MWeddell

If the matching contributions to the 401(a) plan are based on what employees defer to the 403(B) plan, then this might be a role beyond what is authorized for employers in the regulatory safe harbor for non-ERISA 403(B) plans. If that's your case, I suggest you contact your ERISA attorney. The worst case is for you to treat the 403(B) as a non-ERISA plan and later have it determined that it was subject to ERISA.

I agree with the above. Let's add to the list of assumptions that this was not the first plan year in which the plan had a 401(k) arrangement and that the plan's ADP test is performed using the current year method.

The formula will vary depending on whether you calculate the match on a per payroll period basis (which is the most common), on a year-to-date basis, or some other basis.

It's not the 402(g) excess deferrals that are a problem in themselves; it's the match that's left behind in the plan. Suppose the plan matched 50% on the first 6% of pay deferred for a maximum match of 3%. Some of the participant's deferrals were refunded because there were in excess of a calendar year 402(g) limit so that only 5% of the participant's pay remains in the plan as deferrals. If the match isn't forfeited, then 3% of pay match is a 60% match rate, a higher match rate than NHCEs. This is a discriminatory feature per the regulation you just quoted.

Katherine - It's been clear since 401(k) regulations were finalized in 1994 that hanging match (or orphan match) creates a discriminatory rate of match that violates 1.401(a)(4)-4 unless the plan provides for it to be forfeited. If the regulations themselves aren't clear enough, read the prefatory discussion to the 1994 final 401(k) regulations. Kathy - What's your authority for always treating the first match dollars made during the plan year as the hanging match?

Brian, Thanks for correcting my typo several posts ago.

It doesn't matter whether your plan year is a calendar year or not. However, the reason for the refund is because the plan year has ended, you ran the ADP test which failed, and you are correcting the test by making refunds. In that case the refund is to HCE A, who according to your facts is not over age 50 and cannot reclassify any of the money as catch-up contributions to avoid a refund.

I agree with the above post. I was assuming that not all of the deferrals were made in the first half of the calendar year.

Your post seems to assume that this is an ADP test for a plan year that already has ended. In that case, HCE B gets the $1,400 refund and neither employee made catch-up contributions. Note that if the plan document authorizes it, one could have limited HCEs to a lowered max deferral percentage. This a plan limit not an ADP test limit, using the terminology from the proposed catch-up contributions regulations, and any contributions HCE A wanted to make over this amount could be made as catch-up contributions (subject to the dollar amount max).

Disco Stu is talking about having a discriminatory rate of match on an HCE when one considers only those deferrals remaining in the plan after corrective distributions. I'd call this a hanging match rather than match for free, but I think we're talking about the same thing. There's nothing in the 402(g) regulations that requires that the first deferrals be treated as the excess deferrals. Yes, feel free to treat deferrals in the second half of the calendar year as the excess deferrals.

I like the general resources test if the plan adminstrator is relying on the employee's representation unless it has actual knowledge to the contrary. If the hardship withdrawal form is prepared correctly, there's no extra administrative burden and still no mandatory 6-month suspension.

Yes, such plan designs exist. Your plan document may specify that the general resources test is used by paraphrasing Treas. Reg. 1.401(k)-1(d)(2)(iv)(B). If so, no suspension at all applies.

On page 19002, near the bottom of the second column on the pdf file listed in the above post.

Beginning in 2003 (or for plans that adopt the final regulations prior to that date), there's a different conclusion than what I stated above. See Treas. Reg. 1.401(a)(9)-5 (Q&A-9(B)(5)). If pass-through dividends are paid directly to the participant, they will not count toward the minimum required distribution that the participant must receive. This provision was not in the 1987 nor the 2001 proposed regulations. It appears to be new. Sorry my initial response was partly wrong.

It depends. Before 2002, this commonly was structured as a distribution of the cash dividends on employer securities and then a re-contributions. Since this really was a distribution, yes it would count toward one's MRD. Since EGTRRA became effective, it is no longer necessary to structure this as a distribution and recontribution -- the employer can still deduct the dividend without going through such a convoluted process. Hence, many employers restructured this as a nonevent -- just a failure to elect a possible distribution -- if the participant lets the dividends remain in the plan. For employers who have simplified their plan in this way, it's no longer a distribution and hence doesn't count toward the MRD.

The plan prior to the restatement very likely did not permit the employer to mandate distributions of after-tax contributions whenever it discontinued the after-tax contribution portion of the plan. Instead, the prior plan document gave participants forms of payment that are protected by Code Section 411(d)(6). The employer cannot remove distribution rights previously given to the participants without jeopardizing the qualified status of the plan.

Assets that are mapped most likely lose any ERISA 404© protection because any use of a default fund prevents one from getting ERISA 404© protection. Losing 404© protection isn't necessarily that serious, but I thought I'd mention it. Like the previous poster, I don't recall any DOL guidance specific to mapping to similar funds in a defined contribution plan.

This proving a negative stuff is becoming a recurring theme lately. Internal Revenue Code section 401(a) only states the minimum requirements for a qualified plan. If it's silent regarding an issue, that means you can do it and it won't make your plan cease to be qualified. If someone thinks there's a requirement -- e.g. the plan must offer hardship withdrawals -- then the burden is on the person making the assertion to prove that it's so.

Maybe someone else can defend this. I've also seen where the insurance company does charge a loan fee but all interest on the loan is paid to the insurance company (no matter how large the loan is). That raises additional concerns.

Also take a look at the March 1999 Enrolled Actuaries Meeting gray book, Q&A 30, for some unofficial IRS guidance on this issue.

The regulations require that the ADP test pass before elective deferrals may be shifted from the ADP test to the ACP test. It's unclear whether one can use corrective refunds or any other correction method to first get the ADP test to pass and then proceed with shifting. I think this is the point you're summarizing from the ERISA Outline Book. Yes, that's still the current state of things. Whether you are moving percentage points or dollars doesn't matter if the eligible population is the same for both the ADP and the ACP tests. Any shifting is only for testing purposes. I've used "shifting" or "optimization" as two terms for the same thing. The regulations don't have a separate mechanism. The reason why one might want to shift all nonhighly compensated employee deferrals above 2.00% and all highly compensated employee deferrals above 4.00% is to maximize the multiple use limit. That's not an issue for plan years beginning in 2002 or later (assuming one timely adopts an EGTRRA good faith amendment).

Regardless of whether the general test or safe harbor is used for the resources half of the hardship withdrawal criteria, one must take all available nontaxable loans from the plan. If the plan fiduciaries know that she doesn't intend to repay the loan, then the DOL loan regulations say her loan request should be quickly denied and then she can take the hardship. However, most 401(k) plans (or at least most that I work with) require that loans be repaid from payroll withholding and that the participant give an irrevocable consent to have her pay withheld. It that's the case, the loan wouldn't be denied because she would be likely to repay it.

In case you looking for more votes, I agree: the excise tax is based on the earnings due to the late deposit, not the amount of the late deposit.

Yes. One side note: if a participant becomes eligible for the profit-sharing contribution halfway through the plan year and the plan document specifies that only compensation from that point going forward is used for allocating the profit-sharing contribution, make sure your client can track the compensation earned during this time period. I've seen that plan design put into place without any advance thought about tracking the data in that manner.

If your document has the rely on the participant's representation language, then this is part of the general resources test. You don't have examine bank statements, inquire into the participant's assets, etc. to see if he/she has another way to pay the for the financial hardship. However, if you look at how the hardship regulations are structured, the participant's representation has nothing to do with establishing (i) that the need qualifies for a hardship withdrawal and (ii) the amount of the need (grossed up for taxes). I'd still urge a best practice of collecting documentation to establish those items.