buckaroo

While I agree that there could be an issue with a deemed CODA if the individual HCEs make the choice, this is an issue with most new comp plans. Change it from the HCE says yes, to the "plan committee" determined that only one HCE should receive the NEC. Other than the Deemed CODA, what other issues are of concern? I agree that the Carol Gold memo is a concern, but not sure if that is the only one. As far as age discrimination is concerned, does your opinion change if the NHCEs selected are not all the youngest eligible NHCEs?

I have a new client that has a 401(k) plan that has elective deferrals and match. After some discussion, it appears that have spoken with an outside consultant who suggested that they added a new comp allocation with each person in their own group. Based on this set-up, they want to offer the NEC to a very select number of participants in the following fashion. There are 5 HCEs and 50 NHCEs. They are going to ask the plan sponsor, annually, which HCEs are to receive the NEC and then gage who and how many NHCEs are to receive an NEC to pass the ratio test. A quick general example, let's say that 1 HCE says yes. Based on that, the HCE coverage ratio would be 20%. Based on that, the NHCE coverage ration would need to be 14%. Based on that, only 7 NHCEs (14% of the 50 NHCEs) would need to receive an NEC. This would pass the ratio test for coverage. The next issue would be 401(a)(4). Based on this, they could select the 7 youngest NHCEs and provide them with a contribution that would cause them to satisfy the gateway and pass the 401(a)(4) testing. While I know that this does "smell" right, I am having trouble finding a reason that it wont work. There is no reasonable classification requirement as the contribution level can be high enough to pass all testing at the 70%. Can anyone tell me why this won't work? I am sure that I am missing something simple. Comments are greatly appreciated.

1) I have been under the impression that if the plan document is written where the groups are named in the plan document (e.g. Division A, Division B, etc.) then it would be a reasonable classification and the ABT would be permitted. My thought process has been that the employees who benefit under the plan is established under objective business criteria. All employees of Division A get the allocation and Division B does not. 2) If the plan document is written where each person is in his/her own group AND the allocation is performed where some people get the allocation and some do not arbitrarily (Mr. Smith get a contribution and Mr. Joes does not) then this would NOT be a reasonable classification and the ABT would NOT be permitted. 3) The issue is if the plan document is written where each person is in his/her own group and the allocation is performed where the people of one division get the allocation and the people in the other division get no allocation, then I am unclear and think it is open to interpretation. The document is written where each group is named so it would not be considered a reasonable classification. Alternatively, and in practice, the employees who are benefitting were done via an objective business criteria so it could be a reasonable classification. This is my thought process.

Thanks for all of the replies. Mike Preston, I just want to confirm my understanding of your comment. You are saying that since the plan is written for each person to be in their own group, then if a person does not get the allocation, then the ABT is off the table. If the plan was written where the groups were defined as each division, then the plan could use the ABT. So, in your opinion, the reasonable classification is done via the plan document and not via the operation of the plan. Do I have this right?

My apologies, but I am confused by the response. Unfortunately, a large percentage of the HCEs will be in the division getting the NEC. (The allocation will not meet the 70%.) While I agree that each person is in their own allocation class is not a reasonable classification, is the fact that it is being allocated as a flat percent to all in a specific division enough to allow for ABT. To better clarify, my question is does the reasonable classification requirement become an issue based on plan design or in actual practice from the method of the contribution allocation?

I have a plan that has been adopted by an employer with 5 divisions. The plan document has been written where each person is in his or her own class. The plan sponsor intends to provide a flat percentage of compensation (7%) to one of the five divisions only. When the coverage testing is run, it will most likely fail the ratio test. The first question is am I able to utilize the ABT or do I have a reasonable classification issue? The plan document calls for each person in their own class, but, in practice, the allocation is a flat percent to one division. (Before anyone comments, I have spoke with them about amending the document to name each division as a group, but they are resistant as they do not want to put that language in their SPD as they believe that it will alert the other divisions that a contribution is being made to one and not the others.)

I have a collectively bargained plan that fails the ADP test. Rather than issuing corrective distribution checks, the plan sponsor has asked that the corrective distributions be reclassified as employee after-tax contributions. The plan document allows for this and PS understands that the participants will still get taxed on the corrective distributions. Based on the fact that the plan is a collectively bargained plan, it is deemed to satisfy the ACP test (401(m)-1(b)(2)). Therefore, reclassifying the corrective distributions to after-tax employee contributions will not adversely affect any non-discrimination testing. Does anyone disagree with this thought process? Appreciate your responses in advance.

Thee possible options: 1) Tell them to confirm their opinion with their accountant and legal counsel. 2) Point them to Publication 15B Employer's Tax Guide to Fringe Benefits and ask them where it addresses compensation for vacation as a taxable fringe benefit. 3) Tell them that if they want to exclude compensation for vacation that they should amend the plan document to do so and inform them that they would be subject to 414(s) testing.

Did he not file due to the balance in the plan? Is it a one participant plan filing an EZ?

Nancy, My recollection is that this is a deferral only plan. Is the ADP compensation defined differently that the one for eligible compensation for elective deferrals? If so and the ADP testing comp meets 414(s), then my recollection is that all you need to do is pass ADP. If ADP is passed, then it the definition of compensation that you are permitted to defer from is irrelevant. Take a look at 1.401(a)(4)-4(e)(3) and 1.401(k)-6.

If this is a deferral only plan and the definition of ADP testing compensation meets 414(s), then I recall that as long as ADP is passed, no 414(s) testing is required.

We have a similar situation here, but with a twist in how EPCRS is written. We are hoping that we can get clarification. In EPCRS, Appendix A, Section .05(5)(a), it states the employee's missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed the applicable plan limits, including the annual deferral limit under 402(g) for the calendar year in which the failure occurred. My issues is the portion of the phrase "...the missed deferral does not exceed..." Does this mean that the participant should have their elective deferral limit reduced by the amount they would have contributed? Example 1: The participant makes 100,000 annual eligible comp. He elects 18% as of 1/1. On 7/1, the PS discovers that his deferral election was not implemented. The PS wants to provide a 25% QNEC. Based on what he would have deferred (9,000), he would get 2250 as a QNEC. Based on the phrase above, is his remaining elective deferral limit supposed to 9,000? This is based on 18,000 - 9,000 missed deferral opportunity. Or should it be 15750? Let me take it to the extreme using another example: Ptp makes 100K per MONTH of comp. He elects 18% as of 1/1. The issue is discovered in May of that same plan year. The PS wants to provide a 25% QNEC. Based on what he would have deferred (18,000), he would get 4500. Based on the information above, is his remaining elective deferrals limit 0? Or should it be 13,500. Assume no auto enroll features. Any help is greatly appreciated.

I have read this a number of times and I am confused by the response. 416(I)(1)(A) states (in part) that a key employee means any employee who, at any time during the plan year" 416(I)(1)(A)(ii) states a 5-percent owner of the employer I do not see anywhere where it speaks to ownership in the prior year. Assuming a calendar year plan year: 1/1/2014 -- 12/31/2014 - The former owner was a more than 5% owner (sold ownership in 7/2014) and should be a key employee for determination date 12/31/2014. 1/1/2015 -- 12/31/2015 - The former owner was not a more than 5% owner (sold ownership in 7/2014) and should be a former key employee for determination date 12/31/2015. What am I missing?

Does the employer understand that the Roth is tested as part of the ADP? Perhaps they think it would be included in the ACP. If so, they may be worried about corrective distributions to the HCEs (e.g. match) from the ACP test if more people made Roth elective deferrals.

I would say that the additional fixed match would not fit into an ACP safe harbor. My initial thought is that you could have an HCE who receives a higher rate of match than an NHCE (e.g. last day requirement) and would cause the plan to be subject to the ACP test.

1) Shifting from ADP test (if applicable) 2) Does the plan have true after-tax? If so, it would be included in ACP and would help (but probably wont fix). 3) The corrective action would be to refund. This could still "provide for" the HCEs as they will receive a refund of some to all (depending on vesting).

My recollection is that you can exclude elements of compensation if you can pass the 414(s) comp ratio testing and you would still retain your safe harbor status. If you cannot pass the testing, then that is where things get more complicated.

Are you sure that all members are part of a single controlled group/affiliated service group? Or could it be a multiple employer plan? If it is a multiple employer plan, it should be tested separately for each unrelated member. (Related members should be tested together.)

A discretionary match that meets the ACP safe harbor will not cause a TH min to be required. (Plan will still be deemed not TH.) EOB Chapter 11 Sec XIV Pt. H2

I have a plan sponsor asking what the deadline is for this year to process a 402(g) violation. I known that the deadline under 402(g)(2)(A)(ii) is 4/15. However, the tax filing deadline this year is 4/18. Is the deadline for the 402(g) corrective distributions 4/15 or is it extended to 4/18? Can you please provide support for your position?

Thanks Tom.

I am going to attempt to revive this very old post to be sure that I understand. Plan has elective deferrals, match, SNHEC, and profit sharing. The profit sharing has a last day requirement and is a new comp that needs to be cross tested. The match does not satisfy the safe harbor and the ACP test must be run. THe plan fails the ACP. The plan sponsor wants to correct via a QNEC. I have two NHCEs who term prior to the EOY. They are getting the SHNEC. In order to satisfy the ACP, they are also going to be provided with a NEC. My question is if they are given the QNEC to satisfy the ACP, can this count towards the gateway. I know that I have to pass (a)(4) with and without the QNEC, but didn't know if the QNEC still counted for gateway and then needed to be tested for (a)(4) with and without QNEC. Bottom line is can I use the QNEC for gateway and then test (a)(4) without the QNEC? Any help is greatly appreciated.

Generally, the IRS position is that changes to a safe harbor 401(k) plan after the beginning of the plan year violate the 12-month plan year rule and the notice requirements. There are some exceptions to the restriction on mid-year amendments, such as for plan termination, adding Roth, amending to addess same sex marriage, and reducing or eliminating match or nonelective contributions, if applicable requirements are met. All of this being said, the IRS generally enforces restrictions on mid-year amendments. Conservatively, I would think that this would be similar to suspending the SHMAC. In order to reduce or suspend SHMAC, a plan sponsor must provide a supplemental notice to all eligible employees informing them of the reduction or suspension. In addition, the plan sponsor must adopt a plan amendment providing for the reduction or suspension, which cannot be effective earlier than 30 days after the employees are provided the supplemental notice AND that the ADP and ACP tests will apply for the entire plan year using the current year testing method.

I would also change the plan design for future years. Add a group ("Indirect Owners") so that the daughter of the owner is in a separate group. Her contribution can be "shorted" or zero adn then this will not be an issue in the future. If they are adament on giving her a cont, perhaps they can give it to her as compensation outside of the plan.

In the LRM language for an integrated allocation, the third step reads as follows: © Third, any remaining contributions or forfeitures will be allocated in the ratio that the sum of each eligible Participant’s Plan Compensation for the Plan Year and Plan Compensation for the Plan Year in excess of the Integration Level (as defined in the Adoption Agreement) bears to the sum of all such Participants’ Plan Compensation and Plan Compensation in excess of the Integration Level, but for each eligible Participant, not in excess of the Maximum Profit Sharing Disparity Rate (defined below). For purposes of this step, in the case of any Participant who has exceeded the cumulative permitted disparity limit, two times such Participant’s total Plan Compensation for the Plan Year shall be taken into account. I do not fully understand the last sentence in this step. Can anyone explain what this means? Does this have to do with a situation when there is more than one plan? If so, is it if there is a DB plan? Thanks in advance.