MWeddell

Only plans sponsored by the same "employer" are aggregated for 415 limits. When examining the degree of common control for determining whether two separate legal entities are regarded as the same "employer," Code Section 415(h) says that employers with more than 50% common ownership are considered the same employer. Hence, if the partnership really was exactly a 50% / 50% split, then I think the individual has a separate 415 limit for the corporation than he/she had for the partnership. [This message has been edited by MWeddell (edited 10-18-1999).]

If the plan uses the safe harbor events test and the safe harbor resources test, then it sounds like it clearly meets the standards to me. The fact that the plan administrator doesn't like it or thinks that by changing principal residences the spirit behind the rule is violated ought to be irrelevant. Although plan sponsors can amend their documents to change hardship withdrawal forms of payment, one has to follow the plan rules and not exercise employer discretion. It looks to me like the plan administrator has no choice but to approve the hardship request because it meets the standards specified in the document.

Your question points out that using the prior plan year method for NHCE percentages is a bad idea for plans where the matching amount might decrease. Just to make one of your assumptions explicit: we're all assuming that there are no employee after-tax contributions to this plan, because they also will affect ACP testing. [This message has been edited by MWeddell (edited 10-14-1999).]

The best solution based on what we know is to switch to the current year ADP/ACP testing method if it's at all possible.

Yes, the utility may sponsor a 401(k) plan. Because the utility is for-profit, you can't sponsor a 403(B) or 457 plan.

[Deleted multiple posting.] [This message has been edited by MWeddell (edited 10-11-1999).]

[Deleted multiple posting] [This message has been edited by MWeddell (edited 10-11-1999).]

I agree with the above posting. Answering the side question posed by John A., one situation I've seen twice where the group of employees eligible to receive 401(m) matching contributions is larger than the group of employees eligible to make 401(k) elective deferrals is for health systems that include both not-for-profit and for-profit affiliates. The not-for-profit employees are eligible for a 403(B) program instead of the 401(k) plan. The matching contributions are all made in a qualified plan based on either 401(k) elective deferrals (made to the qualified plan) or 403(B) elective deferrals made to a 403(B) plan. I agree that it's not a very common set of circumstances. [This message has been edited by MWeddell (edited 10-11-1999).]

If the plan isn't a pension plan (i.e. it's a profit-sharing or a stock bonus plan) and a few other requirements are met, then the plan is subject to spousal consent only once an annuity option is elected, not before then. Hence, some plans will treat loans as not requiring spousal consent because the spousal consent rules only spring into effect once an annuity option is selected.

The 1999 third edition of the 403(B) Answer Book seems to say that, unless technical corrections are made, when Code 415(e) is repealed effective with the limitation year beginning in 2000, then 403(B) programs no longer have separate 415 limits. This conclusion would apply to 415© limits too. I find that a little hard to believe because Code Section 415(e)(5) states the exception when a 403(B) is aggregated with employer-sponsored plans, and is not the source of the general rule that 403(B)'s are considered sponsored by the participant, not the employer. Has anyone looked at this issue? What are your thoughts on it?

That's not quite right. If you're using a 3% QNEC to meet the safe harbor requirements, that will also meet the 401(m) safe harbor requirements as long as you don't have a matching formula that violates the restrictions in Notice 98-52, Section VI(B). If your plan accepts employee after-tax contributions, then those contributions always are subject to 401(m) testing. A safe harbor contribution doesn't eliminate that need for testing. [This message has been edited by MWeddell (edited 10-07-1999).]

I agree with Dook's posting in regard to hardship withdrawals. There's no external law or regulations that addresses suspending employees from making elective deferrals when they take loans. That leaves it open to the plan sponsor. If the plan document (or written loan procedures incorporated by reference into the plan document) says that participants are suspended from making elective deferrals for 12 months (or whatever time period one chooses) upon taking a loan, then such a restriction should be valid. The penultimate sentence of Treas. Reg. 1.401(k)-1(g)(4)(i) implies that such a restriction is valid (but employees so restricted must be included in the ADP test). [This message has been edited by MWeddell (edited 10-07-1999).]

No, I don't think I agree with your conclusions, but first let's clarify something. Which portions of the plan are failing coverage testing prior to your proposed retroactive amendment? The profit sharing (employer nonmatching?, the 401(k), or the 401(m) portions? All three portions?

Getting an IRS favorable determination letter is required only when one is using the remedial amendment period (which you're not). Besides, you're proposing to submit the plan by 12/31/2000 anyway, so you'll meet that deadline. In general, when you apply for the letter is a matter of judgment. I agree that in your situation I'd suggest to the client to wait until later in the year 2000 when the IRS hopefully will be reviewing language for safe harbor 401(k) plans.

I'd caution a client that the provision you're suggesting may be challenged by the IRS and that you may not be able to get a favorable determination letter with that provision. The 1995 IRS examination guidelines for QJSAs says that, just as you suspected, it imposes a significant detriment on a participant's right to defer distribution for participants whose vested accrued benefit exceeds $5,000. However, the IRS never issued a stronger authority (similar to Revenue Ruling 96-47) stating their position.

Some additional thoughts, although it's clear everyone who has responded agrees with you, not the CPA. If you amend the plan to exclude all key employees from eligibility, then if someone accidentally is allowed to contribute but then is identified as a key employee (e.g. an employee becomes a top 10 highest paid officer and client didn't tell you about it in advance), you can probably correct it under APRSC instead of now being forced to make top-heavy minimum contributions. On the other hand, leaving everyone officially eligible and having key employees elect to contribute 0% will help your ADP test for any non-key HCEs. Maybe the CPA is zealously concerned about the contingent benefit rule in the 401(k) regulations where an employer can't make any compensation or benefits (other than 401(m) contributions and certain nonqualified plans) contingent on whether an employee contributes to the 401(k) plan. You're being asked to prove a negative, which is nearly impossible. Ask the CPA what support he (or she) has for his position because you don't see any reference to highly compensated employee in Code Section 416 or the regulations issued thereunder.

I'm not sure what specific requirements you're referring to. ERISA has many specific requirements (get a fidelity bond, must have a written plan document, etc.), but I don't think there's anything specific you need to do in regard to selecting Vanguard. ERISA section 404(a) lists some very general fiduciary duties, including the duty to prudently select investments. You may take time to document what your process was, how you decided to choose Vanguard, etc., but there isn't DOL guidance regarding what specifically you must do.

I agree with the above posting. If you're looking for a cite, look at Internal Revenue Code Sections 401(a)(30) and 402(g), especially the definition of elective deferrals in 402(g)(3). The limit doesn't apply to employee [after-tax] contributions. That's where the $10,000 limit (which is $7,000 plus many years' worth of cost of living adjustments) comes from.

Cross-tested retirement plans are authorized by Treas. Reg. 1.401(a)(4)-8. Until that regulation changes or Congress passes a new law, you're fine. Back in about 1992-93, cross-tested plans suffered some negative publicity and there appeared to be some momentum to change the law. At that time, the IRS said it thought its regulations shouldn't be changed unless Congress changed Code Section 401(a)(4). Since, then the furor died down and nothing has changed. Will Congress change it at some point in the future? I don't know but the past 10 months worth of cash balance publicity has convinced me that it's possible for arcane benefits issues to garner Congressional attention with only 1-2 journalists serving as catalysts for change. [This message has been edited by MWeddell (edited 10-01-1999).]

Code Section 401(a)(26), which required that qualified plans cover the lesser of 40% of an employer's workforce or 50 employees, since the plan year beginning in 1997 doesn't apply to defined contribution plans. However, there's still a cross-reference to 401(a)(26) in Code Section 403(B)(12). Normally, I'd say that 401(a)(26) doesn't apply to the nonelective deferral portion of a 403(B) plan either because it's not a defined benefit plan. However, the IRS audit guidelines that were updated this summer still refer to 401(a)(26) rules, not that they elaborate at all. Does this mean that the IRS thinks that the nonelective deferral portion of a 403(B) is still subject to the 50 employee / 40% rule? Has anyone already spoken to the IRS about this?

Yes, it can. There's plenty of conditions to be met, but the fact that the contribution is made to a separate money purchase plan doesn't prevent it from being a safe harbor contribution. All NHCEs in the 401(k) plan must be eligible to receive that year's money purchase pension plan contribution.

Let's assume (for simplicity's sake) that your plan doesn't accept employee after-tax contributions or doesn't match them. In that case you could run the ADP test, then forfeit any hanging match for HCEs receiving ADP test corrective refunds, then run the ACP test and multiple use restriction. I think that still complies with the point Tom Poje raises above. More generally, there's nothing in the regulations (check your plan document too) that says in what order the ADP / ACP / hanging match / multiple use problems need to be corrected and you can work on them all simultaneously. When you're done making corrective refunds, just make sure there's no hanging match.

Sounds like this idea will work. Notice 98-52, Sections IX(2) and X are the most relevant to your situation. This assumes that ESOP eligibility is the same as 401(k) plan eligibility and that other safe harbor conditions (notice timely made, no last day of the plan year or 1,000 hour conditions on ESOP NEC allocation are made, etc.) are met. [This message has been edited by MWeddell (edited 09-23-1999).]

A QNEC must either 1) Be tested under 401(a)(4) like any other employer nonmatching contribution or 2) First be tested under 401(a)(4) and then after shifting all or part of it into the ADP/ACP tests, include the part shifted into the ADP/ACP tests in those tests and then retest the portion left behind under 401(a)(4). If your QNEC is allocated to all employees, not just NHCEs, it doesn't help your testing as much. You'll need a large QNEC to get it to pass. However, if whoever is doing your testing is creative, you can still leave just enough behind to still pass 401(a)(4) testing and move some of the QNEC allocated to NHCEs into the ADP/ACP tests.

There's a BNA Tax Management Portfolio that has a good discussion of the authorities. If the plan sponsor is in Michigan, Ohio, Kentucky, or Tennessee, make sure you review the recent Sixth Circuit Court of Appeals case concerning Sea Ray Boats.