MWeddell

I think this is just a matter of interpreting the plan document, so it's hard for us to offer an opinion from afar. Certainly, the document says something about what is being matched. For example, if the document says that matching contributions are allocated based on "elective deferrals" then you'll have interpret whether "elective deferrals" is defined in a way that includes or excludes catch-up contributions.

Thanks, Tom. I'll try it out.

It's definitely investment earnings. Typically dividends in employer stock are reinvested in employer stock, but I have seen plan documents that invest those dividends elsewhere (such as a money market fund).

It's not clear from the proposed regulations, but my reading is no, this would not be allowed under the proposed regulations. The IRS is aiming for the end of June but (i) it hasn't communicated anything that even sounds like a firm commitment yet and (ii) the IRS' record of issuing the proposed or the final 403(b) regulations shows that they miss their deadlines a lot. I don't mean to bash the IRS because they are better at meeting their goals elsewhere. Seems to me that 403(b) regulations only affect a few industries and it's easy for this project to get bumped down their priority list. The IRS is more clear in saying that the effective date should be January 1, 2007 (originally it was going to be January 1, 2006), so final regulations as late as September 30 wouldn't be too big of a surprise.

This is kind of a picky, technical question about an example in the comparability regulations. Under the comparability regulations, one can test a DC plan with a gradual age schedule using a minimum allocation rate on a benefits basis if the schedule satisfies one of two conditions. The second condition is Treas. Reg. 1.401(a)(4)-8(b)(1)(iv)(D)(2). There could be an employee in each age band with an allocation rate greater than the minimum allocation rate who has an equivalent accrual rate that is less than or equal to the equivalent accrual rate that would apply to an employee whose age is the highest age in the band receiving the minimum allocation rate. (I'm paraphrasing a bit.) This provision is illustrated by an example in Treas. Reg. 1.401(a)(4)-8(b)(1)(viii)(Example 4)(vi). It states that the steepness condition is not satisfied because the equivalent accrual rate for an age 39 employee (the oldest employee receiving the minimum allocation) is 2.81% but that the lowest equivalent accrual rate for the oldest employee in the next band is 3.74%. Since 3.74% is not <= 2.81%, the steepness condition fails. I think I understand the provision and the example, but I can't figure out how the IRS came up with exactly those figures (to make sure I completely understand the example). Has anyone figured out the standard interest rate and standard mortality table used to compute the 2.81% and 3.74% equivalent accrual rates in this example? I already checked The ERISA Outline Book and it didn't address this detail.

Regulations are in proposed form only, so the content and effective date of the final 403(b) regulations is not known. In other words, regard my answer as tentative because it's subject to change. Right not it appears that you probably can exchange your AXA Equitable contract for a Fidelity contract only if the Fidelity contract is within the plan of your current employer. If your employer doesn't include Fidelity as a permissible 403(b) vendor, then you're not going to be able to transfer assets to Fidelity after 12/31/2006, when the regulations are expected to become final. There are some conditions that apply, so even the limited transfer capability that I'm describing isn't a sure thing.

The dividend is regarded as investment earnings, not a contribution. The fact that it is not an ESOP means that the dividends on employer stock may not be passed through to participants under Code Section 404(k) and hence that these distributions generally would violate the 401(k) distribution restrictions because there hasn't been a distributable event.

The Tax Reform Act of 1986 added Code Section 401(k)(2)(B)(i)(VI), which is now IRC 401(k)(2)(B)(i)(IV). There was a hardship withdrawal distribution event before TRA'86, but it now said "in the case of contributions ... upon hardship of the employee," which implied that investment earnings weren't distributable upon hardship. The provision was effective for plan years beginning after 12/31/1988, with a later effective date for certain collectively-bargained plans. In August 1988, the IRS issued final and proposed 401(k) regulations, which included that post 12/31/1988 investment earnings were not distributable upon financial hardship. Sometime later (1991 I believe), the 12/31/1988 date was modified for non calendar year plans.

If the plan is subject to ERISA, it should already have a plan document, although I can understand delaying any updates to it until final 403(b) regulations are out.

Yes, an ERISA 403(b) plan may satisfy the ERISA 404(c ) rules.

Is the 403(b) plan subject to ERISA? If the answer is no, then why not? (For example, is it because it's a church plan or is it because it only accepts employees' deferrals.) The answer to your question depends on those answers.

I would urge a little caution here. Due to the exclusive benefit rule, any payment from the trust back to the plan sponsor is likely to be questioned. This doesn't sound like a mistake of fact situation, so I'm not sure what the justification is for refunding the money back to the employer. I'd urge the employer to contact legal counsel.

I say "it depends" but the IRS might say "yes." If the plan document says relatively little about the 401(k) & 401(m) tests other than the plan must comply and specify if the current year method is elected or the top 20% group HCE rule is elected, then there shouldn't be a problem. The fact that IRS regulations specifically require that the latter two items be in the plan imples that the 21 & 1 rule doesn't have to be in the plan. (This matches Tom Poje's answer I believe.) On the other hand, if the plan goes into more detail about the test and doesn't mention treating the < 21 or < 1 group any differently, than in order to administer the plan in accordance with the document, you may not be able to take advantage of that rule. However, I'm aware of one IRS field representative who recently told one of our clients that the 21 & 1 rule always must be in the plan document before it could be utilized. I don't think it's right, but thought you should know that at least some IRS folks are asserting that position.

12 months from now, it might be a purchase. Right now it's a lease with an option to purchase. I vote 'no' as well.

The PBGC has some rules about counting months, but I am not aware of any IRS guidance on that topic.

The deadline for making ADP test corrective distributions without incurring the 10% excise tax is 2½ months. Treas. Reg. 1.401(k)-2(b)(5)(i) and 54.4975-1(c ).

I have helped a client do what you propose. Client had a calendar plan year, then switched to a 4/1 - 3/31 plan year with safe harbor provisions. You can then have a short plan year for 4/1/07 - 12/31/07, switching back to the calendar plan year, if the client will commit to maintaining the safe harbor plan design through 12/31/08. You'll need an SMM for the change in plan year, but presumably that'll be needed for other purposes any way. Data needs to be gathered on the 4/1 to 3/31 basis. There'll be an extra Form 5500 to file and the expense of an extra audit (if the plan has > 100 participants) due to the shifting plan year. If the 1000 hours method of vesting service is used and if you have any employer contributions that aren't fully vested, there'll be some ramifications there.

Here's a more complete response to this question (I just fielded a nearly identical question internally within my firm): I have heard some argue that this is may be a discriminatory benefit, right, or feature because it may fail to satisfy the effective availability requirement of Treas. Reg. 1.401(a)(4)-4©. I don't think that argument holds water, but you should at least be aware the fact that others' opinion differs from mine. First, of all, each match rate is a separate BRF subject to testing, so the BRF issue of whether the 100% match on deferrals between 5% and 6% of pay is theoretically the same regardless of whether the match is backloaded in your example or something simpler like a 100% match on deferrals up to the first 6% of pay. Either all matches on up to 6% of pay are discriminatory BRFs or none of them are. To me, this tends to show that none of the matches are discriminatory BRFs. Second, the argument that the match is not effectively available to NHCEs because they can't as easily afford to defer 6% of pay falls well short of the three examples in Treas. Reg. 1.401(a)(4)-4©. Examples 1 and 3 involve BRFs where it was impossible for NHCEs to get the BRF in question, not just economically more difficult for them to do so. Example 2 involves a BRF available for only 2 weeks that wasn't publicized to NHCEs. None of the examples hint that the effective availability requirement could stretch this far. If there's a discrimination problem with the match formula, it's one that the 401(m) test is designed to handle. It's a problem with how the match is likely to be used, not an availability issue.

No. The SPD should disclose the possibility of the discretionary match, but the amount does not need to be determined in advance.

The 411(d)(6) regulations indicate that employer discretion is not allowed for hardship distributions. That's the source behind the IRS audit guidelines. mreynolds, in your situation I believe that the plan document is fine as drafted and does not have to be amended.

I think this is legal. Tom Poje is right that it still must pass the subjective effective availability rule, but it's hard for me to see circumstances in which one couldn't defend the effective availability. Might still be something you want to warn your client about. One could interpret the safe harbor rule as creating a negative inference that for non-safe harbor matches one can have match rates that increase as an eligible employee defers greater percentages of pay.

I agree. It sounds like he was more than 0% vested when he quit, he didn't experience 5 consecutive one-year breaks in service, so his pre-break vesting percentage, which was 100%, still applies. His vested percentage can't have been lowered.

Code Section 401(a)(4) was substantially revised by the Tax Reform Act of 1986. Proposed regulations were first issued in May of 1990. My recollection is that it was during a ALI-ABA videoconference in 1991 that Jim Holland of the IRS demonstrated the power of cross-testing that was in the proposed regulations, and that event really opened up practitioners' eyes to the possibilities of cross-tested plans. So I'd date their popularity from 1991.

In that case, my posts apply to your situation. The hardship withdrawal portion of the 401(k) regulations won't change his mind at all because they apply to only elective contributions.

Two issues here: 1) Is this a benefit right or feature available to only some participants that is subject to 1.401(a)(4)-4 testing? 2) If so, does the test pass? I believe the answers are yes and yes. There probably are previous threads discussing the first issue and I'll admit that it's unclear. On the second issue, through a series of cross-references, the BRF test is the same as the nondiscriminatory classification test. You compute a ratio percentage but the passing threshold isn't 70.00% but a lower figure between 20% and 50%. If all of the controlled group's employees are eligible for the plan, then your ratio percentage of those who have access to self-direction is 65% >= 50%, which passes. Of course, you'd need to test every three years at least.