MWeddell

There's a compliance concern about whether charging only former employees a fee constitutes a significant detriment that violates the cash-out regulation. It is more fully discussed here: http://benefitslink.com/boards/index.php?showtopic=4161

No, wolfman, that's not what I'm saying. The 4% limit on HCEs is either illegal and shouldn't be there at all or else it is a plan limit for which HCEs should be eligible to make catch-up contributions in excess of it. There's no way you can have the 4% limit and not allow catch-up contributions for amounts over it (unless the plan doesn't allow any catch-up contributions at all).

I believe it would violate the DOL plan asset regulation. When one withholds employee deferrals, they must be timely deposited into the plan. The fact that the IRS views deferrals as officially employer contributions won't impact the DOL's position. I'd be glad to read someelse's explanation too!

If the 4% limit on HCEs is illegal, then it can't be enforced and a plan that imposes the 4% limit anyway violates ERISA and probably has a disqualification error. That has nothing to do with catch-up contributions. If the 4% limit is legal, then it is a plan limit and plans that offer catch-up contributions must offer them to HCEs who want to contribution > 4% of pay. So is the 4% limit legal? Many plan documents will give the plan administrator discretion to set a lower limit for HCEs as is considered necessary or desireable to pass the ADP test. By analogy to the administrative discretion allowed in the 411(d)(6) regulations, that's probably specific enough to constitute a definite allocation formula so that the 4% limit might be legally enforceable. There is some language in the proposed catch-up regulations that bears on this issue, but I don't read that language as intending to change what constitutes a definite allocation formula.

It is also lawful to state that eligibility is 1 year of service (with 1,000 hours) for employees classified as part time employees and 6 months of service (elapsed time w/o regard to # of hours) for everyone else.

"No" is my interpretation, that not all plans in a controlled group need to match the catch-up contributions.

There are two rules that might apply to separate treatment of those with less then age 21 or less than 1 year of service. 1) Use the old disaggregation rules from the 410(B) and 401(k) / 401(m) regulations and test separately then < 21 or < 1 employees. 2) Use the statutory rule that became effective in 1999 where you ignore the NHCEs < 21 or < 1. However, the entry date assumption can only be used for #1 (or at least that's what IRS officials have consistently said -- there's no regulations for #2 telling us this level of detail). In dubya's case, he's got to use the entry date assumption if he wants to exclude someone hired 7/1/2000 from a calendar year 2001 test, so method #1 is his answer.

The Profit Sharing 401(k) Council of American survey for 2000 plan experience says 4.7% of 401(k) plans with 5,000+ employees had a safe harbor matching formula. A complete copy of the survey may be ordered on their website, http://www.psca.org. Others' surveys should have similar data, but there's many other surveys that one might consult.

I guess I took this thread on a bit of a tangent, but hopefully it was an interesting one! If a 403(B) plan continues to allow the old $3,000 per year, $15,000 per lifetime catch-up contributions, then a participant must contribute those deferrals before becoming eligible for the new EGTRRA catch-up contributions. My source for this assertion is Code Section 414(v)(5)(B). I agree that it would be more advantageous if a participant could first use EGTRRA catch-up contributions before using the older 403(B) catch-up contributions, but I don't believe it's allowed. Sure would have been nice if the proposed regulations had clarified this.

Great post. I'd add one point, that at least the IRS gives us guidance on the interaction between the old 403(B) catch-up rules and the new EGTRRA catch-up provision, it looks to me like one must exhaust any of the old 403(B) catch-up first before becoming eligible to make the new EGTRRA catch-up. That underscores the point that one must still track past elective deferrals.

Yes to KJohnson's question. While the IRS does not allow one to amend an allocation formula after 1 or more employees have satisfied the conditions necessary to receive that year's allocation of any contributions, one can add in a separate allocation formula. On the rare occasion when I've done this (e.g. adding bottom-up QNECs in addition to more normal QNEC allocation formula after a plan year has already ended), I've defined a separate contribution source in the plan document with its own allocation formula. Perhaps I'm being more cautious than needed in that regard. The IRS in 1996 rescinded an 1994 field directive that caused problems with multiple allocation formulas for employer nonmatching contributions and a 1998 IRS legal memorandum clarified that the 1994 field directive indeed was completly rescinded.

Yes, I believe what you've suggested, Jed, is permissable. About 5 years or so ago, the IRS used to object to multiple contribution allocation formulas because if the sponsor can choose which profit-sharing account to fund, in essence there is not a definite allocation formula. However, the IRS rescinded its field advice memorandum and you should be able to obtain a favorable determination letter on the plan design you propose.

The structure of the regulations makes clear that one can rely on the employee's written representation (unless the employer has actual knowledge to the contrary) to satisfy the resources half of the hardship regulations but the representation has nothing to do with whether the hardship distribution is for a heavy and immediate financial need. I think a plan sponsor would be running a real compliance risk by not obtaining any documentation substantiating that the event really did occur. I've had a client audited by the IRS where the agent requested to examine the hardship documentation. However, a quick check of the IRS audit guidelines at http://www.irs.gov/prod/bus_info/tax_pro/i...5951a.html#ss26 didn't list this as a recommended action step.

Yes, that's a safe harbor allocation so that no 401(a)(4) testing is required. Every participant gets the same percentage of plan year contributed to the plan. Check though that the compensation definition used to allocate profit-sharing contributions satisfies 414(s) before concluding that no general testing is required.

Only employees eligible at some point during the plan year to make elective deferrals to the plan should be included in the ADP test. (Substitute in "make employee after-tax contributions or receive matching contributions" and the same statement applies to the ACP test.) Therefore, acquired employees who terminated employment before April 1 and were not eligible to make elective deferrals are excluded from the ADP/ACP tests. This applies to both NHCEs and HCEs. Whether one uses compensation prior to the corporate asset acquisition in identifying who is an HCE is unclear. I believe the best interpretation is by analogy to Code Section 414(a) regarding when one must recognize past service. In your situation, where it was an asset acquisition and the buyer never acted as the sponsor of the seller's plan, compensation paid by the seller does not constitute compensation paid by the "employer." Hence, none of the acquired employees are HCEs.

I agree with RLL. If one uses the rule that contributions are classified as ESOP or non-ESOP when they are contributed rather than where they are at the end of the plan year, then it seems to me that all contributions to the ESOP portion of the plan regardless of whether they are made in cash or stock should be called ESOP contributions. Carsca, I'd be very cautious about proceeding with your suggested interpretation -- get a legal counsel's opinion and IRS determination letter at least. Responding to Carsca's latest post, if all money goes into money market and then a participant has to affirmatively elect to transfer the money into the employer stock fund, that sounds like a signficantly different set of facts. Sure, you may have no "ESOP contributions" but you'll also have a lot less money going into the employer stock fund.

While the proposed catch-up regulations didn't squarely address this, one does not need a separate catch-up election. If someone's normal cash or deferred election causes one to exceed the 402(g) limit, one just lets the participant keep contributing an extra $1,000 in 2002 if the participant is born in 1952 or earlier. However, in your example with a 10% maximum contribution percentage, you likely need to offer a separate election of up to $1,000 for those contributing 10%.

There were some comments in the preamble of the Jan. 2001 proposed MRD regulations that make clear the IRS' belief that even isolated instances of missed MRD payments should be corrected using the appropriate correction program, typically the SCP.

Yes, all discrimination tests including coverage and ADP/ACP testing must be performed separately for the ESOP and the non-ESOP portion of the plan. I suppose 414(s) testing officially is separated too for ESOP and non-ESOP, but 414(s) testing doesn't involve any plan-specific data, just a comparison of plan compensation to total compensation, so it seems to me that there'd be only one 414(s) test as a practical matter. How to determine which contributions are ESOP versus non-ESOP contributions is unclear -- does one do so when they are contributed or based on where the money is on the last day of the plan year? If one is using the first alternative -- contributions are considered made to the ESOP portion of the plan based on where they are initially invested -- contributions directed to the employer stock fund (assuming that's what the plan document designates as an ESOP) should be considered as ESOP contributions in my opinion regardless of whether they are made in cash or stock. There's not much guidance on that point, but it strikes me as unreasonable to call all cash contributions non-ESOP regardless of where they are invested, a position that might be implied by one of QDROphile's posts. I could be wrong, but I read QDROphile's comments about it being a "scam" as saying that he disagrees with the policy behind the IRS rules, not that he disagrees with my understanding of the current IRS position.

For elective deferrals, a.k.a. employee pre-tax contributions, with relatively few exceptions all employees of the "employer" (defined in a broad sense to include related entities) must be eligible to make 403(B) deferrals. One of the most important exceptions to this universal coverage requirement is that those eligible for a 401(k) plan do not have to be eligible to make 403(B) deferrals. For the 401(k) plan, if you've got a situation where all the not-for-profit employees are eligible for a 403(B) plan and all the employeees working for for-profit entities within the controlled group are eligible for the 401(k) plan, then there's a special coverage testing rule reinstated by EGTRRA which says the 401(k) plan passes coverage testing. (I'm obviously greatly simplifying things here.) Other than that, the 403(B) deferrals don't affect the 401(k) plan's discrimination testing. In particular, the ADP test for the 401(k) plan is unaffected by the 403(B) deferrals. I agree with Carol that a different explanation is needed for employer matching and employer nonmatching contributions. I'm also assuming that we're not talking about employee after-tax contributions.

I researched PEOs for a client a few months ago and concluded (1) there is no IRS guidance specific to qualified plan issues about PEOs that I could find, and (2) there are compliance risks in assuming that the PEO, not the worksite employer, can contractually be designated as the employer for qualified plan purposes.

401(a)(4) testing is required if (1) there are employer nonmatching contributions made to the plan, and (2) the contributions are not allocated in proportion to 414(s) compensation. The ESOP portion must be treated separately from the non-ESOP portion of this test. The ESOP portion must be tested on a contributions basis without imputing permitted disparity. Explaining in greater detail how to perform the 401(a)(4) testing is probably more than I can do on a bulletin board post. One classifies the employees of the employer as highly compensated employees and nonhighly compensated employees, sorts the contribution percentages for participants, runs ratio percentages for each participant and those with higher contribution percentages although one may group together certain employees, and compares the results to the midpoint between the plan's safe and unsafe harbor percentages. Yes, I know that was probably jibberish -- you'd really have to read the 401(a)(4) regulations or a book to figure it all out. Perhaps others can suggest an appropriate book to read. It strikes me as very common for the plan to pass 401(a)(4) on a combined basis but to fail when separating it between the ESOP and non-ESOP portions of the plan because the highly compensated employees might be clustered in the ESOP portion of the plan (or theoretically in the non-ESOP portionof the plan) to a greater extent than the nonhighly compensated employees.

There are many IRS private letter rulings that consider just the employer stock fund portion of the plan to be an ESOP. Certainly getting your own ruling is the safest route, but there's enough rulings out there to constitute a clear trend. Remember that ESOP and non-ESOP portions of the plan must be tested separately for various discrimination tests, which complicates things a bit.

For the reason pointed out by Jon Chambers above, there's a general question of whether it is a prudent decision for a plan fiduciary to invest or allow participants to invest in life insurance policies. The policies are priced to be competitive if there are bought outside of a qualified plan where the investment component is tax-free, so buying a policy with plan assets constitutes paying for a feature which won't be used because any investment is tax-deferred within a qualified plan. Per an old ALI-ABA outline I have, the DOL has occasionally challenged the prudence of investing in life insurance policies. However, the cases that are brought usually involved other allegations (typically prohibited transactions), so it is hard to infer what the DOL's general enforcement position is.

This tends to somewhat contradict the IRS' written statements, but it seems to me that if a model amendment is not adopted, then which set of proposed regulations (1987 or 2001) a plan must follow depends on interpreting the existing plan document. One can't simply say a plan that doesn't adopt the model amendment must follow the 1987 proposed regulations without reading the relevant portion of the plan document.