MWeddell

ndt123, I guess we'll just have to agree to disagree since we're both making conjectures about what the data might look like when 2002 or 2003 ADP tests are run. Also, we're not even disagreeing about what is likely but rather disagreeing just how unlikely it is that raising the contribution percentage to 80% for everyone will hurt a plan's ADP test. Note that while you are throwing out a possible scenario if only 1 or 2 HCEs change, you are also assuming that (1) those 1 or 2 HCEs change all the way up to 80% and (2) there are exactly 0 out of 6,000 NHCEs who raise their contribution rates despite the fact that a much higher proportion of NHCEs are eligible to contribute at the higher percentages due to the 402(g) limit. Just to clarify, while I called the risk "highly unlikely" I don't believe I said that I wouldn't even mention the risk as part of discussing the issue with clients.

Dmj1998 -- If we're talking about a plan with after-tax contributions, then raising the maximum contribution percentage to 80% instead of 20% for all employees certainly will hurt the ACP test. I agree with that. ndt123 -- I understand how it could happen and flukey things can handle with small companies. But for a medium or large employer, the percentage of NHCEs who contribute > 20% on a pre-tax basis is likely to be larger than the percentage of HCEs who contribute > 20% on a pre-tax basis due to the $11,000 dollar limit. Your situation -- an HCE terminates early in the plan year and foreseeing this increased his/her contribution rate up really high -- just doesn't strike me as that likely.

Deborah, No, I've never heard of that. Without a plan amendment, it doesn't sound valid and even with a plan amendment, it strikes me as questionable if the original beneficiary designation form didn't reserve to the employer or plan administrator the right to revoke the beneficiary designations. It is fairly common to resolicit beneficiary designations for all participants, such as if a plan switched recordkeepers and the new recordkeeper tracks beneficiaries so that the employer no longer has to do this internally. However, I don't recall anyone saying that the prior forms are voided even when the participant fails to submit a new one. Michael

It strikes me as very unlikely that raising the maximum contribution percentage from 20% to 80% would hurt the ADP test because the vast majority of the time HCEs will find the $11,000 402(g) limit more restrictive than the plan's maximum contribution percentage. Even if relatively few NHCEs increase their contributions over 20%, this will still help the ADP test.

I believe that a change in the method of measuring vesting service is treated the same as a change in the vesting schedule itself: - No participant's vested percentage may decrease, and - A participant with 3 or more years of vesting service must be given the opportunity to stay on the old vesting schedule.

Nearly none of these m&a situations are clear under current IRS guidance, but my most guess agrees with your guess, that one considers compensation of both Company A and Company B in determining the controlled group. There are no new employers here because it was a stock acquisition. It's like there were two controlled groups that each consisted of a single company that have now been combined into one controlled group. Code Section 414(a) and regulations thereunder will make you recognize service from Company B and a consistent approach is that you recognize the compensation history too.

I've recommended and had clients adopt an 80% limit, so I disagree with the poster that said 70% is too high. One wants to raise the percentage so high that one doesn't ever expect an employee to contribute at the maximum percentage for the whole year and still not have hit the 402(g) limit first. That way one only has to worry about catch-up contribution eligibility based on the 402(g) limit or when the recordkeeper runs the ADP test.

I was talking about the second sentence in lbach's first posting. If one is excluding employees, then exclude those < age 21 and exclude those < 1 year of service.

If employees were eligible to make deferrals in 2000 but nobody choose to do so, then you can't use the first year plan year in 2001. If there was a plan in 2000 but for some reason no one was eligible to make elective deferrals in 2000, then you've got a stronger argument. An alternative is to use the current year method because you sure don't want to compare 2001 HCE percentages to 2000 NHCE percentages, which are 0%.

I don't mean to be picky, but just to clarify things ... You may exclude nonhighly compensated employees who are under age 21 OR have not earned a year of service. It's an "or" not an "and" in terms of who you may exclude.

Your stable value fund sounds like it is a commingled fund managed by PRIMCO, which is quite common. The word "fund" does not imply only a "mutual fund" but does imply that there are many securities (in this case insurance contracts and perhaps other similar contracts) held by the "fund." Your stable value fund does not have a prospectus. This isn't a problem under ERISA 404© because it requires prospectus distribution only for funds that have a prospectus under federal securities laws. The fund will need to have the same liquidity in terms of how frequently one can transfer in or out of it as your other funds.

The typical plan allows loans for any reason, so doing so doesn't invite any extra scrutiny. Occasionally, one finds a plan that limits loans to the same events that would qualify one to take a hardship withdrawal under the IRS safe harbor standards for hardship withdrawals.

Responding to the original question, assuming that one is testing the plans separately for ADP and 410(B) tests (and other tests), then one does not combine the deferrals and compensation for nonhighly compensated employees. See Treas. Reg. 1.401(k)-1(g)(1)(ii). Responding to the last portion of the above post, I've helped a client split their 401(k) plan into two plans using reasonable classifications, one plan had 100% of the HCEs and 25% of the NHCEs, and the other plan had 75% of the NHCEs. Because we could predict in advance which NHCEs based on past behavior would contribute the most, this very substantially increased the amount that HCEs could contribute and still pass both the ADP test and the average benefit percentage test. A more ordinary example is found when there is one plan covering salaried employees and the other one covering hourly employees, at least some of which are nonunion. Once again, having multiple 401(k) plans typically helps the ADP test. In sum, in my experience the benefit of having multiple 401(k) plans is real, not imaginary. For large employers, the testing advantages more than offset the added cost for having an extra plan.

You may be able to self-correct it under the Self Correction Program portion of the EPCRS, but there is no provision in the regulation for self correcting it. The IRS discussion of this issue is in the preamble to the 1994 revision of the 401(k) regulations (or at least that's my recollection).

In case you wanted another vote, "B" again.

Note that the regulations require that the plan "provide" for this forfeiture, although there's no fix if the plan document doesn't contain that provision.

Eligibility conditions affect who is eligible for the plan. They do not treat some eligible employees different from other eligible employees. Hence, there's no BRF or any other 401(a)(4) issue here. Even in the occasional instance where you've got a HCE with less than 12 months of service, such as when a 5% owner (including one through family attribution rules) is a new hire, there's not necessarily going to be a testing problem. Treas. Reg. 1.410(B)-6(B)(3)(ii) allows one to test the otherwise excludable employees separately, but this isn't mandatory. For the year during which one has an HCE in the otherwise excludable employees, consider testing the plan as a whole, excluding only those with less than 3 months of service in your example. Another solution is to exclude from coverage anyone who is an HCE and has is < age 21 or has < 1 year of service as of the last day of the plan year.

The ratio percentage for the 401(m) portion of the plan is 8.16%, so even if the average benefit percentage test were to pass, the nondiscriminatory classification test doesn't. Letting everyone make after-tax contributions would solve the 401(m) coverage if the plans were aggregated, but the same arithmetic would create a failed benefit, right, or feature test because each rate of match must be tested. Consider including all (or at least 13 I suppose) of the 20 HCEs in a nonqualified plan, although that certainly will have some compliance risk of its own because of uncertainty about who can be in a top hat plan. LCarusi's question is a good one too.

If you or your spouse have 15 years of service, then there's another $3,000 catch-up contribution that may be available depending on your past deferral history. Hence, the maximum might be as high as $15,000, $11,000 + $3,000 + $1,000.

When I sent this to a client, I added the following at the end of the first example in the IRS notice: "(The $2,600 savings is due to a $2000 tax credit (50% of $4,000) and $600 due to lower taxable compensation ($4000 X 15% tax rate).)"

Inattention is one reason why plans don't comply with ERISA 404©. It's a complicated, technical legal defense and if one doesn't meet all of the requirements, one doesn't have the legal defense. The vast majority of plan sponsors don't bother (or don't retain a provider, attorney, or consultant to bother) checking whether all of the requirements are actually met. They just assume that if they have plenty of funds and nice looking investment education that somehow that satisfies ERISA 404©.

Jaemmons, no I couldn't find the authority for the IRS position. I looked for awhile this morning. If I find it, I'll post again.

I couldn't put my hands on a citation to support this, but I recall that the IRS position has been that a participant in a plan that includes a 401(k) arrangement must allow a former participant to be eligible immediately upon rehire and not first require a year of service after rehire. The reason is because one cannot retroactively make an employee eligible for a 401(k) arrangement.

Tom, We already have guidance on how catch-up contributions are reported on Form W-2: http://www.benefitslink.com/IRS/ann2001-93.shtml I believe that one does not need to identify which elective deferrals constitute catch-up contributions prior to preparing Forms W-2.

While logically, one would think that the regulatory rule applying one year's worth of 402(g) limit to two years' of deferrals in the case of a hardship withdrawal using the safe harbor resources test would change or be eliminated because the 12-month suspension is becoming only a 6-month suspension, the safest course for now is to continue to enforce the one year's worth of 402(g) limit until the IRS tells us otherwise.