fiona1

any thoughts on this one?

Any thoughts on KJohnson's question?

,,

I asked this very question at the 8/24/2010 IRS EPCRS phone forum. Rev Proc 2008-50 allows you to fund the 1:1 QNEC to those NHCE's who are still active, but that could still lead to very small QNEC amounts. You can find the transcript online - but here was the response: When using the one-to-one correction method can you have situations where the methodology results in the employee's getting de minimis amounts and so really practically you might want to come up with a somewhat different approach to allocate the QNC that's used to correct the ADP test using the one-to-one correction method? The answer is probably you could. You may want to consider the exceptions to full correction provided in Section 6.02 of the revenue procedure, and that includes a provision relating to the delivery of small benefits. That provision might support the rationale you might use in coming up with an approach that the revenue procedure might otherwise consider to be less than full correction.

I have to disagree with BG5150 on this one. Section 2.01(1)(b)(iii) of Revenue Procedure 2008-50 says that "the portion of the excess contribution amount assigned to a particular highly compensated employee...is adjusted for earnings from the end of the plan year of the year of the failure through the date of correction." And Section 2.01(1)(b)(iv) says that "the employer makes a contribution to the plan that is equal to the aggregate amounts distributed and forfeited under paragraph (1)(b)(iii)(A) (i.e., the excess contribution amount adjusted for earnings, as provided in paragraph (1)(b)(iii)(A)). I agree that if the refund was made timely (within 12 months after plan year end), then no GAP earnings apply. But a 1:1 refund must include earnings to the date of correction. Sal Tripodi notes this in Chapter 15 of the ERISA Outline Book as well: Earnings after the close of the plan year for which the ADP/ACP failure occurred through the time of the corrective distribution is commonly referred to as the “gap period.” In pre-2006 plan years, a plan did not have to distribute gap period earnings unless the plan specifically provided for the “gap period” earnings to be distributed and for post-2007 plan years, also does not have to distribute gap period earnings because of legislative amendments adopted by the PPA 2006. However, when the corrective distributions are being made under the one-to-one correction period, gap period earnings must be distributed, regardless of the plan year to which the correction relates.

I'm curious how others would handle this situation. 1/1 plan year, 401(k) plan. 2011 ADP test failed and refunds were issued in March of 2012. The employer just now realizes that they forgot to deduct deferrals from 3 participants (NHCE's) during 2011. These 3 participants had elections on file, and were included on the ADP test with 0%. The employer is going to self correct, and fund a QNEC equal to 50% of the missed deferral (based on the actual elections). 1) Should the 2011 ADP test be reprocessed to include the QNEC to come up with their deferral percentage? If so, then the test will have better results (since it uses the current year testing method) and the HCE's may need to send some of their refunds back to the plan. 2) Assume the 2011 ADP test did NOT include those 3 participants. So not only did the employer forget to deduct, but they weren't included in testing, either. Should the ADP test be reprocessed to include those members - and if so, do you use their QNEC amount to determine their deferral percentage? There is no guidance that I'm aware of that addresses this....

ABC company has a 401(k) plan with a 1/1 plan year. Division A is spinning off - and employees of Division A are no longer able to defer to this plan effective 3/1/2013. However, Division A does not set up their plan until 6/1/2013. What should happen to the contributions of Divison A from 3/1/2013 to 6/1/2013? Should they go to the original plan and then transfer over to the new plan once its set up? Should these contributions go to an interest bearing account in the meantime?

Is the money still sitting in a forfeiture account? Or has it been used? Even though the match money was taken out of the HCE's account, an ACP correction hasn't been made since the funds have not been distributed as required. So to me that means using the EPCRS to self correct. There are correction options in Rev Proc 2008-50 for the failure of not correcting a failed ADP/ACP test within 12 months. There are actually 2 methods outlined - one in Appendix A and another in Appendix B. Both involve a QNEC to be funded to the NHCE's. I don't know if the improper forfeiting of money is a failure in itself though - and if the money has already been reallocated then additional corrections may be necessary.

Nope. Amounts recharacterized to catch-up are not included in the 1:1 QNEC. Rev Proc 2008-50 states that the QNEC is equal to "the aggregate amounts distributed and forfeited...(adjusted for earnings)" The forfeited part would be for an ACP refund to a HCE who may not be entirely vested in the match. In that situation the non-vested money would still need to be included in the QNEC.

Answer: No Citation: 4979(a)General Rule.— In the case of any plan, there is hereby imposed a tax for the taxable year equal to 10 percent of the sum of— 4979(a)(1)- any excess contributions under such plan for the plan year ending in such taxable year, and 4979(a)(2)- any excess aggregate contributions under the plan for the plan year ending in such taxable year. 4979©Excess Contributions.— For purposes of this section, the term “excess contributions” has the meaning given such term by sections 401(k)(8)(B), 408(k)(6)©, and 501©(18). 401(k)(8)(B)Excess contributions.—For purposes of subparagraph (A), the term “excess contributions” means, with respect to any plan year, the excess of— 401(k)(8)(B)(i) - the aggregate amount of employer contributions actually paid over to the trust on behalf of highly compensated employees for such plan year, over 401(k)(8)(B)(ii) - the maximum amount of such contributions permitted under the limitations of clause (ii) of paragraph (3)(A) (determined by reducing contributions made on behalf of highly compensated employees in order of the actual deferral percentages beginning with the highest of such percentages).

Employee A works as an employee of Company X and participates in the Company X 401(k) Plan. Employee A also works as an independent contractor (receiving a Form 1099) for specific contract work performed for Company X. The 401(k) plan uses the simplified 415 definition of compensation with no additional exclusions. Should the pay received as an independent contractor be included as 415 compensation under the 401(k) plan?

401(k) (1/1 plan year) covers division A and B. Division B spins off and starts their own plan on 10/7/2011. They are running a short year ADP test. What is the general rule in regards to compensation? Should the 10/7/2011 to 12/31/2011 include compensation for just that short period? Or does it need to include compensation for the entire 12 month period? And what about HCE status? I assume you need to look at compensation in the "lookback" year - meaning compenation from 10/7/2010 to 10/6/2011? I'm sure each situation is different - but I'm curious if there are any general rules in regards to testing spin-off plans. Thanks!

An employer will occasionally pay a salary advance to employees. I assume that this would be treated no different than any other regular pay. The employee will be able to defer from it - and it is included a plan compensation for 415 limits, ADP/ACP testing, etc. Does anyone know of anything to watch out for in terms of salary advance pay and qualified 401(k) plans?

401(k) plan document allows the plan administrator to limit HCE deferrals. It states "The Plan Administrator may limit the amount of future Elective Deferral Contributions of the Highly Compensated Employees." And that is it. Has the IRS ever issued rules around administrative limits to HCEs? For instance - does it have to be uniform? Can the employer limit John HCE to 6% of pay and Susie HCE to 5% of pay? And are there rules around communicating the limit? Does it have to be written? Can the employer just communicate a limit verbally at an office meeting? What if John HCE is out ill on the day of the office meeting and he's never made aware of the limit. This "administrative limit" has a direct impact on the ADP test. Assume John HCE makes $100,000 and is limited to 5% of pay. He can defer $5,000 - and then an additional $5,500 in catch-up contributions. The ADP will only reflect the $5,000 in deferrals.

DB plan - been hard frozen for several years - covers union employees only. I'm trying to determine if the plan is subject to coverage and/or minimum participation. I'm pretty certain that coverage isn't necessary. No HCE's are benefiting - and union employees are deemed to pass coverage. But I'm stumped with minimum participation. From what I can tell in the ERISA outline book - frozen plans are "deemed to satisfy §401(a)(26)" but they are still subject to the prior benefit structure test. I can't really tell if union employees are deemed to pass minimum participation / prior benefit structure - as they are deemed to pass coverage. Any thoughts?

For years and years I was on an individually designed plan and in Cycle A. I restated my plan in July of 2011 to comply with the Cycle A cumulative list - and I was intending on applying for a Determination Letter before the 1-31-2012 deadline. However, in September of this year I decided to restate my plan document to a pre-approved proto document with my service provider. Do you think there is a benefit of sending my restated individually designed plan to the IRS and applying for a FDL? The fact that I'm now on a pre-approved plan makes me less inclined to file - but maybe I should. Opinions?

Thanks for the feedback. I feel the same way. And it's amazing that the Cycle A filing deadline is just over 60 days away and Form 8717 still has not been updated yet. I understand that they were waiting for Notice 2011-86 to be released - but that was almost a month ago. And I liked how in their phone forum a couple months ago they kept emphasizing how much of a limited staff they have and that they have over 8,000 unassigned DL applications. It is what it is.....

Any opinions out there regarding Question 13 on the 5300 - the option to apply for a determination on coverage? Is there really a major benefit in getting this determination? At an IRS phone forum in mid-September, they talked about discontinuing the optional determination for coverage/nondiscrimination anyway. Curious how others handle this question.

DB plan, which we'll call the ABC pension plan, is on an individually designed document and they were/are in Cycle A. They filed under the Cycle A RAP back in 2006 and rec'd a favorable determination letter. Cycle A is coming up again - but this plan merged into another DB plan (which we'll call the XYZ plan) effective 1/1/2011. The XYZ plan is also an individually designed plan and they are in Cycle D. So is there any reason for the ABC plan to file under Cycle A? Considering that ABC plan technically doesn't exist anymore and there are no longer any assets under ABC - I don't think that there is really any point. But I've been wrong before. Now, when XYZ files for a determination letter in 2014, then they'll need to provide information regarding the merger - as required on question 7f of Form 5300. Thoughts?

This one gets me every time. A 401k plan provides a year-end match. But in order to get a match, you have to defer a minimum of $500 during the year. As long as you've deferred $500, you'll get a match equal to 75% up to 8% of pay. George only deferred $350 for the year, and therefore doesn't get a match. He is still an active employee - he just decided early in the year that he no longer wanted to defer. Would George be included on the ACP test? I think the regulations say that you're included on the ACP test if you were eligible for the 401(m) portion of the plan. If there was an hours requirement on the match and George didn't work the required number of hours, then he would be left off the ACP. But I'm not sure about this situation. He had the ability to defer more than $500 - so does that make him eligible for the 401(m) portion of the plan?

Awesome. Thank you. Does anyone know if there are any rules regarding this in terms of how to prorate. I know in my example it's pretty clear that you take (9/12)*245,000. But what if the short year was 4-10-2010 to 12-31-2010? Does the IRS provide guidance on exactly how to prorate? Do you count a partial month as a full month?

I am running an ADP test for a short plan year (4-1-10 to 12-31-10) and there is someone who has ADP compensation of $233,000 during these 9 months. I'm trying to determine what compensation to use on the test. Do I need to prorate the 401(a)(17) and limit the compensation to $183,745 ((9/12)*245,000)? Or is the 401(a)(17) limit not prorated on a short plan year?

This is, definitely, one of those contingencies There are a lot of contingencies. The plan document is definitely the most important. You also have to consider the testing method. It's pretty difficult to fund a QNEC if the test uses the prior year testing method, due to the timing rules. There are also the disproportionate rules that went into effect back in 2006. You cannot test a QNEC that is greater than 5% (10% for Davis Bacon) or two times the "representative rate". This is to restrict allocation methods such as the bottom-up QNEC.

401(k) plan - 1/1 plan anniversary - immediate entry. The plan imposes semi-annual change restrictions (1/1 and 7/1) to elective deferral changes. The employer also pay bi-weekly. A participant is hired today, 8/1/2011 and is immediately eligible for the plan. Are there any rules in terms of how long this participant has for their election to begin right away? For instance - suppose they make a 5% election on 9/15/2011, 45 days after they have become eligible. Is the employer required to start deducting on the next paycheck? Or can they wait until the next change date of 1/1/2012 to begin deducting the 5%? The plan just states that elective deferral contributions shall be effective as soon as administratively feasible after a participant's entry date. I don't see the purpose of making the participant wait until 1/1/2012 - but if the employer wanted to impose a 30 day window - or something similar - are they able to? I assume this is a document issue? Or are there rules regarding this?

Thanks Tom...