fiona1

Thanks for the response. After looking into it a little more, I think if the participant defers on the cash-out from the PTO plan under their current election - then no amendment is necessary. If they want to defer a different amount - say 100% - then the plan would need to allow that ability. Hence a possible amendment.

So if an employee can take unused PTO as cash, then it can be deferred into a 401(k) plan as an elective deferral. Does anyone know if a plan document need to be amended in order for an employee to do this? The cash rec'd as unused PTO fits under the definition of compensation as far as I can tell. The Rev Ruling states that the 401(k) has to be amended to allow these contributions - but that doesn't make sense to me. I can understand the need for the plan to be amended if the PTO is "use it or lose it" - and the contribution to the plan is made as a non-elective. But I'm struggling on the deferral part.

I don't believe it's an option any more.

Is it possible for union employees to bargain for some of their retirement benefits, but not all? An employer is telling me that they have union employees and they bargain for a DB plan. This plan is only for the union employees. But the employer also sponsors a 401(k) plan. Everyone is eligible for this plan (both union and non-union). But the employer is indicating that the union employees do NOT bargain for the 401(k) - but they can participate in it if they want to. So if that's the case, then there would be no union employees when it comes to nondiscrimination and coverage testing on the 401(k)? That means no bargaining exclusions for coverage and everyone is included in ADP/ACP? Does that seem legitimate?

Hi Tom. Above you say that if you aggregate a non-safe harbor plan with a safe harbor plan, then the SH plan loses the advantages. However, the ERISA Outline book says that you CANNOT aggregate a safe harbor plan with a non-safe harbor plan: In addition, a safe harbor 401(k) plan may not be permissively aggregated with a plan that is subject to ADP and ACP testing. See section IX.B. of IRS Notice 98-52 and Treas. Reg. §1.401(k)-1(b)(4)(iii)(B) and §1.401(m)-1(b)(4)(iii)(B) (December 29, 2004). Refer to Part I.6.b. of Section XIV of this chapter for more details. Note that the same issues would apply, in post-2007 plan years, to a qualified automatic contribution arrangement (QACA) that is relying on the alternative safe harbors under IRC §§401(k)(13) and 401(m)(12).

Watch your terminology. I wouldn't use the term "tested separately" when trying to explain your situation. First you test on a "Total group" basis. Meaning, you're testing EVERYONE ELIGIBLE FOR THE PLAN. Next, you "carve out" the otherwise excludable employees. This is also referred to as permissive disaggregation. "Testing Separately" normally refers to situations where you have more than one plan (either with one employer or within a controlled group). Here you can test each plan separately, or you might be able to permissively aggregate them to pass coverage. The best way to explain your situation is by comparing the "Total group" test versus the "Permissive Disaggregation" test. The Total group test my include 500 non-highly compensated employees while the PD test may include 490 non-highly compensated employees. You're able to "carve out" the NHCE's who don't meet the statutory entry requirements of age 21, one year of service. These are the employees who are more likely not to defer - thus creating more favorable test results.

If you are permissively aggregating the plans for coverage and nondiscrimination - then the results that they have are irrelevant. They don't matter. You can't have it both ways. You have to distribute the refunds to the HCE's of both plans (as provided by the aggregated ADP/ACP results). Remember that in order to permissively aggregate the plans - they both need to have the same plan year, same testing method, and be able to pass benefits, rights and features testing. You can always try an Average Benefits Test - if you haven't already. If you pass, then you don't need to aggregate the plans.

The refund is taxed at the person's ordinary income rate. However, many record-keepers withhold 10% in federal taxes (and sometimes state, too), unless the participant elects another percentage, including zero. The 10% withholding is mandatory - unless the participant opts out of it by filing a W-4P. But I understand what you're saying about it being taxed at the person's ordinary income rate.

Here is the way I've always had it explained to me...... When a participant receives a match that they shouldn't have - an operational failure has occurred. Examples include the plan sponsor not following the match formula - or not factoring the compensation limit. The correction for these operational failures involve the forfeiture of the excess match. Failing an ACP test is NOT an operational failure. It is a nondiscrimination failure. As a result, the HCE's must remove the money from the plan - but the IRS allows those funds to be refunded instead of forfeited. They still lose out on keeping that money in the plan - and they are taxed on it (10%). Heck - maybe that's it - more taxes for Uncle Sam.

Multiple ER plan - 1/1 plan year - 2 employers. In 2007, each employer was tested separately. On 4/1/08, Employer A becomes 100% owned by Employer B - and they are no longer unrelated employers. How should testing be done for the 2008 plan year? I can see 2 options: 1. Test each employer separately from 1/1/08 to 3/31/08. Then test them together from 4/1/08 to 12/31/08. 2. Test them together from 1/1/08 to 12/31/08 - as they were a controlled group as of the last day of the plan year. Any thoughts?

401(k) plan for Company X - administered by Fidelity. 1/1 plan year. John is a HCE, terminates on 4/18/08, and rolls his money from his 401(k) to an IRA at Washington Mutual. The total amount of the rollover is $122,000. On 5/1/08, the ADP test is completed for the 2007 plan year - and it fails. John is due a refund of $1500. It will be taxable in the year of distribution. Fidelity adjusts the 2008 tax record of the distribution to show a rollover of $120,500. They create another 2008 1099 for $1500, to reflect the excess contribution refund. The plan sponsor notifies John that a portion of his distribution was ineligible to be rolled over. John contacts the Washington Mutual and they refund him $1650 (includes earnings). They create a 1099 for the distribution. January of 2009 - John receives the two 1099's from Fidelity, and the 1099 from Washington Mutual. Question A: What should John do? Contact Fidelity to delete the 1099 they created? Keep in mind that the 1099 from Fidelity is for $1500, while the 1099 from Washington Mutual is for $1650. Question B: Who is to blame for the fact that John has two 1099's for the same distribution? Fidelity or Washington Mutual? Who should be creating the 1099 in this situation? Question C: Instead of rolling the money into an IRA, say that John rolled it into another qualified plan at his new employer. Does that change anything? Thanks for any thoughts...

Very nice. The union serving as the plan sponsor makes perfect sense. Thanks for the replies...

Does anyone know the answer to the original question? I am working with a multiemployer plan that has over 100 employers. There is a guy who owns 100% of one of the 100 companies and earns about $40,000 a year. Should he be considered HCE for the ADP test, considering he is a 100% owner? Even if he only has ownership stakes in just one of the companies?

A plan covers both union and non-union employees. For testing purposes they are treated as separate plans and tested separately. Can the plan specify that the test for union employees use the current year method while the test for the non-union employees use the prior year method?

Here's a good one... 1/1/08 to 12/31/08 plan year. Match has an active at year-end requirement. John has a termination date of 1/5/08 - however he earns no compensation in 2008. He has no deferrals and no match for 2008. Can he be excluded from the Ratio Percentage test as a Certain Terminated Employee? One of the requirements of a CTE is that the employee fails to receive the match "solely because of the failure to satisfy the last day requirement." Well, the reason he didn't get a match can be attributed to the fact that he didn't earn compensation. Without compensation you aren't able to defer - and thus can't get a match. Or is this a bit nit-picky? Thoughts?

1/1 plan year, participant is eligible on 7/1/08. No automatic enrollment feature is in place and the participant has not made an election - but the employer deducts 5% from the paycheck into the 401(k) plan. I'm assuming this is an operational failure - because the participant has not made an election. Is this corrected in the Self Correction program? Is the correction to simply refund that money back to the participant? Are there any other penalties?

There was a thread on this topic from 12/4. Consensus was gap cannot be included in corrective distributions - not even if provided in the plan. http://benefitslink.com/boards/index.php?showtopic=40462

WDIK is on the right track. You want to see if the plan allows for a limit to be set. Our plans have this language, but it specifically states that the limit is only applied to the highly compensated employees. Administrative limits are considered plan limits - and are applied in the same manner as a specific limit set forth in the plan. I don't know if you have access to Sal's ERISA Outline Book, but this is all covered in Chapter 11, Section XI, Part B, 3.b.2. If the plan administrator is allowed by the plan to set limits - then anything deferred over that limit will be a catch-up (if eligible) or an operational failure. If the plan has no wording to set such limits, then you can't recharacterize anything over $8,500 to catch-up because the limit cannot be enforced.

What about 415 refunds? I think the answer lies in the EPCRS. The Final 415 regulations say that 415 failures are now corrected through the EPCRS (Rev Proc 2008-50). It's my understanding that corrections made via the EPCRS generally include earnings through the date of correction - which would mean that GAP would be included with 415 refunds. Agree?

Any other thoughts on this topic?

Employee contributions (after-tax voluntary or required / NOT ROTH) are considered annual additions in regards to the §415 limit. The 402(g) limit, however, only applies to deferrals. This would include Roth, but would not include employee contributions.

Do you have access to the ERISA Outline book? Chapter 11, Section VIII, Part A says: Some of HCE's match might be forfeited. When an HCE has excess contributions, the HCE might forfeit a portion of his or her matching contributions, in order to maintain a nondiscriminatory rate of match, as required under Treas. Reg. §1.401(a)(4)-4. For details, see the discussion in Part E.3. of Section XII of this chapter. If you go to Chapter 11, Section XII, Part E.3., it says: Whether the rate of match is nonuniform is determined after correction of the ADP test and the ACP. See Treas. Reg. §1.401(a)(4)-4(e)(3)(iii)(G). When an orphan match is left in the HCE's account, a discrimination problem arises because the HCE has in effect received a higher rate of match when the matching contributions are compared to the contributions left in the plan that are eligible for a matching contribution. It goes on to say: To correct a nondiscriminatory rate of match, as illustrated in the example in 3.a.1) above, the plan may forfeit the matching contributions attributed to the returned deferrals, even if those matching contributions are vested. See IRC §411(a)(3)(G). There is nothing in this section that references a "deadline" in forfeiting this match. I don't think the 12 month deadline applies. The 12 month deadline is for correcting the nondiscrimination test. The forfeited match is a benefits, rights and features issue. This is corrected in 401(a)(4)-4. I think you have to think of it this way: What if the ADP/ACP passes but you find out that an employer overmatched an employee. Say that the match formula was 50% of deferrals up to 6% of pay. But say that the employer matched 7% of pay. How would you correct this? You would forfeit the excess match. That excess match would not be included on the ACP test. This is a benefits, rights and features issue. What do you consider a deadline for correcting this? I think you would apply the same logic to an excess match related to an ADP refund. This is my 2 cents.

Thanks for the post.

Nice. Let me know what you find out.

The ERISA outline book states that the distribution of gap period earnings are not required for post-2007 plan years. I don't see anything that says they are not allowed, so long as the document requires they be included. I assume its possible to have a situation described by the OP. None of our documents have gap wording in them, so we will not be including those earnings in refunds for post 2007 plan years. Interesting to think about.