Larry Starr

This is a standard optional provision in our documents (and we almost always use it to exclude HCEs from the SH contribution since they are going to get the money anyway through the normal allocation formulas). Doesn't matter if it's a self employed or a W-2 HCE. Why do you think this is aggressive?

I don't know why everyone is making this so complicated. Do an -11g amendment and treat it as an additional profit sharing contribution to the NHCE and you are fine. Just get on it quickly!

We would not do an additional amendment; our plan language always include a provision for 100% vesting on partial or full plan termination. You might want to memorialize the fact that you fully vested some people due to a partial termination. We would do so in our cover letter for the valuation report for that year.

Absolutely; that's the way you do it. You can give credit for eligibility and vesting, or just eligibility (I almost always do both; why would he want to "penalize" his new employees by not counting the years toward vestin?).

Absolutely brilliant response, as always! ?

To everyone (I'm not trying to pick on sdix401k): I wish everyone who posts messages on these boards would post the entire real issue and give all the information about the situation rather than trying to minimize their posted question. Our business is one of almost infinite nuances that make a real difference in what can and can't be done. For this original posting, the real issue is avoiding asset based fees on existing assets (that belong to the owner) when he moves to a platform because he is now going to have employees. So now, let's deal with that and forget all the prior responses. Yes, I think you will have a BRF problem if HCE can direct his prior assets into anything he wants but all new money is restricted to just the platform options. How we would solve it? No platform!!! Set up plan 002, (this will be the "parent plan") and everyone will be eligible, except for a provision that excludes from it any employee who participates in any other plan of the employer. Have it be trustee directed (like most of our clients). Keep plan 001 (this will be the "subsidiary plan), but do restate onto the same document as 002 and have the eligibility for the plan be exclusively (by name) your HCE and change 001 to trustee directed in the document restatement. Note, you have only one person in the trustee directed plan, so you effectively get what you want. All the HCE money continues to go into plan 001; all the other participants go into plan 002. Now, they can be invested differently so long as, in plan 002, he meets the fiduciary requirements of diversification and prudence. And if he really want the participants to be able to select their own investments (always a bad idea anyway!), then he will have to live with the asset fees on the money that was previously in the plan and you just have to amend plan 001 to meet the new design.

I still don't see a successor plan issue, and that is the key. The "new plan" is not a successor plan because is it NOT a plan of the existing employer (or controlled group). The successor plan rules are to prevent the payout when the employees will move to another plan (within 12 months) of the employer who is doing the payout; that is not your situation. I would want to see the documents and fully understand the transaction before deciding exactly how to do the amendments, but it sounds like an amendment to Plan B to merge/transfer the accounts of those employees moving to Plan A (another member of the controlled group) should be fine, which leaves in Plan B just those employees who will be moving to Company C. At that point, rather than terminating B, why not merge it into C? You are not getting around the 2% rule. First, if you do it my way, no one is getting paid out. But even if you terminate plan B after the transfer of those employee accounts moving to Plan A and pay them out (and do not merge it into Company C plan), they are not moving into a plan of the "employer" because it needs to be the SAME EMPLOYER; Company C is a different employer. I don't think you should feel like you are violating the rules; I don't see that you are in any way violating even the spirit of the law. Now, does anyone think otherwise? Does anyone think there really is a successor plan issue?

We have an account into which we deposit all the 20% withholding for cash distributions; then we transmit the funds from our omnibus account. If we were to do an Anonymous VCP, the client would write us a check, we would deposit it in our omnibus account, and then we would make the payment (either by our credit card or ACH). It is the client that is anonymous, not us.

Perhaps I'm missing something, but where is a successor plan issue? You are going to merge Company B into a new Company C; is that Company C in a controlled group with A? Successor plan rules apply when the plan is being maintained by the SAME employer. Do you have that in this situation? Assuming no controlled group with C, the people in B moving to A can have their account transferred by an amendment providing for same. Then, at the end of the year, you terminate plan B and pay everyone out. Where is the successor plan? What am I missing?

Must distribute PRIOR to the annual election period, which begins 60 days (Nov 1) prior to year end. If you gave it in January for the following year, that actually appears to meet the legal requirement.

There is no reason to set up a new plan; if the "solo k" is from one of those marketing firms that think there is such an animal and they have a crippled document, you probably want to amend and replace with a more reasonable document. More than likely, the 100% owner has a bunch of years of service; change to a 2/20 schedule and he would still be 100% vested if he has six years, so changing to a 2/20 schedule should cause no problem. So now the question: why does the owner "want to keep the current plan"? What does he think that will do for him? More than likely, he has something in mind that is not necessary or can be accomplished with the single plan. One last thing, you COULD have two plans (though, to quote our 37th president: "that would be wrong"), and if they were mirror images of each other (with the appropriate language for eligibility purposes), then he could stay in the plan 001 and a new plan 002 could be produced. But there is no logical reason to do this.

Yes, this is not something that someone who is not UBER familiar with what it is all about should be doing on their own. FMV is extremely difficult to determine, and when you are offering a 5.01% ownership, you also have discounts for lack of control, lack of marketability, etc. Plus, it is almost axiomatic that the exercise of the option will never occur. Who would buy 5% of a closely held business that pays no dividends and has no real market for resale where you effectively have no vote over anything either. Just FWIW.

You got it! ?

As usual, we have nowhere near enough information to answer thoroughly. The answer is not simple when dealing with a RE asset. While it can be a permissible investment (so long as we don't have a prohibited transaction involved, which I often see is the situation), it causes its own problems. For example, are there other employees in the plan? Is it participant directed or pooled? There can be BRF (benefits, rights and features) issues depending on whether all participants can buy into it or whether all participants are automatically part of it (as in a pooled trust). Then, you have the problem of annual valuation; expect to have to spend a significant amount of money every year to get professional appraisals that would stand up to an IRS audit (that means, not what 3 real estate agents think it might be worth). Also, if it is a really good investment, the client is turning what should be capital gain property into ordinary income property, which could be giving up a substantial tax benefit. Because the plan is not an active developer of real estate as a business, it should still be a passive investment. But depending on the "deal" with the developer, it can lead to potential UBTI, which I always tell clients that becomes their CPAs problem (not mine) since they will have to file TAXABLE income tax returns for the plan if there is enough UBTI. There are lots of reasons for NOT doing this; more reasons for NOT doing it than doing it.

The EOB certainly deals with this (it deals with EVERYTHING! ? ). See last clause in first cite below. 1.d. How is it determined whether a participant is a 5% owner.? IRC §401(a)(9)(C)(ii) states that the 5% owner rule applies to a participant who is a 5% owner (as determined under the key employee definition in IRC §416) for the plan year ending in the calendar year in which the employee attains age 70½. Also see §1.401(a)(9)-2, Q&A-2(c), of the 2002 Regulations. Under the key employee definition, an individual is a 5% owner if he/she owns more than 5% of the company (or a related group member - see 1.d.3) below) at any time during the relevant plan year. also... it deals with attribution thusly: 1.d.2) Attribution rules apply to determine ownership. To determine whether a participant is a 5% owner, the attribution rules under IRC §318 apply. These attribution rules are made applicable through IRC §416, which is cross-referenced in the RBD definition in §401(a)(9)(C). For example, suppose the company employs the mother of the 100% owner of the company. By attribution under §318, the owner's mother is a 5% owner. See IRC §318(a)(1)(A)(ii). The mother's RBD is April 1 of the year following the year she reaches age 70½, even if she continues working for the company. The §318 attribution rules are explained in Part A. of the attribution definition in Chapter 1A.

Your problem with the above is a misreading of the RMD rules. He has to be a non-owner in the YEAR he turns 70 1/2, not as of the date he turns 70 1/2. So, he would have had to sell by 12/31/18 to qualify for the non 5% owner rule exclusion (without even thinking about the issue of attribution from the son). He needs to get his RMD, for 2019 and all future years.

Yup, even if a 5310 has been filed. And it is nonsense that changing the trustee would have any effect on IRS's processing of the 5310.

I don't think you have ever told us what the DB plan provides as to an insured death benefit. What is the plan PROVISION with regard to insurance in this DB plan? What might provide some useful ammunition. Also, FWIW, a DB plan cannot provide "key man" insurance (unlike a profit sharing plan).

Several commentators have pointed out that this is not really the forum to answer your question. You might very well have a justified reason to ask that the second DRO be withdrawn. But the judge has already issued the order and if the plan CAN comply with it, it must until they are notified by the judge that the order is revoked. You need an ERISA atty at this point who knows what h/she is doing and you have to go back to court since only a judge can vacate the order. Good luck.

A unilateral offer is just fine. So long as it is legitimate, it's attributable whether the participant likes it or not. In all cases where we have used it, both parties were willing to utilize this methodology to make the individual an HCE. FWIW.

Absolutely. I have attached a sample of what we have used a number of times (this is for a dental practice; appropriate modification needed for type of business). Also, the cover letter explain that besides making this individual an HCE (who is a doc and doesn't want any contributions to the plan anyway), we are also limiting him to a zero contribution in the plan. optiontopurchase.sample.pdf

Sorry Bob, you are just not aware of the law. The attribution rules DO ATTRIBUTE a bona fide option to buy 5.01% of the business to the receiver of the option. That's simply the rules. That makes the person who has the option to buy an HCE by definition.

Yup! Go right ahead and make the change.

Need to clarify: it is the employer named as beneficiary, not the plan? That is a problem. The correct way to do it is the beneficiary of the contract should be the plan, and then the plan pays the beneficiary of the participant. However, it is certainly not a PT for a named beneficiary (say, the spouse of the participant) to be named. It shouldn't be done that way (but it often is) because that can cause a serious coordination problem with the actual death benefit payable from the plan (including the insurance). For example, if the participant named his girlfriend instead of his spouse as beneficiary, the spousal required benefit might be compromised. But, it ain't a PT. However, naming the employer is a potential problem. Now, the finesse is that if the employer is also named as the plan administrator (as is the case in all our plans), I could argue that the employer was paid in the role as PA and is holding the funds for the appropriate plan beneficiary. I wouldn't like that, but that's the argument I would make. And I would have the beneficiaries change to the plan (assuming this was a take over; we have almost no insurance contracts left in any of our plans).

Yes, I am aware of some vestigial organs in that one; but absolutely - participant directed accounts are nonsense for the vast majority of participants. And we have hundreds of plans that believe that as well. Yes, I know we are different; that's what makes us so loveable! ?