buckaroo

Thank you for all of the replies. I have continued my reseach and I found the following example in the 2010 EOB. Please let me know if this changes any opinions: Chapter 11 - 401(k) and 401(m) Testing, Section XIV, Part G, Nondiscrimination testing of employer nonelective contributions under safe harbor 401(k) plan or other plan maintained by employer 2.e.1) Preserving design-based safe harbor. Restructuring might be a means of preserving the IRC §401(a)(4) design-based safe harbor rules with respect to the employer’s nonelective contributions, and avoiding the rate group test. 2.e.1)a) Example. The additional nonelective contribution made to a safe harbor 401(k) plan is allocated under a permitted disparity formula, as illustrated in 2.c.2) above. Due to differing accrual requirements (i.e., there is a last day employment requirement on the additional nonelective contribution), some employees qualify only for the safe harbor nonelective contribution. To perform IRC §401(a)(4) testing, the employer divides the employees who benefit under the plan into two component plans. Component Plan #1 includes those employees who qualify for an allocation of both the safe harbor nonelective contribution and the additional nonelective contribution. Component Plan #2 includes those employees who qualify for an allocation of only the safe harbor nonelective contribution. Each component plan is able to satisfy coverage under IRC §410(b). On a restructured basis, the plan still satisfies the IRC §401(a)(4) design-based safe harbor with respect to the nonelective contributions. The employees in Component Plan #1 satisfy the §401(l) permitted disparity safe harbor. The employees in Component Plan #2 receive a uniform rate (3%) of allocations with respect to the nonelective contributions made on their behalf.

I am hoping that option #1 will work. If I can re-structure the plan into component plans and I cna pass 410(b) using the ratio test for both component plans, then based on the premise that the allocations in the component plans meets the design base safe harbor allocation (Component plan 1 is SH cont ptps only; Component plan 2 is SH and regular integrated NEC), then I do not have to perform the 401(a)4 testing. Therefore no cross testing and no gateway. Agree?

The answer is yes. There are HCEs making more than 401(a)17 limit.

I have a client with a Safe Harbor 401(k) plan utilizing the 3% SHNEC to satisfy the SH requirements. It also has an integrated profit sharing allocation with a last day requirement. Based on the client's request, they will make the 3% SHNEC and they want to make an additional integrated allocation. The integration level is 81% of the TWB. The additional allocation will be 6% of total comp and 5.4% above the integration level. Additionally, there are a number of NHCEs who terminated during the year. They will receive the 3% SHNEC, but not the additional intergated profit sharing allocation. Based on the above and my understanding, the rules dictate that if both allocations would essentially be design based safe harbor allocations and they had the same allocation requirements (1000 hours, last day, etc.), then no 401(a)4 testing would be required. However, in this case, the SHNEC cannot have any allocation conditions and the integrated profit sharing allocation has a last day requirement. In this case, I believe that I have two options that I can use for this plan: (1) Component Plans - If I am able to split the plan into component plans (by passing 410(b) for each of the component plans), I could split the group of terminated NHCEs who only receive the 3% SHNEC into one component plan and all of the other participants who receive both the 3% SHNEC and the integrated allocation into the other group. Based on this method, my thought is that the allocations in each of the two component plan groups would essentially be design based safe harbor allocations and no 401(a)4 testing would be required. (2) Cross Test the Plan - The terminated participants who only received only the 3% SHNEC could have their allocaiton percentages increased to the gateway minimum allocation (permited in the plan doc) and the plan could be cross tested for 401(a)4. I would like to confirm that the above is correct and that I am able to utilize either of these methods. (If so, I will utilize the first option as it is the more cost effective.) Any comments are greatly appreciated.

Thank you for the information. I greatly appreciate it.

I know that a trust can be named as a beneficiary designation. I also know that there are some requriements to name a trust. one of which is that the required documentation has been provided to the plan administrator. 1) I beleive that a trust ID may be one of the pieces of "required documentation". Is this correct? Is this true for all trusts? 2) Can anyone tell me what the entire list of "required documentation" is? 3) Is there a good reference I can read more about this subject? 4) Are there any citations and can be provided? Thanks in advance.

Just saw the following link on the daily benefitslink newletter: From benefitslink newsletter However, it does not address how the Roth money (to be refunded) should be recordkept...

Sieve, I agree that it is a mostly a participant issue. And I am not advocating tax fraud. However, I do not think it is soely a participant issue. It is also a plan issue (how it is tracked). Here is my issue: If a participant is in this situation and informs the either or both plan administators after 4/15, what is the reccordkeeper supposed to do? I am not sure that it is addressed. it cannot be distributed as there is no distributable event. My thought (and I have no support for it) is to move the contribution over the 402(g) limit (+/- earnings) to a new after-tax souorce. Therefore, when he takes a dist. he will be properly taxed on the earnings. Issues: 1) What if the plan does not allow after-tax contributions? Forced to amend? 2) How are the earnigns calculated related to any gap earnings? (I ask that b/c the contributions should not have been included at all.) 3) Where is any of this addressed. 4) If this roth deferrals should be moved to a different source (pre-tax), then it should be subjecct to double taxation. If not, then I am still unclear how it will be double taxed. 5) Either way (moving to a different source), the earnings would be properly taxed. Thoughts?

My apologies, but I am having trouble with this. Since the plans are unrelated and the the participant does not request the withdrawal timely, the refund then cannot be processed after 4/15. So, is the answer that the participant will have to pay taxes on the monies detailed on the 1040 eventhough he has already paid taxes on it? If so, then I would think that they would at least be gettting the earnings on the overage (when they request their qualified Roth distribution) tax free as well. I assume that the IRS will not track it and the unrelated plans do not even know that there is an issue as they were not notified and a dist was not processed. Is this correct?

I apprecite your response, but I am still a bit confused. I agree that the IRS will be able to determine if someone violates 402(g), but since they are Roth funds and the funds have already been taxed, their should not be any double taxation, correct? The correction is to report on tax return. If funds are not distributed by 4/15, then the penalty to the individual would be that they pay taxes on their form and then again when they are distributed. Since they have already been taxed, then how can it be double taxed? In addition, I am not an accountant and I am unfamiliar with other applicable late penalties, interest, etc.... Can you detail?

Bird, thanks for your reply. So, if a person were to never report the 402(g) to one of the unrelated plans, then they would simply have been able to make Roth deferrals over the 402(g) limit without any implecations? Just to make sure that I understand this correctly, let's take an extemem example: Person works for 10 unrelated entities in 2009. The person defers $16,500 of Roth funds into each of the 10 plans and does not inform any of the plans of the deferrals in excess of the 402(g) limit. Therefore, the particpant has defered 165,000. He reports 148,500 on his 2009 tax return, with no tax implications. When he is eligible, he can take a qualified roth distribution out of all plans (165,000 +/- earnings) and receive all of the money tax free. Correct? Does anyone disagree?

Thanks for the reply. The actual Roth deferrals have already been taxed. So taking the distribution of the actual Roth Deferrals has no tax implications. The related earnings have not been taxed. In relation to a 402(g) excess distribution, both the actual Roth Deferrals and earnings will need to be noted on the tax return, but only the earnings will be suject to the taxes. My issue revolves around a person who does not take a dist due to 402(g) violation prior to 4/15. I do not think that there is any tax implication for someone who simply notes it on the taxes, but doesn't take the dist. In other words, they get credit in the unrelated plans for both contributions for Roth purposes.

Ptp defers 16,500 of Roth into a PYE 12/31/2009 qualified plan. He terminates his position and defers 16,500 of Roth into the qPYE 12/31/2009 ualified plan of his second unrelated employer. The year ends and he discovers that he has violated 402(g), but does not inform his current employer of the violation. Based on this scenario, he would have to "claim" the 16,500 (not CUC eligible) on his 2009 taxes. He would then be subject to taxation when the funds were withdrawn. The issue is since it is Roth, what are the tax implecations. He would not be paying taxes on the 16,500 for 2009 as he has already paid taxes on it (Roth). No earnings would be on the 2009 tax return as he never took a distribution. When he takes the money in the future (assuming that he has a qualified Roth distribution), he would not have to pay taxes on any of it. Does this sound logical and correct? If so, why would anyone in this situation (or a similar situation) where 402(g) has been violated due purely to Roth deferrals ever inform either plan of the over contribution prior to 4/15? What is the implication for his personal taxes? My untrained tax eye does not see any. Any comments are greatly appreciated.

I have a client that has a new comparability plan. The plan year previously ran from 7/1 -- 6/30. They changed the plan year in 2009 so that they had the following two plan years: 7/1/2008 -- 6/30/2009 & 7/1/2009 -- 12/31/2009. When I run the testing for the 12/31/2009 PYE, my understanding is that I will need to include the informaiton (EBARS) for both plan years when calculating the ABPT. This is due to the fact that all plan years ending in the same calendar year must be included for the ABPT. Please confirm. Any comments are greatly appreciated

I know that a QACA/EACA cannot be added to an exitsing 401(k) during the plan year. My question is can an "unwind" feature be added to an existing QACA/EACA during the year? Any thoughts are greatly appreciated.

Two revised notices have been released. How aer folks going to handle which notice should be sent out? Are they going to send both. REview on an individual basis? Combine for their own notice? Just wondering...

Thanks for the info. It is not a 12/31 PYE. It is a 3/31. For the PYE 3/31/2009, the document is a GUST prototype. It does not have any gateway information in it. My understanding is that I can test for 401(a)(4) using a cross tested methodology. If the testing is passed except for the gateway, an 11g amendment can be drafted and executed up to 9 1/2 months after the end of the plan year. Therefore, the amendment can be done to include three named individuals with a specific contribution amount for each and an increase to their vested percentages (if necessary) to ensure that the correction is significant. Agree? Disagree? Additionally, will processing the 11g amendment take the plan out of prototype status? (There is some disagreement here.) Finally, for my own education, regarding the timing of the amendment. My recollection is that if the 9 1/2 months has passed, then it would be an issue under EPCRS. Under EPCRS, the correction would be to do a VCP filing and draft and execute the amendment. So, the difference would be the VCP filing. Is this correct? Are there any other issues to be aware of? I am sure that I am over simplifing it, but wanted to get details on how this works. Any comments/thoughts are greatly appreciated.

Yes you do. THe 11g allow you to provide an additional NEC contribution for a variety of correction including statisfying the gateway.

I have a plan that uses a modified definition of compensation for the employer contribution. (It excludes bonus, overtime, commissions.) The nonelective contribution is calculated at 4% of modified compensation. When I run the 414(s) compensation ratio test, it fails. At this point, I need to run the 401(a)(4) General Test using a definition of compensation that meets 414(s). I simply use gross compensation. When I run it on an allocation basis, it fails. I then run it on a benefits basis and all of the rate groups pass the ratio test, but the gateway minimum test fails. It fails for 3 NHCE participants (using the gross compensation number) on the 1/3 test. (Obviously, everyone fails the 5% test.) PLEASE CONFIRM 1) My feeling is that since I am using gross comp as my defined comp for 414(s), I can use the 1/3 of the gross comp to satisfy the gateway. 2) Since there are three NHCEs causing a failure of the gateway minimum test, I can provide an additional contribution to these three employees to satisfy the gateway test. (I will automatically satisfy any 401(a)(4) testing on the additional amount as it is only going to NHCEs.) 3) This will need to be accomplished via an 11g amendment and will also have to provide some additional vested percentage if the employees are 0% vested. 4) I would think that the additional contribution should be a uniform percentage. Therefore, I have calculated the NHCE with the highest additional percentage on the modified compensation (to achieve the gateway min on gross comp) and provided that percentage to each of the three participants. Does this sound reasonable? Or can I provide various percentages in order to simply satisfy the 1/3 gateway minimum contribution (based on gross comp). Any comments are greatly appreciated.

Thanks for the posts. I had previously considered aggregating the tests. I had previously discounted it and come up with adding participants (and a prob. QNEC) to the OEE group. The problem is that by aggregating the populations causes a greater failure of the ADP/ACP test. Unforntuately, refunds have already been processed. (I have talked to the sponsor about additional refunds and they contniue to knock that solution down.) For the OEE group, most of the 140 were very little to non-contributers. Therefore, it would increase the refunds and the associated excise tax in a somewhat significant fashion. Based on the fact the that ADP for the lower groups is quite small, I think it may benefit the sponsor to add in the bodies from Co B into the ADP portion and provide them with a QNEC. I have to complete the analysis. As you know with dealing with clients, it is not aways simply a monetary issue when dealing with corrections. For this client, the headache of additional refunds to the HCEs may be outwieghed by the cost of a QNEC. I will present both the additional refunds versus the bringing in participants and providing a QNEC. Thanks for your input.

Mr. Preston, thanks for coming on board. I think the actual figures will be much worse than the imagined could ever be. APPROX FIGURES: Company A (Plan Sponsor) has: 230 HCEs of which 229 are in the Stat EE group and 1 is in the OEE group 1200 NHCEs of which 1060 are in the Stat EE group and 140 is in the OEE group Company B: 2455 NHCEs of which 450 are in the Stat EE group and 2005 is in the OEE group The coverage for Stat EEs is 70.19% [(1060/1510) / (229/229] This one is terribly close, but passing. The coverage for OEE is 6.53% [(140/2145) / (1/1] Passing ABPT as HCE is not defering, but failing the ratio portion of the ABT. The problem is that the eligiblity for Company A's plan is immeidate for the 401(k) portion and Company B employs a large number of part-timers (retail store) who never meet the YOS (1000 hours) as defined by the plan. Ideas? Thoughts?

I misread your post the first time. I think I have it now. Unfortunately, plan B is a profit sharing only.

Unfortunately, no. If I aggregate the Stat EEs and the OEEs, I will bring the large group of NHCs from Company B into the overall coverage test and I will fail. The only reason the Stat EE group passes is because so many of the Company B NHCs do not meet the 1000+ hr and age 21.

I have a client that is part of a controlled group. One entity (A) is a mix of HCEs and NHCEs and has adopted the plan I am testing. (It is immeidate eligiblity and immediate entry.) The second (B) is NHCEs and has adopted another plan which we do not administer. I am testing coverage on A's plan. For the Statutory Employees (Age 21+ and 1YOS+), the plan is passing the ratio test for both the 401(k) and match (no allocation conditions). For the OEE group (<21 and < 1YOS), I have one HCE who falls into the OEE group and did not defer in 2008 and, therefore, does not receive a match. However, he would still be considered benefiting because he has the right to defer. (DOH 7/2007; DOT 1/2008). Based on the data that I have, it appears that the OEE group will fail the ratio test and the ABT at approximately 8%. ABPT for the OEE will automatically pass as the HCE does not receive any contributions for 2008. Short of adding in some of the participants from entity B, is there any other way to pass coverage? (I cannot combine the Stat EEs and OEEs as the ADP tests have been completed and I believe that the entire plan would fail anyway based on the number of NHCs in entity B.) If I do have to include a number of NHCs from B, I would think that there is a cost for including them. Without looking it up, I would think that I would have to provide a QNEC contribution of some kind. (I have not reviewed this as I am hoping for another solution.) Any help would be greatly appreciated.

Calendar Year Plan. 2007 ADP test failed and correction method chosen was refunds. Testing was done disaggregated between Stat EEs and OEEs. All refunds were initiated and all were processed in 5/2008 except for one participant who had a self directed brokerage account. His refund was never processed. In 8/2009, the oversight was discovered. What is the correction? It would appear to be a self correction under EPCRS, but it is not specifically addressed. Here are the options that I have come up with. I think #3 would be my chosen conservative correction, but I would consider #2. I think #1 is a bit aggressive and #4 a bit conservative. 1) Refund the calculated amount with gap earnings and stop there. 2) Refund the calculated amount with gap earnings and process a 1-to-1 qnec based on the calculated refund amount. 3) Recalculate the refund amount for the one participant under an aggregated test run, include gap earnings, and process a 1-to-1 qnec based on the revised calculated refund amount. 4) Recalculate the refund amount for all of the participants under an aggregated test run, include gap earnings, and process a 1-to-1 qnec based on the revised calculated refund amount less any amounts previously refunded. (Refund the ommitted participant as in #3.) Please provide opinion or please feel free to suggest another option. If possible, please provide any back-up to justify the response. Thank you in advance.