Belgarath

This has probably been suggested before, but here goes. After reading some posts in various forums, I'd like to propose Today, February 23, as a "Blanket Amnesty Day." This means that as of today, everyone starts with a clean slate. All prior posts, indiscretions, rude or obnoxious statements, grievances, whether real OR imagined, will hereby be forgotten, forgiven, and everyone will start with a clean slate, and do their darndest to stay civil from this day forward. I know it would make these boards more pleasant from my viewpoint. I've learned a whole lot from the discussions that take place here, and I'd like to think that we could move forward on a purely professional level without the sniping that sometimes takes place. If this sounds too sanctimonious, I apologize - it isn't meant to be - just my humble suggestion for more positive and professional discourse. So I'm going to start today - as of right now, everyone posting on these boards is perfect, and I hope others feel the same way - if not, then as always, feel free to ignore my suggestion!

If you ultimately can't come up with anything, Rev. Proc. 2003-44 has a sample VCP format and checklist for correcting/submitting under VCP - see Appendix D.

I think this is generally not a problem with profit sharing plans, as a profit sharing plan can allow in-service distributions after 2 years anyway. You'll notice that I'm careful to say "generally" as the one thing I've learned in this business is that there are few absolutes! For pension plan, take a look at the IRS form 5310 instructions. As I said, if they are establishing a new plan, I wouldn't normally expect a problem, but the old "facts and circumstances" could rear its ugly head in some situations, I suppose.

Successor plan rules aren't an issue here - that's for distributions FROM a 401(k) plan, which isn't the case here. Agree that an amendment and restatement is probably the way to go. As far as termination and distribution, then subsequently establishing another plan - the employer needs a valid reason to terminate the existing plan. This is a facts and circumstances determination, but I haven't heard much about the IRS giving people a hard time when another plan is being established. Others may have different experiences/opinions. I'd particularly be careful if plan expenses for a termination are being paid from plan assets - as a fiduciary issue, I wouldn't generally think this is terribly prudent when a simple amendment and restatement can be done. But have them talk with legal counsel.

I would be talking to one of the two principal authors of the Notice. Assuming they ever deign to return my calls. And in this case no, I wouldn't be doing any independent verification, as for our clients (mostly small employers) it's very nearly unheard of for a plan termination to have a nonresponsive/missing participant with an account balance in excess of $5,000. So if I get an answer, I'm merely going to accept it, as it isn't really that important to our business.

I'm waving a white flag. I was convinced I could do it. Wrong as usual! Wonder if it would make a difference if you were left-handed?

Just fyi - no response yet from the IRS - I placed a followup call today.

How about 403(b)(7) and (11)? As far as the restriction on the earnings, I believe this was TAMRA1011(A). The following link is on a different subject, but as you will see does have reference, if you read through it, to the TAMRA change. Hopefully the link will work. http://www.irs.gov/pub/irs-wd/0020048.pdf P.S. - around page 10, I think.

Can you instead simply have your deferral election, or some communication, state that no deferral election is deemed valid until investment election is made by the participant? But maybe this creates other problems that are worse than the one you are trying to solve?

SoCal - I don't really know enough about this to probably even ask my question correctly, but I'll give it a shot. Basically, I just want to find out - is the method you suggested automatically safe, or is there any bizarre possibility that it won't work? If automatically safe, then it sure seems nice for a safety net on a takeover situation like this. For example - you mentioned a 90K limit. I understand that this gets reduced if you take it early? So just for the sake of illustration, let's suppose the reduction amounted to $30,000, leaving a $60,000 limit. When setting up the new plan, do you have to bring the previously distributed amount (based upon the $60,000 figure) forward under some sort of actuarial wizardry, where there's any possibility that the required assumptions could produce an amount higher than the 90K? Or will it never under any circumstances exceed that 90K, so that if you just subtract the 90K from current limit, that you'll always be safe? Thanks very much, and I apologize if the question makes no sense - if it doesn't, I'll be glad to try to reword it!

See IRC 4972©(6)(A). Remember that this is only for potential penalty abatement, and does not allow the nondeductible contribution to become deductible.

Andy - I'd send it wherever a determination letter is normally filed. Don't have the address handy at the moment. The IRS has been pretty helpful on this, insofar as they are able to. The problem is, usually they don't have anything...

It's very hit or miss, in our limited experience. Whoever has the POA in this situation can send a letter to the IRS, with whatever data they can scrape together - EIN, TIN, etc., and ask if they have anything. Sometimes the IRS can confirm that they applied for a FDL and even give you a date that the FDL was issued, sometimes they can't find you anything, and once in a while they have something that may help. Odds are that it was never submitted. Where is the funding? Some mutual fund houses, for example, require a copy of the Plan before they will open an account. Just grasping at straws...

I did not hear back from the IRS yesterday, but as soon as (if) I do, I'll post whatever they tell me.

And for anyone who cares, I found the following: "In conventional documentation, exponents are denoted by superscripts, as in the examples above. But it is not always possible to write them this way. When sending an e-mail message, the body of text must be in plain ASCII, which does not support specialized character attributes such as superscripts. If x is the exponent to which some base quantity a is raised, then ax can be written in ASCII as a^x." I do not vouch for accuracy, as my mathematical ability is limited by the numbers of fingers and toes I have.

As an avid fisherman, I have the utmost respect for piscine intelligence and cunning. Your comment about researching questions for yourself is on the button. One of the things I find most useful about these boards is that they force me to look up questions I might not otherwise encounter, or might THINK I know the answer, and often don't. Alternatively, sometimes I come away convinced I'm right. So ignore the naysayers - I find your commentary intelligent and useful, even though on rare occasions I might not agree.

I apologize for not making my resoning (such as it is) clear. The reference to 411(a)(11) made by 401(a)(31)(B)(ii) is solely for determining the present value of the account under 411(a)(11). 1.411(a)-11(e) is not concerned with how the present value is determined - it merely allows a distribution, within certain parameters, for amounts over 5,000 in a terminating defined contribution plan. And this would appear to be consistent with the DOL's safe harbor regulation. But anyway, I'm going to call the IRS shortly, and will keep you posted as to what I find out - if I find out anything. Thanks.

KJohnson - I agree that the Q&A-2 has the precise wording you mention. It's just that I read it to mean something different - due to the reference to 411(a)(11), which provides that you can't have a mandatory distribution in excess of 5,000, except as provided in (D) which allows it for rollovers. I think this is what Q&A-2 is meant to reflect, although it is stated much more clearly in Q&A-14. Has anyone put in a call to Ms. Herrmann or Ms. Carrington on this specific issue? If not, and I get a few minutes tomorrow I'll make a call to see what, if any, response I receive.

Take a look at IRC 401(a)(31)(B)(ii). This seems to me to limit the applicability to 5,000, unless there is a rollover account, in which case, under 411(a)(11) the rollover amount can be ignored when determining the 5,000. The IRS Notice, under the first paragraph (Purpose) specifies that it provides guidance to the automatice rollover provisions under 401(a)(31)(B) (my emphasis). I don't believe a mandatory distribution in excess of 5,000 for a plan termination falls under this Code section. Reading Q&A-2 by itself, and not in conjunction with all other guidance, might bring you to the opposite conclusion, bit my my humble opinion, that isn't correct.

I don't (yet) have strong feelings one way or the other. There are good arguments for amending to remove the required cash out payments. But to play Devil's Advocate and look at it from the other side... Yes, there may be a one-time setup fee, and a charge per account. But the alternative may be to continue to carry a participant for years, with PBGC premiums if applicable, and "per participant" plan charges, which over time may add up to substantially more than the mandatory rollover fees. The plan can provide that distribution fees will be charged to the participant's account, for a terminated "non-responding" participant. So you can get rid of this account forever at little or no charge, depending upon the IRA provider. If you handle plan terminations, you will know that deferring the problem often compounds it. When you are terminating the plan 6 years down the road, and you now have 43 particpants to pay out minimal benefits when you COULD have done a mandatory rollover previously, you may wish you'd dealt with a little aggravation up front rather than a lot of aggravation later on. Because at that point, you now have the 4 mandatory search methods under FAB 2004-02 (for DC plans) and you'll ultimately end up, if they don't respond, by having to do largely the same thing - either set up an account, or have to mess with state escheat laws. The whole thing is completely stupid anyway. The best solution, IMHO, is for all such benefits to be sent to the PBGC. They can collect interest on all funds to help reduce their deficit, and ALL participants would then have a single source where they could inquire to see if they have unpaid benefits. Plan administrators are happy, employers are happy, and drug companies that sell headache remedies will lose sales. I just realized that someone reading the above paragraph might think that I'm saying this can be done. To clarify, of course it can't be done now - it's just what I'd like to see as a solution if the IRS, DOL, and PBGC could get together to solve this foolishness.

Hoo Yah! May the wind under your wings bear you to where the sun sails and the moon walks. Thank you both.

Blinky, thank you for the response. I sincerely hope the IRS (if SoCal has info on this?) agrees with your interpretation! I just get a different result from the same cites that you do. I read the reg merely to say that you don't count a YOS toward the % increase (so in my original example, you remain at 6% rather than moving to 8%) but that the averaging period only excludes years that do not count as a year under 411. I like your interpretation better, and I look forward to hearing what the IRS had to say on this last week, and hopefully being all wet in my thought process on this garbage. Thanks again.

Hi Blinky - I understand your feeling - in fact, I started out with the same interpretation. But after reviewing it for a while, it seemed to me that 416©(i) is saying that except as provided in clause (ii) or (iii) of that paragraph ©, YOS are determined in accordance with (4), (5), and (6) of 411(a). And the purpose of (ii) and (iii) is to ignore those years when no HC benefits - which includes a frozen plan. But paragraph (D) of 416 seems to stand alone - that is, the modifications to "years" that are made in © do not modify 411 for purposes of paragraph (D). If (D) had specifically excluded years excluded under ©(iii) then I'd feel a lot happier. But since it doesn't, I reluctantly arrived at my current position. Does anyone know if the IRS has addressed this from the podium at an ASPPA conference, or some other such venue? The consequences of interpreting this "incorrectly" (from the viewpoint of the IRS - I'm not sure that either interpretation is either completely correct or incorrect) - could be fairly significant with average comp rising over time.

Thanks!

I'm not a DB person, so pardon my terminology if it isn't quite accurate. With the EGTRRA change, you no longer count service after 2001 for additional TH accruals if the plan is frozen. However, it seems to me that there's no mention of freezing the benefit - if your average comp goes up, then you have the same TH percentage, but of a higher salary. For example - prior to a plan freeze effective 1-1-2002, participant has accrued a TH benefit of 6% of a high-5 average salary of 20,000, or 1,200. Three years later, with the high-5 average being 30,000, is his TH benefit: A. still 1,200, or B. 1,800? I'd vote for B, as I see nothing in the statute or regs which indicates otherwise. Additional twist - suppose as of 1-1-02 the client adopted a PS plan that specified that the PS plan would provide TH benefits of 5% if required, but for 2004 there is no contribution to the PS plan. If the answer to the DB question is (B), then does this reqire a contribution to the PS plan? I guess that depends on whether the increase to 1,800 is considered "accruing" an additional TH benefit? Anybody wrestled with this question yet? My inclination is no contribution to the PS plan, as no HC is accruing a benefit in the DB plan.