Mike Preston

Aw, heck yeah! We ARE talking Monopoly money, right? How many sets do I have to supply you with to get up to 100 mil? And we are talking about what the IRS thinks the right answer is (notwithstanding what the technically correct answer is). You asked why the IRS threshold is not used until the next year, in that no other limitation is published in this manner. This is because the compensation is a "lookback" year compensation, not a current year compensation. Look at it this way, the whole purpose of the lookback year compensation was so that employers would know and be able to determine who is an HCE without surprises. My guess is that the Blue Book has something to that effect. although I don't have time to check. When push came to shove, the IRS decided that the only way to live up to the spirit of the rules was to make the lookback year compensation known at the beginning of the lookback year. In order to do that, we need to know that the $100,000 threshold just recently published is the lookback compensation for the 2006 year (that is, for the 2007 determination year). I think, by the way, that if you look at the law itself, without this rationale, you do come up with your conclusion. In fact, it is somewhat trivial - if the base period was 9/30/96 and that applied to $80,000 for the 1997 detemination year, then crawling all dates forward by precisely 9 years results in a base period ending 9/30/2005, a published figure of $100,000 for the 2006 determination year. I would need to do the actual calculations (from 9/30/1996 to 9/30/2005) under 415 to see if it results in a figure of just over $100,000 to see if this actually holds true. But even if it does, as I said, the IRS has interpreted the law to mean that an employer should know the compensation that needs to be paid in the lookback year prior to the beginning of the lookback year. My guess is that if a given employer chose to follow your line of reasoning and use, for example, $100,000 as the 2005 lookback year compensation for determining who is an HCE in 2006 that the IRS would have a hard time challenging it. Especially given the language of Pub 560.

While I agree that your simpler solution would be best, if I get a letter saying that Pub 560 is wrong and that the threshold of compensation to be used in a lookback year (say, 2004) is the threshold as published for that year ($90,000) for the determination as to whether an individual is an HCE in the determination year (say, 2005) then I will be a happy camper, whether you are or not. Actually, I'm already a happy camper, because I am 99.99999% sure that the above is accurate.

mjb, I agree with stephen that the ASPPA Q&A's are usually pretty well thought out. Frankly, the wording of both the Code and the IRS guidance on this issue is so dramatically imprecise. I guess this sort of thing is inevitable when the change is foisted upon us and then the threshold is not modified for a number of years. The initial $80,000 threshold applies for three years, so the newness of the rule sort of evaporated before the uptick became important. As I understand mjb's opinion the threshold for determining whether an individual is an HCE incremented to $85,000 "for 2000" such that compensation in 1999 of $85,000.01 was required to be an HCE "in 2000". I can tell you that my experience is that plans used $80,000.01 as the threshold of compensation needed in 1999 to be an HCE in 2000. Calendar year plans in all cases. I have fired off an general information request to the IRS and, in about 1 or 2 milleniums, I'll post what the response was.

I think the answer is yes. Certainly the RPA rate you use for maximum deductible purposes is not reported on the Schedule B and does not impact the RPA amounts disclosed on the B. I'm not sure whether that constitutes what you are referring to as "for funding purposes."

Unlikely to satisfy mjb, but here is another nail in the coffin of his interpretation: IRS Q&A – 2005 ASPPA ANNUAL CONFERENCE Q34: We had thought the compensation threshold for Determining HCE status was settled a long time ago but noted some recent IRS publications seemed to throw open the issue once again. For purposes of defining who is an HCE in 2005, without regards to the ownership portion of the definition, is it still the case that you examine the lookback year (2004) compensation and use the threshold in effect IN THE LOOKBACK YEAR? For example, anyone who earned at least $90,000 in 2004 is HCE in 2005 (assume no top paid group election ). In other words, does the IRS still agree that the $95,000 comp threshold for determining HCE would only be effective for the the 2005 lookback year and therefore would only be used when testing HCE status for the 2006 year? A. Yes.

Joe, I don't think you are going to like this post very much, but I could be wrong. However, before I start let me assure you that I do a fairly decent job of working with business owners in similar circumstances, so I'm not spouting theory here. You can ask others on Benefitslink privately to confirm my bravado if you like, or look at my posting history. You must understand, before you start, that it will be absolutely and completely impossible for you to establish a retirement plan that provides you with any substantial accumulation while simultaneously allowing you to completely avoid contributing on behalf of at least some of your employees. For some reason, your most recent messages have adopted the theme that you would like to see your contributions for employees completely avoided. I'm not sure why that is, because you started out by saying that you merely wanted to minimize your contributions for employees. The latter is normal, the former is almost (but not completely) impossible. I think it might have been a retrenchment due to the fact that you were being attacked for not wanting to provide more than the minimum necessary. And there really was no cause to attack you for that, as it is the normal desire of most small business owners. Congress (and the IRS) recognizes the fact that most small business owners want to provide only the minimum and they therefore set up a bizarre and almost unintelligible set of rules that a business must conform to in order to ensure that the plan is a true "retirement plan" (what we in the business call a "qualified" plan). However, if you have retrenched into a position of not wanting to contribute anything for your employees, you might save yourself some time and give up on pursuing a true retirement plan. Let's start at the bottom of the barrel: a plain 401(k) plan. If you put one of these in, you can limit your deferrals to that which your employees provide FOR YOU (that is not a typo) with their own deferrals. At one end of the spectrum, if they don't defer a dime, you can't either. If enough of them defer "enough" you can defer $15,000 in 2006. That's it. If putting in 15k is enough for you, then I suggest you go for a plain 401(k) and "convince" your employees to defer into the plan. By "convince" I mean provide them with enough information and education so that they understand it is advantageous for them to put their own money in the plan. At the other end of the spectrum is a "defined benefit" plan where you can get upwards of about $85,000 per year put into a plan on your own behalf, but it will cost you quite a bit in both administrative fees and employee costs. How much it costs you in employee costs depends on a number of factors, such as your specific employees, your employement/compensation history (and theirs) and the plan design itself but an example of your foreman might be something like $15,000 per year (subject to a vesting schedule). And that is just for him. Yes, there are ways to reduce the cost below that amount (assuming it is even that high), but I wanted to give you a feel for what the expense MIGHT be for an increase in your retirement "contribution" from something like $15,000 (the max you can get without contributing A DIME to employees - assuming that they defer enough on their own) and $85,000 (the amount you can get if you go to the other end of the spectrum). By the way, these can actually be combined, so that in a perfect world you could actually get around $100,000 put away for yourself. Don't be alarmed. Most people don't go that route. #1 it is expensive and most can't afford it (even in the good years). #2 is that there are a great number of peculiarities associated with a successful defined benefit plan, many of which are deal-breakers. Suffce it to say that Congress and the IRS don't allow the big-ticket retirement contribution for yourself (~$85k) without extracting a pound or two of flesh. Most people, in fact, go the route that is just about 1/2 between the maximum and the bottom of the barrel. For example, if you are willing to put in a 5% of pay contribution for one, two or more of your tempororary workers (you don't mention how many hours they might work in a year) then you might be able to get the maximum allowed under law for yourself in this type of plan ($44,000). I say might because it is highly dependent upon the exact ages and hire dates of ALL of your employees (even those that work for you for only a very short period of time - yes - even 1 day). I will end by suggesting that you contact a plan design person you want to work with. If that is somebody local to you, then contact somebody local. If not, then you can send a private message to anybody that you feel you would want to work with. Many provide "proposals" for free (I don't). That is, they will collect your employee census (and historical information to the extent important) and provide you with a comparison of what you might be looking at for 2006, given various plan designs that they are comfortable with. I wish you well and good fortune in your search.

The 5500EZ instructions require the maintenance of the Schedule B in the file of the person responsible for filing and that the general rules on record retention apply. But what do they say the penalty is for non-compliance? Has the non-preparation of the Schedule B been relegated to the "no harm, no foul" category when, upon audit, it is discovered that none have been prepared and they are all prepared contemporaneously?

As a side note.... oh, never mind.

I think you are confusing "plan" years with "fiscal" years. They are distinct. I think of "plan" year contributions as those that satisfy minimum funding and "fiscal" year contributions as those which are deductible under 404. Yes, there are some exceptions. But in this case, I don't see why the first $100,000 can't be attributed to the 2003 fiscal year, while the second contribution (the $150,000) is attributed to the 2004 fiscal year. Both are attributed to the 2003 plan year for 412 purposes. Yes, it means that you have different assets for 404 and 412, but that shouldn't be much of a bother. Unless there is some cite on point that tells me something different, that is where I think I would go. At least off the top of my head.

I don't think so. I see no reason not to include the $150,000 on the 2003 Schedule B. It was a contribution that was made during the plan year and therefore should be shown on the Schedule B. I might, repeat might, be convinced to do it your way if reflecting the $250,000 towards minimum funding in the 2003 plan year did not eliminate a required contribution for the 2004 plan year AND IF the client would prefer there not to be a contribution for the 2004 plan year. But, if that circumstance were in play, I think I'd at least ask somebody at the IRS before doing it.

FL, you mean, after all this time, that you have been arguing that the deduction limitation doesn't apply when the combined amount being deducted is less than 25% of pay? Well, ok. I would think that self-evident. Evidently, you don't. Going down this silly path, there are two issues that come up. (1) If the amounts not deducted are attributable to the DB plan, I hope you aren't intending to count them as includible contributions in a future year. I don't think they would enjoy that status. (2) How does the employer determine which dollars are to be treated as not deducted? Is there a reg somewhere that says if $1 is contributed to a DB plan and $1 is contributed to a DC plan and the deduction limitation is $1 that specifically the DC (or the DB) plan is treated as having its contribution treated as deducted? It matters greatly when determining the amount to deduct in subsequent years.

Yes, there is no relation between the two elections.

You are nothing if not entertaining. Do you ever stop to read what you write? (sigh) Can you elaborate on this? I don't see that statement as being correct, either with respect to the OP or with respect to the example from the Gray Book. Are you saying that you believe the one participant in the example that had no accrual during the year was the only participant in the plan? I don't believe that to be the case. Even if it was, are you saying that if all benefits are frozen that precludes 404(a)(7) from applying? That is certainly a novel interpretation. What part of 404(a)(7) and Rev. Rul 65-295 does not count as a citation in your mind? You ask that we read 404(a)(7) carefully. Trust me, it has been read carefully by many. 404(a)(7)(A) merely talks about amounts being deductible. That is it. It doesn't require in any way, shape or form that the amounts deductible be predicated on increases in accrued benefits. Maybe I just missed it though. Maybe you can specify which words therein carry such inference. The only time that the concept of beneficiary is mentioned is within 404(a)(7)©(i), named, get this, "Beneficiary Test". As SoCal has pointed out, the controversy revolves around what it means to be a "beneficiary" of either the DB or the DC plan. The IRS believes that anybody in a plan is a beneficiary unless they have been carved out. Rev. Rul. 65-295 does this magical carve out for DC plan participants who do not receive an increase in the employer accounts due to contribution or forfeiture. Where do you find a similar carve out for a DB plan participant who happens to not have a benefit accrual during the year in question?

What has changed since the 2005 Enrolled Actuary Meeting? Q15: Deductible Limit: Determining Compensation for Combined Limit on Deductible Contributions An employer sponsors a defined benefit plan, a profit sharing plan and a §401(k) plan. Employees in groups A and B participate in the defined benefit plan, employees in groups A and C participate in the profit sharing plan and employees in groups A and D participate in the §401(k) plan that provides for employer matching contributions. a) An active employee in group B has an accrued benefit at the beginning of the year under the defined benefit plan, but accrues no additional benefit during the year. Is compensation for this employee considered for purposes of determining the 25% of compensation limit under §404(a)(7)? b) An active employee in group C has an account balance at the beginning of the year in the profit sharing plan, but receives no allocation during the year. Is compensation for this employee considered for purposes of determining the 25% of compensation limit under §404(a)(7)? RESPONSE a) Yes. This individual is still considered to be a beneficiary under the plan for purposes of §404(a)(7). b) No. Per Rev. Rul. 65-295, only compensation of individuals who receive an allocation of the employer’s contribution in the year for which such contribution is made is considered. Copyright © 2005, Enrolled Actuaries Meeting All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

By the way, the EA Grey book for the 2006 meeting has a question which bears on this thread. Q&A17. Maybe somebody can post it, along with an appropriate copyright notice.

I don't recall ever having an alternate position. Anything is possible, I suppose, but I thought I had posted on the -7(e) issues long ago in this same vein. Remind me.

Doesn't take much to imagine what you are pretending. If the rate group for the one HCE includes one of the two NHCE's, then the rate group fails the ratio % test.

By the way, the original question in this thread did not venture into the average benefit test. It was strictly limited to rate group testing. As I think the very first response by AndyH indicated, there is nothing precluding the rate group testing from considering all employees. This thread then branched off into the average benefit test (see Merlin's post).

Well, to some extent, it looks like this thread has gotten a bit off-track. At least, if adherence to the OP's question is the benchmark. As I understand the question, my paraphrase is: Can one test 410(b)/401(a)(4) compliance of an employer's profit sharing contribution on the basis of "all employees" (that is, not testing the otherwise excludables and the statutorily includables separately) even though one is testing 410(b)/401(a)(4) compliance of the 401(k) and 401(m) components of a plan by testing those groups separately? As far as I know, there is no consistency requirement that requires any plan to ever consider the testing methodology of another plan. However, this is not the first time I've seen this question in the very recent past (I forget where I saw it the first time). It makes me wonder whether the IRS is challenging this at some level and these questions are the result. If it is true that the IRS is challenging this then I would appreciate knowing the specifics. If it is true that the IRS is challenging this, my guess is that the Government Affairs Committee of ASPPA would also be interested in it. To the point where they would likely be willing to help clarify the issue with the IRS.

If I have elected to test a plan for compliance with 410(b) by separating the plan into two distinct testing populations, then I have two distinct ABTests. We are not limited to two, however. While I grant that in most cases we won't have more than two. In any event, an ABT is "run" for each separate plan of the employer. In the case of an employer having 9 plans, the 9 tests may be identical. But they don't need to be. The rule is that you run a test including the plan being tested and each and every single other plan that can be permissively aggregated with that plan - taking into account the rules previously described to determine which plans are, in fact, permissively aggregated. Think of the ABT as being spoke-and-hub kind of thing. Each plan takes its turn as the hub. Then the spokes are inserted to the extent they are required to be inserted for that plan. You test the combination of the hub and spokes. Now, if we merely move one of the spokes to the hub position and move what used to be in the hub position out to where the spoke used to be, we end up testing the exact same group. That is, the tests are identical. It is only when the spokes (permissively aggregated plans) and hub (plan being tested) looked at together comprise different populations do we end up with a distinct test. Since I'm not sure what the above means (in English) I shall conjecture and you can tell me whether my conjecture is close to what you intended. After I get through conjecturing, let's apply the description above and see what we get. You have 3 separate plans for 410(b) purposes. The first is 401(k) taking into consideration only those who were otherwise excludable. The second is the 401(k) taking into considration only those who are statutorily eligible. The third is the non-401(k) portion which has only one testing population: everybody. But I'll stop there and let you tell me: 1) With respect to the first plan - the 401(k) taking into consideration those who were otherwise excludable, what other "plans" of the employer are capable of being permissively aggregated? 2) With respect to the second plan - the 401(k) taking into consideration those who were statutorily eligible, what other "plans" of the employer are capable of being permissively aggregated? 3) With respect to the third plan - the non-401(k), what other "plans" of the employer are capable of being permissively aggregated? I'll answer (3): All three plans.

So far, so good, although I think it is more complicated than what you are implying. Oops. Now, re-read 1.410(b)-7(e)(1)(iii) and see if that doesn't change your mind. In English, I believe that -7(e)(1) says something like the following: Plans in the testing group include the plan being tested and any plan that can be permissively aggregated. You use the rules of (d) to determine what plans can be permissively aggregated. However, as you careen through (d), you do so with the knowledge that (d)(4) is to be ignored (QSLOB stuff); with the knowledge that (d)(5) is to be ignored (you aggregate a plan with a different plan year for this purpose (the ABPT) even though you can't normally aggregate such a plan for 410(b)/401(a)(4) testing); with the knowledge that the general rules of disaggregation ((d)(2)) are to be applied ignoring the fact that k/m/ESOP plans are mandatorily disaggregated (in other words, k/m/ESOPs are not mandatorilly disaggregated for this purpose). If a k/m/ESOP is not mandatorily disaggregated then it is, by definition, part of the testing group because the testing group includes all plans of the employer that can be permissively aggregated. That is, it includes all plans of the employer other than plans that are mandatorilly disaggregated. If a k/m/ESOP is not mandatorilly disaggregated, then, by definition, it is a plan that can be permissively aggregated, at least for this purpose. So, for ABT purposes, you absolutely must include k/m/ESOP's. By extension, since 1.410(b)-7(e)(1)(iii) only references ©(1) through ©(2) (that is, it does not reference ©(1) through ©(3)), we absolutely know that when doing this test, we treat the portion of a plan benefitting otherwise excludables as mandatorilly disaggregated from the portion of the plan that benefits those who are not otherwise excludable (and vice-versa). To get here is not straightforward, though, because it requires reading the last sentence of (d)(2). That sentence says to go back to yet another section for rules on how to test otherwise excludable employees. That is 1.410(b)-6(b)(3)(ii). So, the sequence is to look at 1.410(b)-7(e)(1)(iii) which back references 1.410(b)-7©(1) and -7©(2) and note that -7©(3) is not back referenced. I'm not sure whether all of this is a triple-negative or a quadruple-negative. It is surely not as simple as a mere double-negative.

No.

Somebody said "probably"????????? I have a single rate group, that has a ratio percentage of 89.66% when tested on a contributions basis and we are stuck on "probably"?

Yes, there is a correct answer and you have it, below. However, I disagree with you as to the fairness concept. The plan needs to engage counsel so that the plan does the legally correct thing, whether that is fair or not is irrelevant. Seems right to me, but this needs to be reviewed by plan counsel.

That it doesn't look like you even need to test on benefits. Body counts, please.