billfgrady

Despite 401(a)(13) doesn't the IRS have the right to levy on the interest anyway and, when a participant has an immediate right (i.e., has reached early retirement date) to the principal of the account?

KATHERINE: Thank you for your responses to my questions. Your last response was right on point: these physicians are hospital-based anesthesiologists. Any administerial functions are usually performed by off-site physician accounting firms (i.e., billing, insurance matters, etc.) And there are no "patients" per se, so the physicians don't need staff to answer phones, schedule appointments, etc. Thus, no NHCEs. Here are answers to the questions you posed. 1. The satellite service corporations are C-corporations. The group corporation is an S-corporation. 2. The income earned by a physician is not self-employment income. 3 and 4. Each physician does not have income until paid by his or her satellite service corporation. 5. We treat this as an affiliated service group, as opposed to a multiple employer plan. "Employer" is defined by the Plan as the group service corporation and "any successor which shall maintain this Plan; any predecessor which has maintained this Plan; and all Affiliated Employers." "Employee" is defined by the Plan as "any person who is employed by the Employer or Affiliated Employer, and excludes any person who is employed as an independent contractor." An "Affiliated Employer" is "any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes any Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414©) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o)." 6. Again, we do not treat this as a multiple-employer plan. In fact, there is NO language to the effect of, "Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing." This is language that we would typically include in a multiple employer plan. 7. The physicians are not leased employees of the group service corporation. 8. See answers 5 and 6 with respect to what the Plan says about which corporations are in the Plan. 9. The satellite service corporations do not adopt the Plan of the group service corporation. See answer 6 for more on this. 10. Upon termination, the service agreement between the satellite service corporation and the group service corporation is terminated and the physician is redeemed as a shareholder of the group service corporation as of the same date. This is the extent of how these relationships are terminated. 11. The Plan does not automatically terminate the relationship between a satellite service corporation and the group service corporation. Here is where I am with all of this right now: A. When is the ASG terminated? I'm certain that this is when the service agreement between the satellite service corporation and the group service corporation terminates or, if earlier, when the physician's share(s) of the group service corporation is redeemed. B. Is the individual physician limited a profit sharing contribution based only on pre-termination compensation? Not sure, but I'm thinking the answer here is no, particularly if you consider that the compensation is due solely from services that were performed prior to termination. In the past, we have considered all W-2 compensation paid to the physician for that year, even if it is paid post-termination. "Compensation" is defined in the Plan, in part, as a "Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer or an Affiliated Employer (in the course of the Employer's trade or business) for a Plan Year which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d), 6051(a)(3) and 6052." I think this practice is consistent with the above definition. C. Do we run afoul of the "regularly performs services for" test in Reg. s. 1.414(m)-2(b)(2) because the physician stops performing services for the group service corporation after March 1? No because 100% of the satellite service corporation's (and, accordingly, the physician) income is derived from services performed for the group service corporation. Thanks again for your help with this.

No brave souls?

I'm wondering if anyone out there is familiar with a medical group structure known as the "satellite group" setting. If not, perhaps the truly ambitious among you would be kind enough to wade through to offer suggestions as to the following. We act as Plan Administrator for the 401(k) Profit Sharing Plan of a group of hospital-based physicians. Unlike the traditional medical group structure, wherein each of the physicians is an employee of a single corporation, physicians engaged by our client are actually employed by their own individual satellite service corporations ("satellite service corporations"), which, in turn, are engaged as independent contractors by our client (the "group service corporation") to provide physician services on behalf of the group service corporation. However, it bears noting that the group service corporation is solely owned by the physicians who are engaged by the group through the satellite service corporations. There are no outside or "third party" owners. Each physician is only issued shares (roughly 7% ownership) of the group service corporation at the time when they become eligible to participate in the Plan. Each of the physicians is also the sole owner of their respective satellite service corporation and each has no employees. The group service corporation adopted a 401(k) Profit Sharing Plan (the "Plan"). The Plan definition of "employer" includes all Affiliated Employers, regardless of whether the Affiliated Employers adopt the Plan (hence, the issue of shares for the individual physicians to become eligible to participate). In addition, any Plan participant who is actively employed during the Plan year (calendar year) is eligible to share in the discretionary profit sharing contribution. The profit sharing contribution is paid out quarterly as the group service corporation reconciles the amounts it owes in compensation to the various satellite service corporations. To illustrate, if a particular satellite service corporation is owed $100,000 in compensation for a given quarter, the group service corporation would pay compensation of, say, $93,000 directly to the satellite service corporation. Then, the group service corporation would cut a check for the $7,000 profit sharing contribution directly to the participant's broker (directed investment accounts) and deduct the $28,000 ($7,000 x 4 quarters) profit sharing contribution on its income tax return at the end of the Plan year. The 401(k) elective deferral portion of the participant's contribution is paid directly from the satellite service corporation and thus reflected on the W-2 that the physician receives from his or satellite service corporation. One of the physicians is leaving the group and terminated the contract between his satellite service corporation and the group service corporation as of March 1, 2003. My understanding is that the satellite service corporation and the group service corporation are no longer "Affiliated Employers" as of March 1. In terms of compensation, the individual physician will likely be paid W-2 compensation from his satellite service corporation of approximately $75,000 for the period from January 1, 2003-February 28, 2003. However, you should appreciate that there is a back-up of receivables due to the lag between services and collection, such that compensation from the satellite service corporation to the individual physician will easily be in excess of $200,000 at Plan year end. The question is whether we need to take all of it into account. 1. Is the individual physician required to make a profit sharing contribution to himself for Plan year 2003? I am fairly comfortable the answer here is yes. 2. Is the individual physician allowed a profit sharing contribution based only on pre-termination compensation? Appreciate that the individual physician does NOT want to make a contribution of any amount for 2003 and that all of the other participants (all $200,000+ W-2 comp.) are getting $28,000 profit sharing contributions. 3. What if the individual physician remains a shareholder of the group service corporation until the end of the year? Would this require us to take into account the post-March 1 compensation? Even if neither the individual physician or his satellite service corporation will provide services to the group service corporation after March 1? Any advice on any or all of these questions is much appreciated!

Can a 401(k) profit sharing plan participant waive participation in the plan (i.e., no 401(k) elective deferral OR profit sharing contribution) on a going forward (and, I assume, irrevocable) basis if he or she has already been in the plan for years? I'm quite certain that the answer to this question is "no". The only waiver that I am aware of that is permissible under the Code is the "one-time irrevocable election upon an employee's commencement of employment with the employer or upon the employee's first becoming eligible under any plan of the employer . . ." under Reg. s. 1.401(k)-1(a)(3)(iv). This rule is in place to prevent plans from being interpreted by the Service as a cash or deferred arrangement. Is there another form of waiver or election that applies to folks who are already participants?

Pax, Thanks for the suggestion. Unfortunately, I've looked there and had no luck. Perhaps an administrator would be willing to post this question to the "Who's the Employer" Q&A Section?

Does anyone have an answer to the question posed here? I've been through Section 414(m) and the proposed regulations without any luck.

Short version: If an affiliated service group exists at the beginning of a given Plan year, does it exist for the entire Plan year? Or is it broken down the way that the control group rules do? Long version: Employer A, an S-corporation, and Employer B, a personal service corporation, are an affiliated service group. Employer A contracts with Employer B and other personal service corporations to provide services to a third entity. Employer B is wholly owned by Employee B, who is Employer B's sole employee. Employee B also owns more than five percent of Employer A and is a participant in a 401(k) Profit Sharing Plan organized for employees of Employer A (and by definition, employees of Employer B are included notwithstanding the fact that Employer B does not actually adopt the Plan). Employer B is terminating its contract to provide services with Employer A in March of 2003. Employee B will receive W-2 compensation well in excess of the compensation limit under Section 401(a)(17) in 2003, mostly in the form of collectibles/receivables for services rendered prior to the termination date which Employer A will continue to collect for 18 months after termination and will pay to Employer B on a monthly basis. Employer B, in turn, will continue to pay Employee B wages related to such services after the termination date. Does Employee B need to remain a shareholder of Employer A until the end of the Plan year to receive a full profit sharing contribution from Employer A or can Employer A redeem Employee B's shares upon the termination date without worrying about running afoul of the affiliated service group rules or other prohibitions? I assume that no proration of compensation is required because this is not a short plan year.

Thanks, Tom. That's what I suspected.

Do you disregard former employees for purposes of calculating ADP for the determination year under the prior year testing method? Our plan has a total of six participants, all of whom have been HCEs for all years the plan has been in existence. However, two of the employees retired in August and September of 2002, and, although each met minimum participation standards for 2002, each had compensation of well below $85,000 (using the limit in effect for the look-back year). In addition, neither employee is a 5% owner or meets any of the other qualifications for "highly compensated employee" under Section 414(q) or the regulations thereunder. 2001 Employee 1, $170,000, 10,500 401(k) deferral Employee 2, $170,000, 10,500 401(k) deferral Employee 3, $170,000, 10,500 401(k) deferral Employee 4, $120,731, 10,500 401(k) deferral Employee 5, $104,959, 10,500 401(k) deferral Employee 6, $ 94,268, 10,500 401(k) deferral 2000 NHCE ADP: 100% (i.e., no cap for 2001 HCE ADP because no NHCEs from 1999 information) 2001 NHCE ADP: 100% (no cap for 2002 HCE ADP because no NHCEs from 2000 information) 2001 HCE ADP: 8.06% 2002 1, $200,000, 11,000 2, $200,000, 11,000 3, $200,000, 11,000 4, $132,619, 11,000 5, $ 74,481, 11,000 6, $ 50,850, 11,000 2001 NHCE ADP: 100% 2002 NHCE ADP: 100% (again, no NHCEs) 2002 HCE ADP: 8.03% 2001 2003 1, $200,000, 12,000 2, $200,000, 12,000 3, $200,000, 12,000 4, $100,000, 12,000 2002 NHCE ADP: 100% 2003 NHCE ADP: ? 2003 HCE ADP: 6.76% The testing for 2002 is relatively straightforward: relying on compensation for the 2001 Plan year and the compensation limit of $85,000 for 2001, all of the employees are highly compensated for 2002 testing purposes. Thus, there are no limits to the amounts that HCEs can contribute in 2002. Looking forward to 2003 and 2004, I am uncertain as to whether I need to include the former employees for 2003 ADP testing purposes. I assume that the 2003 NHCE ADP is 100% (i.e., there will be no cap as to the 2004 HCE contributions). If not, how do you compute the ADP if there were no contributions for those employees in 2003? Despite all of this, IRS Notice 98-1 suggests that, "under the prior year testing method, the prior year ADP or ACP for NHCEs is used even though some NHCEs may have first become eligible employees under the plan in the testing year because they meet existing plan eligibility requirements, and even though individuals who were eligible employees under the plan and NHCEs in the prior year are no longer employed by the employer or have become HCEs in the testing year." How does this work?

As of the date that the HCE is employed by the not-for-profit, he performs all required duties for the not-for-profit. He does not perform any more services for the professional service corporation. Rather, the professional service corporation still has income in the form of receivables for services performed prior to the date that the HCE became employed by the not-for-profit. Therefore, none of the income of the s.c. is related to the not-for-profit. The HCE will satisfy all requirements in terms of eligibility in the for-profit 401(k) Profit Sharing Plan. Given that the amount of the receivables for the year of "overlap" is sufficient, I calculate that the HCE may "max out" his 401(k) Profit Sharing Plan contribution for the year of overlap. Assuming there are no aggregation problems or the like, he should also be able participate in the 403(B) Plan of his new employer.

In an earlier post I concluded that aggregation would not occur in the following setting (repeated here for ease of reference): Two employees are each exactly fifty percent owners of a professional service corporation, which maintains a 401(k) profit sharing plan. Each employee will receive a contribution equal to the 415© maximum for 2002, $40,000. None of this amount is attributable to a 401(k) elective deferral. Both individuals are also highly-compensated employees of a non-profit organization, which provides a voluntary 403(B) Retirement Plan for the benefit of its employees. Under this particular plan, employees may elect to defer all or some portion of a yearly bonus of $16,000 into the 403(B) Plan. Neither employee has an ownership interest in the not-for-profit. My earlier reasoning was as follows. Treas. Reg. Section 1.415-8(d)(2), which provides that if the employee owns or controls more than 50% of another business that maintains another plan, the contributions to the Section 403(B) Plan must be "aggregated" with the contributions to the outside plan or the 403(B) employer's other plans. Given that neither employee owns more than 50% of the professional corporation, I concluded that aggregation under Section 415 will not be an issue under these circumstances or otherwise. I am now uncertain as to whether or not 1.415-8 has been superceded. I have been alerted to the existence of Section 415(k)(4), which was added by EGTRRA. 415(k)(4) appears to reiterate some but not all of the guidance provided by Treas. Reg. Section 1.415-8(d)(2), which described special rules under which the employer is deemed to maintain the annuity contract. So, I'm not sure the underlying rule has changed much. Reading Section 415(k)(4) and notwithstanding Treas. Reg. Section 1.415-8(d), I still maintain that, unless an employee has "more than 50%" control of the for- profit employer, the 403(B) plan will not be treated as being owned by the for-profit employer. Thus, no aggregation. Correct?

I'm fail to see how the above post is relevant to my question, so I'll ask again. Is there anything in Section 414(m), the regulations thereunder or elsewhere that suggests that you have an affiliated service group if an owner (50% or less) of a professional service corporation is also a highly compensated employee of a not-for-profit? I haven't found anything.

IRC401: Good point. Another practitioner suggested that, even if there is no common ownership between the entities, one might have an affiliated service group if the primary owner of the for-profit entity is also a highly-compensated employee of the not-for-profit. Given that both employees in the current scenario are highly compensated employees of the not-for-profit, this is a concern of mine. Can anyone point me to any statutory or regulatory authority to validate this?

Two employees are each exactly fifty percent owners of a professional service corporation, which maintains a 401(k) profit sharing plan. Each employee will receive a contribution equal to the 415© maximum for 2002, $40,000. None of this amount is attributable to a 401(k) elective deferral. Both individuals are also employed by a non-profit organization, which provides a voluntary 403(B) Retirement Plan for the benefit of its employees. Under this particular plan, employees may elect to defer all or some portion of a yearly bonus of $16,000 into the 403(B) Plan. Neither employee has an ownership interest in the not-for-profit. However, both employees are highly compensated in 2002. Question: Is it possible for each employee to receive contributions of $40,000 under the professional service corporation's 401(k) Profit Sharing Plan and defer $12,000 (remaining $4,000 in cash) under the 403(B) Retirement Plan of the not-for-profit or does Section 415 or some other limitation prohibit this? Treas. Reg. Section 1.415-8(d)(2) provides that if the employee owns or controls more than 50% of another business that maintains another plan, the contributions to the Section 403(B) Plan must be "aggregated" with the contributions to the outside plan or the 403(B) employer's other plans. Given that neither employee owns more than 50% of the professional corporation, I conclude that aggregation under Section 415 will not be an issue under these circumstances or otherwise. Please advise.

20% each.

How is the discrimination test under Section 125(B)(1) and the key employee percentage test under Section 125(B)(2) applied in a setting where an employer has five employees, all of whom are 5% owners?

Thanks, Jean. That's what I feared. It looks as if we'll need to amend the plan to get rid of the election. The problem occurs with the employee earning $100,000. That employee doesn't defer at all. Taking it back a bit further, I want to make sure I've analyzed the "five-percent ownership" rules correctly. The structure of ownership here is what is commonly referred to as the "satellite structure." There is a group corporation (the employer) which contracts on an independent contractor basis with eight satellite service corporations (each professional is incorporated as a personal service corporation, which is owned 100% by the incorporating individual). As I indicated earlier, there are eight individuals who I am analyzing under the "five-percent ownership" rules. Six of the eight own well in excess of 5% of the group corporation. Clearly, they classify as "highly compensated." On the other hand, two of the eight only have a 1% ownership interest in the group corporation. My understanding of the rules is that these two will also be treated as 5% owners under 1.414(q)-1T, Q&A 8 because they own 100% of their respective "satellite" service corporations. Any thoughts here?

Does an employer who has made a 414(q)(1)(B)(ii) election to limit the definition of highly compensated employees to the top paid group of employees for the year include participants who would otherwise qualify as "highly compensated employees" under Section 414(q)(1)(A) as "five percent owners" when determining which employees are in the the top paid group? To illustrate, a group consists of ten employees, eight of which qualify as five-percent owners AND have plan compensation in excess of $170,000 for the 2001 plan year, and two of which who are not five-percent owners and receive plan compensation of $100,000 and $60,000, respectively. Does the employer include the eight five-percent owners in determining the top 20%? If not, does the employee who receives plan compensation of $100,000 qualify as a HCE (i.e., can the employer round up to 1 although 20%x2=.4)? Any help is much appreciated.

I'm trying to determine whether an employer may make any sort of a disability contribution to a highly-compensated, disabled employee who works part-time for the employer after disability. I'm not finding anything on point other than Section 415©(3)©, which leads me to believe the answer to my question is clearly "no." My understanding of the rule set forth in Section 415©(3)© is that an employer may make "disability contributions" on behalf of disabled non-highly compensated employees at a rate determined by the disabled employee's compensation determined in the year prior to the time of disability. Although it is does not appear on the face of the statute that such contributions can be extended to cover highly-compensated employees, I've heard it suggested that disability contributions can be made to all disabled emplouees as long as the plan documents provide for the continuation of contributions on behalf of all permanently and totally disabled participants for a fixed or determinable period. Anyone hear of this or agree with this? Are there any Code sections or other guidance that you know of? Given that the disabled employee is still employed, I realize I probably have an issue with respect to the definition of "permanently and totally disabled" under Section 22(e)(3).

In a 401(k) profit sharing plan where all plan participants make maximum compensation under 401(a)(17) and all participants want to "max-out" with $40,000 pension contributions, the plan contributions can be structured in one of two ways in 2002: (1) $40,000 PS contributions and $0 401(k) elective deferrals or (2) $29,000 PS contributions and $11,000 401(k) elective deferrals. Taking into account catch-up contributions, 414(v) does not seem to prohibit a catch-up contribution to participants in the first plan setting described above (i.e., $40,000 PS and $0 401(k)). In other words, can a catch-up contribution of $1,000 be made to the 401(k) account of a participant in a 401(k) PS Plan where the participants are not otherwise deferring compensation at all because they've reached their respective 415 limitations with PS contributions?

If all plan participants contribute the maximum amount allowed by IRC s. 415©(1) to the MP and continue to do so after the conversion to PS, does this automatically change the amount of the future annual benefit commencing at normal retirement age (same age in both plans)? How? What if the amounts are held in individual accounts (distinguished from individual plan accounts in 1.411(d)-6 A-5(a)(2))? Thanks for the advice.

Is 204(h) notice automatically required when converting or amending a money purchase plan to a 401(k) profit sharing plan (as opposed to a merger of MP into PS)? A recent case issued by the 3rd Circuit (Brothers v. Miller Oral Surgery Inc. Retirement Plan, 25 EBC (3rd Cir. August 31, 2000)) suggests that this might be the case. However, my understanding of the regulations to Section 411 of the Code and from conversations with representatives from the PWBA is that this determination is very factually intensive. This begs the question: what result in the scenario where the plan participants are all HCEs and all contribute the maximum to the MP and will continue to contribute the max to the PS? I am of the belief that this is not a "substantial reduction" of benefits. What if one of eight participants is able to contribute $25,000 instead of $26,000? I would think this would not change the result. Obviously, if the plans are small and it is unlikely that a participant would file suit for lack of notice, I would anticipate that the risk of not giving participants 204(h) notice is minimal or none. Any thoughts?