Mike Preston

The language is trying to communicate that if you have 3 separate "things" in your plan, then you must treat them as 3 separate plans for 410(b). Thing 1 would be deferrals, thing 2 would be the combination of employee after tax contributions and any employer matching contributions and thing 3 is anything that isn't in thing 1 or in thing 2. In most cases, thing 3 just refers to employer contributions, like profit sharing contributions.

Yes.

Did anybody notice that our good friends at EP:EO seem so have won the day. Pub 560 for 2006 has language that is startlingly clear and completely consistent with the Kyle Brown letter, but totally inconsistent with prior years' Pub. 560's (and, of course, the law). Here is the language from 2006 (for preparing 2006 tax returns): "For the preceding year, received compensation from you of more than $95,000 (if the preceding year is 2005, $100,000 if the preceding year is 2006 or 2007) and, if you so choose, was in the top 20% of employees when ranked by compensation." To remind everybody, this is what the 2005 version stated (for preparing 2005 tax returns): "For the preceding year, received compensation from you of more than $95,000 and, if you so choose, was in the top 20% of employees when ranked by compensation. This $95,000 amount increases to $100,000 in 2006." Now isn't that just peachy?

Did anybody notice that our good friends at EP:EO seem so have won the day. Pub 560 for 2006 has language that is startlingly clear and completely consistent with the Kyle Brown letter, but totally inconsistent with prior years' Pub. 560's (and, of course, the law). Here is the language from 2006 (for preparing 2006 tax returns): "For the preceding year, received compensation from you of more than $95,000 (if the preceding year is 2005, $100,000 if the preceding year is 2006 or 2007) and, if you so choose, was in the top 20% of employees when ranked by compensation." To remind everybody, this is what the 2005 version stated (for preparing 2005 tax returns): "For the preceding year, received compensation from you of more than $95,000 and, if you so choose, was in the top 20% of employees when ranked by compensation. This $95,000 amount increases to $100,000 in 2006." Now isn't that just peachy?

The bands are theoretical. There is no need to have any specific dispersion of participants.

Principle, principal, all the same to me. I just didn't know what you were referring to and I still don't. Such is life.

How are you intending to use the principal?

Reading the regs under 411 regarding protected benefits is a good place to start. I would be very surprised if it is considered a protected benefit.

No, it is just a portion of the participant's account that is treated differently once it becomes time to distribute and possibly as to who has investment authority over it in the meantime. But it is still treated as the participant's for TH purposes.

So they are saying that if you do a non-discrimination test and it needs a corrective amendment to pass, and then the IRS comes in and does a more sophisticated test (say, accrued to date) and it passes, then your amendment is blown out of the water because it is now somehow discretionary? I hope you can see that the above is untenable. So, let's reverse it. The plan is a new comparability plan intended, for the most part, to be tested on benefits. However, in a given year I test it on contributions and, surprise, surprise, it fails. So, if the above case (where the IRS comes in an invalidates your amendment) is not logically sufficient for you because you want to say that at least you have a run in file that shows "FAIL", well in this case I also have a run that says "FAIL", so can I use an -11g amendment now? There are very few cases where one runs a non-discrimination test and at least one kind of test doesn't say "FAIL". I guess you are saying that for my -11g amendments where there is no obvious failure I need to generate that run and put it in file? OK, I guess. But somehow I doubt it. I respect the guys at TAG and would expect them to be right far more often than not, even approaching 100%. But in this case, I think there must have been some communication problem, because the IRS has stated at conference after conference that one need not establish that a failure has occurred to invoke -11g. Otherwise, they would have put that in the regs as one of the requirements. Strange that it isn't in there.

The "basis" is "because we feel like it." The IRS has long ago gone on record as saying that there is no threshold one needs to cross in order to invoke -11g. They said they started down the path of implementing rules for this purpose and decided that it was just about impossible to come up with any that were reasonable. So they made it clear that one does not need a failure, since proving a failure would involve way too much work. The only requirements are those that are laid out: non-discriminatory alone and in concert with the existing provisions.

I would think you should contact a lawyer and see about a civil suit. Can't be good for one'e reputation to have fraudulent Schedules B floating around.

Bingo.

Phooey. Strong letter to follow. If you feel bad about cutting down his hours, -11g is a fine provision to use to rectify it. The IRS is on record countless times indicating that a failure of any kind is not necessary before a plan sponsor may use a -11g amendment. Now, if you want to use an -11g amendment every year to give him a few extra bucks, then I agree that 411 might present a problem (might).

Really?

Dollars to donuts (doughnuts?) the cite you are looking for is 1.401(aa)(4)-11(g). There is nothing special about the amendment. It just says that effective for the year you are trying to add this person, you make an amendment that..... adds this person. The way you go about it, though, can have implications. So you really need to discuss this with somebody familiar with these types of amendments so they can guide you through the choices available.

Yes and no. There may be a contribution amount, less than the full TH minimum, which, when added to the deferrals, result in the plan not being top-heavy. This is a circular calculation and you must be very precise to ensure compliance. The alternative is to make a 3% contribution to NHCE's per the plan's allocation procedures, which may result in a greater than 3% contribution for the HCE's/Keys. This ensures that top-heavy is satisfied and it ensures that the HCE's/Keys get the biggest bang for the buck. Of course, cash flow and deductions is an issue, but if all things align, it works out ok.

Under the circumstances you posit, total flexibility is available.

It is becoming clearer. Thanks for the explanation. It looks like XXX's plan provides some sort of continuation accrual. Maybe something like 10% of pay, for those on an approved leave. One of the limits in qualified plans is that the company (XXX in this case) is restricted by not being able to make a qualified contribution in excess of 100% of somebody's pay. If your sister was on leave during all of 2006, then her pay was zero. If the plan called for her to get around $10,000 as some sort of continuation benefit, then everything makes sense. That amount would exceed the limits and be subject to the rules on non-qualified plans. Hence, the combination of the recent changes in the regulations and her remaining on leave for an extended period might have triggered this. Let us know if my new guesses are close to what XXX says!

You are welcome. OK, I'll go back to my inferior reading, then. And I'm going to stick with the fact that the rules on non-qualified plans have gone through an upheaval in the last few months and that just has to be the genesis. Keep us posted.

Sing along now.... "Times two up to two Plus two over two Until we get to two times two times two! Don't ask, (but) then its five times five times five And we move that decimal left two" If you try real hard, the tune to Sunrise, Sunset works. Yeah, it's Friday.

It would help if I read your original comment in greater detail before posting my thoughts. ;-) I just noticed that you said she just officially terminated. This is probably the key issue. At that point in time, her status changed and the taxation issues changed as well. As has been mentioned, if she was entitled to get her hands on some of her deferred compensation because she officially terminated her employment, then the IRS will take the position that the mere fact that she COULD have elected to receive it (or a portion) means that she owes some tax (maybe just the FICA, maybe more) on it. The letter still is confusing to me, because it seems to be worded in a way that is intended for an active employee. Perhaps she just got the wrong letter? In any event, I'd guess that her termination of employment triggered this thing.

Edward, It is painfully obvious from your tone and your wording that you are not a scammer and that you are making an honest attempt to help your sister. Believe me when I say that there are some real crazies out there that come here (not often, thank goodness) and present the industry with all sorts of stories just to waste everybody's time. Hardly seems worth their effort, but they do. I'd bet more than a dollar to a donut you aren't one of them. There really should be somebody at XXX available to answer questions for you, because if your sister is affected by this, you can just about bet a million bucks there are a heap of folks in the same confused boat that she is in. My guess is that she is a participant in a plan of deferred compensation of some sort. My further guess is that the specific plan she is in somehow either doesn't conform or XXX has decided not to go through the effort to make it conform to the new rules on how non-qualified plans are to be treated in the US. The IRS has recently changed the way that non-qualified plans are taxed, both at the FICA level and at the regular taxation level. It is a BIG DEAL in the non-qualified arena, so anybody who practices with non-qualified plans would immediately be aware of the fact that things have changed dramatically over the last 3 years. For example, IRS Notice 2006-100 starts by saying: "This notice provides guidance to employers and payers on their reporting and wage withholding requirements for calendar years 2005 and 2006 with respect to deferrals of compensation...". It is 21 pages long. It goes into a lot of detail. It makes no sense to even look at something like that, from your perspective, because even if it is applicable, it is aimed at XXX, not at you. I mention it only to let you know that non-qualified plans have, indeed, undergone a recent upheaval in this country and it doesn't surprise me in the least that there is some sort of "catch up" going on which has ensnared your sister. Somebody at XXX should know the gory details. Whether the specific issue involved is the same as what IRS Notice 2006-100 is getting at or not is not what really matters. What really matters is that somebody at XXX (or, more likely, an outsourced call center) has to be in charge of providing details to the ensnared and confused folks who got that letter. I think you did precisely the right thing by coming here and asking for some clarification as a first step. Unfortunately for you, the best that can be done from here is to say that the letter is plausibly legit and that further details have to come from XXX. When you get them, please come back and share. I, for one, am curious as to why the issue appears to be limited to FICA and does not appear to extend to income that needs to be reported to the IRS (and, of course, taxes paid based on that amount, which would normally be higher than the FICA taxes themselves). Good luck.

It is still there.

Yes.