Leaderboard

Since both plans will have the same plan sponsor, each plan will have to consider in its coverage testing non-excludable employees (particularly employees who meet the eligibility and participation requirements for a benefit, but who are excluded based on classification). It doesn't make any difference from a testing standpoint whether there is one plan or two. It may make a difference if the one plan approach would require an audit, but each of the two plans will not. It also may make a difference if the employer does not want to communicate to all employees all of the benefit provisions that it want to provide to the different classifications of employees. Keep in mind that coverage testing using the ratio test is done by type of contribution (elective deferrals, match, and non-elective employer contributions), and coverage testing using the average benefits tests is done based on benefits (assuming the plan passes a reasonable classification test or nondiscriminatory classification test). These additional testing steps can complicate the best of intentions. Keep in mind the complexity of administration and of testing in any design. If the plan sponsor must be able to administer the plan or plans, or they could pay a steep price to correct operational errors. One of the most error prone situations is when employees change classifications during a plan year. This leads to some benefit accruals under each plan and the plan needs to have tight definitions for plan compensation and for eligibility service, vesting service and benefit accrual/allocation conditions.

Whatever would become required or permitted about coverage and nondiscrimination measures: Could the employer’s goal be met by providing one plan with as many benefit structures as are need for all the allocation differences?

A recent reply to an old thread got me curious, what do you use AI/LLM ("AI") for in your practice, if any? Are you allowed to use it all? Do you use it internally or externally (with clients)? I have had this discussion in smaller settings, and I recognize that use of AI varies greatly. I'll start us off with some easy examples from my practice: - We do not use AI for anything with PII data, even if the workspace is locked down (not used to inform the AI outside of our workspace) - We do not use it for legal or compliance questions. I have seen many benefits adjacent professionals do this and the answers can be frightening. "ChatGPT said we are not an Affiliated Service Group" is a scary sentence... - We use it to review and revise communications. Don't like how your email sounds? feed it to an AI to make it easier to read, understand, etc. - We use it as a tool to help with formulas and macros for excel. - I am playing with it as an internal Q&A tool. By creating your own GPT, you can have the AI prompt you with questions (instead of asking it questions) and limit the source material it looks at to the specific documents you provide.

I think making a 401(k) Plan that over laps the 12 month successor plan rule is problematic. I think having 2 plans the 401(k) for the short plan year and PSP for the full year are fine, then merge the 401(k) Plan into the PSP would work. I have no legal support for this, just a conservative approach that I think might work so asking ERISA counsel might be prudent.

The Treasury department’s interpretive rule does not specify how to determine when a plan “exists”. I imagine many of us might often suggest interpretations that not only follow reading the statute’s and the interpretive rule’s texts but also follow an assumed purpose of not allowing the employer’s new plan’s participants to make elective deferrals until 12 months after the last of the final distributions from the terminated plan. 26 C.F.R. § 1.401(k)-1(d)(4)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i). But if a decision-maker or adviser is considering possible interpretations and evaluating risks about when the next retirement plan “exists”, consider this: The consequence from an “alternative defined-contribution plan” that “exists” too soon falls on the terminated plan. It’s the terminated plan that will have provided a distribution without waiting for severance-from-employment, age 59½, or some other distribution-allowing condition because the plan’s administrator believed that the distribution was a § 401(k)(10) termination distribution. So, it’s the terminated plan that would have had a provision that resulted in ostensible elective deferrals that might not have tax-qualified as a § 401(k) cash-or-deferred arrangement (and further might have tax-disqualified the terminated plan). This is not advice to anyone.

Correct - he only is required to get gateway if he benefits under 401(a) portion(s) of the plan(s) (non-elective - CB & PS). Since he gets no CB or PS under the terms of those plans then he does not benefit, so no gateway.

Seems okay to me.

FWIW...I'm not sure there is an answer that can be specifically supported by a line in the regulations. IMHO, it would be overly aggressive to give your blessing to this approach. In the absence of a favorable opinion from counsel, I'd say don't do it.

Great questions. The regulations use the words "in existence". If you adopt a plan now that is not effective until 4/1, is it in existence now? I wouldn't think so but who knows? If you adopt after 4/1 but have effective 1/1 (for PS anyway), is it in existence at 1/1? Maybe yes, maybe no, but it's treated as there for tax and other purposes. Other constructs often refer to the later of the adoption date or effective date but I don't know if I'd hang my hat on that. The safest bet is making it all effective 4/1. I'd spell out the options, lack of regulation clarity and the associated risks and benefits of each option and then let the client decide.