Dougsbpc

It has always been an interesting question. We tell all small business owners that sponsor a DB plan to take some salary even if they have not had a good year and will have to stretch to make the contribution. Here is the definition of Hour of Service in the document: “Hour of Service” means: (a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment. These hours shall be credited to the Employee for the computation period(s) in which the services are performed and not when paid, if different; I think this definition of Hour of Service is a good one as it indicates that hours shall be credited during the period services are performed and not necessarily when paid if different.

Suppose the pay was $25,000 for 10/1/06-12/31/06, but then the high 3 average for all years of service 2006-2011 was $200,000. Then the 415 % of pay limit would be $200,000 x YOS x 10% including a year for 10/1/06-12/31/06? Sometimes when an employer starts a business they can work 3 months and have no pay during that time and work 16 hours a day 7 days a week (oh do I remember). Of course most employers could not afford or want a DB plan for many years after that. Could that period of time be counted for the 415 % of pay purposes?

Suppose you have a small DB plan that was effective 1/1/2007 and only requires 1 hour of service per year of participation to accrue a benefit. Also, suppose the company was started 10/1/2006. Several employees worked more than 1 hour prior to the effective date of the plan (from 10/1/06 to 12/31/06). A Year of service for benefit accrual purposes is defined as the completion of one hour of service. The plan provides a benefit of x% of average salary for each year of participation. Each participant has 5 years of participation. The 415 pct of pay limit should be average salary x years of service. Can the period 10/1/06-12/31/06 be counted as a year of service for 415 pct of pay limit? Thanks.

Top heavy profit sharing plan that is cross-tested. Each participant is in his/her own group. My understanding is that HCEs need not get a gateway. However, if the plan is top heavy and they are employed on the last day, they must get 3% to satisfy TH min. Does then require them to get 5%? I would think not. Thanks.

Back many years ago (around the time of the Paul Schultz memorandum (2002) we administered a combo DB and DC plan). Combined, they passed 401(a)(4) and 410(b) but provided less than 1/2% of pay for one group in the DB plan. The IRS audited the plan and claimed the DB plan failed 401(a)26 because benefits were considered unreasonable. Their solution was an 11g amendment to provide 1/2% of pay per year of participation for any participants the plan sponsor wanted to choose as long as 40% accrued reasonable benefits. They were very clear that ONLY an 11g amendment would allow retroactive correction. I believe they also mentioned that an 11g amendment could be used to correct demographic failures of 401(a)4, 410(b) and 401(a)26 as long as they were executed within 9 1/2 months following the close of the plan year. Unlike the case that was audited, this plan not only needs to provide a benefit of at least 1/2% of pay, it needs to select who that individual is, and that person is an HCE and is excluded from participation by the terms of the plan. Can you instead bring in NHCEs who have not met the plan's eligibility requirements? The HCEs would have met eligibility requirements (1 year and age 21), they are just excluded by class. I would think that if one of them is brought in, you have no discrimination problems as all who have met eligibility requirements are HCEs.

In this case they do have two more nonhighly compensated employees who have not yet met the eligibility requirements. There is every expectation that they will eventually enter the plan. I think that if the plan were designed to fail there would be a problem with definitely determinable benefits. However, the design that is in place is objective. It just happens that all of the eligible NPs for this year are HCEs. Any disagreement?

Thanks for the replies I don't see where this would be a 415 problem as this plan only has two participants and they only ever intend to make small employer contributions. So for 2011 they will make a safe harbor and employer contribution of 3% of salary. That would not bring any participant close to their 415 limit for 2011 even though we need to also include the 3% safe harbor that was intended for 2010.

Took over a small DB plan that excluded two physicians by name and highly compensated nurse practitioners. For the past 5 years, they have only had 4 physicians who met the eligibility requirements. All were HCEs and Keys. The plan passed 401(a)(26) in past years as 2/4 = 50%, which is greater than 40%. They now also have 3 nurse practioners who met the eligibility requirements. All happen to be HCEs and are therefore excluded from the plan. Any problem with bringing in one nurse practioner through an 11g amendment to pass 401(a)(26) even if they would be an HCE and in an excluded class? Would it be possible to do this every year? Thanks

A small safe harbor 401(k) plan timely distributes the 3% SHNEC notice on November 15, 2009 for the 2010 calendar plan year. The employer filed the corporate tax return 3/15/2011 and did not fund or deduct SHNECs. In fact, they still have not been funded. He simply forgot, even though we told him to back in January. My understanding is that SHNECs can be funded up to 12 months after the end of the plan year. So if they are are funded this week: 1. Do any earnings need to be calculated and funded for the late deposit? 2. Would the safe harbor contribution be deductible for 2011 or 2012? If 2011 he will need to amend the corporate tax return. Thanks.

A small DB plan was frozen 3 years ago. The plan had provided 3% of pay per year of service. The company now wants to unfreeze the plan and simply restore the 3% pay for each year of service (including the years the plan was frozen). Is this considered a benefit increase to an HCE and therefore cannot be part of the cushion amount?

There is one employee in the plan who already has a term policy and her health is not the greatest. The agent wants the plan to be able to purchase her policy. I guess what you are saying is that there is no advantage to term in a plan because the ps-58 cost will essentially be what the premium is.

Thanks for the responses. Yes. Would it not be discriminatory if the company owner had whole life and everyone else had term? Perhaps not if everyone was offered whole life and term and each made their choice? Could an employee have the plan purchase / assume her term policy already in force or would this be a prohibited transaction? I know this often happens the other way around but such policies usually have cash value and the purchase price is related to the cash value.

We inherited a 401(k) plan (had been a profit sharing plan for years) where only the company owner has whole life insurance as part of his account balance. Apparently none of the other 7 participants had ever been offered insurance. The agent now wants to offer policies to the 7 participants. However, he wants to offer term policies. Is this possible? Would this not be a discrimination issue since the owner has whole life and employees would have term? Thanks.

Thanks Andy.

Suppose you have a small DB plan that has existed for 5 years and has been top heavy all of those years. The plan is not frozen. Assume there are no former key employees. All non-keys have received top heavy minimums of 10% (2% x 5 years). The benefit formula is amended to reduce the benefit for the one key employee. The key employee benefits are grandfathered of course. The key employee will not experience a benefit increase for years 6, 7, and 8 due to the reduced benefit formula. Is the plan required to provide top heavy minimum benefits for years 6,7 and 8? Section 416©(1)(B)(i) indicates 2 percent multiplied by the number of years of service with the employer. Section 416©(1)© defines years of service and 416©(1)©(iii) provides the following exception: Exception for plan under which no key employee (or former key employee) benefits for the plan year. For purposes of determining an employee's years of service with the employer, any service with the employer shall be disregarded to the extent that such service occurs during a plan year when the plan benefits (within the meaning of 410(b)) no key employee or former key employee.

We have had E & O insurance for almost 20 years and have never had a claim. Hopefully we never will. Isn't E & O insurance to cover damages resulting from an error and/or omission? The biggest exposure for a TPA firm is a plan disqualification as the result of a mistake. Is that not what it is for? In reading our current policy and the prior policy, the exclusions section seems to exclude coverage for damages resulting in any way from penalties initiated by the IRS. Just wondering if anyone else has run into this. Thanks.

To simplify, suppose you had a 2 participant DB plan that had a failure discovered on plan audit. Suppose the plan had existed for 15 years and one of the participants had a PVAB of $1,000,000. Suppose audit cap was offered and the correction was made. Let's say the sanction was 40% of the maximum payment amount. The maximum payment amount is the tax that would be paid had the plan been disqualified for all open years. Suppose $200,000 of the $1,000,000 had accrued during the open years. With respect to the amount taxable to the participant, is the maximum payment amount $200,000 x tax rate or $1,000,000 x tax rate? Thanks

We generally do not get a DL upon adopting the plan unless the plan design is complicated (for example a floor offset plan). In those cases we insist on obtaining one. On plan termination we leave it up to the client. The standard follow-up question from the client is usually something like "what have we paid you fees for over all these years? Are you saying that you think something is wrong with our plan?"

Unfortunately, I don't think his comments will matter. It sure seems like most democrats and republicans are in agreement with reducing or eliminating all deductions and in exchange lowering tax rates. The only disagreements are with the amount of revenue that is raised and the fact that entitlements are being cut. If a compromise is not reached soon they will increase the debt ceiling and then re-visit the tax simplification issue over the next six months. Everyone seems to be on board with this so it will probably not lose steam. Personally, I think deductions for those things that are difficult for most people and good for society makes sense. Buying a home, charitable giving, paying for health insurance and saving for retirement. However, others will claim that the lower tax rates and individual choice of the tax simplification plan will unleash such entrepreneurial freedom and economic growth that we will look back and wonder why we ever engaged in such backward thinking.

A few weeks ago we had a woman in her mid 80's call us to take over the administration of her defined benefit plan. Upon reviewing the plan, we found it to have assets that far exceeded the value of benefits (benefits at 100% of FAC). She has been the only participant, retired 15 years ago and has not worked since. It appears all filings, RMD's etc have been done. It looks like the administrator just kept the plan going without suggesting terminating the plan back 15 years ago when it was slightly over-funded. Of course you never know the real story as the prior administrator does not want to talk about this. At a minimum, they should have considered an in-service distribution. It looks like she could not have a qualified replacement plan as she has not worked and has had no earned income for 15 years. Has anyone run into anything like this? Are there any potential solutions to avoid 50% excise tax and income tax on the reversion? Thanks

Suppose you have a small calendar year DB. 1. Can you change from BOY to EOY for 2009 and then change back to BOY for the 2010 year without approval? 1.430(g)-1(f)(3) seems to allow this. 2. If yes, must the employer make a formal election to do so?

Thanks for the answers. If a profit sharing contribution were made and the SIMPLE is considered invalid, would that mean that any salary deferrals and match contributions are considered salary for that calendar year? Also, since 2010 has gone by, I would think the 6% excise tax would apply to those SIMPLE contributions since they would not have been withdrawn by December 31, 2010.

Suppose you have a company with a 6/30/11 year end that adopts a profit sharing plan for the 7/1/10 - 6/30/11 year. Suppose they also have maintained and funded a SIMPLE through 12/31/2010. 1. If eligible employees were not provided a notice for the SIMPLE for the 2010 calendar year, does that mean they had an invalid SIMPLE for 2010? 2. Since they cannot have any plan besides the SIMPLE, I would think they could not make any profit sharing contribution for the 7/1/10 - 6/30/11 year, correct? 3. Had they funded the SIMPLE at all in 2011, they would not have even been able to make a profit sharing contribution for the 7/1/11 - 6/30/12 year. Thanks a million.

Doe anyone know if there is a late filing penalty for form 945 if all deposits were made timely? Circular E talks mostly about form 941 and indicates there is a late filing penalty equal to 5% of the unpaid tax for each month or part of month the return is filed late. In this case there was only $5,000 withheld and it was deposited timely with no tax due.

We administer a plan whereby the client did not provide us the information timely. Upon completing the valuation we see the two owner participants defaulted on their loans last year. Has anyone had experience with trying to correct this through VCP? The only part that worries me about VCP is to have the client pay the fee and our fees only to have the IRS reject the request because they did not feel correction was warranted. For example they feel the participants should have made payments and the missed payments were not the result of employer error. Thanks.