MWeddell

The 401(a)(17) limit on compensation (currently $160,000) is a plan-by-plan limit, so the highly compensated employee may be credited with up to $160,000 of compensation for each plan. The fact that deferrals to both plans count in each plan's ADP test prevents any really advantage here. You're right about the 415 issue: the highly compensated employee is limited to the lesser of 25% of pay or $30,000. The threshold for determining whether there's a controlled group is lowered from 80% to more than 50% just for the 415 test.

In addition, if the two companies share enough common ownership to be considered as members in the same controlled group, then enforcing the $10,000 limit for both plans combined becomes a qualification issue and highly compensated employees' deferrals to both plans count toward each plans testing, which can really hurt ADP tests.

I disagree with the above post and still see nothing in the Internal Revenue Code nor the IRS regulations and guidance that requires a written plan document for a 403(B) plan. Code Section 403(B)(1)(E), as amended by the SBJPA, required that the contract be amended by 1/1/1998, not the plan. See also Rev. Proc. 97-41, Sections 12.02, 1.02(4), and 2.02.

First of all, the IRS deadline for amending 403(B) plans and contracts was the first day of the 1998 plan year. See IRS Revenue Procedure 97-41, Sections 1.02(4) and 12. It's not been extended since then. However, the real answer is that there isn't any IRS requirement that there be a written plan document in the first place. That's why the IRS didn't bother extending the deadline because there wasn't any deadline (and because Code Section 401(B)'s remedial amendment period doesn't apply to 403(B) programs). Bob Architect of the IRS could informally confirm this enforcement position if you want to talk to someone there (no, I don't have his number handy). Theoretically, if your plan is subject to ERISA, the DOL could say that the document should have been timely amended, but that's not going to happen. In sum, I don't think you have to worry about it. Just make the amendments now. [This message has been edited by MWeddell (edited 07-21-99).]

I believe Revenue Procedure 98-25 is the most current IRS guidance. Whether it applies to 403(B) programs in addition to qualified plans, I'm not sure. It still requires a lot of pragmatic decisions for you to implement it, but that's a start for you.

If a 403(B) plan is subject to ERISA, then I think one has to let an employee participate once he or she has 1,000 hours of service during an eligibility computation period. I don't see the "employees who normally work less than 20 hours per week" 403(B) rule in ERISA.

Notice 92-48 is what chris is recalling. Because the tax law has changed, that notice says we can no longer rely on the safe harbor notice. Significant changes (I believe) were new types of IRAs which don't accept rollovers, the change in rollover treatment of hardship withdrawals, and the elimination at the end of this year of 5-year forward averaging. The IRS has very informally confirmed that one cannot rely on the safe harbor notice in the March 1998 Enrolled Actuaries meeting gray book. What really should happen is the IRS should clearly publicize that the old safe harbor notice doesn't work and publish a new one. It's been on their 1998 and 1999 priorities list but they've not gotten around to it I guess. Yes, you can always have discretion to change it yourself: it was only a safe harbor notice, and you can modify it or draft your own as long as you meet the legal requirements for the notice. Can't help you with a sample.

First of all, the deadline was changed to distributions made after 12/31/1999 by Notice 99-5. Many 401(k) providers will convert their systems during 1999 as permitted by that Notice, but the participant may still choose to roll it over even though the 401(k) provider reports it as ineligible for rollover. To answer your question, if pre-1988 earnings are included in your 401(k) plan's hardship withdrawal payment option (it doesn't have to be because Treas. Reg. 1.401(k)-1(d)(2)(ii) just says "may") and the participant is taking a hardship withdrawal without some other distributable event, then it will not be eligible for rollover after 12/31/99. See Section V(A)(first sentence) of Notice 99-5. [This message has been edited by MWeddell (edited 07-21-99).]

The loan doesn't have to be reamortized under IRS regulations, but unless it was to purchase a home, one way or the other the 5-year deadline still applies even though payments were missed. It's an open question whether ERISA would require the plan's fiduciaries to have the missed loan payments made up immediately or have the loan reamortized rather than just say everything's fine as long as all payments are made by the end of the 5-year deadline. Logically, it seems like there'd be an issue, but I suspect there's little DOL enforcement demanding that fiduciaries be more strict than what the IRS regulations require.

To Gary Wyatt, I don't understand this comment: Finally, they allowed the "dollar-in, dollar-out" combination of QNECs and disgorgement, as well. Sounds interesting, but would you please explain it a bit?

I agree with the above posting but will throw in a couple of other thoughts. 1) Consider having the recordkeeper or whoever's doing the test run both with compensation for the whole plan year and also with compensation for just the portion of the plan year for which employees were eligible to contribute to the portion of the plan (union or nonunion) being tested. The results may differ quite a bit because of your unusual circumstances. 2) I'm guessing not too many nonunion employees who decide to unionize were on pace to earn $80,000 or more, so this comment is probably unnecessary. Nonetheless, ask your recordkeeper to look at all compensation (both union and nonunion) when determining HCEs for the next plan year's testing.

I researched this topic for a client recently, so I think I've got your answers. You can't amend retroactively the existing QNEC allocation after a participant has satisfied all of the allocation conditions (which typically occurs no later than the last day of the plan year). Treas. Reg. 1.411(d)-4 (Q&A-1(d)(8)). I believe that you can add a new contribution type called Bottom Up QNEC (or whatever you want to name it) with a different allocation formula. This is similar to the situation approved in the March 13, 1998 IRS Field Directive. However, the deadline for amending the plan to add in the new Bottom Up QNEC (because it is being used to correct a discrimination test) is 10-1/2 months after the end of the plan year. Treas. Reg. 1.401(a)(4)-11(g)(3)(iv). Looking at Treas. Reg. 1.401(a)(4)-11(g)(2) and 1.401(a)(4)-1(B)(2)(i)(B) makes me think that that same deadline applies to ADP testing too, not just 401(a)(4) testing.

I admit that the point raised by M R Bernardin looks right to me as well. The key sentence is in Section V(B)(1)(B) of Notice 98-52. As shown by the last of the examples in Section V of the Notice, I believe this provision is aimed at a different problem and the most likely interpretation is that matching 100% of the first 4% of pay contributed on a pre-tax or after-tax basis is an ADP safe harbor contribution. However, the language is ambigious. Your legal counsel said it is not clear and M R Bernardin wrote that it is possible it might not satisfy the ADP safe harbor and I agree with those views. Thanks for the correction. [This message has been edited by MWeddell (edited 06-17-99).]

First a couple of warnings before trying to answer your question. 1) Your legal counsel may know more about your situation than what you've disclosed to the BenefitsLink readership, so be cautious before you disregard what he or she says. 2) There are a lot of technical reasons why a contribution may not be a safe harbor contribution, but I'm assuming that you've looked at the situation carefully and that only the match on the after-tax contributions is a possible obstacle. 3) The IRS rules on safe harbor contributions right now are in Notice 98-52. The IRS is collecting comments on it and some changes will likely be made when the guidance is issued in the form of proposed regulations. Hence, in a very broad sense, all of the safe harbor rules are unclear because the IRS doesn't consider itself done with this project. All that being said, I'm inclined to disagree with your legal counsel. Just to clarify, I'm assuming that your match is dollar-for-dollar on the first 4% of pay deferred, regardless of whether it is contributed as pre-tax or after-tax dollars. Section VI(B)(3) of Notice 98-52 says that that match formula is fine. The rate of match satisfies the Notice's requirement and the fact that the match is made on pre-tax or post-tax dollars is not a problem. If instead your plan's match formula is 100% of the first 4% of pre-tax contributions AND 100% of the first 4% of after-tax contributions (so that an employee can earn 8% of pay as a match by contributing 4% pre-tax and 4% after-tax), then that's not an ACP safe harbor contribution. Section VI(D)(Ex. 4) of Notice 98-52. Note that if the match formula does satisfy the safe harbor rules for ADP/ACP testing, you'll still have to perform ACP testing on the after-tax contributions themselves. This may have been what your legal counsel was referring to. Note that sometimes testing only the after-tax contributions can yield worse test results than testing both the match and after-tax contributions together. I know, it's a long response, but it was a complicated question. Good luck.

Beginning with your 1999 plan year, if one permissively disaggregates the employees who could have been excluded under Code Section 410(a), i.e. those with < 1 year of service or < age 21, then all nonhighly compensated employees in this otherwise excludable group are ignored for testing and any highly compensated employees (which there usually aren't) are included in the testing with the employees who are age 21 or more and have 1 or more years of service. Code Section 401(k)(3)(F). The short answer, Tracy, is that your recordkeeper is right that shortening the service eligibility requirement doesn't need to affect the ADP test. Is shortening the eligibility period a good idea for increasing plan participation? Buck's 1997 401(k) plan survey (the question was dropped from their 1998 survey) says with 3 months or less of eligibility, participation is 80%, with 6 months it is 78% and with 12 months it is 74%. I suspect that the cause and effect is much smaller than this correlation implies. Plan sponsors who have high turnover are likely to choose a long eligibility period and likely to have lower participation rates. Nonetheless, there's at least some evidence that the idea is worth pursuing. Certainly other ways of improving participation are more effective (negative elections, higher match, targeted communications, etc.) and should also be considered if you haven't already.

Could be a problem. If at the time of contribution the money was designated or treated as after-tax employee contributions, e.g. by reporting the contributions as taxable income subject to applicable withholding requirements, then it can't be 401(k) elective deferrals. Treas. Reg. 1.401(k)-1(a)(2)(ii). This is determined at the time of the contribution, not when the W-2 is produced next January. Hence, if payroll treated it as after-tax, it looks to late to change it now.

I agree that one applies the rules mechanically but be aware of family attribution of stock ownership rules which might make the ownership percentage of some individuals higher than what it at first appears.

The fresh-start method of taxation allowed one to create a separate contract holding just pre-1987 after-tax contributions so that a participant could withdraw just those contributions first without touching the taxable investment earnings. See IRS Notice 87-13. I think plans have to specifically authorize the fresh start method, but I'm not an expert on it so see the IRS Notice I cited above. I think the answer to your question is under the double contract method all after-tax contributions are examined together for computing what portion of the distribution is taxable.

Notice 98-1 says you use the prior year NHCE percentage computed in the manner for how the prior year test was actually performed (or at least that's my paraphrase of it). Hence, 5.33% if the correct answer in your situation.

The proposed formula is a safe harbor formula, assuming immediate vesting and other conditions are met. IRS Notice 98-52, Section V.B.1.a.ii. For each rate of elective contributions, the aggregate amount of match is at least as generous as the basic safe harbor matching formula. Furthermore, the rate of match doesn't increase at any point when the elective contributions increase.

I came across this while doing some real work. If you want a more direct cite why a 401(k) plan can't use just years of participation (not years of service) for vesting purposes and have access to CCH Pension Plan Guide, see the article reprinted at paragraph 23,890O.

The answer is a qualified yes, assuming you're talking about employer contributions other than the elective deferrals which are always 100% vested. Vesting can be no less generous than one of the statutory schedules, but may be more generous. For example, you could have a cliff vesting schedule where a participant becomes vested upon the earlier of 2 years of plan participation or 5 years of service. You couldn't just say that vesting occures upon 2 years of plan participation. Check with your recordkeeper before adopting such an uncommon vesting provision.

Did the plan sponsor obtain an extension of the deadline for filing a corporate tax return? If so (since you didn't tell us the corporation's tax year), when is the deadline, including any extensions, for filing of the corporate tax return?

Let's make sure we agree on the facts: (1) a plan uses a 414(s) definition for compensation and passes ADP / ACP testing, and (2) the plan's definition of compensation used for computing contributions does not meet a 414(s) safe harbor and appears unlikely to pass 414(s) testing. Whether there's a problem depends on the types of contributions the plan has. For 401(k) elective deferrals or employee pre-tax contributions, it's highly likely that you don't have a problem. The IRS has said that elective deferrals "are not required to be based on compensation determined under a definition that satisfies section 414(s)." Supplemental Information to the 414(s) regulations comments #7, 54 FR 7659, reprinted in Pension Plan Guid (CCH), para. 23,836F. IRS officials have publicly stated that they do not intend to develop a test for definitions of compenstion used in this limited fashion. Unless the compensation definition clearly restricts access to nonhighly compensationed employes, the definition is acceptable. 1992 Enrolled Actuaries Meeting Grey Book, question 40.If this definition is used for computing employee after-tax compensation and employer matching contributions, I still don't think you have a problem. While technically the ability to make each rate of contributions and the availability of each rate of matching contributions is a benefit, right, or feature subject to testing, using the same logic as presented above for the elective deferrals should convince the IRS not to pursue the issue. This one's a judgment call, but I think you're quite safe.If you have employer nonmatching contributions or profit sharing contributions, then you will have an issue with the plan's definition of compensation not meeting 414(s). You won't be able to rely on 401(a)(4) safe harbors and will have to perform general 401(a)(4) testing using a 414(s) definition of compensation.

It's strikes me as odd that this issue is still open. The Clinton administration is so clearly in favor of encouraging employers to use negative elections (a.k.a. automatic enrollments) for 401(k) plans that Pres. Clinton personally endorsed the idea in a presidential news conference. I don't know why in all the pension simplification proposals floating around Congress that someone hasn't introduced a bill stating that "the IRS is given authority to regulate the manner in which cash or deferred elections are made." All it would take is a simple statement like that in a law passed by Congress and there wouldn't be any doubt that the federal government, not the states, have exclusive authority in this area. It'd be a lot more effective at encouraging employers to adopt negative elections than a presidential news conference!