Dougsbpc

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

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

We have a 2 participant defined benefit client that had a profit sharing and money purchase pension plan. The PSP and MPP were frozen and terminated before the DB started. Two years ago, the client wanted to distribute benefits from the terminated MPP and PSP. At that time the prototype sponsor did not have a GUST approved document so we requested a determination letter from the IRS. As part of the request, we submitted an "amendment to meet the requirements of GUST for a terminating plan". It took the IRS over 18 months to respond. Even though we provided copies of TRA-86 documents, they want to see all pre-TRA-86 documents. The client cannot find documents going back to 1984 DEFRA/REA. We have now received GUST/EGTRRA documents from the prototype sponsor. We were thinking about simply giving up on the determination letter request and having the client adopt the new documents. As far as we know, the plans have always been properly administered. Does anyone disagree with this approach? Thank you.

Thanks to all for the replies. mbozek We are the third party plan administrator. However, we are a fiduciary plan administrator and sign the 5500 as plan administrator. We are thinking about contacting our E & O carrier mentioning the potential claim and then asking them if we can retain our own counsel without jeapordising the policy provisions. This way we may be able to choose an ERISA atty who could assess our risk and what our chances are in defense. The SPD does not mention a mid-year valuation, however, the document does. The retiree potentially making the claim was a trustee and committee member a year ago and signed the plan document. Perhaps this may help us somewhat as by signing the document he has acknowledged reading and understanding all the provisions of the plan, including the provision that allows for a special mid-year valuation. The document states that the committee, in its sole discretion, may call for a special mid-year valuation at any time. The two remaining partners of the firm are now trustees and committee members. I would think they (in acting on behalf of participants) could enact the special valuation for the protection of retirement benefits for plan participants. This guy is quite a snake and will certainly plead his case that had he known of the possible (forced) special valuation, would have taken his distribution prior to 12/31/2001 and have been entitled to his $1,000,000. DK

We have a client that has a 20 participant profit sharing plan. Assets are pooled rather than self-directed. The majority company owner (key and highly compensated participant) has now retired and sold the company to two junior partners. Rather than terminate the plan, the junior partners (now combined own 100%) decided to maintain the plan and simply pay the retiree his balance from the plan. The plan has a December year end. In December of 2001 he called our office and asked what his distribution options were. We indicated that he could get paid his prior account balance (December 31, 2000 balance, if he were paid from the trust prior to December 31, 2001) or take a distribution during the 2002 year and share in any earnings or losses of the trust through December 31, 2001. In addition, we indicated he could leave his benefit in the plan beyond December 31, 2002 and share in earnings or losses for the 2002 year. He called a month ago and wanted his distribution based on his December 31, 2001 balance. As of June 30, 2002, the plan lost 24% from its December 31, 2001 value. His 2001 balance was approximately $1,000,000 and remaining employees had about $350,000. He is demanding to receive his $1,000,000 even though making that distribution will almost wipe out all other participant benefits. We mentioned that the plan will be required to perform a special mid-year valuation to allocate losses to all participants (including him) prior to distributing his benefit (i.e. he will share in the loss). The other alternative is to wait until after the 2002 year and hope plan investments recover. The plan document allows for a special valuation at any time during the plan year. He claims he does not want to share in the losses and does not care if all other participant benefits go to zero. He is holding us responsible for not for-warning him of this potential problem. Anyone have thoughts on this? Thank you.

I'm sure someone has had problems with this: Participant terminates employment and elects lump sum. The plan holds all assets in a brokerage account. We as administrator instruct the trustee (small business owner) to cut one check to the participant and the other to the bank the check is drawn on (the bank of the brokerage). We also instruct the trustee to send the withholding check with an 8109 coupon to the bank the check is drawn on. Result: the bank sends the check back and has no intention of making the tax deposit. I have told clients to set up a checking account in the name of the plan at their local bank and have the brokerage send the withholding check to their local bank for deposit. This works but clients are reluctant to take the time to establish the checking account. I'm thinking about simply instructing the client (trustee) to have the brokerage make the withholding check payable to the company, have the company deposit it in the company account and then have the company submit the withholding with the 8109 coupon. I know, I know....plan assets are never to revert back to the employer but I contend that once a participant terminates employment and is paid his/her benefit, they are no longer a participant. This would solve many problems. Does anyone agree or disagree with this approach? Thank you.

We have a client who sponsors a profit sharing plan with pooled investments. The vice-president of the company will retire this year and wants to sell his company stock. The stock is worth about $300,000 and plan assets are about $4,000,000. The employer wants to know if the profit sharing plan can purchase the stock. The plan is considered an individual account plan so we believe it could invest in company stock. The employer wants to know if the plan could purchase the stock directly from the vice-president. I would think the stock should be bought by the company and then bought by the plan. Does anyone disagree? Thanks.

Thanks for the info MJB. We will review our services and fee agreement that was signed by this client. It is interesting how the main objective of a qualified plan is to provide retirement benefits to employees. This allows a small employer to sponsor a plan like a large employer and reap the benefits of tax-deferred accumulation. Of course the small employer is most often only interested in the tax benefits. For a small employer to argue that a TPA was neglegent in ensuring maximum tax benefits were achieved by the owner, seems to contradict the main purpose of the plan.