Mike Preston

Q&A's 19, 20 and 21 address 404(a)(7). They are far too long to quote here in their entirety. But the question you posit is not directly addressed in any. Why? Because, in my opinion, the question you raise is already settled. There is no question to ask, because the Code makes the answer clear. If "they" can't read the Code and come to the conclusion that 404(a)(7) doesn't apply in this case, then I don't really know what to say. Maybe you can argue by innuendo, though. In that case, if you quote Q&A 21, you might win the day. Here it is: Q. An employer sponsors a defined benefit plan and a 401(k) plan. There is only 1 employee common to both plans, and he is eligible to participate in the 401(k) plan for deferrals only. The other participants in the 41(k) plan are eligible to make deferrals and to receive nonelective employer contributions. In a year in which the employer does make a nonelective contribution on behalf of those eligible, does this trigger the combiend plan deduction limit of IRC 404(a)(7)? A. No, as long as the one common employee only has elective employee contirubitons, 404(a)(7) won't apply. ================================= Hard to imagine how it would apply in your case, if it doesn't apply in the above case.

Lazy A** Annuity? Nah. Maybe from the department of redundancy department? Yeah, that's it.

What it is. A DB plan with multiple formulas, which may or may not pass a4 as a safe-harbor design. Note that I think, if I understand the design properly, that this plan is a safe-harbor as it qualifies as a 2% plan that covers 2 NHCE and 1 HCE and an additional 4% plan that covers 1 NHCE and 1 HCE. Isn't it a safe-harbor multiple formula plan?

To require both is merely a reading by an individual who is English challenged. Consider the alternative. What would it mean if it were "or"? Well, the way English language logic was presented to me in college, "or" is EXCLUSIVE of "and"; while "and" is inclusive of "or". Stated another way, "or" means precisely one or the other, not both. While "and" means one or both. In order for "and" to mean both, the language must make it clear that both items are required to be present in order to establish satisfaction of the requirement. The IRS is trying to claim that in this circumstance, "and" means "both". IMO, that isn't correct. Could the language of the law been made clearer? Sure. But lawyers will argue that one needn't require more than what is necessary to establish a "plain English meaning". There are probably lots of examples one can dig up where the IRS has similarly interpreted "and" to mean "both" That wouldn't make it correct here, it would only make it incorrect there.

The entry date provision is heavily debated not for purposes of bifurcation of either deferrals or compensation. Rather, it is debated for purposes of determining whether an individual is, in fact, excludable in the year in question. If excludable, they are in one of the permissively disaggregated plans. If non-excludable, they are in the other of the permissively disaggregated plans. Take an individual hired 8/1/2005 in a plan that has quarterly entry dates. If you take the plans entry date provisions into account, this individual is not excludable in 2006. If you don't, the individual is excludable in 2006.

I emailed the author of the handout at the conference and she made it clear to me that the materials she handed out need to be read with the caveats she identified at the beginning of her presentation. Specifically, she caveated her presentation by saying that she was merely communicating techniques that she had seen in use by others and that she was specifically not endorsing any of the concepts mentioned. Further, if anybody wanted to use any of the techniques identified, they were on their own to research the validity or lack thereof of said techniques. With that said, I'm more comfortable than I was before in saying that I see no justification in the regulations for any sort of testing which limits testing compensation to "compensation while a theoretical participant", but allows deferrals to be based on the entire plan year. If anybody wants to present a citation for an alternative view, I'd be glad to revisit this.

Time to step back and evaluate. I think the fact that we are dealing with a "sister" here is a red herring. We could be dealing with a 3rd cousin twice removed. The issue would still be the same. If the fiduciary is perceived to have dealt with the assets in a way that could potentially benefit the fiduciary, then a violation has taken place. Actually, quoting the law is really a good thing here (which I didn't do above), and I won't do here because it has already been cited by others. If it can be claimed that the fiduciary's judgement MIGHT have been impacted by the "benefits" the fiduciary MIGHT receive, that is all that is really necessary for the DOL or IRS to prevail, IMO. In the case of a sister, it is very difficult to argue that some benefit would not inure to the fiduciary by causing the transaction to consummate. In the case of a 3rd cousin twice removed quite a bit more difficult. The key here is that the standard is "who will convince the judge or jury when all is said and done". mjb has quoted one case where the fiduciary was successful, one might say spectacularly successful, in convincing the court that there was no PT. The question is, with respect to any transaction not yet entered into: do you feel lucky?

No argument there. I agree that a transaction as you describe is potentially not a problem (or, as you put it, not automatically a problem merely because of the familial relationship). However, the likelihood of it being a problem seems greater to me than the likelihood of it not being a problem. Yes, I have roped into my argument in favor of advising against the course of action the issues that I think are relevant and have not limited myself to just the PT issue.

mjb, I don't disagree with anything that you have said. Except that on a practical level, the DOL makes life hell for those it investigates and people should be told that fact before they decide on a course of action. Whether the risk is limited to disclosure upon audit or not is beside the point. If you end up in their cross-hairs it matters not how you got there.

veba, the facts you posit would, in my mind, be highly suspect. My guess is that CALPERS has rules that would preclude such transactions. At least they should. That is the classic circumstance where there should be concern. At the least, the CALPERS individual should engage an independent fiduciary to analyze the transaction. Assuming the transaction went forward as indicated, I would expect the DOL, should it end up running into the issue, to object and demand it be "fixed". That means an independent analysis with any loss to the plan being restored or undoing the entire transaction. At the least I would think it shows bad business judgement to have gone down that road without appropriate fiduciary protection.

Derrin's right, unless you want to fight. That, in itself, should be a fiduciary breach. I know, I know. We are talking about PT's. Wouldn't it be icing on the proverbial cake if the DOL marched in and demanded both excise taxes for a PT and removal of the fiduciary due to the breach? The DOL believes in the domino theory. They feel they can string a series of questionable acts together and paint the principals as rogues. Unless you want to expend that 50k in legal fees (or more and rely on a 50k reimbursement to partially soothe the sting), it makes absolutely no sense for a fiduciary to buy and/or sell from/to a sibling. Any other advice, without strong cautionary caveats, is malpractice, plain and simple. Strong letter to follow. Time to dig out the horror stories, isn't it? Each and every one supports Derrin's position, unless somebody is itching for a fight. Now I know that mjb isn't taking the other side to drum up potential business, although if you find yourself in this sort of predicament he sounds like he would be a fine advocate for your cause, and instead is doing so on a theoretical basis. To h*** with theory, this is the DOL we are talking about. Recall that just recently, right here on BenefitsLink, an admitted ex-DOL field investigator made it clear that his advice to all of us is to ignore things like the literal wording of both the law and the regulations. Instead, he "knows" (divine intervention?) what the "intent" of the law and the regulations is and, as a field investigator, he was taught to apply that "intent". This is the mentality you are dealing with when facing the DOL and therefore, unless you want a fight, Derrin is right.

Well, I remain unconvinced at the moment. There are a couple of obstacles. First, the document should provide a methodology for determining ADPs. There is no need to have the document specify, one way or the other, regarding the use of permissive disaggregation. However, once it is applied, I would think that the document's provisions on determination of ADPs would still apply. And I don't know any documents that define compensation as anything other than one of two things: 1) Compensation while a participant 2) Compensation during the entire plan year Neither of these allow for "compensation while a participant but ignoring compensation earned prior to a theoretical entry date not actually specified in the plan". As I said, I remain unconvinced at the moment.

Do you have a handout that specifies the mechanics or the citation? Somehow I feel there was a disconnect somewhere because I don't really think such an option exists.

What Blinky said.

The proposed 415 regs have a few more restrictions, to ensure that somebody doesn't roll over monies and create additional funding requirements by having the conversion be, while still "reasonable", lead to an actuarial loss for the plan.

I strongly suggest that the request for tech advice be reviewed by Brian or somebody he feels comfortable reviewing it on behalf of ASPPA. I know when I was involved with a TA request a few months ago (not one of my clients, just a friend type of thing) ASPPA was more than willing to assist in the drafting of the request. This is a critical part of the equation and you are not well served by getting ASPPA involved only after the horse has left the barn.

What are my choices?

If the plan is submitted for a letter of determination with respect to a period during which the remedial amendment period is still in effect (as it is for a GUST restatement submitted before 1/31/04, or later if authorized and allowable by virtue of an underlying advisory letter being issued subsequent to 1/31/03), and the plan has a problem that is discovered during the determination letter review that can be corrected by modifying the document language, then the plan can be corrected during the submission process. This is the very nature of the 401(b) period. If there are IRS auditors attempting to modify this by claiming a submission tolls only a document failure and not a coverage and/or discrimination issue the issue should be kicked upstairs to a manager. Send a letter to ASPPA with the details, as this is the sort of thing that Brian Graff eats up: making sure that the IRS treats the practitioner community in a fair and consistent manner. Unless I'm completely misunderstanding what is going on, of course.

I agree that if the services were already performed, the regulation appears to provide an out. Even if not performed, if it is an exception for a valid purpose, the regulations go on to say that as long as it doesn't result in acceleration of deductions, that should be ok, too. But if it is habitual (and therefore not subject to the adminsitrative exception) and if the deposits are made on Wednesday with respect to a paycheck that would not be delivered to the participant until Friday and if that paycheck is for compensation through that Friday which is two days after the date that the amounts were deposited, I still think there is a problem.

This is one of those circumstances where no good deed goes unpunished. Since the monies are not made available to the participants as of the date that they are deposited, they are technically not salary deferrals. They are technically employer contributions subject to all the rules of employer contributions, not salary deferrals. Of course, this means that the salary deferrals were never contributed and the result is entirely illogical. In a practical world, the DOL would view this as a positive thing and just ignore it, even if it did violate one or more technical requirements. In a practical world, the IRS would view this as a positive thing and just ignore it, even if it did violate one or more technical requirements. We do not operate in a practical world. We operate in a world where technical requirements are more important than anything else. Period. Tell the client to stop doing this. No good deed goes unpunished. What you are looking for, as far as the "bad thing" goes, is the rules that were put in place due to the KPMG "trick" of depositing all of the salary deferrals expected to be deposited before the end of the plan year (think 6/30 tax year, 12/31 plan year) and then taking a deduction on the 6/30 tax return. The regs are meant to stop that practice. They aren't technically meant to stop the "1 or 2 day in advance of the paycheck" deposit; unless, of course. the deduction is advanced into an earlier tax period than would otherwise be allowed. More than you wanted to know, huh? Tell the client to stop doing this.

From a logical perspective, the protection afforded a participant by the provision that requires an annuity option whenever a lump sum is also offered would seem to be something that is logical to provide to the alternate payee. In the absence of some clear guidance to the contrary, I would think it unconscionable not to offer the annuity option to the alternate payee in a plan subject to the annuity rules.

And now we know why you are a successful small business owner. Best of luck!

Agreed. The rules are complex. If a small business wants a plan that is easy and safe to operate, they need to put in a plan that requires a certain minimum contribution, such as a Safe-Harbor plan. The hallmark of a Safe-Harbor plan is that the plan sponsor must be willing to make some sort of contribution to NHCE participants, if the circumstances arise where a contribution is required. That is, the employer doesn't get to choose whether an NHCE gets a contribution or not; the terms of the plan control whether the employer has to make a contribution. The problem with retirement plans in general is that there are so many options available at just about every turn that it is impossible to state that anything is absolute. Are you aware of what the Safe Harbor rules are? If so, you will know that a small business can easily sponsor a 401(k) plan if they want to. For those that choose not to it is because they see all these options and none of the "simple" ones are completely free of employer contributions. Probably not. Simply because the rules are not simple. But I've been known to tackle the impossible before, so how's this: 1) ADP - "Average Deferral Percentage" test. The HCE's may only contribute a "given" percentage, on average, based on the average that the NHCE's actually contribute. Example: NHCE's contribute, on average, 2.5% of their pay. The HCE's are limited to, on average, 4.5% of their pay. If the ADP of the HCE's exceeds the allowable average, the plan must correct the problem by spitting back some deferrals to HCE's or by having the employer put in some money and giving it to the NHCE's. The rules on how you determine what to give back or how you add money to NHCE's are quite complex, so there is no way I can specify those within the context of a simple description. But one thing is for sure: if you don't fail the test you don't have to either give monies back or make additional contributions. With that said, the HCE ADP is a function of what the NHCE ADP is. If the NHCE ADP is between 0 and 2%, the HCE's are allowed twice that amount (Example: NHCE ADP is 2%, HCE ADP is allowed to be 4%). If the NHCE ADP is between 2% and 8%, the HCE's are allowed that percentage plus 2% (See above example). If the NHCE ADP is over 8%, the HCE's are allowed 125% of the NHCE ADP. The way I remember it is: "times 2 up to 2, plus 2 over 2, until you get to ..... 2 times 2 times 2 (that is 8), in which case you must use 5 times 5 times 5 (that is 125)." Yeah, I know.... cheesey at best. One final complication that can't be ignored, even if it is a simple explanation. The NHCE ADP can be based on the current year or the prior year, at the option of the plan sponsor (must be in the plan document). 2) ACP - "Average Contributions Percentage" test. This is a test that tests the employer's matching contributions. For simplicity, you run through the exact same test as the ADP test. There are very complicated rules which describe how the two tests interact when one of them is failing. However, the same rule applies here as above: if you don't fail the test, things are simple. 3) TH test: In concept, this one is simple. In practice, not quite so simple. The simple equation is that if as of the last day of the prior year more than 60% of the plan is held by participants who are defined as "KEY Employees" (this is not the same definition as HCE), then the plan is top heavy for the next year. For purposes of this calculation you sometimes have to add back in distributions that have taken place in either the last year or the five prior years, but that really isn't all that difficult once the rules for doing this are analyzed, but detailing them is beyond the scope of a simple answer. Also, discussion as to who is a KEY employee is a bit beyond the scope of this answer. But the general rule is: less than 60% in the accounts of KEY employees and the plan isn't top heavy. Not at all. There are just consequences associated with failing. In the case of ADP and ACP you "merely" have to give back monies to the HCEs or put monies into the plan for the NHCE's. In the case of a plan being top-heavy you merely have to make an employer contribution of at least 3% of pay to all participants who are not KEY employees. The above is a very scaled down, imperfect, and incomplete answer. For details, consult a TPA in your neck of the woods. Good luck.

All systems do it, in one manner or another. Worst case scenario is that you have to have a separate case for each testing group. As indicated with Relius, you can input additional body counts. With ASC you can tell it to aggregate cases. But the only system I know that handles it somewhat automatically is DATAIR. The reason they handle it automatically is that they have the ability to run all the tests against each and every division. Assuming each test fits on one page (it usually doesn't) that means you have 6 tests time two divisions or 12 pages of output. In reality it is more like 36 pages of output. But if you scour those 36 pages and find at least one that says PASS on it in the first 18 and one that says PASS on it in the second 18, all is well. I like my little writeup better.

Or in this case you can just write: Plan 1: 2 HCE's out of 6 = 33%; 1NHCE out of 3 = 33%; pass 410(b) with 100% ratio Plan 2: 4 HCE's out of 6 = 66%; 2NHCE out of 3 = 66%; pass 410(b) with 100% ratio Plan 1: Highest HCE (age 63) 22 years older than NHCE, so percentage allowed to HCE is 1.085 raised to the 22nd power which is 13.6067, so HCE allocation can't exceed 5% * 13.6067 = 68.03% Plan 2: Everybody gets 5%. Print the above out and attach to anything the IRS asks for. Note that in this case, the 63 year old can receive an allocation of 68% of $9600, or $6,528 before imputing permitted disparity.