MWeddell

RCline46 - There are HCEs who are not owners who will benefit by converting to the 401(k) safe harbor. The fact that the two owners will get $40,000 of profit-sharing and hence plan to make $0 of elective deferrals will help the ADP test, but satisfying the safe harbor rules will completely eliminate the ADP test. AndyH, Thanks for the answer. That's what I thought (I didn't want to bias the responses by declaring that), but legal counsel was questioning it a bit, so I thought I'd throw it out for discussion.

Employer sponsors a profit sharing / 401(k) plan. Employer currently contributes 5% of pay to all eligible employees and an additional 5% of pay on compensation that exceeds the social security wage base. Employer is considering contributing $40,000 for employees who also are 5% owners but otherwise not changing the allocation formula. General 401(a)(4) test on a benefits (age-weighted) basis is run without imputing permitted disparity and passes easily. Because all NHCEs receive at least a 5% allocation and no HCEs receive an allocation greater than 20% when measured on a contributions basis, the new cross-testing regulations don't pose a problem. Employer is also considering fully vested the contribution (and meeting other requirements of qualified nonelective contributions) and using it to satisfy the 3% of pay employer nonmatching option for a 401(k) safe harbor so that no ADP testing is required. My question (finally!) is whether this is permitted for contributions that are allocated using the social security wage base as the integration level if the actual 401(a)(4) testing does not impute permitted disparity.

If the participant's account holds $0 because the participant has already received a complete lump sum distribution and the DRO requires $x to be paid to the alternate payee, then the order must be rejected as not meeting the QDRO definition. The formal reason is because the order would require the plan to provide increased benefits in violation of IRC 414(p)(3)(B) and the parallel provision in ERISA. I agree that simply ignoring the order seems to violate IRC 414(p)(7) and is probably not good advice.

Returning to the original question, there's an 18-month retroactive limit in the law, but it refers to the payment date, not the date used for calculating the portion to be assigned to the alternate payee. For defined contribution plans (you did post this in the 401(k) bulletin board, so that's a fair assumption), this typically isn't a problem. Let's be more specific. Suppose: - DRO issued in mid-1990s. - DRO uses a date in the mid-1990s to compute amount assigned to alternate payee. - DRO defines payment date as occuring no earlier than when the plan accepts the order as a QDRO. - Plan still has records from the mid-1990s as needed to determine the amount assigned to the alternate payee. - Plan still has enough in participant's account to honor the assignment to the alternate payee (or DRO is drafted to never assign > the amount in the participant's account). No reason here that the DRO could not be a QDRO.

I just read another post that also addresses this same topic: http://benefitslink.com/boards/index.php?showtopic=11085

Absent IRS guidance, this issue is not easily resolved. Patrick Foley's post states the most likely resolution of the issue, but other reasonable interpretations exist. The "applicable employer plan" definition of Code Section 414(v) is not limited to plans that accept traditional elective deferrals. It is possible to interpret Code Section 414(v) to allow an employer with a profit-sharing plan w/o a cash or deferred arrangement to accept catch-up contributions. This issue is particularly urgent for the IRS to resolve because if one allows catch-up contributions for some participants, then the whole "employer" must allow catch-up contributions for all participants. If there are some participants who aren't eligible for 401(k) plans but are in other types of retirement programs, employers right now don't know whether they'd also have to be allowed to make catch-up contributions. I'd be interested if others think I'm off base here. I like Patrick Foley's simpler answer better than my own!

Code Section 403(B)(12) is what you want to read. With only limited exceptions, a 403(B) plan must allow all employees to be eligible to make elective deferrals.

In my experience, it is more common for the per head charge to apply only to participants, i.e. those who had nonzero account balances at some time during the plan year.

While the DOL hasn't indicated whether fees for searching for replacement recordkeeper and fund managers could legally be paid from the trust, it has indicated that prudently selecting service providers is a fiduciary duty. I'd typically view these search fees as part of the reasonable cost of plan administration, although this is a judgment issue so I'm not surprised to see others post differing opinions.

EGTRRA allows dividends to be deductible on employer stock held by an ESOP if participants are given the election to receive them in cash as pass-through dividends or let them remain in the plan and be reinvested in employer stock. The change affects plan sponsors with publicly-traded or privately-held stock in the same manner -- there's no distinction made in the legislation. As before, one generally may not give employees an investment decision whether to invest a part of their account in privately-held employer stock or else the stock must be registered under securities laws.

Here's another related thread that you may wish to read: http://www.benefitslink.com/boards/index.php?showtopic=4792

That's right, the 12-month suspension (soon to be only a 6-month suspension) applies only if one is using the same harbor resources test, not if one uses the general resources test. You might want to compare Treas. Reg. 1.401(k)-1(d)(2)(iii)(B) with 1.401(k)-1(d)(2)(iv)(B). Getting a determination letter on a plan document that uses the general resources test is not a problem. Administratively, it requires greater care unless the plan document also uses an optional rule to relay on the employee's written representation unless the employer has actual knowledge to the contrary.

$11,000 / $200,000 = 5.5%, so for employees earning near or above the new 401(a)(17) pay cap in plans that match the first 6% of deferrals or more, a decision to match catch-up contributions will affect some employees. Still, the negative impact on ACP tests will probably be slight, and will tend to be more than offset by EGTRRA changes that favorably impact the ACP test, namely the raise in the 401(a)(17) pay cap and the elimination of the multiple use limit.

The plan (or at least the portion invested in employer securities) should be designated as an ESOP. If it isn't, it's likely that there's a violation of ERISA 407(B), because the other exceptions don't often apply. If the plan document is appropriately drafted, then the fact that the investment is undiverisifed is not regarded as a fiduciary violation. See ERISA 404(a)(2). One still can challenge the investment in company stock as not prudent. I wouldn't like this plan design if I were a participant, but it's hard to demonstrate that it's a fiduciary violation under ERISA.

Commenting on the legality, not the advisability, of whether one could terminate a profit-sharing plan and start up a new 401(k) plan, yes. Treas. Reg. 1.401(k)-1(d)(3) is inapplicable. There's no legal reason why one couldn't do this.

Let me try again, although I realize you probably are asking for others' opinions. Rev. Proc. 97-41, Section 1.02(4) provides that SBJPA amendments to 403(B) plans or 403(B) annuity contracts are not required before the first day of the plan that began on or after 1/1/1998. However, there's nothing in the Code that requires that a written 403(B) plan exist in the first place and therefore nothing in the Code that could possibly require that such a plan be amended. Conversations with IRS officials confirm this. The only example given in the Rev. Proc. is (in Section 12.02) one that requires that a 403(B) contract be amended. Typically, the provider has taken care of this without even notifying the employer. ERISA does require a written plan document (if one is dealing with a 403(B) plan that is subject to ERISA) so presumably if the plan rules change, so should the plan document. It's unclear when the plan document must be amended given that the DOL never announces its own remedial amendment period and any similar concept and any IRS pronouncements don't apply to ERISA.

As far as the IRS is concerned, a 403(B) plan does not need to have a plan document. Therefore, the IRS did not feel it had statutory authority to create a GUST remedial amendment period for 403(B) plans. There was a provision or two that should have been changed in the 403(B) contract, but that was a few years ago, perhaps by the beginning of the 1998 plan year (?) when that had to be done. For 403(B) plans that are subject to ERISA, they must have a plan document but exactly when the document should be updated for GUST is unclear.

I work with a health care client that uses the one-time irrevocable election plan design. It was put in place back when not-for-profit organizations could not sponsor 401(k) plans. The plan document is drafted by the client's attorney and hence I'm not at liberty to share it. The money is treated as a pre-tax contribution but does not fall within the 402(g) limit so it doesn't affect the 403(B) elective deferrals that employees may also make. There is just one contribution election, so given that a large percentage of employees elect to contribute (there's a fairly large employer contribution for those who contribute and a smaller employer contribution for those who do not contribute), the plan easily passes 401(a)(4) testing because both rate groups pass the ratio percentage test. As explained by QDROphile, I don't believe this provision helps you in your situation. Since about 1991, the one-time election isn't available to employers who already have sponsored other types of retirement plans.

It's clear from the text of the law and the examples in the committee report that one is eligible for catch-up contributions when one reaches a plan limit such as the 15% maximum. Pending further IRS guidance, it looks like if one offers catch-up contributions at all that one must offer it to all employees, not just those who reach the 402(g) limit. This is a significant complication for plan sponsors, recordkeepers, and payroll systems.

KJohnson's summary is accurate, but perhaps the rollover treatment of hardship withdrawals should be clarified, not that it directly relates to the original question. Effective sometime between 1/1/1999 and 1/1/2000, plan administrators were required to treat hardship distributions of elective deferrals as not eligible for rollover. The new tax law would make all hardship distributions not eligible for rollover. The new law is scheduled to become effective 1/1/2002 although the conference committee report pretty much invites the Secretary of the Treasury to delay the effective date, so we might see that happen again.

Testing rules in merger & acqusition situations really don't exist, so often there is more than one reasonable way to apply the rules. I would say yes, the plan may continue to be tested as if there were one employer even though there are now two controlled groups due to a corporate spinoff. My main source for this interpretation (not that this is definitive) is this question from the 1998 Enrolled Actuaries meeting gray book: "QUESTION #23 Nondiscrimination: Testing after Merger/Acquisition Section 410(B)(6)© provides special transition rules that clearly affect the application of the coverage rules in the event of an acquisition or disposition of a controlled group member. Do these rules also apply to all section 401(a)(4) nondiscrimination purposes? And for the ADP and ACP tests used for demonstrating nondiscrimination and acceptability of income exclusion under section 402(g)? RESPONSE The transition period applies throughout the section 401(a)(4) and 401(k) rules to the extent section 410(B) principles are used to apply tests or determine component plans. In the case of the ADP test, for example, the special transition rule would allow ongoing separate testing of separate plans maintained by the separate pre-merger employers. These separate ADP tests would satisfy the ADP test needed for demonstrating nondiscrimination in accordance with the section 402(g)(3) requirement that deferrals be made under a qualified cash-or-deferred arrangement."

I don't think it's clear when it has to be amended. That's a bigger issue than I want to take up in this posting. Sorry if you didn't like my opinion, but I gave the regulatory cites in case you want to see if you can interpret them differently.

I misunderstood the facts in yet a different way, so some of my prior comments may not make sense. I had thought that one gets 100% match only in 5th and successive consecutive quarters of deferrals and that it could fall back to 50% match if one went a whole quarter without making deferrals.

The valuation dates for account balances and the allocation dates for earnings are not 411(d)(6) protected benefits and, therefore, do not have to be preserved in plan amendments. See Treas. Reg. 1.411(d)-4, Q&A-1(d)(8). My opinion is that this takes precedence over the last sentence of Treas. Reg. 1.411(d)-4, Q&A-2(B)(2)(ix). Assuming the plan document allows this change or was timely amended, I think the employee is shucks out of luck.

Having contributed for an entire year doesn't strike me as fitting within the "application for benefits or similar ministerial or mechanical acts" clause, but I guess we choose to disagree.