Mike Preston

If the amendment to increase accruals relates to the current year, then the current year's accruals are tested (that is, the sum of the regular accruals and the amount of the increase). If the amendment to increase accruals relates to a prior year, then the amendment is technically an -11g amendment and must meet nondiscrimination not only with respect to the combined accruals for the year, but also the accruals on a stand alone basis.

"....and that ERISA age discrimination prohibitions apply only to participants who attain normal retirement age". http://was4.hewitt.com/hewitt/resource/leg...quity_plans.pdf See page 4 Yes, I call that one of the tortured conclusions.

I'm not an accountant, but if the generation of that commission income was based on effort while an employee (and not, say, while dining people on Saturday night) I'd say the 1099 concept would likely not fly on audit. You make the point that, from a FICA tax perspective, all should be ok as long as all the income is reported and the taxes are paid. No argument there, although the employee's share is too high (he pays 7.65% too much, the employer doesn't pay enough). But the real issue is one of discrimination as to compensation. Treat the 1099 as W-2, but exclude it from consideration under the plan(s) and see where you get. Maybe it would be ok because the only person benefitting under the plan is Z, an NHCE, which would be fine. Now, assume Z is supposed to participate in the SEP. If the SEP contribution is based solely on the W-2 income the entire SEP is at risk because if the IRS determines that the 1099 income should have been W-2, Z didn't get the same percentage in his SEP as X and Y. So, I'd say that is a big problem. Assuming a non-model SEP (or, maybe it would be better put to say "assuming a prototype SEP instead of a model SEP) and assuming the SEP is ok standing on its own, I believe there is no prohibition against the "small law firm" sponsoring a profit sharing plan. If that plan covered only Z, that would be fine because Z is an NHCE. The maximum contribution would then be 25% of W-2. If you want to go over that amount, you can include the other four employees to the tune of $1 each. Then the amount going to Z could be 25% of all compensation (other than X and Y) less the $4. The maximum amount going to Z would then likely be 100% of W-2 (something like W-2 of $40k and contribution of $40k). But that is probably more complicated than you want to deal with in this situation. So, why are x and Y the only participants in the SEP?

What if pay doesn't increase? Doesn't the design of the plan have to satisfy the accrual rules 1.411(b)-1? Care to demonstrate how it complies with any of the three rules? Use two employees, both entering at age 21. One with no compensation increases. The other with a 5% salary increase per year. What if compensation decreases? Is it a final pay plan? Or a high x-year pay plan?

It depends. What did you think it was, if it wasn't a plan requiring 3% of pay as an employer contribution to avoid the need for ADP testing? You tell us what you think "safe harbor" means and then somebody can tell you if you are wrong.

Your definition of good and my definition of good are different. With a non-increasing percentage formula, only a tortured interpretation of the longstanding rules applicable under 411 can possibly enable a PEP to survive. If a CB plan has a problem with measuring accruals against annuities, and it does, a PEP has that issue in spades. As already mentioned it is most closely described as a CB plan without future interest adjustments, something that even most CB plan diehards admit is necessary in order to not violate 411 and 417. It may very well be that the political reality forces the defined contribution rules into play when measuring compliance with respect to hybrid plans, rather than the defined benefit plan rules. Such a result might be politically necessary, and would therefore "prove" those who advocated them to have been "right." But, IMO, it is symptomatic of why our entire pension system is viewed with such distrust by those who do not understand all of the intertwining issues. [/rant] Once upon a time, if a plan sponsor had a concern about a particular plan provision, conventional wisdom was to submit an LOD application to the IRS and see whether the concept could be approved. Then, somebody at the IRS developed the concept of "infinite hold" whenever there were issues that they either didn't want to deal with or couldn't deal with. This put practitioners in a tough spot. Either stop innovation or risk a position that might ultimately be held to violate one rule or another. In our competitive society there was no choice. As things diverged from the old "once upon a time" paradigm, the IRS saw their comments made at conferences as to the advisability of various designs given less and less credibility when applied to newly developed concepts. This emboldened certain practitioners. The result is a system where inertia has allowed such concepts as CB plans (and, you say) PEP's to flourish notwithstanding the apparent lack of guidance. Great risk was therefore assumed by those who jumped on these bandwagons. I wonder how many were fully informed of the positions taken without clear guidance? All of those positions taken on the basis of "good" arguments, no doubt. The fault in this scenario, if there is one to be had, was the IRS' decision to "mothball" those things that they felt couldn't be dealt with. I'm sure there were some that thought they were doing the right thing by not rushing to judgment. A cynic would have you believe that they thought they could accomplish by inaction that which they couldn't by forthrightly dealing with the issues. The undermining of the system was predictable. What we need now is an arm of the government that can and will work with the private sector to provide for clarity. A pipe dream? Probably. [/rant]

A SEP (SAR or otherwise) is always an IRA. So your question is can an individual's IRA be rolled over into a 401(k) plan. EGTRRA provided that such a rollover is indeed possible. Of course, the plan has to be amended to allow for it.

I don't think the concepts you are mentioning apply in the context of a DB plan. I believe there is a case out there somewhere which held that a plan sponsor that dumped a whole lot of money into a plan in excess of the total liabilities of the plan was held to violate the exclusive benefit rule. Maybe something like total liabilities of $150,000 but they put in over $2,000,000. It is a very distant and hazy memory. But if the purpose of the funding is to shore up an otherwise underfunded plan or to create a somewhat overfunded plan I can't see the IRS being concerned. Assets to liabilities of nearly 15 to 1 though might be an issue.

To confirm that the deposits have indeed been equal to 3% of compensation? To ensure that compensation taken into account does not exceed the 401a17 limit? To be able to answer the question on the 5500 about timing of contributions with respect to deferrals? Bedtime, I think.

The requirements are the same. What they actually are will depend on how compensation is paid (W-2? K-1? Schedule C?) and how the elections are timed. For example, assume a plan is drafted such that an election can be made at any time. It is a C-Corp so all compensation is paid through payroll and reported on a W-2. Assume that the individual in question has an election on file that says: NOTHING. Then, on December 20, that person signs a modified election saying: 90%. Assume one more paycheck during the year for $5,000. That person's election is $4,500 for the year and it should be deposited as soon as it is reasonable to segregate that $4,500 from the general assets of the corporation (PDQ). Change the facts to a sole proprietorship and it may be possible to delay depositing the funds until after the net Schedule C income is determined, which might be April 10th or so (or even later if on extension). But I don't think the requirements for a solo k plan are any different than what they are for a non-solo K plan.

Sounds like an algebra problem: Solve for 3 unknowns with only 2 equations. Or something like that. ABT is only a "must pass" if you need the ABT to pass. Sounds circular, I know, but if everybody is in all plans, then the ABT is superfluous. But, if you need to run it, yes it must be run on all benefits unless you want to use the exception of running it solely on DC and solely on DB and then testing each type of plan separately without aggregation. If you do that, you can only test for DB on benefits and only for DC on contributions, unless one or the other satisfies the ratio percentage test. See 1.410(b)-5(e)(3).

I think the basic definition of a Pension Equity Plan is that a participant's benefit (account balance) is determined with reference to a formula that is multiplied by their compensatioin earned since inception (or, at least, since some date in the past). A typical formula might be 7.5% of pay. Hence, if an individual makes $40,000 in 2003, has worked for 10 years, and has never received a raise, they would have $400,000 in compensation and their PEP "benefit" would be a lump sum of $30,000. If that person started employment with $22,000 of compensation in the first year, and $40,000 in the last year, increasing $2,000 per year, then their total compensation over that 10 year period would be $300,000 and they would then have an account balance of $22,500. As you can see, this is something like a cash balance plan without any interest adjustment (I know that is definitely oversimplifying). PEP plans are not typically provided by non-governmentals as it is almost impossible to meet the Internal Revenue Code 411 accrual rules in a "pure" PEP. At least, that is my understanding.

For 401(k) tests, you only use the information from the plan in question. For all other tests, you include the other people in the numerators and denominators when counting, you do not include any of the benefits in the other plans except when running the average benefits test.

While it may not be efficient, or wise, the answer is yes, it can be done. Probably more cost than it is worth, though.

As long as it is truly a "non-profit" they should be fine. However, note that the issue here is whether the entity is exempt from the excise tax on making contributions which exceed the calculated maximum deductible contribution. The IRS has opined in the past that to be exempt a non-profit had to meet, IIRC, the following two criteria: 1) They must *always* have been a non-profit 2) They must not *ever* have been subject to UBTI. There may even be more criteria. In any event, the issue isn't as simple as it seems at first blush.

I told you the reinsurers would be cautious. I just didn't know it would be because Grady wouldn't pull Pedro when he obviously should have done so. This appears to be a common theme. Except for Joe Torre. We've seen the Giants (Dusty Baker) in game 6 of the 2002 World Series do it. Dusty does it again this year. Grady does it, too. While it seems obvious to those watching on TV or, in hindsight, maybe the view is entirely different on the field (or, from the dugout). In each case it appeared clear that the pitcher had lost a significant amount of "stuff" and that the bullpen had to be the better option. But in each case the manager says, with an apparently straight face, "That is the guy we _wanted_ to go with at the time.....". Maybe that is why the Yankees are going to the WS again. Maybe Torre has somebody watching on TV so he can actually tell when a pitcher has hit the wall. Then again, it could just be that he has Mariano.

Well, it might not be ungenerous enough, but then again it might be. I think it is likely that the analysis is using accrued-to-date methodologies in a non-top-heavy plan. That allows employers to catch up for past allocations which were bottom heavy. Looked at in that vein, the overall percentage is not likely to be 99.8% or anywhere near. I don't think that using k/m as offsets is ever allowed under a4.

Just ">90%"? Not ">95%"? Why so generous?

It might make sense, but I'm not sure it is easy to get there. Is this change one of the ones that is approved automatically? I seem to recall that it isn't in all cases. How about the following? Keep the date 12/31 and consider the assets distributed to be still owned by the plan. The liabilities will be based on the actual benefits settled, plus an amount that represents the substantial owner's benefits that were not settled. If you have a credit balance coming into the year, and pro-rate the charges to reflect the 1/15/03 termination date, my guess is that minimum funding will approach zero faster than a good diff-E-Q.

You use the age that they turn in the calendar year. If born in 1931, then the participant turns 72 in 2003.

I'm not sure I agree. Refunds, if it comes to that, are based on a "dollar down" concept now. Those that defer the most are saddled with refunds and the percentage of compensation that those deferrals represents no longer determines their personal share of the refunds. That is what the OP was complaining about. If the folks that deferred early in the year are the "heavy hitters", with compensation in excess of $200,000, such that their deferral percentage appears to be 6%, then THEY would be saddled with refunds if the test eventually fails. However, by limiting HCE's for the balance of the year such that the test does not fail, nobody gets any refunds, but the impact is essentially the same as if the test were to fail and those who deferred the greatest percentage of pay (the folks other than the "heavy hitters") were saddled with the refunds.

Oh, you are going to get technical on me, huh? ;-) In which case we state that: 1) Yes, it is discriminatory, 2) No, it is not prohibited discrimination, and, 3) Yes, it is still fair. <gd&r>

It is identical. A target plan is nothing more than a money purchase plan with a different contribution and allocation formula. Treat it exactly as you would a money purchase plan (because it IS a money purchase plan).

However, the complaint here is that those who deferred earlier in the year will somehow have an unfair advantage because they are not subject to the cutback in deferrals for the balance of the year. I don't see it as being unfair. Everybody could have, had they wanted to, put more money in earlier. The fact that they didn't was their own decision and this is one of the risks that they assumed by not putting money in the plan before the doors were partially closed.

2002 or 2003? In any event, I believe that to be incorrect. The plans are given a free pass as to 410(b). If the plan designs are safe-harbors as defined under 401(a)(4), then you are done. However, if they are not safe-harbors, I don't think the general test under 401(a)(4) has the same sort of transition period that 410(b) does.