Mike Preston

No new number. No final 5500, just a continuation. You aren't missing anything.

There have been a fair number of provisions approved over the years that have been deemed inappropriate by the Service in restrospect. Reliance is a nice thing to have. All I can say is that the IRS is somewhat adamant as to what constitutes a "word-for-word" adoption. It is their game, so they get to make the rules. I have fought this particular battle in great detail, so I'm only sharing with you that which I have been told is the ONLY way to insulate the plan sponsor from a claim by the IRS that the document is not a word-for-word adoption. And that is to adopt the plan with documentation that is "word-for-word". If your addendum wasn't submitted to the IRS as part of the pre-approval process (which we both know it wasn't) then the fact that it has language which modifies the plan just seals the fate of the plan sponsor. It is not a "word-for-word" adoption. As indicated in a prior message, you need to do something that finesses the issue. Certainly, having multiple adoption agreements executed fulfills this need. Having an amendment made which is not part of the original "word-for-word" adoption appears to meet the need. But having the original "word-for-word" adoption be something (anything) other than pre-approved language doesn't. Have fun.

None that I can think of. It may not be the best plan design, but that is picking nits.

The SEP is independent of the spouse, if the spouse works for an unrelated entity.

Personally, I think it should be a fine thing to do. I just wonder if anybody at the DOL would have a problem with it. Maybe not.

Age is not relevant to this particular distribution pattern. The exclusion from the additional 10% tax is found at section 72(t)(2)(A)(iv), which reads (as part of a list of exceptions to the additional tax): "(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary." Note that there is no age referenced.

I'm not sure I understand your last comment. Isn't this a pre-approved plan that you are trying to shoehorn your multiple formulas into? If it is pre-approved, that sort of answers your question as to where it is written that the IRS gets to approve the language. If you don't want a pre-approved type plan, the IRS has to go along with anything you write that is substantively compliant. And I'm worried that the way you are contemplating implementing the formulas will result in either the plan being deemed outside of the IRS' parameters for pre-approved plans, or will result in a potential interpretation that a formula higher than what you want to be effective is somehow applicable to a given participant.

As I said, I'm just playing devil's advocate here. But you didn't answer my question, did you? How does one demonstrate that the policy itself is not discriminatory? I honestly don't know how I'd go about that if the DOL came in and said something like: "We don't like it, tell us why we should let you keep doing this."

Just playing devil's advocate here. How does it possibly not discriminate in favor of HCE's? Wouldn't 25%-30% of an HCE's salary tend to be higher than the same percentage of an NHCE's salary? How does the Plan Administrator demonstrate that the imposition of this percentage limitation is not a defacto mechanism for discriminating as to the loan amount for NHCE's?

I think the guidance in the regs is provided by the history of the regs. I think Q&A 20 talks about multiple loans. The original proposal of Q&A 20 indicated that anything in excess of 2 loans per year would result in a deemed distribution. The 2 loan maximum was eliminated from Q&A 20 when it was finalized. The purpose of eliminating the 2 loan maximum in a given year was, in part, to deal with the situation you have here. if the numbers work out according to the reg, I see no reason why a plan sponsor would want to insist on defaulting a loan when an alternative is available to the participant. OK, maybe I see at least one reason: administrative costs.

I knew there were three kinds of actuaries....but..... (g)

I guess the term suspense account isn't very accurate in this case, is it? Nonetheless, that is what it is called. On the last day of the prior year the money has to be somewhere. You can't give it to the owner, so it has to be in a .....yes....suspense account. That account is used to fund the next year's allocation, just like a contribution made on the first day of the year would be used to fund the next year's allocation. The interesting part of all of this is what you do with the earnings on the suspense account. Are they turned into annual additions? Or are they regular earnings that will naturally flow to the owner? What if they are negative? I think the answers to all of these questions can be found by looking at the language of the plan. What does it say?

Yes, the excise tax is levied only on amounts contributed in excess of the amounts that are deductible. The amounts must stay in the plan unless they were brought about by very limited circumstances. To the extent they remain in the plan they are part of a suspense account. The suspense account is used to fund subsequent year contributions. As to where it is reported on the 5330, have you looked at the form? It is very hard to miss.

You need to find out whether the amount being refunded is due to amounts that you deferred which are in excess of the maximum allowed by law (12000) or in excess of the maximum allowed in the plan (this limit can vary). It sounds like it is the latter, because they have told you that you will be taxed on the amount you are getting back in 2003. However, if they have led you astray, and you are getting money back because you have deferred in excess of the maximum allowed by law, you will find that the impact is that you end up paying tax on the entire amount of the overcontribution in 2002. That is, you will only be able to exclude from income the 12000 maximum allowed by law, even if you deferred more. If this is the case, the 1099 you will get for the distribution (a 2003 1099) doesn't really mean much to you.

Maybe nothing, and if the 1/1/97 formula is the lowest, you may be fine. But if it isn't the lowest, I think there may be issues. Why do you favor an addendum over amendments? Aren't they substantively the same thing?

I vote for none of the above. I think a good course of action would be adopt the formula in the A&R which is the lowest. Then prepare as many standalone amendments as are necessary to implement the higher formulas at different dates, with effective dates as appropriate. The problem is with shoehorning multiple provisions into a singular document. I have talked with a number of people at the IRS and they are pretty adamant that the GUST restatement itself needs to be a "word for word" adoption, and if the document as submitted didn't include language which allowed for multiple effective dates as to formulas, well, you just can't use that document along with a modification that does provide for multiple effective dates and retain word-for-word reliance. So, you have to finesse it another way.

Not if they aren't adopted within the 412c8 period (which would have ended on 3/15/2003 - or 3/17/2003 if you are of the mind that the deadline is extended).

I haven't heard of anything lately.

I don't think you can have participants in the 401k plan not eligible for the SH ER contribution. If you do, you don't have a SH 401(k) plan at all. You have a 401(k) plan with a group of people getting a 3% contribution that happens to be 100% vested. So, I think the answer to your first question is that, yes, in order for the SH 401(k) plan to be a SH harbor 401(k) plan, the NHCE's who are also participating in the DB plan must get the 3% contribution. The net impact is that 404a7 comes into play and the maximum deductible between the DB contribution and the SH 3% contribution to the SH 401(k) plan is 25% of pay, or if greater, the DB contribution alone. No, the 3% SH contribution cannot be deemed to be satisfied in the DB plan. Hence, there is no ability or need to handle this through plan documentation. It is what it is.

I think I'm going to hold to my original position. I know this is tenuous and a more direct citation would be desirable, but try this one on for size. 404(n) is quite broad. It says that for 401(k) deferrals, "such elective deferrals shall not be taken into account in applying ANY such limitation to ANY other contributions". The beginning of 404(n) indicates that it will apply to "paragraph (3) ....of subsection (a)". If we look at 404a8c, it starts by saying that it applies to plans described in paragraphs "(1), (2) or ***(3)***". Does the reference in 404a8c to "(3)" coupled with the reference in 404(n) to "(3)" mean that 401©(2)(A)(5), which reads: "with regard to the deductions allowed by section 404 to the taxpayer" is applied without reducing earned income by elective deferrals? I think a strong argument can be made that this was the intent of 404(n). Will we know for sure until some clearer guidance is issued? I don't think so. As mentioned in my last message, most of the time it doesn't make much difference, as a sole prop that has a DB along with a 401(k) is likely to have average compensation in excess of the 415 dollar limit even without resolving this issue favorably. A freind of mine sent me the following quote from RIA, which supports this conclusion: illustration: An owner-employee with $100,000 of earnings for 2003 (before compensation to, and contributions and deferrals for, the owner, and disregarding social security taxes) seeks to maximize deductible contributions through a 401(k). If incorporated, this would be a total of $32,000-that is, $12,000 elective deferral and $20,000 corporate profit-sharing contribution (25% of $80,000 salary). The owner pays income tax on $68,000 (salary less elective deferral). *** If unincorporated, contributions also total $32,000-that is, $12,000 elective deferral and $20,000 of profit-sharing contribution (25% of $100,000 minus $20,000). The unincorporated owner-employee is taxed on $68,000-that is, $100,000 less deduction of $32,000.***

RJ, you got my drift. The ADP/ACP tests and the 410(B) tests are almost never the same as the "beginning of year participant counts." The beginning of year counts are much easier. You just use your fingers and count everybody who is employed that is a participant on the first day of the year and then you use your toes and count everybody else that has an account balance. What I do not subscribe to is the old theory that held you also count those people who had a non-vested account who do not have a break in service as of the first day of the year. I'm not sure when they changed the instructions to eliminate that method, but it was quite a while ago, I think. There once was a pretty good pension consultant who thought that the proper count for this purpose was the participant count as of the end of the prior year. I've since convinced him that the proper count is the participant count on the first day of the year (that is, add in the people who become a participant on January 1 in the case of a plan with a January 1 entry date). In essence, I agree with you.

All the ones that I'm setting up have income well in excess of 200k, so the issue has not presented itself. I'm not sure it rises to the level of a technical correction, if your interpretation is correct, but it sure would put the sole prop/partner. at a disadvantage to the S-corp/C-corp owner.

Correct the W-2's would seem to be the right thing to do, wouldn't it?

1207.19, remember, we round to the second decimal place. ;-)

It is not a "returned" match, it is a "correction of matching funds." The "correction" in this case is to have the matching amounts forfeited, not refunded. This is a huge difference from an ACP correction where the matching amounts are indeed refunded (to the extent vested, they are refunded to the participant). I don't have time to look it up, but I'm fairly confident that the amounts that need to be corrected are treated like any other excess aggregate contribution. To the extent the document calls for inclusion of interest the calculation should be the same, I would think.