MWeddell

I'm unsure that I agree with Alonzo's correction and would appreciate reading others' input whether any failure to follow the terms of the written plan document constitutes a qualification problem (and hence might be corrected through the APRSC). The APRSC is available for Operational Failures. If one tracks through the definitions of Operational Failures and Qualification Failures, an Operational Failure is defined as "any failure that adversely affects the qualification of a plan" "that arises solely from the failure to follow plan provisions." I question whether having an NHCE contribute more than a 15% of pay limit specified in the plan document constitutes an operational failure that can be corrected through APRSC because I don't see how it affects the plan's qualification. In response to Elizabeth's original inquiry, if the mistake affected a highly compensated employee, go ahead and correct. Otherwise, you might want to wait for input from others. [This message has been edited by MWeddell (edited 01-07-99).]

If a student works less than 20 hours per week, a plan may exclude the student because of the number of hours worked. It's only if a student works 20 or more hours per week that the student exclusion becomes crucial.

I think the recommended course of action depends on whether the participant who exceeded the 15% limit was a highly compensated employee. If the mistake affected a HCE, then if left uncorrected you have a discriminatory benefit, right, or feature in violation of 1.401(a)(4)-4. I'd correct the mistake (using APRSC if the plan meets those requirements) by refunding the elective deferral over 15% and any match attributable to it and issue a 1099R similar to other corrective distributions taxable in the year of receipt. If it's not a HCE, then realize that the 15% limit you're referring to is a plan document rule, not an Internal Revenue Code rule. The only problem is a failure to follow the plan document under ERISA. There's no self-correction procedure available from the DOL, so I think I'd just leave the situation alone and only correct it if a DOL auditor requires it. Naturally, you'll want to prevent a similar problem from reoccuring in the future.

The deadline is 15 business days after the end of the month in which a participant would have received cash but for the deferral election. Extensions are available under quite limited circumstances. Contact the local Department of Labor office probably.

Responding to gsd, Section VI(B)(4)(a) of the Notice makes it fairly clear to me that one can layer "additional" matching contributions on top of a safe harbor match. I read the introductory clause to Section VI(B)(3)(Other Matching Contributions) as applying to any plans that don't meet all of the requirements of VI(B)(1) or VI(B)(2), so that it can include plans where the match satisfies the ADP safe harbor. I agree with all of David Shipp's comments. As for Laura Millwood's original request to explain this stuff, I don't think I could improve on David Shipp's comments.

Yes, you can have the gainsharing contributions made to the 401(k) plan. It'll be subject to qualified plan rules, including that employees couldn't withdraw these contributions for at least 2 years (or if earlier when an employee has 5 years of plan participation) and most plans are more restrictive than that. If contributions are made to all eligible employees (so it's not a match) and employees don't have the choice to defer it or not (so it's not elective deferrals), then it's subject to 401(a)(4) testing. However, if the gainsharing contribution is allocated as an even dollar amount or percentage of compensation for all eligible employees, then there isn't any 401(a)(4) testing required. Hope that answer helps you. Your 401(k) provider might also be able to answer your questions.

The definition of compensation for 404 deductibility purposes is after one subtracts out the elective deferrals. This didn't change when Congress changed the 415 definition of compensation. Elective deferrals are considered a type of employer contribution and are included in what is deductible. In your example, $7500 should be <= 15% of net compensation.

I'm responding to Richard's comment wondering why the Wall Street Journal doesn't present a balanced view. The writer of the Dec. 4 and Dec. 31 cash balance plan articles, Ellen Schultz, has not been a friend of 401(k) plan sponsors either, so it's not that she prefers 401(k) plans. The writer seems to intentionally choose to write provocative anti-employer articles and isn't aiming for a balanced presentation. Examples of the author's prior work concerning 401(k) plans are a 5/1/98 article critiquing matching contributions, a 12/4/97 article scutinizing the increase of the cashout amount from $3,500 to $5,000, and a 10/17/97 article criticizing 401(k) loans despite a government study saying that offering loans increases contributions by 35%. All of the above articles are interesting and provocative and may help sell newspapers, but don't expect a balanced presentation including a pro-employer viewpoint from this particular writer.

IRS permission for changing a plan year is only required for pension plans. See Rev. Proc. 87-27. Since we're talking about a plan that has a match, it sounds like it's probably not a pension plan.

There are a lot of optional rules that result in different ways to run an ADP test every plan year. You may be referring to the special rules in Notice 98-1 for using the prior plan year method in the first year. It may be done using the actual current year NHCE percentages or using 3% for the NHCE percentages.

I think you're right to question it. There's no provision for setting up a suspense account (assuming it's not an ESOP) for pre-funding a contribution. I've only seen it where the employer is making a contribution early in the plan year that will be allocated as of a date later in the same plan year. If KPMG is suggesting it, there's probably some correspondence describing the idea in the client's file.

Students regularly working 20 or more hours per week can be excluded from the elective deferral portion of a 403(B) plan only if they are employed by their own college, school, or university. I've seen plans where health systems have incorrectly thought they could exclude all students from 403(B) coverage. This is apparent if one looks up the cross reference to 3121(B)(10) that Dave Baker cites, but I thought I'd emphasize it.

Not only is there not a de minimus rule for minimum required distributions, but the IRS has rather specifically said that's there no de minimus amount. See the last sentence of Q&A A-5 in Prop. Treas. Reg. 1.401(a)(9)-1. There may be other ways to resolve your dilemma. If the vested account balance never exceeded $5,000 as of the time of any prior distribution, the plan document may require a lump sum payment. Starting March 22, 1999, a plan may provide that the participant be cashed out unless the vested account balance exceeded $5,000 at the time of the first age 70-1/2 payment. Another possibility is to make the 70-1/2 withdrawal permissive, not mandatory, for current employees who aren't 5% owners or to eliminate it altogether if the plan has a 59-1/2 withdrawal option that permits partial withdrawals at least annually.

The safe harbor contribution of at least 3% of pay to all eligible employees may be made to a different plan. Hence, from what you've said, it might qualify as a safe harbor plan, but Notice 98-52 contains a host of pitfalls so you'll have to look at it carefully. Also, the employer can't have only the HCE eligible for the 401(k). Check out that the NHCEs are eligible but merely decided not to contribute.

A 6-month period with 500 hours of service eligibility requirement is legally permitted because it's impossible for someone to meet the 410(a) maximum eligibility period of 1 year with 1,000 requirement without meeting a 6-month with 500 hours requirement. Whether 1/2 year of service in your plan really means 500 hours or just 6 months of elapsed time depends entirely on how one interprets your plan document. I'd be hesitant to imply that "1/2 year of service" also requires 500 hours of service during that 1/2 year, but it'll be hard for anyone to tell you the answer without looking over your plan document.

I think this is really a case of check the plan document. It doesn't sound like there's likely to be a solution here, but the problem is generated by the plan document's semi-annual contribution election restriction, not external law created by Congress or the IRS, so you've got to look closely at the plan document. The only external legal restriction that strikes me as relavent is that the plan can't provide a discriminatory benefit, right, or feature. Hence, if the HCE had an opportunity to resume making contributions at this point in time, the same opportunity also should be available to NHCEs.

If you are performing coverage testing, then you can exclude anyone with less than 1 year of service, so an employee who never earned 1,000 hours during an eligibility computation period (which at least initially is based on the person's hire date, not the plan year) may be excluded. If you are talking about 401(a)(4) general discrimination testing, then you first want to see if you meet a safe harbor, which permits 1,000 hours in the current plan year and employment on the last day of the plan year if you're allocating in proportion to pay and meet the other requirements. If you have to use general testing, then you'll be able to exclude only the < 501 hours crowd.

The plan document should state (1) how the multiple use is corrected (by affecting the ADP test or the ACP test), (2) whether non- or partially vested matching contributions to HCEs that become excess aggregate contributions are refunded to the HCEs or treated as forfeitures, and (3) if they are forfeitures whether they are offset against future employer contributions or whether they are allocated to participants and the allocation formula. Clarifying a couple more points relevant to your questions: If the excess aggregate contributions were vested, they cannot be treated as forfeitures, but the disposition of nonvested excess aggregate contributions depends on the plan document. How the forfeiture is treated depends on how it's allocated. If it is allocated in proportion to plan year compensation (that meets 414(s) standards) for all eligible employees, then it's treated like a nonmatching contribution, seems to meet a 401(a)(4) safe harbor, and there's no reason why it couldn't be allocated to HCEs. If it's allocated only to employees who've made elective deferrals and/or employee contributions during the plan year, then your concern about not allocated them to HCEs is valid because they will be subject to 401(m) testing. Hope that helps you.

The 403(B) Answer Book, Q 8:54, explains that one may terminate the plan eventually but because there are no provisions (in contrast to 401(k) plans) allowing for distribution of 403(B) assets upon plan termination that the terminated plan is still maintained until the last employee turns age 59-1/2 or separates from service. Quite a wait! In terms of merging it into another 403(B) plan, if it's an ERISA plan where the plan sponsor has fiduciary obligations to make sure the investments are prudent, this has to be allowed. However, if it's a non-ERISA plan where it's essentially just a contract between the employee and the annuity issuer, then the employer doesn't have that right.

I think the hard part is figuring out what exactly is no longer an eligible rollover contribution. The IRS hasn't issued any guidance to help us interpret this and the provision becomes effective 1/1/99, so we'll have to make our best guess. Tracking through IRC 402©(4)© to the cross references in IRC 401(k)(2)(B)(i)(IV) and IRC 402(e)(3), it looks like the best interpretation is that the new exclusion from the "eligible rollover distribution" definition only applies to qualified cash or deferred arrangements and salary reduction 403(B) arrangements. Hence, I think you're right that it excludes other contribution sources and, per the IRS regulations under 401(k), investment gains and elective deferrals after 12/31/88. Last week the Joint Committee on Taxation released its General Explanation blue book, which seems to support a narrow reading of the exclusion to be limited to the stuff described in IRC 402(e)(3). The blue book isn't completely unambigious either. For the portion that's not an eligible rollover distribution, it's clear that the withholding percentage is 10% (because this is a lump sum distribution) unless the participant elects not to have withholding. The plan must give advance notice to the participant of the right to elect not to have withholding. However, the plan doesn't need to give the participant any choices other than 0% or 10% withholding. See D-18 through D-27 of Treas. Reg. 31.3405-1 for more detailed information.

One possible argument for not merging the plans is if you have to use the merger & acquisition transition period that's in IRC 410(B) because you're maintaining differing levels of benefits or contributions for the 1-2 year period after the corporate acquisition. That rule has never been incorporated into regulations so it's always been a little unclear whether one can still use it after plans are merged together, making it become a 401(a)(4) testing situation. That's a situation where you might want to keep the plans separate until you figure out how to pass the discrimination tests on an ongoing basis.

The SBJPA provision you referred to isn't effective until plan years beginning in 1999. However, for several years the IRS has allowed employers to disaggregate (test separately) employees who otherwise could have been excluded as not meeting the IRC 410(a) standards including age 21 and 1 year of service. Since 1997, this provision has been especially helpful because there usually are no highly compensated employees in the < 21 or < 1 group.

I'll give this question a shot, but caution that I've not worked with any leasing companies, so someone else may have more experience with this situation. The question is whether the employees have experienced a separation from service within the meaning of IRC 401(k)(2)(B). It sounds like employees perform the same work at the same physical location, but one day they no longer are employed by the leasing organization but instead are directly employed by the host company. The current IRS position, called the same desk rule, is that (at least as it pertains to the 401(k) contributions) the employees have not separated from service. If that's the case, then the leasing organization can't process distributions (except for hardship or age 59-1/2 or some other valid reasons) to those employees until they terminate employment with the host company. If the host company is willing to take these participants' accounts in a plan-to-plan transfer (which is not a rollover), then (1) make sure the host company's plan will preserve all optional forms of benefit payment, and (2) if the plan has a vesting schedule, consider the cost of losing potential future forfeitures (which will now be in the host company's plan) versus the administrative hassle of tracking whether employees have terminated with the host company. [This message has been edited by MWeddell (edited 12-01-98).]

I agree with LCarusi but wanted to also add that even though a partial termination is a facts and circumstances issue, the IRS uses a rule of thumb that a partial termination probably occurs if 20% of a plan's participants terminate employment. Also, partial termination is an issue that sometimes slips by employers unaware, so if you're a participant, it's worth raising the issue.

Looks to me like the Notice requires one to amend the plan each year unless one knows ahead of time which years are intended to be safe harbor and which ones won't.