Can an 11g amendment add in a controlled group?

[J Simmons]

Facts: On 1/1/2006, a sole proprietor with 3 employees and a calendar year x-test k plan incorporates, and amendment is made to plan for the corporation to succeed the sole proprietor as the sole sponsoring employer. However, after 12/31/2006, the plan's advisors learn that the sole proprietor only took a small chunk of his earnings as W-2 wages from the corporation, running the rest 'outside' of the corporation, in essence as a sole proprietor. (All the compensation for 2006 for the other 3 employees was W-2'd from the corporation.)

Contributions were made to a suspense account held in the plan's name, throughout the year. Totaling about $50,000--about the same amount that had been contributed for 2005.

Giving the other 3 employees their 5% gateway (about $5,500), the owner snags about $18,000 through x-testing. That leaves about another $26,500 having been contributed, and as yet unallocated.

Under 404 and given the total corporate payroll, only $34,800 is deductible.

I was thinking first to have the $15,200 ($50,000-$34,800 deductible limit), and proportionate share of earnings while in the plan, returned to the corporation as a mistake of fact under IRC sec 403©.

We can boost the allocation for 2 of the 3 NHCEs (two separate groupings of them) so that the NHCEs, in the aggregate, would receive about $7,000, and the owner (based just on the W-2 earnings) receiving $27,800.

That looks like the cleanest thing to do from my perspective.

I was wondering if anyone thought we could do an 11g amendment to add the owner's sole proprietorship earnings for 2006 into consideration. It looks to me like we'd at least have to give the NHCE's a second, duplicate gateway if we tried that--even if it were otherwise doable.

Any thoughts or other suggested approaches to correct the situation?

[Blinky the 3-eyed Fish]

There are numerous discussions on what constitues mistake of fact and whether contributions can be returned, so I won't answer that.

Regarding the -11(g), remember two things: 1) the amendment in of itself must be nondiscriminatory and pass coverage. Your proposal does neither. 2) the extra contribution derived cannot be deductible in the prior plan year irrespective if you are trying to re-add back the sole prop as a plan sponsor, which is another issue.

[J Simmons]

Blinky,

Thanks.

I was thinking that giving "the NHCE's a second, duplicate gateway if we tried that" would make the amendment pass nondiscrimination and coverage. Maybe I was too oblique. On top of the 5%-of-pay the NHCEs already receive on the 'initial' allocation, we'd be giving them another, second 5%-of-pay as part of the -11g amendment (so the NHCEs woud receive a total 10% of pay for the year). Would that satisfy the nondiscrimination and coverage issues?

Would the amendment allocation amount not be deductible for PY 2006, the plan year being tested, even though that's when the money that would be allocated per the amendment was actually placed into the plan?

[Blinky the 3-eyed Fish]

Q1: I suppose it very well could if you spelled it out correctly in the amendment. What I would have trouble with though is if you could give the NHCE's the allocation without regard to the amendment. So in my mind it's questionable.

Q2: That's right.

And to pile on you aren't able to add back the sole prop to count the compensation for deductibility purposes since it's after the fiscal year. Long story short, it's no good.

[AndyH]

Blinky, would you mind elaborating on the deductibility? What is your take on that?

Certainly I would agree that cannot be the purpose to the amendment, but what if it were a byproduct?

[Guest Guest99]

Facts: On 1/1/2006, a sole proprietor with 3 employees and a calendar year x-test k plan incorporates, and amendment is made to plan for the corporation to succeed the sole proprietor as the sole sponsoring employer. However, after 12/31/2006, the plan's advisors learn that the sole proprietor only took a small chunk of his earnings as W-2 wages from the corporation, running the rest 'outside' of the corporation, in essence as a sole proprietor. (All the compensation for 2006 for the other 3 employees was W-2'd from the corporation.)

Contributions were made to a suspense account held in the plan's name, throughout the year. Totaling about $50,000--about the same amount that had been contributed for 2005.

Giving the other 3 employees their 5% gateway (about $5,500), the owner snags about $18,000 through x-testing. That leaves about another $26,500 having been contributed, and as yet unallocated.

Under 404 and given the total corporate payroll, only $34,800 is deductible.

I was thinking first to have the $15,200 ($50,000-$34,800 deductible limit), and proportionate share of earnings while in the plan, returned to the corporation as a mistake of fact under IRC sec 403©.

We can boost the allocation for 2 of the 3 NHCEs (two separate groupings of them) so that the NHCEs, in the aggregate, would receive about $7,000, and the owner (based just on the W-2 earnings) receiving $27,800.

That looks like the cleanest thing to do from my perspective.

I was wondering if anyone thought we could do an 11g amendment to add the owner's sole proprietorship earnings for 2006 into consideration. It looks to me like we'd at least have to give the NHCE's a second, duplicate gateway if we tried that--even if it were otherwise doable.

Any thoughts or other suggested approaches to correct the situation?

[Guest APensionGuy]

I'm relatively new to the pension world, and have started looking through the message boards to educate myself. Kind of a "if you don't know what question to ask, how do you know how to find the answer" mentality.

How can I find out more about an "11g amendment". Is there a long name that I could look up and do research on?

Thanks!

[J Simmons]

11g amendment refers to an amendment that might be made within the parameters of Treas Reg 1.401(a)(4)-11(g).

[AndyH]

I'm relatively new to the pension world, and have started looking through the message boards to educate myself. Kind of a "if you don't know what question to ask, how do you know how to find the answer" mentality.

How can I find out more about an "11g amendment". Is there a long name that I could look up and do research on?

Thanks!

It is the section of the IRS regulations that states the conditions under which some failures can be corrected (e.g. coverage failures or discrimination test failures) in the next year. The full citation is Regulation 1.401(a)(4)(11)-(g).

[Guest APensionGuy]

Thanks!