Mike Preston

Good point. If that were really the position, I would suggest to every client that they deposit all of their deferrals other than $1 in a normal processing period (somewhere between 1 and 20 days), then I they would deposit that $1 as late as they could, maybe 45 days later. Even if it rises to the level of a PT, the costs incurred would be more than offset by the reduction in punative interest charges the DOL might otherwise apply. This would make the "average" period for deposits more than 20 days, thereby rendering the DOL's mthod meaningless. Now, i'm not suggesting this as a serious alternative, just that illogical governmental actions beget illogical private sector responses.

BTH wrote: Does anybody else see the fallacy in this methodology? By definition, if a plan sponsor does not deposit the deferrals on the same, exact day each and every cycle, there will at least one cycle where the deposit is late. This method seems to guarantee that absolutely every DOL audit will punish the plan sponsor. If it is a true representation of the DOL's position it is an example of government at its worst.

Amend the plan to provide a one time election on a specific date in addition to the general (quarterly) dates specified.

By definition, if an allocation conforms to the 401(l) rules, it will pass the general test on a contributions basis, with only one rate group. Or am I misinterpreting what you are trying to say, Blinky? Now that I've read the original post in more detail, I agree with Blinky. I see nothing in the general test that allows the permitted disparity imputation on anything other than 100% of the SSWB. In fact, the language makes it pretty clear that you are stuck at the 100% of SSWB for imputation.

mbozek wrote: "However under IRC 408 (m), certain types of collectibles such as art, rugs, antiques stamps, coins and alcoholic beverages are prohibited investments for IRAs and employee salary reduction contributions to 401(k) plans." The bolded section should be replaced with a reference to individually directed accounts. There is no requirement that salary deferrals be made to an individually directed account plan. Neither is there a requirement that only 401(k) plans provide for individual direction.

Dawn, try this logic and see whether it makes you feel any better about the allocation. Do you think the IRS would allow you to treat an allocation to an NHCE in year of death as having no future life expectancy? I don't think they would.

You won't find any cites because the only cite you would be looking for would be a cite indicating that there is some sort of change required because of the death. There isn't any, to my knowledge. Remember that the non-discrimination regs are faithful to the concept that the measurement is to be made on a theoretical basis. The current year's benefit is assumed to be valued or measured at the testing age. That which takes place between the year in question and the testing age is the theoretical part.

In what sense? Certainly not in any current sense. However, since the IRS has seen fit to decide that it is impossible for recordkeepers to keep track of these funds separately, they count in the account balance for purposes of determining whether a plan is top-heavy in a subsequent year. In the absence of the IRS reversing this position, I would imagine that those amounts would count in any ABT done in a future year that used those amounts; i.e., in any test using the accrued to date method. But I suspect that the answer you are seeking deals with the current year and hence the answer is no, they aren't taken into account.

Probably. The story of their playoff life, huh? LOL

Most 1099-R processing systems (I use Datair) provide information to their users that enable them to get up and running on electronic filing quickly. You still send the same form to the participant that you always did. There is no change there. You apply to the IRS for a special ID number. When you run your software for the preparation of the 1099's you tell it the special ID number. The software then creates a file that you can send to the IRS. The IRS gives you a phone number for your computer to call and connect to the IRS' internal network (it doesn't work over the internet). You then transfer your file to the IRS. Check back a few days later and the IRS will provide you with an indication as to whether the file was accepted or not. Send something to your client indicating that the IRS has accepted the filing. Wait till next year and do it again.

No, I'm saying that the FICA tax isn't required to the extent that it has already been paid by the individual. In my scenario, the reduction is to D (and only D). That is why my calculation splits out the 2.9% from the 12.4% portion. There is no limit as to the income that is taxed by the 2.9% portion. Think the Giants will go 162 and 0?

Tom, very nice spreadsheet. I might make one suggestion, though. I frequently run into situations where a sole prop or a partner has W-2 income from another source. You might consider adding an item which allows for that to be input and then adjust the results accordingly. Just a thought.

Is this a situation where the plan document is individually designed, included provisions that the plan sponsor should not have gotten approved by the IRS, but nonetheless was approved by the IRS which, because of the letter of determination, is entitled to 7805B relief?

The calculation works like this: A=Income (in this case $152,397.) B= 0.9235 * A = $140,738.63 C=SSWB (in this case $76,200) D=lesser of B or C (in this case $76,200) E=0.124 * D (in this case $9,448.80) F=0.029*B (in this case $4,081.42) G=(E+F) / 2 (in this case $6,765.11, which rounds to $6,765) Using $65,000, one gets: A=$65,000 B=$60,027.5 C=$76,200 D=$60,027.5 E=0.124*$60,027.5=$7,443.41 F=0.029*$60,027.5=$1,740.80 G=($7,443.41+$1,740.80)/2=$4,592.10 which rounds to $4,592

Here in California we seem to be awash in employers that count hours for part timers, so I'm not sure that I agree with you that employers aren't able to do that. I agree that elapsed time is better, if the intent is to eliminate part timers from the plan, than the DOL equivalencies.

OK, it's Saturday, so let me take a swipe at that 1,000 hour comment. Phooey. If one is concerned about counting hours properly it is far less expensive to institute one of the DOL equivalencies than the elapsed time method. And, vesting does not need to be recognized for all service, just for service while a plan was in effect. And, in fact, with the strange successor plan rules, one can even ignore service from when a terminated plan was in effect as long as the new plan is bound and detemrined to be kept alive for a period of 5 years since the terminated plan went out of existence. So, while the general rule is that you count all service for vesting, there are enough exceptions that I wouldn't expect an individual that doesn't practice in this area to inherently know when it is ok and when it isn't ok to credit service.

You can avoid double-FICA with the installation of a qualified plan, rather than a nq plan. While the new cross-testing regs might make it difficult to implement if the employer doesn't already sponsor a cross-tested plan, it just may be that the individuals in question are not HCE's with respect to the new employer. Especially if their compensation is negotiated at a level which is lower than it might otherwise be because of the funds being put into the new plan. If they aren't HCE's, then the effective limit for a plan would be 100% of pay, as long as the employer isn't bumping up against the 25% of pay limit. Personally, I don't understand why most 457 plans aren't replaced with qualified plans for non-profits. Every time I've gotten involved in one, we have done that and everybody is much happier.

In addition, there is at least 1 PLR out there that allows the new employer to modify the payment stream to accomodate different payroll cycles. So, if the loan was being paid off in bi-weekly installments, and the new employer has semi-monthly payroll periods, the modification of the loan payments to accomodate the less frequent payments is OK with the IRS. The only requirement is that the period of the loan not be extended by the revised payment stream, as I recall. There may be other requirements, but this is the big one.

Unfortunately I've seen it in a few prototypes. But the cite by mbozek seems awfully good to me, if you have no contradiction within the four corners of the document.

I agree with Belgarath. This is the first mention of the possibility that the compensation under the terms of the plan is in question. My comment was limited to the contribution. However, with that said, there is no difference if the loan is used to satisfy pension obligations or is turned around and paid out as W-2 (so as to increase the required pension contribution). There are, of course, ramifications of increasing W-2 (payroll taxes), but there is nothing I'm aware of that restricts a loan for this purpose either. I suppose one could get really esoteric and start discussing reasonable compensation issues. But usually those issues revolve around under-utilization of W-2 income.

No, I think I misread the OP's comment to mean that if a second loan is taken there is a deemed distribution. Not only is it clear that the deemed distribution only takes place if the loan is the third loan, the regs themselves are just proposed. So I guess a case could be made for not even treating a third loan as resulting in taxable income until the proposed regs are finalized.

Why does a loan to the corporation by a shareholder (an event that happens routinely) to enable the corporation to meet its obligations (a contribution to its qualified plan) strike you as anything other than an every day occurrence?

Belgarath, don't you mean the 3 loan limit? Se Q&A 20 (a)(3) of 1.72(p)-1 (proposed regs). If the plan only allows one loan at a time, the old loan can be retired at the same time that the new loan is created. There is no requirement for a waiting period that I could find in the final or proposed regs.

We ask for S-Corp income in those situations where we would ask for C-corp income. There is no difference from a plan perspective. There is no question that a contribution to the plan is deductible by the S-Corp if would be deductible by a C-corp. If it throws the S-corp into the red, so be it. The pass through of the loss is precisely why the entity put itself on the map as an S-corp to begin with. Whether the pass-through to the shareholders is deductible or not on their individual tax returns depends, in part, on the basis of the entity as of the end of the tax year. Again, this is standard S-corp stuff that every CPA should know. Heck, I know it and I'm not a CPA. But, just to careful here, since I'm not a CPA you should check with a CPA who actually knows the rules in your state, because state issues might be different from federal. Unless there has been a change in the law since I last reviewed this stuff. Again, check with a CPA who says they know the rules with respect to S-Corps.

A strict reading of 8735001 would probably say no. It appears that the only way to accomplish what you want is to put in a second plan. I'm assuming here that the standardized plan has the standard standardized language that states a participant accrues a right to share in the allocation after working 500 hours and that you have at least one participant in the plan that has those 500 hours as of 5/1/2002 and that, further, that participant would receive less if the formula change is adopted than they would have received had the employer not adopted the change and, finally, made the same contribution to the plan. I think it may be possible to add a second type of employer contribution to the plan, leaving the first type as subject to the rules of the standardized plan and invoking new eligibility and allocation formula provisions for the second type. This is a rather drastic amendment to a standardized plan, though. Maybe it can be accomplished through some volume plans rather easily. As I see it he client has the following choices: 1) forget it for 2002 2) adopt a second plan for 2002. If the client chooses this route it might be advisable to look to local counsel as to whether or not a contribution to both plans needs be made (watch out for forfeitures). 3) amend the plan to provide for what you want and submit to the IRS asap, thereby hopefully getting some resolution before the end of the year. Maybe a combination of 2 and 3 makes sense, planning on not funding the separate plan if the IRS allows the amendment in 3.