Mike Preston

As far as the rest of this thread goes, there is a lot of information missing in order to do a proper calculation: compensation history; years of participation; actuarial equivalence and 415 factors as of the transition date with respect to the 415 regulations (typically 12/31/2007); retirement age under the plan; early retirement factors under the plan (if different from the actuarial equivalence factors).

How about a comment or two: 1) peripheral 2) ^10 Other than that, it is still an open question as to whether the pre-retirement interest rate or the post-retirement interest rate should be used in discounting from retirement age to early retirement age when dealing solely with actuarial equivalence. I would say (b) is silly because you are using 6% in a post-retirement sense and nothing in your description would allow that. Which leaves us with (a) versus © and I think that most with go with ©. I certainly do. However, I've seen some that argue (a) and with a contemporaneous SPD that gives an example that matches up to (a) I don't think a participant would be successful challenging it. But, I suppose, one never knows.

Well, I'll play devil's advocate here and side with Lance in one respect. While the IRS may allow one to adopt an amendment later than might otherwise be expected, we have yet to see a court case dealing with a participant's ERISA rights in such a circumstance. While I wouldn't be so bold as to say "not correct", I might say that a court might find that an amendment shouldn't be given retroactive effect to the extent it reduces benefits retroactively. Obviously, nobody is sure one way or the other since I don't think the issue has been litigated, but if that is Lance's opinion, at least it isn't too far fetched. Now, expecting an explanation from Lance might be the quintessential definition of far fetched.

PPA did not change the way that benefits are accrued.

In general, I don't trust any company which requires personal information just to show me a demo. They probably all do, but I aborted as soon as I saw that I am supposed to provide personal information before they will demo their product.

They are two different limitations. The 100% limitation applies to allocations to a participant's account. Allocations can include contributions and forfeitures. The 25% limitation applies to the tax deduction available. In the case of a one person plan, the lower of the two control. You would need multiple participants to be able to push any one participant's contribution north of the 25% barrier. Of course, that would only be possible if the plan allowed for disparate treatment of participants so that there were one or more participants receiving less than 25%.

What do you mean by this? If there was only one participant receiving an allocation, how is it "New Comparability"?

I think that is one of the issues that the IRS is grappling with as they decide whether the limits are subject to deflation or not. We'll all just have to wait and see what they come up with.

If I'm reading this right, I'm having trouble understanding your concern. If there is a plan that covers only NHCE's, it passes coverage automatically. Am I missing something?

In the context of an offset plan, it is perfectly normal to have a benefit payable from the defined benefit plan be greater at the beginning of the year than at the end of the year. I think it is irrational NOT to allow a negative normal cost in that circumstance. I don't think it makes sense to arbitrarily include the reduction in the BOY benefit (which reduces the FT arbitrarily, I would think) because one's AFTAP's may be questionable. So, until we get specific guidance saying it can't be done, I think it must be allowed.

Larry's post is correct, if you superimpose the requirement that only "nonexcludable" employees would be included in the test. For example, if somebody terminated with less than 500 hours that person would be excludable and not included in the test.

Lots of questions, but no specific answer, I'm afraid. Can we assume that the Trustee of the plans is/are the same? Can we assume that the Plan Sponsor wrote a check to the Trustee and the Trustee deposited it in the wrong account? Or was there a wire transfer to the wrong account? If a wire transfer, was the Trustee a part of the transaction? Probably more questions to come. However, there isn't one right answer to the specific question you raised. Different advisors have different opinions on the matter. Certainly, the mistake in fact route is one way to go, but that can lead to big problems for minimum funding if the contribution was deposited into the 401(k) plan anywhere near the funding deadline and not discovered until after the deadline. I'm sure others will chime in.

As David said, yes, assuming the plan document allows.

I see no reason to close the thread. If somebody wants to chime in with their opinion as to the best way for you to proceed (or somebody in similar circumstances) then there is no reason why they shouldn't be able to. Threads are closed very, very infrequently around here. By the way, one of the reasons why you may not be getting the support you are looking for is that there are many that view the correction method for missed opportunity to defer in a 401(k) plan as a sort of windfall for the employee. I think it goes something like this: you noticed that deferrals weren't being taken out, so what did you do with the money? Did you put it away for safe keeping so that you could make up the amount missed once the opportunity to defer presented itself again? There are some that think if you spent that money (that you wouldn't have had) and now claim that you "can't afford" to make up the missed deferrals, isn't that a sort of double dipping? I'm not saying this necessarily applies to you, and even if it does, I'm not saying that the employer shouldn't try to ensure you are made whole. As others have said, try to work with HR and let them know that you are willing to work with them to construct a fair solution, you may be surprised to learn that what you have read about turns out to be exactly what they propose, but it may take quite a while to have all the outside advisors in the loop convince the internal decision makers as to how to go about it. Keep in mind that you may not be the only person in this category. Also, keep in mind that it is the Plan Administrator's decision as to whether it makes sense to apply one or more correction methods and they can make that determination in conjunction with the IRS. In any given circumstance, the correction may turn out to be significantly different from the correction method you posted. Good luck and let us know how things work out by posting back to this thread (which you couldn't do if the thread was closed).

I suggest you read 1.401(a)(4)-3(e) in its entirety, along with the definition of "Section 414(s) compensation" in 1.401(a)(4)-12. Assuming your plan does not provide for benefits on the basis of compensation earned before the year of plan entry (that is, you ignore the entire 2007 compensation when determining actual benefits under the plan) you have an option to exclude the 2007 compensation from the average as a drop out year because the period of time that the individual worked in 2007 was exactly 2/3 of a year (assumes that this individual worked no more in that last 2/3 of the year than 2/3 of the regular hours that someone working full time for the year would have worked). If you take that option, then since you are using an average compensation, your average would be $30,000. If you don't take that option, the average would be $25,000. The option that I'm talking about is the definition of "drop out years". See the reg cite above. Keep in mind that the definition of compensation used in testing must be consistent from one year to the next. The IRS does not like it when you use different definitions of, say, drop out years, from one year to the next. I've actually seen them attempt to force a plan into audit cap for doing so. If you were NOT using average annual compensation (3 or more years), then you would have the option of using compensation while a participant, which in this case would be only $15,000.

No problem. Every once in a while it is good to run through the examples anyway. In this context I was looking for a specific issue, which is what I meant to imply with the "tear apart" reference.

To be fair to Jim, the timing of when they are released is not up to him. The review process AFTER it leaves the confines of the IRS is fraught with peril. Seemingly, once a "higher up" gets a hold of the regulation in what is perceived to be final form, they are free to raise any number of issues, such as policy issues, or consistency issues (maybe even with things that have not yet been published), and things get delayed. It is an old story. One that has repeated itself over the years more times than I can count. It is therefore never a good idea to take anybody's statement about when regulations will be published as gospel.

I wish I knew. All I know is that somebody was talking to somebody at Treasury earlier this week and they said "They aren't ready, yet."

You may not. Strange as it may seem, the IRS has stated that they intend to apply that provision even in a 100% HCE plan, due to the fact that there is a possibility that someday, an NHCE might enter the plan. [Don't shoot me, I'm just the messenger.]

Your message has highlighted the difference in our methodologies nicely. Yours is the "more conservative" in that you are defining a higher required contribution. The net effect is that I'm giving "credit" for purposes of satisfying the quarterlies as of the quarterly due date, while you are not giving that "credit" until the date of the election to use the COB. Nicely highlighted. We will have to just wait and see which is the method they end up with in the final regulations. I *think* (although I can't be sure) that my method is the one that the IRS used at the ACOPA Symposium. Maybe somebody who was there can confirm.

I'm not so sure that the proposed regs don't prescribe. In fact, I'm pretty sure there is no such thing as a separate election to use the COB to satisfy quarterlies. Instead, there is an election to use a part of the COB toward the required minimum. Once that election is made, the amount put toward the required minimum is treated as satisfying the quarterlies, to the extent the interest adjusted amount as of the quarterly due dates satisfies those quarterlies. The application of the interest penalty is a separate issue and merely serves to increase the required minimum, but doesn't, in and of itself, impact the amount of the quarterlies. In the case posited, the amount of the $200,000 COB that is needed to satisfy the 4 quarterlies is: -first installment due 4/15/08: use $4,916 of COB as of 1/1/08 since $4,916 x 1.06^(3.5/12) = $5,000 -second installment due 7/15/08: use $4,845 of COB as of 1/1/08 since $4,845 x 1.06^(6.5/12) = $5,000 -third installment due 10/15/08: use $4,775 of COB as of 1/1/08 since $4,775 x 1.06^(9.5/12) = $5,000 -fourth installment due 1/15/09: use $4,706 of COB as of 1/1/08 since $4,706 x 1.06^(12.5/12) = $5,000 Total COB that must be elected to be used towards the required minimum to satisfy quarterlies is: 4916+4845+4775+4706=19242 Now, it goes without saying that the required minimum is at least $20,000 (otherwise the quarterlies wouldn't be $5,000), so the required minimum is never satisfied by the amount that just barely satisfies the quarterly contribution requirement. Assume that the required minimum as of the val date of 1/1 is $25,000, before any uptick required by not satisfying the quarterly contributions timely. In the absence of an interest uptick the additional amount of the COB that must be elected towards the minimum required contribution would merely be $25,000 - $19,242 = $5,758. But that can't be the right amount if any of the quarterlies were late, since that calculation ($5,758) doesn't provide for an interest uptick of any kind. At issue is how to determine the interest uptick. In the case of an EOY valuation, the law and proposed regs really make very little sense (some silliness about the interest uptick not applying to the extent the late amounts are satisfied before the valuation date - just nonsensical). I think the eventual rule will be that the interest uptick is calculated identically for an EOY val and a BOY val and the interest uptick will be based on the date of the election, just like it would be based on the date of a contribution. So, assuming that this client waits until 9/15/2009 to make the election to use all that is necessary of the COB to satisfy the complete required minimum contribution, we would find that the uptick is determined as follows: 1st quarterly is 17 months late, therefore leading to an uptick of [1.05 ^ (17/12) * $5,000] -$5,000 = $358 2nd quarterly is 14 months late, therefore leading to an uptick of [1.05 ^ (14/12) * $5,000] -$5,000 = $293 3rd quarterly is 11 months late, therefore leading to an uptick of [1.05 ^ (11/12) * $5,000] -$5,000 = $229 4th quarterly is 8 months late, therefore leading to an uptick of [1.05 ^ (8/12) * $5,000] -$5,000 = $165 So, we know that there is an interest adjustment of $1,045 to make. Clearly an election to use $26,045 of the COB will satisfy the required minimum for the year. What is not known is whether the $1,045 is to be used as of the valuation date or whether the "uptick" is deemed to occur (in fits and spurts) partially on 4/15, partially on 7/15, partially on 10/15 and partially on 1/15/x+1. If that were the case, then the uptick would be discounted to the valuation date at the EIR (6% in this case). I'm not going to calculate those amounts because I don't think it is reasonable to interpret the regulation this way (others may disagree, of course). I think the $1,045 will be the uptick as of the valuation date and therefore $26,045 of the COB appplied to the required minimum on 9/15/2009 will just satisfy the required minimum for the year. Note that there is a significant difference between electing to use $26,045 of the COB on 9/15/2009 towards the required minimum and contributing $26,045 on 9/15/2009. The contribution made on 9/15/2009 would need to be discounted at the EIR to the valuation date, so the amount credited towards the required minimum would be substantially less than $26,045 as of 1/1/2008, although the interest uptick calculation would be identical to the above. This is obvious to those who have worked with quarterlies for years, but since everything is new with PPA in 2008 it is worth stating the obvious.

Well, you were sort of right. There is no prohibition on contributing to multiple plans. Only a tax consequence. When the CPA did this individual's taxes, if they did it right, they would have been made aware that only a single 402(g) limit was excludable from income. At that point, assuming they weren't on extension and therefore had come to this conclusion by 4/15/2008, they could have requested a refund of any excess deferrals from one of the plans (assuming one of the plan allows this, and most do). They most certainly would have been aware of the limit on the amount excludable from income by the time the second year came around! The net result for those years is that the amount that went into the plans in excess of the respective limits was not excludable from income and will be taxed when withdrawn from the plan (double taxation). It is likely that they have continued this into 2009. You can "save" 2009 from double taxation by getting the excess deferrals back by 4/15/2010.

You might want to consider having the DRO prepared/modifed based on getting your medical support from the plan. Check with a lawyer in your state for how that works.

Well, based on your answer, which I admit was a bit of a surprise to me, I went back to the proposed regulations and tore apart Examples 6 and 7 under 1.430(d)-1f7. I think the math implied there is fundamentally inconsistent with using two separate first segment rates. Sorry I didn't do that *before* posting the example, otherwise I would have said that I think the lower number is the proper result based on those examples. If you get a chance to look at those examples, let me know if you think they support a different answer than the one you just game. In general, I think "restarting" the segment rates (or the yield curve if using the yield curve) is inconsistent with the general theory under which they are developed. Not that that would stop the IRS from doing so if it felt like doing so.

Boy, I was beginning to think I posted all of that for naught! <g>