Mike Preston

Only if the employer is over age 50 at the end of the year in question. But otherwise that is precisely how the catch-ups are supposed to work.

I have made the same change to the spreadsheet uploaded pursuant to Earl's request, as well. So, if anybody downloaded it before the date/time of this [edited] message, you need to either make the change as indicated or re-download.

Actually, it should be E15 in the first place rather than E$15 so it will change as you indicate, but there is no real reason to "freeze" the row either because it isn't copied to any other location. I have re-uploaded to the original message a modified version making that change. So, if anybody downloaded it before the date/time of this [edited] message, you need to either make the change as indicated or re-download. Thanks for the feedback.

OK, Earl. Try the attached. If you think the prior spreadsheet came without any warranties, that goes for this one to the nth power! (where N=> infinity) See the prior message for how some of the information is expected to be input. C7 now asks for overall profits, and the amount put in there is allocated to Partners IN ADDITION to the individual earned income put into row 12. Row 13 now asks for the share of profits to divide up the overall profits identified in Cell C7. This allows for a share of profits to be different from the share of expenses. There is only one "share of expenses" row, which is Row 16. If an employee becomes a partner during the year, the portion of the ER contribution attributable to the period of time when that individual was an employee is shared among all the partners (including the partner who was previously an employee). If you don't like the way the breakdown works, change the percentage on the "share of expenses" row until you like what you get. Line 22 now contemplates that any W-2 from the firm should be entered here. It is only used on this line for partners, though, to determine the FICA offset. It is NOT tied to the "employee" column (see below) because I've seen situations where accountants issue W-2's for partners that were never "rank and file" employees during the year. Flexibility makes things complicated, doesn't it? In normal circumstances you would just enter here the amount of W-2 from the column that represents the employee. Or, if the partner was never an employee during the year, normally this would be zero. Line 23 asks for W-2 earned outside the firm to help determine the FICA offset, also. Some judgment is used in this break down. If you don't like it, change it! Note that this is just a shortcut anyway, because the other "modifiers" that you find on Schedule SE aren't included here. In normal circumstances, without farm income and the like, it should get you close. Line 26 asks for the COLUMN indicator of the COLUMN that corresponds to the employee that matches the partner. Huh? If an employee becomes a partner during the year, enter that employee both as a partner and as an employee in separate columns. Then indicate in the partner's column, in line 26, the letter that corresponds to the employee's column. I have removed the cell protection on this workbook because there are just too many things that somebody might want to override. There are a ton of things not "checked" (for purposes of maximums, like overall deferral limitations, overall 415 limitations, etc.). The compensation limitation of $200,000 (as input in Cell C5) *IS* checked, however, and limited as to the SUM of the EE and Partner columns, if Line 26 has a letter in it. Again, no warranties, and check absolutely every result.... twice... to see whether it really works. Net_Earned_Income_Determination_version_with_Partner_W2.xls

Bernie, Try the following. I make absolutely no warranties of any kind, however. Instructions: Input stuff in blue cells. Start with the plan stuff at the top. Cell E4 is for overriding the integration percentage if you aren't using a standard one. Cell C2 is Y if SH match is 100% up to 4% of pay; otherwise if it is anything other than Y it is 100% up to 3% plus 50% over 3% and up to 5%. Then put in everybody's deferrals in row 16 Then put in actual earned income inn row 12 Then put in "share of employee cost" in row 13 Then put in something for compensation in row 9 Then see if the stuff in row 9 matches the stuff in row 30 If not, change the stuff in row 9 until it matches row 30. You can hit cntl-shift-I if you have enabled macros and it will fiddle with 9 until it matches row 30. Again.... no warranties. [Macro wasn't updating the 6th Partner column, so I changed it.] Net_Earned_Income_Determination.xls

Yes. (g)

Assume you have a plan that provides a projected benefit of 100% of compensation. As of the end of 2003 the individual has an accrued benefit of $4,000 per month and that the projected benefit is $8,000 per month. Assume the contribution requirement based on a projected benefit of $8,000 per month is $75,000. Assume the plan is amended 3/15/2004 to modify the projected benefit to 90% of pay. The accrued benefit, of course, can't be reduced below the already accrued $4,000/month. But the projected benefit is now reduced to $7,200. Assume that the actuary takes the amendment into account for purposes of determining the minimum funding for 2003. Assume that this reduces the required contribution from $75,000 to $69,000. The Schedule B is completed on the basis of the $69,000 required contribution.

Please make sure your session is not scheduled at the same time mine is. I want to hear YOUR Mr. Preston story!

I don't believe that the administrator has any responsibility whatsoever (at all? ;-)) after the check is cut. If there is any responsibility at all it is before the check is cut. The course of action taken (cutting the check) is of course subject to the normal rules on when or when not to do something and documenting that is a fine thing to do. But once that money is out the door, there is nothing left to do. Ever. One does not and can not default the loan no matter what the participant actually does with the proceeds. Oh, I suppose if you have a loan policy that says the plan administrator will check up on you and default your loan if you spend it on something other than what the loan was justified for you would have to follow the loan policy. I'd let the loan policy drafter do the work required, though, as the responsibility for such a silly (stong enough?) policy should be borne by the drafter.

In order to make this "work", which as mbozek points out it does so just fine, there are two things that need to happen: 1) The refunds must be taxable in 2004 - which means they must be refunded after the deadline and the employer therefore pays a 10% excise tax. 2) The NQDC plan must be something the participants and plan sponsor are willing to create, live with, etc. Not as simple as it seems and probably cost prohibitive between hard dollar expenses to establish and soft dollar expenses to get up and running. Unless this is something that already exists within the culture of the plan sponsor it is a non-starter without a lot of grief, typically.

And I am penciled in to chronicle a year in the life of a small defined benefit plan. I'll leave the tough stuff to Tom!

I believe you add back regardless of HCE/NHCE status. I also believe that ADP/ACP corrective distributions are added back to the extent they are actually distributed to the participant in question. If they are forfeited, I don't think they count as distributions to be added back.

The 412c8 election is now a part of the 5500 itself. However, if filing a 5500-EZ the election must be attached.

Following anything other than Harwood's "opinion" on this is likely to find one's plan eligible for EPCRS.

There is no DUTY of the plan administrator beyond the date that the check is cut. However, if the participant comes back the next month and asks for something that is inconsistent with the prior request, the plan administrator has a duty to not proceed. This is very similar to the fake QDRO situation somewhere in the Southeast a while back. It was ok for a plan to process the first few, but once it became clear that something was rotten in Denmark (Georgia?), the plan administrator had a duty to do something other than just process the paperwork as if it had no knowledge that something was amiss. Exactly what to do is a much more interesting problem. For that, they have ERISA attorneys!

Yes, that is one of its most useful features.

SIx of one, half a dozen of the other. I suppose, if one was being charitable, one could say that the ASPA Q&A was merely silent on the issue as intended.

I don't think so.

IMO, Yes.

It depends. If you are testing on the basis of those who are statutorily eligible and those who are not statutorily eligible you would not include those that are eligible only for the k plan. However, if you are not testing separately under 410(b) then your average benefits test must similarly not be separated. The basic rule is from the definition of a plan in 1.410(b)-7. The IRS got this one wrong at the 2001 ASPA Annual Conference where they said that there is always precisely one ABT. Then they reversed themselves and got it right at the 2002 Enrolled Actuaries meeting. Q&A From 2001 ASPA: 1. Plan has immediate entry in 401(k) and 21/1 for profit sharing allocation. When running the average benefits percentage test for purpose of the general test how are employees with less than a year handled – i.e are they in the ABPT? A: Yes, they are in the ABPT. Does it matter if we have bifurcated for ADP testing or not? A: No, not for the ABPT. Q&A From 2002 EA Meeting: QUESTION 43 Other DC Issues: Treatment of Different Eligibility Requirements in Average Benefits Percentage Test A plan allows immediate entry for purposes of making 401(k) deferrals but imposes one-year service and minimum age 21 eligibility requirements for participation in the plan’s profit sharing allocation. a) Are employees who have not completed the age 21 and one-year service requirement included in the average benefits percentage test (ABPT) for the profit sharing component plan? b) Is the response the same if the 401(k) component plan is disaggregated into two components using the otherwise excludable employee rule? RESPONSE a) Yes, they are in the ABPT. b) No, in that case, the “otherwise excludable employees” component plan is a “mandatorily disaggregated” component plan that cannot be included in the ABPT testing group. Reg. 1.410(b)-7(e) calls for the aggregation of the “plan being tested and all other plans of the employer that could be permissively aggregated with that plan”. The regulation indicates that this is determined by applying paragraph (d)(2) [Rules of disaggregation] of this section without regard to paragraphs ©(1) [401(k) and 401(m) mandatory disaggregation] and ©(2) [ESOP mandatory disaggregation] of this section. Thus, the disaggregation rules do not allow mandatorily disaggregated plans, other than 401(k), 401(m) and ESOP component plans, to be included in the ABPT for other classes of plans. If you want chapter and verse there is a really, really long post of mine somewhere on here that goes into all the citations one could ask for. I think. Maybe somebody else actually knows where it is!

I'm with Katherine. I think pro-rata fees are always acceptable, no matter how the charges are developed.

It did to me! That means you are probably in trouble. ;-)

I fully admit that it looks crazy. However, there are circumstances where it can make sense. Just some examples: 2 person plan with second person being the owner's relative (spouse, parent) with compensation of $40,000. A favored NHCE, such as a son-in-law or brother. Especially if, in the absence of the benefit, the individual might clamor for compensation such that they would end up being an HCE. It can work in any situation where an NHCE wants to trade benefits for compensation (I know one has to be careful of the deemed CODA minefield). In any of these situations, the terms of the plan must make it clear how this sort of disparate allocation is accomplished. Whether it is a tiered plan design or a reallocation of 415 excess, the result is all that matters. I'm sure there are others, but that is just a top-of-the-head list.

Surely you wouldn't hang for it. Maybe breaded and baked is more apt.

Q1: The determination of the number that you multiply by 20% in order to establish the employees that are HCE's because of compensation is not a trivial calculation. It has nothing to do with who is eligible under the plan. You need to read Q&A 9 of regulation section 1.414(q)-1T. Basically, the employer needs to answer five questions: a) What is the service threshold to use in determining the top-paid group? [Default, and maximum, is 6 months] b) What is the age threshold to use in determining the top-paid group? [Default, and maximum, is 21] c) What is the "hours per week" threshold to use in determining the top-paid group? [default, and maximum, is 17.5] d) What is the "months of normal work" threshold to use in determining the top-paid group? [default, and maximum, is 6 months] e) If the employer employs those who are covered by a Collective Bargaining agreement such that the number of collectively bargained employees is 90% of more of the employer's total workforce, then does the employer choose to ignore the collectively bargained employees when determining the top-paid group? Once you have the answers to the above questions, you can fill in a chart that will look roughly like this: 1. Total Employees employed at any time during the look back year: ______ 2. Subtractions: a) Employees that did not complete W months of service where W is determined from (a) above. Note how this is determined (See Q&A 9-(b)(1)(i)(A) of the regulation cited above for this. Basically, you look at everybody who is employed during the lookback year who had, if active at the end of the year, a hire date that is at least W months prior to the end of the plan year, and, if not active at the end of the year, a hire date is more than W months prior to their termination date). _____ b) Employees who did not reach their X birthday as of the end of the lookback year (or as of their termination date if no longer active), where X is determined from (b) above. ____ c) Those employees that do not "normally" work Y hours per week, where Y is determined from ©, above. Again, note how this is determined (See Q&A 9-(e) of the regulation cited above for this. Basically, you count the number of weeks that an employee worked at least 1 hour. You then count the number of week that the employee worked at least Y hours and the number of weeks that the employee worked less than Y hours. If the former divided by the sum of the two is 50% or more, that employee is not excluded under this rule). ____ d) Those employees that do not "normally" work Z months during the year, where Z is determined from (d), above. (See Q&A 9-(f) for the determination of this one. This one is the toughest to determine because it is the only one where you take into account experience before the look back year. Most often I see people just default this one to ZERO to avoid the complexity.) _____ e) If the answer to (e), above, is YES, those employees that are excluded pursuant to (e), above, if any: ___ 3. What is (1) less the sum of 2(a) through 2(e)?: _____ 4. The number in 3 is multiplied by 20% to determine the top-paid group number. ___ But you aren't done, yet. Now you need to round the number determined in 4. You can round up. You can round down (truncate) or you can round to the nearest whole number. You need to adopt a rule here, though, and stick to it from year to year, as there is a consistency requirement. Now that you have your number, you rank the employees by compensation in the prior year and you make those that are in the top 20% the HCE's. Note that it is possible to have somebody in this ranking that is not included in the total in 3. For example, if you pay somebody lots of money as a hiring bonus at the end of the lookback year they might be excluded under (a) because they did not work 6 months by the end of the lookback year. But if they end up being in the top 20% of all employees, they are still an HCE. This all seems pretty intimidating, but it really is a pretty simple determination once you get the answers to the questions above. There are some minor exceptions to the above (like if the employer has a QSLOB), so there really is no substitute for reading the regulations: both 1.414(q)-1T and 1.414(q)-1. Q2: No.