Q: A DB plan terminates with excess assets. The employer transfers the excess DB plan assets to a qualified replacement plan, which is a 401(k) plan.
Can the transferred assets be used to reduce future matching contributions? Can they be used to pay plan expenses?
A: No, and no.
Section 1.401(m)-1(a)(2)(iii) of the Regulations provides generally that employer contributions are not matching contributions if they are contributed before the cash or deferred election is made or before the employees' performance of services with respect to which the elective deferrals are made. So the transferred assets cannot be used to reduce future matching contributions.
Under IRC section 4980(d)(2)(C), the transferred amounts must either be "allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or...credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer." Therefore, these assets cannot be used to pay plan expenses.
Q: Plan uses a non-414(s) safe harbor definition of compensation. 414(s) test is performed resulting in an NHCE ratio of 88.1%. Participant has earned income of $300k. 401(a)(17) limit is $250k.
Is the 414(s) ratio (88.1% in the example above) applied to the total earned income: $300k x 88.1% = $264,300, which is then limited to $250,000 for plan purposes? Or is it applied to the 401(a)(17) limit: $250k x 88.1% = $220,250?
For reference, the 1.414(s) regulations don’t stipulate that the earned income should be limited; rather, the special rules indicate total earned income is considered. There is no reference to first limiting the earned income to the 401(a)(17) maximum:
(g) Special rules—
(1) Self-employed individuals—
(i) General rule. If an alternative definition of compensation under paragraph (c)(3), (d), (e), or (f) of this section is used to satisfy an applicable provision, an equivalent alternative compensation amount must be determined for any self-employed individual who is in the group of employees for whom paragraph (b) of this section requires a single definition of compensation to be used. This equivalent alternative compensation amount is determined by multiplying the self-employed individual's total earned income (as defined in section 401 (c)(2)) for the determination period by the percentage of total compensation (as defined in paragraph (d)(3)(ii) of this section) included under the alternative definition for the employer's nonhighly compensated common-law employees as a group (determined in a manner consistent with the rules in paragraph (d)(3)(iii) of this section and, if applicable, paragraph (d)(3)(vi) of this section). Thus, for purposes of this determination, highly compensated common-law employees must be disregarded. This equivalent alternative compensation amount will be treated as the self-employed individual's compensation under the alternative definition of compensation for the determination period.
A: It is applied to the 401(a)(17) limit.
§1.401(a)(17)-1 - Limitation on annual compensation
(c) Limit on compensation for nondiscrimination rules
(1) General rule.—
The annual compensation limit applies for purposes of applying the nondiscrimination rules under sections 401(a)(4), 401(a)(5), 401(l), 401(k)(3), 401(m)(2), 403(b)(12), 404(a)(2) and 410(b)(2). The annual compensation limit also applies in determining whether an alternative method of determining compensation impermissibly discriminates under section 414(s)(3). Thus, for example, the annual compensation limit applies when determining a self-employed individual's total earned income that is used to determine the equivalent alternative compensation amount under §1.414(s)-1(g)(1). This paragraph (c) provides rules for applying the annual compensation limit for these purposes. For purposes of this paragraph (c), compensation means the compensation used in applying the applicable nondiscrimination rule.
Q: Sole Proprietor established a SEP for herself for 2009. In 2012 Sole Proprietorship joined a partnership (and is therefore a partner, not a sole proprietorship).
Does she have to set up a SEP sponsored by the Partnership now in order to make contributions or can she continue to deposit funds to her current SEP?
If she needs a new SEP, can she rollover her old one to simplify her life?
A: If she wants to make contributions to a SEP, the SEP must be sponsored by the partnership. That means all eligible employees of the partnership (including the other partners) must receive SEP contributions. This is the case even if the partnership has no other employees.
She can roll over her current SEP balance into the new (partnership) SEP.
Q: Companies A, B, and C became a brother-sister controlled group as of 1/1/2012. Each company has employees and offers a different product/service to customers. Company A sponsors a 401(k) plan. Beginning 1/1/2014 (after the 410(b)(6)(c) transition period), in order for Company A to be treated as a QSLOB and test its plan accordingly under the rules applicable to QSLOBs, is it required that company B and C MUST be QSLOBs as well?
A: Yes. If an employer uses the QSLOB rules, all employees of the employer must be in a QSLOB. A controlled group is the employer, whether a parent-subsidiary or brother-sister.
Section 1.414(r)-1(b)(1) provides that "...once an employer has determined its qualified separate lines of business..., no portion of the employer may remain that is not included in a qualified separate line of business. In addition, once the employer has determined the employees of its qualified separate lines of business, every employee must be treated as an employee of a qualified separate line of business, and no employee may be treated as an employee of more than one qualified separate line of business”.
Q: Client/owner has a TEFRA 242(b) election in place under a DB plan. The DB plan is terminating in 2013 and client/owner will receive a full distribution.
Is a minimum (401(a)(9) distribution required for 2013, or can the full amount of the distribution be rolled over to an IRA?
A: Assuming the distribution is in accordance with the participant’s 242(b) election, the full amount of the distribution be rolled over to an IRA.
Section 1.401(a)(9)-8 of the Final Regulations provides guidance with respect to TEFRA section 242(b)(2) elections. Q&A-13 under section 1.401(a)(9)-8 provides that although the distribution requirements added by TEFRA were retroactively repealed by TRA of 1984, the transitional election rule in TEFRA section 242(b)(2) was preserved. Thus, a plan may make distributions in accordance with such an election without adversely affecting its Code section 401(a) qualified status.
Section 1.402(c)-2, Question and Answer 3, of the Income Tax Regulations provides, in relevant part, that except as specifically provided in Q&A-4(b) of this section, any amount distributed to an employee...from a qualified plan is an eligible rollover distribution. Q&A-4(b) does not contain an exclusion for distributions made in accordance with a valid section 242(b)(2) of TEFRA election.
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