doesn't cause coverage testing to fail... But, there are some folks who got their prototypes approved with such a provision! So it apparently made a difference who you got for a reviewer.

First answer - if there is no controlled group or affiliated service group, then yes, she can receive up to the maximum employer contribution in each plan. (Note that this does not extend to elective deferral limits, which are an individual limit). Second answer - based upon the information given I don't see this as a controlled group. But it certainly could be an affiliated service group. And depending upon who owns the other 52%, and what ownership could be attributed through things like stock options, minor children as Janet mentions, etc.,could even still be a controlled group. I always recommend a client seek legal counsel to make the CG/ASG determination.

For the authority as to why you can't convert a DB to a PS, see ERISA 4041(e). As to your other question - I don't have time to look it up at the moment, but I believe you have up to 7 years to amortize it. So if you transfer over 300,000, and your 25% limit only allows, say, 50,000 each year, you would be ok, assuming the business remains open and people are still employed with sufficient payroll, etc... I'd caution you to read the applicable IRC code section (4980(d)) yourself, as my "7 year" answer is purely from memory. As I grow older, this source becomes less and less reliable.

You can't convert a DB plan to a PS. However, you may want to investigate the possibility of terminating the DB plan and setting up a "qualified replacement plan." See Revenue Ruling 2003-85, and IRC 4980(d). Depending upon the situation and the amount of excess assets, this might do the trick.

Sorry - I didn't realize this was already on today's benefits link newsletter links. For taxable wage base: http://www.socialsecurity.gov/pressoffice/pr/2006cola-pr.htm For IRS limits: IR-2005-120 October 14, 2005 IRS Announces Pension Plan Limitations for 2006 WASHINGTON — The Internal Revenue Service today announced cost‑of‑living adjustments applicable to dollar limitations for pension plans and other items for tax year 2006. Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the IRS commissioner annually adjust these limits for cost‑of‑living increases. Many of the pension plan limitations will change for 2006. For most of the limitations, the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Furthermore, several limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to increase at the beginning of 2006. For example, under EGTRRA, the limitation under section 402(g)(1) on the exclusion for elective deferrals described in section 402(g)(3) is increased from $14,000 to $15,000. This limitation affects elective deferrals to section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans. Cost-of-Living limits for 2006 Effective Jan. 1, 2006, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $170,000 to $175,000. For participants who separated from service before Jan. 1, 2006, the limitation for defined benefit plans under section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2005, by 1.0383. The limitation for defined contribution plans under section 415©(1)(A) is increased from $42,000 to $44,000. The Internal Revenue Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows: The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)©, and 408(k)(6)(D)(ii) is increased from $210,000 to $220,000. The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $135,000 to $140,000. The dollar amount under Section 409(o)(1)©(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $850,000 to $885,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $170,000 to $175,000. The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $95,000 to $100,000. The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost‑of‑living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $315,000 to $325,000. The compensation amount under Section 408(k)(2)© regarding simplified employee pensions (SEPs) remains unchanged at $450. The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $85,000. The compensation amount under Section 1.61‑21(f)(5)(iii) is increased from $170,000 to $175,000. The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $10,000. Limitations specified by statute The Code, as amended by the Economic Growth and Tax Relief Act of 2001 (EGTRRA), specifies the applicable dollar amount for a particular year for certain limitations. These applicable dollar amounts are as follows: The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $14,000 to $15,000. The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $14,000 to $15,000. The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or 408 (p) for individuals aged 50 or over is increased from $4,000 to $5,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or 408 (p) for individuals aged 50 or over is increased from $2,000 to $2,500. Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.

Sole prop makes a deferral election prior to the end of 2004 to defer 14,000 for 2004. Now as he is finalizing his taxes, he decides he only wants to put in $12,000. Now I know that being a sole prop he may search his files and find the corrected election that he did last year. But assuming he doesn't, is there any legal way for him to avoid making this deferral, assuming he has at least 14,000 in income? I can't find one, but I'm probably missing something obvious. Thanks.