Mike Preston

Aw, you are such a spoil sport. (g)

I seriously have my doubts that amending the plan to make the deferrals be treated as after-tax will work. First, the employee probably (hopefully?) signed a salary deferral election. Making that an after-tax contribution election seems difficult at this stage. Second, assuming you can get the IRS to go along with recharacterizing the deferral as after-tax, you would still be subject to the ACP test on these monies. If there was no match then the only ACP monies would be the HCE's and all of it would need to be disgorged. Very thorny. Yes, takeovers are fun.

You need to hire somebody to review the non-discrimination tests in total to let you know what you need to do.

A plan that has 100% qualifying assets will not be forced into an audit if the disclosure requirements are modified (see the SAR changes required). There is no need to have a bond to avoid the audit. However, not having the appropriate bond, even if it doesn't result in an audit, is not a good thing.

You need to check the 401(k) plan to determine if the plan allowed contributions fromemployees that were not pre-tax. If it didn't, then the only course of action is amend the W-2's and past tax returns to reflect what actually happened. There are likely some changes to the payroll tax returns, as well, that will no doubt make the accountant pull out his/her hair. If the plan allowed post-tax contributions and these were indeed post-tax contributions and if the plan was properly administered by treating these contributions as post-tax contributions (unlikely, but, hey, gotta allow for the possibility) including the appropriate ACP test (post-tax contributuions and matching contributions are tested together), then there really isn't anything to be done. What other options are there?

In the real world, the auditors do not have the ability to (nor do they want to) calculate the numbers required under the various rules of disclosure. This always falls to the actuaries. As far as the assumptions being the clients (or the auditors), the fact is that, in general, plan sponsors will look to the actuaires for guidance in these matters.

I would have to see the numbers, as not all 412i programs are created equal, before I could say one way or the other about it being a good idea or not. But, if: 1) by the end of the 5th year the individual will have established a high 3 year average that supports a distribution in year 10 of the value expected to accumulate in the product at year 10 after switching from 412i to non-412i in year 6; 2) if the employer is able to maintain some sort of operation such that service can be credited for years 6 through 10; 3) if the client is happy with the internal rates of return that would be generated at that time (this isn't too tough in today's economic environment - it was much tougher two or three years ago); 4) if the client understands the risks involved in seeing interest rates rise such that 415 lump sums are restricted; 5) or, in the alternative to 4 is willing to accept an annuity distribution for life from the insurance company equal to the contract guarantees (this is an annuity product, after all) 6) if the client, and maybe the client's estate planning attorney, understand the consequences of death before cessation of the 412i program (through year 5); 7) if the client, and maybe the client's estate planning attorney, understand the consequences of death in the 6th through 10th years 8) if the client understands the consequences of shutting down the program and distributing the assets while the relatively large investment penalties are in place, including a shut down brought about by legislative or regulatory changes 9) if the client understands the costs associated with maintaining the program in the face of additional staff; 10) [reserved for something else that isn't popping into my head at the moment, but you get the drift] then I would have no problem recommending such a program. As you can see, it is a somewhat unusual set of circumstances where such a program really makes sense from my perspective. I have had many inquiries regarding 412i programs. I've only had 2 clients ask me to help them fully understand the ramifications of the suggested program. One decided things were too speculative for him to enter into it. The other one was fully informed before she went forward with the program.

You might want to edit your original post to put a "not" in the reg quote.

Keeping money off the table is fundamentally inconsistent with a 412i arrangement. I presume you meant unfavorable.

I think it depends on the language in the prototype. But it was my understanding that prototypes were restricted to use of the same method. Then again, if a prototype was approved with the ability to test on an inconsistent basis, all you would need to do is confirm that your document says so.

Things must work differently on the East Coast. Good faith does not require providing copies of "all correspondence". It should be enough to provide targeted communication indicating the source and cause in sufficient detail to be understood and verified by the participant or his/her advisors. I've read Great West and I see almost no correlation. In fact, where the monies have been rolled over, the concept of having the monies essentially sitting in a constructive ERISA trust seems closer to the mark than anything else. I'm not arguing for demanding payment without disclosure or thought. I'm saying that if the payment was bigger than it should have been, the plan has a duty and a right to get it back. If it is still around to be "got back" then a participant that decides to fight the issue had better be prepared to pay some of the legal fees of the plan (a la Primary CareNet v. Scott). OK, it wasn't a Florida case. It was an Alabama case: http://www.ebia.com/weekly/articles/2001/4...010524Carr.html

All correspondence between the plan and attorneys, advisors, TPA, etc relative to this issue? Right. Are we into discovery already? I'm sure plan counsel will volunteer that a participant has a right to a copy of all of that just by making a simple request. By the way, in what country? Certainly not the US. I would recommend just modifying the 1099 to reflect the correct amount of the distribution at the same time that the correct amount to be returned is being requested from the participant. Any amount in excess of that is money paid that shouldn't have been paid, and should be returned. Here's the Texas case: http://www.ebia.com/weekly/articles/2001/4...10308Scott.html I can't find the Florida case at the moment with the time available. Maybe later.

I think somebody else needs to jump in here and try to explain it. Obviously, I'm not doing a good job for you. I'll try a bit more, but it is kind of a busy day, so I may not be able to spend as long as I might otherwise. You need to establish how the plans are being tested under 410(B). If they are aggregated under 410(B), they are aggregated for 401(a)(4) and the gateway requirements. If they can stand on their own, then they are tested separately under 401(a)(4) and the gateway requirements. Just because you use the Average Benefits Test (which requires all plans of the employer be tested together), it does not therefore follow that you are aggregating all plans of the employer for 410(B) testing. I know it gets confusing, but that is the way it works.

I think you are confusing the testing required for purposes of the Average Benefit Test with regular 410(B) testing. The gateway rules apply to regular 410(B) testing.

If you are combining the associates plan with the non-associates plan to satisfy 410(B), then the associates plan would be subject to the gateway. However, in most cases it is not necessary to aggregate the associates plan with the non-associates plan. That is, the non-associates plan will satisfy 410(B) without being aggregated with the associates plan. If so, then the associates plan is tested separately under 401(a)(4).

I think my message from above is far from clear, maybe even misleading. There are two parts to the test: the 80% test (the controlling interest test) and the 50% test (the effective control test). The first is better stated as: do five or fewer owners own, between them, 80% or more, taking into account only those people who own some part of both entities. The second is better stated as: do five or fewer owners own, between them, more than 50%, taking the ownership into account only to the extent such ownership is identical with respect to each organization. In this case, since the brother owns nothing of the first entity, the only owner that owns part of both companies is A and he only owns 79% of the second entity. Therefore the two entities are not controlled because the controlling interest test is failed. It would not fail the effective control test, as A owns 79% of each entity. But you have to satisfy both tests to be controlled, courtesy of Vogel Fertilizer.

I certainly haven't seen anything on point. Here is IRS Q&A 28 from the October, 2002 ASPA Annual Conference: 28. Presume a business maintains 1 plan that has a mix of 401(k) deferrals, matching contributions & profit sharing contributions. If in 2002, the only contributions are deferrals and a 4% (dollar for dollar) safe harbor match, would this plan be considered top-heavy if key employee balances exceed 60% of plan assets? i.e., does the presence of a profit sharing option preclude use of the new rule deeming safe harbor plans not top heavy? What if in addition to the above, previous forfeitures get reallocated? The thing that is throwing me is the exact wording of EGTRRA: “The term top-heavy shall not include a plan which consists SOLELY of a CODA which meets the requirements of 401(k)(12) & matching contributions with respect to which the requirements of 401(m)(11) are met.” What exactly is meant by the word "SOLELY"? No other contributions in that plan year? No other contributions permitted? A: This is an issue that is not resolved. Look for guidance by the end of the year. ============================ Well, I haven't seen any guidance. Has anybody else?

Well, I think it turns on whether you or plan counsel believe the error was egregious. If not, and if found before the end of the second plan year after it took place, it seems like it is self correctable. Judgment call. Preferably made by plan counsel. Assuming it _can_ be self-corrected, you then get to struggle with making the correction appropriately. Lots of fun. Preferably for plan counsel.

Aren't there two cases (one in Texas, the other in Florida) where a participant received monies in excess of entitlement under the plan, refused to repay when asked, and had to not only refund the monies but pay the legal fees of the plan that was forced to sue them? Maybe nobody there raised these particular arguments. Then again, maybe they did. I find them non-persuasive. Maybe even ludicrous. But that is just me. If a 1099 was issued in error (amount of taxable benefit) I find it hard to believe that the right course of action is to not correct it. I usually agree with your postings but this one I'm wondering if you aren't playing a little devil's advocate.

Yes, it is permissable if the document allows for it. I admit to being confused about your example, as something seems reversed to me. Maybe it is just because it is late and my eyes are seeing things (or not seeing things, as the case may be) backwards.

I'm not aware of any prohibition on the use of rate banding in cross-tested plans that doesn't exist in non-cross-tested plans. I'm sure somebody else can post the citation if you need it. However, the use of banding requires that the impact of the banding not be applicable significantly to decreasing HCE's or increasing NHCE's. Hence, it is rarely useful in smaller plans. Somebody else will need to address your Quantech concerns.

I think the issue is whether the first part of 1.415-8(d)(2) will survive in any manner. The more I read of the Code's modifications, including the codification of the second part of that regulation (415k4 which you mentioned) the more I am struck by the absence of anything which implies it should survive. It appears that the IRS was using the fact that there was individual choice on the part of the participant in invoking a different limitation other than the one that was "normally" available. Now, there is no reason for that choice, as the regular 415 limits apply. Nonetheless, I remember reading something (a newsletter?) from somewhere concerned that the IRS will attempt to reinstitute the requirement for aggregation. We will know for sure once the IRS gets around to updating 1.415-8. I'd still like to see something that directly addresses the issue.

Andy, Andy, Andy. Trying to confuse us with the facts, huh? It does seem like if you follow the terms of the document and run your tests, they will pass. I'd say that is pretty darn close to where you want to go! Unless I'm missing something, too.

Keep in mind that you have to follow the terms of the plan. Hence, one cannot just bump people up to the gateway unless the plan has a provision allowing that. Similarly, one cannot just bump up the NHCE's in a particular, pre-defined grouping to the gateway because that is necessary to make the plan pass. With that said, I agree with the result you are attempting to get to. If the document allows you to get there, you can do it. What does the document say? After you decide how close you can get to where you want to go within the four corners of the document, you can then get the rest of the way there with an -11g amendment.

Actually, I'd say the "tapering off" part does argue for a 412(i). What level will it taper off to?