Dougsbpc

Is it possible for a new company to adopt a DB with a beginning of year valuation? For example, suppose an S-corp is formed 1/1/2006. No compensation exists for the prior year, but suppose we wait until 12/31/06 and use 2006 compensation. I know an end of year could be done the first year and then switch to beg of year, but could you start with beg of year? If it is possible to use first year salary for a new company and beg of year DB, could the plan year be different from the company year? For example, suppose an s-corp is formed 10/1/2005 with a 12/31/05 year end. Could the employer adopt a db with a plan year 10/1/05-9/30/06? My understanding is if a beg of year valuation is done, the deduction could be taken on the 12/31/05 return. In this case the only participant will be the 100% owner and he will absoultely have more than $210K in salary every year. the contribution would have to be funded by 9/15/2006. Thanks much.

Does anyone know if there is a model amendment available for Roth Contributions yet? Thanks much.

An Employer has 6 employees and wishes to cover 3 employees in a defined benefit plan and 3 employees in a profit sharing plan. They will commit to making a 25% of pay contribution to the PSP, so both plans will easily pass 401(a)(4). Also, both plans would be aggregated for 410(b). The census should not change as all 6 are long term stable employees. My understanding is that the 25% deduction limit would not apply as long as no employee participates in both plans. Does anyone see problems with this arrangement? Thanks much.

Thanks for the replies. Ultimately, we will have this employer seek an opinion from an ERISA atty. if they wish to go ahead, but in the meanwhile it would be good for us to get it staight. R. Butler - could company B be an FSO? It would not be a professional corp, but my understanding is that you can have a service organization without being a professional organization. I read that the real test is whether services are performed for the public and whether capital is a material income producing factor.

This has to be one of the most complicated areas of qualified plans. Have an employer who may want to sponsor a defined benefit plan. Here are the facts: Company A is a construction company with 30 employees. It is owned by Mike 47%, Bill 47% and two non-related others for a total of 6%. Company B is in the business of estimating project costs. It is owned by Mike 25% and Bill 25% and an unrelated person 50%. It has 10 emloyees. The unrelated person has no ownership in company A. Company B wishes to sponsor a DB plan but does not want to cover employees of company A. It appears no controlled group exists. The question is whether an affiliated service group exists. Niether company will act as a management company for the other. It is true that Company B will do some estimating for company A but the majority of work will be done for other unrelated companies. Capital is a material income producing factor for company A so it cannot be an FSO. Capital is not a material income producing factor for company B so it would be the FSO. In this case, company B would be the FSO and company A would be the B-org. Our understanding is that a significant portion of the B-org must be the performance of services for the FSO for an affiliated service group to exist. No services would be performed for the FSO. However, a significant portion of the FSO's business is the performance of services for the B-org. Do we need to consider this in both directions or is an affiliated service group only present when the B-org performs significant services for the FSO? Thanks much.

No controlled group exists as Jim has no ownership in corporation A and John has no ownership in corporation B. Therefore, neither Jim or the employee should have to be covered in Corporation A's plan.

Only a notice has been provided. After the 30 days were up, the employer was going to adopt a new 401(k) document. However, now they dont want to.

We have a takeover that was originally a profit sharing plan. The prior plan administrator was in the process of converting to a Safe Harbor 401(k). Safe Harbor notices were provided to employees just 2 weeks ago. All eligible employees signed Safe Harbor notices. The employer now has cold feet and wishes to not go forward with the Safe Harbor 401(k). Can they withdraw the safe harbor aspect of the plan and just remain as a PSP? Thanks much.

What about the ever popular cross-tested DC plan? Most really have no basis for providing 20% of comp to one group and the minimum gateway to another. Yet many operate this way. As long as a sufficient number of young NHCE's benefit, the plan will pass the general test. Will these plans some day be targets for age discrimination?

Is there potential age discrimination in a DB plan that reduces the NRB for years of service less than X? For example, suppose the benefit is 50% of FAC multiplied by years of service divided by 25 years. Clearly an employee who is hired at age 55 will have a smaller NRB than an employee hired at age 35 (assuming same salary history etc.). However, if the employer does not force retirement at a specific age, the 55 year old participant could (but not likely) work another 25 years and earn a full benefit. Also, the 55 year old would accrue benefits at a rate at least as great as the 35 year old. Suppose a plan passes 401(a)(4) but provides 50% of FAC to Group A participants and 50% of FAC reduced for years of service less than 25 for all other participants. Could a non-group A participant claim age discrimination? Thanks much.

Suppose you have a 2 participant DB plan with individual aggreagate funding. The participants are 50% partners in a partnership. One partner is somewhat older than the other. Both partners have the maximum plan salary for all years. The normal cost for partner A is $100,000 and the normal cost is $50,000 for partner B. Total Contribution $150,000. The accountant wants to know the contribution breakdown for each partner. We generally provide the normal cost as above. However, it would probably be more equitable if the $150,000 were allocated based on accrued benefits. Is it acceptable to determine the deduction split this way? Thanks much.

In this case, the employer does not care about the deduction. The plan has a June Year end, they are on extension until March 15 and will probably be able to fund the contribution by March 30. I have tried to find a cite that identifies a deadline but havent found one. There have been prior discussions on this that indicate there may not actually be a deadline. For example, suppose the 415 issue is not a concern in the next plan year and the employer makes the June 30, 2004 top heavy minimum contribution on July 31, 2005 (one month beyond one year). Is there any consequence? I dont want to beat this to death, just curious if anyone is aware of any recent clarification on this issue.

The plan in question is a 401(k) plan not a pension plan.

I know this has been discussed before and I have read some past discussions on this. Assuming the employer already has losses and does not want the deduction, when must the top heavy minimum contribution be funded? Apparently there is no deadline other than 30 days following the extented corporate tax filing deadline if the contribution is to be allocated for the prior plan year. Is anyone aware of any recent clarification on this issue? Thanks much.

Thanks for the replies mwyatt, jay and blinky. The 110% of CL of 1.401(a)(4)-6(b)(3) will indeed prevent him from the distribution now. This plan is now frozen and would have no problem paying all benefits if it were not for the low 417(e) rates. As it is, we changed to unit credit (as required for a frozen plan) which results in annual contributions of approx. $75,000. So the idea is that they will chip away at the shortfall over the next four years or so. We actually wish they could fund more than $75,000 per year but are held to this amount by the 10 year amortization on the change in methods. Suppose for example he was not currently at the comp limit or dollar limit. How would that prevent his lump sum benefit from decreasing in the future? Assume he established his high three several years ago and can no longer afford to be paid higher salary than his average for the next three years.

Have a 20 participant frozen DB that is covered by PBGC. A 50% owner participant has reached NRA and the document allows for an in-service distribution after reaching NRA. This participants benefit represents 60% of all plan benefits. Is there a problem distributing his entire benefit now? PVAB's based on 417(e) rate is approx $1,800,000 and assets are approx $1,500,000. The problem is that his PVAB will decrease with each future year.

Why not pay the spouse a small salary? I dont believe minimum wage laws apply to the owner of a business or his/her spouse. Many spouses work for small business owners, work long hours and draw low salary, particularly in the first few years of a company. The plan should be able to count this service as long as the spouse works the required hours per the plan.

What is an AVA? Socal, if the assets were adjusted by $10,000 this would only effect the maximum contribution but would not effect the minimum, right? They could always choose the minimum, but in any case we do need to properly adjust for the valuation as you mentioned.

A 20 participant DB is sponsored by a professional corporation. The company and plan have a December year end. Suppose the pension contribution is $100,000 for 2003, the corporation goes on extension and the full $100,000 is funded by September 15, 2004. However, the accountant files the tax return prior to the final $10,000 deposit and only deducts $90,000 for 2003. Question: can the $10,000 plus the 2004 contribution be deducted on the 2004 return? Or, could $10,000 of the 2004 contribution be pushed to 2005? Assume there is no 404(a) limit problem. I seem to think they cannot because the last $10,000 deposit was contributed timely for the 2003 return and the only way to remedy the problem is for the accountant to file an amended return for 2003. Anyone disagree? Thanks much.

We administer a 5 participant calender year DB. The company owner, his wife and three unrelated employees participate in the plan. The plan is covered by PBGC. As of December 31, 2004 the plan was frozen and the plan will terminate 2/25/2005. All notifications (204(h) notices etc.) have been prepared and signed although nothing has been sent yet to PBGC or IRS. Question: would it be possible to unfreeze the plan and withdraw the termination? They wish to instead terminate the plan next year. Thanks.

I agree with Mbozek. There must be objective standards applied across the board. This explosion of questionable plan designs was, for the most part, neutralized by the minimum gateway requirements for non-safe harbor plans. Today, there is a very small percentage of all qualified plan participants who are affected by truly abusive designs thought up by smart tax lawyers. This in exchange for, well, an explosion of qualified plans adopted by small employers. This is a good thing. I remember those years prior to 1994 when very few small employers were interested in qualified plans. Detailed, quantitative rules such as 401(a)(4) including the minimum gateway requirements result in more employers adopting plans and more employees having meaningful retirement savings.

So are you saying that because the death benefit is not a 411(d)(6) protected benefit we may be able to reduce the death benefit which thereby reduces the premium and future cash value? If that were the case then (in my previus example) the death benefit for the participant could be changed to $20,000 ($200 X 100)?

Mwyatt you are correct. I hadnt thought about the grandfathering requirement. However, suppose a participant currently has a projected benefit of $2,000 and an accrued benefit of $200. If we amend the plan to add the offset, the participants accrued and projected benefit (after the offset) may be $200. The face value of the policy is $200,000 (100x proj benefit currently). Suppose the participant terminates employment 5 years from now and the CSV of the policy exceeds his PVAB. Furthermore, suppose he wishes to take the policy as part of his distribution. Can he then purchase the policy from the plan by writing a check to the plan for the difference between the Cash value and his PVAB?

Have a 25 participant DB and PSP that was originally set up by an insurance agent. So of course the DB contains life insurance. The policies have been in force only a few years so CSV is low. This employer would really be better off with a non-safe harbor floor offset plan. Their younger employees understand and appreciate a 10% of pay PS contribution, while 5 senior owner employees would be happy with the additional benefits in the DB. Both plans would easily pass 401(a)(4). Our dilemma is how to deal with the life insurance as the new proposed design may result in no DB benefits (after the offset) for several participants. Yet these same participants currently have policies of 100 times benefits. They could terminate the plan and start a new DB but that would result in 100% vesting. Since the same employees participate in the PSP, is there any way to somehow transfer the policies to the PSP? Thanks much.

Unlike all of our other clients, we do not have a direct relationship with the plan sponsor and trustee in the case of these two small profit sharing plans. The financial planner is the contract administrator in this case. The financial planner simply hired us to assist them in preparing reports and the 5500. Our services and fee agreement are between the financial planner and us. In the agreement, we indicate the responsibilities of the financial planner to us. One of those responsibilities is to provide timely, accurate data including all investment statements and valuations that reflect all assets and financial activity of the plan. They have not honored this nor have they paid us one dime. Clearly one party might have recourse on another that is paid for services, but what about when no payment is made?