Belgarath

Seems to me something is being confused here. Or maybe I'm misreading the posts. MGB - suppose a VS sponsor is preparing EGTRRA amendments. The sponsor cannot unilaterally amend the VS document like they do in a prototype. And even a unilateral prototype EGTRRA amendment may require employer elections, such as which rollover provisions they wish to allow or not to allow. So the deadline for employer adoption of these amendments, ASSUMING the employer is already eligible for the GUST RAP, is extended. Does this reflect your understanding as well, or are you saying something different?

The information in 2001-77 hasn't changed, at least to my knowledge. The IRS said, subject to certain restrictions listed in 2001-77, that the employer could rely on the document sponsor's opinion or advisory letter as a letter of determination. However, I don't read this as carte blanche to never file. You may have situations where it is still advisable. Suppose, for example, you have a plan that credits service with prior employers. I see this with things like medical practices quite often. Depending upon the document specifics and census information, you might want to consider a determination letter to get IRS assurance that you aren't doing anything discriminatory in your methodology. I'm sure there may be other, probably better examples. Say they are using a doc other than standardized prototype, and missed their GUST deadline (not having satisfied the requirements for the extended deadline) - the way I see it, they have to submit under VCO which REQUIRES a concurrent filing for a determination letter. Having said that, I'm of the opinion that the vast majority of the cases I see using proto or VS documents do NOT need to file for determination letter.

Agree with KJohnson. By the way, I understand that Mr. Watson has accepted a position with Corbel. I certainly hope he continues to publish his "Who's the Employer" since this is my Bible for such questions! And it also reveals to me the extent of the complexity of such questions, which can turn 180 degrees on the TINIEST bit of information, which is why I always refer a client to their attorney.

I'd be pretty leery about establishing a 412(i) plan just because investment yields are temporarily down. Because you can make the same investments in a split-funded plan if that is all you are concerned with. As far as switching over to split funded, the documents I've seen automatically revert to split funded if you fail to make the required premium payments prior to the policy lapse date. But you'd have to check this question out with the document sponsor or TPA. And I can't really answer your investment return question. Maybe some of the investment gurus on these boards can. I'd say that in general, an annuity policy would give you a return comparable to fixed investments, and probably higher than a money market. But there are likely to be expenses - loads, surrender charges, etc. which may apply. Again, you'd need to speak with an investment expert. Good luck!

They are mostly sold by insurance agents with dollar signs in their eyes. But that aside, if a client is willing to accept a potentially lower yield, since the 412(i) plans can be funded ONLY with insurance or annuity products, you can front-load your deductions. So compared to a traditional split-funded DB, your initial deductions are generally greater. They really aren't, in my opinion, suitable in most situations. There can be, in a minuscule percentage of the situations I've seen, a very small niche where they can work. But rarely...

Assuming he will have sufficient income for 2002 to cover a $2,000 dollar contribution to his SEP, why can't he simply claim $5,000 as a 2001 deduction, and use the $2,000 "extra" as part of his 2002 contribution? As long as he actually deposited it in 2002, I don't see any problem with this, again assuming income sufficient to support it.

I'd say it depends. If your 3% is being provided via the Safe Harbor MATCH, then I would agree that you cannot use it to satisfy Gateway. If it is being provided via the mandatory NONELECTIVE Safe Harbor, then it can be used toward Gateway. The only citation I can give you quickly is IRS Notice 98-52. This allows the nonelective Safe Harbor to be used toward 401(a)(4) testing. There may or may not be other cites that someone can provide to assist you.

Interesting discussion. Is anyone aware of any legal decisions specifically involving this question? Because it is a VERY common clause in IRS approved Prototypes and Volume Submitter documents to not permit a loan which has a repayment period extending beyond the participant's Normal Retirement Date. And it's a lovely little Catch-22 for a plan Administrator/Trustee. On the one hand, you have the ADEA problem, if that does in fact trump all other rules and document provisions, and if you abide by ADEA, you violate the terms of your document, for which the IRS can hang you if they so choose. Charming.

I'd double check your plan language. Some plans, prototypes included, have a provision that distinguishes eligibility from accrual. In other words, nothing is accrued until the last day of the plan year. You may have satisfied the hours for eligibility for an allocation if a contribution is made, but no accrual until last day of plan year. So you could amend the plan as you have suggested with no trouble, in my opinion, if your plan has such language. As long as the amendment is done before the last day of the plan year!

Yes, BUT - you have to be careful. For example, if you have a cross-tested plan, you can use 414(s) compensation (which would allow you to exclude the 125 deferrals) for the 1/3 test, but you cannot do this for the 5% test. For the 5% test, you have to use total compensation which would satisfy 415©(3), which would require inclusion of such deferrals.

Got it. Thanks for clarifying this - I was going off on a tangent, instead of looking at the actual question. I have a tendency to do that...

I think we may be agreeing, but I'm just stating it badly. Yes, you can test as stand alone. However, if you end up having to use the average benefits test in order to pass, part of the average benefits test requires aggregating the benefits and contributions of all the plans of the employer. And this might screw up your results from the stand alone testing. Or is this not at all what you are saying? Thanks!

Agree that they must either meet the qualifying asset requirement, or increase their bonding as required. The SAR disclosure applies in either case.

Hi Mike - are you sure about this? The regs are a bit confusing. 1.401(a)(4)-2©(2) provides that only employer contributions and forfeitures under the plan being tested are taken into account to compute the EBR's. However, when computing the average benefit ratio test under 1.401(a)(4)-2©(3)(iii), it provides that a plan satisfies the average benefit ratio test if the plan of which it is a part satisfies 1.410(B)-5. Which means that the plan has to apply the average benefits test as if you were doing a regular coverage test. I understand this to mean that you are required to include contributions or benefits from all plans maintained by the employer that are part of the testing group that includes the plan being tested. I'm not sure I'm conveying this lucidly, but what I come out with, having to take into account 1.410(B)-5, is that you do have to include the other plans for EBR testing in each plan. This seems to make some amount of sense where you have a cross-tested and a non cross-tested plan. But I've never had to consider how to apply it with two cross-tested plans of the same employer...thankfully I've never seen such a situation!

Hello all out there in the pension world! Been busier than a one-legged man in a butt kicking contest this summer, and haven't even had time to read these message boards. I'm not aware of anything specific to target plans. Perhaps your informant was referring to the general increases in compensation, 415 limits, etc?

Interesting. Certainly, it is a conservative position with which you can't go wrong, and that's not a bad thing! Thanks for passing this along.

Merlin - I thought that the specific language of the regulation was that you could only assign a particular payment or future payments. And maybe that's what you are saying? I've always thought that this meant you couldn't simply assign your accrued benefit as collateral for a loan, for example, but could assign certain future benefit payments, if you are in pay status, or a particular payment. But to answer your question, I see no reason why it cannot be assigned to the employer, assuming all other intricacies observed. The reg specifically includes the employer, as you mentioned. I wouldn't worry about any prohibited transaction consequences here. FINAL-REG, PEN-FINAL-REG, §1.401(a)-13. Assignment or alienation of benefits (d) Exceptions to general rule prohibiting assignments or alienations--(1) Certain voluntary and revocable assignments or alienations. Notwithstanding paragraph (B)(1) of this section, a plan may provide that once a participant or beneficiary begins receiving benefits under the plan, the participant or beneficiary may assign or alienate the right to future benefit payments provided that the provision is limited to assignments or alienations which-- (i) Are voluntary and revocable; (ii) Do not in the aggregate exceed 10 percent of any benefit payment; and (iii) Are neither for the purpose, nor have the effect, of defraying plan administration costs. For purposes of this subparagraph, an attachment, garnishment, levy, execution or other legal or equitable process is not considered a voluntary assignment or alienation. FINAL-REG, PEN-FINAL-REG, §1.401(a)-13. Assignment or alienation of benefits (e) Special rule for certain arrangements--(1) In general. For purposes of this section and notwithstanding paragraph ©(1) of this section, an arrangement whereby a participant or beneficiary directs the plan to pay all, or any portion, of a plan benefit payment to a third party (which includes the participant’s employer) will not constititute an “assignment or alienation” if-- (i) It is revocable at any time by the participant or beneficiary; and (ii) The third party files a written acknowledgement with the plan administrator pursuant to subparagraph (2) of this paragraph. (2) Acknowledgement requirement for third party arrangements. In accordance with paragraph (e)(1)(ii) of this section, the third party is required to file a written acknowledgement with the plan administrator. This acknowledgement must state that the third party has no enforceable right in, or to, any plan benefit payment or portion thereof (except to the extent of payments actually received pursuant to the terms of the arrangement). A blanket written acknowledgement for all participants and beneficiaries who are covered under the arrangement with the third party is sufficient. The written acknowledgement must be filed with the plan administrator no later than the later of-- (i) 18 August 1978; or (ii) 90 days after the arrangement is entered into.

Hard to generalize on these, because there are so many possibilities. But, assuming you have a fully GUST approved volume submitter document, and you don't deviate from the language, you shouldn't generally have to submit for a new plan. If an existing plan, there are all kinds of possibilities - I would say that in many situations you will still not have to file, but in many you will. I know that's a pretty wishy-washy answer, but the possibilities are nearly endless. Most TPA's I talk to are leaning heavily toward NOT filing - if it is a judgement call, and the conservative approach would be to file, most aren't.

We don't do ESOPs, so I know very little about them. But we've been asked by a client - "If I have a 401(k) to which I have made profit sharing contributions, (which are participant directed, by the way) and I want to establish an ESOP, and "transfer" the profit sharing contribution accounts to the ESOP, can I do this?" I would assume not. But I don't know. I think you could establish the ESOP and make all future profit sharing contributions to that ESOP, but I don't see how you could force the participants to transfer their existing account balances to it without "converting" the 401(k) to an ESOP. And even if you can, it seems that there could be a gross breach of fiduciary prudence if the employer stock ever drops. Any opinions would be appreciated!

Darned if you do, darned if you don't. Depending upon how much value the assets had lost by December of 2001, I question whether a prudent fiduciary could have paid him his full benefit anyway. Suppose there had been a 300,000 loss by December 2001. If the Trustee pays him out his full benefit, the other participants lose the whole thing. And then they would likely have a cause of action against the Trustees. We wrestle with this in our plans too. And generally tell fuduciaries to retain competent counsel prior to making any large payout if they have reason to know that it would be detrimental to the interests of all the remaining participants - particularly when the payee has had the opportunity to take a distribution for a long time - say more than 30 days - but did not take advantage of it until the market drop occurred months later. That's why most plans have an option for off-anniversary valuations. Good luck!

mgb - thanks for the response! Now, please bear with me on this, because here is where my confusion arises. When I look at 1.414(v)-1(g) and (h), these sections are the ones that indicated to me that the 457 and the 401(k) would be aggregated, and that during the 3 year 457(B)(3) period you couldn't have both. If you read these sections as not aggregating the 401(k) and 457 catchups, then what do they mean to you? Thanks in advance - I really appreciate your input.

kdm - yes, you're correct. So the individual could not have a full catchup contribution under each plan. It is a per individual limitation. mgb - can you clarify something for me, because I'm not all that sure I understand it properly. I interpret the regulations to coordinate the limitation with 457 plans, UNLESS you are in the 3 year period where 457 allows the special catchups under 457(B)(3). And then the special 457(B)(3) catchup applies, and not the new EGTRRA catchup. So I guess what I'm thinking is that if you participate in, say, a 401(k) plan with employer A, and a 457 plan with non-related employer B, then you only have the one catchup. You wouldn't be allowed the 1,000 in each plan. If you think otherwise, can you elaborate as to how you reach that conclusion so I can go back and rethink this? Thanks!

Others may disagree, but I've always understood that if the terminations were in fact VOLUNTARY, then no PPT occurs. I saw a reference to a court case, Anderson v. Emergency Medicine Associates, that reached this conclusion. But your client would have to prove this to the satisfaction of the IRS that these terminations were in fact voluntary. That might be difficult, becuase there is generally some form of employer initiated action that causes such a mass defection.

I like mbozek's idea. Get him out of it altogether! Only caveat is that I'm not all that familiar with the laws determining whether you are an employee or not. In other words, it is a facts and circumstances situation - merely paying someone on a 1099 doesn't automatically make them an independent contractor. But if you can get past these requirements, then I'd certainly opt for this approach.

The old IRS 5305 model SEP form did indeed contain the prior DB restriction that your client mentions. However, as you correctly noted, this restriction has since been removed. I can't, offhand, tell you when this revision was made. It may have been on the January 2000 updated 5305.