fiona1

I'm trying to determine who is Highly Compensated but I'm unclear what pay I'm supposed to use. It's a new plan that was effective in June of 2003. The company was sold in June and the new owners started this DB plan. The employees worked for the whole year in 2003 - but for part of the year they were working for the prior owners. Do I use their compensation for the whole year in determing if they are Highly Compensated for 2004? Or do I just use the pay they made under the new owners?

Assume 1/1/02 to 12/31/02 plan year. ADP failed, resulting in refunds to some HCE's. Refunds were not made by the 12/31/03 deadline. Plan Sponsor is correcting the operational defect by the one to one method -distributing the excess contribution to the HCE's and contributing to the NHCE's an amount equal to that distributed to the HCE's. The plan has a provision for catch up contributions and one of the HCE was age 50 by 12/31/02. Should their refund be recharacterized as a catch up contribution? Will the amount of the QNEC made to the NHCE's be before or after the recharacterization of the catch up monies? Thanks for any help.

HCE received a refund due to a failed ADP test. The refund was made prior to the 2 and a half month period so it's taxed in 2003. The problem is that the HCE already filed their 2003 taxes and they don't want to amend them. They've already cashed the refund check. Anyone know if there are any other options to have this taxed in 2004 for this HCE? Can they return the money to the recordkeeper and have them reprocess it using a date after the 2 and a half month period?

Hypothetical: Joe Schmo is in two different 401(k) plans with two different recordkeepers. He exceeds his ED limit. Are there any rules or guidelines on where the excess deferral refund should come from? He is active in both plans.

Has anyone experienced a situation where no test was done for 2002 because the plan had no highly compensated employees eligible? In 2003 the plan was amended to allow highly compensated employees to participate. Since no test was run during 2002, as the plan was deemed to pass, how should we handle the non-highly average for the 2003 test using the prior year testing method?

If a match for the 2003 plan year isn't going to be made until May of 2004, is there anything wrong with doing an ADP test now and then doing the ACP test after the match comes in? What are possible consequences of doing this? Thanks a lot.

Thanks for the reply. What about the wording in Notice 98-1 that says: Section 401(k)(3)(E) provides that, for the first plan year of any plan (other than a successor plan) that uses the prior year testing method, the ADP for NHCEs for the prior year is 3%, or, if the employer elects, is the ADP for NHCEs for that first plan year. For this purpose, the "first plan year" of any plan is the first year in which the plan, within the meaning of section 414(l), is or includes a section 401(k) plan (i.e., the first year a plan provides for elective contributions described in section 1.401(k)- 1(g)(3)). However, a plan does not have a first plan year if for such plan year the plan is aggregated under section 1.401(k)-1(g)(11) with any other plan that was or that included a section 401(k) plan in the prior year. Section 401(m)(3) provides that rules similar to the rules of section 401(k)(3)(E) shall apply for purposes of the ACP test. For purposes of the ACP test, the "first plan year" of any plan is the first year in which a plan, within the meaning of section 414(l), is or includes a section 401(m) plan (i.e., the first year a plan provides for employee contributions described in section 1.401(m)- 1(f)(6) or matching contributions described in section 1.401(m)- 1(f)(12), or both). However, a plan does not have a first plan year if for such plan year the plan is aggregated for purposes of section 1.401(m)-1(g)(14) with any other plan that was or that included a section 401(m) plan in the prior year. This wording looks to me like the first year that the plan provides for employee contributions can use the 3%. Does the fact that they had match provisions, even though never used, not count as the "first year" ?

Here's the scenario: This is the first year that matching contributions were made. So last years 12/31/02 nondiscrimination testing did not involve an ACP test. Matching contributions were made in the 2003 plan year however, so an ACP test will be done. What will be used for the prior year test percent? Will it be 0% or the default of 3%? I'm thinking that the 3% can only be used for a new plan in their first year of testing. Has anyone come across this? thanks for the help.

For the 12/31/02 ADP/ACP test, we did not disaggregate the employee's who did not meet the statutory age/service requirements. The test was done using the total group. For the 12/31/03 ADP/ACP test, we'd like to disaggregate. However we use the prior year testing method. What percents do I use for my prior year test percentage?

So let's say I'm determining my HCE employees. I use the alternative definition of HCE, so the employee must: -be a greater than 5% owner in the current plan year or preceeding 12-month period, or -have earned more than the HCE dollar limit and have been paid in the top paid 20% of all employees in the preceeding 12 month period. I'm doing my 12/31/03 plan year testing. So I need to look at the 2002 plan year. Let's say I have 100 employees. Q1: Do I need to subtract the employees who are not eligible? Q2: Let's say I determine I have 14 employee's who should be HCE. So I take sort my list of employee's by compensation - highest to lowest. 2 of those members termed in November of 2002, so they won't be included in the 2003 test. Do I substitute the next two employee's who qualify to be HCE to replace the two who won't be on the test?

Great information. Thank you very much.

Can someone help me out with Permissive Disaggregation rules? I understand that if the plan's entry requirements are less restrictive than the statutory maximum, then you can run additional tests and rely on those results for coverage and ADP/ACP. Here is where I'm confused. -You run 1 test with the total group. -You run 1 test with the otherwise excludable group (those who do not meet the statutory requirements) -You run 1 test with only those that meet the requirements. So as long as you pass one of the three tests, you can rely on those results? Is it true that you in order to rely on Permissive Disaggregation results for ADP/ACP, you must pass Permissive Disaggregation for coverage? Does that mean you must pass both Permissive Disaggregation tests, or just one? Thanks for any clarification anyone can give me!!

Company A purchased another company and merged the plans effective 1/1/03. Do you look at what the individuals' comp was from the previous employer during 2002 to determine if they are HC or are they treated like a new hire?

But regardless of whether they can be excluded or not, they should be counted as employees? Do they need to meet any rules to be counted? Or just the fact that they are employers of the employer, not mattering where they work or how they're compensated, they need to be counted?

Company A, in the United States, has a 401k plan. The plan is a 1-1 anniversary. They started a new operation in Mexico in April of 2003 and are now a controlled group. They started with 4 employees and added 40 more in December of 2003. Will the employees in Mexico be included in the total number of employees for census? Or is there more information needed?

NM

The only wording in Reg 1.414©-4(b)(6) and Sec 1563(e)(5) addresses grandchildren and grandparents. Can't find anything that addresses "great" grandchildren or "great" grandparents. Has anyone ever encountered this situation?

In a straight percent qnec calculation - If one of the members reaches their 415 limit, how is the excess money distributed to the rest of the NHC's? Does the same amount go to all or is it prorated based on their compensation? Example: It's determined 1.75% QNEC needs to be made to the 3 NHC ee's. EE 1 has a comp of 39,000 so their qnec is 682.50 EE 2 has a comp of 42,000 so their qnec is 735.00 EE 3 has a comp of 58,000 but reaches the 415 limit at 1%. Their qnec is 580.00. How is the additional 435.00 distributed? 217.50 each to EE1 and EE2? or will EE 2 get more because their comp is higher?

Thanks for the reply. Yes, I meant 2002 tax year was $10,999.70. So $2000 from 2003 calander year can be used. Still not clear if you believe $1000 from 2002 can be used as well. Your first paragraph indicates no, that you can only recharacterize the limit for the year in which the plan year ends. But second paragraph indicates that $1000 can be taken from 2002 in addition to the $2000 from 2003. Found some info in ERISA Outline - but nothing yet that addresses combining two calandar year limits for one play year.

9/1 plan year Failing 9/1/02 to 8/31/03 ADP test 1 member getting refund and they're over 50 Refund is 3730.16 2000 tax year contribs equal 10,999.70 Catch up for 2002 would by 1000.00 and for 2003 would be 2000.00 for a total of 3000.00 that could be reclassified for the 2002 test year. Does that sound right?

A plan fails their ADP test for the 2001 plan year. Refunds are not made by the 12 month period ending 12/31/2002. The plan is doing the one to one correction method. There are union and non union members. Do just the NHC non bargaining get the QNEC? Or do the NHC bargaining get the QNEC also?

Is it correct in saying that a participant can only defer on pay earned? I have someone who is receiving 80% of their pay from workers comp and the employer is paying the other 20%. Are they only eligible to defer on the 20%? Anyone know where I can find information regarding whether this can be done or not?

Thanks for the replies. The plan sponsor is going through a bankruptcy. They've paid a portion of the 2002 PS contribution. The companies buying the other locations have agreed to pay the rest, and are being given 4-5 years to do so in the agreement. As for the term partial plan termination, I guess that's just my way of saying that a plan event is occuring that results in disbursements beyond the natural operation of the plan.

Testing coverage for 12/31/2002 plan year. There was a partial plan termination in the 2002 year. All locations were sold off and only 2 ee's remain. The companies that bought out each location have agreed to pay the remaining profit sharing contribution owed to the employees as part of the buyout. They were given 4 to 5 years to make this contribution. Since these contributions will be paid so far in the future - how will that effect the 12/31/02 coverage testing? Thanks for your help.