JJRetirement

This could lead to unexpected results. If the firm were large - let's say 100 partners, each of whom is a P.C. owning a 1% interest in the partnership, and each P.C. has adopted the plan, would there be one hundred 5% owners even though the partnership itself has no 5% owners?

Thanks mbozek. The plan references 416 for the 5% owner definition because 401(a)(9) also references 416 for this purpose. The plan's definition of Employer includes participating employers who have adopted the plan. But the definition of required beginning date in the plan doesn't refer to the capitalized employer. I think I now see the answer in the top heavy regs. T-17 Q&A from 1.416-1 says that the rules of subsection (b), ©, and (m) of section 414 do not apply for purposes of determining who is a 5% owner. For my case, I think that makes the owner of the PC a 5% owner of the participating employer, so he is required to take distributions starting for 2015 (by 4/1/16)

I have a question about determination of 5% owners for purposes of RMD rules. Law firm partnership has a 401(k) profit sharing plan. Several partners have P.C.s that have adopted the plan as participating employers. The owner of one of these P.C.s has just attained age 70 1/2 in 2015. He owns less than 5% of the partnership by capital interest or profits, but of course own 100% of his P.C. For testing purposes, all of the employers of the plan are aggregated under 414(m). Does aggregation apply for determining 5% owners for 401(a)(9) purposes? 5% owners are defined as under the top heavy rules, and aggregation applies for top heavy, but does that mean aggregation applies and only those who own 5% of the partnership are treated as 5% owners for RMD purposes? Put another way, is this partner's first distribution calendar year 2015 or will it be deferred until the calendar year in which he retires?

Employer has an existing severance pay plan covering all employees for both involuntary and voluntary separation from service. Plan does not qualify for 2 /2 separation pay plan exception because it pays on voluntary termination as well as involuntary. Lump sum severance benefit is service-based and terms comply with 409A. Plan also provides that employer will pay COBRA premiums (again for ALL employees) for the period used to determine severance (and this is always shorter than COBRA continuation period). They now want to eliminate the health coverage continuation premiums and instead pay an additional lump sum benefit at the same time as the existing lump sum benefit. Not trying to get out of paying employees, but want to make it easier to administer and they envision that the company may stop offering health insurance altogether as it winds down operations. The medical coverage should be exempt from 409A - meaning it isn't deferred compensation because it is a nontaxable benefit (or in the alternative, qualifies under the Medical benefits exception for separation pay plans that limit reimbursements to the COBRA continuation period. So I am thinking that eliminating this benefit and replacing it with a lump sum benefit would not be a substitution of deferred compensation that would result in an acceleration because it wasn't deferred compensation in the first place. Any one see any problems with this approach?

I believe that the only retro amendments that are permitted under self correction to fix operational failures are allowing loans or hardships that were made but weren't permitted under the document, early entry of otherwise eligible employees and correction of a 401(a)(17) failure by providing for additional allocation. See section 4.05 of Rev. Proc 2013-12 and Appendix B section 2.07.

Thanks rcline46. We are operating under the assumption that the plan is covered under ERISA as a welfare benefit plan. It isn't an employee pension benefit plan because it does meet the requirements for an exception as a severance pay plan set forth in the regulations under 2510.3-2. Still, it is possible that under the analysis set forth in the Fort Halifax case, no ERISA plan would be found. The plan doesn't require much of an ongoing administrative scheme. Employees are paid in a single lump sum upon termination and there are no decisions to be made as to the cause of termination since voluntary terminations, involuntary terminations and terminations for cause are all treated the same. What I am having more trouble with is whether Code Section 409A applies, which is independent of whether or not the plan is an ERISA plan. This depends on whether there is a legally binding right created according to the 409A regulations. There is a non-409A compliant term in the plan document that will require correction if the plan is subject to 409A. Since the transitional relief for 409A document corrections has long since expired, this would involve notice to the employees and a possibly complicated attachment to the employer's and employee's tax returns.

Employer has severance pay plan (adopted about 10 years ago) that pays based on a service and compensation formula upon either voluntary or involuntary termination of employment. Covers rank and file as well as management and owners as long as they have at least a year of service. In the plan, the employer retained the right to unilaterally modify amend or terminate the plan after 90 days' notice to affected employees. Putting aside those employees who might be considered to have effective control, does this plan provide deferred compensation (legally binding right to compensation in subsequent tax year)? Generally there is no legally binding right to a payment if the service recipient can eliminate it after the services are performed. However, in this case, the employees have a right to notice and in the 90 days following the notice they can take action (voluntarily terminate employment) and then would be entitled to the severance pay. So does the employer's discretion to reduce or eliminate the payment lack substantive significance? (I understand that because payments are made upon voluntary termination that this plan doesn't qualify for separation pay plan exception to 409A).

No I have not found anything on this since my post.

More broadly - has anyone made a correction for employer's failure to deduct mandatory contributions?

Public employer calculated the mandatory pick-up contributions for one employee based on the wrong definition of compensation (definition varied based on date of hire, and when he was rehired, his rehire date was in record rather than his original date of hire). So contribution was smaller than it should have been for some period of time (since adjusted prospectively). Is anyone aware of guidance - or informal IRS statements - addressing this kind of situation and whether the employee needs to make up the contribution or whether the employer can simply absorb the cost for its error? The error was in no way the employee's fault.

Under Section 1.125-4(e) a mid year change is permitted when an employee or spouse "Becomes entitled to coverage (i.e. becomes enrolled)" in Medicare Part A or Part B. If an employee does not actually enroll in Medicare when first eligible, does the actual enrollment in a mid-year in a later year (say beyond age 70) qualify as a change permitting him to drop health care under the employer plan? Premiums are paid pre-tax under the cafeteria plan. I am wondering what the purpose of the parenthetical in the regs is and will it help this employee who has now decided he wants to enroll in Medicare, but he won't be covered in time for start of the plan year.

Company applied for a Distress Termination under the business continuation test. PBGC approved termination in 2013 and has assumed Trusteeship with a Plan termination date of 2012. PBGC has not yet demanded payment for unpaid contributions and unfunded liabilitiy, but has sent a package asking them to complete the form for termination premium payments. If there is now a transaction with the company that would be a PBGC reportable event, is there still an obligaton to report? The purpose of reportable events is to give the PBGC warning that a distress termination might occur. Here it already has. But I don't see any exception - is there one? Company was not in bankruptcy at the date of termination, has not filed since, and is not intending to file for bankruptcy.

Thank you for your comments. I absolutely agree that is it important to make sure the change in ownership in 2013 isn't conditioned on any kind of deal (whether or not in writing) that he would be entitled to increase his interest in profits (it's a partnership) as soon as the 2014 calendar year ends. Thanks for the link to the IRS directive too.

Active Participant will attain 70 1/2 in 2014. He currently owns more than 5% of profits interest, but he will reduce his ownership by 12/31/13 to not more than 5%. Plan Year = Calendar Year. No RMD for 2014 if he continues working. Suppose in 2015 he continues working, but increases ownership to greater than 5%? Literal reading of 1.401(a)(9)-2 Q&A 2© says no required minimum distribution as long as he continues to work because the ownership test is done in the year of attaining 70 1/2. "© For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2. " Agree that if he isn't a 5% owner in 2014, becoming a 5% owner later won't matter for RMD purposes?