Belgarath

Let's suppose you have calendar year 2001 DB plan, and employer also has a 401(k). 401(k) is deferral only. Employer contributes the required amount to the DB, which is more than 25% of compensation. In addition, the employees all defer under the 401(k) plan - no one exceeds 415, a plan limit, or 402(g). So, the employer has a nondeductible contribution to the 401(k)for 2001. Pays the excise tax. What happens in 2002? How do they go about deducting this, since the DB cost will exceed 25% of comp every year for the forseeable future. Are they stuck paying the 10% tax for every year that it remains nondeductible, or is there another way out? (I'm thinking they are stuck, but I'm hoping one of you clever people can explain otherwise) Thanks.

I agree with Appleby. You can take a look at PLR 9144041 for some background. If it is a DB plan, as opposed to a DC plan, you may be able to get it back out if you qualify under Revenue Procedure 90-49.

bdeancpa - you are correct - this would not be a qualifying asset for purposes of the Small Plan Audit Waiver conditions.

Interesting question. I haven't thought it through for the 2002 plan year yet, but for 2001, the elective deferrals reduce the earned income for purposes of the deduction calculations, and count against the 15% deduction limitation. So in your example, they can't "double up" for 2001. Again, I haven't worked through it for 2002. I agree with you that seems unlikely such a scenario is possible, but I have no basis yet for saying that other than a gut feeling.

Beats me! I was assuming it is a DC plan, and that subsequent rollovers are allowed. But your point is well taken. I was discussing this issue earlier today with an attorney, who commented, and I can't quote him exactly, something like,"The remaining discontinuities in the rollover rules will offer unparalleled opportunities to trap the unwary."

There sure are a lot of clever people out there, and I'm not one of them! I would never have thought of this, but I can't see any reason why it wouldn't work. The custodian of the current IRA may well require the 2002 minimum distribution to be taken before the proceeds are transferred to the plan. There's been some previous discussion on these boards about whether or not this is required, which I'm not going to rehash, but just be prepared that this is quite likely to happen.

I agree, as per previous message. Note the phrase "for service in the calendar year." So I see no problem in your situation as described.

Also, there are some (albeit rare) circumstances where the employer contribution is very low, yet the income of the participant is sufficient so that the loss of IRA deduction is greater than the contribution they receive.

You can't, during any part of the calendar year, (2003) maintain another qualified plan "with respect to which contributions are made, or benefits are accrued, for service in the calendar year." So if no deferrals or contributions in 2003, then you are OK. Earnings do not count as contributions, and forfeitures do NOT count as a contribution unless they replace a contribution which is otherwise required. Transfers or rollovers also do not count.

The previous responses are right on - the plan should have a checking account! But, if the Trustee refuses, for some obtuse reason, to set up a checking account, then the employer could just write the check to the Trustee. This would qualify as a contribution, and the Trustee can then simply endorse the check over to the participant. Note, however, that this brings up additional potential problems if it is over $200.00, because you then have mandatory withholding. So unless it is a direct rollover where the Trustee can endorse directly to the new custodian, this approach won't work.

I'll second the recommendation for Derrin Watson's book. I once did just the opposite - confused 318 attribution with 1563 attribution, and spent about 4 hours convincing myself that there was attribution from children over 21 for controlled group purposes. Some kind soul pointed me toward "Who's the Employer" and it got me straightened out in about 5 minutes. Having said that, of course, I should still mention that these situations can be desperately difficult, and I always recommend they consult their attorney...

I find leased employee questions rather difficult, not least because the definitions used are frequently used differently by different people. Some people used the term "leased employee" to mean anyone hired from a temp or leasing agency. Others use it more under the statutory definition, which means they are not "leased employees" until they meet the 414(n) requirements, including being employed on a substantially full-time basis for at least one year. See IRS Notice 84-11. Assuming the latter, and based upon your statement that the plan excludes leased employees, then if they have otherwise satisfied all other eligibility requirements, and would particpate but for being in an excluded class, then they will become participants immediately upon being hired as a common law employee. In other words, you would count service while they were "leased." Again, these situations are tricky enough that I hesitate to attempt general answers, so this may not be good for much!

Thanks for the info.

I agree with Mbozek - they need a good ERISA attorney, and fast! But I do have a question - Mbozek - since I've never seen a situation like this, let me play devil's advocate for a minute. Aside from their other problems, since it is a profit sharing plan, where there are no contributions required anyway, couldn't they simply amend tax forms, 5500's, and valuations, to properly reflect the lack of contribution? Perhaps the consequences could end up being less dire than one might initially think. I don't see, offhand, that it is a prohibited trtansaction, since with no legally required contribution, I don't see how it can be an impermissible loan to the employer. What do you think?

Although it is possible to contribute to a NON-MODEL SEP in conjunction with another qualified plan, you cannot maintain a SIMPLE while maintaining, during any part of the calendar year, another qualified plan to which contributions are made or benefits accrued. A "qualified plan" would include a SEP.

Mweddell - you're probably right, and I'm probably just paranoid. I certainly hope you are right, because your position makes a lot more sense. I just can't help feeling like if I abandon the (possibly overly) conservative interpretation that it will come back to haunt me. So until I see something from the IRS to the contrary, I think I will continue to hide behind my revetment. And I'll be delighted if I'm proven wrong!

I'm not aware of anything in either the statute, or the regulations, which specifically addresses the short plan year question. With regard to the testing period, the statute and regulations refer to plan years. For your plan years beginning prior to 1-1-02, your 5 year testing period would include any short plan year that includes the determination date or any of the 4 preceding plan years. As to the key employee tests that you mention that require a minimum compensation amount, I tend to think you could interpret either way (prorate or not). Logic would indicate that it should be prorated, and this would be a more conservative position. However, since there doesn't appear to be specific guidance on this that I know of, it seems reasonable to me that you could use the 1.416-1 regulations. These refer to "annual plan year compensation." See T-12, T-14, etc., and particularly T-19, which refers you to the definition of Compensation in T-21. T-21 says to use 1.415-2(d) compensation, which refers to limitation year, then includes the following: "Alternatively, compensation that would be stated on an employee's Form W-2 for the calendar year that ends with or within the plan year may be used." So again, I suspect you could make an argument for both, subject, of course, to the plan document language. Don't know if this helps or confuses the issue further!

Happy Monday! Well, I'd say this incorporates by reference. As far as amending this year (calendar year 2002 plan?) I'd think that the document must have at least a 500 hour requirement? If so, then I think you are safe in amending before they satisfy the 500 hours, because then they haven't accrued any right to an allocation. Beyond that, I'm still thinking that this could be a cutback. Would be a cutback in most plans we handle. You could have a plain vanilla plan where the employer simply contributes (x)% of compensation, and you could avoid the cutback issue there, but it seems to me that the bulk of them, which have formulas skewed in favor of the HC, are still stuck with the cutback issue. It does seem to me that I saw somewhere that the IRS had said the top-heavy issue wouldn't result in a cutback, but I haven't seen anything else that would help.

I guess we'll just have to agree to disagree on this one. I don't see any particular inconsistency here. Is the rule stupid, as you assert? You bet! I agree totally. But I look at the G-3 as a very specific answer to a specific circumstance. I wouldn't want to fight the IRS on this using the argument that it is inconsistent with the B-1a reg. And I don't see it as a hindrance to multiple transfers, either. All you have to do is make sure the minimum distribution requirement has been satisfied by the transferor plan. Once that has been accomplished, you can do as many transfers as you want, with no problem. But the good thing is, it's Friday! My brain, such as it is, always starts to shift into reverse about this time...

First, I agree that the plan consultant is wrong. But I think this question is addressed quite clearly in the 401(a)(9) regulations. Take a look at 1.401(a)(9)-1, Q&A G-3 which provides guidance for the situation you describe.

I just love this stuff... Suppose you have a plan with 50% of it's assets in a Real Estate Limited Partnership. The preamble to the DOL regs (2520.104.46) gives an example where such a partnership is NOT a "qualifying plan asset." My question is, does this necessarily have to be the case? For example, suppose the Limited Partnership is purchased through a registered broker-dealer, or through an organization authorized to act as Trustee for IRA's under section 408 of the IRC? These are "regulated financial institutions" for purposes of the SPAW requirements. Would the Limited Partnership then count as a qualifying plan asset, or not? I'm inclined to think that the "held by" requirement doesn't simply mean "purchased through" and that therefore these wouldn't qualify, unless you had, say, a bank as Trustee. Since the bank is a a regulated financial institution, and would hold title in this case, then it should qualify. Any opinions out there? Thanks!

In a situation like this, assuming the document permits it, I'd just treat as a forfeiture. At such time as the employee ever decides they want the money, then pay them the 50 bucks from a new employer contribution. As long as the employer can document that they made a good faith attempt to pay it out, then I don't see the DOL getting all exercised over it.

Isn't the issue moot? I thought that you could no longer open a SAR-SEP?

Mike - I started off thinking exactly as you do on this. And maybe I'll get back to that by the time I'm done. I'm just getting hung up on using compensation actually earned outside of the limitation year. If the method you are suggesting is valid, then to take an extreme example, you could have a plan year of 1-1-01 to 12-31-01, with a limitation year of 12-30-01 to 12-29-02, and yet use calendar year 2001 compensation for plan purposes because it was "paid" "within" the limitation year. Maybe this is fine - it just doesn't feel right to me. And yet if the method is ok for a 1 day overlap, then it must be ok for a longer one as well. Do you know of any PLR's, ASPA meeting questions, etc., where this has ever been addressed? Regardless, I appreciate your input on this - I find it very helpful to have discussion of these items to help focus my thoughts.

Thanks! Appreciate the info.