Mike Preston

zimbo, zimbo, zimbo.......

As far as food for thought goes, I think if the individual is not an HCE at the time that the benefit is being provided that it would be very, very difficult for the IRS to claim that there is prohibited discrimination. Even if that extends to a period of time after which the individual is an HCE. Hence, theoretically, anyway, if the individual's vesting percentage was enhanced due to something which took place while the individual was an NHCE it would be similarly difficult to press for a charge of prohibited discrimination.With that said, these sorts of dances are best done with an ERISA attorney (although that conjures up an image that is most disturbing!).

You'd have to check with an accountant to see if there are (or are not) any rules that would scuttle that approach. Something tells me that passive income in the corporation will be subject to different rules, but then again, maybe not.

Thanks for the kind words, David. The program already has the ability to output its results to a data file (in any format you choose). But it doesn't do alternate forms, yet. I have had one request to make it do alternate forms using the PPA 417(e) mortality table/segment rates as the basis for alternate forms calculations. I think that can be added fairly easily (famous last words), but I'm wondering if there are enough people who have plans with that sort of provision to make going through the effort worthwhile? It seems that since the program already can output the information to a merge file, the program can already do alternate forms in a merge sort of way. For example, run the program and set the parameters up to do a lump sum based on Single Life Annuity rates. That information is now output to a text file. Change the information on the screen to an alternate form (say, 100% J&S based on a specific beneficiary's birth date) and output that to another text file. It would then be a simple matter to add the two text files together and use them as input to an excel or word mail merge. I know that Word *can* (although it isn't trivial) do merges based on information on multiple lines. It *is* trivial to do so if the merge is being done in Excel. So, other than putting together a little tutorial on how to output the information necessary and then how to use that in Word or Excel I'm left wondering if it makes sense to try and have my program do any of these things automatically? I need to ponder it a bit, I suppose.

I've always operated under the presumption that the maximum deduction under 404 is limited to net earned income. I would be surprised if any other kind of income, such as the passive income of $80k you've described, would allow the deduction under 404 to exceed net earned income.

In case it hasn't been made abundantly clear by the previous messages, the answer is no, unless the plan has provisions in it for establishing an unallocated fund (usually referred to as a suspense account). Even then, I'd tell the client that the amount is then not deductible in 2007. I'm not sure it would even rise to the level of a deduction in 2008, though. So, if the client really, really wants to not allocate it in 2007, they can try to see if the document allows for a suspense account and then they can see if they are satisfied with allocating it in 2008 while deducting $35k in 2007 and never deducting the remaining $5k. Ever. Isn't likely to happen, and even if it could, is isn't likely to make the client happy.

If you have a browser that attempts to open the file based on its name, it will attempt to invoke the software you have for pdf reading. As you noted, it ain't a pdf file so the software appropriately complains. What you need to do is DOWNLOAD the file. Try right-clicking on it and see if your browser gives you an option to do something like "Open link in IE tab" (if you are using Firefox). If so, when you do that you will then have an option to save the file (and then you can rename it). If you are using Internet Explorer, try right clicking and using the "Save target as..." option.

Does anyone have any opinion on this? I just picked up a client that has plan AE directly referencing Applicable Interest and Mortality. Were plans with this situation changing AE each year when the Applicable Interest rate changed? If so, would this be considered a similar situation? In the case of AE provisions which morph per pre-existing plan document provisions, there is no need for 411(d)(6) protection. Yes, the actuarial equivalence changes per the terms of the plan document and it is a two edged sword. The benefits/conversions can increase/decrease per the pre-existing terms of the plan without it being considered a violation of 411(d)(6).Having spent quite a bit of time recently analyzing the 417(e) rates and what uses they are/can be/ put to, I'm fairly comfortable relying on pre-PPA document provisions that incorporate automatic changes as being exempt from 411(d)(6) concerns. Of course, one should confirm same with an ERISA attorney if they have a specific case that needs this.

I agree with jpod. But it seems to me there are two levels of analysis one must satisfy: 1) Is the specific grant of past service (e.g., to all those employed by our esteemed rival Dooie, Cheatum and Howe, LLC we credit their service for eligibility purposes with respect to hours worked in 2006 and forward) discriminatory 2) Is the general grant of past service (e.g., we are granting past service to a group of people) Now, the issue is a bit cumbersome and may just provide a path through the thicket, but not without the expert guide services of an ERISA attorney. Why? Because if this law firm is big enough, then the individual joining the plan will not be an HCE at the point in time (or for the plan year during which) the past service is granted. If the person is an HCE for the given year it is a bit more challenging. That is not to say that if the person is NOT an HCE it is not challenging at all. I predict that the next big item on the IRS' agenda may very well be retroactive analysis of discrimination with respect to first year employee participants. But I'm hopefully wrong on that.

May?

I don't think mjb's cite is on point. And, no, I don't have time to do the research on this particular point without being engaged by the client to do so. And since it would probably cost more than the amount involved, it probably isn't worth it to him. Loosely speaking, though, it goes like this: The terms of the plan govern what happens. You know, that silly little requirement to operate a plan in accordance with its terms. Any contributions made during the year are usually referenced directly in the plan. There are limited circumstances where a plan establishes a suspense account. If the client doesn't fit into them, then the strong implication is that the monies can't be in a suspense account. If not, where then? How about "allocated under the terms of the plan." The exception to this is with respect to monies contributed AFTER then end of the year and treated, for all purposes, as if they were contributed on the last day of the year. That is courtesy of 404a7. If that isn't enough for your client, have them send a retainer check for, oh, $5,000 and I'll put chapter and verse behind the above.

The client is stuck. /mantra on/ All of my clients know not to contribute before the end of the year, except for 401(k) deferrals. Leads to more problems than it is worth. I tell them that the gain on the contribution in advance will be greatly exceeded by the increased expense in consulting WHEN (not IF) an issue develops and it ALWAYS does. /mantra off/

I think the smart thing to do is to have a stern talking to with the client. The HCE plan is well funded? The NHCE plan is poorly funded? Even in the absence of the new rules, I'd be concerned that there is a potential for discrimination if the plans were to terminate abruptly. If the firm were to go belly up, and nobody was around to ante up, the plans might be disqualified because of the inability to rectify the problem. That would expose the advisors to lawsuits from the participants (who, being out of a job and familiar with the legal process, might very well decide that they should sharpen their litigation skills at the expense of the advisors who "allowed" the plans to get into this mess in the first place). I'd seriously consider telling the client to deposit enough to eliminate the restrictions on the NHCE plan or risk untold difficulties that can't be predicted or insulated against at this time due to the newness of PPA. Get an ERISA attorney involved (have one on staff?) to nudge them in the right direction. But at the least, put your CYA on the table. Of course, the simple solution is to just merge the plans on March 31.

Glad you like it. It has been a long week! :angry: I actually have the J&S done, but I'm stress testing it to make sure there aren't any holes in the logic. I guess that means it isn't really done. I KNOW that means it isn't ready to go out the door. Those who have the program will get an update with the J&S feature as soon as I can up my confidence level as to its accuracy! I'm contemplating sending it out as a beta with respect to this feature just to get it out a bit earlier. If somebody wants to be a beta tester on the J&S capabilities, please contact me off list. The next version also has an excel-like feature built into the monthly annuity field. Hence, if you have a formula for the benefit, you can use that instead. Something like: $185,000/12*.1 will give you the value based on an annuity of $1541.67. While I'm adding a J&S normal form feature to the program, there are a number of people who have asked whether the program can calculate alternate forms. I don't think that is in the cards, for the near future, anyway, unless somebody can describe for me why doing so would be useful based solely on the segment rates. It seems to me that what folks are looking for is the ability to produce the information necessary to generate distribution paperwork, like relative value disclosures. That is a great extension of the program and I may implement that at some point. But it isn't trivial, because to do so requires that the program either have lots and lots of mortality tables or, at the least, allow users to enter in their own mortality tables. That is, the program needs to be capable of doing actuarial equivalence based on PLAN FACTORS. Right now, the program only has actuarial factors based on segment rates/regulatory mortality tables. Am I wrong on this? Is it useful to calculate alternate forms based on segment rates/regulatory mortality tables?

In the absence of some clear guidance to the contrary, I think it is best to treat this a covered. If the parties have just the right flavor of options and ownership, you might be able to shoehorn it into non-Title I treatment, but it would not be something I'd be comfortable with unless an ERISA attorney was involved in the process.

It certainly can be done. The only issue is one of discrimination. If, as you say, there are no NHCE's, then all is well. If there are NHCE's, then at the least, service with THAT employer would need to be credited to all in order to avoid the non-discrimination issue entirely. There are some pretty complicated rules dealing with the crediting of service with other organizations, related or not, in the 401(a)(4) regs somewhere, I think.

The administrator should use the actual document. In my opinion, the prudent course of action is that an unsigned document is not appropriate to use, unless: 1) an ERISA attorney has stated that the administrator should follow specific terms not contained in the signed document 2) the administrator has confirmed, perhaps with their own counsel, that there is at least some basis for the attorney's instruction - such as the belief that the plan was effectively amended through another document, such as a resolution.

This could be the crux of our diferrent interpretations.I think the regulation uses the term taxable year to mean the plan year. If you re-read (iv) in both examples, it is hard to come to any other conclusion. However, notwithstanding that, in parsing Example VI, they clearly state that the "the elective deferrals previously treated as catchup contributions under Plan R for the taxable year" is $1,000. If my interpretation were correct, then that amount should be $1,600. I would like to see the example changed somewhat so that the deferrals between 11/1/05 and 12/31/05 were larger. Something like $4,999 in excess of the 2005 a(30) limitation and the deferrals made between 1/1/06 and 10/31/06 equal to $15,002. Nobody argues that the first dollar in excess of $15,000 is not catch-up. I was previously arguing that the second dollar is not catchup because the $4,999 is treated as catchup for the plan year. However, reading (iv) more closely reveals, as indicated above, that it should state that $1,600 is the relevant amount. It doesn't. It says $1,000 and that would lead to the conclusion that in my just cited example, the second dollar in excess of $15,000 is also catchup. However, that gets us back to right where Austin has been all along: off-calendar plan years have a distinct advantage over calendar plan years. I don't think I said anything differently. So, do you agree with Austin that there is a significant advantage for non-calendar year plans?

Has the "error" crossed a plan year end?

Maybe I'm reading too much into the specific words used by the Service. How else do you take the words I quoted above? ("as they are deferred"). Combine that with the last paragraph of Example 6, where they say that "In addition, Participant E may make additional catch-up contributions of $3,800 (the $5,000 applicable dollar catch up limit for 2006, reduced by the $1,200 ... of elective deferrals previously treated as catch-up contributions DURING THE TAXABLE YEAR [emphasis added by me])." If you add it all together, I think something in their description goes KER FLOOEY if you say that a participant can defer monies on, for example, the last day of the fiscal year if they have previously been rewarded with the catchup limit of contributions at any time during the TAXABLE YEAR, including that portion of the taxable year which began in the prior calendar year and, during which stub period, the participant made contributions which were treated as catch up contributions AS THEY WERE DEFERRED. Long winded, huh?

Are you sure? For many reasons, the one year rule usually is not applied to those who are rehired. So, check the document and see if it doesn't say that a prior participant, upon rehire, commences participation immediately, including eligibility for employer match.

Could be. But post #31 was Autin's not yours. If he restated your example, then so be it. No disagreement. Let me stop you there. I think the regs draw a distinction that is missing in your analysis. They talk about catchups for calendar year (401(a)(30)) and for the fiscal year (401(k)(8) I think)). The amount treated as a catchup for 401a30 purposes gives rise to a catchup for fiscal year purposes. So, at 3/31/2007, all of the catchups that were originally available have been used up. I think that Example 6 says that this is not true.Of course, I could just be wrong on all of this if I'm misreading Example 6.

I'm not. I'm saying that the "big" contribution at the end of the 2006 calendar year, gives rise to an amount treated as a catchup contribution for both a30 and 402g. a30 allows it to stay in at the end of 2006. 402g allows it to stay in, also, but it also precludes adding any more as a catchup at that point (assuming we are talking about a $5,000 a(30) catchup). Hence, if the adp limit is $10k at 3/31/07 and the $20,000 contributed in late 2006 is reduced to $15,000 for testing purposes against that adp limit, we find that there is a $5,000 overage that must be refunded because, at 3/31/2007, there are no more catchup contributions available. See Example 6.

OK, I needed a break from what I was doing, so I looked at this again. Austin, you are correct that FOR PURPOSES OF 401(a)(30) the regs make it clear that: "Catch-up contributions for the TAXABLE YEAR ARE NOT TAKEN INTO ACCOUNT in applying the section 401(a)(30) limit" and that phrase appears in both Ex. 5 and Ex 6 in subparagraph (v). However, that doesn't mean that the subsequent catch-up contributions resulting from 401(a)(30) are ignored for purposes of future ADP testing. Looking at Ex 6, we find that there is a $1,000 amount that is treated as a catch-up "as they are deferred" since that is contributed in excess of the a(30) limitation for the calendar year on 9/1/2006. Hence, in your example in Post 31, as we begin to test the 3/31/07 year, we find that the we were both wrong, and that the $20,000 contributed on 9/1/2006 gives rise to a $5,000 catch-up right then and there because it exceeds a(30)'s limitation and when we test the allowable deferrals at 3/31/2007 and find that they are only $10,000 we must issue a refund of $5,000 at that point. That is, we can't use the 2007 catchup limitation at that point. Great example to analyze in depth. I await anybody saying my analysis above is incorrect for one reason or another (nothing would surprise me - even to find that there is a contradiction in the regs somewhere).

Why do you say it is of zero consequence? It is a mandatory usage of an individual's catchup limitation. Try the numbers with a refund of $6,000. Surely we both agree that the most that can be treated as catchup is $5k and that therefore this person would get a $1,000 refund. It seems to be a timing issue. I, for one, have no problem with considering a portion of an individual's deferrals as catchup for failed test purposes and then allowing that person to defer up to a total of $20,000. From my perspective, then the first few dollars were classified as catch-ups they fell off the "regular 401(k) deferrals" bandwagon and therefore the person can move all the way to $15,000 (or $15,500) from the "remaining 401(k) deferrals" platform before again eating away at their catchup limitation. But I admit to being a tad confused as I just don't see the issue. Care to restate in simple terms?