Amendment to reduce MPP %

[Guest saiyer]

I opened a QRP (keogh) for my corp (California C-corp) at Schwab on 12/29/2000. It is a paired plan (MPP + PSP) with an effective date of 3/16/2000. I am the only employee in my company at this time. I chose MPP % to be 15 and PSP to vary from 0 to 10% based on flawed advice that Profit sharing contribution can only be made if there was 'profit' in the corporation.

It was a mistake and I would like to amend it as an 'error correction' to MPP 10% and PSP 0 to 15%. Schwab is telling me that amending the MP% 'COULD' disqualify the plan and that I should consult a CPA. I haven't deposited the full contributions yet. Just the initial deposit of $500 in each account(MPP and PSP) that Schwab required me to open.

Here are my questions:

1. What would be the grounds for disqualification? It doesn't make sense that a reasonable change should cause any problem, especially considering that I am the only employee at this time. (I have called IRS help line and am hoping for a call back from them in the next few days.)

2. Can I amend it so year 2000 contributions reflect 10% MPP and rest PSP. If not, can I at least change it for 2001.

3. Do the plan documents get sent to IRS? Since I am the plan administrator, could I not make reasonable changes and put it the company file. Isn't the role of Schwab merely that of a custodian? Should they care if it is amended?

4. Any pointers as to where I can get the skinny on what is the common sense approach to QRP and how it all works?

Thanks in advance.

[KJohnson]

As to amending the MPP, if it is a calendar year plan, it is probably too late to do anything for 2000. For 2001, you may be able to amend for the entire year if your plan has a last day or 1000 hours of servcie requirement for a contribution. If it doesn't have such a provision you may have a problem although I suppose that you could amend to provide something like 15% for comp through 3/1/01 and 10% thereafter.

As to the grounds for disqualification, the IRS would take the position that you already accrued the 15% benefit for 2000 and a plan cannont be retractively amended to reduce an acrued benefit.

For MPP there are timing and notice issues regarding reducing the contribution rate and a notice known as a "204(h) notice" must be sent. I haven't looked to see if there is an exception in the regulations for "non Title I" or owner only plans.

[rcline46]

A lesson learned the hard way. Never buy qualified plans from someone who only wants to sell product to make a commission. They do not understand qualified plans and only offer standardized prototypes, which will burn you again. You got what you paid for.

Bet you didn't read the document carefully (how could you on 12/29 when you were desparate!). Unless you terminate the Money Purchase plan (bet Schwab can't explain what happens for contributions when you terminate mid year!) you are already stuck for 15% in 2001.

Of course if you can afford the 15%, there is no problem.

Better read the Profit Sharing document. It might state you need profits or retained earnings to contribute.

Find a pension administration firm. Their reputation depends on correct advice because you can sue them. Try to sue Schwab for misleading information. SOme firms advertise on this site, ASPA has lists, and their address is on Benefitslink. (I am on the east coast so this is NOT a solicitation!)

Good luck, really.

[Guest saiyer]

IRS man just called and here is a jist of what he said in response to my questions:

Q1. Can't I just strike out the 15 and put in 10 in the form and sign it, stating that it is an error correction? After all, I am the administrator and the only employee for now.

A. Why bother. Just leave it alone for 2000. After all I can still make the total contribution of 25% by putting 10% in PSP.

Q2. Can I change it for 2001?

A. Sure. Just Amend it for 2001 effective 1/1/2001.

He didn't clearly address the notification requirements.

Q3. Do I have to prorate the $170,000 compensation limit since the plan effective date is 3/16/2000?

A. He was not sure but thinks the 30,000 contribution limit would have to be prorated but he could not find any documents to confirm it. (Is this true???)

He was also suggesting Defined Benefit plans if I would like increased contributions but that they are more complicated.

It appears that all of this is complicated (by design?) that no one including IRS can give authoritative answers.

-----------

Apropos rcline46's response:

1. Why does MPP have to be terminated?

2. IRS Pub 560 (page 10) clearly says "you do not have to make contributions out of net profits to have a profit-sharing plan".

3.I used to have a similar Keogh with Schwab when I was filing Sched C in 1999 and before. I used to just contribute the max amount computed by TurboTax into a single account. Seemed simple and effective then...

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

Thanks

[Guest]

we just had (or are still having) a lively debate over whether to prorate the 30,000 the first year of the plan.

see the discussion under the 401(k) board.

Based on everything I have seen and read, I would say no, but rather than repeat the discussion all over again, look at the discussion.

[Richard Anderson]

saiyer

Publication 560 does not address what your document says; it may allow contributions if there are not profits or retained earnings or it may not. You must follow what the plan document says.

IRS advise over the phone will have the same problem. Even if you get accurate information from the IRS, they will tell you what the law is; while your plan document may be more or less restrictive than the law.

As rcline46 suggests, you need to employ someone who understands qualified plans and will interpret your document in order to advise you.

[KJohnson]

rcline. Why do you think he would be stuck for 2001? If the Plan has a last day or 1000 hour requirement for a contribution I thought you could amend until someone had "accrued" the benefit for the year?

[Richard Anderson]

From the original post "paired plan (MPP +PSP)" I would think that these are standardized plans; if so they would not have 1000 hour and last day provisions, and could not be amended for 2001.

[rcline46]

Why did you not adopt the old plan into your new company? That would have been perfectly legal.

Terminate the MPPP because that would kill the 15% for 2001 if it matters to get it to 10% with a new plan. Otherwise just amend for 2002 and be happy.

What happened to the old plan? Did you know it might still be very active and alive for 2000? and you might have more problems than you realize!

Richard Anderson responded to the Pub 560 item.

Now I am really concerned about the old plan!

[AndyH]

Wouldn't he be able to amend for 2001 if the plan is standardized (by that I mean get contribution unless either employed on last day or worked 501 hours), unless of course he worked 501 hours in 2001 before the amendment?

[Guest PAUL DUGAN]

First I agree with Richard, you get what you pay for. I also like the terminology brought into this business by our buddies, the mutual fund salemen, a "C-corp keogh plan"?

I really do'nt think this is a Top Heavy question. Section 416 states that the T.H. contribution is equal a contribution to non-key employees of the lesser of 3% or the largest contribution given to a key employee. There for if the document has a last day provision andor 1000 hr requirement and contribs. are not required under the basic MPP formula to key EEs no T.H. contribution would be required.

Under th PS plan ther never is a TH contribution to thr plan if the ER elects no PS contrib.

[Guest saiyer]

Old plan and New Plan:

The old plan (Keogh) for which I signed up with Schwab about 4 or 5 years ago was for me as a self-employed individual receiving 1099 and filing a Sched-C (for sole-proprietors). I think it was 10% MPP + 15% PSP. Since it was a single account, I never even had to think about apportioning my contribution between MPP and PSP.

The new plan is set up by my C-Corp, incorporated on 3/16/2000, in which I am an employee (the only one, for now) and I get a W-2. So it didn't even occur to me to mix the two plans. Also, Schwab now requires separate accounts for MPP and PSP.

Yes, I suppose the old plan is still active and I would like to contribute to it as well since I had a 1099 in year 2000. Is this allowed or can I only contribute to one plan?

My plan details:

I have not accrued any benefits in 2001. That is, I haven't had a paycheck yet. I couldn't find anything about Profit requirements in the Schwab's loooong prototype document. Their basic adoption agreement appears quite simple. I chose Plan Year = Fiscal Year (which is also Cal Year) and Limitation year is the same. I specified 100% immediate vesting with no waiting period for eligibility and semi-annual entry dates. I wanted it to be simple for me and any employee I may hire.

Their FAQ (www.schwab.com) and plan overview states that 1 year=1000 hours and hours required to avoid break in service=500. I signed as the trustee but the investments will be directed by the participants.

Do I still have to wait until 2002? What would be the reason for the wait? Also, was the IRS advice of amending it as of 1/1/2001 wrong?

By the way, I think Schwab is a great company and I am sure their experts drew up the plan document and IRS seems to have blessed it. I am not surprised now that their front office people do not know all the intricate details of QRP.

As I am drowning in esoteric minutia, I will probably consult a benefits specialist. I didn't think I needed that until I decide to hire the second employee.

It is amazing how the laws and regulations get so bloated as to completely obfuscate the 'spirit'.

Thanks to all those who responded and those will.

[rcline46]

You ain't gonna like this. You are now the proud sponsor of TWO profit sharing plans and TWO money purchase plans.

According to the IRS your sole prop never really goes away regardless of income, and it is a controlled group with your corporation. The STANDARDIZED plans you adopted automatically include all members of a controlled group.

Sooooo, you old plan is sitting there waiting for, nay, demanding a contribution. I have seen this many times especially with doctors. My worst case was 4 sets of plans (MPPP / PSP) each opened at different times with different mutual fund companies.

My suggestion is to immediately rescind the new plans and have the deposits returned as mistake in fact. This may be stretching the law a bit, but Schwab did you no favors by allowing you to install the plans. Then contribute to the old plan. 10% MPPP and up to 15% PSP. When you have the time (and you will have to in 2001 anyway) amend the old plan for self direction and whatever else you want.

FUnny thing is - you will be using the same docs I just said to rescind! Except you will be marking them as an amendment of an existing plan!

[richard]

Actually, the laws are complex with good reason. Otherwise, experienced practitioners would allow clients to deduct more than the IRS would allow.

For example, consider a individual sole proprietorship (with no employees) who nets $400,000. He sets up a pension and profit sharing plan like yours, and contributes the legal maximum of $30,000. He then thinks, "hey, if I incorporate half of my business and keep the other half as a sole proprietorship, I can net $200,000 from each and have a $30,000 contribution for myself for from each. Gee this is nice."

Or the person earning $2 million who sets up ten corporations, with net earnings of $200,000 in each, and a contribution of $30,000 from each.

Or, why don't I set up 2 companies, one that employs me (with a pension plan) and one that employs my other employees (with no pension plan). Not a bad idea to avoid contributing for those other employees.

Or, if that won't work, why don't I simply lease those other "employees" so they won't even be my employees. Gee, I could have an entire business with one employee (me) and 10 non-employees, a/k/a leased employees. And no pension contribution for any of them.

None of these approaches work, because the law has evolved nearly 30 years to prevent them. I (along with most contributors to this thread) could give additional examples --- suffice it to say the complexity in the law is deliberate, and prevents unwanted consequences, i.e. abusing the system.

As far as Schwab's people not being familiar with these nuances, this applies to most investment brokerage firms (or banks or insurance companies) involved in this business. They make their money by HOLDING AND INVESTING YOUR PLAN'S ASSETS. They set up the pension documents as a loss leader (either as a freebie or at a significant discount to market rates). They do not make any money on administrative or consulting questions. They also only provide the types of retirement plans that they can understand and can support.

The questions you ask are actually quite routine for experienced practitioners --- but not routine for Schwab (or others).

That's why the people on this thread exist, because there are a lot of complex rules that become simple only after 10-20 years experience.