Dougsbpc

I would like to thank everyone for jumping in on this. It has been extremely helpful.

Tom Agree with everything you said, but are you sure compensation cannot be counted for deduction purposes for an employee who is excluded from participation? Although I do not have it in front of me, seems like we researched this some years ago and found that for 404 purposes only, an eligible employee (whether or not excluded) is considered to have benefited from the plan. Years ago, we purposely designed plans to benefit key employees who did not wish to participate. We established a seperate class and gave them $100 per year just so we could count their comp. However, I believe we found that we need not provide any allocation to consider their comp for deduction purposes.

MGB I can see how you would have thought my original question was in regard to calculating a distribution, which will eventually happen when he winds up the plan. Perhaps I should have described it better. We are a small TPA firm and do not have an in-house actuary. In this case, we mentioned that the annual deductible contribution would be approximately $140,000. When we sent the valuation to our actuary, he indicated the employer would be restricted to a monthly benefit of only $3,333 per month under the new plan, and the resulting annual contribution would be approximately $70,000. He based his explanation on the fact that benefits must be accrued over 10 years in the new plan and that we could not consider any of his participation under the prior plan. It is true that we always accept full responsibility for the plan. In this case the actuary believes the plan would eventually be over-funded because the participant could only be paid a monthly benefit of $3,333 per month.

MGB, As an actuary, do you agree that prior years of participation are counted under the new plan in this case?

That's funny. Seems I cannot conclusively prove to him that we count prior years of participation and he cannot conclusively prove to me that we cannot. What a conundrum hah? Problem is he signs the schedule B.

Thanks for the reply Flosfur. reg section 1.415-8 on combining and aggregating plans indicates that for purposes of applying the limitations of section 410(b), all qualified defined benefit plans (without regard to whether a plan has been terminated) ever maintained by the employer will be treated as one defined benefit plan. We interpret that to include all of 415(b) including subparagraph 5 which explains the application of the 1/10th reduction for the dollar limit. Our actuary disagrees and believes the 1/10th reduction only considers years of participation under the current plan. He could be correct but has not been able to provide us with anything that would indicate we cannot consider participation under the prior plan.

My question has to do with the treatment of the 415 dollar limit when a prior DB existed. Supose a one participant DB was established with a NRA of 65. Also, the only participant was 55 when the plan started, always had more than $200k in salary and accrued the maximum benefit under the plan. He participated 5 years and then terminated the plan at age 60 and distributed benefits. Suppose he then immediately adopted a new DB with a NRA of 65 and wanted to have the maximum benefits. Does he get penalized on the 415 dollar limit simply because he had a prior plan? We are told that we must subtract the prior plan accrued benefit from the 415 dollar limit and then accrue the benefits over 10 years in the new plan without any consideration of participation in the prior plan. If this is the case, here are his maximum benefits under the new plan: 415 dollar limit: $13,333 Less prior plan benefit: -$6,666 Adjusted limit: $6,667 x 5/10 Max proj benefit $3,333 In this case he will have participated 10 years under two plans but will only be able to receive $10,000......a 25% penalty so to speak. I've looked under 415(b) and the regs and cant seem to find anything on point. Anyone have any experience with this? Thanks much.

Yes. That is what I was thinking too. We would only remove the top heavy minimum requirement with respect to a frozen DB effective for plan years beginning in 2003.

Thanks all for the replies. In this case all employees participate in both plans. The plan sponsor executed an EGTRRA good-faith amendment back in April 2002. Their plan year ends 9/30/2003. My understanding is that we must administer the plan in accordance with EGTRRA and 416©(1) for plan years beginning in 2002. Can we really amend (or do we really have the choice) the plan to make the provision effective for plan years beginning in 2003? That would be great if we could. If this is possible, I would think a key employee could make any deferral (even 1% of pay) in the 401(k) and trigger the 2% top heavy minimum in the DB. And again, the 401(k) document indicates top heavy minimums are provided in the DB plan.

We administer a 15 participant defined benefit plan that was frozen 2 years ago. For plan years beginning in 2002, the top heavy minimum is no longer provided. This employer also sponsors a salary deferral only 401(k) plan. This employer wishes to provide another year of top heavy minimum benefits to participants of its defined benefit plan. The 401(k) document indicates that the 2% top heavy minimum is provided for in the DB. Question: If a key employee makes say a 5% of pay salary deferral in the 401(k), wouldnt that then require the frozen DB to provide the 2% top heavy minimum for 2002? We realize we could unfreeze the plan and change the benefit formula to 2% for each year of participation up to 10 years, but would prefer not to. Anyone have any comments about this? Thanks DK

A calendar year employer adopts a non-safe harbor defined benefit plan January 1. Some employees leave the company by mid year without accruing a benefit and the plan fails 401(a)(4) by December 31. Can the employer provide additional benefits to a group of currently eligible NHCE's to pass 401(a)(4) for the first year of the plan? 1.401(a)(4)-11(g) does not seem to say you cannot. It only appears to indicate you cannot have a pattern of such amendments. I seem to remember reading something about corrective amendments being questionable in the first year of a DB plan. Anyone know about this? Thanks.

Thanks for the reply AndyH. I agree. However, it seems a little less clear with a floor plan. Benefits will be higher for all after making this change. For example, a participant may be guaranteed a monthly benefit of $500 after the change whereas he/she may have only been entitled to $100 before. It is true that this participant will likely be paid less than $100 at NRA. What if the DC plan lost money over time? In that case participants would have higher accrued benefits and may be paid more as well.

We currently administer a DB and PSP for a group with 15 participants. The DB plan has two tiers-one for owners and one for employees. None of the owners participate in the PSP, but all other employees receive (and will continue to receive) contibutions of 10% of pay. The plans easily pass 401(a)(4), however, we are concerned that the DB may not pass 401(a)(26) as employee benefits in the DB are small (and perhaps not considered meaningful). To correct the problem, we are thinking about providing higher benefits to employees in the DB and converting it to a floor offset. The result will be $0 benefits for EE's in the DB but at least 10% of pay each year in the PSP. Question: are we required to provide a 204(h) notice to EE's in the DB prior to converting it to a floor offset? Also, even though EE's currently have small benefits in the DB, do their benefits go to $0 once the offset is in place or are their accrued benefits grandfathered? Thanks.

We administer an 80 participant 401(k) Profit Sharing Plan. All assets are pooled except participant loans. The plan has a June 30 year end. In October 2001, the trustee decided to pool all loans. An amendment and corporate resolution changing loans to pooled investments were prepared and sent to be executed. A few days later the trustee (a company employee) was fired. Action was taken but the amendment was not executed. The company hired a new CFO who subsequently became the new trustee. Even though earmarked loan accounts had already been liquidated and moved to the pooled account, we prepared a new resolution and amendment for him and corporate officers to sign. He acknowledged receipt of the new amendment and assured us it had been executed. Just prior to completing the June 30, 2002 valuation, we again asked him for a copy of the amendment. He mentioned he would send a copy but never did. The pooled account had -13% earnings and 9 participants who had loans of course wished they still had earmarked loan accounts. In February 2003 the trustee was fired. Apparently, the trustee misplaced the amendment and resolution which were never executed. Question: Can a plan be amended by virtue of action taken on an earlier date? The best solution for this employer (if possible) would be to amend the plan now with a retroactive effective date. The corporate resolution would contain language indicating agreement that the plan was amended by vitue of action taken on an earlier date. Anyone have any comments on this? Thanks!

Thanks for the replies KJohnson, Kirk, and Katherine. In this case, the 100% shareholder is the trustee on both plans. He offered all 10 other participants the opportunity to share this investment on a pooled basis and has had no takers. It is true that appointing an independent fiduciary would be very costly. It seems to me that the only other alternative then would be to force all participants (all those who already declined) to share this investment on a pooled basis. Although the type of plan is irrelevent, benefits in a defined benefit plan are independent of investment performance. Therefore, no participant (other than the 100% shareholder) could be affected if the DB plan purchased the investment and it lost value. On the other hand, DC plan participants could complain if the investment did extrodinarily well. However, they were offered the opportunity to share in the investment.

An Employer sponsors a Defined Benefit plan and 401(k) Profit Sharing Plan. Each plan has its own trust. The profit sharing portion of the 401(k) has had pooled investments. The 401(k) Profit Sharing Plan is in the process of changing investment providers and making all accounts (including profit sharing) self-directed. The pooled profit sharing account contains an investment worth $35,000 that cannot be liquidated. Generally, we would recommend that the sole key employee (100% owner) accept this investment as part of his account to be transferred. However, his entire account balance is only $10,000. This would be a perfect investment for their defined benefit plan. Could the defined benefit plan purchase this investment for the current fair market value? This would be the perfect solution. Thanks.

We administer a new DB plan that is offset by account accumulations in a profit sharing plan. The arrangement is not safe harbor so we will be general testing both plans. Our volume submitter document provides no other choice than to offset DB benefits with the actuarial equivalent of account accumulations in the profit sharing plan using DB plan actuarial assumptions. Suppose we use 6% pre and post retirement interest and 1983 GAMU for DB benefits. Other than possibly having to submit the plan as an individual design, is there a problem using different actuarial assumptions for the offset? We were thinking UP84 at 8.5%. Thanks.

We are currently restating a small defined benefit plan for GUST and EGTRRA. The effective date of the restatement will be 1/1/1997 although the client will not actually execute the restated document until next month. Our understaning is that we need to use the 1/1/1997 effective date because the changes brought about by GUST started for the plan year beginning in 1997. Suppose the prior TRA-86 document was amended in 1998 and 1999 for benefit increases. Are we required to indicate the prior benefit formulas in our restated document? Thanks DK

mbozek Thanks for the reply. The loan (note, statement of disclosure etc.) and SPD are silent on how loan repayments are invested. The plan document, however did indicate loans were direct investments of the plan. We provided the plan sponsor with a plan amendment that did change the language for loans to indicate they are now pooled investments of the plan. This is a case where we provided information on treatment of pooled vs. earmarked loans and the client immediately moved the loans to the pooled account without informing us. We only dicovered it after reviewing a brokerage statement then immediately sent the amendment for them to execute. I wonder if the amendment is even valid since it was executed 5 days after the accounts were moved.

Suppose a profit sharing plan has pooled investments for all plan assets other than participant loans. Each participant who has an outstanding loan makes his/her payments to a savings account (earmarked account). In late 2001, the plan committe and trustee decide to make all loans pooled investments (i.e. liquidate earmarked loan repayment accounts and transfer proceeds to the plan pooled account). The pooled investment return was -17% for the 2001-2002 year. Instead of earning 1.5% in the earmarked savings accounts, all participants with loans suffered 17% losses. Furthermore, the committe and trustee did not inform participants of the change to pooled loans. Now one participant claims he would have repaid his loan had he known the loans would be pooled. The committe and trustee truely had the best intentions for all participants in mind when they made the decision. They felt that the pooled account (professionally managed) would produce a higher average investment return over a period of time than the earmarked savings accounts. The plan is not subject to minimum funding and I believe the right to direct investments is not a 411(d)(6) protected benefit. Of course the committee should have informed participants, but is there any legal requirement to do so? Would this participant have recourse against the committe who are fiduciaries? Thank you.

Here is some additional background: The owner (and only key employee) is 57. There is one other HCE age 58, and most NHCE's are young (late 20's, early 30's). The goal of the employer is to be able to put away about $100K per year for him and approx 10% of pay for all other eligible participants. The problem is that he has 4 hourly participants who work > 1,000 hrs per year who would normally be independent contractors. However, because some of their jobs are government jobs, the otherwise independent contractors must be employees. The company does not anticipate having any more of these hourly employees going forward. Basically, they want to benefit salaried participants and not these hourly employees. The problem is that they already have a salary deferral only 401(k) that all 4 of these hourly employees are eligible for. If the employer had thought about the DB last January, we would have had them adopt a 401(k) Profit Sharing Plan with a one yr eligibility. Then 6 salaried NHCE's would have been eligible and all 4 hourly employees would not have been eligible. The Floor-Offset DB seems to work fine and will pass 401(a)(4) with the 10% profit sharing portion of the 401(k). We are aware of the meaningful benefit issue and will provide 1% of pay per year of participation for all non owner participants. This amount would be offset by the 10% profit sharing contribution. The owner has not or will not participate in the profit sharing portion of the 401(k) (although he has made Salary Deferrals). In a nutshell, the plans are top heavy, and the owner would like to benefit salaried employees and not provide the top heavy minimum to hourly employees for 2002. This most likely cannot be done, but we were thinking that if there were some way to make hourly employees an ineligible class of employees prior to year end, they would not need to be given the 5% top heavy minimum on December 31. Even if this could be done, we would fail 401(a)(4) (just barely) by having to consider the 4 hourly employees in the test. Thanks for the responses. DK

We have a client who has a 20 employees. The company has done very well so they wish to adopt a floor-offset DB. They already have a salary deferral only 401(k) that has been active for all of 2002. Since the owner (only key employee) will have high benefits in the DB, all plans will be top heavy for 2002. Under their current salary deferral only 401(k) employees are eligible after 3 months. Therefore they have 10 eligible participants. Suppose they terminate the current 401(k) prior to year end and adopt a new 401(k) profit sharing plan effective for all of 2002. Furthermore, suppose only 5 of the 10 current participants will be eligible for the new plan (this because the new plan has a 1-yr elig requirement). Also, only 5 of the 10 will be eligible for the DB. A 5% top heavy minimum will be provided in the new 401(k) Profit Sharing Plan. Are we required to provide the top heavy minimum to just the 5 that are eligible for the new plans or all 10? Thanks

Thanks much for your replies on this! ERISA Sec 408(e) then indicates that sections 406 (prohibited transactions), specifically sale or exchange between the plan and a party in interest and 407 (qualifying employer securities) do not apply to the acquisition or sale by a plan of qualifying employer securities. So it appears the plan could directly purchase stock from principals (whether or not considered parties in interest). Also then it seems as though the plan could eventually sell the stock back to the company. Of course before stock is purchased, the company would be required to get a stock evaluation and no commision could be charged on the sale of that stock. Does this sound correct? Thanks again.

Thanks much for the answer IRC401. This plan would have the stock in their pooled profit sharing account only. The stock would only represent about 12% of total pooled assets so cashing out participants would not be a problem. The one thing I am not sure of is whether the trust can directly purchase stock from retired employees. For example, one retiring executive has $200,000 worth of company stock. If the plan were to purchase his stock (after a proper appraisal of course), could the plan simply write the retiree a check for the value of the stock? Thanks again.

We administer a 90 participant 401(k) Profit Sharing Plan where salary deferrals are self-directed but profit sharing money is pooled. The company that sponsors the plan is privately held mostly by employees of the company (though not through an ESOP). Next year, two long-time principals will be retiring and selling their stock. It appears the plan qualifies as an eligible individual account plan and can therefore have more than 10% of assets invested in company stock (actually, in their case it would be about 12%). Question: Is it possible for the plan to simply write a check to these individuals in exchange for their stock? Suppose a few years from now the plan wishes to sell the stock. Can it sell the stock to the company? Thanks