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PDtax
PDtax, CPA firm owner
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Experience:  32 years tax experience, including four years at a Big 4 firm.
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This is forCustomer Can you help with the following? I think

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This is forCustomer

Can you help with the following? I think I know the answer to the first part, but I am unsure about the second part. I understand the plan administrator could amend the proposed change so that the plan qualifies, but I wonder why the professor selected 2006 as the year and I am wondering how long the plan administrator has to correct the problem and does the administrator have to go all of the way back to the effective date of the change to rectify the problem? If you see anything else, please advise. Thanks.

Due to a profitable year, a plan sponsor would like to enhance its qualified defined benefit plan for a select group of participants. The current NRB and AB formula provides 1% x FAE x years of participation/65/life only or J&S. The early retirement reduction factor is 3%. The sponsor would like to enhance the benefit annual accrual rate to 1.5% for a select group of participants only.

a. What additional numerical testing is required to be satisfied in order to maintain the plan’s qualified status. Briefly describe how the tests would be satisfied.

b. Assume the change is made in 2006 for a select group of participants and, as a result, the plan fails to satisfy the applicable discrimination tests for 2006. What recourse would the sponsor have in order to avoid disqualification?
Submitted: 1 year ago.
Category: Tax
Expert:  Rachel-Mod replied 1 year ago.
Hi, I am a moderator for this topic. I sent your requested professional,CustomerA message to follow up with you here, when they are back online. If I can help further, please let me know. Thank you for your continued patience.
Expert:  PDtax replied 1 year ago.
Welcome to the site. Thanks for asking for me.

I will work on your question, and get back to you later today.
Customer: replied 1 year ago.
Okay.
Expert:  PDtax replied 1 year ago.
Due to a profitable year, a plan sponsor would like to enhance its qualified defined benefit plan for a select group of participants. The current NRB and AB formula provides 1% x FAE x years of participation/65/life only or J&S. The early retirement reduction factor is 3%. The sponsor would like to enhance the benefit annual accrual rate to 1.5% for a select group of participants only.

a. What additional numerical testing is required to be satisfied in order to maintain the plan’s qualified status. Briefly describe how the tests would be satisfied.

The top heavy testing of IRC 416 and the qualification test of IRC 410(B) cover the amounts of contribution for key employees as compared to all eligible, and the tests for determining non-highly compensated employees (NHCE) to highly compensated (HCE). Those two tests provide the numerical testing to determine the plan's qualified status. http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf provides current guidance for 401(k) plans, and touches on both the Actual Deferral Percentage and Actual Contribution Percentage tests for NHCE participation.

b. Assume the change is made in 2006 for a select group of participants and, as a result, the plan fails to satisfy the applicable discrimination tests for 2006. What recourse would the sponsor have in order to avoid disqualification?

I googled this question to see if there was anything special for 2006, and found something fascinating. http://jmls.mrooms2.net/pluginfile.php/33807/mod_resource/content/0/Ch_8/Self-Assessment_Questions-_Chapter_8.pdf is a link to the question as a textbook self-evaluation question, and it appears the instructor may have made some notes on it before e-publication. Note the original year the question was posed for, and the instructor's note.

College texts do come with test banks and other exam support materials for use in the classroom. It is entirely possible this question went through re-submission and the test year for part a was changed, but part b was not.

Or, of course, your question about changes specific to 2006 would be relevant. Let's look at repair remedies, and see if anything is year-specific.

http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf was referred to earlier, and covers current repair techniques in great detail. Let's start with current law as applicable to your question, then citate the history and see what, if any, changes were 2006-appropriate.

Generally, plan administrators are allowed to repair problems in their plans themselves, if the problems were inadvertent. For example, if all that happened was an increase in benefits to HCE's so that the plan fails one of the tests for NHCE's, remedies can include making qualified contributions for the NHCE's. In this case, you have twelve months from the end of the plan year ends to make the voluntary repairs.

If you miss the twelve month window, more recent law (Revenue Procedure 2013-12) gives current repair procedures. Let's look back at 2006 law to see what would be the remedy, by looking at what was replaced by the newest Rev. Proc.:

Rev. Proc. 2008-50 is modified and superseded by Rev. Proc. 2013-12, so let's look at that one:

SECTION 15. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2006-27 modified and superseded. Rev. Proc. 2006-27 is modified
and superseded by this revenue procedure.
.02 Section 3 of Rev. Proc. 2007-49 modified and superseded. Section 3 of Rev.
Proc. 2007-49, 2007-30 I.R.B. 141, is modified and superseded by this revenue procedure.

So, On to Rev. Proc. 2006-27:

SECTION 15. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2003-44 modified and superseded. Rev. Proc. 2003-44 is modified and superseded by this revenue procedure.
SECTION 16. EFFECTIVE DATE
This revenue procedure is generally effective September 1, 2006. However, (1) sections 11.11, 11.14, and 14.04 are effective on or after May 30, 2006, and (2) plan sponsors are permitted, at their option, to apply the provisions of this revenue procedure on or after May 30, 2006.

So, the IRS compliance rules were transitioning in 2006, from the Rev. Proc. 2003-44 rules to the Rev. Proc. 2006-27 procedures. Let's look at the procedures under 2003-44 first:

http://www.irs.gov/pub/irs-drop/rp-03-44.pdf is the text for the Rev Proc.

Section 9 of that text provides that self-correction procedures will be allowed for two years after the end of the plan year that contains the error. "The last day of the
correction period for an Operational Failure is the last day of the second plan year
following the plan year for which the failure occurred."

The assumption I would make is that an error in 2006 would likely have a plan year ending December 31, 2006, so the provisions of the Rev. Proc may not apply. Let's look at the superseding document, Rev. Proc. 2006-27:

"SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements. The requirements of this section 9 are satisfied with respect
to an Operational Failure (even if significant) if the Operational Failure is corrected and
the correction is either completed or substantially completed (in accordance with section
9.04) by the last day of the correction period described in section 9.02.
.02 Correction period. (1) End of correction period. The last day of the
correction period for an Operational Failure is the last day of the second plan year
following the plan year for which the failure occurred. However, in the case of a failure
to satisfy the requirements of § 401(k)(3), 401(m)(2), or 401(m)(9), the correction period
does not end until the last day of the second plan year following the plan year that
includes the last day of the additional period for correction permitted under § 401(k)(8)
or 401(m)(6). If a 403(b) Plan does not have a plan year, the plan year is deemed to be
the calendar year for purposes of this subsection."

Expert again...So, the two year period by which an administrator could self-correct did not change in 2006. There are other, more onerous procedural change methods, but I think your question focused specifically on 2006.

Thanks again for asking for me, and thanks from Just Answer/PDtax.
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 2181
Experience: 32 years tax experience, including four years at a Big 4 firm.
PDtax and 3 other Tax Specialists are ready to help you
Customer: replied 1 year ago.
Thank you very, very much!!! You are so thorough!!! I wish I knew how to do the research. I guess that comes with more knowledge and experience.

By the way, the question is not from a previous edition of my text. The professor must be using another older text for his questions. Now, I understand why his questions seem off the wall with the dates.
Expert:  PDtax replied 1 year ago.
I appreciate the kind words and bonus. I learned tax research from my time at one of the "Big 4" firms (starts with an "E"), and they would accept nothing less than a defendable position. Everything had to be citated, which was getting the history of a case, or in this instance procedural requirements.Just wait until you drop the 2006 year end assumption bomb on his desk.
Customer: replied 1 year ago.
You are welcome. Perhaps, the professor will realize the error of his ways.
Expert:  PDtax replied 1 year ago.
Nothing I liked better when I was teaching than knowing my students were smart enough to figure things out...
Customer: replied 1 year ago.
Thanks for the compliment.

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