austin3515

Here's my opinion. The regs are very clear that: a) You do not need to take a loan if it would increase your hardship b) You are allowed to rely on the representations of your employees for this "needs" portion of the test (assuming safe harbor standards are being used). SO, if the employee represents to you that the loan would increase the hardship, then it should not be required to make the employee take a loan first. Really, the only way we could possibly have "actual knowledge to the contrary" would be to get copies of their financial information, mortgages, credit cards, personal investment accounts, etc. Am I way off base here?

From the EOB, 2009. Shockingly, they're saying pre-2006 this would have been OK. I can't imagine the DOL would agree with that statement, but I suppose it is a moot point today, as I think we all agree that now BOTH the IRS and the DOL would not like this at all... And for the record, this would definitely be a PT, in addition to a violation of the new 401k regs. 1.e. Could forfeitures be used to reduce elective deferrals? IRC §402(e)(3) provides that "[f]or purposes of this title" (i.e., the entire Internal Revenue Code), elective deferrals under a 401(k) plan are not treated as employee contributions. In other words, they are treated as employer contributions. So, if the 401(k) plan contains language that provides for forfeitures to be allocated to reduce the employer's contribution liability, and does not specifically confine the definition of employer contributions for this purpose to matching contributions and/or nonelective contributions, is the employer able to use the forfeitures to pay for its elective deferral contribution liability? Regulations that took effect in 2006 address this issue directly. See 1.e.1) below. However, before those regulations were issued, there was no published guidance that precluded such an approach, so the IRS permitted forfeitures to be used in this manner. See the Q&A session at the ASPPA Conference in Washington, D.C., on October 25, 2004. 1.e.2) Use of forfeitures to reduce elective deferrals prohibited in post-2005 plan years. Treas. Reg. §1.401(k)-1(a)(3)(iii)© prohibits the contribution of elective deferrals made on behalf of an employee before the employee performs the services to which the elective deferrals relate (or before the compensation would have otherwise become currently available had the deferral election not been made). No exception is made for forfeitures that are allocated to satisfy the employer's contribution obligation with respect to elective deferrals. Note an exception for forfeitures applies for matching contributions (see 1.d.3) above), but not for elective deferrals. Thus, the allocation of a forfeiture to another employee's account to satisfy the employer's obligation to contribute the employee's elective deferrals would be in violation of §1.401(k)-1(a)(3)(iii)©. These regulations are effective for plan years beginning on or after January 1, 2006, unless the employer elects to apply them to earlier plan years ending after December 29, 2004. 1.e.2) Example. A 401(k) plan has unallocated forfeitures in the amount of $35,000. The employer has a contribution liability of $72,000 with respect to salary reduction elections made by eligible participants. The employer deposits $37,000 and has the remaining liability satisfies with the $35,000 forfeiture account. This would violate the regulations described in 1.e.1) above. However, for pre-2006 plan years, so long as the plan document allowed for forfeitures to reduce employer contributions, and did not preclude the application of such rule to the employer's elective deferral contribution liability, the allocation of the forfeitures in this manner was permissible.

Yeah but those increases are "hidden" so no one will ever know! (please read with the intended sarchasm which is a little hard to convery on a message board...)

There's no question it's a money saver if you only have to split into two plans. $10,000 is the low-end of what we're seeing for audit fees.

I could not find the site in the EOB. Any help would be appreciated...

This has been discussed out here before, but I am curious to know if anyone has actually split 1 plan into to two for the purpose of avoiding an audit. Has anyone actually done this? Has it ever been scrutinized by the DOL. I putlled this from TAGData, who pulled it from an ASPPA Q&A session. the question was raised at the 2000 annual ASPPA meeting, in the general Q&A session. The questions at this session were answered by Joe Canary, Scott Albert, Lou Campagna and Mabel Capolongo of the Department of Labor: Question 5: A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct? Answer: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance--even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process.

We always start there, I should have mentioned... Occassionally, it's a plan ein/number issue, but as you point it is often wishful thinking!

Client insists that they filed their 2007 5500. IRS sends out a notice saying the filing was never received. The first thing we do is respond saying, no it WAS filed, and here is a copy of the filing. They then respond and say, you need to efile this 2007 return. What are people doing at this point? Fighting with the governemtn to convince them that it was filed? Or doing the efiling/DFVC program? At the end of the day, sicne this goes back 2 years, I can't see how anyone could say with absolute certaintly that it was filed (client does not have return receipts). I've been taking the cautious route saying that a known $750 is better than an unknown $15,000. Also, now that they are asking us to efile, I think we have less basis for then going back and using the DFVC.

The Corbel document that we use allows us to use the 20 hour a week exclusion, so we are using it. Because let's be realistic, the entire country is using the exclusion, ERISA or not. We wouildn't have alot of clients if we told them all they couldn't do this or even if we recommend the two plan design (which by the way is very clever!). Can anyone vouch for what the other major providers did in their prototypes? Corbel: included the option for the 20 hour exclusion TIAA/Ascensus: Did NOT include the option Anyone know what Datair or McCay Hochman did? I'm wondering if TIAA is the only one that took that "conservative" position.

I just wrote this explanation for myself because it helps me to understand things by writing about them. What does evreyone think about my conclusions? I wanted to write this from TIAA's perspective. 1.403(b)-5(b)(4) states (more or less) if any one or more people that work less than 20 hours a week are allowed to defer than NO ONE can be subject to this exclusion (by reference to some 410b section). Therefore, ERISA covered plans could be interpreted to be ineligible for this exclusion across the board because any employee who meets ERISA eligibility is allowed to defer, even if they work less than 20 hours a week. Therefore, because there is a group of employees who ARE eligible to defer in spite of working less than 20 hours a week (i.e., someone who goes from full-time to part time), then EVERYONE in that group must be allowed to defer (i.e., anyone with < 20 hours per week). Because the plan DESIGN violates this requirement, it shouldn't matter whether or not a plan actually has anyone in this situation. For example, even if a 401k plan has never used profit sharing, it still cannot include a 5 year cliff vesting schedule. It cannot include a 2 year eligibility period on 401k for mailroom employees, even if the plan doesn't have anybody working in the mail room.

This ERISA/403b Reg conflict aside, I just got off of a very lengthy phone call with a "BIG" name industry person (often gives seminars, etc) who is adament that a) if you're document states that people with less than 20 hours a week are exlcuded, and b) you let one out of 30 such people into the Plan, the correction is that you refund the one person - you don't make a contribution for the others (assuming the one person did not meet ERISA eligiblity). He's siting EPCRS, inclusion of ineligible employees which addresses this issue and references 403b plans eligiblity for the correction methods indicated. I didn't see it with my own two eyes, but he is convinced the IRS is completely way off on this.

This is sort of a continuation of a previous thread, but a different question... OK, so ERISA Plans say that anyone who works 1,000 hours in 12 months must be eligible for the Plan, even if they subsequently drop below 20 hours. The question is (assumign the plan is using the 20 hours exclusion), will allowing this ERISA eligible employee (who now only works 10 hours a week) automatically violate the 1.403(b)-5(b)(4) "all or none" rule? Maybe THAT's why the TIAA document doesn't include the 20 hour a week exclusion?

Thanks! I seemed to recall that there was something that prohibited this beyond just the obvious PT rules. Thank you thank you thank you...

Client has no liquid assets and wants to make back 401k contributions in a non-cash asset that he has. We understand that this could give rise (or probably does give rise) to a PT, but I'm wondering if there is a broader prohibition on funding 401k with non-cash. In this case, it is a mortgage. We're trying to tell the client all of the reasons not to do this. It's a pooled acccount.

Without the 20 hour a week exclusion they are eligible for deferrals immediately because the only way to avoid immediate eligiblity for part-timers is the 20 hour a week exclusion. You can't have an eligiblity in a 403b that says "1,000 hours in 1st 12 months." At least not for deferrals.

The document I'm using is definitely an ERISA Plan, as is the TIAA CREF document I'm referrring to. But you seemed to suggest in an earlier statement that the 20 hour a week exlcusion should not be used in an ERISA Plan. Am I stating your thoughts correctly? I believe that it is still an effective way to limit participant counts. Are you suggesting that a plan with 125 active employees, including 30 people working 10 hours a week, should NOT use the 20 hour a week exclusion to remain below the audit threshhold?

The Corbel document that I am using does not ignore it. It says you can exclude people who normally work less than 20 hours; HOWEVER, if that person ever goes over 1,000 hours in a 12 month period, then they will always be eligible (and thereofre satisfies ERISA). Let's assume a client would never make a mistake - wouldn't you agree that this language reduces the participant count by 30 people in my example, as opposed to a plan that does not allow the 20 hour a week exclusion? But on an unrelated note, I think TIAA made a grave error not including this option, since many of their clients are operationally excluding them, not realizing that their document does not include this option. At least that's what I'm hearing from many different CPA auditors...

Example- ERISA Plan excludes people who normally work less than 20 hours a week: Johnny (and 30 people just like him) work 10 hours a week every week forever. These people are NOT eligible for the Plan because a) they fit into the 20 hour a week exclusion, and b) they have never worked 1,000 hours in a 12 month period. So I've avoided having to count 30 people in the audit, giving 30 people enrollment materials, giving 30 people the SAR, etc. Steve, on the other hand, worked 10 hours a week for years, and then was hired full-time. He therefore met the statutory eligiblity and is in the Plan forever now, even if he drops below. So out of the 31 part-timers, we are able to exclude 30 using the 20 hours per week exclusion. Not bad... Example - TIAA-CREF's Document Same facts and circumstances, and now all 31 people in the prior example are all participants in the Plan. I totally agree that the consequences of misapplying this could be disastrous, but there are very compelling reasons to use this exclusion (again, the $10,000 audit fee being the biggest). But I admit I am just beginnign to comprehened these complexities, so if there is something I am missing, please do tell me...

My understanding is that the exclusion is still available ot ERISA Plans, HOWEVER, if an employee every breaks the 1,000 hour threshhold (in either their first 12 months or any subsequent plan year), then they can NEVER be excluded. A Non-ERISA Plan, soemone who drops below 20 hours could subsequently be considered ineligible. But of course, if your client operates an organization with a lot of people working 10 hours a week who will never hit 1,000 hours, then the 20 hour a week exclusion can still be quite valuable. My reading of TIAA-CREF's document is that this is not an option. Does everyone agree with that? As for switching over to 401(k), I agree that is an option, and perhaps if I was advising on a new plan I would steer them towards 401k. But they already have a 403b, and starting a 401k is a good sized project. A very good sized project.

And why, pray tell, are there different restrictions depending on the funding vehicle? Anyone? This is a strange new world (403b's)indeed...

100% owner of a business sells 100% of the stock to a new owner in 2010. Who signs the calendar 2009 Form 5500? The form is being filed AFTER the sale and it was a stock deal so the new owner "bought the plan too." My position is that the new owner signs, because the new owner is the Plan Administrator. Why should some unrelated 3rd party be filing a 5500? But of course the owner's valid point is "how can I sign as plan administrator if I wasn't the owner for that period?" Of course, if the prior owner refuses to sign, the new owner has no choice but to sign. But if the prior owner is willing to sign, does anyone see a problem?

Corbel's adption agreement doens't let you elect hardship distribution for non-deferral balances under a 403b7 contract, but DOES allow it under 403b1. Can anyone shed some light on why that is?

To save $10,000 a year in audit fees, for one!

We also do the RMD before paying someone out. We try not to be ridiculous about it, for example, if the distribution is $1,200 we wouldn't bother... But the RMD is definitely required. If I'm not mistaken, even if they terminated in February 2010, and they don't turn 70 1/2 until June of that year, I'm pretty sure that they still need to take their RMD even if they close their account in March 2010.

Was your client required to make a corrective contriubtion? I'm trying to decipher if it is irrefutable that the sole means of correcting this type of failure (i.e., document excludes ee's woith <20 hours per week, while operationnally a couple are allowed to defer) is to make a contribution. I like the idea of imposing the documents provisions regarding correcting inclusion of ineligible employees. Any sites, etc. would be very helpful...