MWeddell

The answer to your question depends on whether the plan or a portion of it is designated as an ESOP. The ESOP portion of the plan may not be tested on an age-weighted basis. You could not designate it as an ESOP. ERISA 404 makes clear that a profit-sharing plan also may provide that > 10% of plan assets be invested in employer securities, although most observers feel that there's more fiduciary risk with a profit sharing plan doing this instead of an ESOP. Another option would be to age-weight for testing purposes only the portion not invested in company stock and to designate the portion invested in company stock as an ESOP. Lastly, these rules apply to how the testing is done. You can age-weight or do whatever you want to the allocation formula as long as the plan has a definite allocation formula, the annual contributions meet the 401(a)(4) discrimination test, and contributions can't decrease with age without violating age discrimination prohibitions.

The amount of the contribution must be in the plan document if the plan is a money purchase pension plan (including a target benefit plan). It you're dealing with a profit sharing or stock bonus plan, the plan document only needs to stay an allocation formula and not obligate the employer to contribute a certain amount. However, if the plan document requires a certain amount, then one must follow the plan document. Hence, the short answer is check the plan document. From what you've said, it sounds like the plan document requires specified percentages to be contributed.

I agree with the above post by Alexander Calin, except if forfeitures are allocated to all participants regardless of the 1000 hours requirement, one can still count the employee for 410(B) purposes and the contribution allocation (which includes a 1000 hour requirement) may still meet a 401(a)(4) safe harbor. Hence, it's possible for the exclusion of this participant to not hurt your testing.

"401(k)" refers to a section number in the U.S. Internal Revenue Code, so there's no such plan under Canadian tax law. Employee deferrals to a RRSP will reduce employees' taxable compensation. Hopefully that answers your question.

Responding to the original post, a fiduciary could reasonably decide that all of those expenses are part of the reasonable cost of administering the plan and therefore pay from the trust. Responding to a point raised in Paul McDonald's post above, ERISA requires that a plan have a written document, so a fidiciary might decide that time spent preparing the written document can be charged against the trust if it can be separated from time spent discussing what features will be in the plan, which is definitely a settlor function.

If you only want to use the new cross-tested plan, then I'd still suggest merging the old profit sharing plan into the new cross-tested profit sharing plan. It's not uncommon for employers to decide not to make a profit sharing contribution for a plan year, but as of whatever date you're found to have permanently cease making contributions, you should have vested employees if the old plan is still a separate plan. Why wait around for trouble, even if it may not be a problem for one year or less? As far as the time period, if any employee has satisfied the conditions for receiving a 1999 profit sharing contribution, you'd have to first have the employer declare that there's no contribution for 1999 before merging the old plan into the new one. If the plan has a 1,000 hours condition or employed on the last day of the plan year condition, this wouldn't be an issue.

Impute permitted disparity

The QNEC isn't reflected on Form W-2. That's also a logical conclusion because QNECs aren't subject to the 402(g) limit either.

I think the answer is "yes," but would also like to hear from others. Note that when you cross test the 3% safe harbor nonmatching contribution, you may not impute permitted disparity. Also, you'll need to meet the other IRS requirements for the safe harbor contribution including no last day of the plan year condition, 100% vesting, distribution restrictions, etc.

If you're going to permanently cease make contributions to the old plan, you should merge it into the new cross-tested plan if you wish to avoid partial termination status which'll 100% vest all participant accounts.

I also agree with Larry M and richard that the amendment needed to be made before the end of the year for a profit sharing allocation that has a last day of the plan year requirement. Once a conditions for receiving an allocation of contributions or forfeitures for a plan year have been satisfied, one cannot retroactively change the conditions to lessen the percentage of contributions or forfeitures that a participant may receive. Treas. Reg. 1.411(d)-4 (Q&A-1(d)(8)).

The IRS delayed the effective date of the new law regarding the rollover and withholding rules for hardship withdrawals until 1/1/2000. Plan providers may start to implement the new law at any time from 1/1/1999 to 1/1/2000. However, even if a plan provider reports a hardship withdrawal as not eligible for rollover and doesn't process a direct rollover during 1999, the participant may still make a rollover the old indirect way (within 60 days of the distribution). It's a pretty technical point, because virtually no one ever rolled over hardship withdrawals anyway. Besides changing the rollover rules, the law will also change the withholding rules to 10% withholding, which the participant will have the opportunity to waive, instead of 20% mandatory withholdings on hardship withdrawals not directly rolled over.

The IRS released a Technical Advice Memorandum stating that the gain on the sale of unallocated ESOP stock could be treated as investment earnings, not as a contribution subject to 415 limits. This also affects 401(a)(4) testing too. I first saw it publicized in the December 1997 ESOP Report published by the ESOP Association. If you call them, they should have a copy of it.

Consider posting your thread under "Operating a Pension Consulting Firm."

I agree with mquincy, in case you're looking for consensus.

Legally, one can make a QNEC to all eligible employees but only include a portion of it in the ADP test if the dollars not included in ADP/ACP tests still pass 401(a)(4) on your own. I've done this before for a custom plan document but don't know whether it'll work with PAM's prototype plan document.

The 401(m) portion of the plan (match and any after-tax contributions) is disaggregated for 410(B) purposes, so you'll have to test it separately. To the extent that the rate of match available to employees differs from one group to another (as in your situation), then you must do benefits, rights, and features testing under 1.401(a)(4)-4 for each rate of match: 1) You're testing the matching rate that was available to employees, so you look at all eligible employees, not just those who make sufficient contributions to actually receive the maximum match. 2) One can't cross-test the match on a benefits or age-weighted basis. Also, there's no imputing permitted disparity. This makes the test fairly easy to do but harder to pass often than if you were testing nonmatching contributions. 3) Good news (if you track through all of the cross references in the regulation) is that you only need to pass the nondiscriminatory classification test (which requires a ratio percentage between 20.75% and 50% depending on the employee population), not the regular 70% ratio percentage test and not the average benefit percentage test. All of this is in addition to your 401(m) test. Hope that helps. Good luck.

In general, one can require employment as of a certain date other than the last day of the plan year. One plan design I've seen a couple of times is employment at the end of a quarter to receive that quarter's profit sharing contribution. The plan won't qualify for a 401(a)(4) safe harbor, so general testing will be needed. Also, it generally can't be done with a prototype plan document. In your circumstance, making the change sounds like it would be discriminatory. There's a facts and circumstances test that applies to the timing of adopting an amendment in Treas. Reg. 1.401(a)(4)-5(a). ERead's suggestion to require 1000 Hours of Service instead of employment as of September 1 is a practical suggestion because it makes the amendment look less suspicious so the IRS might not detect the issue on audit as easily, but the legal issue remains unchanged because the timing of the adoption of the amendment still has the effect of favoring HCEs. Also, unless you made the amendment within a day or so after your original posting, it's too late to change your 1998 allocation formula for a calendar year plan. The IRS regulation for 411(d)(6) protected benefits define "other rights and features" in a way that clearly implies that changing an allocation formula after someone has satisfied its conditions (the end of the plan year for a plan that requires employment on the last day of a plan year) is indeed a protected 411(d)(6) benefit that can't be retroactively changed.

I agree with L Carusi that the answer is yes, but only if permitted by the plan document, including any loan procedures that are considered as part of the plan document. Some plan documents also will differentiate between what types of contributions the loan money can come from and what types of contributions can be used when making the 50% of the vested account balance calculation.

The 403(B) Answer Book's argument (Q 8:54) seems to be based on lack of statutory language analogous to 401(k)(10)(A) that would authorize 403(B) money to be distributed upon plan termination. 1-800-901-9074 is the publisher's number if you'd like the book. I think it's useful and no, I'm not affiliated with the publisher.

I think the ownership of the stock may be attributed to the son. If so, the son is considered a 5% owner and hence a highly compensated employee. Perhaps someone else who routinely works with family-owned businesses could confirm this.

Well, I'm definitely outvoted (by FIVE others at last count!). This issue has become tangential to Elizabeth's original posting because she discovered that the erroneous contributions exceeded the $10,000 402(g) limit which is a qualified problem under IRC 401(a)(30). Therefore, Elizabeth should correct the problem under APRSC if possible. However, I still don't understand everyone else's position. I know the failure to follow the plan is an ERISA violation. I know that Treas. Reg. 1.401-1(a)(2) requires that a qualified plan be "a definite written program." Where does it say that any failure to follow the written plan document is a qualification problem? I looked up Susan's cite, and it doesn't help me understand. If it's not a qualification problem (literally "a failure that adversely affects the qualification of the plan"), then I question whether a failure to follow the plan document that doesn't violate some substantive qualification requirement constitutes an operational failure susceptible to APRSC correction as explained in my prior posting. Thanks for your responses thus far.

The TIME article refers to a new discrimination testing provision effective for plan years that begin in 1999 that allows one to ignore nonhighly compensated employees who haven't attained age 21 or haven't earned one year of service. For those familiar with the discrimination testing, this is a pretty minor development because prior rules allowed us to get to the same result because this group could be tested separately and generally didn't have any highly compensated employees anyway. Financial disincentives to allowing newly hired employees to participate still occur if (i) the plan makes employer contributions including matching contributions to participants, or (ii) the employer pays administrative costs (such as per participant recordkeeping charges or distribution fees) for these particiapnts. [This message has been edited by MWeddell (edited 01-07-99).]

A similar inquiry was discussed in a thread titled "Pre-Tax Deferrals After 401(a)(17) Limit" started by Tom Moses, last updated on 10/30/98. My opinion is that the plan can accept deferrals up to the $10,000 limit even after a participant reached $160,000, although most plan documents are drafted in a manner that allows this interpretation. However, others reached different conclusions when we discussed this issue before.

Most prototype plans don't allow for an employee to waive participation. I do think this would have to be in the plan document. It's permitted for profit sharing and money purchase plans, but if there's a cash or deferred arrangement, the 401(k) regulations only allow a one-time irrevocable election not to participate under fairly narrow circumstances. Furthermore, if the employee is getting higher compensation for opting out, then you're in danger of having it considered a cash or deferred election. We've got a client who put in an opt-out provision to its profit sharing contribution because it had some very fierce anti-government sentiment among some of its employees who didn't want to profit from a federal tax break. There was no compensation increase to these employees. We didn't have any trouble amending the document and obtaining a favorable determination letter, but that client wasn't trying to use a prototype document anyway.