Dougsbpc

I think the comments by GSHAC are excellent as well. He/she touched on this but it was very important in our success. We looked at where we were geographically, what our competitors were offering and then determined our specialty. For example, we knew most of our competitors were administering simple safe harbor plans (afraid to venture out). We determined our market area was comprised of several small very profitable businesses (they had to be to live here). We let our competitors bang their heads trying to compete with fund companies and large administrators, while we concentrated on cross-tested DC and DB plans and floor-offset plans. So as GSHAC pointed out, making a name for yourself like the " " guy is very important.

Mwyatt This is exactly right. Where is the PBGC's liability? In fact, they have almost no liability for the vast majority of small plans. They should allow all plans to reduce the value of benefits (on the schedule A) by the benefit of any greater than 50% owner participant. It would be so simple and so fair.

This is actually a hypothetical. The fact is that this plan is an active PBGC plan with several issues. There is a single 100% shareholder participant and six other participants. The employee benefits are relatively small. This may be a takeover case for us and I'm not sure what happened in the past. They probably invested too heavily in the market in the late 1990's and got clobbered. One thing is for sure, they will have high PBGC premiums. This leads us to think they may just want to terminate the plan and then adopt a new one starting 1/1/05. The premium savings could be $20,000 over four years. A DB plan is right for them as the business has consistent profits. With a small reduction in benefits for the owner, it makes sense.

A Single employee corporation wants to adopt a new DB. The sole shareholder and participant previousely sponsored a DB under which he accrued a benefit of $5,000. Under the new plan his salary will be $10,000/mo and his projected benefit will be $10,000. Under the new plan we must adjust for his accrued benefit under the prior plan for the 415 100% of pay limit. Question: suppose they terminated the prior plan in 2003 with insufficient assets (i.e. the shareholder participant accepted a major reduction in benefits). For purposes of adjusting his benefit under the new plan, must we use $5,000 or the reduced equivalent of his benefit. Thanks much.

You have probably addressed this but does your client have W-2 salary in past years? If so and if average salary is high enough to support the benefits/contribution you want, then you may not have a problem.

Yes, we will be excluding by class in this case. Suppose we fast forward three years, they have 30 employees and the plan excludes all salespersons. Furthermore, suppose they happen to have 5 otherwise eligible sales employees who are all over age 40. Perhaps we still would not have a problem because we would be excluding by class. If we excluded by name, we may have a problem.

We administer a small DB plan with 10 participants. The emloyer has 13 employees. The employer just hired a very highly compensated employee and wanted to exclude him from the plan. The employee is age 49. There will be no problem passing 401(a)(4) or 410(b). I believe ADEA only applies to employers with more than 20 employees. Anyone see a problem with this?

We have a PS plan where we are using accrued-to-date for 401(a)(4). One participant reached NRA and took an in-service distribution of all but $10,000 of his account back 3 years ago. I assume we need to add back his distribution to his balance when testing correct? Thanks much

What is the definition of uniform and reasonable? Although not certain, we contend that a safe harbor plan would be considered as providing benefits on a uniform and reasonable basis. Owner employees need not benefit for a plan to be a safe harbor plan. Therefore, as long as all participants other than the owners benefit on a uniform basis, you may satisfy 1.401(a)(26)-5.

Thanks for the replies Blinky I guess one option for us is to submit these plans for a determination letter. If the IRS determines the DB plan does not meet the minimum participation requirements because the two HCE's do not benefit in the DC plan, they will let us know.

Everett Thanks for your answer. In this case I can just have the HCE's get the same % contribution as the NHCE's in the DC plan. I guess it really doesnt matter as the total benefits from both plans (for the HCE's) will be approximately the same as if they were receiving $0 in the DC plan. Just curious though, would a safe harbor DC plan be considered a plan that provides uniform and reasonable allocations to all? If so, an HCE can receive lesser contributions in a safe harbor DC plan and it would still be considered a safe harbor plan.

Suppose you have a new non-safe harbor DB that is offset by a new profit sharing plan. The DB will provide 5% of pay per year of partic for shareholders and 2% of pay per year of partic for non-shareholders. All benefits are offset by the act equiv of profit sharing balances. The employer will make contributions of at least 7.5% in the profit sharing plan. However, they wish to provide no profit sharing contributions to the two shareholder employees in the profit sharing plan. The plan easily passes the general test and they will have no problems with 404(a). 1.401(a)(26)-5(2)(iii)(A)(2) states that an employee whose benefits are offset is deemed as benefiting but only if he/she benefit in the other plan on a uniform and reasonable basis. Does this mean that we simply do not count the two shareholder employees for 401(a)(26) purposes because their benefits (in the DB) are not being offset? Or does this mean that we cannot count any participants because two HCE's did not receive the same contribution as every other eligible participant in the profit sharing plan? Thanks much!

Can a non-key HCE be prospectively excluded from a top heavy db plan when he has already accrued benefits under the plan? I dont think so. I think it is a different story if he was excluded from participation right from the effective date (i.e. he never accrued a benefit under the plan). Then as long as the plan passes 401(a)(4) they are OK. Anyone disagree with this? Thanks

Have an existing 401(k) plan and wish to convert it to a Safe Harbor 401(k). If the employer wishes to make the basic match safe harbor (100% match up to 3% of pay plus 50% up to 5% of pay), do existing match accounts need to be 100% vested? Clearly, future match contributions must be 100% vested, but what about existing match contribution accounts? Thanks much

I agree. The same five or fewer owners who do have 51% identicle ownership between A and D do not together have at least 80% ownership in each company A and D. Companies B and C do not have more than 50% identicle ownership.

Have a small profit sharing plan (10 participants) that requires employees to be employed on the anniversary date of the plan to receive a contribution. One of the participants terminated employment prior to year end with 750 hours and therefore did not receive a contribution. However, this participant did receive contributions for the past three years (i.e. he has an account balance). We are using the accrued to date method when testing for 401(a)(4). Is it correct that he should have an accrual rate even though he did not benefit this year? Thanks.

Administer a small cross-tested 401(k) plan that has depended on QNECs to pass ADP test in prior years. Next year they will not need QNECs to pass ADP test. However, the employees now count on getting a 3% of pay 100% vested contribution on top of the 5% Nonelective contribution subject to a vesting schedule. Question: can they make a QNEC anyway even if they already pass the ADP test? Does the QNEC simply become an additional Nonelective contribution that just happens to be 100% vested? If so, I would think we could use the QNEC in the a4 test and not have to pass a4 without it. We suggested the employer simplify matters and just make an 8% of pay Nonelective contribution but they just cant face the wrath of the employees who have gotten used to the 100% vested contributions.

We administer a (non-PBGC) 20 participant DB that provides a lump sum and installment payments from the plan as optional forms of Benefit. Our concern is that the plan will terminate soon, optional forms of benefit cannot be eliminated per 411(d)(6), an therefore we cannot eliminate installment payments from the plan. What happens if a participant has 20 years to NRA and chooses the installments? Does that mean the plan must be maintained for 20 years after termination? Has anyone run into this? Thanks.

I found a prior post that directly answers my questions.

We administer a cross-tested 401(k) plan that will fail the ADP test. The employer may want to provide a 2% QNEC to all NHCE's to pass the ADP test. Can the QNEC be considered in meeting the 5% minimum gateway? Is the QNEC considered for purposes of passing the rate group portion of the 401(a)(4) test? Thanks.

Have a small DB plan that provides the deminimus benefit. The plan is co-sponsored by two sole proprietors (each participants in the plan and no other employees). One sole proprietor has yet to make a profit. Can we provide him with the deminimus benefit even though he has only had negative earnings so far?

I've written the PBGC before too. The problem is that it usually takes them about 6 months to respond. That would usually not be a problem but in this case a buyer is considering purchasing the stock of the company that sponsors the plan. The buyer wants to seal the deal by December 15. Even though they cannot find anything on point, the buyers attorney somehow thinks we have a PBGC plan even though only greater than 20% owners remain as participants.

How about this to add even more assurance to Blinkys position: What if the current owners establish a new corporation and have that corporation become a successor plan sponsor? Then surely the plan should not be a PBGC plan as it will only cover greater than 20% shareholders of a non-related plan sponsor. In this case we would change the current plan year (and limitation year) from 9/30 to 12/31. Then, presumably when this plan terminates in the next plan year, there should not be any controlled group questions. For what its worth, I did find an opinion letter (90-6 dated October 31, 1990) on a similar question. The letter indicates that while the plan was not established exclusively for substantial owners, it is presently so maintained and therefore exempt from coverage. DK

We adminster a small DB plan. 3 owners and 10 non-owner common law employees. Last year all 10 non-owner employees terminated employment. A partial plan termination occured so we made all employees 100% vested and distributed their benefits. All that remians are greater than 20% shareholders of the corporation. The company will not ever have employees again. This company was recently approched by a potential buyer who wants to make a stock purchase. My understanding is the plan is no longer covered by PBGC since only greater than 20% shareholders remain as participants. Is anyone aware of a cite that proves this? Or disproves this? This is important because the plan is underfunded and shareholders are willing to waive a portion of their benefits. However, if the plan is still a PBGC plan, they cannot waive benefits and the potential buyer will run away as they feel the underfunded plan will be their liability. Thanks.

We administer a 12 participant DB that has benefit liabilities that exceed assets by about $600K. The plan is covered by PBGC. The owners (stockholders) would be happy to waive a portion of their benefits to terminate as a standard termination. The majority owners are brothers. One has 50% of the stock, the other has 30% and his daughter owns 20%. Clearly the one who owns 50% can waive his benefits, but it is less clear as to whether the 30% and 20% family members can waive their benefits. Although the constructive ownership rules of code section 318 appear to aggregate family members, resulting in two 50% owners, PBGC reg 4041.21(b)(2) references the constructive distribution rules of IRC sections 414(b) and © when defining a majority owner. 414(b) and © deal with controlled groups, which we do not have here. Anyone have any thoughts as to whether the family members can waive their benefits? Thanks.