MWeddell

Welcome to the message boards, Shuo! I don't have a survey to back this up, but I'd guess that the median participant wants 2-3 years before taking a distribution of his or her account from a 401(k) plan. Most of the time the distributions are rolled into an Individual Retirement Account. Obviously, there is lots of variation around that median case. So a participant might not take a distribution right away but they usually aren't leaving their money in their former employer's plan for a really extended time period either. If a participant's vested account balance exceeds $5,000 (depending on the plan document, this might exclude any rollover contribution account), then a distribution can't be made without the participant's consent. A plan could force out a distribution as early as age 62 for those with vested account balances > $5,000, but this almost never happens. So, one has to deal with account balances of terminated vested employees. It's not much of a problem though. Recordkeepers are pretty good these days minimizing lost participant problems. It may be helpful to keep those accounts in the plan: they give the plan a greater pot of assets, which allows one to purchase more economical investment management.

Addressing your second question first, the 415(c) limit on annual additions is based on the "limitation year." Usually that is defined in the plan document to be the same as the plan year but not always. You'll have to check the plan document. Look for a definition of "limitation year" or else you'll find it in the provision dealing with the limit on annual additions. I agree with your first paragraph too provided that when you write "there is NO controlled group between the two entities" you are looking for > 50% common ownership, not the usual 80% common ownership threshold for determining a controlled group. There is a special rule in Code Section 415 that lowers the common ownership threshold only for 415 limit purposes. It feels aggressive though, doesn't it? I'd still caution the participant to check with his/her tax advisor.

I was wrong Apologies to Kevin C, AKconsult, NYHeel, and anyone else I missed. Example 3 in Treas. Reg. Section 1.401(k)-3(c)(7) is what convinced me that I was wrong. The example isn't quite identical to the original poster's question but close enough. It deals with a situation where elective deferrals are computed using a different definition of compensation than the definition of compensation that is used to compute the safe harbor matching contributions. It would have been a cleaner example if it had discussed and dismissed my objection based on the ratio of deferrals to match from 1.401(k)-3(c)(4), but it still seems to indicate that there is not a problem.

At least we have isolated the source of our disagreement clearly enough for others to follow the conversation and decide for themselves, Kevin. Using the phrase from the end of Treas. Reg. Section 1.401(k)-3(c)(4), the two individuals that I have compared have "elective contributions at the same percentage of safe harbor compensation." They both elected to defer 4% of the safe harbor definition of compensation (base + bonus) that is used by the plan to compute elective deferrals.

In the example shown in my prior post, the ratio of match to elective deferrals for an HCE contributing 4% of pay is greater than the ratio of match to elective deferrals for an NHCE contributing 4% of pay.

Suppose that (consistent with the original post) the definition of compensation for elective deferrals includes both base pay and bonus but that the definition of compensation for matching contributions is base pay only, excluding bonuses. Suppose that the plan purports to be a 401(k) safe harbor plan using an enhanced safe harbor match of 100% on the first 4% of pay. Here is an example illustrating why this plan design violates the restriction Treasury Regulation Section 1.401(k)-3(c)(4), as quoted above. Hence, this plan will not be a 401(k) safe harbor plan but instead the plan has a disqualification issue.

I disagree with AKconsult's second paragraph for reasons previously explained.

NYHeel: The argument is NOT a stretch. It just plain doesn't work. I provided the regulatory cite so you can decide if you agree with me. That particular restriction looks at the ratio of match to elective deferrals for HCEs and compares it to the ratio of match to elective deferrals for any NHCE with elective deferrals at the same percentage of safe harbor compensation. I don't see any way to construe the restriction to have anything to do with match-eligible compensation.

I'll assume that the matching contributions are safe harbor matching contributions, i.e. that there isn't an unmentioned 3% safe harbor nonelective contribution fulfilling the safe harbor rules. This doesn't work. A HCE might have a better ratio of safe harbor match to elective deferrals than an NHCE electing the same percentage of pay to be contributed as elective deferrals. That would violate Treas. Reg. 1.401(k)-3(c)(4). Welcome to the message boards!

Treas. Reg. Section 1.401(k)-1(e)(2)(ii) requires that a 401(k) plan give participant to opportunity to change their elective deferral contribution elections at least once during each plan year. So it's awfully unlikely that the plan says what Larry initially suggests above.

The amendment cannot be effective retroactively for any participants who have satisfied all of the allocation conditions under Treas. Reg. 1.411(d)-4. Certainly for the deferrals, possible for the match, participants have already satisfied the allocation conditions.

I view it as there are three types of 403(b) plans: - Plans that are not subject to ERISA - Plans that are subject to ERISA - Plans that the employer erroneously believes are not subject to ERISA but it eventually becomes evident are indeed subject to ERISA Tell your client that they want to make sure they avoid being in the last category.

For a profit-sharing plan, there must be a definite, predetermined allocation formula, so the plan document ought to state how contributions are allocated. Not sure though whether that requirement applies to 403(b) plans without researching it. One can have the match determined based on fiscal year compensation, but it opens up the possibility of more widespread 415 limit failures if the limitation year is the plan year. Also, it may yield odd ACP test results because the ACP test will use plan year compensation.

I agree. It depends what is in the plan document but the answer very likely is 9/11/2019. Mr. xz has a year of eligibility service on 1/4/2019 and reaches his entry date on 7/1/2019. He is not employed on 7/1/2019 so he isn't eligible. When rehired on 9/11/0219, he will be recredited with his previous eligibility service and become eligible immediately.

The Code Section 402(g) limit on the amount of elective deferrals and the annual limit on the amount of catch-up contributions are calendar year, not plan year, limits. Even if you had a short plan year, they are not prorated. In the 401(a)(17) compensation limit regulations, the fact that contributions are made each pay period can be ignored when deciding whether proration is needed, but you are using just 3 months' worth of compensation to compute contributions to the 401(k) and 401(m) portions of the plan. So, yes, the compensation limit needs to be multiplied by 3 months divided by 12 months for those portions of the plan. If you have an employer nonelective contribution being made, the compensation limit does not need to be prorated for that contribution source.

I agree with Lou S and Rather Be Golfing. However, if you "need to be very sure we understand exactly how this works," I doubt that relying on Internet message board posters fulfills your need!

Thanks, Luke. It is in Section III of IRS Notice 2020-52 at the link above. The IRS reasoning for that section of the notice doesn't have anything to do with COVID-19, so the conclusion that one may reduce contributions for HCEs because they are not "safe harbor contributions," although a 30-day notice is generally required unless Section IV of the Notice applies, should work for all future plan years too.

It depends on what the (now amended) plan document says. The plan document could be amended to grant a full year of vesting service for 2020 even if there were zero hours of service if desired.

An employer could amend its plan before the end of the current plan year to lower vesting for just 2020 to require fewer than 1000 hours of service if desired. The proactive suggestion to consider doing so might be appreciated!

Kevin C, I am assuming that the plan document is silent about this level of detail. Like you, I would prefer that it be better drafted. Based on the IRS page that you linked, there will be deferrals in every pay period. Just as crossing the $285,000 earned so far during the plan year threshold didn't stop the deferrals, it shouldn't stop the match. There is no reason to reach a different result for one contribution source compared to another. My clients have a variety of plan designs. Nearly all employers have matching contributions but only about half of them have a true-up feature. I generally recommend a true-up feature when we have plan design discussions. A slight quibble with the end of your post: a true-up feature eliminates much but not all of the difference with match amounts varying based on the timing of deferrals. Suppose A and B are employees eligible for a 100% match on the first 3% of pay, both earn the same compensation, and their compensation is completely level during 2018-19. The plan year is the calendar year. A contributes 4% starting 1/1/2018, suspends contributions starting 10/1/2018, and resumes contributing at 4% starting 4/1/2019. B contributes 4% starting 1/1/2018, suspends contributions starting 1/1/2019, and resumes contributing at 4% starting 7/1/2019. With a true-up match feature, A will receive more matching contributions than B will. This kind of distortion was more likely to occur when there were 6-month suspensions for hardship withdrawals.

Bumping this really old thread ... I have the same question. If one QSLOB falls into one of the 12 broad categories listed in Rev. Proc. 91-64 but the second QSLOB falls into a group that is not assigned to any of the 12 categories listed in 91-64, can we still use the SIC Code method of the administrative scrutiny test or are we forced to not use the SIC Code method?

True, Kevin, that the last section of that IRS webpage refers only to elective deferrals. However: - It doesn't make any sense that the IRS would insist (unless the plan document clearly requires otherwise) that elective deferrals may continue after the first $280,000 of compensation has been earned but that matching contributions have to stop. They both are contributions that (in the case of a match without a true-up) are allocated during the year after each payroll period. There's no logical reason why it should play out differently for the matching contributions, why the IRS should require that deferrals continue to be made but that they can no longer be matched. - The only example concerning matching contributions shows the employee Mary receiving the full match, not having her match cut off at the point when she earned $280,000. Of course, the example isn't very clear given that it doesn't say whether the match is allocated each pay period, annually, or each pay period plus annual true-up. Although we disagree to some extent, we agree that clear plan document drafting should address this. For example, Fidelity's basic plan document has a paragraph at the end of the Compensation definition addressing this.

I read that link to state that except in the uncommon case where a plan document states that contributions cease after the first $280,000 (now $285,000) of compensation, then both deferrals and match may continue. Overall match is limited to the dollar amount determined by applying the plan's matching formula to the $285,000 compensation limit.

Welcome to the message boards. The IRS has said (informally, not in regulations) that the participant can keep making elective deferrals and the match can continue to be allocated on compensation over the 401(a)(17) compensation limit assuming that when one looks at the plan year as a whole that 402(g) & plan match limits considering the compensation limit have not been exceeded and HCEs can't contribute a greater % than NHCEs do. Ideally, the plan document would contain language clarifying this but that's not required.

The question is confusing. Suppose the employee was hired during 7/2/2018 - 12/31/2018 so that 1/1/2020 is the employee's plan entry date. The employee didn't enroll. Are you asking whether the employee could enroll in February 2020 or whether (once the person missed the 1/1/2020 date) the employee must now wait until July 1, 2020? It's a matter of interpreting the plan document, but all the plans I work on would let the person enroll in February 2020 (or any date on or after 1/1/2020 as long as the person remains eligible).