Help - Misguided CPA!

[Guest PLHart]

A clients CPA is preventing them from adding a 401(k) provision based upon misinformation. What can I show the CPA firm to show them they are wrong?

Here is the situation:

Client with approximately 50 employees sponsors a Profit Sharing Plan that is top-heavy. Due to business conditions no contributions have been made for several years, and most likely none can be made for at least several more years. Client decided they would like to add 401(k) provision so at least employees could add to their retirement account balances. I advised them this was fine as long as key employees did not defer until such year that plan is no longer top heavy, so as not to trigger a top heavy minimum contribution.

However, CPA advised first advised them that if even a highly compensated employee who is not a key employee defers that that would also trigger a top heavy minmimum contribution. Now they are also telling the client that the only way the key employee can elect not to defer is to opt out of the plan permanently. Both these statements are dead wrong, but client respects his CPA.

How would you deal with this situation. Please HELP!

[davef]

For purposes of determining the T-H minimum contribution, there is no need to be concerned with HCEs, just key and non-key employees. The T-H minimum contribution will be less than 3% if the largest contribution for a key employee is less than 3% (see Reg. Sec. 1.416-1, M-7). I would ask to see any Code/Reg. authority for his position re HCEs.

[M R Bernardin]

Maybe what the CPA is saying is that the only way to absolutely ensure the key employees don't defer while the plan is top heavy is to have them sign a participation waiver. I would agree with that. You can perhaps have an informal arrangement with your key employees that they will not defer, but if the plan document does not exclude them from participation, then if the keys change their mind and decide they want to defer, the employer could not prevent it.

[Guest]

cpas are idiots in some things.

anyway, there are a few issues to keep in mind:

waiving out is generally a one-time irrevocable election, done at first eligibility, so that doesn't seem likely.

excluding keys can be done via amendment, though if plan is standardized, that woud be impossible. well, heck, if they are amending to put in a 401(k) feature might as well amend everything if you have to.

plan would have to pass 410(B), and would only be a problem if you have an HCE who is not key. even then you probably have enough keys who are HCEs, so even 410(B) would pass.

if keys aren't excluded, keys could defer 0. since they haven't made a profit sharing contrib. for a few years, they are likely to defer and then require themselves to put a profitsharing contribution in. This might be a problem if you have a non-owner key who wants to defer 'cuz he don't care.

my understanding, which certainly could be wrong, is deferrals are considered an on-going contribution, and therefore the profit sharing contributions do not become 100% vested - but since you said no contributions have been made for a number of years, maybe you have vested everybody 100% already.

[Guest PLHart]

I understand what you are aying M R, but in this case all Keys are family members, so practicially speaking it would be quite easy for them to simply informally agree to elect not to defer without the permanent election to opt out. Isn't that right, or am I missing something here?

[MWeddell]

Some additional thoughts, although it's clear everyone who has responded agrees with you, not the CPA.

If you amend the plan to exclude all key employees from eligibility, then if someone accidentally is allowed to contribute but then is identified as a key employee (e.g. an employee becomes a top 10 highest paid officer and client didn't tell you about it in advance), you can probably correct it under APRSC instead of now being forced to make top-heavy minimum contributions.

On the other hand, leaving everyone officially eligible and having key employees elect to contribute 0% will help your ADP test for any non-key HCEs. Maybe the CPA is zealously concerned about the contingent benefit rule in the 401(k) regulations where an employer can't make any compensation or benefits (other than 401(m) contributions and certain nonqualified plans) contingent on whether an employee contributes to the 401(k) plan.

You're being asked to prove a negative, which is nearly impossible. Ask the CPA what support he (or she) has for his position because you don't see any reference to highly compensated employee in Code Section 416 or the regulations issued thereunder.

[BeckyMiller]

First - no offense taken on the all CPAs are idiots crack.

I do agree, however, that it sounds in this case as if the CPA has over stated or misunderstood the case. I believe that because of the conservative character attributed to most CPAs, the advisor may be concerned about what would happen if an individual slipped from non-key to key during the year. If this happened regularly, I suspect that repeated reliance on APRSC would be at risk. However, given the facts that you have described, it does not sound very likely that your group of keys is going to be particularly dynamic. As such, I agree with everyone else.

I suspect that what has happened is the classic misunderstanding of the distinction between an HCE (which can be a very dynamic group) and a key employee, which generally is not.

[Bruce Steiner]

Have the attorney speak with the accountant.

------------------

Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[GBurns]

Why not have the Lawyer speak to the Accountant ?? In any case how did an attorney or lawyer get into this issue?

[This message has been edited by GBurns (edited 10-22-1999).]