Dougsbpc

My understanding is that when cross-testing, any nonhighly compensated employee must receive the minimum gateway when he/she receives any employer provided benefit or non-elective contribution. Suppose a company sponsors a cash balance plan and a 401(k) plan which are cross-tested together. If an NHCE receives no employer contribution in the 401(k) plan (last day requirement) but does get a CB plan pay credit that equates to a 2.5% allocation rate, must he be provided the additional contribution to bring him to the (in this case) minimum gateway of 7.5% ? Thanks.

It appears only current year compensation can be used in determining the contribution credit each year. If that is the case, are we forbidden from general testing based on average compensation with a cash balance plan? Thanks.

Suppose an employer sponsors a 401(k) plan with a 25% match (non-safe harbor). This plan will fail the ADP and ACP tests for 2018. They will refund to HCEs. They want to adopt a Cash Balance Plan and a Profit Sharing Plan for 2018. The 401(k) plan, Cash Balance Plan and Profit Sharing Plan all pass 410(b) on their own using the ratio percentage test. All of the same employees will benefit in each plan. For 401(a)4 and Top Heavy, can the 401(k) plan be tested on its own and the Cash Balance Plan and Profit Sharing Plan be tested together? Or must all 3 be tested together? Thank you.

I see there was a question somewhat like this recently posted. However, it is not completely the same. Suppose you have an employer who sponsors a cash balance plan and a safe harbor 401(k) Plan. The plans are top heavy and the 401(k) plan provides a safe harbor match. Both plans would pass 401(a)4 and 410(b) combined testing. The top heavy minimum is 5% and provided in the 401(k) plan. The non-elective employer contribution in the 401(k) plan requires 1,000 hours and last day. The CB plan only requires 100 hours to accrue a benefit. There is a non-key NHCE who terminated employment in 2018 with 400 hours of service. She is covered under both the 401(k) plan and Cash balance plan. Must she receive a 5% top heavy minimum in the 401(k) plan since she did accrue a benefit in the CB plan? Then must she receive the 7.5% gateway as well? Thanks.

Suppose a greater than 5% owner has been taking annual payments of his RMD on 4/1 of each year. His most recent "RMD annuity payment" from the plan was 4/1/2018. Suppose the plan terminated 8/1/2018 and his benefit is distributed 9/15/2018. Is he required to take another RMD upon distribution even though his next installment is not until 4/1/2019? Thanks.

Other than a management function scenario, I believe there must be some cross-ownership for an affiliated service group to exist correct? In other words, suppose you have an employee of an accounting firm (no ownership) start his own firm. Then 100% of his work is done for the accounting firm. He owns 100% of his corporation but has 0% and has never had any ownership in the accounting firm. No affiliated service group? Thanks.

A small DB plan covers husband and wife. They also have 3 long term employees that are covered under a profit sharing plan. They always pass 401(a)4 because they always make a 12% profit sharing contribution and there is adequate age difference. The DB plan now has excess assets of about $100k over 415 maximums. The document is a volume submitter with one of the actuarial equivalent selections as 417(e) assumptions. The plan has operated under more conservative assumptions. If the actuarial equivalent is amended to the 417(e) assumptions and then terminated and distributed next year, it is likely they will not have excess assets, especially if they take an in-service distribution of the bulk of the assets now. I know this would likely be seen as discriminatory. However, they would be willing to make a 25% profit sharing contribution to employees this year. If the 401(a)4 test were then run on an accrued-to-date method they would easily pass. In running the test, we would convert the monthly benefits to the actuarial equivalent based on prior assumptions. Any thoughts? Thanks.

Suppose you have a sole proprietor who came up with an Engineering process and had significant schedule C profit for the first two years. The third year he spent all of his time making the idea / process better but had no income for that year and did not even file a Schedule C. In the fourth year, he adopts a defined benefit plan but has not been quite as successful as he was in years 1 and 2. Per the document, the plan can count past compensation if elected. Can the plan count his first 3 years as his average compensation even though he filed no schedule C the third year? He claims he worked harder and longer in year 3 than any other year. Thanks.

Suppose you have a company that sponsors a traditional DB plan and 401(k) plan with a December year end. 1. The DB terminated April 30, 2017 so no participant accrued a benefit for 2017. 2. The DB and 401(k) plans are top heavy as of 12/31/2016. 3. The plan documents indicate that a 5% top heavy minimum will be funded in the 401(k) plan instead of the 2% top heavy minimum in the DB plan. Question: Since the DB plan terminated in 2017 without any participants receiving a benefit, can just a 3% top heavy minimum be funded in the 401(k) plan for 2017 or must the 5% be funded? Thanks.

To clarify, The one 50% shareholder is actually now retired. He just wants his benefit earlier because he is moving. The corporation will soon be 100% owned by the remaining 50% shareholder. The termination amendment and corporate resolution contained language indicating that if assets are insufficient to pay benefits upon distribution of benefits, assets will be allocated in a non-discriminatory manner. A 4044 allocation except the remaining business owner decided he would waive a portion of his benefit and make sure all employees receive 100% of their benefits. This brings up another question. If the retiring shareholder did receive his benefit earlier and elected a rollover instead of annuity, would there be a requirement that the plan be funded 110% after his distribution. I would think not since the plan is terminated.

When it comes to plan terminations, we have always obtained all benefit elections and then instructed the trustee to distribute benefits all at one time. Is this really required? For example, we handle a 10 participant non-covered traditional DB plan that terminated November 30. Is there any problem distributing the benefits to one of the two 50% shareholders of the plan sponsor now and all remaining participants 6 months from now? All participants other than the one remaining 50% shareholder would receive their full benefits (including PVABs determined up to the distribution date). The one remaining shareholder will end up waiving about 10% of his benefit. Thanks.

At first I was thinking of how unfair this is given the fact that a company could maintain a DB and DC plan (non floor offset) and a participant could have much higher 415 limited benefits. However, I guess the best way to look at it is that the DC offset is considered part of the participant's pension benefit in a floor offset DB plan.

We administer a traditional defined benefit plan that is offset by participant's vested balances in a profit sharing plan. Our understanding is that the 415 limit applies to the gross benefit and not the net benefit under the floor offset plan. This does not seem right but apparently an IRS examination guide indicates that the “current approach is that the limit applies to the gross benefit (i.e. prior to offset).” There was a discussion between an actuary and Jim Holland a few years back on this issue. Rev. Rul. 76-259 was often cited in the discussion. I don't believe we have seen any further guidance on this issue, has anyone else? The actuary made some good points as to why the 415 limit should apply to the net benefit. In our case, our pre-approved document makes no reference to the 415 dollar limit applying to the benefit prior to offset. Any comments on this? Thanks.

We administer an 18 participant DB plan covered by PBGC. We are going through a standard termination and the company will fund any difference between assets and liabilities. Participants will likely be paid benefits in late March 2018. Exactly at that time a contribution will be funded. Given the plan termination, are there any restrictions on what year the deduction for the contribution can be taken? Must it be 2018 or could it be 2017 (assuming they went on extension) Thanks.

We have a 1 participant DB plan with the unusual scenario of the business owner being over age 70 when the plan was started. The NRA is 65 and 5 yrs partic. Vesting is 3 year cliff excluding yrs prior to effective date. He works one week per month. Suppose the plan had 500 hr. requirement to accrue a benefit but 1,000 hours for vesting purposes. Would think he would not need to take an RMD until his 5th year of participation. Anyone disagree with this? Thanks.

We have not run into any safe harbor plans that have wanted to suspend safe harbor contributions. An accountant stopped by the other day and mentioned he had a small client (about 8 participants) that did not make their 2016 safe harbor contribution and don't want to fund it. I explained that it was my understanding that if the company had financial problems and they could prove it, they may be able to provide a 30 day notice to participants and then not make any safe harbor contribution from that point (after the 30 days) to the end of the year. But I believe they are responsible for making the safe harbor contribution for the time up to that point. In addition, I think the plan then needs to provide top heavy minimums and run the ADP test for the year. He seemed to think that if the company could prove it had declining sales and business for the past few years, that they could simply not fund the safe harbor contribution. Has anyone heard of this? They are a going concern but has anyone heard of this for a company that was in very bad financial shape? Thanks.

Generally, a small defined benefit plan must be at least 110% funded after a lump sum distribution is paid to an HCE. Is this also the case for a cash balance plan? Thanks.

Have a small calendar year defined benefit plan that terminated and distributed all assets 2/28/2017. The final 5500 is due 9/30/2017. However, I don't believe the 2017 electronic forms are available yet. What do we do? Thanks

Congratulations Mike! you have been so helpful over the years.

If the participant worked 1,000 hours per year for each of the three years then the participant would have a vested accrued benefit before December 31, 2017. Wouldn't this require an RMD by December 31, 2017?

What I wish we could do is have the schedule SB certified now and submit it under the 5500-EZ delinquent filer program. Pay $500 and get a letter of acceptance that the entire 5500-EZ and Sch SB are considered to have been filed timely. I woke up from that good dream and realized that may not be possible so nothing is done. Two years go by and the plan is chosen for audit. The IRS notices the 5500-EZ was filed timely but the SB was not certified until a year later. I hear one of the following from the IRS: 1. No late penalties, after all your 5500-EZ was filed timely and we will just ignore that fact that the schedule SB was not signed until a year after the filing deadline. 2. It will cost you $1,000 for a late schedule SB. We go back to sleep as $1,000 is not great to deal with but not the end of the world. 3. It will cost you $9,125 in penalties because we consider the entire filing to be late up to the date the schedule SB was certified. We loose sleep for a few months. Which one do you think we will hear?

We would not file the SB, we would just hold on to it. However, by filing an amended 5500-EZ just after the SB was signed, we may establish a separate filing. You might ask why would you want to establish a separate filing? Our explanation would be that preparation and certification of the SB is an integral part of the 5500-EZ and that we discovered the first filing was incomplete because a schedule SB was not certified as of the initial filing. Therefore, we are now filing a complete late return hopefully eligible for the 5500-EZ late filer program.

All good points. The client knows he did a bad thing. I think he would be perfectly willing to file under the 5500-EZ delinquent filer program if it would help. I just don't want to run into a situation where they pay the $500, we file for them and the IRS rejects the submission because they "have a timely filed 5500-EZ" on record. The other option is just to have the schedule SB completed and signed now. If the plan were ever audited, the late signing would probably be caught. In this case, if the penalty were $1,000 it may not be the end of the world. But if the penalty were $15,000 that would be a problem. I suppose we could file an amended return just after the SB was signed and then go through the delinquent filer program.

Thanks Mike. Great explanation!

In this case the plans are being tested separately. Also, no employee participates in both plans. Must they be aggregated for the top heavy test? If top heavy, must a top heavy minimum be provided to participants of both plans? What if we were talking about two 401(k) plans? Must both plans be aggregated for the ADP test or could the tests be run separately for each plan? Thanks.