austin3515

For some reason your start-up example sounds even less aggressive than my scenario 1, since you can point to the fact that this was a new plan, and to not waive eligiblity would render the plan with no participants, which would be ridiculous. I agree with Bird that scenario 3 does work the best if thre are other NHCE's...

Plan uses statutory 1 YOS/age 21 eligiblity. Scenario 1: Owner and owner's immediate family are the only employees. Owner's Kid is hired on January 1, 2010, and owner wants him in the Plan from Day 1. No other employees have been hired since that date and there are no immediate plans to hire anyone else. Would an amendment that waives eligiblity for anyone hired as of 1/1/2010 be allowed? My assumption is yes, since there are no other NHCE's, and therefore there is no issue of discrimination. If the answer is "no, this isn't allowed" then it would seem that this type of Plan would be precluded from making several kinds of amendments, which would seem wholely inappropriate... Scenario 2: Same as Scenario 1, except that there are three employees who have been working there for 5 years who were made to satisfy statutory eligiblity. My feeling is that this WOULD be discriminatory because there are NHCE's in the Plan, and as such the amendment is subject to discrimination testing. Scenario 3: Same as scenario 2, except that eligbility is amendmed to be immediate. The employer has very very low turnover and is not growing, and it is not anticipated that any new employees will be hired any time soon.

I guess that makes sense... I have run across it once or twice. If that's the purpose of it, then I agree with Bird that netting would definitely be required...

Yup

From the EOB: 8.Change in status from employee to partner. It is possible that, within a plan year, an employee might become a partner in the partnership that maintains the plan. As a result, the individual is an employee for a portion of the year and a self-employed individual for the rest of the year. In that case, the compensation taken into account under the plan will be the sum of the individual’s compensation as an employee plus his earned income as a partner. If the combined amount exceeds the compensation dollar limit prescribed by IRC §401(a)(17) (see the discussion in Section II of Chapter 3A), the combined amount is limited to that dollar limit. 8.a.What if the partner’s earned income is negative - does that offset the compensation received as an employee? The Joint Committee on Employee Benefits of the American Bar Association posed this question to the IRS. Suppose a participant works as an employee for part of the year, and then becomes a partner for the rest of the year. For the part of the year he is an employee, his compensation from the partnership is $40,000. Due to a one-time charge to the partnership, the participant’s earned income for the year is a $45,000 loss. What is the person’s section 415 compensation? The IRS says it is zero because the loss completely offsets the compensation. See 2001 Q&A-25 at www.abanet.org/jceb/2001/qairs.html. This is a surprising conclusion, since the individual nonetheless earns W-2 wages for that year as an employee. An opposing view is that the negative earned income is simply treated as zero and this person’s section 415 compensation for the year is $40,000. Proponents of this view argue that the W-2 wages paid as an employee are different from guaranteed payments, as described in 7. above, which are paid to the individual in his or her capacity as a partner and are subject to offset by partnership losses distributable to the individual. There certainly is room for disagreement here!

How do they have both W-2 and K-1, Box 14A income? That's really not supposed to ever happen. The two ideas are mutually exclusive. You are either a partner (receiving a K-1) OR an employee. Are you sure this isn't a K-1 from an S-Corp?

Yes, it is a year-to-year thing. I meant you lose top-heavy exemption just for that plan year.

If as of the last day of the plan year the plan is top-heavy, AND you do profit sharing for the first plan year, than the top-heavy minimums are due. SH only makes you exempt from thm's if the plan solely cosnsits of 401k and SH contributions. As soon as you do ps, the plan cosnsits of something other than SH and 401k, and the top heavy minimums are due. Of course, the SH Match would count towards the thm that would be due.

Once it goes into an IRA, I'm not sure how you could call it a related rollover. IT's been scrubbed clean as far as I can tell... And obviously, I told the client he could just roll it to an IRA and leave it there, but he's got his life savings in one spot right now--in the Plan.

My documents say the same thing so I'm sold. No can do. BUT, let's say he rolled it to an IRA for a day or two, and then rolled it back. I think it would be allowable at that point.

It was...

Participant takes an ISD and within 60 days they realize they didn't need it. Can they roll the mone back into the Plan? Wouldn't it just be a regular rollover? I get that they need to make up the 20% withholding.

Prior post is incorrect - I think there was a similar discussion very very recently if you look back regarding forfeiture/refund. Match is only forfeited to the extent the participant is not vested. My opinion by the way is that there is no excpeiton for the excise tax in this situaiton. I came across the same thing as you before, and looked for an exception and came up with nothing.

Personnally, I think it's just wrotten to leave the owner of the ADP test solely because the business was struggling, etc. There should be an exception for someone working 80 hours a week who is not getting paid because he decided to pay his employees instead... But alas, there is not

But not eligible for rollover treatment thiugh right? So this isn' t saying the ADP Test is a moot point in the year of termination? We would still notifyt the receiving IRA custodian that the amount was not eligible for rollover?

From the EOB: 7.a.HCE takes no compensation for plan year. This issue also arises when an HCE, particular one who is an owner of the plan sponsor, does not receive a salary, and does not otherwise receive any compensation for the plan year. This is another one of those situations where there is no clear guidance from IRS, and it may place a plan administrator "between a rock and hard place" to resolve the issue. The more conservative approach would be to treat the HCE as not eligible, based on the discussion in the prior paragraph. Of course, in many cases the employer would like to treat the HCE as eligible, and then calculate the HCE's deferral percentage as 0% for ADP testing and ACP testing purposes. This is probably too aggressive a position. Even if the HCE is treated as eligible, should the deferral percentage actually be 0%? A case could be made that to defer $0 out of zero compensation is actually a 100% deferral. Given these mathematical gyrations, it is probably a sounder approach to treat the HCE as ineligible until formal guidance is issued by IRS. The IRS acknowledged this to be a reasonable approach at the ASPPA 2000 Fall Conference in Washington, D.C., in a "Q&A" session with IRS representatives. In the Q&A Session, the issue dealt with a partner in a partnership whose earned income was negative for a plan year. Taking nominal salary might be a better approach. This issue, at least where the HCE is a common law employee of the plan sponsor, can be avoided by paying the HCE at least a nominal salary (e.g., $100). So long as some compensation is taken and the HCE does not defer any of that compensation, it is proper to include the HCE in the ADP test at a 0% deferral rate. This won't work in the context of a self-employed individual (e.g., sole proprietor or partner), whose compensation must be based on an earned income calculation. If the earned income is zero or negative, the best approach appears to be to treat the self-employed individual as an ineligible employee.

The point of the rule is that you're not allowed to change the rules on people mid-year. So you can't change the match formula, etc. This doesn't change the rules on anyone in Plan A, so I would think it would be OK. What's more, Company B could itself have started it's own SH 401k plan with no problem at all. The fact that you're doing it in one plan should not change the outcome.

Based on what I've learned we're giving the clients a notice (that looks kind of like a form) for the HCE's, telling them the amount of the refunds, that they'll get a 1099, not eligible for rollover, yada yada, and that by checking the box below, they can opt out of the 10% withholding. So we're not requiring that they send it back, but we are complying with the requirement to provide them with the appropriate notification and opportunity to opt out of the withholding. I'm quite happy with it

W-2' wages is the plan's definition of comp for 415. Plan excludes fringe benefits (Personal use auto, etc). When calculating THM's, should pay be increased for these amounts? Almost all of our plans include fringe benefits (especially the small ones that tend to be top-heavh), but once in a while on takeover, etc., we get one where fringes are excluded, and today I happen to be looking at one that is top-heavy... I'm pretty sure we need to gross it up, but I wasn't sure if it was possible to exlcude them.

Sounds like a 3 year eligiblity to me, which would violate 410(a)... Me thinks this is very very bad...

3405(e)(10) Time and manner of election. -- 3405(e)(10)(A) In general. --Any election and any revocation under this section shall be made at such time and in such manner as the Secretary shall prescribe. 3405(e)(10)(B) Payor required to notify payee of rights to elect. -- . . . 3405(e)(10)(B)(ii) Nonperiodic distributions. --The payor of any nonperiodic distribution shall transmit to the payee notice of the right to make any election provided in subsection (b) at the time of the distribution (or at such earlier time as may be provided in regulations). 3405(e)(10)(B)(iii) Notice. --Any notice transmitted pursuant to this subparagraph shall be in such form and contain such information as the Secretary shall prescribe.

It;s much less refuse as opposed to procrastinate that I'm concerned with. But in either case, the default 10% withholding would apply. I just wasn't sure what the requirements were in terms of opting out of withholding.

BG150, you';re thinking of the calendar year data election, which relates to HCE determination. What I was referring to is different than that. But of course, not every document gives a lot of flexibility in choosing testing comp, although most prototypes do (at least I know ours does). Oh, also, this election relates to cOMPENSATION, not deferrals. So even if you elect to use calednar year comp, you still use plan year 401k. Not sure how that would work operationally, but that's the deal...

Do I have to have an HCE sign off an ADP refund? I know the refund is mandatory, but, for example, they could elect to waive out of the 10% withholding. Or is the employer allowed to proceed without the elections? Is there any guidance on this?

Under 414(s), it can be either the plan year or the calendar year ending within the plan year. Although there does not appear to be a restriction on going back and forth, I would recommend applying it consistently because of the 401k regs that talk about the anti-abuse provisions (i.e., flip-flopping on testing methods for the sole purpose of skewing the testing results). The preamble to those regs apparetnly states that they're not talking about run of the mill stuff (net comp, otherwise excludables, etc), but to me, this seems to be agressive to flip-flop between these two, especially depending on the plan year end, since it could be tantamount to switching between CY and PY testing (for example, if the Plan has an 11/30 year end, and you decide to use the prior 12/31 data--perhaps because a terminated participant deferred 50% of pay in that period!).