Gilmore

A non-profit (NP) is spinning off employees who are creating a for profit company (FP). The FP will be owned 75% by a venture capital firm and 25% by the NP. The FP will have representation on the NP's board. Can anyone tell me at what level of representation would a controlled group exist? Is it 80% of the board controlled by the FP, or is it only 55% since the NP owns 25% of the FP? Or am I completely off base altogether? Thank you so much.

Thank you for the input. The service provider who did the document amendment did provide a new SPD, but the employer is certain he neglected to give it out. Thank you.

I appreciate any comments on the following scenario: A 401(k) plan is established for calendar year 2014 with a safe harbor match and operates throughout the year as such. Prior to the start of the 2015 plan year the plan is amended to remove the safe harbor match. The employer does not provide any notification to the participants that the plan will no longer be a safe harbor plan for 2015. Question: Does the fact that the participants were not provided notice that the plan will not be a safe harbor for the start of the new plan year (2015) mean that the employer must still make the safe harbor match for 2015? If so, I'm assuming this would be a corrective contribution? The participants were not provided a new SPD or SMM either. Thank you.

Thank you.

The owner of a small company with a defined benefit plan dies in 2014. There is no spouse. Beneficiary is owner's brother who inherits the business. Beneficiary plans to sell the company and is terminating the DB plan. Owner and Beneficiary both younger than 70. PBGC termination forms are being submitted shortly. The Beneficiary is going to elect to begin taking distributions under the Life Expectancy rule rather than the five year rule. I believe the RMD must begin by 12/31/2015? Question, can the RMD be taken before the PBGC determination, or must the Beneficiary, now owner as well, until the PBGC determination and the other participants are paid out? Thank you.

Tom, if the limitation year is the plan year, would the comp limit need to be prorated for one month, or would three months be used as I was thinking the plan year ended with the assets merging on 4/1/2015?

Company A is acquired by Company B on 1/31/2015. Each has their own calendar year 401(k) plan. The 401(k) plans are merged on 4/1/2015, creating a short plan year for Company A's plan. An ADP test is run for Company A's plan using the deferrals and compensation from 1/1/2015 to 1/31/2015 (ie, prior to acquisition date). Company A owners defer the maximum $24,000 into the Company A plan, and now need refunds. Let's assume Owner A deferred $24,000 and now needs a $10,000 refund, which is distributed to him in 2015. If Owner A goes to work for another company with a 401(k) in 2015, can Owner A defer the refunded amount of $10,000 into his new company's 401(k) plan in 2015? That doesn't sound right, but would like to be certain that I am not missing anything. Thank you.

Well actually I spoke with the other document provider that we use (changing with restatements), and they agreed with the consultant who says the comp should be included. They are working to get me some back up from and IRS Q&A session. Hard to say anyone is incompetent on this topic since the opinions seem pretty split and everyone seems pretty confident that their opinion is correct.

Well I checked with our document provider who was of the opinion that severance compensation should not be included in plan compensation whether it is paid pre- or post- severance. I also spoke with a VERY respected ERISA consultant who said if the severance pay is paid on or before severance it is to be included as plan compensation.

Kevin, is that a quote from your document? not the regs, correct?

Compensation is defined as W-2 compensation, which includes all compensation reported on the participant's W-2. I am assuming that all of the compensation paid to the participant on their date of severance will be included on their W-2. To KJohnson's point, the only excluded compensation is "leave type" compensation paid post-severance, as permitted by 415. It would seem to me that the compensation should be included since it is not paid post-severance, however I have also heard similar comments as Toolkit's, that severance comp is never included. I had always assumed, however that true severance comp was paid after severance. Since the participant in question is an HCE, and the additional compensation will have an affect on the ADP test, I want to be certain. Thanks.

A participant terminates from a 401(k) plan on 6/30/2014. The participant is paid their final paycheck on their date of termination, 6/30/2014. The paycheck includes their final hours of service, plus 6 months severance pay. Assuming total gross compensation is used for plan purposes, is the 6 months severance pay included for plan purposes since it is technically not paid post-severance? Thank you.

Does anyone have any information, or know of a report, that indicates the participation rates of exempt employees versus hourly employees? Any information would be appreciated. Thanks!

Thanks John, All good stuff, and you are pretty close in your analysis of the demographics. Actually all 5 of the NHCs will receive more than 3% in the match. But we will need to benefit at least 1 NHC in Component Plan, as you are correct, there is one non-Key HCE who must receive the top heavy minimum, so the benefiting NHC will need to get the gateway. This is actually a bit of damage control. The census they originally provided to run the original illustrations showed the two younger children of the owner as not deferring, and since HCEs do not receive the safe harbor match, the ABT was not an issue. Now we get the numbers for 2013 and of course the children are deferring. To me this is a starting point. They are not concerned about providing additional benefits to the HCEs so if they want to be more equitable to the NHCs we know that will not be an issue, based on your agreement of the testing method above. I can't thank you enough for taking the time to work through this.

Hi John, Thank you for the explanation. One question, though. If the 3 NHCs in Component Plan A do not receive any benefit under 401(a), are they still required to receive the gateway? I thought only NHCs who benefited under 401(a) were required to receive the gateway. Since they are not receiving a top heavy minimum under 401(a), as it is already satisfied under the match, is it possible that they would not need the gateway and their benefit under 401(a) would remain at 0%? Thanks for your patience.

So is the following scenario possible? The plan consists of 5 HCEs: Targeted Owner, non-key HCE receiving 3% top heavy, and 3 HCEs not benefiting under profit sharing. NHCs: 5 NHCEs, 4 of which received at least 3% match. Component Plan A: HCEs would consist of the 4 non-owner HCEs. NHCs would consist of 3 of the NHCs who received top heavy under match, and would not benefit under profit sharing, plus one NHCs who would receive the 5% gateway. Am I correct that this Component would pass rate group using allocation rates since 1 out of 4 HCEs, and 1 out of 4 NHCs are benefiting? Component Plan B: Targeted Owner and one NHCs, each receive identical EBARS. I'm thinking that each component would satisfy the ratio test. I appreciate the assistance.

I know this question is probably overdone, but I hope you will indulge... Safe Harbor 401(k) uses basic match. ER rarely makes a profit sharing contribution, but this year they are considering. The HCEs are Owner, Owner's recently divorced spouse, two Owner's children (in 20s), and one non-Key HCE. Only the Owner is being targeted, and non-Key will receive top heavy minimum. PS is allocated by putting each ee in their own class. HCEs do not receive safe harbor contribution, however the two children deferred a lot in relation to their compensation. ABT is not passing by a wide margin due to the deferrals of the Owner's children. Am I correct that, even if the plan was restructured into component plans in which the children were in their own plan, and would not need to rely on the ABT since they are not benefiting under 401(a) to pass 401(a), because the other component plan would need to rely on the ABT, that the ABT would include the contributions of both component plans? That is to say that, regardless of the number of component plans, if one component plan requires the ABT to pass 401(a), then the ABT includes everyone's contributions? Thanks for the help.

Dr A's PC is a partner with two other Dr PCs in a medical practice. The medical practice sponsors a plan benefiting all four members of the ASG (the three PCs and the medical practice). Dr A's spouse, DR S is also a Dr in an unrelated field and has his own PC, with no employees. Drs A and S live in a common-law-state, and have minor children. So it appears that Dr A's PC creates an overlap between the ASG and the CG. If Dr S becomes an employee of Dr A's PC, Dr S will become eligible for the plan of the ASG. If Dr S adopts a plan for his PC, and assuming Dr A's PC does not adopt Dr S's plan, does Dr S's plan affect the plan of the ASG? I know that Dr S's plan must consider the employees of the controlled group (meaning Dr A's employees), but does the overlap extend to the ASG employees? I've received one opinion that, because Dr S is an employee and HCE of the ASG (by being an employee of Dr A's PC), then his separate plan under his PC cannot benefit him without taking into consideration the other employees of the ASG. I've also read, however, that there does not appear to be any requirement for the members of the controlled group to consider the members of the ASG even if there is an overlapping member. I could see an issue if Dr A's PC adopted Dr S's plan, but not so clear if Dr S's plan is NOT adopted by Dr A's PC. I appreciate any thoughts.

Ok, thank you for the responses.

I was just speaking with an ERISA attorney who said that while there is no specific rule against adopting a new plan with a different allocation method, in his opinion the IRS could consider this as abusive. Could this be considered as overly aggressive?

Can you elaborate on the "butterfly effect"?

A 401(k) plan with a pro-rata discretionary profit sharing allocation is written on a standardized prototype document. The document provides for an allocation if the participant is employed on the last day of the year, or earned 500 hours of service. The employer would like to make a profit sharing contribution, but would like to use a tiered allocation rather than the pro-rata allocation. I understand that the existing plan cannot be amended if a participant has earned 500 hours. Is it permissible for the employer to adopt a second profit sharing plan that allows for a tiered allocation and a last day requirement? If so, would the plans be allowed to merge at some point in the future? It seems to me that starting the second plan circumvents the contribution provisions that would be required under the first plan, especially if the plans were merged, say the next plan year. Thanks.

Thanks again.

Thank you Mac, that is good to know. One additional question... Let's assume the salary deferral/safe harbor portion of the plan provides for a 3 month wait, but we amend the profit sharing to provide for a 1 year wait. A participant that is not yet eligible for the profit sharing may be required to receive a top heavy contribution. Assuming we are not using statutory exclusions for testing the profit sharing coverage, then the participant would need to get a top heavy minimum, and then also be bumped up to the gateway, correct? If that is correct, are those contributions used in the 401(a) testing, or are those contributions just "wasted" for purposes of 401(a) since the participant is not technically eligible for that portion of the plan? Thanks again.

All good points. Thank you very much for your confirmation.