Dougsbpc

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.

b2Kates- Thanks for the reply. We are a third party plan administrator who sells no investments and usually directs clients to consult with their CPA regarding tax matters. Seems like we often come up with advantageous plan designs that lead to great savings for small employers, but we never give tax advise. For one thing, we're only one peice of the puzzle and dont have nearly enough information about a client to advise them in tax matters, nor would we want to. Hog factor - that's funny. Now, I could see, if a plan became disqualified or a client had to pay high penalties for non-filing, or a participant sued an employer over a mistake we made. But it seems like she is stretching it - indeed the hog factor. Thanks again.

We just terminated a 1 participant DB and received a favorable Determination Letter. Initially, the client approached us about a DB because she received a $2 million referral award from a law firm. She was age 63 and a sole proprietor. We set up the DB to have NRA of 65 and 3 years of participation. We also suggested she incorporate as an S-corp so she could carry back the losses created from the large pension contribution to the year she received the high income. This probably saved her $200,000 in income taxes. Two years ago she needed some money to remodel her home and tapped $50K from her IRA. Of course, this had the effect of reducing the loss carried back to the high income year by $50K. Now, after all is done, she wants to sue us for the $24K in income tax she paid in relation to the IRA distribution. Nobody in our office recalls talking to her about any IRA distribution. She claims we did not properly counsel her regarding the taxation of her IRA distribution. Anyone have any experience with such a matter? Thanks

We administer a 1 participant / 1 employee DB that was adopted and effective 1/1/00. The owner (100% shareholder) sold his old company to another firm that purchased the assets of the company. The 3 employees he had, terminated employment in 1999 before his new corporation adopted the DB plan. The income he is using to fund the plan is flowing into his corp from the sale of his old business. Payments stopped in 2001 so we amended his plan to reduce the benefit to prevent any funding requirement in 2002 (the year he will have less income). We changed the benefit from 60% of FAC to 10% of FAC. He now wants to somehow provide a benefit to one of his former nhce/ non-key employees. I thought perhaps we could amend the plan to get rid of eligibility and change accrual to one hour of service. He could then hire his former employee for one day and provide the tax-deferred benefit he wants. We could acheive this by having a benefit formula for non-owner employees of say 50% of FAC. FAC is defined as the highest 3 consecutive years of all years including years with a predecessor employer. I dont see a problem passing 401(a)(4) in 2002 as we should pass using the annual method. He will terminate the plan in early 2003. Anyone see a problem with this? Thanks

Thanks for the answers Frank and PAX. In this case the guy does not want a contribution. He did not work the required 1,000 hours this year. If we amended the plan to freeze benefits (signed prior to 15 days before year end), would he have a funding requirement (assets approx 100K and PVAB approx 90K)? It seems he would not if we were running end-of year. What if we continued with beginning of year? Or would it make a difference in terms of a required contribution? Thanks.

We administer a one participant DB (sole proprietor). The plan was effective 1/1/2000, has assets of about 100K and PVAB of about 90K. He worked less than the required hours to accrue a benefit this year and wishes to freeze the plan. Is there any problem with freezing benefits, switching to end of year and avoiding required contributions this year? Is it even necessary to switch to end of year to avoid the contribution requirement? He expects the business will be profitable 2-3 years down the road. What happens if he is profitable next year? Is that too soon to unfreeze benefits? We have communicated that a DB cannot be amended / altered every year and must generally be permenant in its design. Thanks!

Hi All We currently administer a small defined benefit plan with two participants (husband and wife). The plan has been in existence for 5 years and has a $10,000 annual minimum benefit. My understanding is that any participant with the $10,000 minimum must receive the benefit in the form of an annuity. What happens if the wife (who has the minimum benefit) dies? Is her primary beneficiary (the husband) prevented from electing to receive her benefit as a lump sum? Thanks