Mike Preston

Nah. Warnings on things which are a little like whack-a-mole are a good thing. I don't think I've met anybody who said that they interpreted the Code the way the IRS published in the Notice. The only issue where there appears to be disagreement amongst practitioners is whether the sneezing applies both to the regular 150% limit (obviously it does) and the 100% limit inherrent in 404a7. I've seen some folks I respect line up on the opposite side of the fence from me. Not that my side is unpopulated. Just that there is a scattered opinion on this one issue. On my side are those folks who believe that the 100% UCL minimum referenced in 404a7 is NOT reduced by any CL attributable to amendments for HCE's within the last x (2?) years.

Ah, yes, 87-16. Only 20 years ago. Should be fresh in everybody's memory, don't you think? First of all, on a practical level, you go by what is on your W-2. If your W-2 doesn't have the box checked, then you should be ok. You should check with your employer to ensure they aren't planning to issue an amended W-2. If they are planning on doing that, perhaps you can talk them out of it with the information you've found out here? As has already been mentioned, the rules are somewhat convoluted. But in certain circumstances they are clear. To really understand what the answer to the question is, you need to know a whole bunch of information which is typically only available to the employer. As such, it is their responsibility to tell you what to do, and they do that by checking or not checking the box on the W-2. So, let's knock them out a few at a time. 1) In the normal course of events, with a contribution being made in 2007 for the 2006 year, you would be treated as active for 2007 and not for 2006. 2) An exception occurs if the contribution for 2006 was because the contribution was required due to the fact that the plan was "top heavy" for 2006. In this case, the IRS considers the required contribution to be something that the employer should have known about and therefore you are stuck with treating the contribution for 2006. Only your employer would know if this is the case. If it is, they will be planning on re-issuing the W-2's and you are stuck. If so, you have until 4/15 to take out your contributions from the IRA without suffering any penalty. 3) Another exception occurs if they already made a contribution for 2005 in early 2006, thereby making you an active participant for 2006 even if they didn't make the contribution in 2007 you mention. If this is the case, though, they should have been aware of it and already marked your W-2, so I'd be surprised if this is the case. Hopefully, this is enough information for you to go back to your employer and find out the real skinny.

I'm just going by memory here, since I don't have time to look it up in detail, but I think your employer has an option of treating the contribution for 2006 or 2007 purposes. Whatever they decide they end up creating a precedent which is not supposed to be changed in subsequent periods, but that is not a completely hard and fast rule; just that the IRS is concerned about flip-flopping. Sorry I don't have time to do more. Maybe this will jog somebody else's memory that can pull a cite easier than I can at the moment.

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.