Belgarath

Assuming he isn't a "5-percent owner" then no. He hasn't reached his required beginning date under 1.401(a)(9)-2.

I assume that as a controlled group, they are already contributing for B under the SEP? Assuming a contribution is made for 2004? They could terminate the SEP for 2004 and establish a 401(k) deferral only for all participants, perhaps? But realistically, they'd probably just want to do this for 2005. I don't think they can do anything special for this one person only, although if there are enough NHC there may be possibilities for doing something fancy. Some of the design wizards here may be able to suggest something clever if you can provide number of NHC and HC.

FWIW (This affirms what JanetM just told you) The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: A profit sharing plan provides that each eligible participant who is credited with 1,000 hours of service and who is employed on the last day of the plan year is entitled to receive an allocated share of the discretionary employer contribution. The plan sponsor intends to amend the plan to change the allocation formula, and the amendment could result in smaller allocations for some participants. To avoid any potential violation of the anti-cutback requirements, when should the amendment be adopted? a. Before any participant is credited with 1,000 hours of service? b. Before the last day of the plan year? c. Before the employer contribution is actually deposited to the plan? d. Within 2½ months after the end of the plan year? Response: In Technical Advice Memorandum (TAM) 9735001, issued on August 29, 1997, it was concluded that a participant’s right to an allocation is protected under Code section 411(d)(6) once the participant has satisfied all of the conditions necessary to receive the allocation. Therefore, the plan amendment would have to be adopted prior to the time that the participant satisfies the conditions necessary to receive the allocation. In this example, because the participant must be employed on the last day of the plan year to receive an allocation, the amendment could be adopted anytime prior to the last day of the plan year.

1:25 am? Is that cute kid in your picture keeping you up at night, or are you merely insane? The thought of thinking about qualified plan issues in the wee hours is too horrifying to contemplate!

Hi Blinky - you're absolutely right - I stated this very poorly. What I was trying to get across was that even with a conservative approach, none if this matters unless you are trying to make a deductible employer contribution to the DC plan - since even if you consider them to have "overlapping" participation, (7)(A) allows you to contribute the full DB cost even if greater than 25%. Your comment states it much more succinctly and accurately. Instead of fishing, I'll cut bait.

I agree with Blinky that there appears to be some confusion on the precise question being asked. Here's how I see it. If you have a DC and a DB plan, and no contributions other than employee deferrals are made to the DC plan, then your deductible limt under 404(a)(7)(A) will be the GREATER of 25% or the required funding for the DB plan. Where you run into potential problems is when your required funding for DB plan exceeds 25%, and you STILL want (or need) to make an employer contribution to the DC plan. To amplify a bit as to how this applied to the bizarre situation we ran into - Employer had both DB and PS plan. Plans were set up so that certain employees were excluded in both plans, so that there was NO overlapping participation. Then, due to a change in job status, a participant who had previously received contributions in the PS plan now became ineligible for further contributions in PS plan, but became eligible and covered in DB plan, which had a required contribution in excess of 25%. So the question arose as to whether there was "overlapping participation" which would preclude a deductible contribution to the PS plan. The client's tax counsel took a look at it and determined not to contribute to the PS plan based upon the uncertainty as to whether it would be deductible or not. Sal has a good writeup as Blinky mentioned - worth reading, and continues for a few pages beyond the deferral only question.

I'm not sure that it is necessarily good advice. It's conservative advice - you certainly can't get in trouble with the IRS by choosing this more conservative route. Conversely, the employer could lose out on a substantial, legitimate deduction if the IRS believes that it is ok. I should have mentioned that I wouldn't ever advise the client - I'd give him both sides of the argument, and tell him to consult tax/legal counsel to make the determination. We had a client with a similar set of circumstances, (although somewhat more convoluted) and the payroll was such that the PS contribution was around 200,000. When the client reviewed with tax counsel, they determined NOT to go ahead with a PS contribution.

The IRS has flip flopped on this one like a Blinky out of water so many times, that I wouldn't trust any answer from the podium. Being of an essentially conservative bent on such issues, I'd wait for something official before trusting that it is ok to "damn the torpedoes, full speed ahead."

Even a lot of the old SAR/SEP's didn't end up being "noncontributory." If they used the 5305A-SEP model, and any key employee deferred, the plan was deemed top heavy and minimum contributions were required for the nonkeys. I saw a fair number of people get shocked on this one.

While I agree that it is wise not to provoke the IRS, (and I suspect astonewall was using this for our reading pleasure, and wouldn't necessarily tell the service that they were inane), does it necessarily matter? My understanding is that there is an automatic abatement of the second tier tax (see IRC 4961) IF you correct it within the correction period under IRC 4963(e). In this case, you have 90 days after the IRS mails the notice of deficiency. So in spite of the fact that folks shouldn't deliberately confront the tiger in his lair, it doesn't remove your correction and abatement remedies available under the law. Of course, they might just then decide to audit your plan, etc... - so MGB's advice is very sound! I do agree that this is more of an annoyance than a real problem - the problem has been corrected, and you just have to prove that to the IRS. Again.

If I were informed that a participant may be going through a divorce, I would notify the Plan Administrator. But determining whether or not to allow a distribution is a fiduciary decision, and we are MOST careful to avoid this. If the Plan Administrator subsequently instructed us to process a withdrawal/distribution, we would do it.

They should be, subject to normal rules under IRC 404. See Revenue Procedure 2003-44, Section 6, .02(4)(b).

Maybe you can get your employer to send you to England to deliver the payment in cash. Then everyone will win! Except possibly your employer... Seriously - could you take advantage of DOL field assistance bulletin 2004-02?

You could also try to find a Revenue Ruling, Announcement, Procedure, etc., that is even faintly related to your question. Call the principal author of that release directly at the number listed, and ask them who you should talk to - I've had this work a couple of times.

As long as the reduction (or elimination) of the cure period is prospective only, then I see no problem. But I don't think you can do it for existing loans.

While it does apear that the regs permit one plan to have, for example, 5 year cliff and another group to have 7 year graded (assuming NTH), I must admit that I'd be squeamish about having 2 (or more) separate 3 year vesting schedules, with one being more favorable to HC than the other which covers NHC. I feel the same way as Tom - the ©(2) that you refer to does offer an "exception" but I wouldn't dare to attempt to use it for something that falls outside of that specific exception. And the situation you outline, to me, appears to fall outside of it. At the very least, I'd request a determination letter on this one if I were going to attempt to use it. But I probably wouldn't attempt to use it. I don't think ©(2) is saying that it (your situation) is ok just because the 3 year is better than TH minimum vesting. It is just saying that for a NTH plan, the 5 and 7 year schedules are equivalent, and for TH, the 3 and 6 are equivalent. But within that framework, a combination of several plans can't discriminate against the NHC under the general principles of ©(1) as Tom mentioned. But I'm not supremely confident that I'm correct...

Question: Does anyone know if the IRS is planning to do a model amendment that can be tacked on to a prototype? 'Cause otherwise, I think the timing is such that this could be a real problem - the submission period proposed in 2004-71 doesn't start until after the amendment would be required...

I want to see if I've got this right - without going blind figuring out original case, vacated decisions, remands, etc... maybe some of you legal types are more conversant with it. With the latest decision, are we now, for the moment at least, at the stage where vested participants are counted? Have I got that right?

I'm not aware of any guidance which suggests that the missed earnings must be considered. Therefore I would not consider them for excise tax purposes.

I'm not so sure - depends upon what you mean by the "required contribution." Are you talking about a termination liability? If so, then I'd agree, and please ignore the rest of my blathering. If you are talking about a "regular" contribution, it gets murkier. 404(g)(2) is discussing payments under (g)(1), which refers to termination liability amounts under ERISA 4041(b), 4062, 4063, and 4064. You still may be able to do as you suggest, but I wouldn't rely on (g)(2) to support that stance. I've seen arguments for both sides on this - some that the other participating employer(s) can deduct the contribution as they wish, and some that say you can't. And I'm not convinced either way, although I have a tendency to think that the cost should be allocated proportionately to the businesses that incur the expenses, and not arbitrarily to another business, even if owned by the same individual. I haven't found any consensus among CPA's on this either, (and I queried 4 in the last week on this very question, since it came up on a potential takeover situation.) Three of them said you couldn't arbitrarily allocate to one entity or the other of the sole owner, and one said you could. But even the three who said you couldn't also siad they didn't see it as a "high risk" - whatever that means. FWIW.

The employer had better seek legal counsel. There are all kinds of potential problems here if it really is an impermissible loan - prohibited transactions, taxation, penalties, etc... - and I don't see an easy "fix" with no costs involved! As far as TPA "culpability," that's a facts and circumstances issue for the attorneys as well. It would seem that if the TPA didn't know, and had no reason to know, that the TPA can't/shouldn't be held responsible. Impossible to say from this end.

No, they wouldn't be precluded from using this provider. It could just affect the deduction pattern. In IRS publication 560, there's an example of just such a situation you are referring to - I think you'll find it helpful. It is under the SEP section, "When to deduct contributions." Yes, there are SEP providers who have custom documents. I do not specifically know who they are or how to locate them, but I'd probably start with a web search. And probably other folks here know of some specific providers. I expect some of the big mutual fund houses may have custom docs.

Bob, I'd remember the old adage, "free advice is worth what you pay for it." That includes the free advice I'm about to post! I agree with what the other folks have posted, but the comment likely to be the most helpful to you is Blinky's. Hire someone who knows what they are doing! $55,000 is a lot of money. At least to me. I doubt you would consider closing a real estate deal, for example, for 55K without engaging the services of an attorney. Maybe you would, and more power to you. But it shouldn't really cost you that much to find a local CPA, TPA, attorney, etc., to guide you through this. It is indeed likely to be, for someone versed in these matters, a pretty easy process. But it also is impossible for any of us here, without knowing your plan or documents, to be certain of that. I will say that I've seen many, many, many disasters on these "easy" one-person plans that are administered or terminated improperly. I'm not suggesting that you aren't capable of handling it yourself, but I am suggesting that the possibility of a problem is much greater. Is it worth the risk? Good luck to you with whatever approach you choose!

Thanks. That's what I had decided, but it sure is nice to have someone else agree!

I received a question today, for which I'm uncertain of the answer. Wondered if any of y'all have run into this. Small plan has life insurance on a participant. Participant dies. Insurance proceeds are paid to the plan, deposited into participant's account, and subsequently distributed to participant's beneficiary. How do you account for this on the Schedule I? Is it considered a "noncash contribution" on the Line 2b? I wouldn't think so, but it doesn't seem to "fit" any category. I believe it would all be reported as a distribution on Line 2e, but I'm having trouble figuring out where the death proceeds paid to the plan should be reported. On line 2c? Thanks.