Mike Preston

Get disabled. Get divorced. Go back to work at a company that allows rollovers from IRA's. Then quit. Assuming the individual is over age 55, distributions from the plan might be exempt from the excise tax. The last idea is not as farfetched as the first two. Have you tried using the RMD tables in lieu of the annuity rates method? Remember that the 120% rate is not cast in concrete. It is merely an example of a rate that was deemed to satisfy the requirement of being "not too high" when it was approved in a PLR. RR 2002-62 doesn't specify an interest rate, does it? What do you think the highest rate can be and still not be greater than a reasonable rate? How lucky do you feel?

There are no hard and fast rules out there. So, you might want to let the client know that there is this issue that they need to get resolved. Your legal department needs to follow the rules, so it needs to get the issue resolved and guide the process. If the net result is that the plan is considered to have violated the substantial and recurring requirements, then the plan participants will be 100% vested at that point. That time might have been in the past. If so, then certain distributions might have been made which were less than the employees' vested interest in the plan. That is the real exposure here. You, as Trustee, need to ensure that you have no liability and that is hard to do once you have been made aware of the situation, even if you are a directed Trustee with respect to administrative functions, which is likely. I have heard that a 3% of pay contribution once every 3 years will ensure that the plan doesn't violate the rule. I have also heard the IRS say on occasion that if the entity in question has no profits and the plan document requires profits that an interval of 5 or 6 years might not trigger the issue. Obviously, there is a lot of middle ground that can go one way or the other.

If I understand the question, yes.

I suppose the lawyer idea is a good one. But if the plan approved the draft DRO as acceptable and didn't communicate that the real DRO had to show up within a specific period of time, I would bet the lawyer would counsel something like the following: 1) Pay the alternate payee as per the QDRO 2) Reduce the payments to the participant to recover the overpayments. The Plan Administrator might endeavor to make this adjustment in as painless a method as possible. Maybe reducing the life annuity to reflect the overdistributions? If that isn't fast enough for the Plan Administrator, certainly no greater than a 50% reduction until paid back. You might want to give the Participant notice of what is intended and let them register any complaint they have in a given window. You might want to have the lawyer hired by the plan write the letters to the participant on behalf of the plan. Does anybody see any problem with the above advice, assuming the facts are as given, of course?

I'm not sure it is a 415 violation, per se. It is possible that the deductions claimed exceeded the deductible amount, but that doesn't give rise to a 415 violation. Unless of course a distribution in excess of the maximum lump sum was also make.

Every pre-approved document I've seen has the language you cite. You are correct.

It can't. The only way to eliminate the DB feature is to allow for participant choice in the conversion of their benefits. You can only do that at retirement age or plan termination. I suppose if 100% of the participants in the plan are beyond NRA, one could make the argument that a participant could be given a choice as to benefit distribution, and if they elected to move the monies into the contemplated DC plan, that would work, ala 414(k). Of course, that is whole other can of worms. And I suppose if one wanted to be super agressive about it the plan's definition of NRA could be lowered to be lower than the youngest participant in the plan. Have to be very careful about benefit formulas, though. Wouldn't want to make somebody's 10% of pay benefit payable 20 years earlier, would we? Geez, just terminate the DB plan already.

If it is a percentage of deferral it is a match, no?

A SEP is not a qualified plan. Hence, you can't restate a SEP into a 401(k) plan. You can, therefore, create a SH 401k plan at any time if the only existing plan is a SEP. However, since a SEP is not a qualified plan, the rules regarding how a SEP can be terminated are not the same as a qualified plan. If you review some of the SEP threads you should see comments along the lines that a SEP creates a contractual promise that can't be eliminated retroactively.

No. In my world a "profit sharing contribution" is a "profit sharing contribution." A "match" is a "match."

With respect to the 401k deferrals, sure. But the OP was dealing with both deferrals and PS contributions.

She didn't address it because she didn't need to address it. The whole darn plan is top-heavy. Period. People who have designed a SH 401k plan with disaggregation for those who don't meet 21/1 are out on a limb if the plan is TH. While an argument can be made that the "plan" for SH purposes consists of only those who meet statutory eligibility (and hence you retain SH treatment of the 401k plan), there is no question that since the overall plan is TH the minimum contribution must be met somehow for all participants, even those who do not meet statutory eligibility.

The "highest outstanding balance" seems pretty clear to me. Look at the last year, day by day. What is the amount that the participant would need to pay in order to eliminate the loan on each day? Take the highest one. Examine the consequences of doing it any other way. What you'll find is that if you are wrong, the entire new loan becomes taxable when issued. Why take that risk?

Just resign if he won't do it. Who is the looney tunes suggesting that it isn't a plan termination? Going to any attorney familiar with these matters will generate a citation for the client.

No. No. No. Hence, it is better to make the contribution that is deductible before the due date of the tax return (and make sure the due date is before 9/15) and then file by that date (no later than 8/15) then deposit the balance before 9/15. Then you have a chance of using that towards the deductible contribution for the next year even though it counts for the required contribution for the prior year. Kind of mucks up the actuarial valuation as you have two separate asset values, one for 404 and the other for 412, but it beats the alternative.

If they really want out, why not have the plan sponsor amend the plan to eliminate the individual? If the plan document allows waivers of participation, I don't think they are restricted solely to those who have never participated. I'm not an enthusiastic proponent of allowing waivers. They should at least be subject to Plan Administrator review and/or rejection. Otherwise, too many NHCE's might waive out of a plan and threathen its qualification. Sometimes "too many" is 1!

Not legitimately, in my opinion. There may be a way to accomplish close to what you want though if you use EPCRS. I seem to recall that there are certain corrections one can make that involve ignoring a correction for any participant who would have a correction that is less than $20. But you have to satisfy a certain "pain" threshold in order to take advantage of this rule. That is, the plan would need to claim that it would endure too much pain if it attempted to correct completely. That seems like a hard threshold to meet, on its face. But, then again, maybe not.

1.It is an S-corp. Therefore the FYE is 12/31, right? 2. In order to have a deduction disallowed the IRS has to disallow it. Nobody else can. See 90-49, which I think has something on this issue, even though it is geared towards DB plans. Also, in order to have a contribution contingent on deductibility,the plan must so state. In fact, the IRS, around 1990 or so when 90-49 came out, made it clear that even if the document said the Plan Administrator "MAY" withdraw a contribution that was disabllowed, that the language wasn't good enough. It had to say "SHALL" withdraw.

No.

I am not in agreement with Blinky on his opinion as to the acceptability of individuals being in their own groups. If the IRS thought it was a problem, they would have said so before approving it for use in so many _pre-approved_ documents. With that said, I also disagree that 2 is a "must". The only way one is forced into the ratio test for 410(b) is if you are including in the allocation/benefit provisions a group that does not satisfy the reasonable classification test. That may or may not happen. It is much more likely in a DC plan where the exclusion is potential in each year. In a DB plan with multiple formulas, unless one of the formulas was "zero", it just doesn't apply.

My comments were only 1/2 done when I had read pax's comment in another window. I intended to not respond at that point, but I clicked the add reply button anyway. I could have edited the post to complete my comments, but there was nothing substantive I had to add other than saying that the IRS' position on the retention of annuity rights and lump sum rights seems illogical to me. Of course, participant elections upon plan termination negate the need.

The plan really can't do much until it gets a DRO. The only possible exception has to do with freezing of investment/distribution options once the Plan Administrator is informed that a DRO may be forthcoming. However, that is a sticky subject. Basically, the Plan Administrator should be ok as long as the QDRO procedures are followed. If the Plan Administrator doesn't follow its own QDRO procedures, there may be some difficult times ahead. So, what do your QDRO procedures say?

Start wtih 1.411(d)-4 Q&A1-4(d). Then trace back to 1.411(d)-4 Q&A1-1(a). Then on to 411(d)(6) itself and finally 411(a)(7). There are other things to read, like the full code and regs mentioned, but those are the highlights.

Somebody will probably come up with a cite to contradict this, but I think the Annuity Starting Date is as you have defined it. Hence, if the ASD is indeed 1/1/2001, you use the rate (and mortality table) in effect on that date, along with the other plan provisions which identify the benefit at that time. If this includes an interest adjustment since then to compensate for the time value of money, as I would expect it to, the amount distributed today will be higher than the amount you would have distributed then. But that doesn't change the ASD. If they want a current ASD they get the current rate (and mortality table) but they also get the current benefit under the terms of the plan.

1. You don't "enter" it anywhere. It just happens. Your income from your employer was $X. It doesn't matter whether you put $0 into the 401k or $13,000, it is still $X. You report that on your 2002 tax return. Later, you exclude from income your 401k deferrals. The amount that you can put on that line is maxed out at $12,000. Even though you actually put $13,000 into the plan, you still only list $12,000. When you compute the amount of income subject to tax, you will subtract $12,000 from $X (along with other stuff). The net effect is that you pay tax on the additional $1,000. 2.If you enter it as a loss at all, it will be for 2003. 3. 2003 tax return, because that is when the money was forwarded to the IRS. I'm not 100% sure on this one, though. Again, since there was nothing really taxable to you in 2003, as fas as the check you received goes, then I'm not sure it was appropriate to withhold taxes. But, they _were_ withheld, so you are entitled to get credit for them. Since they were withheld in 2003, I don't think you can claim them as having been withheld for your 2002 taxes.