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I don't think you need anything in the document. As far as disclosure goes, it may not be required but I'd advise the employer to do it. The DOL has made it clear that investing in a default fund gives the trustee NO protection under ERISA 404©. In order to have protection, there must actually be affirmative control over the account. Thus, whether or not you disclose the default fund won't matter as far as the DOL goes. Ultimately, the trustee is solely responsible for ensuring that the participant's account is invested prudently and is diversified. Thus, the key is to advise the employer about the risk. But, if you end up in court, we all know that bad facts make bad law (and regulations have been overturned in court). Of course if you end up in court you lose even if you win the case, but there is no downside to providing lots of disclosure.

Blinky - I don't there is disagreement regarding the nonelective safe harbor or basic or enhanced match used to satisfy the ADP test. Those contributions must generally be made to all who are eligible to defer. But, I think the original question (which I could have misinterpreted) is whether you can impose conditions on someone deferring. The thought being that if they can't defer, then they aren't entitled to the safe harbor contribution. So the question is... where does it state that you can't impose end of the year/1000 hours on deferring? All I was trying to point out in my prior comments is that I don't need a specific cite to prohibit this because as a practical matter, it just can't be done.

The refund for a failed adp/acp test is statutory and thus a refund of deferrals is permissible. You're correct that someone who terminates with less than 500 hours is excludible for coverage testing. But, a plan is not required to preclude those who terminate with less than 500 hours from benefiting -- it's a permissible provision. Thus, if you include such a provision but you let someone benefit in error (i.e., you let the person defer), there is no authority the statute or regulations to allow a refund of deferrals. What would have is a failure to follow the terms of the plan - not a failure of a statutorily imposed adp/acp test. So you're option is to prohibit any deferrals until 500 hours are completed or don't impose any conditions on deferring and let them defer right away. And, without spending hours on this, suffice it to say that not letting someone defer until 500 hours are completed won't work. There you do have potential qualification problems by precluding any deferrals for the first quarter of every plan year.

There are two issues here that seem to be making this confusing. It has to do with conditions you can impose on (1) deferrals and (2) safe harbor nonelective contributions. It's clear that for the safe harbor nonelective contribution, it goes to everyone who is eligible to defer. You can't impose any conditions on receiving that contribution. What you're really asking is whether you can impose conditions on deferring, thereby eliminating the need to make the nonelective safe harbor contribution (because the person isn't eligible to defer). I don't know of a specific cite in the regulations addressing this, but what I was trying to point out that even without a specific cite, you can't impose ANY conditions on deferring because it just doesn't work. For example, your last question about what happens if somone terminates with less than 500 hours. If you COULD impose conditions on deferring (e.g., you must have more than 500 hours in year of termination to defer) then I don't know what the answer to your question would be. In other words, what do you do with the deferrals if somone deferred but then quit with less than 500 hours. The first time that happens you might be able to use self-correction and refund the deferrals. But, one of the principles of self-correction is to have procedures in place to prevent it from happening again. There's absolutely no way to prevent it from happening again -- other than by making sure the plan does not impose any conditions on deferring.

You are correct that rollovers from an IRA are not the same as "deemed IRA" contributions. However, there is no guidance from the IRS on how IRA rollovers need to be handled. For example, you pointed out the RMD rules. In addition, there are the prohibition on the purchase of life insurance and loans. I guess one position is that since the IRS has been silent, that a reasonable interpretation is they take on the charchteristics of the plan once they are rolled over. However, the deemed IRA regulations do give you reason to pause. If rolled over funds are treated differently, then I don't know why you'd ever advise someone to make deemed IRA contributions to a plan. You'd be better off advising the person to make the IRA contribution to an actual IRA and then immediately roll it over to the qualified plan. Perhaps there may be better bankruptcy protection by keeping it charachterized as IRA money. But, I don't think it's clear whether you have bankruptcy protection over deemed IRA contributions.

Since it is an NHCE, I can't think of anything in the Code that would prevent it. I don't know if there would be any ERISA fiduciary concerns on this.

The short answer is no - you can't do that. The problem is that at the beginning of the year, how do you know whether or not the person can defer? If you let the person defer and then find out the person doesn't complete 1,000 hours or end of the year, then you haven't followed the terms of the plan. You would have an operational violation. Under EPCRS self-correction you have to have procedures in place to prevent the error from happening again. Not sure how you would do that. That's why no plan imposes any conditions (other than initial eligibility conditions) on someone deferring. And, once you defer, you can't impose end of the year/1000 hours on the employer non-elective safe harbor contribution.

Just to clarify, there is nothing to add back in because it was never taken out. Cash was taken out of the plan to make the loan, but the plan received a note with a FMV equal to the loan. Thus, the plan has not had an increase or decrease in the value of the assets just because a loan was made. However, if there is a default on the loan and there has been an offset of the loan from the participant's account, then it would be considered an in-service distribution and would need to be added back.

I think you could have a resolution that stays in effect until modified. Also, I think the issue regarding a resolution is more of a state law issue than an IRS issue (which would explain why it rarely comes up in an IRS audit). The question is whether the board of directors must approve a contribution or whether management can make the decision without board approval. Likewise, as pointed out, if you are changing a plan provision, board approval is needed because management won't have the authority to amend the plan on behalf of the company. It doesn't matter that the decision to make a contribution is after the end of the year (in my opinion). It just matters as to who can make a binding decision to make a contribution.

As you pointed out, there is no clear guidance on this issue. However, most TPAs will base the test on all eligible participants (although you can exclude those earning under $25,000 - I think that's the threshold but I don't have Code Section 129 in front of me right now). The problem with basing the test on all eligibles is that you end up with many individuals who are averaged in at $0 (i.e., those who are eligible but don't elect to participate are averaged in). This is the case even though they may not be participating because they have no eligible dependents. The exclusion of those under $25,000 allows you to exclude many who don't participate because the tax credit is more valuable. Now, for an angle on this that I've pondered over the years. Suppose you wrote the eligibility requirements for the dependent care program to exclude anyone who has no dependents. You would need to make sure that the plan is nondiscriminatory as to eligibility, and I could make a good argument that such a provision would be nondiscriminatory. Taking that approach would eliminate the $0 amounts being averaged in for those who just don't have a need for dependent care because they have no dependents. The practical problem is gathering accurate employee census data as to who has dependents. FYI, I haven't seen anyone try this.

Yes, you should adopt it no later than the end of the year.

The initial question was about a new plan established in 2003. So, even the GUST RAP ends in Sept. for most plans, my point is that you may need to use the new plan rule in 1.401(b)- 1 (I think that's the correct cite). What's not clear to me is whether the 1.401(b)-1 period applies (you have until the due date of the 2003 return) or whether the Notice applies and you must adopt by the end of 2003. I agree that regardless of when you adopt it, you need to be aware of the 411(d)(6) anti-cut back issues.

Agree. But you do agree that an EGTRRRA amendment is required. The issue is the figuring out what the deadline is for adopting that amendment. And, pursuant to Notice 2001-42, you can't wait until 2005. Based on my message below, I think you need to adopt it by the end of the year - to be absolutely safe. The added benefit of doing it by the end of the year is that if it's a dc plan, it resolves the issue you raised about the anti-cut back issue for the top-heavy provisions.

I agree, you don't have to submit for a letter if you don't want to. But, I think an EGTRRA amendment is required. While most of the provisions are optional, the top-heavy changes aren't.

Notice 2001-42 provides: • Good faith EGTRRA plan amendments must be adopted no later than the later of (1) the end of the plan year in which the amendments are required to be, or are optionally, put into effect or (2) the end of the GUST remedial amendment period. In limited situations, earlier amendment may be required to avoid a decrease or elimination of benefits prohibited by 411(d)(6). It doesn't specifically address new plans. To be safe, I'd have it adopted by the end of the plan year. But, I would think the general remedial amendment period that applies to new plans would apply. Under that rule, you generally have until the due date of the employer's tax return for the 2003 year (wow - it's been a long time since we've had to deal with those rules).

Under Rev. Proc. 2000-20, you cannot have different allocation rates for different members of a controlled group. However, there are prototype plans out there that do allow for this. The reason is because the IRS makes mistakes. And, this is a fairly easy mistake for the IRS reviewer to make because they don't have any checks and balances on this issue (in other words, it's not a question on the prototype application form (series 4461) and it's not in the LRMs). So, to the extent the IRS approved the provision, then that's their mistake and you would have reliance.

I haven't this issue come up before, but here's my stab at an answer. As Ricky Ricardo would say to the Plan Administrator "...you have some 'splaing to do.." The loan is in default and it's taxable. I think that's the position the IRS will take. Because the statute provides the results (taxation), it's not something you can handle through EPCRS. One other consideration, it's possible the IRS could argue that it was taxable when made. The reason is because you didn't have level amortization over a 5 year period. Maybe others will have some creative ideas ...

It's fairly common to see something less than 1,000 hours used. In fact, many prototype plans allow you to do this in the adoption agreement. You would also need to make sure there is a corresponding change to the definition of a 1-year break in service (e.g., many plans provide that a 1 year break is 1/2 the hours needed for a year of service.

There are two ways to approach it. One is that the plan shouldn't have made the distribution. In that case, you would follow rev. proc. 2002-47 (EPCRS) for paying someone out. I'd go to the Q & A columns on plan corrections to see the permissible correction methods. The other approach is that the distribution was permissible and therefore you don't do anything. The support for this is that assuming the termination of employment was bona fide, the individual had a distributable event (I'm presuming the plan permits distributions upon termination of employment). The issue is whether the subsequent rehire nullifies that distributable event. And, again assuming the termination was bona fide, you can make a good argument that the distribution was permissible and the plan doesn't need to take any corrective action.

That's a loaded question and the answer, of course, is it depends. Without knowing the capcity of the advisor and whether there is self-dealing, at the very least the fees paid by a plan must be reasonable. That means all fees regardless of whether they are buried in investment fees or software.

One other point to bring up. There is no authority for a "forfeiture suspense account." Thus, until a forfeiture has been disposed of, it's still part of the individual's account. That's why I would conclude that the individual is fully vested if the forfeited amount hasn't been disposed of yet. Thus, if someone had been paid out but the plan doesn't forfeit the account until 5 breaks, I think the person is fully vested and is entitled to an additional distribution. I guess that's the tradeoff of delaying forfeitures for 5 breaks vs. an immediate forfeiture coupled with the buy-back rules. And, another consideration. As pointed out there are various court cases out there. My guess is individuals weren't fully vested and brought a cause of action against the plan. So, if you like going to court to fight the issue, then these cases should give you some comfort. For a very large plan it's probably worthwhile on both sides to fight it. For a small plan, what's the net loss to the employer after taking into account your time to research the position and provide an opinion?

I agree that it depends on what never used means. If you have a prototype that has an election in the adoption agreement as to whether elective deferrals are pemitted (just like any other employer election that is offered in an adoption agreement), then the CODA is available if the employer has actually selected to permit deferrals. If the plan permits elective deferrals but no one has used them (which would be suspect as to why no one used them), then I think you have an existing CODA. To me, that would be similar to the plan permitting a discretionary match but the employer has elected to put in $0. So, I would look at what the provisions of the plan, as adopted by the employer provide.

IRC 401 - The issue doesn't directly relate to competition. However, the case before NC was certainly brought up because of competition (the attorney who complained to the bar was charging around $5,000 to do GUST restatements and didn't want to lose business to those who give it away for "free"). The philosophical issue here is whether legal representation is needed. It doesn't matter whether you're the one collecting 12b-1 and providing "free" services (which don't include legal representation) or whether you're with the independent TPA firm, CPA firm, actuarial firm, etc. (that also doesn't provide legal advice). As an example, go back to my reference to the ERISA issues involved with a plan. Sure, the last page of most adoption agreements tells an employer to seek legal counsel. And, we all know that rarely happens. So, unless your firm is a law firm providing the ERISA advice, who is providing, or best able to provide, this advice? Should employers be forced to get legal advice -- even if it's only limited to legal advice on the ERISA fiduciary issues? Most of us look at this and say it's just the attorneys trying to take away our business. But, the issue is everyone complains about the lack of advice and how no one attempts to comply with rules (except for your own firm, of course). As GBurns pointed out, just because you're a CPA or an actuary or an IRS enrolled agent doesn't mean you know the qualified plan rules or ERISA. And, just because you're an attorney doesn't make you qualifed either. At the very end of the brief filed in this NC case, it was pointed out that no NC law school offers classes on qualified plans and there have been no continuing education classes on qualified plans sponsored by the NC Bar in the past two years (they didn't go back to prior years). Plus, most lawyers familiar with ERISA have no idea on how to perform some of the operational tests (such as an ADP test). But, arguably an attorney is held to a higher standard and isn't allowed to represent someone unless qualified to do so. While other professionals have the same concerns, but they may be restricted in providing legal advice. Hence the issue being addressed by the bar- should non-lawyers be permitted to practice law in this area. What I was trying to point out is that it's rather ironic. We complain about people who give bad advice and don't attempt to comply yet we don't want to put plans in the sole domain of the legal profession. Once again, as GBurns pointed out, exactly what type of certification or degree will ensure that employers are protected (if you think protection is needed) without increasing costs that would discourage the establishment of plans. As far as the 12b-1 fees, I was disappointed that the DOL addressed this by creating a fee schedule form that could be used by employers. I doubt anyone has or will use that form. But, their opinion is the employer has a responsibility to determine the fees it pays. Although, I do agree that at some point you can't protect people from their own stupidity. On the pending legislation on conflicted investment advice, the question to ask is whether conflicted advice is better than no advice at all. We know participants won't pay for professional advice on their own. So, if there is some way to ensure some protection so that advisor won't abuse the situation, why not allow the advice. At least that's the thought process going on and it's really a tough one to decide.

You might also look at the two revenue rulings issued today (May 15) regarding medical equipment, drugs and certain surgery. They confirm the issues in this thread on drugs and medical equipment And, I'm still confident that since the remote control is used solely with the hearing aid, that it's an allowable expense.

I think you'd be a safe harbor plan for those with 20/6 and would not be a safe harbor for those with less than 20/6. If those with less than 20/6 are all NHCEs, you pass. One other point. Watch out if you're trying to use the top-heavy exemption (for plans consisting solely of deferrals and safe harbor contributions). Since those with less than 20/6 aren't getting a safe harbor contribution, some people interpret the rules to mean that you are no longer exempt from the top-heavy rules. Absent definitive guidance from the IRS on this issue, I'd have to agree with that interpretation.