Mike Preston

Andy, can you point me to the cite for the top-heavy only participant in a safe-harbor plan not being considered benefitting for 410(B)? At this moment, I'm skeptical.

There is just too much we don't know. Another thought is the one-year rule. This individual wasn't marrited for the full year when taken away. Does that impact the determination? I like the question about whether it is a governmental plan. Another thing to consider. Again....call an attorney! I guess the alternative would be to plan on submitting the whole thing to the court for a determination. Inter plead it and let the court decide? I don't know. Maybe you need to call an attorney to decide whether that is a viable option or not!

Failure to provide a designation form that conforms to the rules of the plan? Dated improperly? Improper spousal consent? I don't know? All I know is that I would want an attorney telling the Plan whether it appeared to be valid or not!

Not as far as I can tell. Was this a trick question? See 1.401(l)-2(B)(2)(i). I suppose if the formula you mention is an allocation formula and not a contribution formula and the amount contributed is just enough to give folks 4.5% + 4.5% above $16,000 it might satisfy the general test on contributions. But then again, I seem to recall that the general test doesn't allow any integration level other than the wage base. Nonetheless, the resulting contributions might still satisfy the general test on benefits.

You should probably get to an attorney in advance of being contacted by the widow. While I *believe* that the terms of the beneficiary designation will ultimately be the ones that the plan follows, there are a number of questions that all sides will no doubt want to have answered before the final decision is made. If you already have your ducks all lined up, the process may go smoother. The biggest issue, of course, will be whether the beneficiary designation you have was valid when executed. If i were the widow, I'd want to confirm or deny that one first. Then there is the potential that the divorce decree invalidated the designation in some manner. Probably not, but then again..... There are probably other issues to deal with, such as those that might be specific to your circuit court. In any event, if anything ever called out for the need of an attorney to advise a Plan Administrator, this is it.

So, for the 12/31/2001 limitation year applicable to the 401(k) plan you would take into account, in addition to the 401(k) plan annual additions, the MP allocations with respect to the 6/30/2001 year (assuming a single allocation date of 6/30/2001), measuring everything against 12/31/2001 415 compensation. For the 6/30/2002 limitation year applicable to the MP plan you would take into account, in addition to the MP annual additions, the 401(k) "allocations" made during the 12 month period 7/1/2001 through 6/30/2002 - this would be employer contributions and forfeitures plus deferrals and matching contributions allocated as of any date in the 12 month period, measuring everything against 6/30/2002 415 compensation. I strongly suggest that somebody review RR 79-5 to see whether the plans have a problem with their overlapping limitation years, as I haven't reviewed that RR in a number of years. Hence, it may be ok, it may not.

No.

Yes.

The easiest way to deal with this is to draw it out. For each limitation year that you have, count all annual additions in that limitation year and make sure they don't exceed the limitation year's maximum. Annual additions count as of their date of allocation: 401(k) when contributed, match and other employer contributions when allocated. So, the question I have is: what limitation years are you dealing with? Are both plans using a calendar limitation year? Are the plans using a limitation year that corresponds to the plan year (that is, overlapping limitation years)? I think it is Revenue Ruling 79-5 that gives the blueprint for overlapping limitation years. As I recall, the rules are somewhat restrictive in that having multiple limitation years in multiple plans of the same type (401k and MP are both defined contribution plans) is not universally available. Are these individually designed plans with determination letters? Or are they prototypes where no real legal counsel helped in their establishment? Or somewhere in between?

I agree with KJohnson. It turns on the definition of plan assets. I see two regulations. One dealing with investments. The other dealing with participant contributions. I see nothing dealing with receivables of employer contributions.

Checking the LRM's, we find the following: "The plan must also specify a reasonable period at least once each calendar year during which a participant may elect to terminate an election or to modify the amount or frequency of his or her Elective Deferrals. " Hence, there doesn't seem to be a legal requirement, from the IRS' perspective. However, it is generally considered bad for participants to restrict their ability to eliminate deferrals. Maybe an employer might want to do this in a plan where deferrals aren't being encouraged (such as a safe-harbor plan), but otherwise, I wouldn't think it a terribly good idea.

In normal circumstances, it would be considered a contribution. However, if it is somehow found that there was a fiduciary breach by entering into the contract in the first place, restitution to the plan participants would not be considered a ontribution. It is somewhat difficult to convince everybody involved to volunteer that there was a fiduciary breach. When everything is explained, for some reason, people just don't want to belly up to that particular bar. Besides, it is a very unusual plan that can't handle the restitution as a contribution and still pass muster under the non-discrimination tests of the code. Of course, if the plan is a prototype that doesn't support disparate benefit amounts, or the plan sponsor is unwilling to amend the plan in order to allow it to support disparate benefit amounts, then I guess the plan sponsor can't do what it wants to do.

You hit the part of my first response that I wrote and then erased! I meant to put it back, but forgot. If you go through the priority categories, you very, very rarely end up with anything other than what a normal allocation under 80-229 will allow you to do. Only if there is a very longstanding plan with significant early retirement benefits, and HCe entitled to those early retirement benefits, do you even approach anything other than the owners are last in line. At least that has been my experience.

I don't know whether you are intentionally trying to obfuscate the issues or not. But you seem to be doing an awfully good job, nonetheless! I don't know, maybe it is we rather than you. No matter. I'm not saying that an individual that is terminated with less than 501 hours at the time that the plan is merged would be entitled to a benefit. If I implied that, I take it back. Now, will you take back your implication that there are are potentially some active people who would not be entitled to a benefit?

Does the plan have the safe harbor rules with respect to hardship? If not, I would think that it most certainly satisfies the general definition. Besides, I'm a little bit curious. Is this person still employed? If not, wouldn't they be eligible for a regular distribution at some point? Or is there some sort of delay with respect to termination distributions (not payable until after 1 year break in service, for example) that the participant is trying to finesse with a hardship? If you implement the safe-harbor rules the participant must fully exhaust their ability to borrow from the plan before a hardship can be granted. With a slight twist, even the safe-harbor rules might be satisfied. Just have the place he is currently under house arrest insist on a rental payment or else they will evict. Wouldn't that satisfy the need?

There is no requirement to 100% vest upon a merger from a MP to a PS plan. The IRS just recently came out with a clarification on this very point. Many practitioners believed that it was necessary to 100% vest when a MP was merged into a PS. I wasn't among them, so I'm particularly happy that the IRS agreed with me. ;-)

Another souce of comfort might be some private letter rulings or tax court cases where there have both been significant minimum funding violations and, yet, no assertion as to the existence of a prohibited transaction based on said violations. For example, see PLR 9146005. That one seemed to be particulary concerned, from the IRS' perspective, with hitting the taxpayer from every conceivable angle. But nary a mention of a prohibited transaction related specifically to the funding deficiency. That particular ruling seems to stand out because the prohibited transaction rules were considered when dealing with aspects other than minimum funding. Seems the IRS had a perfect opportunity to layer the prohibited transaction aspect on if they felt they could.

For purposes of 411d6, I think a merger is very much a freeze or termination. Again, you are implying that a merger can be used to prevent these people from receiving a benefit to which they are entitled. I disagree. Perhaps you would like to clarify?

Sorry. I was interpreting your first comment to imply that those who were not terminated were in a categeory where they could receive nothing for the year. I agree with you that as of the time of the freeze or termination if an individual is already terminated and did not work more than 500 hours in the year, that individual is not entitled to a contribution. Do you agree that those who are active as of the date of the freeze or termination, even if they have less than 500 hours are entitled to contribution for the year?

Since the plan does not have an end of year requirement, if the plan is terminated or frozen now, the requirement is zero hours, isn't it?

Unless there are other issues involved, Paul Schulz, who is the head of the IRS determination letter program, indicated at the ASPA Academy last month that non-conversion cash-balance plans should not be held up. If you have a cash-balance that is not a conversion and is just sitting at National Office, a simple email to Paul may get it sent back from National to continue its way towards a determination letter.

No.

I really do feel your pain. The problem is not with the system, it is with those that either sell or must accept the system. I've seen it all, Codi. I've seen plans put in place where there is absolutely no attempt to communicate what the real results will be. I've seen attempts to communicate met with belligerent irrationality on the part of the client that either refuses to or just can't grasp the complexities. I'm not alone. Any advisor in this industry for a substantial period of time has no doubt seen the same. If you want to send me the details on the 4 other employees you had during 2001, I will be glad to tell you whether the exception I referenced before is in play or not. Feel free to email me at mike.preston@prestonactuarial.com. These boards aren't to be used for direct solicitation so I want you to know up front that I will not attempt to bill you for anything I do on your behalf, nor will I accept payment. What can I say? Your candor and attempts to do things "correctly" makes you a "good guy" in my book (whether you are male or female!). If you decide to do it, I need date of birth, date of hire, number of hours worked in 2000 and 2001, W-2 compensation, and deferral amount. There might be other pieces of information needed, in case you have anybody that is not clearly a full time employee. It won't bum me out if you decline, either. Just wanted to give you options.

Codi, from what you have described, it looks like the test is not passing. You say the plan was started on March 1, 2001. Further, you state that the employee that makes $93,000 in 2001 was first employed fifteen days before March 1, 2001. This would mean that his compensation from your company was zero in 2000, as he wasn't employed in 2000. When determining somebody's compensation in the lookback year, one only takes into account compensation paid from the plan sponsor. In this case, your company. It doesn't matter what his W-2 was from the company where he worked before he started with your company. Hence, for purposes of the test, his lookback year compensation in zero. That means that unless this individual qualifies as an HCE by virtue of owning more than 5% of your company (either stock or, if not incorporated, capital or profits interest) he is treated as an NHCE in your test. By the way, the fact that he signed up for the plan or didn't sign up for the plan is not particularly relevant. If he was an eligible employee at any time during the year (2001) then he gets counted in the test. Do you have any employees in this category who might have been eligible but did not sign up? They count as zeroes in your test. I know that isn't what you wanted to hear. Now, what to do, what to do......hmmmmm....... I would suggest that you find out whether the test is being done correctly and whether it is being done in a manner that is most beneficial to you. First, see if doing the test based on 401(k)(3)(F) works to your advantage. I'm giving you the cite so that you can repeat it to your provider. Basically, it groups you only with those NHCE's that have more than 1 year of service and are age 21. This would exclude the individual you are mentioning. So, if all the other participants are long service employees, you can at least exclude this individual from the test, thereby leaving the average at 5.50%. If there is another of the 4 employee participants, though, that are recent hires (like the gentleman making 93k) and their contribution is similarly low (or zero) then excluding that person from the test, too, will bring the average up even further. Keep in mind that it is an all or nothing type of test. You either exclude everybody who is short service/under age, or you include everybody in the test. Also, was there a match? If so, consider whether the plan provides for turning those matches into what are called QMAC's (qualified matching contributions). If so, then those monies can be counted as deferrals and maybe your ADP test will pass. Can't hurt to do the calculations. Good luck, but is sounds like you have some refunds coming from the plan if none of the facts are changed.

Good catch, Kirk. I meant to say that the way the termination is handled, you will end up with the same thing as if they had waived. Instead, you merely have them (and their spouses) sign an agreement agreeing to accept less than their full benefit, and relieving PBGC from any liability. The form of document I've used is something like the following. This was originally drafted pursuant to the old PBGC reg 4041.7(B), and there may be a corresponding provision in the new regs, but I found this first, and that is good enough for a Friday afternoon: [PBGC Reg § 4041.7(B)(a)] A sample waiver form follows: Waiver of Benefits I, , being a majority owner of , and a participant in the plan hereby agree to accept a benefit that is lower than my accrued benefit under the terms of the Plan if, upon termination of the Plan and allocation of assets pursuant to plan section , assets are insufficient to cover all such benefits. I understand that my signature on this form will release the Pension Benefit Guaranty Corporation from any and all liability to myself or my beneficiaries with respect to my benefits under the above mentioned plan. Date: Signed: Participant/Majority Owner Married: Yes No As the spouse of the majority owner mentioned above, I also agree to release the Pension Benefit Guaranty Corporation from any liability to myself or my beneficiaries with respect to benefits under the above mentioned plan. I understand that by signing this form I may be giving up valuable benefits under the plan. Date: Signed: Date: Signed: (Witness or Notary) All defined benefit plans have language that allow for benefits to be paid only to the extent funded. Further, the IRS typically allows the allocation of assets on plan termination to be consistent with RR 80-229 (basically requiring that the allocation be non-discriminatory). Having the owners stand last in line is usually consistent with RR 80-229. The IRS will most assuredly approve any such termination and the PBGC is happy to go along with it. There is the distinct possibility that a majority owner or spouse may have buyer's remorse and bring an action later, but that is a small risk to undertake, IMO.