Mike Preston

From what you have described, it sounds like your wife's attorney "assumed" certain things and the assumptions were incorrect. He may have more information than what you have indicated. Certainly your claim with the company would have been better served had that information, if it exists, been forwarded with your claim. Should you appeal, you should ensure that all information favorable to the claim be submitted. For him/her to be billing you now to clean up the mess it appears that he might have created by assuming a DRO he forwarded to them would be accepted even though he has no proof that they not only received it but opined as to its acceptability as a QDRO seems a bit weird to me. Perhaps you can come to an agreement with him as to the issue at hand before you render payment? If he is uncooperative, it may be that you will need independent counsel.

412c8

All or nothing.

The reason that this issue tugs at our logic strings is that if the IRS' draconian interpretation is correct, a plan that has a lower threshold for allowable deferrals is a more inviting arena as far as HCE deferrals go. That makes no sense to me. Consider two plans, where the ADP limit is $10,000 in the first plan and is $11,000 in the second one. Assume that an HCE deferred $12,000 in each. In the first, there would be $2,000 of catch-ups and in the second there would be $1,000 of catch-ups. Now, presume that the employer would allocate whatever the absolute maximum is under 415. In the first case, where the ADP limit was $10,000, an allocation of $10,000 less than the 415 limit seems appropriate. Let's assume that is $34,000. In the second case, where the limit was $11,000, an allocation of $11,000 less than the 415 limit seems appropriate. Let's assume that is $33,000. Hence, with an ADP limit of $10,000, the HCE can be allocated $34,000; while with an ADP limit of $11,000 the HCE can only be allocated $33,000. It hardly seems right that a plan with a lower allowable HCE deferral should have a greater allowable employer contribution. I have poured over the 414(v) regulations and the code over the last few days and I am amazed that the examples are devoid of 415 references. And the code and regs aren't much better. The relevant phrase that seems to be the deciding factor is in 1.414(v)-1(b)(1)(i): "A statutory limit is a limit on elective deferrals or annual additions permitted to be made (without regard to section 414(v) and this section) with respect to an employee....". That, combined with the fact that the regulation makes it clear that the determination of what is, and is not, a catch-up is determined as of the end of the year (see 1.414(v)-1©(3), which specifically mentions section 415) sure does make it seem like any deferral which is made that would, when added to an employer allocation for the year, exceed the annual additions limitation ($44,000 in 2006) should be treated as a catch-up contribution. But I can see that the regulation and the code, by not specifically referencing employer contributions under Section 415 as being included in the determination under 414(v) might (just might) be read to mean that limitations must be exceeded solely by deferrals to give rise to catch up contributions. That is, if a deferral exceeds 415 before consideration of employer contributions then it most certainly is a potential catchup. If a deferral exceeds 415 only after inclusion of the employer contribution the reg can be read to not offer catchup status to that deferral. Just barely. Maybe. The only way this would make sense would be if the language bolded above has the potential for establishing a catchup contribution without consideration of any employer contribution. Can it? The only circumstance it can be talking about is when the deferral limit is not reached, but the annual additions limit *is*. That means specifically for a participant with compensation that is less than the 402(g) limit. So, take an example of a participant with 415 compensation of $10,000. In such a case, we look to the code (414(v)(2)(A)(ii)) and find that if the participant defers $10,000, the maximum catchup is zero. That is, EGTRRA not only gave us catch-ups, but it also increased the 415© limit to 100% of pay. The only way one can interpret all of this to preclude consideration of employer contributions in the determination of catch-ups is if the drafters made a mistake and included the language in bold because they thought that the 415© limit was still 25%. Once the 415© limit became 100%, it became fundamentally impossible to create a catchup with deferrals alone, when focusing solely on the 415 limit. Sure, $10,000 in deferrals with $10,000 in compensation can certainly give rise to catch-up contributions relative to the ADP limit. But here we are trying to focus on the annual additions limitation. [Added later] Isn't it much more logical to conclude that the inclusion of the bolded language instead was intended just as it is written? That is, that the determination of what is, and what is not, a catch-up must be made after consideration of not only deferrals, but also the employer contribution (i.e., annual additions)? [/added later] With all that said, I think that in the case being discussed here, the fact that the ADP limit is low enough to cause $5,000 of deferrals to be treated as catchup contributions means that only $10,999.88 + $93.86 + $31,941.40 is taken into account under 415 an an annual addition and that adds up to only $43,035.14. Hence, an employer contribution/allocation of $32,035.26 works. Just to drive home the point, assuming the plan had no ADP limit and therefore only $999.88 would end up as a catch up contribution, the employer limit would then be $44,000 less $15,000, which is $29,000; and in such a case, an employer allocation of $32,035.26 would exceed the 415 limit by $3,035.26. Most importantly, since it couldn't give rise to additional catch-up contributions, it would need to be handled as a 415 excess. Knowing what we know about this case, can it possibly be that the HCE in question discouraged NHCE's from contributing to the plan so that the allowable deferrals were reduced so that his profit sharing allocation could be increased? If it were true doesn't that seem like a result that is against public policy?

It can be any or all. It depends on the language of the plan document. Most plans use W-2 compensation, but certainly not all. The Summary Plan Description should have a definition, if you can't get a copy of the plan document.

The plan did not terminate. It must be re-terminated.

No.

At ASPPA Annual 2006, government representative indicated that they had some kind of problem with a catchup being created by timing of the PS contribution being made after the deferral. BTW, Blinky, if other HCE had larger deferrals than $5k, adp correction involves turning othr HCE deferrals into catch-ups, not this HCE. Therefore, not "already there." I don't see how the government position squares with the catch-up reg. I think the catch-up reg is consistent with Voila!, though.

I have always been a bit uncomfortable about using ages. If the protected class is those who are over a certain age (such as 40) then the provision you are talking about discriminates against those between 40 and 55. Yes, it discriminates in favor of those who are older (not as bad as discriminating against those who are younger), which may be something that is not viewed as age discrimination (at least not viewed as prohibited age discrimination). Let a lawyer make the call.

Chicken, egg. Should somebody tell the retirees that retiring is bad for their health?

You'd have to explain in a bit more detail what specific test you are talking about.

They must receive the gateway.

Good point, Andy.

As long as the DRO was clear as to how to handle the calculations (a daunting task, I might add), yes, the additional benefit can be divided once it is accrued.

My understanding is that the deduction limitation applicable to "for profit" entities does not apply to non-profits.

I think I will retract my statement about not being kind to the PA. In retrospect, I think it is closer than such a reaction would be reasonable for. But I still think the balance tips to the AP.

Interesting. Isn't the point of a separate interest DRO to provide that the AP rides the coattails of the participant and receives a share of the ultimate benefit? Why would an increase in benefits pursuant to compensation not yet paid (clearly contemplated) be any different from an increase in benefits pursuant to an amendment to the plan not yet contemplated? I think the PA is misreading 414p. The AP isn't asking for a share of benefits that are not provided (such as demanding a subsidy that exists but this participant doesn't have a right to), but is asking for a share of benefits as they may be constituted. I side with the AP. If I were a judge and asked to rule on this I would not be kind to the PA.

Seems to me this is a straightforward calculation. It just depends on what the document says. If the document is a normal document, your calculation looks right to me. If there is special language in the document that somehow makes the client's interpretation proper, then obviously your calculation is wrong!

Call Derrin Watson. The client needs to engage an attorney at some level and, in this case, they might as well go straight to the guy who "wrote the book".

I have always found the "effective date" issue to be confused. That is, some people put one meaning on the term and others put a different meaning on the term. I prefer to think of the issue encompassing a single adoption date (for example, a Cycle A individually designed plan must have EGTRRA provisions incorporated within an amended and restated plan no later than 1/31/2007) along with a requirement that the document provide for various things with effective dates that vary by provision. So, to state that there is a general "effective date" is a bit of a misnomer. The number of provisions which require varying effective dates is large and varies by year of adoption. This is part of what the Revenue Procedure describing the determination letter program is attempting to describe: exactly which provisions need to be in what document. Generally, one looks to the "list" as provided by the IRS near the end of a specific year to determine what must be in plans adopted in plans with adoption dates following the specific year (depending on the type of plan - mass submitter or individually designed - the lag period is different). All of this says that one can make the "general" effective date something which is the earliest date amongst the provisions and then carve out later effective dates for individual provisions or one can provide for a general effective date which is later (perhaps no earlier than the adoption date) and then provide that various provisions are effective earlier than the general effective date. Both approaches work. Preference is in the eye of the beholder. The details as to what needs to be included and with what effective dates can only be found by following the Rev. Proc.

Somebody must have edited their post, because I couldn't find a reference to the document being initially adopted in December of 2006 or January of 2007. The only thing I found was a document effective in 2003.

But it shouldn't be precluded, either. That is, the document should provide it as an option of some sort. If the document can't be interpreted as providing for it optionally, I'm not sure it can be invoked unilaterally.

I don't know whether you are drunk or not. But excluding non-owner HCE's is a common approach to solving the problem you are having.

If you feel the rates push the plan outside of safe harbor compliance, then running a general test with the actual allocations may work.

It is hard to find anything to say that hasn't already been said, but I shall try. ;-_ Also, I wanted to add my appreciation for ctfudge07's participation here on benefitslink. And, of course, to the other contributors in this educational thread. You started out focusing on IRA's. But as it has developed, the discussion has highlighted how important one's entire financial picture is. One seemingly small detail can sway the recommended course of action dramatically. Focusing on whether you can save $1,200 in taxes this year and in each of the next few years may not be the right thing to focus on. As long as you keep to some sound basic financial decisions such as not extending yourself, debtwise, beyond what you are comfortable handling, you should be fine whether you go with traditional IRA's or not. With that said, it seems to me that a basic issue your family will be facing within a (too) short period of time is funding for college. In fact, I'd suggest it may be the fulcrum upon which the rest of your decisions might be based. Only your family can know the likelihood (how many of your children will go to college) and the expense anticipated (in-state, out-of-state, whether you and your husband believe in participating in the cost of college, etc.). If you find that the institutions you think your children are likely to attend have favorable rules regarding grants and scholarships predicated on ignoring home equity (as has been discussed), it may be in your family's best interest to maximize your home equity at the expense of cash reserves. Of course, to do so blindly would not be prudent, but I will suggest that it may be the best course; that is if all other things fall into place nicely. Those other things might include: 1) ensure your credit will allow you to establish a home equity line of credit (more about this below); 2) find a home that you believe you can add value to through improvements you can do yourself; 3) ensure your insurance is up to date and protects your family from financial ruin; 4) feel comfortable enough with the entire picture that you don't end up creating more anxiety than it is worth. That last point is crucial. You've been through some painful times and you may therefore be a bit gunshy with respect to a plan that diminishes liquidity. If so, that is just fine and nobody should try to force such a strategy on you. But if your family can deal with it emotionally, you might find that the potential additional scholarships/grants, coupled with the fact that the strategy I'm discussing might currently put you in a larger home than you might otherwise be thinking of can pay off in more ways than one. Based on your thought process relative to the real estate professional you worked with, you seem to know the value of professional assistance. You might consider laying everything out with a trusted financial planner who can balance all of your personal details and emotional needs. Research your choice of professional, of course. For example, some papers run periodic analyses by local planners. You might be able to find somebody who has just the right kind of pencil sharpener for you. Here are some other random thoughts. One of the often overlooked tax breaks that we have is the rule that says once you have owned a home for two years any (reasonable) gain that you realize upon sale is tax free. There is a limit, but it is not likely to be reached in a two or three year period if you start with a value of between $240 and $400k. Would you and your family consider moving every two or three years to maximize or lock in the tax free gains that might be available? Couple the above with the fact that the interest you pay on your home loan is deductible. Now go back to the example given earlier in the thread. You can see that your rate of return on home ownership is dramatic, even with a modest uptick in the value of the property. In fact, it dwarfs the tax savings you can get from your IRA's, even at relatively low income tax rates. By the way, with respect to the home equity line of credit I mentioned, I did so based on the assumption that it would never, ever be accessed. That is, it is there as a safety net for staving off disaster, not for dipping into on a whim. Based on what you have said about your desire to remain debt free, I don't think you would be tempted to invade the line of credit without good reason, but I did want to point out that I wasn't thinking of it as a piggy bank. Here's my basic point. If the $8,000 (actually $6,800 after taxes) makes the difference between you being able to comfortably enter the real estate market or not, I'd avoid the IRA's entirely and plan on putting that money to use on a down payment. Nothing I've said means that you should scarf up the first home that becomes available. But if you put pencil to paper and find, in conjunction with a professional planner, that this concept has merit, I would think your focus would be to find that (currently distressed?) property. Which requires work, as you know. Happy planning. I'm sure you will find a path that is right for you and that you are comfortable with.