MWeddell

Okay, let's clarify the original question. In the sentence that Kirk just quoted, does "employer money" refer to employee pre-tax elective contributions (technically employer contributions under the Code) or does the question refer to other types of employer contributions? Up until this post, I've been assuming that we were talking about other types of employer contributions. If the attorney said one must comply with the 2-year or 5-year withdrawal rules for hardship withdrawals and age 59-1/2 withdrawals of elective contributions, that's really ignorant.

Four01kman, The regulations that provide under what conditions a plan may pay a hardship distribution on 401(k) elective contributions are not relevant regarding under what conditions a plan may distribute other types of employer contributions.

They are in proposed form only. They have not been finalized. http://a257.g.akamaitech.net/7/257/2422/06...df/04-25237.pdf

You're asking me (although it's not really you, but the attorney) to prove a negative, and I can't do that. I produced a Revenue Ruling that says one can withdraw employer contributions to a profit-sharing plan upon the occurence of a hardship with no mention of the 2-year or 5-year withdrawal rules. The reason the Revenue Ruling doesn't mention the 2-year or 5-year rules is because they don't apply. If your attorney thinks they do apply, they he ought to obligated to come up with a cite showing they do apply. Here's another attempt. Treas. Reg. 1.401-1(b)(1)(ii)(2nd sentence) says that profit-sharing plan assets may be distributed "after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment." The 2-year and 5-year rules interpret what it means to allow distribution "after a fixed number of years" but due to the use of the word "or" don't affect distributions upon financial hardship, with is an "occurrence of some event." I agree with the others about obtaining a new attorney, if that's within your power. It's not that bad to me that he came up with the wrong answer. It's that he refuses to reconsider his opinion and research it more carefully even when you show him reputable secondary sources showing he's wrong.

Rev. Ruling 71-224 might convince him.

Thanks, Tom, for the reply and for helping me work through this issue. In my sample plan design, no HCE receives a more favorable match formula than any NHCE. In part, this is because the last day of the plan year condition doesn't apply to the safe harbor matching contribution allocated to NHCEs. I think we've reached a consensus.

No ACP testing is required if a plan satisfies the ACP safe harbor provisions except that one must still perform an ACP test on any employee after-tax contributions. Treas. Reg. 1.401(m)-1(b)(1)(ii) and 1.401(m)-3(j)(6). For simplicity's sake, let's suppose we are dealing with a plan with no employee after-tax contributions. As I read through the provisions of Treas. Reg. 1.401(m)-3, no where does it state that one fails to satify the ACP safe harbor provisions if there is an eligibility condition on the discretionary match. It's just not in there. There is a requirement (see 1.401(m)-3(d)(4) and also 1.401(k)-3(c )(4)) that matching contributions divided by elective deferrals for any HCE cannot be greater than the matching contrbiutions divided by elective deferrals for an NHCE deferring the same percentage of compensation, but that's not an obstacle here because it applies to "matching contributions" not to "other matching contributions." There is no ACP testing required. If someone disagrees, please provide a citation to what provision in the ACP safe harbor provisions this plan design would fail to satisfy. The plan design I'm tallking about would allocate a basic safe harbor matching contribution to NHCEs and a discretionary match of no more than 4% of pay to HCEs, such as up to 80% of the first 5% of compensation or up to 66-2/3% of the first 6% of compensation. The discretionary contribution to HCEs could be allocated only to those HCEs employed on the last day of the plan year if desired.

The IRS believes that one cannot have a suspense account unless it is authorized by law. However, I don't know of any basis for that belief in the regulations except when there is a plan merger or spin-off.

This is a generic version of an email that Dave Baker sent me when I couldn't log in. I don't know whether it works for everyone or not. 1. Please go to this page: http://benefitslink.com/boards/index.php 2. Scroll to the bottom of the page and click on "Delete cookies set by this board", which appears just before the "Board Statistics" box. 3. Then scroll back up to the top of the page and click on "Log In" (next to "Welcome Guest"). 4. Enter your user name 5. Enter your password 6. Click "Log me in"

Any citations? What language are you relying on? I'd love to know what I'm missing here.

Darrensoup, As noted in the threads above yours, when one considers the safe harbor match for NHCEs and the discretionary match for HCEs, then as long as the discretionary match doesn't get too high then at no rate of safe harbor compensation deferred to the plan would a HCE receive a higher ratio of match to elective deferrals than would be true for an NHCE. Perhaps your argument instead is that one cannot consider both types of match, the qualified matching contributions used to satisfy the safe harbor rules and the discretionary match, together when applying that rule. However, I believe I've already cited the authorities that apply the rule to just "matching contributions" which certainly would seem to include both types of match.

Mine is working fine, but the difference might be caused by the fact that I had to delete my cookies before I was able to log in on the new bulletin boards.

I've considered the above post but I disagree with it. I was indeed assuming that the basic matching formula for the safe harbor contribution was being used for the NHCEs. Suppose 4% of pay is deferred. An NHCE would receive a match of 3.5% of pay. An HCE under the 66-2/3% of the 6% of pay formula would receive 2-2/3% of pay or an HCE under the 80% of the first 5% of pay formula would receive 3.2% of pay. Both of these rates are less than or equal to the 3.5% rate that the NHCE receives. Now it is true that if one considers just the elective deferrals between 3% and 4% of compensation that the NHCE is receiving a lower match rate, but I don't read either Treas. Reg. 1.401(k)-3(c )(4) or 1.401(m)-3(d)(4) as regulating that comparison. One assumes that there's an NHCE contributing the same percentage of safe harbor compensation as the HCE and then compares the ratio of matching contributions to employee deferrals for the HCE to the same ratio for the NHCE. The regulations don't restrict what the marginal rate of match is (other than it can't increase because that would violate Treas. Reg. 1.4o1(m)-3(d)(2).

I believe the IRS still includes approval that BRFs are nondiscriminatory if one fills out the approrpriate demos and asks for this level of approval in the determination letter application. Paraphrasing this a bit more precisely, Notice 98-52, Section VIII.D says that the safe harbor contributions can't be used as QMACs and QNECs to satisfy other discrimination tests for the year. This doesn't contradict what I'm contending, that all matching contributions are not subject to the 401(m) test. One would actually be able to allocate as a discretionary contribution to HCEs up to 66-2/3% of the first 6% of pay deferred or up to 80% of the first 5% of pay deferred. Thanks for your agreement.

I must not have expressed my view very well. What I meant was please suppose that the plan is drafted so that the various conditions I listed were met. In particular, suppose the plan is drafted so that the discretionary match given to HCEs can never be more than 100% on the first 3% of compensation deferred and 50% of the next 2% of compensation deferred. If a plan were properly designed and drafted to meet that condition and the others listed in my prior post, I believe that one can allocate the discretionary match only to HCEs and the plan can still meet the 401(k) and 401(m) safe harbors.

Tom, I guess I'm starting to make a habit of disagreeing with you. Why do you think that this does not satisfy the ACP test safe harbor if NHCEs are given a safe harbor match and HCEs are given a discretionary match? The HCE discretionary match can never be more favorable than the match given to NHCEs, cannot be greater than 4% of compensation, cannot have an increasing match rate as an eligible HCEs' deferrals increase, and cannot be made on deferrals or contributions exceeding the first 6% of compensation. The fact that the HCE match is discretionary and the NHCE match are qualified matching contributions meeting the safe harbor requirements doesn't matter. Look at Treas. Reg. 1.401(m)-3(d)(4) (which is similar to Notice 98-52, Section VI.B.3(iii)). The phrase "matching contribution" sure seems to refer to all matching contributions, not just discretionary matching contributions. (See Notice 98-52, Section V.B.3. Ex. 5(a)(last clause) for an example where "matching contributions" quite clearly includes qualified matching contributions meeting the safe harbor requirement, not just the discretionary matching contributions.) In short, this plan design in my opinion potentially can meet the ACP test safe harbor. -- Michael

Realize that There is still no ERISA 404© protection for money originally placed in company stock as a default. Plan fiduciaries can still be sued claiming that the stock isn't a prudent investment. You might need to adjust what portion of the plan is designated to be an ESOP. One can argue that matching contributions as a whole are no longer designed to be primarily invested in employer stock. Lots of companies have done what you suggested but it's not at all clear that this action actually addresses any of the potential liability of having an employer stock fund in one's 401(k) plan.

Depending on the facts, I think selecting the fund with the higher revenue sharing could be considered prudent. Of course there's a lot more involved than just looking at expense ratios when selecting a fund. Also, if the other funds in the plan are priced to include revenue sharing, it may seem like an anomaly to have funds in only a couple of isolated asset classes that don't have revenue sharing.

Q&A8 for what conference? Recognizing that they do not constitute official guidance, are the Q&A's you are referring to available on the web or in written form?

Tom Poje, I got lost reading your answer. Do you think the plan design in rcline46's post satisfies the 401(k) and 401(m) safe harbor rules? Also, why would Notice 98-52 be relevant at all if we're talking about 2006 when the final 401(k) / 401(m) regulations definitely are effective?

Tom -- then perhaps we'll have to just agree to disagree. Looking at the 401(k) regulations regarding safe harbor matching, when the IRS wants to refer just to qualified matching contributions, it does so. When it writes "matching contributions" as in the regulation I'm relying on, it seems clear me that it includes all matching contributions including any discretionary match that one wants to try to add on. Blue -- Now that I understand that you're using the 3% nonelective method of satisfying the safe harbor, then those facts are different from what I had assumed before, so my conclusions don't apply to your situation.

Nothing more definite than the regulation I cited. I'm unaware of any written IRS guidance interpreting it more specifically. I would think a client would more readily agree to switching to current year testing than to not allocate any match during the first year that the match is funded to highly compensated employees.

By having a discretionary match allocated only to those employed on the last day of the plan year (and assuming there is at least 1 HCE who is employed on the last day of the plan year and 1 NHCE eligible to make 401(k) contributions at same point in the plan year but who wasn't employed on the last day of the plan year), then the 401(k) and the 401(m) portions of the plan both fail to satisfy the safe harbor rules and both ADP and ACP testing is required. The regulation I've cited twice now is in the 401(k) regulations, not the 401(m) regulations. This is different from the situation you mentioned where one matches deferrals in excess of 6% of compensation. In that case, one was violated the rules for the 401(m) safe harbor not still satisfied the 401(k) safe harbor rules. That's a different situation that what we've been discussing in this thread. Hopefully that clarifies my position.

I agree that it's safer to not include provisions for matching contributions in the plan until they are actually funded so that one can still use the deemed 3% rule for the prior year NHCE ACP the first plan year the match is funded. However, is it definitely wrong? First, let's assume that the plan doesn't permit employee after-tax contributions and that the plan is not a successor plan. Furthermore, assume the plan provides for using the prior year testing method for ACP testing. Suppose the plan has provisions for the match but only if the employer determines to make a matching contribution for the year. The issue is when is "the first plan year in which the plan provides for ... matching contributions" as that phrase is used in Treas. Reg. 1.401(m)-2(c )(2)(ii). There are no examples in the regulations illustrating this regulation. Might it be reasonable to interpret this situation as the plan itself provides for matching contributions only if the employer decides to fund them? I think that's a reasonable interpretation. This certainly is an aggressive position (probably any time one contradicts Tripodi's ERISA Outline Book it has to be considered aggressive), but one that still strikes me as a reasonable interpretation.

Well, Tom Poje is usually a reliable source and I've been wrong on these boards before, but I'll have to disagree. Treas. Reg. 1.401(k)-3(c )(4) prohibits a plan that uses the matching contributions method from allocating a higher rate of matching contributions to an HCE than the rate allocated to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation. The prohibition applies to all matching contributions, not just to the qualified matching contributions used to satisfy the safe harbor rules. My answer to blue's question is that if you have a discretionary match that requires employment on the last day of the plan year to receive that allocation, your plan no longer meets the safe harbor requirements (unless one is using the 3% of pay nonelective contribution method).