How do you (or plan sponsors that you work with) and interpret the 25 percent participant exclusion allowance under Code Section 402(h)?

Facts: An individual, and the only employee of X, has pre-plan compensation of $100,000 for 2003. The individual defers $14,000 ($2,000 of which is treated as a catch-up contribution). The plan is either (a) model SARSEP (see compensation definition below that excludes elective deferrals), or (b), a prototype SARSEP that defines compensation as including elective deferrals in the definition of compensation, but also contains the LRM required 25 percent allocation limit (see LRM language below)? Are the exclusion allowances under the model and prototye determined the same?--

(1) $24,000 -- .25 ($100,000 - $12,000) + $2,000

(2) $23,500 -- .25 ($100,000 - $12,000 - $2,000) + $2,000

If method "(2)" how is Section 414(v)(3)(A)(ii) resolved? That section provides for purposes of Code Section 402(h)--among other sections covered--that catch-up contributions are not "taken into account in applying such limitations to other contributions or benefits under such plan or any such plan." If catch-up reduces 402(h) compenation, it would appear that the individual gets $500 less overall. In a sense, the employer's maximum exludible contribution is lowered by considering the catch-up in the computation of the exclusion allowance.

From model SARSEP (3/2002, pg 3), it states:

Compensation does not include any employer SEP contributions, including elective deferrals. Compensation, for purposes of the $450* rule, is the same, except it includes deferrals made to this SEP and any amount not includible in gross income under section 125 or section 132(f)(4).

● The maximum an employee may elect to defer under this SEP for a year is the smaller of 25% of the employee’s compensation or the limitation under section 402(g), as explained below.

Note: The deferral limit is 25% of compensation (minus any employer SEP contributions, including elective deferrals). Compute this amount using the following formula: Compensation (before subtracting employer SEP contributions) X 20%.

● If you make nonelective contributions to this SEP for a calendar year, or maintain any other SEP to which contributions are made for that calendar year, then contributions to all such SEPs may not exceed the smaller of $40,000* or 25% of compensation for any employee.

● Catch-up elective deferral contributions ... are not subject to the 25% limit.

Aren't allocations required to be based on total compensation. Would allocations in excess of the T/H requiremet (assume 3 percent) have to be allocated any differntly then the first 3 percent?

From SEP PROTOTYPE LRM--(3/2002, page 5), it states:

In no event can the amount allocated to each participant's IRA exceed the lesser of 25% of the participant's compensation or $40,000, as adjusted under Code § 415(d). For purposes of the 25% limitation described in the preceding sentence, a participant's compensation does not include any elective deferral described in Code § 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code §§ 125, 132(f)(4) or 457.

From SEP Model document--(3/2002, page 1) it states:

Is a catch-up contribution described in Code Sectrion 402(g)(3)?

Contribution limits. You may make an annual contribution of up to 25% of the employee’s compensation or $40,000*, whichever is less. Compensation, for this purpose, does not include employer contributions to the SEP or the employee’s

compensation in excess of $200,000*. If you also maintain a salary reduction SEP,

contributions to the two SEPs together may not exceed the smaller of $40,000* or 25% of compensation for any employee.

What is the result if a model SEP and model SARSEP are adopted? Which document is followed?

Assume a prototype SEP included elective contributions in its definition of compensation and allocations are made comp-to-comp. How do you or plan sponsors you work with interprete the 25% allocation limit specified (see LRM language below) in the plan--25% of compensation excluding ALL elective amounts or just excluding normal elective contributions?

From SEP LRM--(3/2002, page 5)

In no event can the amount allocated to each participant's IRA exceed the lesser of 25% of the participant's compensation or $40,000, as adjusted under Code § 415(d). For purposes of the 25% limitation described in the preceding sentence, a participant's compensation does not include any elective deferral described in Code § 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code §§ 125, 132(f)(4) or 457.

IRC 414(v) lists 402(h) as a section to which the catch-up contribution would have no effect on a limit or taken into account, as follows:

(3) Treatment of contributions--In the case of any contribution to a plan under paragraph (1) --

(A) such contribution shall not, with respect to the year in which the contribution is made --

(i) be subject to any otherwise applicable limitation contained in sections 401(a)(30), 402(h), 403(b), 408, 415©, and 457(b)(2) (determined without regard to section 457(b)(3)), or

(ii) be taken into account in applying such limitations to other contributions or benefits under such plan or any other such plan, and

(B) except as provided in paragraph (4), such plan shall not be treated as failing to meet the requirements of section 401(a)(4), 401(k)(3), 401(k)(11), 403(b)(12), 408(k), 410(b), or 416 by reason of the making of (or the right to make) such contribution.

So, is a catch-up elective contribution an "elective deferral described in section 402(g)(3)"? If so, it would reduce the exclusion allowance under Code Section 402(h) which it is not supposed to do..

Participant took a $10,000 loan in June, 2003. There have been no repayments. I have two questions.

1. Is there any kind of a correction program the employer can go through to avoid a deemed distribution? (Probably not, but I thought I'd give it a shot)

2. At what time does it become a deemed distribution if we are using the calendar quarter "cure period".

Thanks.

I have a plan whose sponsor went bankrupt during the previous plan year (2002). They closed down completely with layoffs after 3 months into the plan year (2003). There were 140 participants on 1/1/2003 and about 15 participants at the end of the plan year (2003). They've always filed a Schedule H with an Auditors Report. Can anyone think of a reason why the don't need an auditor's report for 2003? Is there any way we can request a waiver, etc.

The Situation: XCo maintains a fully-insured health plan. Both XCo and its employees contribute towards the cost of coverage (XCo bears the larger share). For whatever reason (e.g., demutualization or premium refund), XCo receives a check back from the insurance company.

As far as the DOL is concerned, at least a portion of the "refund" XCo received consists of participant contributions. As such, the allocable portion of the refund attributable to participant contributions (say 20%) must be used to benefit the plan. This could be accomplished through premium holidays, issuance of rebate checks, or increased plan benefits.

The Question: Must the benefit (whatever it is) flow only to people who participated in the plan during the year to which the refund relates (e.g., the year in which the demutualization occurred or the year in which claims experience was less than premiums paid) or can it be used to benefit current and future plan participants?

Assume a model SARSEP is very top-heavy (see definition of compensation in model below). Does the "net" compensation definition contained in the model document require that elective deferrals are to excluded in computing the top-heavy contribution amount? If so, wouldn't that violate the 416(i)(1)(D)/414(q)(4) top-heavy rules? The model only adds back elective for purposes of the $450 minimum participation compensation requirement (but not for t/h purposes).

If the employer contributed 5 percent to a (top-heavy) model SEP would the first 3 percent have to be allocated any differently than the additional 2 percent?

The model SEP states that compensation doesn't include "employer contributions to the SEP..." However, unlike prototype language, it does not state that compensation "includes" elective deferrals "except where specifically stated otherwise" [sARSEP LRM #7 (3-2002)]

Note:From model SARSEP (pg 3):

Compensation does not include any employer SEP contributions, including elective deferrals. Compensation, for purposes of the $450* rule, is the same, except it includes deferrals made to this SEP and any amount not includible in gross income under section 125 or section 132(f)(4).

● The maximum an employee may elect to defer under this SEP for a year is the smaller of 25% of the employee’s compensation or the limitation under section 402(g), as explained below.

Note: The deferral limit is 25% of compensation (minus any employer SEP contributions, including elective deferrals). Compute this amount using the following formula: Compensation (before subtracting employer SEP contributions) X 20%.

● If you make nonelective contributions to this SEP for a calendar year, or maintain any other SEP to which contributions are made for that calendar year, then contributions to all such SEPs may not exceed the smaller of $40,000* or 25% of

compensation for any employee.

● Catch-up elective deferral contributions (see Section 402(g) Limit below) are not subject to the 25% limit.

From page 4 of model SARSEP--Top-Heavy Requirements

Elective deferrals may not be used to satisfy the minimum contribution requirement under section 416. In any year in which a key employee makes an elective deferral, this SEP is deemed top-heavy for purposes of section 416, and you are required to make a minimum top-heavy contribution under either this SEP or another SEP for each nonkey employee eligible to participate in this SEP.

A key employee under section 416(i)(1) is...

Also consider the changes in the SEP LRM language--

NEW SEP LRM (3-2002):

For purposes of the 25% limitation described in the preceding sentence, a participant's compensation does not include any elective deferral described in Code § 402(g)(3) or any amount that is contributed by the employer at the election of the employee and that is not includible in the gross income of the employee under Code §§ 125, 132(f)(4) or 457.

OLD SEP LRM (4-2000)

For purposes of the 15% limitation described in the preceding sentence, a participant's compensation does not include any amounts contributed by the employer pursuant to a salary reduction agreement and which is not includible in the gross income of the employee under Code §§ 125, 402(e)(3), 402(h)(1)(B) or 403(b).

IRC 414(v) lists 402(h) as a section to which the catch-up contribution would have no effect on a limit or taken into account, as follows:

(3) Treatment of contributions--In the case of any contribution to a plan under paragraph (1) --

(A) such contribution shall not, with respect to the year in which the contribution is made --

(i) be subject to any otherwise applicable limitation contained in sections 401(a)(30), 402(h), 403(b), 408, 415©, and 457(b)(2) (determined without regard to section 457(b)(3)), or

(ii) be taken into account in applying such limitations to other contributions or benefits under such plan or any other such plan, and

(B) except as provided in paragraph (4), such plan shall not be treated as failing to meet the requirements of section 401(a)(4), 401(k)(3), 401(k)(11), 403(b)(12), 408(k), 410(b), or 416 by reason of the making of (or the right to make) such contribution.

So, is a catch-up elective contribution an "elective deferral described in section 402(g)(3)"?

Generally, do participants get to vote the stock in their accounts?

Does it matter whether or not the stock is "employer stock"?

Does it matter whether or not the stock is publicly traded?

Thanks.

A client has failed to withhold 401(k) contributions for this payperiod. It is only Wednesday.. How should they proceed? Should they stop the current run and reissue the checks, potentially making the direct deposits late? I am not certain how this should be handled.

I am a post-doc which means that although I get a paycheck and have to pay taxes like the rest of the world, I don't get a W-2 at the end of the year. Instead, we get a Misc. Income from Government Grants form reporting our income. I am wondering whether I can still contribute to my roth with this type of income? If it makes a difference, we get a form called 1099-G at the end of the year instead of a W-2

Hi there this is my first time to this forum. My company has been talking to us about an ESOP. I've done research but I'm still not catching on as to how it works. The thing that perked my curiosity today was that it's time for my annual review. Each year I go to my boss (owner of the company, it's small aprox 50 employees) and I remind him we talk and I ask for something reasonable and he says okay. However, this year he told me that with the ESOP coming up that my salary will be going up considerbly but for now he'll talk it over with the other powers that be and see what they can come up with, b/c they are happy with my work. What I didn't think to ask him, is when will this take place? Does this mean I'm stuck at this salary until I retire?

So my question to anyone who takes the time to read this. How does and ESOP work and when do you get paid etc. I'm totally not grasping this. In the past I've dealt with MBS and with a company that was supposed to go public but didn't......The ESOP is something new and confusing for me. HELP!

Thank you

metmer

Nationwide Student transportation provider sent RFP to 4 insurance brokerage firms and is interested in responses from this forum.

We are a large employer of seasonal parttime drivers. Where required, we offer

health, dental, vision and life. Only about 1/3 of our drivers are enrolled.

We sent RFP to

Nieman Hanks. - Austin, Texas

Benefit Administrative Systems - Illinois

J. Wortham & Son, Houston, Texas

Marsh

Any information will be appreciated.

I have a self-employed individual who has about $75K in comp for 2003, and doesn't have a plan. Can he set up a plan now? I know he can't use the IRS Form, but can he set up an individually designed SEP plan?

This has no doubt been asked before (and I remember seeing it before) but I seem to be having trouble with the search engine since the server switched over.

Is it permissible for the plan to impose a limit on elective deferrals that is different for different classes of HCE's. For example, 15% for more-than-10% shareholders, 7% for other shareholders, and 3% for other HCE?

I need to file a 5558 extension for the 5500, for plan year ending 9/30/03. We have changed who the plan sponsor is since the last 5500, so I am not sure if the old or the new plan sponsor should file the extension.

Also, we changed the name of the plan. Which name should be on the extension form?

Thanks! Sorry if this is a simple question.

Question: An individual has his/her 403(b) account with Mutual Fund Co. "A" (the Custodian) and wishes to purchase past service credits using his/her 403(b) account. Mutual Fund Co. "A" is refusing to honor the request claiming EGTTRA allows for Custodial discretion as a matter of internal administrative policy.

Is this correct?

I received a draft DRO a few months ago that had the Plan Administrator "stipulating" to the terms of the QDRO. When I supplied the drafting attorney my suggested corrections I said that as the Plan Administrator we are unable to stipulate to items outside of our knowledge or control such as the date of the parties marriage and the agreement between the parties.

Long story short, the final DRO still had the stipulation language in it. I approved the DRO for qualification but refused to sign the order. My questions: Are QDROs often written to require stipulation of the Plan to the DRO? Was I too picky or was I misinterpreting the effect of stipulation?

Hi,

Can someone please confirm that when running a cross-test for a 401(k) profit sharing plan, if the rate groups do not pass on the ratio percentage test so that the ABT is used, are the 401(k) contribuitons included in the ABT?

Please help.

Thanks!!

I have two plans that need to be tested together for 410(b), but they have different plan years: one is calendar the other is Oct-Sep.

How do I go about that? Do I just test the portion of the plan year that over laps?

How would installment distributions work in an ESOP? When a person terminates and wants monthly distributions over 5 years, do you liquidate all the stock in the participant's account at termination, and distribute cash monthly, liquidate one year's worth of stock at the beginning of each year, etc? How does it work?

This Corporation was a Missouri Corporation, it established a 401(k) plan and now, a few years later, decided it wanted to Incorporate under the laws of Delaware. The employer has not changed employees, addresses, phone numbers, or anything else; only their taxpayer identification number. Can a simple amendment to the 401(k) plan adoption agreement, amending the Adopting Employers EIN handle this, or is it necessary to go to the extreme of terminating the plan, giving th employees distributions and letting them decide whether they want to roll into the plan of the new employer?