2001 IRS Q&A
Larry Starr and Criag Hoffman met with Mr. James E. Holland, Jr., Chief, Actuarial Branch 1, and Mr. Richard J. Wickersham, Chief, Projects Branch 2 of the Internal Revenue Service. The meeting took place in Arlington, VA on September 25, 2001.
The purpose of the meeting was to provide Mr. Holland and Mr. Wickersham with questions which were submitted by members of ASPPA. It is intended that the responses or deferrals to the questions provide the basis for discussion at the 2001 Pension Actuaries and Consultants Conference during the IRS Question and Answer session. The answers reflected in this presentation are Larry Starr’s and Craig Hoffman’s interpretation of Mr. Holland’s and Mr. Wickersham’s responses, and not direct quotes. They are intended to reflect as accurately as possible the statements made by the government representatives. This material does not represent the official position of the Internal Revenue Service, the Treasury Department, or any other government agency; nor has it been reviewed or approved by the Service or Treasury.
It is intended that this written material will meet the requirements necessary to qualify for Continuing Education Credits.
ASPPA wishes to thank Ms. Evelyn Petschek, Ms. Carol Gold, Mr. Paul Shultz, Mr. James Holland, and Mr. Richard Wickersham for agreeing to this meeting, and for their cooperation and assistance in making this portion of the program a success.
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Regarding questions that were answered at the podium: These questions involved long commentary, and have not been included in this hardcopy. To find the answers to those questions, feel free to order the session audio tapes, available by downloading the audio cassette ordering form. |
1. Plan has immediate entry in 401(k) and 21/1 for profit sharing allocation. When running the average benefits percentage test for purpose of the general test how are employees with less than a year handled – i.e are they in the ABPT?
Yes, they are in the ABPT.
Does it matter if we have bifurcated for ADP testing or not?
No, not for the ABPT.
2. In determining the
ABPT for an employer are the following amounts included or excluded?
(i) Elective deferrals returned due to a failed ADP test?
(ii) Matching contributions returned due to a failed ACP test?
(iii) Matching contributions forfeited due to a failed ACP test?
(iv) Matching contributions forfeited due to association with elective
deferrals returned due to a failed ADP test??
(v) Excess elective
deferrals?
(vi) Elective deferrals returned under 1.415-6(b)(6)(iv)?
Items (i) - (v) are included. It is arguable that item (vi) are not counted (that is, they are excluded).
3. When making a distribution under 1.415-6(b)(6)(iv) earnings must be computed and distributed. If there is a loss is the distributed amount decreased as it is for 401(k) and 402(g) failures?
This will be discussed from the podium.
4. We have a client that is a partnership. The firm is making a 3% minimum for the employees but the partners will not receive a contribution allocation. The firm is extending the partnership tax return. Can the individual partners file their personal returns before the 3% TH minimum deposit is actually made to the plan? Is there a cite we can go to? Would the answer change if a contribution were being made on behalf of the partners?
Until the contribution is actually made, the personal return (if filed earlier) is technically incorrect. When the contribution is made, the personal return is now ok (even if not extended). The “most correct” thing to do is to extend the personal return.
5. During 1999 a Schedule
B is filed for a defined benefit plan using the Unit Credit funding method.
For the 2000 plan year the plan changes actuaries. The new actuary uses a
different software system than the prior actuary. Additionally, the new actuary
wishes to use the level dollar individual aggregate funding method for 2000.
Provided other conditions are met, Section 3.05 of Rev. Proc. 2000-40 provides
for automatic approval of the change to the level dollar individual aggregate
funding method. However, in this case there is also a change in actuary and
a change in software.
Section 4.03 of the Rev Proc provides for automatic approval of a change in
actuary where certain conditions are met. One of the conditions is that the
funding method used by the new actuary is the same as that used by the prior
actuary. Does this mean that when actuaries are changed there is no automatic
approval for a change in underlying method?
No. There is automatic approval to the change in underlying method under 3.05 with not restrictions. Issues under 4.03 and 4.04 are inapplicable.
Further, Section 4.04 of the Rev. Proc. provides for automatic approval
of a change in valuation software where certain conditions are met. One of
the conditions is that there is no change in actuary. Does this mean that
where there is a new actuary and new software there is no automatic approval
for a change in the underlying method?
This will be further discussed from the podium.
6. We know that 415(h)
only applies through 1563(a)(1) - Parent-Sub controlled groups, and not through
1563(a)(2) - Brother-Sister controlled groups. Which category (Parent-Sub
or Brother-Sister) would the following fact pattern fit into?
Individual A, has a sole proprietorship and also owns 70% of a corporation.
If the "sole proprietorship" is deemed to own the corporation, then
it looks like a Parent-Sub (as defined by 415(h).
However, if the individual owns both the sole prop and the corporate stock,
it looks like a Brother-Sister.
Without regulations on this issue, the answer is unclear. However, it would appear appropriate that an individual should not be penalized for the form of business; if incorporated, this would be a brother sister controlled group. Therefore, we would most likely treat this as a brother sister controlled group.
7. Participant terms 12/31/00. Has final paycheck due to vacation reconciliation that will be paid in 2001. He was a 4% contributor and the ADP averange for NHCE's was 5% for 2000. Is this final paycheck and deferral used in the 2001 testing even though he wasn't actually working in 2001?
He is not an employee performing services in 2001; therefore this does not count as eligible deferral wages in 2001.
8. If a participant has to take a distribution of deferrals in 2001 to avoid a 415 limit violation for the 2000 plan year, do the same rules of before 3/15 and it is income for 2000 and after 3/15 it is income for 2001 and a 10% excise tax applies?
Revenue Procedure 92-93 makes it clear that it is always taxable in the year received.
9. Rev. Proc. 2001-17
is the new EPRSC guidance. Appendix B contains a correction method for overpayments.
The correction method is to first perform due diligence to get the money paid
back. Failing that, it says that "the plan sponsor or another person"
may contribute money to the plan to make up the overpayment.
Assuming the plan sponsor contributes the money under this correction method,
is it deductible? Deductible under 162, 404 without regard to the other 404
limits for the year, 404 with regard to the other 404 limits for the year,
or something else?
The conservative approach is to use 404 as the basic rule. However, there may be an argument that 162 would be appropriate in some situations.
10. Our client, employer
A, has a 401(k) plan. Two years ago a new member of the controlled group
sprung up with its own 401(k) plan. Call this Plan B. We performed an average
benefits test last year, determined that plan A could stand on its own for
ADP/ACP testing purposes, passed our ADP/ACP test, and everything was fine.
Now, this year, there is a third employer, employer C, with a third plan.
This plan has only 4 employees, all NHCE's. So far so good. But, this 4-man
plan has no minimum age or service requirement. Our reading of the 410 regs
is that we now can no longer exclude age 21/1 year like we could last year.
So we bring in a several short-term employees from employer B, who never meet
the 1 year, and it makes us fail our ABT.
For next year, we can certainly ask employer C to adopt a one year age/service
requirement. In the interim, is there any trick here that we're missing to
get around this result? By the way, employer C is a new employer (in 1999)
but was never NOT part of the controlled group, so we can't use the 410 transitional
rule.
We have no trick; your understanding is correct.
11. Individual owns
100% of sole prop. Also owns 50% LLC. Sole prop and LLC are not an ASG.
Has 100K of SE income from each. How is net earnings from SE computed for
purposes of plan deduction in LLC? ie, how is 1/2 SE tax deduction allocated?
Would a pro-rata allocation based on self employment income be acceptable?
Would attributing the SE tax first to the entity without a plan be acceptable?
A reasonable apportionment would be appropriate. It would be unreasonable to allocate all the cost to one entity.
12. Schedule B, Question
11 asks "has a change been made in the actuarial assumptions for the
current plan year?"
I have always thought this question addresses only the Funding assumptions,
excluding the Current Liability assumptions. Otherwise, I would be answering
"Yes" for 99% of the Schedule B's I sign for small plans, because
there is almost always a change in the Current Liability INTEREST RATE used
from year-to-year.
Question, must I answer YES to question 11 whenever a change is made to CL
int rates? (Note, I never deal with plans approaching an Unfunded Current
Liability anywhere near $5 million)
Under the current instructions, the answer is yes.
13. Individual A goes
to medical school and begins practice at age 35 under the name Individual
A, M.D., P.C. (the MDPC) which is owned 100% by A. The MDPC sposnsors a
DB plan. At age 50 A stops practicing medicine and goes to law school after
accruing a benefit in the MDPC SB plan equal to the 415(b) $ limit. At age
53 A leaves finishes law school and goes to work for Big Law Firm. At age
55 A leaves Big Law Firm and starts Individual A, Esq., P.C. (the law PC)
which is owned 100% by A. The law PC would like to adopt a DB plan.
Is the MDPC considered a related employer with the law PC such that the accrued
benefit under the MDPC plan must be considered in determining the maximum
benefit under the law PC plan?
This will be discussed from the podium.
14. Are payments under a QDRO “on behalf of” a restricted employee for purposes of the limitations on distributions under 1.401(a)(4)-5(b)(3).
Yes; you cannot get out of the restrictions by obtaining a QDRO.
15. Suppose a plan sponsor
on a calendar year basis is currently using a prototype profit sharing document
that has been amended a few years back to add a "cross tested" allocation,
turning it into an individually designed plan.
Suppose further that the sponsor would like to do the same thing with the
new GUST version of the prototype...ie., adopt the new version of the prototype
with a SIMULTANEOUS "cross-tested" amendment.
Question: what is the restatement deadline? 12/31/01? Or the later of 12/31/02
& 1 year from the prototype approval?
To be discussed from the podium.
16. My client, a law
firm that did a stock swap with larger law firm. The larger law firm wants
the plan terminated immediately. My client is putting pressure on me to get
it terminated right away.
My client is contributing 1/2 of what they did last year.
The attorneys have YTD wages in the $150,000 to $200,000 range through 7/31/01.
It is a new comparability plan in which the client designates the dollar amount
to go to each group.
If I have to pro rate wages and 415 limits I will get much different results.
The limitation year is defined as the calendar year. I think I can use the
total wages and 415 limit for the year, regardless of when the assets are
distributed.
Does the distribution of the plan's assets before the plan’s normal year-end
create a short plan year for purposes of 401(a)(17) and 415(c)?
The issue is: when is the termination date? The 401(a)(17) amount will be pro-rated. There is still a full limitation year so 415(c) is NOT prorated. The distribution of the assets is not relevant.
17. In 2001 employer
adopts defined benefit plan covering 5 of 10 employees. Profit sharing plan
is adopted covering the other 5 employees. Since no cross over of employee
between the plans, 404(a)(7) does not apply.
Client would like to add a 401(k) feature to the profit sharing plan for 2002
and allow all 10 employees to defer. DB participants would only be able to
defer – they would not receive PS contributions or matching contributions.
Are DB participants considered to be participating in DC plan such that 404(a)(7)
now applies? Or does new 404(n) override?
We believe that 404(a)(7) will still apply and make the DB participants considered as participating in a DC plan.
18. Since the profit
sharing deduction limit is being increased to 25% for 2002, for our clients
that have both a profit sharing and money purchase plan, we will most likely
be merging the plans for 2002. We intend the merger to be 12/31/2001, with
the merger notice specifically requiring the MPPP contribution, which will
become a receivable in the surviving PSP, and with adequate 204(h) notice.
If the merger date is 12/31/2001, can a contribution be made to the money
purchase plan for 2001 (the plan requires employment on the last day of the
plan year to receive an allocation), and to the profit sharing plan, to get
a 25% total deduction for 2001? Or does the merger date have to be 1/1/2002?
Specifically would the money purchase contribution still be considered being
made to a pension plan (and not a profit sharing plan) for 2001 such that
it is not part of the 15% PS limit?
This will be discussed from the podium.
19. There has been some talk about cash balance plans that provide a contribution credit of $100 for NHCEs. Specifically, it is my understanding that the Service is looking into whether the NHCEs are considered benefitting under 401(a)(26) in such a case. Is there anything to report with respect to this issue?
This is an issue under review and we’re trying to address it in the context of individual plans rather than a guidance project.
20. Plan has an overriding clause that reads as follows: "Notwithstanding anything contained in this Article to the contrary, the limitations, adjustments and other requirements prescribed in this Article shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder, the terms of which are specifically incorporated herein by reference."
Is this enough to cause the pop up for new 415(b) limits?
It can, but it might not. It will depend on all the other terms of the plan.
21. DB plan provides benefit of 3% of average annual compensation (AAC) times years of service. AAC is defined in the plan as highest 3 consecutive years of last 10 years of service. Employee goes part time and AAC goes down in such a manner that accrued benefit decreases. This does not seem to be prohibited under 411(d)(6) since an amendment did not cause the decrease. Is this correct?
No. This is prohibited under 411(b)(1)(g)
22. Two plans [Plan 1 and Plan 2] have eligibility requirements of the later of attainment of age 21 and completion of one year of service (i.e., traditional 21/1) and dual entry dates. The dual entry dates are defined for Plan 1 as “next following”, and for Plan 2, “coincident with or next following” attainment of participation requirements. Employee begins work 1/2/00.
Is the year of service completed on 1/1/01 such that under Plan 1 the participant would enter 7/1/01 and under Plan 2 he would enter 1/1/01. Or is year of service up on 1/2/00 such that in either case entry 7/1/01?
With a hire date of 1/2/00, under Plan 1, he would complete his one year on the following 1/1 and enter on the next entry date after 1/1, which would be 7/1/01. Under Plan 2, he would complete his year on 1/1/02 and enter 1/1/02 since that is coincident with the attaining of eligibility. Attention must be paid to the drafting of the plan language to accomplish what is desired.
23. Is the schedule Q optional yet for a 5310 filing? I had read that the IRS was, at one point, thinking of making it optional. I received an email back from a reviewer who said that I needed to send in a Schedule Q if I file a 5310 before 1/1/2002 and after that, it's optional.
The 5310 is supposed to be modified to include the Schedule Q questions by 1/1/2002. At that point, the Schedule Q will not be filed with a 5310. Schedule Q will be required until the new 5310 is available.
24. A cross-tested profit
sharing plan has a 401(k) feature. The profit sharing plan has a 3-month eligibility
with 1/1 and 10/1 entry, while the 401(k) feature has immediate eligibility.
The profit sharing contribution is based on full plan year compensation.
When testing the rate groups we're using compensation while a participant
for participants who entered the plan 10/1.
Some of the rate groups have a coverage ratio of less than 70% (but greater
than the midpoint) such that we need to perform an average benefits percentage
test. When aggregating the benefits in the testing group, 1.410(b)-5(e)(2)
says we can determine the benefit percentage separately for each plan and
then add together. For testing purposes, can we use 3-month compensation
for the profit sharing benefit and full plan year comp for the 401(k) benefit?
Does it matter that the profit sharing and the 401(k) are actually one plan,
or are the results different if they are in separate plans?
Only full year compensation can be used, regardless of whether there is one plan or two.
If it is reasonable to use this new scale, then it is acceptable. It is not prohibited.
26. An over-funded DB plan terminates. 100% of excess is transferred to qualified replacement plan. GCM 39744 seems to require that excess over 25% is taxable to employer to extent it would not be deductible under 404? True?
Yes; also, it would be subject to the normal deduction rules.
27. I have been asked to OK an amount for annual withdrawal from an IRA starting before age 59 1/2. To get the amount the client wants to receive, we would need to use an interest rate in excess of 7% and UP-84 mortality. What is a reasonable interest rate and mortality table? Also, is 175% of the mid term AFR a reasonable rate?
Any mortality table used for 401(a)(4) purposes or used for current estate tax purposes would be considered reasonable. Any interest rate up to 120% of the Federal Midterm rate at the time of the calculation would be considered reasonable.
28. Presume a business
maintains 1 plan that has a mix of 401(k) deferrals, matching contributions
& profit sharing contributions. If in 2002, the only contributions are
deferrals and a 4% (dollar for dollar) safe harbor match, would this plan
be considered top-heavy if key employee balances exceed 60% of plan assets?
i.e., does the presence of a profit sharing option preclude use of the new
rule deeming safe harbor plans not top heavy? What if in addition to the
above, previous forfeitures get reallocated? The thing that is throwing me
is the exact wording of EGTRRA: “The term top-heavy shall not include a plan
which consists SOLELY of a CODA which meets the requirements of 401(k)(12)
& matching contributions with respect to which the requirements of 401(m)(11)
are met.”
What exactly is meant by the word "SOLELY"? No other contributions
in that plan year? No other contributions permitted?
This is an issue that is not resolved. Look for guidance by the end of the year.
29. Assume a MP plan is merged into a PS plan on 12/31/2001. Assume that the MP plan allocates forfeitures from non-vested participants in the year when a distribution is made. Assume that there is at least one participant in the MP plan that will receive a distribution in 2002 and that there will then be a forfeiture in 2002 that must be allocated.
May that forfeiture be allocated to the participants in the resulting plan in 2002 as "profit sharing" monies? That is, once allocated may they be distributed along with other PS monies eligible for in-service distributions. Or, are the monies allocated from the MP forfeitures subject to the distribution restrictions of the MP accounts?
This would be treated as PS money.
30. I have heard that the national office has changed their position on rolling over a DB benefit within a DB plan to a 414(k) account (ie, they used to say that such a transaction would not remove the DB characteristic, but I've heard that they have changed their position and now say that such a transaction, if there is a distributable event, would remove the DB characteristic). Can you confirm this change?
This will be discussed from the podium.
31. Facts: A tax-exempt
organization under 501(c)(3) has a 401(k) plan. They decide to abandon the
401(k) plan and replace it with a 403(b) plan. Primary motivation is to eliminate
need to run the ADP test.
Question: Is the 403(b) plan a successor plan, within the meaning of 401(k)(10)
and the underlying regulations? If yes, then the employees in the
401(k) plan cannot receive distributions merely because of the termination
of that plan (at least not their 401k deferrals and any other contributions
subject to the 401(k) distribution restrictions). I would argue that the 403(b)
plan should not be treated as a successor plan. The intent of the regulations
appears to be that the successor plan must be a qualified defined contribution
plan. That's why they clarified that SEPs were not successor plans (and have
informally indicated that SIMPLE-IRA plans are not either).
The 403(b) plan is NOT a successor plan.
Alternative scenario:
Suppose the reverse situation. A tax-exempt organization abandons its 403(b)
plan and replaces it with a 401(k) plan. Since 403(b) does not include "plan
termination" as a distribution event, is there any way a participant
in the terminated 403(b) plan can take distribution and roll it over to the
new 401(k) plan unless he is at least 59-1/2?
No.
Third question: An employer
maintains a SIMPLE-IRA plan for 1999, 2000 and 2001. In 2002, he abandons
the SIMPLE-IRA plan and installs a 401(k) plan. One of the employees withdraws
his SIMPLE-IRA account and rolls it over to the 401(k) plan. Is this a related
rollover or an unrelated rollover for top heavy purposes? I would say it should
be treated as an unrelated rollover, even though the SIMPLE-IRA was maintained
by the same employer that maintains the 401(k) plan because SIMPLE-IRA plans
are exempt from the top heavy rules and a rollover into the qualified plan
should not have any impact on the top heavy ratio.
It is currently unclear, but it appears that it should be treated as an unrelated rollover.
Follow-up question: Suppose the employer maintained a SEP instead of a SIMPLE-IRA plan. Is a rollover of the SEP-IRA into the 401(k) plan a related rollover? Here I would say yes, because SEPs are subject to the top heavy rules. But there is a curious effect. When the SEP is in the IRA, only the contributions have to be taken into account in computing the top heavy ratio, and not the investment earnings. When the rollover comes in from the SEP-IRA, assuming we have to treat the rollover as a related rollover, do we count the full value or only the cumulative amount of contributions that had been made to the SEP?
We believe this would be a related rollover. The question of whether the full value or only the cumulative amount should be counted has not been dealt with.
32. Does a money purchase needs to be updated for GUST before it is merged into a profit sharing/401(k) plan?
No.
33. A defined benefit pension plan makes distributions without spousal consent if the amount is less than $5,000. The plan is amended and restated to comply with GUST. Under the GUST document, the de minimus cash rule is written as amounts under $3,500. Does the plan have a qualification problem? If yes, how is this corrected?
Yes, it is a problem. If still within the correction period, fix it. If not, go APRSC.
34. A 401(k) plan mistakenly
allows an employee to defer before he is actually eligible. Under APRSC the
plan refunds the ineligible deferrals plus earnings.
We don’t believe APRSC allows for a refund. We would suggest you amend the eligibility to make the contribution “good”. The next two parts of the question are moot.
Is the corrective distribution subject to the additional tax imposed by Code Section 72?
Is the corrective distribution counted as a distribution for purposes of determining whether the plan is Top Heavy?
35. A 401(k) plan mistakenly allows an employee to defer in excess of 25% of compensation. Under 415 regulations, the plan refunds the excess deferrals plus earnings. Is the corrective distribution subject to the additional tax imposed by Code Section 72.
It is not subject to tax; see Revenue Procedure 92-93.
36. Does the IRS have the discretion to receive GUST II Determination Letter applications not subject to a user fee (per EGTRRA) prior to January 1, 2002? If yes, can the 2001 Schedule Q to Form 5307 be utilized for the submission. If not, is the IRS geared to handle very few restatements in 2001 and receive truckloads on the first business day of ’02.
We have no such authority.
37. This is a four-part question concerning the extension of the remedial amendment period for plan restatements under IRS Announcement 2001-77 and assuming a calendar year plan.
i) If a Plan is currently an individually designed plan based on a volume submitter plan document that has been significantly modified to meet client needs, can the Plan sponsor certify by December 31, 2000 that it will adopt a practitioner’s Volume Submitter GUST II plan and then delay the actual restatement until the end of the extended remedial amendment period?
ii) If the answer to a) above is “yes”, assume that the GUST II Volume Submitter Plan needs to be significantly modified by a plan sponsor to meet its needs. If the modifications are sufficient to make the plan an individually designed plan, do these modifications “take back” the extended remedial amendment period and require that the plan be amended and submitted prior to December 31, 2001?
iii) Assume that the answer to a) is “yes”, can the sponsor then adopt an individually designed plan within the extended remedial amendment period or does the adoption of the individually designed plan cause the extended remedial amendment period to be abated for this Plan?
iv) What criteria will the IRS use to determine if a Volume Submitter plan is modified to such an extent that it becomes an individually designed plan? For example, will the use of a bank trust agreement to replace to the Volume Submitter trust agreement cause the plan to become individually designed?
To be discussed from the podium.
38. Question 10a on
the Form 5307 asks if any amendment reduces or eliminates any section 411(d)(6)
protected benefits.
If a 401(k) plan document was restated for GUST and in the process the annuity
optional forms which were in the prior plan document were eliminated, is the
answer to question 10a "Yes"? If yes, must an explanation be attached
stating reliance on final 411(d)(6) regulations? Or is the answer question
to 10a "No" in light of the final 411(d)(6) regulations?
If you are eliminating a benefit in a way that is allowed by the regulations, then you are not eliminating a protected benefit. The answer would be NO.
39. Will the IRS revise the certification to adopt a volume/prototype plan as outlined in Announcement 94-136 for the GUST restatements?
A sample was provided by the Service in a recent newsletter which is on the IRS website. http://www.irs.gov/prod/bus_info/ep/sum01.pdf (Page 8 of Newsletter)
40. Must the GUST restatement reiterate “corrective” amendments adopted under Treasury regulation §1.401(a)(4)-11(g)? If the answer is yes, then does the addition of these amendments remove the plan from being a “word for word” adoption of a volume/non-standardized prototype document and thus it should be submitted for a Determination Letter.
Generally, no, provided the language of your restated plan is appropriately drafted.
41. Section 902 of EGTRRA provides the increases in the IRC section 415 limitations revert back to the prior law with the first limitation year beginning in 2011. For a defined benefit plan’s 2002 valuation should the actuary assume the 2011 benefit be based upon the EGTRRA limitation or the prior law limits?
Will be answered by forthcoming guidance. (NOTE: Guidance was issued as RR 2001-51 in mid-October).
42. Section 659 of EGTRRA provides for significant excise taxes for the failure of an ERISA section 204(h) notice to comply with regulations that will be issued. What modifications to 204(h) notices that complied with prior law would be needed for notices in 2002? Is 15 days reasonable until regulations are issued?
Will be answered by forthcoming guidance.
43. Will Treasury require a plan amendment in order to recognize the new 2002 IRC section 415 limits before contributions or benefits may accrue in excess of the prior law limits?
If your plan language does not automatically recognize an increase in the limits, then an amendment will be necessary in order to recognize the new limits.
44. Section 613 of EGTRRA provides that safe harbor 401(k) matching contributions will now apply toward any required top heavy minimum contribution. May a 401(k) plan that would be considered top heavy without regard to this change provide the safe harbor matching contribution only to employees who are age 21 with one year of service? Would participants who meet the plan’s eligibility requirements but who do not have a year of service be required to receive any contribution?
This will be discussed from the podium.
45. If an individual over age 50 participates in two or more 401(k) plans sponsored by separate employers in 2002, may each plan allow the participant to make a $1,000 catch-up contribution? If “no”, is there any qualification risk to either of the plans? If so, which one?
Will be answered by forthcoming guidance. Note: Proposed Regulations under IRC §1.414(v)-1 were issued in late October. The regulations create aggregation rules, even though the statutory language did not clearly provide for such rules. (It is assumed technical corrections will be adopted to IRC §414(v) to conform to the position taken in the regulations.) Thus, an employee will not be able to exceed the annual catch-up limit (e.g., $1,000 in 2002) by participating in more than one elective deferral arrangement that is aggregated under a statutory rule (e.g., because of IRC §402(g), an individual's aggregate catch-up contributions to a 401(k) plan and a 403(b) plan during 2002 may not exceed $1,000).
46. The average benefits test for coverage testing consists of the nondiscriminatory classification test and the average benefits percentage test. To satisfy one part of the nondiscriminatory classification test, it is necessary to determine if the classifications are reasonable based on objective business criteria. Do participants employed at the end of the plan year constitute a “reasonable classification” under Treasury regulation 1.410(b)-4(b)?
Our opinion is that it is not a reasonable classification. This will be discussed further from the podium.
47. Employer A maintains a profit sharing plan covering 100 participants. In 1998 Employer A purchases 100% of the stock of Employer B. Employer B maintains a 401(k) profit sharing plan covering 10 employees. Assume both plans are calendar year plans and that each plan meets the requirements of Code section 410(b) without aggregation. In 2001, Employer A would like its employees to be covered under a 401(k) plan.
i) If Employer A converts its profit sharing plan into a 401(k) profit sharing plan, may that plan use the “first plan year” rule of Code section 401(k)(3)(E)?
We believe this would be OK.
ii) Would the answer be different if Employer A adopts a new 401(k) plan?
No.
iii) Would the answer be different if Employer A adopts Employer B’s 401(k) plan?
It would not be a new “K” plan, so there would not be a first year rule available.
iv) Would any of the above answers be different if Employer A's profit sharing plan had to be aggregated with Employer B's 401(k) plan to satisfy the coverage requirement prior to making any changes?
Yes - it would not be a new plan under (i) or (iii).
48. An employer maintains a safe harbor 401(k) plan in which the 3% safe harbor contribution is required under the terms of the plan. Can the employer decide to discontinue the safe harbor contribution for the current plan year by treating the safe harbor contribution as if it were a non-discretionary money purchase contribution for notice purposes? How much notice to participants is required? Is it 15 days (ERISA 204(h) notice)? Or can it be one day?
This will be discussed from the podium.
49. A calendar plan
year defined benefit pension plan is amended in July of 2001 to liberalize
eligibility effective January 1, 2000.
i) For purposes of the reduction of the 415-dollar limitation for participation
less than 10 years under IRC Section 415(b)(5), does a participant who enters
the plan in 2000 on account of this amendment receive a year of participation
for 2000?
The question suggests that the amendment can give a retroactive year of participation. It is difficult to see how someone who is not a participant in the plan can be made to participate by a plan amendment. Giving past service is permissible; it is not possible to amend a plan to start participation after the hear has closed. In certain limited cases, such as when using a -11g compliance amendment, this may be permissible.
ii) Does the answer change if the amendment was executed before March 15, 2001 to satisfy IRC Section 412(c)(8)?
No.
50. If a Defined Benefit plan offers an immediate lump sum to terminated participants, must the plan also offer an immediate annuity even though the plan does not have an early retirement age?
i) Are the immediate annuities based on the subsidized lump sum (using GATT rates) or are the immediate annuities based on the actuarial equivalent of the single life annuity payable at the plan’s normal retirement age?
ii) At a minimum, does the plan only have to offer the QJSA based on the subsidized lump sum and the rest of the annuities based on the single life annuity payable at the plan's normal retirement age?
iii) The most valuable benefit appears to be the immediate annuities based on the subsidized lump sum. When calculating the most valuable accrual rates for the general test, should the administrator be using the immediate annuities based on the subsidized lump sum instead of the immediate annuities based on the actuarial equivalent of the single life annuity payable at the plan's normal retirement age since the former would produce a greater benefit?
This will be discussed from the podium.
51. If you have immediate entry on the 401(k) feature of a Profit Sharing Plan and a one year and semi-annual entry on PS feature what is your 404 limit? Are there 2 404 limits?
There is only one 404 limit and all eligible participants’ compensations will be included.
52. If Employer pre-funds its crosstested profit sharing plan that allocates using defined groups, does the employer need to do a letter of instruction to the trustee for every deposit? If so, does the timing of the allocations need to be non-discriminatory as well?
When the money goes in the plan, the plan sponsor much designate to which group the dollars belong. In addition, timing of contribution (all money for HCEs goes in at beginning of year and NHCE money goes in after year is over) can be a benefits, rights, and features (BRF) issue.
53. Plan: Money purchase formula. 100% of pay up to 415 limit. Plan year begins 1/1/02. Non-owner. One employee. Salary $40,000. Required contribution $40,000. Minimum funding standard requires a contribution of $40,000 but new law (Section 616) language provides that a DC plan subject to 412 shall be treated in the same manner as a PS plan for purposes of modification of deduction limits, “except as provided by the Secretary”. Without regulations issued, that appears to mean that only 25% of $40,000 ($10,000) would be deductible and $30,000 would NOT be deductible.
Correct.
Will regulations be issued that will allow the full deduction?
This is not on our project list.
If not, is the extra $30,000 still required to be contributed under 412?
YES!
Is it subject to the excise tax for excess contributions?
YES!
Could the $30,000 be deductible as a business expense?
No.
54. EGTRRA 2001 amended the 15% SEP deduction limit to 25% (IRC Section 404(h)(1)(C)) effective for years beginning after December 31, 2001, but did not amend IRC Section 402(h)(2)(A) regarding limitations on employer contributions which mandates that contributions in excess of 15% would be taxable to the participants.. What is the SEP contribution limit for years beginning after December 31, 2001?
We expect that there will be a technical correction that will allow the 25% deduction. Until that occurs and barring any other guidance, the effectiv limitation is 15% unless you want your participants taxed on the contributions in excess of 15%.
55. Is the following statement correct? Under Announcement 2001-77, a collectively bargained plan may no longer use Form 5303 for a determination request, and through December 31, 2001, may use only either the old or the new version of IRS Form 5300 for a determination request.
Yes.
56. At plan termination, there is an illiquid asset to be distributed proportionately in-kind to plan participants. Can those with balances less than $5,000 be given cash instead?
If the plan so provides, yes. Plan can be amended to eliminate the right to an in-kind distribution for distributions under $5,000.
57. Regarding the filing of Schedule SSA. According to the instructions for the form 5500, an SSA should be filed to report participants with a "Deferred Vested" benefit. In my mind this refers to participants in a retirement plan whose benefits are not payable until either Early, Normal or Social Security Retirement Age, or some other "deferred date" as indicated by the plan document. Should a plan such as 401(k) profit sharing plan with a participant who has terminated with a vested balance, who is eligible for an immediate distribution, but chooses to wait be reported on a Schedule SSA?
Yes.
58. Is it permissible for a plan, that was originally written to cause employee salary deferrals to be treated pursuant to IRC Section 403(b) and employer match contributions to be treated pursuant to IRC Section 401(a), to be restated into a plan that is treated pursuant to IRC 403(b) for both types of contributions? If permissible, will such a plan change required some kind of merger treatment? If so, please describe the proper treatment. If permissible, will the plan experience Form 5500 filing problems in the future by moving from a full ERISA IRC 401(a) type 5500 filing to the limited 5500 filing requirements applicable to 403(b) plans?
Nothing in EGTRRA allows a 401(a) plan to be amended into a 403(b) plan. A 401(a) plan could be terminated and employees given the option to transfer to the 403(b) program. Note; the reverse of this (terminated the 403(b) and roll into the 401(a)) would not work because a 403(b) plan cannot be terminated.
59. The actuaries at our company are trying to determine the level of “confirmation” of contribution we should require from our clients. That is, should we require documentation of the contribution deposit into a bank or brokerage account, or is it enough to receive a letter or e-mail from the client just saying that he has made the contribution of $X on Y date? Is it enough to see a copy of the check without proof of deposit?
We are asking this question as a matter of “business practice” (which might suggest getting as much documentation as possible), rather that from the standpoint of what IRS requires the Enrolled Actuary to see as part of his certification on Schedule B.
The Service has no specific requirement in this area. If the contribution is actually late, IRS will impose the excise tax as appropriate. However, the Joint Board would likely be the place the actuary would have to explain his due diligence or lack thereof if the issue was pursued.
60. If a defined benefit plan terminated and the sole participant desires to roll over a lump sum, but a required minimum distribution must also be taken, how is the minimum distribution taken? From the terminated plan first? From the IRA rollover?
The RMD must be taken from the DB plan since it cannot be rolled over to the IRA.
61. Following EGTRRA, will funds rolled over from a regular IRA into a qualified plan be eligible for:
(i) a participant loan from the qualified plan
(ii) all other benefits, rights, and features of the qualified plan, including annuitization?
We believe it will be treated as regular qualified plan money. However, there is still a question regarding “deemed IRAs” and how they will be treated within a qualified plan (Section 408(q)). Note, deemed IRAs won’t apply until after December 31, 2002.
62. Does the extended remedial amendment period (to the last day of 2001) apply to the deadline as to when you can switch between current year and prior year ADP and ACP testing?
Yes.
63. After termination of a plan, if the distribution of assets does not take place within one year, what are the consequences?
See Revenue Ruling 89-87. If the distribution takes place beyond a “reasonable time”, the plan is NOT terminated and all the bad things that could happen in such a circumstance are possible.
64. Consider a plan sponsor who sponsors a DB plan in which the minimum funding exceeds 25% of pay. Under the new rules, this plan sponsor could provide a 401(k) plan to augment the DB plan. But, since the DB plan exceeds 25% of pay, the sponsor could not make either a safe harbor QNEC, or any match. Can the plan sponsor provide a minimum benefit in the DB plan equivalent to the 3% of pay safe harbor minimum in order to make the 401(k) plan a safe harbor plan? (Of course, that portion of the DB benefit would have to be 100% vested.)
No. There is no statutory provision for such a position.
As an alternative, is it possible to structure this as the “DC side” of a 414(k) plan?
No. Section 414(k) provides specific rules for which the DC side of a 414(k) plan is treated as a defined contribution plan and 401(k)(12) is not one of them.
65. Simplified Employee Pension Plans [Code Sections 402(h), 404(h), and 404(n)]
There are several elements of Code Sections 402(h), 404(h), and 404(n) regarding SEP arrangements that need to be considered.
(i). Whether percentage limit, currently 15 percent, is increased to 25 percent?
No; that will require a legislative change.
(ii). Whether the compensation cap under 401(a)(17) applies to Code Section 402(h); currently it does not?
It still does not apply.
(iii). Whether elective contributions (within appropriate limits) are deductible by the employer in addition to the percentage limit (but not in excess of the $40,000 aggregate limit under Code Section 415)?
No.
(iv). Whether elective contributions (within appropriate limits) are excludable from income (in addition to the percentage limit) - up to the $40,000 aggregate limit under Code Section 415?
No.
(v). Whether the reduction of the dollar limit ($40,000 for 2002) should continue to apply when the plan is integrated?
Yes