MWeddell

Pax is right. Once an employee, regardless of whether he or she is highly compensated, has satisfied all of the conditions for receiving an allocation of contributions for a plan year, an amendment to change the allocation formula or conditions violates the anti-cutback rules. See Treas. Reg. 1.411(d)-4, Q&A-1(d)(8).

This was foreseeable when Congress simplified the definition of highly compensated employee effective in 1997. Occasionally there'll arise a situation like you've got when it feels discriminatory without violating any testing rule but that's what happens when Congress simplified the definition of highly compensated to eliminate things like the lower dollar amount threshold for officers or the rule that every employer must have at least 1 HCE.

Moe, Nah, enjoy the sandwich yourself! Sorry for the slow response: I was out of town for a few days. -- Michael

Okay, I like a challenge, although I won't be in New Orleans to collect on the sandwich. RLewis's post in this thread refers to the rule that only employees eligible to make elective deferrals during the plan year are included in the ADP test and also cites the relevant regulation: http://www.benefitslink.com/boards/index.php?showtopic=4164 Tom Poje's cite here explains the concept although that time Tom didn't cite the regulation: http://www.benefitslink.com/boards/index.php?showtopic=10564 KB's post explains the same concept very concisely: http://www.benefitslink.com/boards/index.php?showtopic=4712

No, EGTRRA good faith amendments must be signed by the last day of the plan year for which they are effective.

My recollection is that one could use any definition of compensation that satisfied Code Section 414(s) for safe harbor contributions. You'd have to do some general 414(s) testing at least once every three years though.

One may exclude from eligibility for the plan employees who have not yet earned 1 year of service (which may be defined as 1,000 hours or more during first year of employment or subsequent plan years). Alternatively, one may allow employees with < 1 year of service into the plan but give them no match or a reduced match. Once the seasonal employees earn 1 year of service, they must receive the safe harbor match. You're right -- there is no exception for seasonal employees and you can't require 1,000 hours of service and/or employment on the last day of the plan year to receive each year's match.

The harm might be disqualification depending on how the IRS views the matter. If the IRS doesn't really care about the during the plan year projections and only cares that at the end of the year the catch-ups are corrected computed and limited, then this may be a case of "no harm, no foul."

Just to point out the obvious, the whole point of complying with the 401(k) safe harbor is to avoid discrimination testing. If there's no highly compensated employees, i.e. if no union employees are expected to earn $85,000 or more indexed for inflation, that no need to comply with the safe harbors. I've had a couple clients put in safe harbor matching formula including for union employees. No landmines to warn you about. Obviously it's an additional cost (including the 100% vesting) that the employer will need to present during negotiations.

Yes to Jim D's question. Even if the plan allows any catch-up contributions, then the employee earning $40,000 and who contributes $8,000 under a 20% maximum election must also be allowed to make catch-up contributions. T-BONE, I didn't read the regulations the way you propose. It sounds like the plan administrator or payroll makes an initial determination of what is a catch-up contribution that seems reasonable based on that payroll period and what is projected to happen and then the final determination is made at the end of the year. I don't believe that one could accept the participants' word for what constitutes catch-up contributions initially without doing any checking. I agree this isn't clear though.

I've not specifically asked that questions, JonB. If terminated after some of GUST became effective, I believe the DOL would expect that those plans would eventually be amended.

We ran into this issue regarding the GUST amendments, and here's what we found out from conversations with IRS and DOL officials. There is no Internal Revenue Code requirement that a 403(B) plan have a written plan document. Therefore, the IRS feels it does not have statutory authority under Code Section 401(B) to declare a remedial amendment period for 403(B) plans. For plans subject to ERISA, they must be administered in accordance with a written plan document. However, the DOL has never (to my knowledge) stated how promptly amendments are needed to comply with this requirement. Certainly, there were many ERISA plans amended in 1994 effective in 1987 and the DOL never complained that those amendments were so tardy as to violate ERISA's written plan requirement. To be safe, amend as Carol suggested but realize that if one misses the "deadline" it doesn't necessarily mean there's a violation.

General question under the new proposed catch-up contributions regulations: can a participant who is suspended from making elective deferrals choose to make catch-up contributions? (Let's assume the plan in general permits catch-up contributions). My own vote is that a suspension is not a limit, and therefore a suspended participant cannot make catch-up contributions. It's unclear enough that I wanted to collect others' opinions. Follow-up question is does it matter whether the limit is required by law (where it doesn't seem to have made the list in the regulation) or an employer limit? 4 specific examples designed to explore this: a) Plan follows hardship withdrawal safe harbor rules and suspends future elective deferrals for 6 months for distributions taken after 12/31/2001. Can participant make catch-up contributions during that suspension? b) Plan follows old hardship withdrawal safe harbor rules and isn't changed for EGTRRA so the suspension period is 12 months. Can participant make catch-up contributions during the first half and/or second half of the suspension? c) Plan uses more than one resources test. Let's say it uses the general test relying on the employee's representation but also uses the safe harbor test with the 6-month suspension. Arguably the suspension is not legally required but a matter of cautious plan design. Can suspended participant make catch-up contributions? d) Suspension is clearly a matter of plan design only. For example, employer contributions may be withdrawn by those with 5 years of plan participation but only if participant is suspended for 6 or 12 months. Can a participant with that type of suspension make catch-up contributions?

Code Section 401(k) says that that those elective deferrals may only be distributed upon certain events, one of which is attainment of age 59-1/2. Code Section 403(B) has a similar restriction. The 10% excise tax for distributions prior to age 59-1/2 (with various exceptions) is in Code Section 72(t). There's an old regulation under 401 that says profit-sharing money may be distributed upon the attainment of a specified age. If I've not answered your question yet, post a more specific one.

Buyer is considering acquiring Seller. Seller sponsors a SarSEP. Buyer wishes to terminate or cease allowing contributions to the SarSEP and to make the employees eligible for 401(k) and matching contributions in Buyer's existing qualified plan. Does anyone know how to terminate a SarSEP? Any other issues the Buyer should be aware of? I already thought of coordinating 402(g) limits. Here's what I found out so far on the termination issue: I'm not very familiar with SEPs or SarSEPs. The only primary guidance I could find was from IRS Notice 81-1, if indeed that's still current law, which seems to imply that one can just amend the SEP agreement to discontinue contributions. However, I also saw this excerpt from the Individual Retirement Account Answer Book, 7th edition, by Panel Publishing, which seems to imply that a more formal process may be needed. Too bad it didn't give a citation: "Q 12:74 How is a SEP or SARSEP terminated? A SEP may be terminated by an amendment prepared by the employer. Employees must be given notice of the amendment. Because contributions are generally discretionary, a formal termination is rarely used to terminate a SEP. To discontinue elective contributions under a SARSEP, however, an employer would have to formally terminate the elective portion of the plan."

I do think that reducing (presumably temporarily) the match is more common in the automotive industry than in the rest of the economy because the automotive industry is so cyclical and because many of those companies still have a defined benefit pension plan so employees are receiving some level of retirement benefits from their employers. Here's an article on the topic: http://www.freep.com/money/business/delphi...i8_20010908.htm

I agree that the amendment cannot be adopted with a retroactive effective date. Once any participant has satisfied the conditions for receiving an allocation of contributions, those conditions may not be changed. Treas. Reg. 1.411(d)-4, Q&A-1, esp. Q&A-1(d)(8). If a plan has a trust or is subject to 412 funding rules, unless one obtains IRS approval, an amendment changing plan years must be adopted before the short plan year ends. Changing plan years to delay the effective date of legal provisions is not allowed, but changing plan years to accelerate the effective date of legal provisions appears okay to me. Rev. Proc. 87-27, Section 4.01.

IRS regulations rarely tell one precisely what to do when one violates IRS regulations. Rev. Proc. 2001-17, regarding the EPCRS or whatever the umbrella name currently is for IRS correction programs, doesn't contain any specific guidance. I would think a reasonable interpretation of the general principle that one should restore the plan to the position it would have been in had the error not occurred would support excluding employees who should not have been eligible for any 401(m) contributions from the 401(m) test. However, it's not that clear.

A discretionary match on top of a safe harbor match will not cause the plan to fail the 401(k) / 401(m) safe harbors. Conditions are: - The annual participant notice accurately describes the potential for the discretionary match. - Total discretionary match (excluding the safe harbor match) for any participant cannot exceed 4% of pay. The source for this is IRS Notice 98-52. Notice 2000-3 doesn't modify any of the above rules.

The Conference Agreement for section 632 of EGTRRA, which raised the 415 limit from 25% to 100%, includes this statement: "With respect to the increase in the defined contribution plan limit, the conferees intend that the Secretary of the Treasury will use the Secretary's existing authority to address situations where qualified nonelective contributions are targeted to certain participants with lower compensation in order to increase the average deferral percentage of nonhighly compensated employees."

Look at Revenue Ruling 2000-36 regarding making a direct rollover to an IRA the default form of payment prior to this provision in EGTRRA becoming effective. Just because the employer has some fiduciary responsibility over the IRA investment doesn't negate the fact that this is a distribution out of the qualified plan.

I have received such favorable determintion letters, but not since EGTRRA was signed into law. It's a statement in the legislative history of EGTRRA that is making many consider whether bottom-up QNECs are still lawful. (My opinion is yes, still lawful until we hear otherwise from the IRS.)

For a qualified plan that is designed to satisfy the 401(k) or 401(m) safe harbors, the employer contributions must be allocated using a 414(s) definition of compensation. There are regulations under 414(s) that define more precisely what must be done. There is an example in Notice 98-52 that says that the compensation must meet the reasonable requirement of 1.414(s)-1(d)(2), but the rest of the Notice contradicts this and fairly clearly requires that all of 414(s) be satisfied by the definition of compensation used for employer contributions.

Thanks. The testing passes by a fairly wide margin without imputing disparity at all. If I need to impute permitted disparity on all but the 3% QNEC, I can handle that.

We don't know until we get IRS guidance. Seems to me like the plausible solutions are: a) One gets one 401(g) limit for the two years beginning with the calendar year when one takes the hardship withdrawal, which is the current rule. b) The special modification of the 402(g) limit for hardship withdrawals that use the safe harbor resources test is dropped. c) One gets 1.5 times the 402(g) limit for the two years beginning with the calendar year when one takes the hardship withdrawal. I'd assume a) until the IRS proposes a change to its regulation even though it seems unlogical now. I personally hope they choose b) because payroll systems and/or recordkeeping systems' compliance with a) is poor and it's just not that important a rule to have to deal with c).