Mike Preston

You are quite welcome. Those of us in the pension "biz" rarely get an opportunity to interact with participants without a client relationship or two to consider. It is refreshing to "hear" your thoughts on this complicated issue, both before the rules are clarified and after. Keep the bridge loan in mind, though. Credit is somewhat easier to come by these days than it has been historically. If you find that dream home while you still have a loan from your 401(k), it may be just the ticket.

Correct. But the plan has to allow for it.

The rules of 72(p) are pretty complicated. Bridge loans are still a valid tool. When you took out your $34,000 loan, it should have been combined with the largest outstanding balance of your prior loan in the 12 month period immediately preceeding the date that you got your $34,000 loan. When those two numbers were added up, the result should not have exceeded $50,000. A lot of people think that instead of $50,000, you should make sure that the sum of the two numbers doesn't exceed the "50% of account balance" limit. But that isn't the way 72(p) works. So, as long as the loan you were replacing didn't have more than $16,000 outstanding at any time in the 12 month period before you took out your $34,000 loan, you were ok. If you had more than $16,000 outstanding on your original loan in the 12 month period immediately preceeding the point in time that you took out your $34,000 loan then the Plan should have provided you with a 1099, and you should have been taxed on the amount in excess of the limit.

Well, this is kind of a complicated situation, so bear with me. First, it looks to me like both of you might be right. If that is the case, then the Plan's rules will need to be followed, unless you can convince them that they should change the Plan's rules. Second, some background. The IRS issued some final regulations on the application of 72(p) in July of 2000. Those regulations were effective for loans issued 1/1/2002 or later. Unfortunately, the section of those regulations that would have helped you convince your plan's TPA that they could accomodate you (which was Q&A 20 from that regulation) was not implemented with the final regulations. Instead, it was marked as "reserved." At the same time that the final regulations were being published, the IRS published some proposed regulations for 72(p). You guessed it: those proposed regulations included the previously reserved Q&A 20. That Q&A is pretty long, so I don't think it is best that I provide a copy of it here. If I can find a link to it on the web somewhere, I'll post it later. But the Q part of that Q&A is: "Q- 20. May a participant refinance an outstanding loan or have more than one loan outstanding from a plan?" Found a link: http://www.bc.edu/bc_org/evp/polpr/govtupd...l3100_46677.pdf Unfortunately, the proposed regulations have never been finalized. More on that later. OK, with that as background, let's first talk about the Plan's current rules. Their rules are probably consistent with the TPA's explanation (with one exception - if you can get a supervisor to review the rules, I think you'll find that the limit under the Plan's rules is probably $26,000, which is arrived at by subtracting $24,000 (the highest amount outstanding in the 12 month period before your new loan is established) from $50,000 (the amount you would have been able to borrow today had you never had a previous loan from the plan)). That was, in my opinion, a reasonable interpretation of Section 72(p) prior to the issuance of the proposed regulations. Again, in my opinion, your interpretation that one is merely to ignore previous loans if they are already paid back at the point in time that a new loan is applied for is not reasonable. I don't think any plan in the country used your interpretation. So, under the current Plan rules, you are probably stuck with a maximum loan of $26,000. Your job is therefore to gently persuade them that they can, if they want, change the program to recognize the proposed regulations. If you can do that (and I'm not saying it will be easy, because there is nothing that requires them to do so - remember, the proposed regulations aren't yet in effect, because, as best I can tell, they have never been finalized), then you can structure the new loan so that it satisfies the new rules of 1.72(p)-Q&A20 and both you and the TPA will be happy. The proposed reg on this issue gives you two options: 1) Establish the new loan such that it is completely paid off by the time that the original loan would have come due. It looks to me like you were about 2 and 1/2 years into your first loan, so you could have the $49,000 loan paid off in the next 2.5 years and satisfy the rules. 2) Establish the new loan so that it is really paid off as if it were two separate loans, the first for $20,000 paid off over the assumed 2.5 years remaining on the original amortization and the balance of $29,000 paid off in level payments over the next 60 months. This would mean that you would have payments for, say the next 30 months of about $1,325, then ratcheting down for the next 30 months to about $600. This is a complicated method that I've not heard a lot of TPA's jumping for joy at and it is probably the reason the IRS has not yet finalized the regulations. Hopefully, this has given you enough information so that you can proceed. Wish I could have offered you more in the way of a definitive method to get what you need. There are some pretty good consultants and lawyers that frequent this message boad. Maybe someone will come up with something better than I have. Good luck.

I have been led to believe by the IRS that the requirement is not only satisifed by the safe harbor, but that the IRS considers contributions to the 401(k) portion in satisfaction of that requirement.

Seems on track to me.

The 410(B) issue relates solely to whether or not a plan satisfies the coverage rules. The coverage rules relate to eligibility. As long as eligibility is generic (like age 21 and 1 year of service) or, as you point out, based on reasonable classes, then the fact that the document provides for different levels of benefits for various participants is an issue solely for 401(a)(4). It is not an issue for 410(B). Hence, there is no restriction on the use of the Average Benefits Test if a plan has a tiered contribution formula, even if one, or many, of the tiers name a single individual.

ukh: I'm not sure I agree with your interpretation of RP 2001-17. The relevant cite, in Appendix B, Section 2.07 is: "This paragraph does not apply unless (i) the amendment satisfies section 401(a) at the time it is adopted, (ii) the amendment would have satisfied section 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees. " In the case of an amendment that lowers the eligibility criteria solely for a given participant, it seems the IRS will approve if that individual is an NHCE and the amendment could have been made at the earlier time when it is effective. So, while there might be some 410(B) and 401(a)(4) implications of such an amendment, they may not be fatal.

I agree with MGB on the NRA clarification. In a 401(k) plan, the attainment of the early retirement age (or even the NRA) specified in the plan is not sufficient to allow a distribution of restricted 401(k) monies. Until the participant reaches age 59 and 1/2 the restriction remains in place no matter what the plan's definition of ERA, NRA or NRD happen to be.

There are many, many cross-tested profit sharing plans that identify groups by naming individuals. If the IRS were to attempt to deem such an arrangement as a CODA there would be a tremendous backlash, I would think. If in doubt, submit! The next question would be whether, even with a letter, the IRS could claim it as an operational issue, rather than a form issue. In that case, if anyone is concerned about it, they could take steps to distance themselves from the CODA issue. For example. policies and procedures that result in a contribution determination that is subject to input from more than just the affected participant.

The plan will be a "GUST non-amender". The current procedure on correcting plan defects will need to be followed in order to requalify the plan.

Sounds right. However, unless the PS plan has a specific formula, there is effectively no difference between the two.

Have him or her find a new job with a company that will allow a rollover of the loan? Seems like a bit of the tail wagging the dog.

To the extent that unallocated forfeitures existed in the MP prior to the date that the MP was merged into the PS, those monies are allocated under the terms of the PS plan, as the continuing plan post-merger. I think the IRS was asked this question at the ASPA conference in October.

If they are currently on a document from a document provider that submitted for approval before 12/31/2000, then they are extended to at least 12/31/2002 and there is nothing they need to sign to get it, nor is there any requirement to actually use the current document provider's new document. But I agree that the best course of action is to just send them a cert and let them sign it by 2/28 at midnight.

It can be tested in any way that you want. That is, the fact that it is a cash balance plans does not restrict the testing methods to anything in particular. You would test it any way you could otherwise test any defined benefit plan.

The answer is yes, you must separately test under 410(B) in order to be able to use the separate testing under 401(k) or 401(m). If you need the cite for some reason, let me know and I'll look it up.

Yes, I agree that 411(a)(9) defines NRA the way you describe. I agree with you that the rules surrounding the use of SSRA as the "retirement age" in a plan (not to be confused with the NRA) are confusing. I think, in a db plan, that the requirements are that a participant be fully vested at NRA and that the participant be entitled to a distribution unless the plan satisfies the suspension of benefit rules. There are also some accrual rules. All of which CAN be dealt with in a plan that defined NRD (not NRA) as SSRA. Are you sure the plans of which you speak define NRA as SSRA and not NRD?

In a word, yes. The ABT and the gateway are merely parts of the puzzle. They do not provide a safe harbor for the rate group test.

Then how is it that you believe they are a QSLOB?

I'm pretty sure the answer is yes. However, I'm not entirely sure what you mean by carve out. Care to explain?

You should be ok, Scott. The whole purpose of the Roth IRA is to enable any gains that you might otherwise have to pay tax on to be completely tax free. But there are rules that apply to how and when you can gain access to those funds without having to pay tax. They are pretty simpe, really, but they don't apply to the question you are asking, so let's not go there just yet. Instead, dealing with your specific question, it appears that your Roth IRA owns some stock that you now want to have the Roth IRA sell. When you do that, the proceeds will then belong to the Roth IRA and the Roth IRA can then re-invest them. The sale of the stock and the Roth IRA's receipt of the proceeds are tax-free transactions. You have no taxable income from that transaction. So we never get to the issue of whether or not the sale of the stock generates a captial gains tax, because it doesn't generate any type of tax! But you mention one thing that is a bit confusing: "even if I leave the profits in the IRA account? " The monies in your Roth IRA, including any gains, remain free of tax only as long as the funds stay in the Roth IRA, or are withdrawn in accordance with the rules I mentioned above. Those rules allow for distribution only if: 1) you die 2) you become disabled 3) you attain age 59 and 1/2 4) your withdrawal meets a very limited exception for first time home buyers up to $10,000. Hence, if you do anyhing with the profits other than leave them in the Roth IRA, then you will end up paying some tax. Since I'm pretty sure that isn't what you want, I won't go into the details of how much the tax would be.

You are correct. Sounds like somebody (the doctor) doesn't understand his or her plan all that well. Such is life. There may be a small opportunity to save a situation that has run amok, but it is not one that is for the timid. If the spouse is a new employee, the spouse may just be a statutorily excludable employee. If so, there is a chance that you will get better results by applying the ABT separately. The problem is that the IRS hasn't come out and agreed that it is possible to have two separate ABT's, even though the regulations seem pretty clear (although convoluted) to me. In fact, the IRS has publicly stated that there is only one ABT in this particular circumstance. See Q&A #1 at the ASPA Annual Conference, 2001. However, many practitioners believe the IRS to be wrong in that particular answer. The logic that I believe applies has been previously posted by me in response to another thread recently. If I can find it, I'll post a link.

Not that I can think of. BTW, the 25% deduction limitation is applied solely to non-deferral contributions. Hence, if the only contribution is the 3% safe-harbor employer contribution, there obviously isn't an issue with deductibility.

There are both individual limits (25% of pay, but not more than $35,000 - note that the $35,000 rule applies to anyone who has pensionable earnings of $140,000 or more) and overall plan sponsor limits (15% of pay for all participants). So, if you are the only participant in a plan, your limit would be 15% of $170,000, or $25,500. Since the maximum salary deferral for 2001 is $10,500, there must be employer contributions of at least $15,000 to push up to the $25,500 limit. If there are other employees who receive, in total between deferrals and employer contributions, less than 15% of pay, then whatever portion of the maximum 15% of pay limit is not used up may be used by other participants in the plan. There is a small "gotcha" in the above rules if a person is participating in a plan as part of a group of employers. If that plan was established after 1988, then the overall limitations apply employer by employer. In the typical situation, you will see a medical practice, where 1 or more of the doctors has their own corporation. In this case, the doctor is usually the only employee of the corporation that employs the doctor's services. Even if the overall medical practice has employees in the plan who have not used up their portion of the 15% of pay limitation, the doctor is still limited to 15% (or, at max, $25,500) because the limit applies separately to each employer under the plan. If this isn't clear, add some personal facts to the equation and somebody will no doubt calculate the exact maximum.