MWeddell

The undercontribution will violate the terms of the plan document, and the IRS regards that as a qualification issue. Yes, it should be correctable under the SCP if all of the various conditions in the Rev. Proc. are met. I'm not sure about when the two-year period for self-correcting significant errors would start. A possibility you didn't mention is from the end of the 404(a)(6) grace period for making the contribution.

Include any employee eligible to recevie the match regardless of whether he or she actually made deferrals. Employees who don't satisfy the 1,000 hour condition are excluded from your 401(m) test. Employees who satisfy the 1,000 hour condition but didn't defer are included in your 401(m) test.

You also have to test separately the group of employees who are less than age 21 or haven't attained the one year of service (including any entry date assumption you make up to semi-annual entry dates). This group doesn't usually have an HCEs, so it is unlikely to be a problem.

There's a rule in the 401(k) regulations that prohibits distributing plan assets attributable to 401(k) elective contributions due to the termination of the plan if the same employees are eligible for another 401(k) plan sponsored by the same "employer." Check out Treas. Reg. 1.401(k)-1(d)(3) for more details.

No, neither the President nor the secretary of treasury has declared that suffering property damage due to hurricanes is a deemed hardship event. Obviously you could modify the plan to include the general hardship language or to add your own custom event but if you are only using the deemed hardship events then your participants are shucks out of luck.

No. You need to have the plan's definition of compensation used for the purpose of computing contributions satisfy 414(s) -- either by meeting a 414(s) safe harbor definition of compensation or performing a 414(s) test that passes. You can't somehow use 401(a)(4) or any other test. You'll need to modify the plan's definition of compensation so that it does satisfy 414(s) or else you will not satisfy the 401(k) / 401(m) safe harbors and instead will be subject to 401(k) and 401(m) testing.

Peter, what you've suggested is possible. Whether the 403(b) plan is non-ERISA depends on more than whether it accepts employer contributions of course.

This is not the most optimal way to enforce Code Section 401(a)(17)'s limit on compensation but I don't know that I would call them wrong. What seems bizarre to me is the inconsistency: letting participants continue to defer but not allowing them to earn the match. I've got some clients who use Fidelity (the recordkeeper with the largest U.S. market share) who do this and I just don't get it. Consider using the plan's claims appeal procedures to get past the gatekeeper and have the issue seriously considered by the plan administrator.

I've never been able to find an English translation of the Puerto Rico tax regulations. If you find one, let us know.

Yes. Note that there's an argument that the 403(b) must be subject to ERISA when you're computing a match based on the deferrals even if the match is made in a qualified plan instead of in the 403(b) arrangement.

If the 403(b) arrangement is subject to ERISA, then it is subject to the plan asset regulation regarding when deferrals must be deposited. Nothing in your post indicates that it is a church or government plan so that if employer contributions are made then yes the 403(b) arrangement will be subject to that regulation. Note that in an especially eggregious situation where deferrals are deposited very late, then the employer might be considered as obtaining an economic benefit from the deferrals and this might be used to show that it falls outside of the regulatory safe harbor for non-ERISA 403(b) arrangements. I've never seen the argument made in practice but it seems possible in an extreme case.

Either way is permissible as long as you are following the allocation formula in the plan document.

Yes, for the second time today I'm updating / correcting a stale post on Puerto Rico law. I had argued that Puerto Rico employees were excluded from coverage testing. Two other posters referred to secondary sources that disagreed with me. Plus the excellent article in the Summer 2003 edition of the Journal of Pension Planning & Compliance also disagreed with my previous position. I was wrong. Puerto Rican employees are not excluded. Code Section 7701(B)(1)(B) defines a nonresident alien as someone who is neither a citizen nor a resident of the United States. Code Section 7701(a)(9) provides "The term “United States” when used in a geographical sense includes only the States and the District of Columbia." Apparently, when we are talking about a "citizen ... of the United States," we are using the term "United States" in a political not a geographic sense. Hence, the restrictive definition of Code Section 7701(a)(9) doesn't apply and one should interpret "citizen ... of the United States" to include a citizen of Puerto Rico. Anyway, just in case someone else searches old threads and rediscovers this one, I wanted to revise my position.

This is an old thread, but since it contains an error, I thought that I'd correct it. Puerto Rico IRC 1165(e)(7)(A) limits an employee's pre-tax elective contributions to the lesser of 10% of the employee's compensation or $8,000 (not indexed for inflation). Catch-up contributions in excess of this limit are not permitted.

On the other hand, I'm not aware of any employer who has successfully defended that their 403(b) plan with a single provider is not subject to ERISA. It's an open issue. Obviously DOL Reg 2510.3-2(f)(3)(vii) does not expressly require that more than one provider be offered to participants in a non-ERISA 403(b) plan but in my opinion it'd be difficult based on the factors the regulation lists as relevant to justify hiring only one provider. If you are narrowing the field to just one provider, then you're acting like an employer and a fiduciary, you aren't merely facilitating an arrangement between the provider(s) and the employees where you are limiting providers because participants already have a reasonable choice and offering more creates an unnecessary administrative burden on the employer.

No, if you are running the average benefit percentage test for the qualified plan, you don't include the 403(b) elective deferrals.

mbozek -- I find it difficult (others including you may disagree) to have just one 403(b) provider given the language of DOL Reg 2510.3-2(f)(3)(vii). This is especially true if one considers that the worst situation is to have a plan sponsor treat an arrangement as not subject to ERISA but that later is determined to have been subject to ERISA.

I disagree with some of the points raised: 1) Whether the 403(b) plan is subject to ERISA or not is irrelevant when applying Code Section 415. In general, you'll have two 415 limits (one for any qualified plans, one for 403(b) plans) regardless of whether the 403(b) is subject to ERISA. Of course if all contributions are placed in the 403(b), then there's not any arithmetic advantage to having a separate 415 limit for qualified plans that isn't being used, but I thought we should clarify this a bit. 2) I wouldn't call a non-ERISA 403(b) plan an excellent arrangement except for a small employer who REALLY wants to have no role in administering retirement benefits. They often are quite expensive. To keep it non-ERISA most of us probably agree that it must have multiple providers much means one is setting up competition for assets at the participant, instead of at the plan sponsor, level. An employer is setting loose multiple insurance agents and then must be extremely passive about what it communicates about the various providers. The result is lower participation than necessary and (due to expenses) lower investment returns than necessary. Also, because the assets are held in non-ERISA contracts, the employer cannot very effectively take advantage of any economy of scale and start to use the plan assets to retain the best provider for the sake of all participants. The above doesn't always mean that ERISA 403(b) plans or 401(k) plans are better than non-ERISA 403(b) plans, but it's a perspective that hadn't been raised in this discussion.

That formula assumes that wages are limited to the 401(a)(17) compensation cap already.

Before 2002, having a vested schedule on employer contributions would create some odd results with the maximum exclusion allowance calculation. Those rules are gone now, but 403(b) providers historically don't have much experience administering vesting schedules on employer contributions. Sure, you can put a vesting schedule on the employer contributions, but really check with your provider(s) to make sure that they can handle it accurately.

JDuns, I hope you're doing well! I disagree with the portion I quoted above. Your 8/18, 12:22 PM post clarifies that you believe that the whole match must be tested based on a statement from the supplementary information for the final catch-up contribution regulation but that statement is not specific to plans designed to meet the 401(k) & 401(m) safe harbor plan design for which 401(m) testing on matching contributions is not required. I think you'll have better luck if you look at the supplementary information to the July 2003 proposed 401(k)/ 401(m) safe harbor. There's a paragraph or 2 in there specific on whether one may or must calculate a safe harbor match on catch-up contributions. If you come to the conclusion that you can match catch-up contributions while still avoiding the 401(m) test because of the plan's safe harbor plan design, then the administrative issues coupled with the fact that it is $0 additional cost will lead you to the conclusion that you might as well match all deferrals regardless of whether they are regular deferrals or catch-up contributions. -- Michael

My prior post was intended to list advantages of allowing employees to contribute to a deemed IRA feature versus not offering one at all (leaving employees to establish their own Roth IRAs for the few who bother to do so). Sorry if that was unclear.

Advantages of deemed IRAs: (1) protected from creditors as you've pointed out, (2) can be presented by the employer as part of the employee benefit package, not just as something extra that the employee arranges on his own, (3) might be presented as a useful solution to sheltering HCE deferrals that can't be accommodated due to ADP test or 402(g) limits for those below the Roth IRA compensation threshold, and 4) may have access to the same funds potentially as the 401(k) plan, thereby taking advantage of economies of scale from the participant's point of view (an advantage only if the employer's plan is large and hence has driven down the cost of investment management and account maintenance to less than what if available to individuals) and building up additional buying power through the accumulation of plan assets from the employer's point of view. Are they worth the bother? I doubt it. However, if there are major 401(k) recordkeepers prepared to offer these feature, I'm at least interested enough to investigate further now that there's a way to have problems with the deemed IRAs not disqualify the whole plan. So I'll repeat my question: Does anyone know of any major 401(k) recordkeepers who have the capability of administering a deemed IRA feature?

Under the final regulation, as long as the deemed IRA assets are in a separate trust or separate annuity, then a problem with the deemed IRA doesn't disqualify the whole plan. Hence, this is now a plan design I'd consider. The fact that there is no coverage testing and the regulation expressly states it isn't a BRF either on the deemed IRA feature also might make it attractive. I'd lean toward offering just the Roth IRA as a deemed IRA due to the higher compensation limits for eligible employees. Does anyone know of any major 401(k) recordkeepers who have the capability of administering a deemed IRA feature? There would be a ton of programming for a feature that is unlikely to become widely used. How about any that are planning on introducing this feature effective 1/1/2005? I can't get excited about the plan design possibilities without knowing that some providers can administer the darned things. Contributions to the Roth 401(k) accounts will count toward the 402(g) limit and the ADP test limits, so they quite different from a plan deisgn viewpoint even though the participant would view them as similar to a Roth deemed IRA account.

Whether the loan interest rate is reasonable is a DOL issue not an IRS issue. There are a fair number of surveys on the issue that will indicate that (i) prime + 1% is the most common interest rate, and (ii) prime +/- an increment is used by a large majority (2/3rds?) of retirement plans that offer loans to participants and that this has been true ever since the 1989 DOL loan regulations were final. Given those circumstances, if the DOL ever wanted to challenge the practice of using the prime rate, realistically they will have to issue less ambiguous guidance given that commercial lenders don't make loans fully secured by retirement plan accounts.