Belgarath

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.

Actually, there is another document which I forgot to attach. Hope everyone finds this helpful!

Ok, thanks. Here goes, and I hope it works ok!

It was forwarded to me by a cohort who is a member of the PIX bulletin board - run by Derrin Watson, I think. I don't know how long a document I can put into this - I'm technologically disadvantaged! But it was forwarded to me in a WORD document, so I can cut and paste it into an e-mail if you want to send me your e-mail address. Unless that violates some protocol on this message board.

Just an update - I just saw an analysis posted on another message board, by a couple of attorneys at Fidelity investments, (Michael Dibiase and Weiyen Jones were the attorneys 617-563-3669, and 617-392-8632). Although the analysis was specific to Massachusetts, many of the same issues will arise in other states. The potential implications are worse than I had realized, and while I hope that states will be reasonable about these issues, it gets a bit scary when dealing with a bunch of state legislatures who are looking for revenue...

It's certainly pre-tax for federal purposes. But I can see your point, and Linda's, about potential nightmares for state reporting and recordkeeping purposes. I just don't know any answers. Does anyone know how this is handled at a state level? I seem to remember in the dim and distant past that Minnesota didn't allow the full IRA deduction that was allowed at the federal level. If so, how was this handled? Maybe a CPA out there can give us an indication. I'm glad it's Friday!

The minimum distribution regulations require that you withdraw the IRA distributions from an IRA. Now, if you have two or more IRA's, you must calculate the required distribution for each, but you can take the withdrawal from one or more of them in any amount that you wish. But you can't withdraw your IRA distributions from a qualified plan.

Assuming a state does not have conforming statutes: in a general way, is this really such a big deal? (In relative terms) I don't know what the tax rates are for the states involved, but as long as the employer gets the tax deduction for federal purposes, that's the bulk of it. Then, do they get the deduction for the state income tax up to the level or pre-EGTRRA, or are they precluded from taking a state tax deduction at all? If the former, the difference shouldn't be that great for most employers. If the latter, then it's a much bigger problem. I realize that losing any deduction isn't much fun, but in the overall scheme of things, maybe this isn't really as bad as it might initially sound...

That's correct. Although I believe congressional intent was clearly to increase, EGTRRA didn't do it. So absent a technical corrections change or some other official IRS guidance, we're stuck with the 15% deduction limit.

Pax - the modifications to ERISA 204(h) are part of EGTRRA - section 659. And the penalty for non-compliance is pretty stiff - $100.00 per day, per individual who has not received the notice. I suspect that until some regulations are issued defining the "reasonable" period that the 15 day notice is still fine, but you sure can't go wrong being more conservative!