MWeddell

Replying to the points as numbered in the preceding post: 1. The letter stating the IRS's interpretation that one should apply the $80,000 threshold to 1999 compensation when identifying who are HCEs in 2000 is a general information letter. It states "We hope this general information is of assistance to you. Please note that this letter is not a ruling and cannot be relied upon as such." The request and the IRS response did not purport to be binding on any particular taxpayer. The IRS used the letter as a vehicle to announce its general position. If one advises a client to use the $85,000 figure instead, one should make the client aware that the IRS has announced that it believes a different interpretation is correct. 2. Prior to the general information letter's being issued, I agreed with IRC401's interpretation. However, my recollection is that BenefitsBoard contributors mostly seemed to agree with Jim Holland's unofficial comments, which became the IRS position. I tried to do a search on old messages, but I didn't seem to be able to access them. 3&4. What's the "correct" answer? My clients generally want to know what is the IRS's likely position and whether they can obtain a favorable determination letter, not what a court might say after spending plenty of time and money litigating the issue. Some of them are interested in our opinions about whether the IRS's positions are well-founded but most are not. Hence, for the bulk of clients I work with, the right answer is use the $80,000 threshold for 1999 compensation when identifying 2000 HCEs. My job is to help clients, not to "relay IRS gossip" and not to "interpret the law" without any regard for well-publicized IRS positions. This is in fact a common dilemma. The IRS often announces rules that cannot be found in the Code. For example, a plan designed to satisfy the 401(k) and 401(m) safe harbor rules does not satisfy the 401(m) safe harbor if (in addition to the safe harbor contribution) the employer has discretionary match totalling > 4% of pay. Where is that rule found? Not in the Code. It's in IRS Notice 98-52, as modified by IRS Notice 2000-3, documents that are binding on the IRS but not binding on taxpayers. In that situation, I'd express disagreement with the IRS position, but tell the client if they want to be sure to meet the safe harbor, don't have discretionary match > 4% of pay. My point is that if one wants to ignore IRS pronoucements, there are plenty of times when the IRS seems to disagree with or go beyond what's in the Code. The HCE issue isn't the only example of that.

To answer your question, I don't believe the 5 years of service requirement for the additional contribution violates Code Section 410(a). One looks at the plan as a whole, not the more specialized definition of "plan" in Treas. Reg. 1.410(B)-7 and -9. Because employees are covered under part of the plan after 1 year of service, it looks fine. However, I'd suggest you research the issue more carefully than I just did. Let's assume that the extra contribution is a nonmatching contribution. In that case you need to meet 410(B) and 401(a)(4), excluding only employees < age 21 and < 1 year of service. Cross-testing, a.k.a. testing on a benefits basis, is allowed. If the extra contribution is in the form of a matching contribution, then not only do you include it in ACP testing, but also must perform benefits, rights, and features testing. See Treas. Reg. 1.401(a)(4)-4(e)(3)(iii)(G). Cross-testing doesn't seem to be allowed because the rules in Treas. Reg. 1.401(a)(4)-8 don't apply to -4 of the regulations. One cannot ignore the service condition because 1.401(a)(4)-4(B)(2)(ii) does not apply to an "other right or feature." The determination letter will help if the problem is a matter of not following the plan document. If the problem is that you need to perform a discrimination test and it fails, the letter doesn't help at out. Good luck.

There may be other differences too, but the regulations don't allow employer discretion for a 411(d)(6) protected benefit, even if one could amend the document to get rid of the benefit.

The IRS has not announced the official limits for 2000. In years past, the IRS has made their announcement within one business day of when the underlying economic data is released in mid-October. Possibly they've delayed making an announcement this year because they were hoping that the pending legislation would be resolved in one direction or another.

The efficiency of saving through a Roth IRA is the same as saving through a 401(k) or traditional IRA if one makes several assumptions: tax rates remain constant, the taxpayer remains in the same tax bracket, investment rates of return are the same in all vehicles, the same amount is saved, Roth IRA money is used for the appropriate purposes, liquidity is not an issue, transaction costs are equivalent, and perhaps one or two others I've left out. If an individual's circumstances differ from the above assumptions, then it'll tilt the balance for or against Roth IRAs. However, if one adds a match to the advantages of savings through a 401(k) plan, then usually this will tip the scales in favor of saving first in the 401(k) plan at least to the extent needed to earn the full match. If you want advice specific to your situation, then talk to a financial planner. The above post is right, one can contribute to both a 401(k) plan and a Roth IRA. That tax break is phased out I believe starting at $150,000 for married couples and $95,000 for individuals.

The separate account must be part of the 401(k) plan's trust. You'll need to make sure it is held by the trustee. Given that typically the employer is not a trustee or an investment manager, this may be hard to do. It'll really have to be a STIF account held by the trustee. I've not seen the employer get the expenses and given exclusive benefit and prohibited transaction concerns, I don't suggest you do that unless you research a lot more carefully that it's legal. I have seen the written contract with the bundled recordkeeper specify that STIF fund interest is part of the provider's compensation and is used to pay their costs (which would be higher in the absence of such a provision in the contract). That enables the account to not be interest-bearing (from the participant's viewpoint anyway). Slick idea, although I have no idea how the DOL would view it. Of course, you could suggest to the client that funds be contributed and invested promptly! It may be the easiest solution.

A target benefit plan is a specific type of money purchase pension plan. Therefore Revenue Ruling 94-76 applies: one cannot allow in-service withdrawals from the money that used to be in the target benefit plan (and related investment earnings). I don't believe that the new 411(d)(6) regulations change this conclusion.

I think it is permissible (as well as desirable typically) for the minimum required distribution to be paid first from the after-tax employee contributions account. See IRS Letter Ruling 9840041. Especially considering I can only cite a letter ruling to support this viewpoint, you probably want to do other research to confirm this conclusion.

The phrase usually refers to employer contributions other than salary deferral contributions that participants have elected.

While others have correctly pointed out that it may be hard to get the IRS or DOL interested, there is an IRS requirement that a profit sharing plan that includes a 401(k) arrangement must have a definite allocation formula. In other words, the plan document must state how contributions are allocated. While this requirement is generally viewed as not violated if the plan document gives the plan administrator administrative discretion to limit all HCEs' contributions to minimize the chance of an ADP/ACP test failure, randomly choosing which HCEs to limit sounds to me like a violation of the definite allocation formula requirement. You probably want to examine the plan document before proceeding too far with this argument. For the DOL, you'd have to take a slightly different tack, arguing that the plan wasn't administered in accordance with its written plan document, since the above argument raises an IRS issue.

The IRS issued proposed regulations yesterday on this topic. I'd guess that the Benefits Buzz will have a link to them by the day's end.

I think the argument is that once the plan year has ended, an ADP test fails, and rerunning the test under various other methods still produces a failing ADP test, one is limited to the correction methods specified in Treas. Reg. 1.401(k)-1(f)(1). Failure to use one of those correction methods fails to remedy the failing test. A second argument in your case is that the client's proposed correction method (to consider some of the 1998 deferrals to remain in the plan and be reconsidered as future years' deferrals) is specifically listed as an impermissible correction method under Treas. Reg. 1.401(k)-1(f)(1)(iii)(first sentence). Of course, we're > 12 months past 12/31/1998, so we're looking at the EPCRS, not the regulations themselves, but I don't think you'll find any IRS endorsement that the client's proposed method is a valid correction. Good luck.

Carol, To what are you referring when you stated "this requirement has been waived ...?" Has the DOL ever explicitly said that it'll ignore failures to update plan documents as long as the plan is still within an IRS remedial amendment period? If so, how does that apply to 403(B) plans for which the IRS didn't extend a GUST remedial amendment period (due to concerns about lack of statutory authority)? Thanks in advance for any clarification you can offer. Michael

There are no restrictions on what a retirement income account may invest in.

See Treas. Reg. 1.401(a)-13(g)(3) for a provision that allows distributions to alternate payees pursuant to QDROs even if there is no other distributable event.

The promissory note or loan agreement when the loan was issued will state when a loan is in default. The DOL does not have any specific guidance. The IRS on 7/31/2000 issued final and proposed regulations under Code Section 72(p) on when a loan is deemed to be a distribution for tax purposes, which is similar to your question. Although plans may set stricter rules, the loan is treated as a taxable distribution when there's a whole calendar quarter with no payments. The first year of unpaid leave may be ignored and payments aren't required if the participant is on leave because of U.S. military duty.

... any incentives for attending the enrollment meeting should go to everyone who attends, not just those who sign up to contribute. Otherwise, if the T-shirt or trinket came from the plan sponsor, some disgruntled employee with too much time on his or her hands could claim a violation of the contingent benefit rule contained in the 401(k) regulations.

Yes, for changes not related to GUST law changes, the remedial amendment period extension doesn't apply. Instead, the normal plan document amendment deadlines apply.

Assuming you're using the disaggregation method found in the regulations, not the relatively new statutory method, then either of the two choices you listed are allowed. When determining who falls short of age 21 & 1 year of service, you may either assume that there is an entry date or not.

This sounds a bit complicated to resolve just through message board exchanges, but here's a start anyway. I agree that since you are a partner with > 10% ownership that the loan was prohibited. ERISA Section 408(d) looks like it's been around since ERISA become effective in 1976. The DOL issued guidance six months ago and how to voluntarily correct the situation, plus you'll need to consider IRS excise tax liability under Code Section 4975. Code Section 72(p) contains the $50,000 limit, the quarterly repayment reqirement, the level amortization requirement, the 5-year limit, etc. It became effective generally for loans made after August 13, 1982. This should be indicated in the amendment notes following Code Section 72(p) if you've got a hard copy of the code by a major publisher. I don't know of a web site that'll list this, but then I've never looked for it. As I recall, some of the requirements were added a couple years later, before the Tax Reform Act of 1986. Because your loan was made before August 13, 1982 and assuming it was never renegotiated or modified after then, you probably "only" have the problems indicated in the preceding paragraph of this posting to worry about.

Neither the Code nor the regulations state a deadline. I'd conclude that there is no deadline. IRS officials informally summarize the situation a little differently, but basically concede the point: "There is no regulatory deadline for making the 415 correction. The expectation is that the correction should be made within a reasonable time after it is discovered. For example, the Service would not look favorably on a full year's delay in getting the correction made." 1996 Enrolled Actuaries Meeting "gray book," question 20.

I'm pretty aggressive at using testing strategies, but even I don't think your idea will fly. Just to clarify, your plan passes ADP and ACP tests so you're not worried about hurting those tests but it might help the 410(B) test if this employee were considered ineligible for 401(k) and 401(m) tests. Whether an employee is considered benefitting under 401(k) and 401(m) plans, i.e. must be included in the numerator of your HCE percentage, depends on the 401(k) and 401(m) regulations. 1.410(B)-3(a)(2)(i). However, look at the last two sentences of 1.401(k)-1(g)(4)(i). It doesn't expressly list inability to contribute because of reaching 402(g) limit but it does list several analogous situations that lead me to say you've got to include the employee as eligible for 401(k) and 401(m) contributions.

402(g) is a calendar year limit, so having a short plan year won't matter. Highly unlikely that there's anything in your document to change that. 401(a)(17) limit should be prorated. Document ought to address this but there are also regulations that require proration. Treas. Reg. 1.401(a)(17)-1(B)(3)(iii)(A). Read document for whether and how the plan year change affects the 415 limitation year. Changing limitation years is tricky, so you'll have to look at those regulations. HCE compensation depends on what was earned during the prior 12 months before the plan year began. Check your plan to see if your plan determines it instead on a calendar year basis.

I agree that ERISA requires one to have a written plan document and to follow it. However, if the plan allowed for a 9% of pay contribution only for those participants who deferred at least 3% of their pay, that would be a matching contribution and be subject to 401(m) testing. There's no requirement that the amount of the matching contribution vary in proportion to the amount of deferrals.

Presumably, you're asking which is the best alternative. Because these message boards tend to be visited by retirement savings enthusiasts, many of us would say invest in both the 401(k) and the Roth IRAs. The Roth IRAs will be limited to $4,000 total, $2,000 each for you and your wife, for many couples that's not necessarily going to be enough savings to be confident of a comfortable retirement. The next assumption I'll make is that you and your wife earn less than the $150,000 threshold where eligibility for Roth IRAs starts getting phased out for married couples. In general, we'd probably say contribute at least 1% to the 401(k) to get the match. After that, it's a toss-up that none of us can resolve without knowing a lot more about your situation. You can read a lot of articles touting Roth IRAs (especially a couple years back when they were new), but the truth is that theoretically, unmatched 401(k) contributions and Roth IRA contributions take you to the same place. Invest now and then tax versus tax now then invest: either way you end up at the same point. It's like asking which is greater, 2 times 5 or 5 times 2? In practice, things to think about when comparing unmatched 401(k) contributions to Roth IRA contributions are: - Whether you expect your personal marginal tax rate to rise or fall between now and when you plan to spend your money. - Whether the investment returns available in your 401(k) plan are likely to be higher or lower than what you might choose from in the Roth IRA. - Expenses paid by the 401(k) plan assets versus costs of opening a Roth IRA. Don't ignore investment management costs. - How much is the convenience of payroll withholding for 401(k) plans worth versus the Roth IRAs where you and your wife have to save on your own. However, you can probably arrange for a monthly automatic debit from your checking account to the Roth IRA. - To what extent do you value having access to your money? One can pull out contributions to the Roth IRA without paying taxes but the 401(k) plan will have more limited access to your funds. On the other hand, the 401(k) plan probably has loans available, which IRAs can't offer. - Is the money being saved for retirement or for other goals? - A 401(k) plan gives you better protection in case of bankruptcy, not that many of us would plan for that possibility! I'm probably leaving out a few other considerations, but that should give you enough to think about. Probably how much you put in and what asset classes you invest in are more important factors in affecting how much long-term savings are generated, so the worst thing to do is delay saving because you can't decide between the 401(k) plan or the Roth IRAs.