MWeddell

IRS officials adamantly say that one can't test ESOP contributions on a benefits basis for average benefit percentage testing. Question 27 from the 1997 Enrolled Actuaries meeting gray book plus conversations with the IRS is my source for this. Nonetheless, I believe a reasonable interpretation of the regulations is that it is permitted, although I'd advise the client that this is an aggressive position and to confer with legal counsel.

There's little regulation of this. While many plans might use the 401(k) hardship rules, that's not required. Investment gains may be withdrawn and no suspension of future contributions is required. If you'd like cites, see Treas. Reg. 1.401-1(B)(1)(ii) and Rev. Ruling 71-224.

Looking just at Reg. 1.401(a)(4)-4 and ignoring IRS officials' unofficial comments, I believe that this is a benefit, right, or feature that requires testing. The fact that the restriction might be imposed by a provider doesn't prevent it from being a BRF in my opinion. I believe we've addressed this issue before in prior threads. You may try a search.

MGB, correct, one can have 404© protection regarding some but not all transaactions for a plan. Pjkoehler, look at the section titled "Absence of Affirmative Instruction" in the prefatory discussion with the DOL finalized the 404© regulations. I've got an old hard copy from the 10/13/1992 Federal Register, so I don't know where this is on the Web. It's clearly a DOL interpretation that 404© protection doesn't apply to a default fund when a participant has not made an affirmative investment election.

Here's the latest American Benefits Council update: http://www.americanbenefitscouncil.org/doc...pdate042602.pdf

Let me try to summarize because this issue just doesn't seem that hard to me. If a default investment is used for participants who fail to make their own investment choices, then ERISA 404© is not available for that transaction. The best course of action is to re-examine the enrollment process to eliminate or minimize the possibility of contributions being made for someone who has not made an investment election. Second choice is to choose the default fund and let the participant clearly know what the fund is and the procedure for the participant to change the election. I lean strongly toward picking something in the middle of the risk / return spectrum, i.e. a balanced or asset allocation or lifestyle fund, although it's common for employers to pick the low-risk low-return option like a money market. While there's no 404© defense, most believe that this process complies with 404(a)'s fiduciary duties.

Also, under the old law the 402(g) limit would have risen from $10,500 to $11,000, so the extra $500 shouldn't be subject to state income tax in nonconforming states.

ERISA Sections 404(a)(2) and 407 are full of references to an "eligible individual account plan." In other words, those are special rules that apply just to DC plans. See ERISA Section 407(d)(3)(B) for the cite requiring that the plan explicitly provide for the employer stock fund.

The limit is 10% unless the document authorizes an employer stock fund. See ERISA Sections 404(a)(2) and 407.

Going back to the original post (yes, I know it's kind of old) ... Be aware that the legislation that the House passed recently imposes a new diversification right after contributions have been in the plan for three years. The ESOP exception only applies if it's a stand alone ESOP not part of a 401(k) and 401(m) plan. In other words, merging a stand-alone ESOP funded with employer nonmatching contributions into a 401(k) plan might turn out to be a bad idea from the employer's perspective if this bill becomes law.

None that I'm aware of. For plans intended to satisfy the ERISA 404© rules, there's a requirement that the company stock trades be able to settle promptly. (I'm paraphrasing from memory, so look it up if this is relevant.) That may indirectly require that there be a cash component if the stock is thinly traded so that trades may not always settle promptly.

We're now disagreeing on something that's irrelevant to Christine Roberts, but rcline46's post is contrary to my reading of Q&A 1 of IRS Notice 2000-3. One can give the notice less than 30 days before the plan year begins and argue that the amount of advance notice was still reasonable, but I read the IRS to still require that some kind of safe harbor notice be given before the plan year begins, even for the nonelective safe harbor. At the least, those interested in following rcline46's suggestion should review Q&A 1 of Notice 2000-3.

Thanks, R. Butler, for making my point, which is not intended to disagree with Firestone if the plan truly is ambiguous. If one looks at the plan provision regarding matching contribution allocation, it might not expressly state whether the allocation is made on the basis of a year or a month or a pay period, etc. However, by tracking through the plan's definitions of what are Basic Deferrals or what is Compensation, sometimes the annual concept sneaks in anyway. The larger point I was trying to make is that this is a matter of interpreting the plan document, not what the Code or ERISA or regulations demand, so it's hard for us to answer the question.

It's all a matter of interpreting the plan document, which means it's a hard question to answer by message board postings. I don't disagree with the other posters, but often if the plan is silent on the issue, the document may be worded in a way that implies that the match is calculated annually, which may require a true-up.

How about keeping the same plan, but just changing the plan year? For instance, amend the plan year to start June 1 with the safe harbor formula. Distribute your safe harbor notices during the latter half of April. ADP testing is required for the short plan year (5 months if it has been a calendar year plan) and it'll accelerate when the Form 5500, annual audit, etc. are due. You'll permanently have a plan year that begins at an odd time, but that would have been true under the more complicated method you'd proposed. Seems possible to me if the employer really wants to convert to a safe harbor plan immediately.

Actually, it's more work for the employer to exclude the employee. The safe harbor 401(k) plan rules can be avoided only if the employee is not eligible to make any elective deferrals. Hence, a plan amendment may be required, unless the plan already provides for irrevocable permanent waivers of participation. The employee may be excluded from participation by name if the plan passes the ratio percentage test. Reasonable classifications are required only if the plan relies on the average benefit test to satisfy the 410(B) coverage test.

Thanks, KJohnson. It wasn't my boss that threw out the gray book Q&As, but everything else in your post is helpful. It at least lets us know the IRS' informal position, but there's not much to back up their informal position.

Yes, I want to switch to the current year testing method -- sorry for the typo. I know that in the abstract it's not a problem to switch from the prior year testing method to the current year testing method. My question is can the amendment to the plan be done at this point in time, April 2002 for an amendment effective for the 2001 plan year.

According to an American Benefits Council call last week, only one state (Indiana maybe, I don't recall for sure) has passed legislation removing itself from the list. Otherwise, the March list continues to be up to date.

Employer sponsors a 401(k) plan with a calendar year plan year and individually designed plan document. Hence, the GUST remedial amendment period ended 2/28 and the 2001 plan year ended 12/31/2001. The plan document provides for 2001 and future plan years that the prior year testing method is used for ADP testing. We'd like for the employer to amend the document now (April 2002) to change for 2001 and future plan years to the calendar year testing method. Is this permitted? They have been several threads on this question in the past, the most useful of which is http://benefitslink.com/boards/index.php?showtopic=13800 in my opinion, but now that the GUST remedial amendment period has ended, it becomes a tougher issue to resolve.

If the 410(B) plan were a 401(a) plan, then the 403(B) deferrals would be contributions to a 401(a) plan other than employee after-tax contributions. I believe the most reasonable interpretation is that 403(B) elective deferrals are included in the average benefit percentage test for 403(B) deferrals. mbozek is apparently not alone in disagreeing with my viewpoint. Q&A 4:19 from the 403(B) Answer Book (Panel Publishing) states "The salary reduction portion of a 401(k) plan is included, but it is not clear whether the salary reduction portion of a 403(B) plan is likewise included. [Treas Reg § 1.410(B)-5(d)]"

Yes, the matching contribution portion (and also any employee after-tax contributions) is subject to coverage testing. If you're running the average benefit percentage test for the 403(B) plan, then yes elective deferrals to the 403(B) must be included in the ABP test. Code Section 403(B)(12) and IRS Notice 89-23 are the relevant authorities for these questions.

I'm inclined to agree with ndt123's post above, that you may choose to break the data into two separate records or to place the employee's entire year's worth of data based on his/her union or nonunion status on the last day of the plan year. Good catch.

I agree that as long as the 3% contribution is provided and the ADP / ACP tests pass, then you've done all you can to correct the situation. I misread your earlier question -- I thought you were asking what the penalty was for not providing the 3% employer contribution. I must have read it too quickly.

The penalty isn't just that the plan isn't safe harbor. If the contribution is not made, it sounds like the client is not following the plan document. That's an ERISA violation (no specific penalty is prescribed) and the IRS views it as a disqualification issue (loss of tax advantages).