Dougsbpc

We received a bunch of late notices from clients. We then wrote the IRS for each one and included a copy of the certified mail receipt and the tracking proving they received. So far one client received a response to our response saying thank you for your reply but we received your return on January 18 and we have assessed you the penalties. We have no idea how they randomly came up with January 18 as it was filed before October 15. And they must have just ignored the certified mail receipt.

It is interesting. This plan fails the ratio percentage test but passes the average benefits test. The document indicates each participant is in their own group. When the prior administrator was asked how they could have used the average benefits test when they do not have a reasonable classification, they gave a Bill Clinton-like answer. They mentioned that even though the document does not have a reasonable classification, in reality the allocation was such that no participant that could be of a certain class received a different contribution. For example, all the docs received 15%, all the CEO's received 9%, all the part time participants with under 40 hours received 25% etc. Basically, I did not have an unreasonable classification with respect to that plan, the XXX plan, given that in fact an unreasonable classification did not, in fact, happen! Maybe they are right.

Thanks Tom This is a takeover plan. We normally don't recommend this aggressive of a plan design as a 5% gateway is very often a good deal for the employer and employees. As it turns out, this plan may not pass nondiscrimination classification test. When we received a copy of the most recent plan amendment (adopted in 2010) they had each participant as their own group. I believe this would not be considered a reasonable classification per 1.410(b)-4(b) and therefore they not only fail 410(b) but also the average benefits test because of the classification issue. Do you agree.

Suppose you have two 401(k) plans sponsored by one company. Assume the plans are not top heavy and they have nondiscriminatory classifications. As far as Employer Contributions: Plan 1 - Covers all employees hired before xxxx date - Provides 15% to owners, 5% to all others Plan 2 - Covers all employees hired after xxxx date - Provides 2% to all participants - There are no Key or HCE's in this plan Our understanding is that as long as both plans pass 401(a)4 and coverage independently, the 5% gateway does not apply to plan 2. Suppose plan 1 fails 410(b). Is it possible to use ABPT to pass coverage? Or must both plans then be combined, and thus deemed to not pass coverage independently? Thanks much

We file them for our clients. So when penalty notices appear they just think we dropped the ball. We received 23 late notices so far. All EZ's. The proposed penalties are mostly $2,375. It is a lot of work calming down clients and preparing responses. I think SoCal has a great suggestion in copying your congressional rep. It sure couldn't hurt, and they need to know about problems like this.

Thanks Andy When the plan was set up they were so anxious to get going that they assured us the contribution would be funded as of December 31. So we gave them the target normal cost. Of course they changed their mind and will now fund by 3/15. We can go back and have them fund the contribution with interest, but it would be great if we did not have to. I will remind them of their original intention to fund as of December 31 but you know how sometimes clients develop amnesia over things like this. It is interesting how the maximum contribution page from our admin system (latest update only) contains the following at the bottom of the page: Note: Interest that increases the minimum required contribution for deposits made after the valuation date, MAY increase the Maximum Deductible Contribution amount shown.

Suppose you have a new plan with a 12/31/10 year end. The contribution will be funded 3/15/2011. The maximum contribution is the target normal cost. However, interest is applied to the minimum contribution from 1/1/11-3/15/11. Can the company contribute the target normal cost or must they contribute the amount with interest for the first year?

A small non-pbgc plan terminates December 31, 2010 with benefits that are slightly less than the value of assets. The plan was to allocate plan assets per ERISA 4044. They are now ready to distribute but have had an unexpected major increase in the value of plan assets within the past month and now have excess assets of about $30,000. They would like to allocate excess assets in a non-discriminatory manner rather than pay the 50% excise tax. However, it is now after the plan termination date. Is it possible to have them adopt an amendment allocating excess after the termination date? We will be applying for a determination letter soon but don't want to wait to distribute benefits. Back about 10 years ago we had a similar scenario and the IRS let the plan sponsor adopt an amendment allocating the excess. Anyone have any experience with this? Thanks.

Suppose you have a partnership with 8 partners that buys a corporation with 25 employees. Is there anything wrong with having the partnership sponsor a safe harbor match 401(k) plan and the corporation sponsor a separate but identical safe harbor match 401(k) plan? The partnership plan would exclude all non-keys and the corporation plan would exclude all keys. They are a controlled group and affiliated service group so both plans would be aggregated for purposes of 410(b). All employees that meet age and service would be covered with exactly the same benefits under either plan. The reason they may want to have two identical plans rather than one is that the partnership plan could file a 5500-EZ and not be subject to the audit / high bonding requirement for non-traditional assets. Many of the partners are big non-traditional asset investors. A controlled group can now qualify to file an EZ.

The majority of the 401(k) plans we administer have all of their assets invested with one of the major platform providers. They will be able to provide the investment disclosure information. What about small 401(k) plans that allow each participant a brokerage account? Identifying the investment alternatives and the investment performance of each investment alternative would be impossible as there may be thousands and thousands of investment alternatives. Does anyone know if this has been addressed in the new disclosure requirements?

A small DB plan covers the company owner and 5 employees. Plan assets are invested very aggressively (not our recommendation). In early 2008 the plan had assets of $1.8m and liabilities of $1.4m. As of January 2009 assets of $200k and liabilities of $1.5m. As of today assets of $1.8m and liabilities of just under $1.7m. The owner has reached NRA and we would like him to be able to take an in-service distribution of his entire benefit. This way he can satisfy his gambling addiction with his benefits and not affect employees. I believe any reasonable method can be used in valuing benefits for determining whether plan assets will exceed remaining benefits by more than 110%. How about valuing benefits using funding segment rates (yes those same rates that make new DB plan benefits exceed assets by 20%)?

A partnership sponsors a DB and a 401k. The partnership is owned by two corporations. Each own 50% of the partnership. Each corporation has one employee (the owner of each corporation). They are related employers so each corporation adopted the plans as participating employers. Each corporation (as a participating employer) deducts the contributions that are funded for its employees (just the owners of those corporations). The participating employer section of the DB is somewhat ambiguous on contributions. However, it appears to indicate that all compensation paid through all related employers is considered. Each of these participants have w-2 salary from their corporations of more than $245K and each have DB contributions of about $75k. One participant has no contributions in the 401(k) (no SD and no ER contribs.). The other would like to contribute $54,500 to the 401(k). Something tells me he must be limited to a 6% employer contribution in the 401(k). But then again, the participating employer section of the document seems to indicate that compensation from all related employers is considered. Does anyone have any insight on this? Thanks much.

Suppose an employer sponsors a safe harbor 401(k) plan with a safe harbor match. Also, suppose the sponsor a cross-tested profit sharing plan. The profit sharing plan must be tested for 401(a)4. Must all components of the safe harbor 401(k) be aggregated for testing purposes? Or does the safe harbor 401(k) stand on its own? Thanks.

We administer a 401(k) plan where the employer mistakenly funded an employer contribution to one of the participants old SEP account. I would think the proper thing to do is have the trustee send a letter to the IRA custodian indicating the mistaken deposit. Then we should determine earnings/losses on the deposit and have them either make a payment out of the SEP account for $xxx to the trustee or to the plan directly. The IRA custodian is claiming the only way they can do this is by claiming the deposit is a taxable distribution. Does anyone have experience with this? Thanks.

A group of 12 physicians adopts a 401(k) plan and wants to adopt a DB plan. All are HCE's and key from compensation and ownership. No employees yet. They may hire 1 or 2 employees in the future. Only 4 want to participate in the DB but others will participate at a minimal level to pass 401(a)(26). The meaningful benefit of 1/2% of pay per year has appeared in a few memos, especially the June 2002 IRS memo. It appears from reading the memo that only non-owner nhce's would have to be provided at least 1/2% of pay to be considered as benefiting. In this case, any nhce's they hire would have much higher benefits than 1/2% of salary. Question: suppose 2 more physicians want to participate at a level of less than 1/2% of pay. Would they pass 401(a)(26)? Or must they receive at least 1/2% of pay to be considered?

A 401(k) plan does not allow concurrent loans. However, it does allow participants to refinance loans. The plan also allows for extended amortization for loans used to purchase real estate. A participant took a loan 7 years ago at a much higher rate than now. He has 23 years remaining. He wants to refinance the existing loan to the current lower rate and expects the new refinanced loan to have 23 remaining years. I could be wrong, but I contend that the new refinanced loan repayment cannot exceed 5 years. This because the new refinanced loan is not for the purchase of a principal residence at this time. I checked the plan document and looked in other places but could not find anything on point regarding this. Has anyone run into this before? If so, do you agree the new loan cannot exceed 5 years?

Thanks Andy. We will need to be careful with 401(a)(4) and past service credits. I think it will not be a problem in this case as the same employees would simply be resuming benefit accruals from the prior year.

Thanks David They should not have a 415 problem going forward as nobody accrued more than $900/mo per year of participation and they never had a DB plan before the prior plan. Their intention will be to have about the same level of benefits they had in the prior plan.

A small professional service employer had a DB plan for 5 years, terminated it and distributed benefits by 12/31/09. They are now seeing the tax bite of not having the plan and want to adopt a new DB plan effective for 2010. Is there a problem adopting a new plan within one year of terminating the prior plan?

We inherited a DB plan that has a 100% J&S Normal Form of Benefit for married participants and single life for unmarried. For terminated participants, must we provide the Qualified Optional Survivor Annuity? I would think not since the normal form is 100% J &S.

Benefits were distributed a few months after the termination date. That was a long time ago already. Back a few years ago we had a DC plan termination that took almost two years. Benefits were not distributed with that plan until after the DL letter was secured. We did not hear from the IRS after the initial letter indicating they received the DL request. The client got impatient and started a calling Frenzy and screamed at the IRS every day for a week. Immediately, we received the favorable DL with no questions asked! That was a first. They normally have at least a few benign questions.

We have one terminated DB that was submitted to IRS in September 2008. Other than the initial letter indicating they received the package, we have not heard a word from them.

Thanks for the replies. We did not think this could be done with a DB distribution. A CPA recently mentioned that one of his clients had a DB plan and that they charged participants distribution processing fees. The benefitslink board is fabulous. However, we have found the search feature to not be the greatest.

We administer a few DC plans that insist on charging terminated participants the distribution processing fee. We know this is somewhat common. Is this possible with a distribution from a defined benefit plan?

Agree with SoCal as it is unlikely that employees will accrue a meaningful benefit of at least .5% of pay per year of participation.