Dougsbpc

KJohnson Thanks for the reply. Reading the two threads gives me an uneasy feeling. Although quite extensive with excellent points, the 2002 discussion seems to conclude with an indication that a single DB spnsored by a loanout corp must be aggregated with the multi for the 415 dollar limit. The 2005 discussion concludes with IRS guidelines that refer to the treatment of loanout corporations as "beyond the scope of the guidlines". However, they then seem to indicate that a single employer plan sponsored by a loanout need not be aggregated "if a worker qualifies as an independent contractor with respect to the production company under these guidelines, the production company would not be required to treat the worker as an employee even if a loan-out corporation is involved. Nonetheless, the worker may be an employee of the loan-out corporation". I guess there is no real concrete answer on this other than the apparent guidlines right?

mjb Good point on checking with the accountant to make sure the loss does not exceed the basis. But why would there be any tax law violation or prohibited transaction for an S-corp shareholder to lend money to the corporation? The pension contribution would be considered an ordinary and necessary expense of the corporation. The shareholder would not be making a loan directly to the plan (prohibited transaction) but instead to the corporation.

Have an entertainer who is 100% owner of her corporation. She is also a member of the Screen Actors Guild. The Guild has a multiemployer defined benefit pension plan. Our understanding is that if her corporation sponsors a single employer DB: 1) The single is not aggregated with the multi for the 100% of pay limit. 2) The single is aggregated with the multi for the 415 dollar limit. If, for example, she had participated in the guild plan for 10 years and acrued a monthly benefit of $2,000, would the proposed single employer plan sponsored by her corporation be in violation the first year (max dollar limit = $14,583 / 10 = $1,458). Or, when aggregating plans, do we get to consider participation under BOTH plans for the 415 dollar limit in either plan? Thanks much.

Thanks again for all the replies. In this case two of the three doctors could really benefit from a DB as they are in their 50's and the other doctor is 33 and really wants to direct his own investments. This is a perfect situation for a DB that covers the two elders and excludes the youngster. Meanwhile the 401(k) would exclude the two elders. Should work fine as they have no employees and are all HCE and Key (33 1/3% ownership each). The problem is they currently have a 20% MPP that covers all of them. They will soon terminate the MPP (by 12/31/06) but will not distribute benefits until about March 2007. So in 2007 no contribution would be made to the MPP. Meanwhile, they want to adopt a DB for the two docs and a 401(k) for the younger doc. So in 2007 no participant will benefit in a DB and a DC. That is unless just having an account balance in the MPP during the same year means the two older docs are deemed to benefit in a DB and DC. If that were the case then maybe there would be a 31% limit between the new DB and new 401(k). However, if Jim Holland indicated that inactive DC participants are not considered participants for 404(a)(7), then we should not have a problem.

Thanks for all the replies. Isnt that the truth, round and round we go. In this case the younger doctor will have the 401(k) and employer contributions will be made.

Actually, that was a bad example. Suppose the same group terminated their MPP distributed benefits in mid 2007, adopted a DB for two of the doctors and adopted a 401(k) plan for the other doctor.

That is the question. It sure seems logical that if there were no MPP contribution in 2007 there should be no combined limit. However, 404(a)(7)© indicates there is no combined limit if no participant is a beneficiary in both plans. I would think beneficiary means any participant with an accrued benefit or account balance. If they dont distribute benefits until 2007, all would have account balances in the MPP in 2007 and be considered beneficiaries in both plans.

I know this has been discussed before but not sure if it has been completely resolved. Suppose you have a partnership of three doctors who sponsor a money purchase plan through 2006. They terminate the plan on December 31, 2006 but do not distribute benefits until mid 2007. Furthermore suppose they adopt a DB plan effective 1/1/2007 for calander year 2007. Does the 31% limit apply in 2007? In reading 404(a)(7)© it seems that if any one participant is a beneficiary in a DB and DC the 31% combined limit applies. Even though none of them will receive contributions in the MPP in 2007, it appears that just because they have an account balance in 2007, they are considered beneficiaries and therefore the combined 31% limit applies. does anyone disagree with this?

Suppose you have a one participant DB with a NRA of 62. The plan has a benefit formula of 100% of FAC. The participant will reach age 62 this year, so this will be the final contribution. Suppose the contribution is $100,000. Could he fund $50,000 by March 15, 2007 (initial tax filing deadline) NOT GO ON EXTENSION and file the remainder before September 15, 2007? Our understanding is that $50,000 would be deductible in 2006 but we are not sure the remaining $50,000 is deductible for 2007.

Andy This participant: a. worked more than 1,000 hours each year the plan was frozen. b. had met the eligibility requirements two years prior to the plan being frozen. The document defines benefit accrual service as an accrual computation period during which an employee completes 1,000 or more hours of service. An accrual computation period is defined as the 12 consecutive month period commencing with the plan year in which occurs the employee's entry date and each plan year thereafter. We could really take this: Thus, where the terms of a plan provide that a participant with 50 hours of service earns a year of service for benefit accrual purposes, a participant with 50 hours of service could be credited with a year of participation for purposes of IRC 415(b)(5). And replace it with this: Thus, where the terms of a plan provide that a participant with 1,000 hours of service earns a year of service for benefit accrual purposes, a participant with 1,000 hours of service could be credited with a year of participation for purposes of IRC 415(b)(5). In this case the document indicates the participant earned a year of service for benefit accrual purposes because he worked more than 1,000 hours during an accrual computation period.

I really appreciate all the great comments here. What if this were five years ago when we had to provide top heavy minimum benefits even if a plan was frozen? Certainly back then years of participation for the 415 dollar limit would have included years when the plan was frozen. How could it not? Did the definition of years of participation for 415 purposes change between then and now? Or did the definition always only include years in which a participant was eligible for an increase in accrued benefits?

So then in the example if an amendment were adopted in year 5 to unfreeze the plan and provide benefits of 8% of pay per year of participation, the participant would have a projected benefit of 80% of pay at NRA. He would then be considered to have 10 years of participation at NRA and no reduction in the 415 dollar limit?

If we have an 8 year fence, the lesson then is to never freeze a small DB. Instead, consider amending to reduce the benefit formula. Then, if by chance the employer is fortunate enough to ramp up the plan in future years, the 415 issue will not apply. I guess the question is whether a participant is considered to have participated in a frozen plan. Does "participating" mean only an increase in accrued benefits? What about an increase in vesting?

Thanks Socal. One final question. Would a 415 dollar limit be affected by years a plan is frozen? i.e. $14,583 must be earned over 10 years of participation. If a plan is frozen 2 of those 10 years, do we get to count those years?

Suppose you have a 1 participant DB with unit benefit of 8% per year, where the participant will have 10 years of participation at NRA. Furthermore, lets assume he accrues $1,200/mo. each year. If they froze the plan in year 3 and want to unfreeze in year 5, does the 133 1/3 rule apply to his prior accrued benefit or the last increase in accrued benefits before the freeze? They would like to increase the benefit going forward. Thanks much.

Is it really possible to exclude participants from a DB plan when they have been eligible and have accrued benefits in the past? What if the plan is top heavy and the future excluded group are HCE's but not key employees? Wouldnt they have to receive top heavy minimums? In this case there are four junior partners (all in their 40's and each currently have 5% interest but not more than 5%). They are buying into the partnership and will eventually have full ownership. They, as a group, have expressed an interest in not being covered under the DB plan for the next five years. This because much of their incomes are going to buy out current partners and as part owners they are responsible for some of their own benefits. Our understanding was that you could have different benefit levels for different groups of participants, but you could not exclude entirely a participant or group of participants who have already accrued benefits.

What if under the same circumstances the employer had a plan year 6/1/06-5/31/07, tax year of 12/31/06 but paid no salaries until 4/30/07? We still think the entire contribution would be deductible. Revenue ruling 90-105 indicates that any contributions related to compensation paid after the tax year would not be deductible, but only with respect to a 401(k) PLAN.

Yes. I dont think we can have a plan effective date prior to when the business was started. Also these two guys both worked as employees for a large company so there is no predecessor service. Reg 1.404(a)-14© states that if the employer's taxable year does not coincide with the plan year, the deductible limit for a given taxable year is one of the following alternatives: 1) The deductible limit determined for the plan year commencing within the taxable year. 2) The deductible limit determined for the plan year ending within the taxable year. 3) A weighted average of #1 and #2. In this case, it seems as though #1 would allow the full plan year contribution to be deductible in 2006. Anyone disagree with this?

Suppose you have a small company (just two 50% partners in LLC) that starts business June 1, 2006. They already have income of $600K each. The tax year is December 31, 2006. Their plan salary already exceeds $220k each. They could adopt a DB plan with a plan year 6/1/06 to 5/31/07. Question: Given they will have maximum plan salary before 12/31/06, could the DB plan be run on a beginning of year basis? If so, could the full contribution for the 6/1/06-5/31/07 plan year be deducted on the 12/31/06 tax return? It would be contributed by 12/31/06. Thanks.

Thanks for the reply Pensions in Paradise. The loan policy does not specifically say that a cure notice will be issued. However, it states: The committee will attempt to advise the plan administrator approximately one month before the end of the grace period and the participant will be given a chance to pay the missed or insufficient payments.

A 401(k) plan has a loan policy that allows a participant to repay missed loan payments within three months. It also indicates that the employer will inform the administrator of the missed payments and the administrator will allow a cure period for repayments. In this case, the employer did not inform the administrator until eight months had passed after the participant had terminated employment and had made his last loan repayment. A 1099-R was issued but no cure notice was provided. What are the consequences of not providing a notice to the terminated participant before his loan went into default? Are there any penalties? Thanks.

We administer a very simple small profit sharing plan. They are re-locating and would like to terminate the plan and distribute benefits. We feel comfortable terminating this plan without obtaining a determination letter. Does PPA '06 force us to apply for a DL? I would think the plan must conatin the language for PPA '06. How do others handle this situation? Thanks.

Thanks for clearing this up.

Blinky Thanks for your observation. You are right that the actuarial increase would make the two equivalent. I dont think the BFR's will be an issue in this case as the company owner is the only participant. Are you saying that the requirements of 412©(8) will not be satified because the $1,000 accrued benefit payable at age 65 will be less valuable than $1,000 payable at age 64? Wouldnt the actuarial adjustment make it equivalent? Thanks again.

Suppose you have a DB plan with a 12/31/2005 year end that was amended 2/15/2006 to increase the retirement age from 64 to 65 effective for the 2005 year. 412©(8) allows for retroactive amendments as long as 1) It was executed within 2 1/2 months after the close of the plan year. 2) The amendment does not reduce the accrued benefit of any participant as of the first day of the plan year to which it applies. If a participant had an accrued benefit of $1,000 on 1/1/05, he would still have an accrued benefit of at least $1,000 after such amendment. However, his PVAB might be less valuable on 1/1/05 because of another year of discounting. Would this negate the amendment?