Deemed Deferral?

[SMB]

Have reviewed most of the prior posts in this section, but did not come accross exactly my situation. If addressed previously, just point me to the post.

Have a 401(k) sponsored by an LLC (taxed as a partnership). The partners (6 of them) would like more flexibility in designating the amount of their individual "profit sharing" contribution amounts - i.e., some would prefer nothing, others the maximum available, still others somewhere in between. Sound familiar?!

Can this be accomplished via "class allocation", with each participant constituting his/her own class? Or, since the amount of a partner's profit sharing contribution directly affects his/her "compensation", would such profit sharing contributions for the partners be "deemed deferrals"?

Also, even though the "employer" would technically be designating the individual profit sharing contribution amount for each partner, we all know that, in reality, each partner is making the call.

The plan is already a 401(k), so the "deemed CODA" aspect didn't seem to be an issue, but since the common law employee participants do not have the same ability to designate the amount of their profit sharing contribution, I suspect there might be other issues with which to contend.

Thanks for any any all comments.

[WDIK]

The plan is already a 401(k), so the "deemed CODA" aspect didn't seem to be an issue, but since the common law employee participants do not have the same ability to designate the amount of their profit sharing contribution, I suspect there might be other issues with which to contend.

If you feel the situation described is a "deemed CODA" (opinions among posters are strong and varied) then aren't the issues as follows?

1) Deferral limit of $13,000 (for 2004)

2) ADP Test should include these amounts.

[SMB]

Dear WDIK,

Yea - those were my major concerns, also, but thought I should have the "big guns" (and anyone else) weigh in on the subject...

[WDIK]

"big guns"

I'm afraid you may have a case of mistaken identity.

anyone else

I may qualify under this category.

[AndyH]

Blinky, we lost Mike P again. What to do? Must be a summer siesta. Last year if you remember, he returned with a big frown. Hopefully this year will be different.

I have appointed myself in charge of nominations this week. As such, I nominate Tom and Blinky as "co-big guns of the month". Unless of course we have other interested candidates.

[Blinky the 3-eyed Fish]

I noticed his conspicuous absence.

Not enough experience here to be a big gun, so I will take the "big mouth" nomination.

[Tom Poje]

ah, the truth is out.

You must be a large-mouthed bass.

[SMB]

Dear Tom, AndyH & Blinky,

As much as I enjoy your warm ups for the "Last Pension Comic Standing", I'd really appreciate some serious feedback on my initial question.

Thanks!

[Guest Happy Actuary]

Let me humbly weigh in with my 2 cents, although certainly not as a Big Gun!

We do a lot of new comp. with law firms as you have described, and I do see conflicting issues here.

The "deemed CODA" issue is very important, as if the IRS were to determine that the new comp arrangement is (Itself) a CODA, then the P/S amounts would exceed the allowable $13K/yr., and you'd have a potential disqualification (or other big problem.) The 401k regs say that any elective arrangement, whether "direct or indirect", is deemed to be a 401k, so you are right to be a little (but not too) nervous.

We recommend that no written "election forms" exist, as they'd leave a bad paper trail. Further, although it isn't in any regs, we informally adopt a rule that lawyers can only hop among groups once every 3 yrs. (As an aside, we do not use the approach where each member can be his or her own group; instead, we create different "levels", i.e., a $0, a $10K, a $20K, and maybe a $28K level. We then write the names of each partner who is in each group.)

Also, we typcially file these dox for determination letters, just to be safe.

One of the conflicting issues is how the IRS can approve language like accudraft's, which does allow each member to be in their own group. This would seem to allow unlimited flexibility, so we do not use this in the situations that you describe.

Finally, FWIW, this issue does not appear to loom large on the IRS radar.

Good luck, hope this helped somewhat

[Guest merlin]

Tom Finnegan touched on this issue in his presentation at the Mid Atlantic Benefits Conference last month. Tom was discussing the plan design where each participant is in his/her own allocation class. The key is that the allcation made to each class must be authorized by the appropriate management body: board of directors, mangement committee, partners committe, etc. Jim Holland was his co-presenter and didn't dispute Tom's suggestion.

[AndyH]

I think it is just a matter of time before the operation of plans with this design becomes an issue with the IRS, and for that reason plus potential coverage (reasonable classification) issues I strongly caution against single person allocation groups.

[ak2ary]

I've seen this referenced here before. Are you referring to something other than the reasonable classification portion of the average benefits test? Most plans will use the ratio percentage test as their primary coverage test. For rate group testing you only look to the plan passing the Average Benefit Percentage Test portion of the average benefits test and never look at the reasonable classification test.

So.. that's a long winded way of asking why reasonable classification as a coverage issue come up here?

[AndyH]

It is unlikely to be an issue but could be, for example, in the context of a doctor group. Only an issue or possible issue when ratio percentage cannot be passed for coverage.

Not a major consideration; a minor consideration.

[Blinky the 3-eyed Fish]

Are you referring to something other than the reasonable classification portion of the average benefits test?

He's not.

Most plans will use the ratio percentage test as their primary coverage test.

Sure, most plans pass the ratio test for coverage. This addresses plans with this design that do not.

So.. that's a long winded way of asking why reasonable classification as a coverage issue come up here?

To point out that the plan needs to pass the ratio test for coverage in this situation.

[ak2ary]

gracias...

BTW I spoke with Holland on this issue and they are concerned about the deemed 401(k) issue as well as the definitely determinable allocation formula requirement. They realize that their current stand on definitely determinable allocation formula permits this "one person per category" structure and have said publicly that "At this time" they are allowing it. In the next breath, they have talked about the demed "k" and that if a participant has the ability to alter his pay by electing to make a greater contribution to a plan, it is a CODA. The work around is that the employer's governing body has to determine the contribution to each allocation class, not the employee/member of the class. That doesn't mean the employer cannot take into acount the employees needs/wants/desires, but the employee cannot have the full control of the contribution...it's a fine line and I could see one email from a partner saying "I've decided to put $25,000 in the Profit Sharing plan this year" could cause real problems

[Blinky the 3-eyed Fish]

And from a reality point of view it's that line of thinking that is pure nonsense. Everyone, including Jim Holland, knows that it is the partner making the decision on how much PS contribution is made for his benefit. The fact that a made-up piece of paper exists that says it's coming from the employer has no substantive value in my mind.

It's like we are in an establishment that doesn't allow pink elephants to enter, but does allow black poodles. You and I desperately want to bring our pink elephants and the manager of the place really likes us. So we slap a sign on the beast that says "I am a black poodle" and Little Pinky comes in and has the best time. He even dances without ever stepping on a single person's toes.

But that being said, I play by the rules begrudgingly.

[AndyH]

Blinky, did you have a liquid lunch today that caused you to discuss pink elephants?

[Blinky the 3-eyed Fish]

You better not be making fun of Little Pinky!