Mike Preston

I must be missing something, merlin. If the plan year from 12/31/2002 through 12/30/2003 uses comp during the calendar year ending with or within the plan year, wouldn't that be the 2002 calendar year? That is, $27,000? The look back year for the 12/31/2002 through 12/30/2003 year is the 12 month period ending 12/30/2002, unless the calendar year election is made, in which case the lookback year is the calendar year ending with or within the plan year; that is, the 2002 calendar year. In other words, there isn't much difference in the period used to determine HCE status in this case. It should be around $27,000. I don't understand how the 2001 calendar year compensation is used for any purpose for the 12/31/2002 through 12/30/2003 plan year.

Got it. Thanks Mary Kay, Appleby, KJohnson.

Interesting. Which side were you on? I think I'd side with the employer on that one. It seems that if the employee had the choice between cash and making the contribution to the flexible benefit plan, at the point in time when it was contributed it lost its flavor, so to speak.

Mary Kay Foss: Hi, neighbor. I'm curious. I thought that since the IRS has essentially admited that they can't get money from a qualified plan unless the participant is eligible for a distribution, the participant is subject to the taxes associated with the distribution. In the case of an inservice distribution before age 59 and 1/2 that would include the excise tax. Does the fact that the monies are paid directly to the IRS make the payment eligible for escape of the excise tax?

I've never seen a Davis-Bacon plan where anything other than 100% vesting was used. It seems illogical to allow anything other than 100% vesting.

At a minimum, I think you should discuss this with plan counsel. With that said, I think the general rule is that the IRS may force a plan to distribute funds only if the participant is eligible for a distribution. However, some at the IRS may not be aware of the need to have the plan's terms control the timing of distributions. If a participant is eligible fora distribution, then the tax levy essentially serves as the participant's election to have the distribution processed and forwarded to the IRS. Things get tricky where a participant would be able to make a withholding election of state taxes. The IRS may not want their share of the distribution to be reduced. Then again, if properly elected, maybe the State wouldn't want their share to be reduced, either. Hence the need for plan counsel.

I think the OP's question was answered by jpod's earlier post about the filing of the notice. No notice? Subject to reporting and disclosure. Notice? Lawyer appears to be incorrect. However, even if no notice, DVFC can be used.

Creating 401k plans as opposed to PS only plans will not modify the ability (or requirement) to test independently.

No receipt that I am aware of. Cancelled check is the receipt. They appear to accept any kind of check, I think.

Yup.

I thought the original request was for Company A to have a 3% TH min only? Now, it wants a new comp plan. Which is it? Assuming it is a new comp plan with 3% to everybody other than the owner and the maximum that a new comp plan can support for the owner, that amount would be no greater than 9% in order for the gateway to be satisfied.

No.

If I understand this, the owner is an employee of both A and B. There are 2 HCE's in total. There are about 40 NHCE's in total. You want to establish a 3% contribution for about 20 of these employees. Further, you want to establish a new comparability plan, which implies a 5% minimum contribution, only for the other 20 NHCE's. As long as the plan for Company B satisfies 410(B) without considering the plan of Company A and the rate group testing under the plan for Company B is performed assuming the individuals in Company A are not benefitting, I think that the individuals in Company A would not need to satisfy the gateway. Maybe I'm not understanding the situation, though. Anybody disagree? Note that the Average Benefit Test will still count the Company A contributions.

You can find the Code here: http://www4.law.cornell.edu/uscode/26/414.html You can find the regs here: http://www.access.gpo.gov/nara/cfr/waisidx...6cfr1v5_00.html

I haven't looked this up in a while, so if someone wants to clarify, that would be fine with me. However, if the foreign parent does not have any other US based operations, I think you are ok. If it has other US based operations you would need to be concerned about aggregation rules and non-discrimination issues, just as if the ownership were US based, rather than foreign. There are various provisions of the Internal Revenue Code that might help, though. Specifically, 414r dealing with Separate Lines of Business. I would suggest that an ERISA attorney review the situation if there is any doubt whatsoever.

I'm not sure that a definite pre-determined allocation formula is necessary with respect to QNEC's. Just like a definite pre-determined allocation formula is no longer necessary in cross-tested plans. I agree one has to follow the terms of the plan document. If the plan document has a letter of determination, then I would think a QNEC allocation that conformed to its terms would be ok, even if it didn't fit the definition of a definite pre-determined allocation formula.

Not often, Tom.

I would be concerned with any plan that invoked escheat laws. Unless the client was informed that there is a risk of the IRS taking the position that such laws are preempted by ERISA. Should the IRS do so, and prevail, as I believe they would, the plan would then be subject to potential disqualification. Likely? No. But likely enough.

QNEC's are typically provided solely to NHCE's, thus they will not have need of the ABT to satisfy 410(B). It is only when the QNEC's are provided in some across the board mechanism (or maybe a clever allocation that is meant to provide an advantage to an HCE) that one has to be concerned. Picking and choosing a couple of NHCE's over others will not run afoul of the non-discriminatory allocation issue. Just like a bottom up QNEC won't. At least as the regs are currently drafted.

I would not characterize it as a parent-subsidiary vs brother-sister argument, although I'm willing to be proven wrong on the point. I guess what is boils down to is that if the entities WERE controlled, there would be no question that such an investment would be allowed. However, with the entities not controlled, the co-investment, if you will, must now go down a different path. One that deals with the party-in-interest rules and prohibited transactions. I admit that the prohibited transaction/party-in-interest rules are some of the most spaghetti-like in the Code and ERISA. But, plowing through all of that, the decision as to whether or not it is not prohibited will probably rest on two issues. One is whether the transaction itself, as far as transferring ownership, is handled properly. That is, a third party, unrelated to any of these people will sell interests to each of the plans. If one plan buys the land and then sells a portion of it to the other two, there could be problems. I have one case right now with the DOL where just such a "form" problem exists. The DOL admits that if the transaction had taken place as indicated, instead of going to one party-in-interest and then to the others in the mix, it wouldn't be an issue. But it is to them. So, best to avoid it. The other is that the DOL thinks that anything that smacks of a prohibited transaction probably is, even if it technically isn't. They have sound support for this in their rules regarding indirect prohibited transactions. Hence, if one of the plans that is investing in this investment is doing so only because somebody who controls one of the other plans is "playing a trump card", if you will, I think the DOL would have an easy time of labeling it a PT. Bottom line is that there is nothing on its face that contraindicates this investment as a prohibited transaction. But we don't have near enough details to conclude that it is not a PT, either. And the only individual who is likely to be able to get enough information from the parties to make an informed judgement is an attorney. Hie thee to one.

I believe it is the Vogel Fertilizer case that brings us the concept that you included in your first message: "taking into account the ownership of each person only to the extent such ownership is identical with respect to each organizaton". Hence, for the 80% test, you have 79%. No control

Isn't 79% less than 80%?

I'm not aware of any requirement for QNEC's that specifies one cannot use individuals as targets. The trick is getting a document that allows it. I know I've seen at least one. Maybe the IRS made a mistake in approving it. Maybe not. But the client certainly has used the provisions. It will be interesting to see whether the GUST restatement (not yet done) will be similarly approved. I sort of expect it will be, as the IRS may not focus on QNEC language until EGTRRA.

Yes.

At the moment, there are no restrictions on QNEC's other than those in the regs that require the QNEC to essentially stand on its own under a4 as a non-discriminatory allocation. The Blue Book for EGTRRA however mentions that Congress expects the IRS to modify its regulations to preclude bottom up QNEC's. This is becasue the 415 limit is now 100% of pay, not 25% of pay. A bottom up QNEC that takes advantage of the 100% of pay limitation is not likely to be very costly, in any circumstnaces. However, until they actually come out with modified rules, the basic rule is that if your plan allows it, and your plan has a determination letter, you can do it. You can't have a QNEC allocated solely to HCE's, as it would violate the rules mentioned in my first paragraph.