buckaroo

Sorry Mike, I misspoke. I was referring to Otherwise excludable employees. I have continued searching the site and I came across a post which is close to what I am looking for. Here is some text from an old post which helps explain what I am asking: For example, plan eligibility is 3 months of service and the plan uses the elapsed time method of crediting service. Participant has been continuously employed since 1995, but has never completed 1000 hours of service during an eligibility computation period. May the employee be considered an otherwise excludable employee for purposes of the ADP test based on the actual hours method of determining a year of service, or is the participant required to be included because he has completed a year of service based on the plan's use of elapsed time? Now the response to the above said that the person could be an OEE b/c 410(a)(3)(A) says that a ""year of service" means a 12-month period during which the employee has not less than 1,000 hours..." I would think that a plan the uses elapsed time would never have a need to track hours, but this seems to indicate that if an employer were to track hours and found there were some employees who never worked 1000+, the could be OEEs forever. Does this sound correct? If it is correct and there are plans that use elapsed time and don't track hours (and I assume that most don't), I would think that they are doing the ADP/ACP testing incorrectly. To clarify, if they simply test everyone together, that would be fine. But if they are separating the OEEs, then they are probably not doing it correctly and the testing is wrong. Thoughts? Last hurdle: The plan is using the hours counting method. By the logic above, the employees who never me the YOS (1,000+) will forever be OEEs. What do you think?

I had a colleague who just came over to my desk and said that he thought that the employee could only be excluded the first year. I did some research and I am unable to support my claim that they can be excluded forever. Can someone please point me to where I can show that they can be forever excluded? Regs or even ERISA outline book. Or is it that it does not say it is restricted to one year? Any help would be greatly appreciated.

The answer is you cannot use the 2006 catch-up for a PYE 11/30/2007 test. The 2006 catch-up could have been used for some failure of the 11/30/2006 PYE testing (415, ADP, Plan Limit, etc...) or the 401(a)30 limit (or 402(g) limit) for 12/31/2006. Once these tests/limits have been reviewed and completed, you no longer have the ability to use the catch-up contribution for 2006. It is a "use it or lose it". Now you are running the 11/30/2007, you have reclassified 4347 for the 401(a)30 limit failure and you now have 653 remaining. You ran the ADP and failed with a refund amount of 1148. Of that amount 653 can be reclassified, but the remaining 495 must be refunded. Sorry, your cannot go back.

Here are the facts: Plan elig for deferrals immediately upon DOH. Plan elig for match after three months on 1st day of month coin or following. Plan calls for an annual match true-up Plan states that annual compensation is used for contributions and ADP/ACP testing. Are the contributions made to the plan prior to the match elig date taken into account when calculating the true-up. NOTE: The document is silent on the issue. (I know bad document, but that is the situation.)

I am not sure of the answer, but I would guess that you would have to take into account all participants. I do not recall seeing anything about excluding the OEEs. Furthermore, I would think it would probably follow along with the top heavy rules in that if a participant is eligible for the plan (whether or not an OEE) than he would be eligible for the TH min. Sorry I cannot be more helpful.

Jim, This is what I would recommend: 1) If they are not already aware of it, I would inform the client of the issue. Explain to them that the funds are comingled and that you will not take any responsibility for any issue that arises from the previous record keeping. I would probably get something in writing from the Plan Sponsor to this affect. I would also have them tell you exactly how the funds are to be used (loans, withdrawals, etc...) 2) I would leave that money in a source by itself and never add to it. 3) I would establish a new source for the SHNEC going forward. This is the new source I would use for all future SHNEC conts. 4) If the sponsor ever decided to the SHMAC, I would establish another source for that as well. Hope this helps.

Sully, Thanks for taking the time.

Sully, Thanks for the quick reply. However, you comment "No mention of rounding" is the part that has me concerned. If the section does not specifically say that you should round or to what place, can't that be interrpreted to say that I can round or not round? if I do round, can it be to the nearest integer? Tenth? hundreth? etc... Am I just reading too much into this? I do not mean to be a pest, but the guy I am dealing with is being very picky and pushy.

Have you considered the transition rules regarding coverage? If Plan A is passing coverage just prior to the "spin-off" and there are no other significant changes to the plan going forward, the plan should be able to rely on the transition rule for pye 12/31/2007 as well as 12/31/2008. Remember to test each mandatorily disaggregated portion spearately. The ERISA outline book details this rule in Chapter 8. As far as the nondiscrimination testing is concerned, this has no transition rule and I would think it is run as normal. You run the ADP for all employees who were eligible for the 401(k) portion in 2007. So all employees should be included. I would think the ACP and any test for a poss PS cont would run the same way. For plans B,C,D, the question is are the physician groups related? If not, then they should simply be treated as unrelated individual plans and tested as such. if they are related then the testing gets more complicated. I hope this helps.

I thought this would be a simple thing to do, but I am having major trouble trying to find a book (similar to the 401(k) Answer Book) for Puerto Rico plans. Does anyone know of any type of reference book? If so, what is it and where can I get it? Any help is greatly appreciated.

Colleagues, Thanks for your posts. It appears that we are all in agreement. Now all I need is a reference to a book or a cite. Can anyone help me?

I will also chime in that I am not an attorney and I am just brain storming as well, but how about amending the plan to a different distribution date/timing? What are the other choices in the proto-type? How long can it be delayed under those choices? The other two questions are: 1) How will this affect other termianted employees? My answer is the distribution date/timing is probably a maximum. Maybe it says payout within x days/months etc... but does it say anything about paying it out earlier? 2) Is this a protected benefit under 411(d)6? By legally amending the plan and essentailly delaying the distribution, are you cutting back a participant's benefit? Something else to consider. Again, just brain storming...

In order for a plan to be top heavy, the top heavy ratio must be greater than 60%. One of my colleagues is caliming that the rules surrounding top heavy do not detail how many decimal places must be used in the calculation. He is further stating that the ratio that is slightly above 60% (i.e. 60.15%) can be rounded down to 60% and the plan would not be top heavy. My recollection is that the ratio must be carried out for two decimal places and anything over 60% makes a plan top heavy. My problem is that I cannot find this in any reference book or the regulations. 1. Please confirm my thought. 2. Please identify where this can be found. (regs would be best) Thank you in advance.

Mike, Thanks for the response. It is what we came up with. I did try to analyze it and figure out what the attorney was thinking and the only thing I came up with is that he feels he is violating 415 for the plan year and, therefore, he can use any catch-up he wants for any calendar year involved in the plan year to rectify. Strange.

This is an example I received from an ERISA attorney. I am under the impression that you cannot fix the 415 violation using the catch-up for the calendar year that ends in the plan year. Am I wrong? (I thought it was "use it or lose it".) Participant B, who is over 50 years old, had catch-up contributions of $1,000 for 2005 due to a correction of an ADP testing failure for the Plan year ended March 31, 2005. This equaled Participant B’s pre-tax deferrals of $1,000 for January through March, 2005. From April 1, 2005 to December 31, 2005, Participant B made $14,000 of pre-tax deferrals (equal to the $14,000 limit of Code Section 402(g), with no catch-up contributions). Participant B made pre-tax deferrals of $4,000 from January through March, 2006, and received $6,000 of matching contributions for the Plan year ended March 31, 2006. Therefore, his annual additions subject to Code Section 415 for the Plan year ended March 31, 2006, prior to considering transition benefit contributions would be $24,000. If the transition benefit contribution formula provides a contribution of $30,000 for Participant B, that amount must be reduced by $10,000 in order to satisfy the Code Section 415 limit of $44,000 for the Plan year ended March 31, 2006, unless Participant B’s pre-tax deferrals can be recharacterized as catch-up contributions. $3,000 of Participant B’s pre-tax deferrals from April 1, 2005 to December 31, 2005, may be treated as catch-up contributions because only $1,000 of catch-up contributions were previously taken into account for 2005. In addition, Participant B’s $4,000 of pre-tax deferrals between January 1, 2006 and March 31, 2006 may be treated as catch-up contributions. Therefore, $7,000 of Participant B’s pre-tax deferrals may be treated as catch-up contributions, and only a $3,000 reduction applies to Participant B’s transition benefit contribution. A $27,000 transition benefit contribution should be made to Participant B’s Plan account for the Plan year ended March 31, 2006.

K man, I believe that the fact that the employer is still paying some of the benefits of a term'd ptp is irrelevant. If the person has truly terminated and they are receiving severance, it cannot be utilized for plan purposes. (I think it has to do with if the participant actually worked hours.) The only post severance comp which can be included is from a ptp’s last paycheck or unused sick/vacation. The only other issue has to do with commissions which are paid much later as well. If I recall correctly, if the ptp is permitted to defer out of them, then they can be counted as comp. I am a bit fuzzy with this so I will stop here as it isn’t what you were asking about. I hope this helps.

Client has decided to terminate their 401(k) plan as of 10/31/2007. They are in the process of adopting an amendment/resoltuion to terminate and to cease any 401(k) deferrals. They have asked us to process the ADP test immediately, utilizing the data through 10/31/2007. Since the amendment resolution does not make a short plan year, can the testing be done utilizing the data through 10/31/2007? Or do we have to wait for 12/31/2007? Of does the client have the option? Any advise would be greatly appreciated.

If you fail an ADP or ACP test, you have 12 months to make a correction. If you don't make a correction within the 12 month prescribed correction period, then you have a failure on your hand. You can use the One-to-One Correction Method, which involves the refunds being made and a QNEC allocated to the NHCE's. I have a client who failed their 2003 ADP test. The test was completed in 2/2004. They did not properly process the distributions. Now it is 2007, they want to make the proper distributions. We told them that they could still make the distributions to the HCEs (with the applicable earnings), but they would also have to make the 1-to-1 QNEC to a group of the NHCEs. We reviewed the original corrective distribution calc, brought forward with earnings and told them how much needed to be distributed. We then attempted to calc the 1-to-1 QNEC. When we did so, we came up with an HCE who gave us some problems: HCE: He terminated in 1/2004. He rolled over his funds in 2/2004. For his situation, he would still need to be notified of the corrective distributions and need to get some of the funds out of his rollover vehicle. Our questions/comments are as follows: 1) Since he took his funds prior to 3/15/2004, the employer would not have to include him in the 10% excise tax for the late distributions. (if he took his dist after 3/15/2005, then he would need to be included in the 10% tax calc. Correct?) 2) He would need to receive a 1099R in 2007 showing the taxable distribution. Correct? Do we need to provide that to him or should that be issued by his IRA based on our letter? 3) Since the funds were taken from his account prior to 12/31/2006, does he need to be included in the 1-to-1 QNEC calculation? I believe that he should because even though all of his funds were distributed, the distribution was not done properly. Does anyone agree? Can anyone please provide a cite? Any replies are greatly appreciated.

I have a prospecive client who has a 401(k) plan with both collectively bargained (CB) and non-collectively bargained (NCB)employees. The CBs are part of the of the same CBA. The CBA provides every is elig to make 401(k) contributions, but different employer contributions for subset CB employees. For example, one subset CB employees will receive a match and no PS contribution. Another subset will receive a PS cont, but no match. Another will receive a match and a ps, but the levels are not the same as either of the two previous subsets. Since it is in the CBA, we are going to follow it. Our question is what testing needs to be done on this? 410(b), 401(a)(4), ACP? I would guess that the ACP is not required for the CB employee disaggregated portion, but I am not sure. Any help would be greatly appreciated. Also, any cites would also be appreciated. Additionally, they are also talking about using a comp definition that does not meet 414(s). For the CB employees, does a comp test need to be done. My guess is yes if there are HCEs as part of the CB employees. Again, any help would be greatly appreciated. Also, any cites would also be appreciated.

Again, I am confused. If the 2/1/2005 -- 1/31/2006 Plan Year fails the test and the $5,000 refund is recharacterized as catch-up, then he has met his $5,000 catch-up limit for 2006. Then he contributes 20,500 to the new employers plan from 2/1/2006 -- 12/31/2006. He now needs to have $5,000 recaharacterized as catch-up because Employer B has allowed him to defer $20,500 and does not know about the previous employer's test failure. In this case, he has had $5,000 recahracterized by Employer A's plan that failed the ADP/ACP for PYE 1/31/2006. (This is a 2006 catch-up.) He then has an additional $5,000 recharacterized by Employer B's plan dues to him exceeding 402(g) for PYE 12/31/2006. (This is also a 2006 catch-up.) Now he has recharacterized $10,000 as catch-up. How does this not violate the catch-up limit? Please explain.

All: I want to thank you all for your continued efforts to help me understand this issue. I apologize if I ruffled some feathers, but I was just trying to understand the topic and the disconnect in my thought process. Tom, I appreciate your response and you really know how to end a conversation:) I am sorry if you felt my comments questions were not intelligent. I am just trying to make sure that I understand. Mike, I want to apologize for sending you the private message. I did not realize that it was genrally not accepted as I sent them to you and Tom for the first time. I believe that your time is very valuable and I would not want to take you away from the more pressing issues that you have. I will refrain from doing so again. Finally, I have a related scenario. It does not question the method, but more how something is not a violation. Ptp is a member of Company A with a plan of 2/1/2005 -- 1/31/2006. He contributes 14,000 from 2/1/2005 -- 12/31/2005. He does not contribute anything in 1/1/2006 -- 1/31/2006. The client runs the ADP for 2/1/2005 -- 1/31/2006 and it fails and he needs a refund of 5,000. Since he is catch-up eligible, it is recharacterized. He then quits his job on 2/1/2006 and joins Company B with a calendar year plan with immediate entry. He then contributes 20,500 to the new plan for 2/1/2006 -- 12/31/2006. The new employer would take a catch-up of 5,000 from his 20,500. He would receive two W-2s: one from the Company A showing 0 deferred and one from Company B showing 20,500 deferred. It appears from this example he would have 10,000 of catch-up. Company B would not know about the recharacterization in Company A's plan and the ptp would not know because ptps are not informed that their recharacterization. (At least we never have informed a ptp directly and I do not think a client would.) How does this get caught? How is he prevented from exceeding the catch-up limit?

I have pretty much bought into Mike's explination. However, from my example, yes. He would get a refund.

Mike, Thanks for your response. I am in the minority at my firm thinking that you could not reclassify what has not yet been deferred. You seem to support the position of my colleagues. Let me see if I can present two additional issues to you that may sway your opinion 1) What if the employee does not defer anything in the second calendar year? Wont he then have contributions being recharacterized for 2006 when he has not physically made contributions to 2006? 2) Next is his W-2 will show 0 for the 2006 year. If the client gets audited and actually checks his W-2 for the deferral amounts, the ADP/ACP test, and the re-charaterized amounts, then, again, he'll have contributions being recharacterized for 2006 when he has not physically made contributions to 2006? Does this sway you at all or am I just off-base here? As always, thakns for your help.

I have a couple of issues related to catch-up contributions Below are a couple of examples and the associated questions: Example 1: Due to the failure of the 04/05 ADP testing, Participant D (age 50+ on 12/31/05) must reduce his 04/05 deferrals by $1,900. To avoid a refund, the plan recharacterized $1,900 of his 05 contributions as CUC. The question is how does this recharacterization affect the 05/06 testing and refund requirements. Participant D made the following deferrals: 1st Q 05 --- $3,400 2-4th Q 05 ---$14,600 1st Q 06 ---$ 3,500 The following applies to this example: • Out of the $3,400 for 1st Q 05, $1,900 is CUC , the remaining $1,500 (3,400-1,900) is regular deferral • For the last 3 quarters of 05, $2,100 (4,000 – 1,900) is CUC and $12,500 (14,600-2,100) is regular deferral • For the 05/06 ADP testing, the amount of deferral is $16,000 (12,500+3,500) • If the 05/06 ADP fails and D is due a refund, up to $3,500 of that refund could be avoided by recharacterizing as 06 CUC. • No refund is required for D unless the 05/06 failure requires a refund larger than $3,500 1) Is this correct? (I think this is.) 2) Can a plan recharacterize catch-up contributions which have not been contributed yet? Take the example above except the only change is in the fourth and fifth bullet. It would be that that the plan requires a refund of $5,000 for the failure of the test for PYE 03/31/2006. Can the plan recharacterize the whole $5000 from the 2006 plan catch-up level? (Based on the idea that the participant would make additional 401(k) contributions during 2006.) I believe that this is not allowed because the only contributions made for the 1st quarter of the 2006 calendar year were $3,500 and you cannot reclassify more than was made in the portion of the calendar year that was contained in the plan year. Now I am taking the example above and changing a few items. Below I have stated the revised example: Example 2: Due to the failure of the 04/05 ADP testing, Participant D (age 50+ on 12/31/05) must reduce his 04/05 deferrals by $1,900. To avoid a refund, the plan recharacterized $1,900 of his 05 contributions as CUC. The question is how does this recharacterization affect the 05/06 testing and refund requirements. Participant D made the following deferrals: 1st Q 05 --- $3,400 2-4th Q 05 ---$12,600 1st Q 06 ---$ 3,500 The following applies to this example: • Out of the $3,400 for 1st Q 05, $1,900 is CUC , the remaining $1,500 (3,400-1,900) is regular deferral • For the last 3 quarters of 05, $100 (4,000 – 2,000) is CUC and $12,500 (12,600-100) is regular deferral • For the 05/06 ADP testing, the amount of deferral is $16,000 (12,500+3,500) • The 05/06 ADP fails and D is due a refund of $4,000. • Based on my assumptions above, $3,500 is recharacterized as 2006 CUC because that is all that was contributed in 2006 calendar. • Based on my assumptions above, since we still have CUC available from 2005 ($2,000), I can recharacterize the remaining $1,500 as CUC for 2005 so the participant does not have to receive a refund. 3) Is this correct? Can I use the remaining 2005 CUC as a recharacterization of a refund for the 3/31/2006 PYE ADP/ACP test once I have exhausted the 2006? Any citations would be greatly appreciated. Also, multiple opinions would also be appreciated.

I have a client who has two separate divisions. Each division has its own plan. Both are PSPs with 401(k) features. Elig is 21/1 with semi-annual entry for both. The plan for division A is providing a PS cont. The plan for division B is not. I have begun to test coverage and I am currently failing the ratio test for division A. I am moving on to the ABT. I am going to calc the ABPT, but I have a question. The plan for div A defines comp as while a participant. The plan for div B defines comp as the whole year. When I calc the ABPT, I assume that I use partial year comp for plan A (as defined by div A's doc) and whole year for B (as defined by div B's doc), correct? If so, is there any way I can use partial year comp for B? (Presumably this will help my results.) A hypothetical follow-up. If either of the plans were to define comp differently for each component of the plan, I would have my choice as to which to use for the ABPT, correct? Provided it meets 414(s). (I would think this is a no brainer. I would want to use the partial year for a better result.) Thanks in advance.