fiona1

Thanks so much...

Interesting. Thanks for the reply. What is involved in becoming the successor plan sponsor? So the purchasing company can just say "Hey, we decide we do not want to be a successor plan sponsor" and therefore no more deferrals can be made? Is becoming a successor plan sponsor an election the purchasing company can make? Say the acquistion occurs on 7/31/08 - and that the purchasing company will sponsor a new plan effective 1/1/09. Can they decide to become a successor plan sponsor of the acquired plan, allow the participants to continue to defer, and then terminate it effective 12/31/08?

Company A (which has a 401k plan) is potentially going to be purchased (asset purchase) by a company that does not currently have a 401k plan. This purchase will happen very quickly. Is there a legal way to allow the employees to continue to defer into this plan after the purchase while they are working on starting up a brand new plan for the purchasing company? The purchasing company does not want to take over the plan as is, they want to terminate and roll the assets to a new plan. Any thoughts?

That makes sense. Thanks for the post...

Let me ask you this then - assume you take the conservative approach and include the match in the ACP. Would you do this for both HC and NHC? I know it's not likely for a NHC to be over the comp limit, but it's possible due to the fact that HC status is based on the lookback year. And how would you handle match made in excess of the match formula? For example, say a plan matches 100% up to 3% of pay. You have an employee who made $50,000, defers $3,000, and is matched $3,000. 3% of pay is $1,500 - therefore they have been overmatched by $1,500. This match is forfeited, but would you include in on the ACP test for the same "conservative" reasons as above?

The 2008 ERISA Outline book addresses this, to a certain extent. It states that "certain forfeited matching contributions are disregarded" from the ACP test. It describes the forfeited match contributions to disregard as match contributions allocated on: (1) excess contributions under the ADP test, (2) excess aggregate contributions under the ACP test, (3) excess deferrals under IRC §402(g)(2)(A), or (4) for plan years beginning in 2008 or later, matching contributions that are forfeited as a result of a permissible withdrawal under an eligible automatic contribution arrangement described in IRC §414(w). It references §411(a)(3)(G): 411(a)(3)(G) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION OR ERRONEOUS AUTOMATIC CONTRIBUTION. --A matching contribution (within the meaning of section 401(m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under section 401(k)(8)(B), an excess deferral under section 402(g)(2)(A), an erroneous automatic contribution under section 414(w), or an excess aggregate contribution under section 401(m)(6)(B). I don't think it's necessary to take a conservative approach and include this match in the ACP test for a HCE. But that's just me.

I believe this is referred to as an overpayment and is an operational failure of the plan. Because it's an operational failure, it can be corrected through the SCP. There is information in the EPCRS on how to correct overpayments. But to answer your question - yes, the HCE's need to pay back the excess amounts. The EPCRS says "the employer takes reasonable steps to have the overpayment, plus appropriate interest from the date of the distribution to the date of the repayment, returned by the employee to the plan. To the extent the amount returned by the employee is less than the overpayment adjusted for earnings at the plan's earning rate, then the employer or another person contributes the difference to the plan."

Assuming the plan was amended mid-year to change to a multiple employer, how would the testing be done? For part of the year they were a controlled group and for part of the year they were a multiple employer.

I was wondering if any one else has dealt with this situation this year.... A participant has the following amounts in the 2007 limitation year: $33,750.00 Employer Other $15,500.00 Elective Deferral $11,151.18 Employee Contributions $60,401.18 Total contributions This results in a $15,401.18 415 limit excess. The plan says to first refund Employee Contributions. If there is still an excess, then to refund from Elective Deferral. This was the first year the member was in the plan and during 2007 there was a net loss in her account. So, my first question is should we apply any of the net loss to the amount or do we still have to refund the entire $15,401.18? Now, in 2008 the account has had more net loss. As of today, the value of the Employee Contributions is $9,851.67. So, my second question is should we just be refunding $9,851.67 from the Employee Contributions and the remaining 5,549.51 from elective deferrals? That means the member is losing $1,299.51 of their after tax contribution. Thoughts?

The qualified match has always been tested in the ADP test. So in 2006, there was no ACP test done at all. But we have to run an ACP test in 2007 because in 2007 they have match money that can ONLY be tested in the ACP. When we run the ACP test for '07 we need a prior year percent. Since the qualified match was tested in the ADP last year, I didn't think we could use that average for the ACP test in '07. Here is an example: 2006 ADP test: NHC Elective deferral average = 5.00% NHC Qualified match average = 7.00% NHC ADP average = 6.00% 2006 ACP test: Not done 2007 ADP test: prior year average used must be 6.00% 2007 ACP test: prior year average used must be 0.00% I didn't think we could apply the 7.00% qualified match average (tested in the ADP test in 2006) as the prior year percent on the 2007 test.

1/1 plan year for a 401(k) plan. In 2006 the plan had deferrals and a qualified match (i.e. QMAC or Match in K). Both contributions were tested in the ADP test. It failed and refunds were issued. An ACP test was not done. The plan was amended and effective 1/1/07 they switched from a qualified match to a basic match (Match in M) - which has to be tested in the ACP test. Now that an ACP test has to be done for 2007, does anyone know what prior year percent would be used? Here are the 3 options I can think of: 1. Since an ACP test was not done in 2006, you'd have to use 0%. 2. Since the plan was amended, could you make the argument that they added the 401(m) provision for the first time and therefore could use the 3% for new plans? 3. I suppose you could retest 2006 to test the qualified match in the ACP. However, the ADP results will change and since you're past the 12 month deadline then that could get messy. Thoughts?

The EPCRS (Rev Proc 2006-27) has an example of an eligible NHC not given the opportunity to defer from 1/1/03 to 9/1/03. This is Example 4 on page 71. In this example, the NHC defers $400 from 9/1/03 to 12/31/03. To determine the corrective QNEC, it says to take 50% of the NHC's missed deferrals. This is determined by taking the 2003 NHC ADP (3%) multiplied by a pro rata of the NHC's 2003 compensation (8/12 of the compensation). The corrective QNEC comes out to be $360 in this example. That is all straight forward enough. Here is my question though. When preparing the 2003 ADP test, how is this participant included? 1. Are they left out all together? 2. Are they included, but only with compensation and contributions from 9/1/03 to 12/31/03? 3. Are they included with the full year compensation but only contributions from 9/1/03 to 12/31/03? Thoughts?

Hoping I can get some thoughts on the following situation... Two 401(k) plans (we'll call them Plan A and B) are aggregated for both coverage and ADP/ACP for 1/1/06 to 12/31/06. However in 2007, they are being tested separatley. Both plans use the prior year testing method. Let's assume the NHCE average on the 2006 aggregated test was 4.50%. What prior year percent would you use on the separate tests for Plan A and Plan B in 2007? The regs define this as a plan coverage change and says to determine the prior year subgroups and defines that as: (B) Prior year subgroup. --The term prior year subgroup means all NHCEs for the prior plan year who, in the prior year, were eligible employees under a specific plan maintained by the employer that included a qualified cash or deferred arrangement and who would have been eligible employees in the prior year under the plan being tested if the plan coverage change had first been effective as of the first day of the prior plan year instead of first being effective during the plan year. The determination of whether an NHCE is a member of a prior year subgroup is made without regard to whether the NHCE terminated employment during the prior year. © Weighted average of the ADPs for the prior year subgroups. --The term weighted average of the ADPs for the prior year subgroups means the sum, for all prior year subgroups, of the adjusted ADPs for the plan year. The term adjusted ADP with respect to a prior year subgroup means the ADP for the prior plan year of the specific plan under which the members of the prior year subgroup were eligible employees on the first day of the prior plan year, multiplied by a fraction, the numerator of which is the number of NHCEs in the prior year subgroup and denominator of which is the total number of NHCEs in all prior year subgroups. I can see this going one of two ways: 1. The plans were aggregated in 2006. If plans are aggregated together, they are treated as a single plan for nondiscrimination testing. Therefore there is only 1 prior year subgroup. The NHCE average used on both Plan A and Plan B's tests for 2007 would be 4.50%. If 2 plans are tested separately in Year 1 but aggregated in Year 2, then in that case you have 2 prior year subgroups. 2. If the plan coverage change had been first effective on the first day of the prior plan year (2006), the testing would have been disaggregated and you would have had two subgroups. Therefore you determine individual NHCE averages for each plan in 2006 to use on the 2007 test. Any thoughts?

Here is the situation - Multiple ER plan with 2 employers (Company A and B). 1/1 plan year. John works for Company A from 1/1/06 to 8/15/06 and earns $80,000. He works for Company B from 8/15/06 to 12/31/06 and earns $70,000. He works for Company B from 1/1/07 to 12/31/07. 2 questions: 1. HC determination for the 2007 plan year (must use 2006 compensation for determination). Do you look at the compensation he earned with Company B (which would make him NHC) or do you have to include all the compensation ($150,000 which would make him HC). 2. For the 2006 plan year there is an ADP test for Company A and a sepearte ADP test for Company B. John will be on both tests since he worked for both employers. What compensation will be used on these tests? $80,000 on the Company A test and $70,000 on the Company B test? Or would each test use compensation of $150,000 to determine his deferral percent? Thanks for any help!

Kind of a 2 part question here ---- I know there has been a lot of discussion on this board on how to test employees with no compensation. I think the general consensus is that you would not include them on ADP/ACP because they were not able to defer due to no compensation. What are your thoughts on how you test an employee with no compensation in coverage / Ratio Percentage? They're an active employee who can't be excluded in minimum age/service, bargaining employee, etc. My thoughts are that they'd have to be considered not benefiting on the Ratio Percentage K test. They can't be deemed to benefit because with no compensation, there is no way they'd be able to benefit. Going a step further, what if the employee with no compensation is on military leave. I thought USERRA indicated that they couldn't be considered not benefiting for coverage - but for the life of me I can't find any reference to that. Any thoughts?

18,282.25 in they are HC and 15,000.00 if they are NHC.....I believe.

An employer wants to set up a shared leave program - where an employee can donate some of their vacation time to a pool so others (who are out of vacation time) can pull from the pool. For example, employee A has 100 hours of vacation. He donates 16 hours to the pool. Employee B has no vacation and becomes ill. They take 16 hours from the pool and are able to take 16 hours of paid time off. The employer does NOT want employee B to be able to defer from this 16 hours of pay they received from employee A. Can they exclude this pay from their definition of compensation in their 401k plan?

Thanks for everyone's comments. I appreciate it.

1/1/06 to 12/31/06 ADP test failed. The recordkeeper only provided the Total group test to the plan sponsor - so just over $16K in Total group refunds were issued in March of 2007. The plan sponsor later questioned why a Permissive Disaggregated test was not prepared. It was evidently an oversight. The Permissive Disaggregated test produced more favorable results - and refunds from the PD test are under $2,000. Does anyone if it is allowable for the plan sponsor to have the HCE's return the difference between the Total group refunds and PD refunds back to the plan? I don't think this can be considered an operational failure - in which too much money was distributed. Any thoughts?

For the limitation year 1/1/05 to 12/31/05, a member has an excess annual addition of $1000.00. All of their deferrals were matched, and the plan document says to prorate the excess from deferrals and match. If the refund was done correctly, then $700 in deferrals would have been refunded and $300 in match would have been forfeited. Instead, $1000 in deferrals were refunded to the member. Any idea's on how to remedy this failure? Would it be acceptable to have the member return the overpayment?

Thanks for the reply. There is no second plan. There is only one plan document (401(k) plan). It covers 2 employers - and is thus a multiple employer plan because the 2 employers are not a controlled group. The participant in question has deferred and been a member of the plan for several years. He has always worked for Company A. But in the middle of 2006 he left Company A and is now working at Company B. He doesn't have to meet entry requirements for the Company B plan - because it is the same plan sponsered by Company A - in which he was already a participant. He just continued to defer into the same plan when he started working at Company B. In my original post, I said that I was leaning towards combining the compensation for each ADP test. But now I'm leaning the other way. I think separating the compensation is the correct way to go. As it says in the ERISA Outline book, "compensation is remuneration for an employee's personal services to the employer." Since these are separate employers, I'm thinking the compensation should be separated.

2 different car dealerships are part of 1 plan. It is a multipler employer plan. According to the regulations, each employer has to be tested separatley for ADP/ACP testing. There is one participant of the plan who worked for both employers during the year. To make it easy, let's say he worked for Company A from 1/1 to 6/1 and he worked for Company B from 6/2 to 12/31. While at Company A he deferred $5500 and made $44,000. While at Company B he deferred $6000 and made $55,000. Correct me if I'm wrong, but on the ADP test for Company A, his deferral average will be 5.56% ($5500/$99,000) and his deferral average for Company B will be 6.06% ($6000/$99,000). Or, would his deferral average for Company A be 12.50% ($5500/$44,000) and 10.91% for Company B ($6000/$55,000). I think his deferral averages would be 5.56% and 6.06% - but I just can't seem to find any documentation supporting this. The ERISA Outline book says you must use Section 414(s) compensation to calculate deferral percentages. It also says "an employee's section 414(s) compensation includes his compensation for all related employers, regardless of whether the employers maintain a single plan or separate plan". However, these are not related groups. If they were, then they'd be a controlled group and not a multiple employer. Any thoughts?

This employee evidently transfered to the company in the US in 2007. So I guess my initial question has to do with his HC status in 2007 - in which you have to look at compensation in 2006. He would have had no US income in 2006. So for his HC determination in 2008, I can see how you would convert his 2007 Canadian money to USD and add it to the income he made in the US in 2007. From what I understand, the converstion of his 2006 Canadian money to USD would easily put him over the HC dollar limit of $100,000. But it still baffles me if this compensation can be excluded or not.

Thanks for the reply. however, don't the 415 regulations provide a rule for administrative convenience? I thought this allows a plan to exclude compensation received by a nonresident alien provided the individual does not participate in the plan. The regulations say that this rule is relevant for purposes of determining who is a key employee under section 416 and a highly compensated employee under 414(q). 414(q)(8) SPECIAL RULE FOR NONRESIDENT ALIENS. --For purposes of this subsection and subsection ®, employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)) shall not be treated as employees. At the time the individual received the nonresident alien compensation, he was not a plan participant. So, the first plan year of participation, the employee would not be considered an HCE. Subsequent years, the employee will be an HCE if his compensation is over the dollar limit. Out of curiousity, why do you believe his Canadian pay needs to be converted to USD?

A company in the US has a 410(k) plan. They are part of a controlled group with a company in Canada. The company in Canada is a separate company and not eligible for the 401(k) plan of the company in the US. One of the workers at the company in Canada goes to work for the company in the US. So he is now eligible for the 401(k) plan. I'm confused on if you would consider his wages at the company in Canada in determining his HC status. If so, how is that done?