MWeddell

All employees who defer are included in the coverage test for the 401(m) portion of the plan without regard to whether they were still employed on the last day of the plan year. (I'll ignore what happens if you're doing snapshot testing.) One 401(m) test is run on all matching contributions (and any employee after-tax contributions.) You need to run a benefits, rights, or features test from Treas. Reg. 1.401(a)(4)-4 because those employees who stayed until the last day of the plan year have a higher match rate available to them than others.

Why should they be charged more? All new matching contributions are credited to a different contribution source with the 2/20 vesting schedule. Surely your recordkeeping system can handle more than one contribution source! For participant statement, the two match sources are reported together. This is not a big deal to me in my opinion.

http://www.benefitsattorney.com/links/Appl..._Federal_Rates/ There's another link. If you borrow the interest methodology from the DOL's VFC Program, note that it's a modified version of those interest rates that are used.

Unfortunately, the DOL doesn't have a self-correction program. The official fix is to follow the DOL's Voluntary Fiduciary Correction Program to deposit the deferrals late and investment gains. The IRS won't impose a prohibited transactions excise tax if you follow the DOL procedure.

They were unable to make any elective deferrals during the year regardless of what they might have elected. Hence, excluding them is correct. (Besides that, dividing by zero is undefined result, not 0.00%.)

Kirk, The proposed allocation method might satisfy a 401(a)(4) general test. I was merely asserting that it will not satisfy the 401(a)(4) safe harbor and will require general testing. Treas. Reg. 1.401(a)(4)-2(B)(2)(i) provides a safe harbor if each employee is allocated the same percentage of plan year compensation but doesn't provide a safe harbor if each employee is allocated the safe percentage of payroll period compensation. None of the stuff in Treas. Reg. 1.401(a)(4)-2(B)(4) says that we can ignore the payroll period allocation method. Let me know if that doesn't clarify it yet. -- Michael

Sounds right. Look at Code Section 404(a)(6) to support your position.

Also the in the proposed regulations released last fall under Code Section 414(v).

Was this question hard to ask with a straight face? No, that's not a permitted plan design. Problems are: (1) It violates Code Section 401(a)(17), and (2) When considering only compensaiton less than 401(a)(17), it gives a higher rate of match to some HCEs than is available to any NHCEs, which will cause the rate of match, which is a benefit, right, or feature, to be discriminatory in violation of Treas. Reg. 1.401(a)(4)-4.

The match allocated during the plan year is tentatively or provisionally allocated to the participant. Furthermore, regardless of whether the plan complies with ERISA 404©, all of the investment choices offered by the plan must be prudent under ERISA 404(a). The fact that the participant is choosing which investment fund(s) to use among several prudent options is not particularly troublesome to me. On the plan I worked on that implemented this idea, we remove associated gains or losses on the contributions as well if the participant ends up not satisfying the last day of the plan year requirement. I agree that this is an unusual plan design, not what I'd typically recommend or implement.

It depends on what the plan document says. For plans designed to satisfy the 401(k) and/or 401(m) safe harbors, the suspension period may be only 6 months, but for most 401(k) plans the suspension period for hardship withdrawals must be at least 6 months but the plan may impose more onerous conditions on the hardship withdrawal. If you're asking what do the hardship withdrawal regulations require assuming a plan uses the safe harbor hardship standards not the general test, then your answer is 1/15/2003 -- nothing in the regulations hints that one must wait until the next semi-annual entry date.

Having two different vesting schedules, one for match pre-2002 and another for match post-2001, doesn't strike me as a significant administrative burden. One must supply the recordkeeper with the data needed to compute vesting service. All recordkeepers have software that allow them to credit post-2001 match to a different contribution source with a different vesting schedule, so this complication doesn't impose greater administration on the employer assuming that an external recordkeeper is retained. It certainly does make the vesting more complicated to communicate to participants. Also, this decision would presumably have been made before the 2002 plan year begins.

I suggest you read Treas. Reg. 1.401(k)-1(d)(2) carefully and this is what you'll find: There are two halves to the hardship withdrawal regulation. First is the events test where your choices are (i) general test or (ii) safe harbor test or (iii) both. Second is the resources test where your choices are (i) general test, (ii) general test with employee's written representation, (iii) safe harbor test, (iv) both general test and safe harbor test, and (v) both general test with employee's written representation and safe harbor test. The suspension is in Treas. Reg. 1.401(k)-1(d)(2)(iv)(B)(4), part of the the safe harbor test of the resources test. EGTRRA and IRS guidance not yet incorporated in the regulations shortened the suspension period to 6 months and also eliminated Treas. Reg. 1.401(k)-1(d)(2)(iv)(B)(3). If you'd like to minimize employer discretion and the time it takes to administer hardships but yet still avoid the suspension requirement, I suggest you consider using the safe harbor test for the events test but use the general test with employee's written representation for the resources test.

An employer must have adopted a plan with a cash or deferred arrangement (i.e. a 401(k) plan) before the effective date of any employee election to defer cash into the plan. Treas. Reg. 1.401(k)-1(a)(3)(ii). As long as the cash or deferred arrangement has been adopted, then the amendment permitting catch-up contributions may be adopted by the end of the 2002 plan year even though the plan has accepted catch-up contributions earlier during that same plan year. In short, I agree.

It depends what's in your document (or more precisely what will be in your document when your good faith EGTRRA amendment is adopted by the end of the 2002 plan year). EGTRRA only required that the matching contribution vesting schedule apply to contributions made in the 2002 plan year or later, but many plans voluntarily will extend the more rapid vesting schedule to older match as well.

1. The right to direct investments is listed in Treas. Reg. 1.401(a)(4)-4(e)(3)(iii)(B) as an example of a benefit, right, or feature. The right to invest in a self-directed account instead of being restricted to the core funds selected by the plan sponsor very likely is a benefit, right, or feature. 2. Restricting the right to invest in the self-directed account to rollover accounts could be discriminatory if a significantly greater percentage of HCEs have rollover accounts than non-HCEs. Treas. Reg. 1.401(a)(4)-4(B)(2)(ii) lists various conditions that may be disregarded when testing the current availability of a BRF and no where does it authorize ignoring the fact that a plan extends a BRF only to one contribution source. 3. Almost certainly limiting the right to invest in the self-directed account to those who have $500,000 or greater account balances would be discriminatory because that group likely will contain a disproportionately high concentration of HCEs. If there are concerns as a fiduciary about offering self-directed brokerage accounts to participants, then one may refrain from offering them altogether, but the IRS regulations don't allow these concerns to affect the discrimination testing.

Katherine, Isn't the structure of Code Sections 401(a) and 401(k) something like "If you meet these requirements, your plan is qualified?" If something is left unstated, then it's allowed. If Congress or the IRS wanted to require that participants may suspend their cash or deferred elections at any time, sometime during the last 20 years they should have said so. Saying that a suspension at any time is required in an automatic enrollment context doesn't strike me as implying that a suspension is always required. Like I said earlier, proving a negative, that something is NOT prohibited, is difficult. Your response to my earlier argument is technically correct -- sure it could be a nonqualified cash or deferred arrangement -- but I have a hard time envisioning the IRS drafting that regulatory provision if it thought that a qualified cash or deferred arrangement had to permit participants to suspend contributions at any time. On the other hand, if you want to allow contribution changes and suspensions at any time, that's probably a more sensible plan design decision. I just don't think it's legally required.

There was a GAO study a few years ago that had some amazing statistics indicating that offering loans in a 401(k) plan had a very significant impact on participation and contribution rates, especially the latter. Hence, even if one assumes that all of the dollars actually loaned out provide no retirement savings (which obviously is wrong), that study's statistics said it was still a good idea to provide loans. With that in mind, actually loaning out money does undercut retirement savings. It's the perception that loans are available that you are aiming for, not the loans themselves. With that in mind, I generally suggest that loans be made only from employees' contributions and limited to 1 loan maximum per participant at any point in time.

While many plan documents will permit participants to suspend their contributions at any time even when they limit the frequency of other deferral election changes, this is not legally required. Proving that something is NOT prohibited isn't easy. If you look at Treas. Reg. 1.401(k)-1(a)(3)(iv), the circumstances for which one can have a one-time irrevocable election and still not be subject to 401(k) are limited. The negative inference from that provision is that one can have an election that is irrevocable for a year and it would still be a cash or deferred arrangement.

Some of my clients use 80% as the deferral limit. You want to use something quite high so that you don't have to worry about anybody actually contributing for a whole year (without hitting the 402(g) limit) and then wanting to make catch-up contributions.

I agree with Pax: search for prior threads on whether 401(k) contributions may be taken from severance pay. I know I've commented on this previously too.

If the plan sponsor has derived more than a de minimis economic benefit from the late deposit of elective deferrals, that in itself might make the plan subject to ERISA and therefore subject to the plan asset regulation's deadline. I've not seen it happen in practice, but it's at least a theoretical possibility.

Yes, a 403(B) plan may comply with the 401(m) safe harbor plan design to avoid 401(m) testing. See IRS Notice 98-52, Section VI©, which was not modified by Notice 2000-3.

The Form 5500 instructions make clear that no audit is required.

I'll throw in my two cents. In terms of trying to lessen the chances of fiduciary liability, if one has a plan that allows participants investment choice, complying with ERISA 404© somewhat lessens fiduciary liability. However, I don't think there's a clear consensus on whether a 404© type plan bears more or less fiduciary risk than a plan where assets are invested as directed by the employer or trustee.