dan.jock

Sec. 403(c)(2)(C) of ERISA permits the return of a contribution made by an employer if the contribution was made on the condition that it was deductible. If a business owner makes a contribution in 2016 based on what he thought his income would be and then the income is less making the contribution non-deductible, can the contribution be returned without any reversion tax?

I'm seeing this recurring problem with floor offsets. Strategy is to provide a 5% DC contribution as the floor offset for DB. In order to pass 401a26, this needs to be provided to everyone including the owner. If 401a4 requires higher PS allocations to pass, we are exceeding the 6% of pay DC threshold under 404a7. Owner would be fine foregoing his 5% PS, but then we fail 401a26 because everyone else is 100% offset. After a few years of 31% of pay contribs, the DB gets underfunded enough that we can get bigger contributions to fund the 412 'minimum' given by 404a7 but that still doesn't fund the full 415 LS. Any solutions?

I was reaching this some time ago and arrived at the following conclusions using who's the ER. I generally agree with Belgarath about corps. AFS and terminated plans aside for now. Let's deal with sole props. Where is this rule that a sole prop exists in perpetuity? Thus 415 cannot be restarted for a different business later in life. I think the cite above from the revenue manual that " All employees of trades or businesses (whether or not incorporated) which are under common control. " is weak for this purpose...I'd need something more to be able to argue this as an IRS agent against a deduction. Cite for corps: Ex 8.18.3 says that proposed regulation under 414(o) provided that entities existing at disjoint time periods are aggregated for 415(b) limits, and then this language was withdrawn from final regs indicating the contrary to be the case. The commentary below the example alludes to this. Q 10.10 speaks to predecessor employers and 415. Specifically 10.10.2 provides that a predecessor employer relationship exists if the new entity’s business is not substantially different than the prior. The case law cited supports this. In the absence of a predecessor employer relationship, a controlled group does not exist for organizations that don’t exist at the same time. Thus 415 is not aggregated.

OK, I see that. I think that 6 being non deductible is better than limiting the whole thing to 124. I don't have a real world scenario at my fingertips to apply and when I do, I'm sure the right decision will become evident in that case with this analysis at hand. Thx for the input.

More on this topic that I am currently researching. Particularly addressing the 25% vs. " not be less than the excess (if any) of the plan's funding target (as defined in section 430(d)(1) over the value of the plan's assets (as determined under section 430(g)(3)." Say it's the first year of a plan with past service credit. FT is 200. AVA on val date is $0. Minimum is 33. Pay is 400, 25% = 100k and 6% = 24. Sponsor contributes 30 to DC plan. The so-called 31% rule would say the combined deduction limit is 124, leaving 94 for the DB. Said in the 404a7 language, it is 25% of pay (100) reduced by the amount the DC contrib exceeds 6%. 100 - (30 - 24) = 94. If I am understanding this correctly, the DB limit is actually 200 - (30 - 24) = 194. Seems like a nice trick for first year so I'm sure I'm reading it wrong.

Thx Effen, I agree there is a problem. I was writing here in hopes of a creative solution. What irks me is that it is an owners-only plan. Minimum funding is in place to protect the rank in file (and the PBGC) from an underfunded benefit promise. Seems like the spirit of the law should make an exception here but I cannot figure out how the letter of the law supports the exception.

An early slide in a Jan 2016 ACOPA ppt (comes up as a Google result for 'EOY valuations') said final 430 regs provided that only in the case of a plan termination, a sponsor may change from an EOY val date to any other date. Honestly, since you asked, I cannot verify that in the final regs.

Can I reopen this topic with regards to the MRC? Owner-only plan with EOY val. Plan terminates and distributes late in 2016. With automatic approval, I'm persuaded to do a BOY val. MRC turns out to be more than they contributed (and could really afford anyway) If a resolution is in place for the majority owner to take a reduction in benefits at termination, can I assume that to be the benefit for purposes of the TNC? Same issue if the val date is any other date, but 1/1 feels nice and neat. It all seems like formality since it is a 1-person plan but I'm wondering what the academically correct course of action should be. An excise tax on a missed MRC for a benefit accrual that never took place doesn't seem to be what the IRS should be after in this case.

ok thx

Why the provision for FT - AVA? They did make the contribution after the plan year end. But they need to whole thing pass 401a4 so it all has to be for that plan year. I think I'm picking up the scent though. They can contribute 6% for the tax year even though 8% is contributed to the plan year. They can make contributions to prior plan years in a later tax year? Hmm, 404(a)(7)(C)(iii)(I) says the 6% exception applies to contributions..."paid or accrued during the taxable year"

...also assume the DB MRC is less than 25% of pay...

Assuming a DB/DC combo where everyone participates in both plans. When the DC contribution (not including deferrals) exceeds 6%, then the total deduction limit to both plans becomes 31% and the DB 'loses' it's otherwise larger max. Say the sponsor contributes 8% of pay to DC and 40% of pay to DB. My initial assessment is that 17% of pay is not deductible. To the extent it does not exceed the amount of matching contributions, no excise tax is due. If it was made in the following plan year, they can take the deduction in the following tax year and avoid any non-deductible contributions. (But that eats into the next year's 404(a)(7) limit) My question is this, is there a provision such that they do not deduct 2% of pay contributed to DC plan, leaving the amount at 6% and thus preserve the larger DB deduction? My read of 404(a)(7) is no. But I'm open to other interpretations or solutions to the problem.

Attached is another excerpt from Who's the Employer After reading through 1.414(c) I am actually with Lou in that I think >50% triggers a combined 415 limit. The author here though is pushing the issue if it is not a parent-subsidiary situation so I'll hang it out there for any other interpretations. controlled groups1.docx

Attached from Who's the Employer says the >50% rule only applies to parent-subsidiary groups. Even brother-sister groups have to be corporations. For SOle prop and partnerships, we are directed to the "groups of trades and businesses" rules (which are very similar to the corporations guidance) and I believe a relationship only exists for any purpose there when there is 80% ownership. I don't think >50% comes into play since it is not a parent-subsidiary. I feel like I've been in conversations in practice, however, where the >50% was cited for 415 under a partnership situation... I'll keep reading WTE and let you know if I find anything compelling controlled groups.docx

Bob is an owner of a sole prop with DB and PS plans and just invested in a 50% partnership of another practice. No attribution, affiliated service, or any other relation. Since this is not a controlling interest, the employees of the partnership do not need to be covered by the sole prop plan. Further, if the partnership wanted a qualified plan, Bob could benefit from fresh 415(b) and (c) limits. Seems like a nice fit and wanted to double check if anyone had any objections. Further, I think Bob is ok to have separate plans until he owns 80% of the partnership. Cheers, Dan

Another twist on waiving a benefit. Say there is a 2-person organization, both owners. One owner wants a plan, the other doesn't. I'll fail 401(a)(26) by excluding one of them. Can that owner forgo his right to the benefit under the plan?

Is anyone aware if Internal revenue bulletin 2004-26 has been updated for max J&S percentages for larger age differences with non-spouse beneficiaries? 12 years is a long time. Does there exist a table for spousal bene's with large differences? Thx

Great discussion above. One last clarification...if all the non-owners are 100% offset in the DB, is the plan still covered by the pbgc? It's a plan where only owners have an accrued benefit and it is covered by the pbgc. This seems counter-intuitive but since the plan/employer would otherwise be covered, I can believe that it is covered.

What if a formula has a service cap and then increases the cap so the person could have a benefit increase in a current year of several times the accrual of last year due to the sudden inclusion of several back years? Does that violate 411(b)?

With regard to the amount of RMD discussed above, the life annuity AB * 12 is the simplest compliant number. If we want to be more aggressive and use the life expectancy method, I don't think that we simply take the 417e LS and divide by 26.5 like an IRA. I think the participant needs to elect (and the plan needs to provide) for a term-certain annuity of 26.5 annual payments. This is compliant and should produce an RMD much less than the life annuity. I personally don't like this one because it makes future RMD's sufficiently confusing especially with additional accruals. Usually, the simpler answer is the better one. I also believe that rolling over the 417e LS to an IRA before 12/31, taking the RMD off the IRA balance, and continuing to accrue in the open DB plan is a good option. Watch out for 436 restrictions and the 110% rule.

Thx. I've done this calc in the large plan context before and for an owner-only plan, I think I'm OK projecting for younger participants. But I don't think I'm brave enough to project that an owner making 100k this year will make 200k next year because he is that optimistic.

I'm an actuary who grew up in the large plan arena and still developing a worldview on these small plan issues. I'm working with a firm that is historically very aggressive on deductions. I'm seeking feedback on the reasonability of projecting salary increases based on my client's expectations of future experience. There is no experience study or valid industry research relating to an individual entrepreneur's profitability so I'm inclined to take his word for it with the warning of risking overfunding.

Thx. If the 415 limit goes up because of increased comp (or increased statutory comp limit), I don't think any offset to the 415 limit is necessary since the prior distribution was based on comp limit and comp limits are not actuarially adjusted.

Under 404(o), the cushion can include increases in FT due to expected increases in comp. If a first-year DB owner-only plan sponsor tells me that his 2016 compensation will be 100,000 but is certain that he/she will earn more in 2017 and later years, is it unreasonable to assume a higher comp limit and thus value a benefit greater than 10,000/yr comp limit for the tax max cushion? Say he's age 45 and NRA is 62. I'm thinking a reasonable approach is to assume 3% salary scale and use 100,000 * 1.03^17 / 10 / 12 =~ 1650 benefit adding 650 to the cushion benefit. Of course, warn the sponsor of the risk of overfunding. What if he's age 62 and starting a DB...how aggressive can we be with the sponsor's assurance of higher comp? Is there any other discussion or guidance I can lean on here?

Similar question in reply to Calavera's reply...say a prior year employed this method. benefit was at comp limit and the plan stayed open. Participant's comp limit is now a little higher. Do we offset by an actuarially increased benefit of the prior distribution or not since we don't generally increase a comp limit? If we offset, I figure there would be no benefit accrual (it would probably be negative since the comp is growing at less than 5%)