MWeddell

Terminating the plan and distributing its assets won't work if those 2 employees are contributing to another 401(k) plan within the controlled group. Merging the plans may become easier when the new 411(d)(6) regulations come out. Treasury officials have given some verbal previews of the new guidance and it sounds helpful. I'd put this project on the back burner for a couple weeks until that guidance comes out. [This message has been edited by MWeddell (edited 02-07-2000).]

There is no problem with the matching formula of 0% match on the first 3% of compensation deferred and 100% match on compensation deferred in excess of 3%. The availability of the match does not favor HCEs. (As a matter of fact if one considers the 402(g) limit, the match's availability probably favors NHCEs). The amount of the match is subject to ACP testing. You might have difficulty passing that test. There are no other testing requirements applicable to the match. John A has asked for clarification but there's nothing more to add. By the way, this isn't just a completely hypothetical response. I've seen this type of matching formula twice on clients I've worked with. It makes sense in the right situation.

I agree with your understanding of the situation. While the matching formula is unorthodox, it doesn't cause any effective availability problems under Reg. 1.401(a)(4)-4. The only test you need to run is the ACP test (which should be especially challenging with this match formula!).

It's not allowed until new legislation passes.

The employer contribution that the participant will receive regardless of whether he or she contributes is nonmatching. It will be subject to testing under Reg. 1.401(a)(4)-2 although it sounds like it still meets a safe harbor. If this amount is fully vested, has certain withdrawal restrictions, etc., it might be shifted into the 401(m) test under the QNEC rules, but that's an exception. The excess amounts that the employer contributes only because the employee made elective deferrals is a match subject to 401(m) testing. Thus, before the testing is done, you'll have to separate out just the portion that the employee wouldn't have received if he or she had not contributed. If this still isn't clear, maybe it'd help if you gave a specific numerical example of your plan's contribution formulas.

Sounds like only part of the money is a match subject to 401(m) testing.

That's correct. Actually, the 3% nonintegrated contribution can do triple duty if you want to count it as a top-heavy minimum contribution as well.

I was referring to Treas. Reg. 1.401(k)-1(a)(3)(iv). Rereading these posts, I'm unsure whether Tom Poje was referring to the same development.

The plan should provide that match attributable to refunded elective deferrals doesn't stay in the HCE's account. If it did stay, then you'd have a discriminatory benefit, right, or feature under 1.401(a)(4)-4 because the matching rate is higher for this HCE than other employees once one considers only the elective deferrals left in the plan. Check the plan document. The excess match typically becomes a forfeiture. Look at your plan document whether it offsets future company contributions or is allocated to employees. If allocated to employees, typically the HCE shares in it, but it's a matter of what's in the plan document.

Tom Poje is right. There's the old method of testing separately those <21 & <1 and the new statutory method of ignoring NHCEs <21 & <1. I recall the IRS believes that one can't use an entry date assumption under the new statutory method but still can under the old regulatory method.

I agree it sounds like a violation of the plan asset regulations. Most service providers will direct contributions received during the black out period in accordance with participant investment elections, so the problem really shouldn't arise. In your client's situation where the service provider couldn't provide that service, the separate interest-bearing account should have been opened in the trustee's name, not the employer's name.

The reason why a plan that excludes individuals by name must pass using the ratio percentage test is because it won't pass the average benefit test. The average benefit test consists of two portions, the nondiscriminatory classification test and the average benefit percentage test. The nondiscriminatory classification test also consists of two portions, an objective arithmetic test and a subjective component. The subjective component is passed only if "the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan.... An enumeration of employees by name ... is not considered a reasonable classification." Treas. Reg. 1.410(B)-4(B).

Yes, it is permissable to exclude HCEs from the safe harbor contributions but still allow them to make elective deferrals. Yes, you may exclude HCEs by name or by classification as long as it's done in the plan document in a way that doesn't give the discretion to the employer. If you exclude by name, then the plan must pass coverage testing using the ratio percentage test. On your last point, you could think about fail-safe contribution language to allow a partial allocation to the young HCEs. You have to define in advance exactly how you're going to do the testing / allocation plus others report that it makes getting a determination letter a challenge, so fail-safe contribution language isn't always a popular option. From your posting, it's unclear why you'd have to perform cross-testing, but I'll assume there's some other things going on within your plan that makes cross-testing necessary.

If you're trying to fit a 414(s) safe harbor definition of compensation, you must use both 125 and 401(k) deferrals (and 457 & 403(B) deferrals if you've got those plans) or use none of them. However, you could do 414(s) testing perhaps to demonstrate that using on 401(k) deferrals plus W-2 pay is nondiscriminatory. Telling an employer who's trying to avoid 401(k) / 401(m) testing that it now has to do 414(s) testing might not be the easiest thing to do however!

There are a number of other problems with merging the plans (who will produce trust statements suitable for auditing, does the document have to be amended beforehand to avoid any 411(d)(6) problems, and whatever else I've not thought of), but compliance testing isn't a problem. Having different investment options for various groups of participants is a benefit, right, or feature that is subject to testing under Treas. Reg. 1.401(a)(4)-4. However, assuming the plans have not had a problem passing 410(B) coverage testing, then a combined plan also won't have a problem with benefit, right, or feature testing. [This message has been edited by MWeddell (edited 01-12-2000).]

I agree. However, when you say that the employers are not a controlled group, remember that the common ownership need only be > 50% for 415 purposes, not the usual >= 80% in order to make a controlled group. [This message has been edited by MWeddell (edited 01-10-2000).]

The regulation is here: http://www.dol.gov/dol/allcfr/Title_29/Par...R2510.3-102.htm The regulation isn't too long and is more readable than the average government regulation in my opinion. I'd paraphrase it by saying that 401(k) contributions must be deposited as soon as they can reasonably be segregated from the employer's general assets but no later than 15 business days after the end of the month during which they were deducted from an employee's paycheck. However, you'd be better off to read the regulation than to rely on any of our paraphrases. [This message has been edited by MWeddell (edited 01-05-2000).]

Well, I doubt we'll tell you anything you don't already know, but here goes ... Be honest and up front with the participants. Set expectations for the black out period long enough that your provider is likely to beat the deadline. Hold weekly conference calls with your new provider and keep in touch with outgoing providers so if things go off track, you discover it quickly. Consider that if your complaints come only from former employees, you must be doing something right.

To amplify the above comment, certainly < 50 / 3000 is a low percentage to be considered as the top hat group if one looks back to those old DOL rulings before it stopped ruling on that issue. However, there's a remark in early 1990's prefatory discussion to 414(q) proposed or final regulations (yes, that's a vague cite, but it gives you enough to look it up if you want to pursue it) that specifically says that the DOL told the IRS that IRC 414(q) definition can't be used to define the top hat group. Granted, the indexed amount jumped from $66K to $80K since that remark, but it'd still be aggressive. [This message has been edited by MWeddell (edited 01-03-2000).]

I'd say somewhere between 1/3 and 1/2 of the larger 401(k) service providers send prospectuses to participants immediately after they move money into investment funds. We ask a specific question on this point in most of our requests for proposals for vendor search clients, because if one only asks "does your program comply with ERISA 404©?" one doesn't get to this information. I think you're right, that at least most providers don't distinguish between moving money into a fund for the first time ever versus moving money into a fund on a subsequent occasion, but I'm less sure of this point.

Obviously, you'd want to urge the employer to make 100% sure that the secretary has never earned 1,000 or more hours of service during any year. A cash or deferred election can only be made on cash not yet currently available. Hence, it could apply only to paydates between the effective date of the plan and the end of the year. You can use compensation earlier in the year to meet 415 and 404 limits, but no more than 100% of remaining compensation (less FICA, etc.) could be deferred. You'll want a resolution or something else authorizing deferrals.

Generally speaking, including prospectuses in the enrollment kits doesn't suffice if the plan is intended to comply with ERISA 404©. Most plans allow participants to transfer their money into an investment fund in which they haven't previously invested at any time during the year, not just during an annual or semi-annual enrollment campaign. Hence, the plan will not have provided prospectuses to participants immediately before or immediately after the participant invests in a SEC-registered investment vehicle for the first time if the only time participants are provided prospectuses is in the enrollment kits. I don't have any special knowledge regarding these questions. This is just based on a straightforward reading of the 404© regulations. Lots of service providers claim their programs comply with ERISA 404© but don't provide prospectuses when needed (or clearly tell employers that they need to do this if the provider isn't doing so).

By comparing the two lists of information in the 404© regulations, it's clear that the prospectus must be "provided" not "provided upon request." Hence, as long as it's provided to the participant (regardless of whether it's by the trustee, the recordkeeper or the plan administrator), that condition is met. Telling the participant that he or she can get it from the plan administrator doesn't meet the plain language of the regulations (in my opinion).

There isn't an IRS regulation on this topic. What you're probably looking for is in Sections 404-407 of ERISA. There's an exception to the 404(a) duty to diversify investments (and the prudence duty to the extent it requires diversification) for employer securities. Because shares of the former parent's stock are no longer employer securities, this exception will cease to apply. The effect is that a sizeable portion of the plan assets may no longer be invested in the former parent company's stock. [This message has been edited by MWeddell (edited 12-22-1999).]

First the bad news: Look carefully at the 415 regulations and you'll see that (if you're talking about a defined contribution plan that violated 415©) corrective action which may include refunds can only be made for certain types of errors. Good news is that there isn't a deadline in the regulations, so I wouldn't assume you're out of compliance. The IRS will holler about this, but your client may have a large enough problem to want to challenge the IRS's initial position. The IRS acknowledges that there isn't a deadline, even if it doesn't like it. The IRS response to Question 20 from the 1996 Enrolled Actuaries Meeting gray book states in part: "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." In your situation, your client is probably not concerned with the IRS's "expectation" or what they "would not look favorably" upon but is a whole lot more concerned with what's the legal deadline.