Belgarath

I'm suffering from brain cramp today, and my brains have turned to sand and are running out my ear every time I tilt my head. Is the Gateway minimum calculated on the cross tested plan alone or does it include the 401(k) contributions? Example: Highly Compensated employees receive 20% of pay between both plans, but only receive 9% in the cross tested. Is the Gateway minimum 5% or 3%? I think that under 410(B) these are not aggregated, and it is the 3%. Would appreciate any opinions! Thanks.

We are sending a fairly generic newsletter to our clients on this. It's worth noting that this has happened with every major bill affecting qualified plans for as long as I can remember, which is longer than I care to contemplate! And it's never had much effect on clients establishing, maintaining, or contributing to qualified plans. This time I think it's a bigger deal for a couple of reasons - first, with the internet, there's just so much more communication and information that you get bombarded with it. Second, due to the breadth of the EGTRRA changes, there are many more potential traps. I mean, who ever heard of rolling non-qualified 457 money into a qualified plan before! We're just recommending that clients discuss their particular state situation with their CPA/advisor before they make any decisions.

Has anybody heard when the new forms and instructions will be released? I checked the DOL website, but couldn't find anything giving an estimated release date. Thanks.

Alonzo - yes, you are correct, and I didn't really mean to imply that it was only employer contributions that counted. What I meant to do was differentiate between employer contributions and voluntary employee contributions. Although Rev. Ruling 69-408, which specifically exempted voluntary employee contributions from the incidental limits tests, was concerning after-tax contributions, I would argue that rollover contributions from an IRA would receive the same treatment. As I said, I'd consult competent counsel before proceeding on this!

Take a look at 1.401(a)(9)-1 G-3. I wasn't really clear from your message, if in # 2 the ownership of the annuity would be retained by the Trustee of the plan, or if it will actually be distributed to the annuitant as an IRA rollover. If ownership is really retained by the Trustee of the plan, then I don't think the distribution is required. If it is actually being transferred out of the plan, then I think the insurance company is correct.

I'd make participation in the SEP a condition of further employment, and tell them they will be fired if they don't participate.

It's a very subjective area at best, and if you ask 20 people you'll probably get at least a dozen strong opinions. I've never been a fan of variable products in qualified plans, simply because the tax deferral of gains is already available on mutual funds in a plan, and usually with lower associated costs. Nevertheless, there are arguments that can be made in favor of the VA - i.e., you already have inherent diversification of the funds, often it is backed by a state insurance Guarantee fund, and, particularly in the light of market performance in the last year, your gains are often protected once you've passed a policy anniversary, etc. Ultimately, the responsible party, (Trustee/Fiduciary) will have to able to justify any investment decisions, no matter what they choose for investments. As a general rule, I think it is easier to justify investments in more than one financial institition, from a Fiduciary prudence/diversification issue, than it is investing in a single policy or investment.

MarZDoates - a bit of non pension trivia here which your handle brought to mind. As a kid, when I heard the nursery rhyme, I just heard it as "Maresy doates and dozy doates...etc." I've never understood what the heck the nonsense rhyme was supposed to mean. Just recently, I stumbled across it in print, and was astonished to learn that it is really "Mares eat oats and Does eat oats, and Little Lambs eat ivy." Oddly enough, when we were laughing about this, several people confessed that they were under the same misunderstanding as I was. So for any of you out there who never knew this, Happy Monday!

This probably depends upon who you ask, and certainly also on the terms of the plan document. But in my humble opinion, the law as it now stands would permit the entire 2 million to be used towards the life insurance premiums. The incidental limits apply to employer contributions. They do not apply to voluntary employee contributions. This rollover obviously would not be considered an employer contribution. Effectively, until there is further guidance, there is now a mechanism for allowing the purchase of life insurance with IRA assets, as long as you have a plan which you can roll the IRA assets into and which allows the purchase of life insurance. Since Congress and the IRS have steadfastly refused to allow IRA assets to be used to purchase life insurance (rightly in my opinion, but I'll keep further philosophical opinions to myself) I would think that some sort of technical correction and/or guidance would shut the door on this. And in the situation that you describe, there's a real possibility that the IRS could disqualify the whole arrangement on the grounds that contributions were never meant to be "substantial and recurring." In addition, the IRS has toyed in the past with declaring that while the insurance can be purchased as described, that it would be considered a taxable distribution. They've never pursued this, but this loophole may bring it to the forefront again. I'd want to get advice of some good tax/legal counsel before I'd ever proceed.

Anybody know anything about the new "Stark" regulations that take effect in January of 2002, specifically regarding any effect on qualified plans? As far as I know, (and my knowledge is severly limited on this!) they do not supercede ERISA, nor the normal IRC rules and regs pertaining to qualified plans. They may have effects(major/minor - don't know) and cause employers to make changes to the entity structure and ownership arrangements in various medical practice situations, but that can be dealt with under the existing rules for qualified plans. All opinions appreciated.

Hi Joe - sorry, I didn't realize you had asked a question in your last response. No, there's no violation of 410(B) in the situation you describe. The 410(B) rules for 401(k)/(m) plans are set up differently than for other 401(a) plans. For other 401(a) plans, 410(B) is tested by who actually benefits. For 401(k)/(m) plans, the test is based on those who are eligible to participate. So once you pass 410(B) for coverage, by using eligibility as discussed earlier, then you're all set. The ADP/ACP tests don't apply to the SIMPLE(k) plans, assuming you have met the other requirements. Hope this helps.

Appleby - no I don't agree that SIMPLE 401(k) plans are exempt from 410(B). The SIMPLE(K) plan is basically subject to all normal qualified plan requirements other than those specifically modified or exempted. It is subject to 410(B). The eligibility requirements for age and service under 401(K)(2)(D) still apply, so you can't require anything beyond the requirements of 410(a)(1) in terms of age and service (i.e. age 21 and 1 year of service). But you can exclude by classification, such as hourly employees. However, if you do, you'll have to pass 410(B). Now, most SIMPLE(K) plans (as far as I know) cover every employee who meets the age and service requirements, if any, and don't exclude by classification. If you do this, you're going to pass 410(B) anyway, and there's no need to worry about it. But you can exclude people if desired and appropriate.

If the plan excludes employees for reasons other than age or service, then the plan would have to pass 410(B) coverage. But as long as employees aren't excluded for other than age or service, if the eligible employees choose not to defer, then you're still all set.

Are you sure about this? I had always understood that under 404(j), no deduction in excess of the 415 limitation was permissible. In this situation, since you've exceeded 415, then I'd say you have a nondeductible contribution of 500, you'd have to pay the penalty tax, then carry over the 500 and deduct it in the next year.

Interesting thread. Pax, I read the thread you referred to. I think the answer to your final observation in that prior thread can be found in 1.219-2(B)(1), ..."an individual is an active participant in a defined benefit plan if for any portion of the plan year ending with or within such individual's taxable year he is not excluded under the eligibility provisions of the plan. An individual is not an active participant in a particular taxable year merely because the individual meets the plan's eligibility requirements during a plan year beginning in that particular taxable year but ending in a later taxable year of the individual." So assuming no previous participation, in your example, he would not be a participant for 1999, but would be for 2000. JanetM - I read the regulation to say AN employer, not YOUR EMPLOYER's as the CPA was claiming. Again, take a look at 1.219-2(B)(2).

Yes, I'm laughing at myself over this one. You're right, the deductibility issue isn't an issue in this situation. I'm unused to dealing with non-profits. And as I think about it, I agree with MGB - even though a "C" election isn't going to be possible since it will no longer exist, you have a regulation saying the 403(B) and the qualified plan aren't aggregated unless a "C" election is made. So for now, a 403(B) and the DC plan would appear to have separate 415 limits. Seems like this is an unintended result of EGTRRA. Any feelings as to whether IRS will change the regs on this?

Thanks for the response. I should have provided more information, however. The DB plan will have a contribution far in excess of the 25% limitation to a DC plan. So if the 403(B) plan is aggregated as a DC plan with the DB plan, then the DB contribution would be fully deductible, and the contribution to the 403(B) would not. Although 415(e) has gone away, the deduction limitations have not. So you still have the 25%, or DB cost if greater, as a maximum deduction. So I guess I'm basically asking if the 403(B) plan will be treated as any other DC plan, or will it still enjoy the non-aggregation that it did before? Thanks again.

Employer has 403(B) plan to which employer contributions are made. Wants to install a DB plan for 2002 as well. Current rule is that, in general, the 403(B) plan is not aggregated with the DB plan for 415 limits (1.415-8(d)(1)). However, one of the specific exceptions to this under 1.415-8(d)(2) is where the 403(B) participant made the so-called "C" election under 415©(4)©, to use the Section 415 limitations, rather than the exclusion allowance calculation. With the passage of EGTRRA and the unlamented demise of the MEA, it would seem logical that this is tantamount to the "C" election being made, and that the 403(B) plan will now be aggregated with the DB for the 415 limits. Do you read Section 632 of EGTRRA to get to this result? It seems to me that it does, but I'd sure appreciate any opinions on this issue. Thanks!

But, if he was a 5% owner at any time during the plan year ending with or within the calendar year in which he attained age 66-1/2, or in any subsequent year, then he's permanently considered a 5% owner for RMD purposes, even if he no longer actually has any ownership. So he may still have to take minimum distributions even if he rolls it into the plan. This one has given a lot of folks some unpleasant surprises, after the fact when it is too late. I didn't double-check the new RMD requirements to make sure this hasn't changed - I don't recall that it did, but I wouldn't advise a client of this without checking first!

Yes, the attribution rules under 416 apply.

No, your 40,000 section 415 limit includes elective deferrals. So you are limited to the 40,000, plus the catch-up if applicable. The catch-up does not count towards the 415 limits, but regular deferrals do.

Suppose you have a 1 person defined benefit plan in 2002. If you add a 401(k), elective deferral only, the client will be able to defer an additional 11,000 (plus catch-up if applicable.) And this figure will rise rapidly in future years. I suspect you may see a lot of these. But you wouldn't want a safe-harbor, because it should be deferral only.

I think your situation is different. You hit the nail on the head when you say that your document contains the authority to reduce based upon projected test results. In this case, I believe you are ok. Many documents don't contain this language, however, and those are the ones that I'm talking about. I'll be interested to see what folks think on this.

I agree - can't do it if no specific plan limit. Trying to think of a workable solution off the top of my head - how about this? The plan administrator performs the testing at some poiont during the year based upon assumed salaries, and determines that the HCE should be limited to 4%. Checks with those HCE to find out if they want catch-up, (or already knows this from checking with them at beginning of year) Based upon this information, the plan administrator calculates the percentage for each HCE that would enable them to have deferred the full amount, plus catchup, by the end of the year. Then the HCE makes a NEW election to have that percentage deferred for the remainder of the year. Of course, you can't force the HCE to do this... Assuming the testing assumptions were accurate enough, the HCE will have run up against the ADP limit, and the contributions over and above that will be valid catch-up contributions. If they don't run up against the ADP, then they will simply be valid elective deferrals. The only danger I see here is that the testing assumptions may be so far off that they don't end up getting a full catch-up. Having said that, I should hasten to add that I'm not involved in the nuts and bolts of daily 401(k) administration. Those of you who are can probably point out all sorts of reasons why this won't work!

Here's another one which I didn't have when I forwarded the first two. This is just a short one, but the footnote at the bottom gives a preliminary listing of the states.