Kevin C

There were two ways to comply with the automatic rollover rules. You could have either amended to add the automatic rollover rules, or amended to reduce the cashout limit to $1,000 (or less).

I agree with J4FKBC's interpretation. But, don't count on the DOL agreeing to anything deposited after the 7 business day safe harbor. We have had two different DOL agents challenge timeliness of deposits when checks were mailed no later than the first business day following the pay date. They initially used the date the deposits were credited on the trust statements as the deposit date. The current final deposit regulations have a mailbox rule of sorts. The deposit is considered made when the check is mailed, as long as the deposit check clears the bank. We recommend that our clients who mail deposit checks keep a written log showing the pay date, deposit amount, date mailed and who mailed it.

There is information on the DOL website about the program. From the Q&A's it looks like the program applies at least back to the 1988 year filings. From what I recall, the penalty relief only applies to the years included in the filing. http://www.dol.gov/ebsa/Newsroom/0302fact_sheet.html http://www.dol.gov/ebsa/FAQs/faq_DFVC.html

We had a very long discussion on this topic that ended a couple of months ago. There was some disagreement about some of the details. I’m sure if anyone disagrees with my response, they will feel free to join the discussion. The timing for determining catch-ups depends on the limit triggering the catch-ups. Catch-ups from an ADP test failure are determined at the end of the plan year, 6/30 in this case. Catch-ups from the 415 limit would also be determined at 6/30. You did not mention 415, so I’m assuming it does not come into play here. Catch-ups from the 402(g) limit are determined at the time the deferrals are made. You will want to take a look at reg 1.414(v)-1. Examples 5 & 6 are non-calendar year plans. Ignore the payroll company’s catch-up number. If the HCE’s deferrals are roughly the same each month, he will have deferred about $9,100 for 2007 by 6/30/2007. With no ADP failure at 6/30/2007, he has not yet used any of his $5,000 catch-up limit for 2007. As he continues to defer for 2007, once his deferrals for the year-to-date exceed $15,500, his deferrals become catch-ups as they are contributed. By 12/31/2007, he has catch-ups of $2,634.83 that are disregarded for ADP testing at 6/30/2008. If you have an ADP test failure at 6/30/2008, his refund applies towards his 2008 catch-up limit, to the extent he has not already used up his 2008 catch-up limit by exceeding 402(g). If he deferred from 1/1/2008 through 6/30/2008, then his catch-up from the ADP test is considered to be part of his year-to-date 2008 deferrals. If he did not defer from 1/1/2008 – 6/30/2008, the refund still applies towards his 2008 catch-up limit. Suppose he defers $10,250 from 1/1/2008 – 6/30/2008 and his 6/30/2008 ADP refund is $2,000. Then $2,000 of his 2008 deferrals get reclassified as 2008 catch-up. At 6/30/2008, his 2008 deferrals that count towards his 402(g) limit are $8,250 ($10,250 – 2,000). Then he defers another $10,250 from 7/1/2008-12/31/2008. His first $7,250 ($15,500 - $8,250) of deferrals from 7/1/2008 - 12/31/2008 are regular deferrals. The next $3,000 of deferrals above that would be 2008 catch-up and excluded from the 6/30/2009 ADP test.

Did the plan pass the ADP test at 6/30/2007? If it failed, that will affect the catch-up determination.

I wouldn't call it illegal. You can change the cashout limit back to $5,000. However, as rcline46 pointed out, involuntary distributions from $1,000-$5,000 must be rolled over to an IRA. You will need to amend for the automatic rollover rules. The Trustee(s) need to select an IRA provider and sign a contract with them. Then, everything needs to be disclosed to participants.

That's the section covering how the amount of the match is determined. There will be another section about how it is allocated. The allocation method will refer to the Compensation used.

MJB, ERISA section 404 Act Sec. 404.(a)(1) Subject to sections 403© and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and -- Unless you have something constructive to add, I will ignore your future comments.

QDRO, Whoa! slow down. You are claiming thoughts in my head that aren't in there. As I said before, it is not a one-size-fits-all question. The answer may vary from plan to plan depending on the circumstances. I'm not trying to give my opinion on how to construct a proper brokerage window. I'm trying to point out that you don't magically get relieved of all fiduciary responsibilities and liabilities just because you offer a brokerage window. Actually, the losses I was referring to happened as much during the up markets as during the bad. The worst case example lost over 90% of his account balance from 1998-2007. There were others with bad results, too. I said it would be difficult to argue that the brokerage account continued to be an appropriate option for those particular plans. I didn't say it wasn't appropriate for any plan.

Yes, that is what I am saying. It is a fiduciary's decision about whether or not to make it available. Even if the brokerage window satisfys 404©, the fiduciary still has some potential liability for selecting it as an option. If they make the window available, they need to monitor it to make sure it remains an appropriate option. With some of the huge investment losses I've seen in individuals' brokerage window accounts, I think it would be difficult to try to argue the brokerage window continued to be an appropriate investment option for those particular plans. If you look on page 10 of the brief masteff posted, The DOL says they are not commenting on the merits of the case. They just want to point out that 404© relief does not apply to the selection of investment options. They also say that even though there is currently no statutory requirement for disclosure of revenue sharing to participants, the general fiduciary duties of ERISA may require such disclosure. MJB, There is no way you can determine whether or not options trading would be an appropriate investment option unless you have information about the plan and its participants. An investment option that may be appropriate for a plan covering investment advisors is not necessarily an appropriate investment option for a paving company. It's up to the fiduciaries to act in the best interest of the participants. It's not a one-size-fits-all question.

What does the plan say about how the match is allocated?

MJB, Where does it say that options trading is an appropriate investment option for all self directed plans? You referred to 404© as if it would eliminate all fiduciary issues related to allowing the proposed investment. The DOL says otherwise. It may or may not be an appropriate investment option for a given plan. My point is that this decision has to be made by a fiduciary and the fiduciary has a potential liability related to that decision. If the fiduciary decides it is appropriate now, it still needs to be monitored to make sure it remains appropriate in the future. There is no 404© protection for the selection and monitoring of investment options for a plan.

The fiduciary issues here are the selection and monitoring of the plan's investment options. The DOL has repeatedly stated that 404© protection does not apply to those fiduciary obligations. Who is going to monitor the brokerage window to insure that it is and continues to be an appropriate investment option for the plan?

Yes, you lose the ACP safe harbor for that match. 1.401(m)-3(d)(4): (4) Limitation on rate of match. --A plan meets the requirements of this section only if the ratio of matching contributions on behalf of an HCE to that HCE's elective deferrals or employee contributions (or the sum of elective deferrals and employee contributions) for that plan year is no greater than the ratio of matching contributions to elective deferrals or employee contributions (or the sum of elective deferrals and employee contributions) that would apply with respect to any NHCE for whom the elective deferrals or employee contributions (or the sum of elective deferrals and employee contributions) are the same percentage of safe harbor compensation. An employee is taken into account for purposes of this paragraph (d)(4) if the employee is an eligible employee under the cash or deferred arrangement with respect to which the contributions required by paragraph (b) or © of this section are being made for a plan year. A plan will not fail to satisfy this paragraph (d)(4) merely because the plan provides that matching contributions will be made separately with respect to each payroll period (or with respect to all payroll periods ending with or within each month or quarter of a plan year) taken into account under the plan for the plan year, provided that matching contributions with respect to any elective deferrals or employee contributions made during a plan year quarter are contributed to the plan by the last day of the immediately following plan year quarter.

I would expect that to be part of the plan's definition of Compensation. Our prototype base document defines Compensation as amounts that are actually paid to the participant by the employer during the compensation computation period.

Safe harbor matching contributions must be allocated using a compensation definition that satisfies section 414(s). The plan compensation definition you are describing would not be a 414(s) safe harbor definition, so you would have to test it. Your plan compensation definition includes additional items only for those HCE's participating in the non-qualified plan, so I don't see how you could satisfy 414(s). But, I would run the test anyway, just to see what the results look like.

Does the plan have any language about what happens during the 410(b)(6)© transition period?

Austin, I worked through some examples and decided in most cases, there is no advantage either way. 8/31/08 year end, two employees. HCE, Comp $200,000 Deferrals for PYE 8/31/08: $20,500 deferred at 1/12 each month. $5,000 2007 Catch-up at 8/31/2007 from failed ADP test, so his deferrals from 9/1/2007 – 12/31/2007 are regular deferrals. Deferrals counted in ADP test = $20,500. Testing deferral rate = 10.25% NHCE, Comp $20,000 Deferred $1,150 for PY Deferral rate 5.75% In the ADP test, the maximum HCE average percentage is 7.75%. The test fails and the refund amount is $5,000. He hasn’t used any of his 2008 catch-up, so his refund is classified as 2008 catch-up. Per examples 5&6 of the regs, he can still defer $20,500 for calendar year 2008, but his deferrals from 9/1/2008 - 12/31/2008 are all regular deferrals. Now shift to a 2008 calendar year. Two employees. HCE, Comp $200,000 Deferrals $20,500 deferred at 1/12 each month. $5,000 2008 catch-up when deferrals exceed $15,500 for 2008. Deferrals counted in ADP test = $15,500. Testing deferral rate = 7.75% NHCE, Comp $20,000 Deferred $1,150 Deferral rate 5.75% Maximum average deferral rate for HCE’s is 7.75%, so ADP test passes. Both HCE’s contribute the full $20,500 for the calendar year and both have $5,000 in catch-ups. How can you say either has an advantage????? The only situation I see where they are not equal is where the fiscal year HCE doesn’t defer at least $5,000 from 1/1/2008 - 8/31/2008. In that case, the fiscal year HCE would be at a disadvantage because he won’t be able to defer $20,500 during calendar year 2008.

I disagree. If you look at (iv) in examples 5 & 6, they both refer to the "applicable dollar catch-up limit ($5,000)". This is the catch-up limit that the 10/31/2006 ADP refund is applied towards. Sorry, but that contradicts your interpretation of "taxable year" being the plan year. The applicable dollar catch-up limit is determined by the start of the taxable year. If, as you claim, the examples used the 11/1/2005 through 10/31/2006 plan year as the "taxable year", then the applicable dollar catch-up limit would be $4,000, not $5,000. I think it is pretty clear that the "taxable year" being used is the 2006 calendar year. Besides, if you look at 402(g), it also refers to "taxable year" limits. Example 5 has the person deferring $19,200 for the 11/1/2005 - 10/31/2006 plan year. They certainly are not using the plan year as his "taxable year" for 402(g). I would not agree that fiscal years have a catch-up advantage. Actually, in some situations, they can be at a disadvantage. Suppose a 10/31 PYE. I defer $10,000 from 1/1/2006 - 10/31/2006 and have $5,000 reclassified as catch-up due to a failed ADP test at 10/31/2006. then I defer $10,000 from 11/1/2006 - 12/31/2006. The last $10,000 is all regular deferrals. If you look at the calendar year 2006 deferrals that are counted in an ADP test, it is $20,000. $10,000 counts in the 10/31/2006 test and $10,000 counts in the 10/31/2007 test. If this was a calendar year plan, only $15,000 would have counted in the ADP test. There are other situations where fiscal years have an advantage.

Mike, I never said someone could make catch-up contributions after they have already used up the catch-up limit for the taxable year. Austin is the one who said he thinks the regs examples are letting people exceed the catch-up limit. I'm taking the "taxable year" used in 414(v) and in 402(g) as being the participant's taxable year. That taxable year is generally the calendar year. I've heard there are exceptions where someone can have a non-calendar taxable year, but I've never seen one. Regardless, both the catch-up limit and deferral limit are determined based on the same taxable year. I don’t understand what you are trying to say in your comment you describe as “long winded”. I also take that section of example 6 literally, that deferrals in excess of the 402(g) limit become catch-up “as they are deferred”, to the extent that the catch-up limit for the taxable year has not previously been used. There is a different timing rule for when ADP refunds become catch-ups. Example 6 also makes it clear that the $200 ADP refund at 10/31/2006 is counted against the 2006 catch-up limit. It’s part of the $1,200 that you quoted. They subtract the full $1,200 from his YTD 2006 deferrals of $16,000 at 10/31/2006 when they determine how much of his 2006 deferrals count towards 402(g) at 10/31. They are treating the $200 ADP refund as being part of his 2006 YTD deferrals. The way I read the regs, if you are catch-up eligible and have a $5,000 ADP refund as of 10/31/2006 and you have not previously used up your 2006 catch-up limit, then your $5,000 refund is classified as 2006 catch-up. The leap I am making is that this happens even if you have not deferred at all for your 2006 taxable year by 10/31/2006. Look at the second example in my post #54.

Mike, The catch-up limit is determined on the basis of taxable years. The plan year comes into play when you are determining whether deferrals exceed a plan year based limit to determine the amount of catch-up. Prior to the ADP refund on 3/31/07, why do you say his catch-up limit for 2007 is already used up? He is in his 2007 taxable year and has not deferred yet for 2007. Or, are you saying his 2007 catch-up limit is not available as of 3/31/07 to use towards the ADP refund? Example 6 expands upon example 5. In both, the participant deferred 16,000 from 1/1/06 through the 10/31/06 PYE. Nothing in either example addresses someone who did not defer at all from 1/1/06 - 10/31/06. In example 6, the person has the following catch-up amounts: 600 - paragraph (i) - from deferrals 11/1/05 - 12/31/05 in excess of 402(g) 1,000 - paragraph (ii) from deferrals 1/1/06 - 10/31/06 in excess of 402(g) 200 - Paragraph (iv) from ADP refund at 10/31/06 3,800 - paragraph (v) allowable catch-ups 11/1/06 - 12/31/06 in excess of 402(g) That's a total of 5,600 in catch-ups for the plan year. That can't happen unless both unused 2005 and 2006 catch-up limits are available for the 10/1/05 - 10/31/06 plan year.

This was discussed at the 2006 ASPPA annual conference in the IRS Q&A session. I think the IRS attorney ak2ary referred to was speaking. It was a rather lively exchange.

Mike, In your last post, first paragraph, I think you were referring to my post, not Austin’s. I think there is a problem with your example. The 20,000 deferred 9/1/2006 results in a 2006 catch-up. (Of course, that assumes that he still had the full 5,000 of 2006 catch-ups available at 9/1/2006.) When you get to 3/31/2007, the refund is classified as 2007 catch-up. In the example he didn’t defer again until 9/1/2007, so he had not used up any of his 2007 catch-up limit by 3/31/2007. The 5,000 refund would be classified as a 2007 catch-up. Austin, What example did you give Derin Watson when you asked? If you gave him an example where nothing was deferred in the calendar year until after the ADP test failure at PYE, then I understand why he would agree with you. Also, the ADP refund is of consequence. It forces the HCE to use up his catch-up limit earlier than he otherwise would. Plus, catch-up resulting from ADP refunds is not excluded from the ADP test. He would be better off having the catch-up result from exceeding 402(g) or a plan imposed limit, so the catch-ups would be excluded from the ADP test.

Austin, If you do that in all situations, you will violate the universal availability requirement for the catch-ups. For example: 1/1 – 3/31/06 deferrals of 4,000 ADP failure at 3/31/06 with the 3,000 refund reclassified as 2006 catch-up. You are saying this person can only defer a total of 15,000 + 5,000 - 3,000 = 17,000 for 2006. Example 5, paragraph (v) of the regs refers to catch-up due to an ADP test failure and says that the catch-ups are not taken into account in applying 401(a)(30). In the example above, since he deferred at least 3,000 in 2006 by 3/31/06, then 3,000 of his 2006 deferrals are reclassified as 2006 catch-up due to the ADP refund. Now, as of 3/31/06, he has 4,000 – 3,000 = 1,000 of regular deferrals and has used up 3,000 of his 2006 catch-up limit. His remaining available regular deferrals are 15,000 – 1,000 = 14,000. He also has 5,000 – 3,000 = 2,000 of his 2006 catch-up limit still available. So, when his deferrals from 4/1-12/31/06 exceed 14,000, the next 2,000 of deferrals become 2006 catch-up. He can defer a total of 16,000 from 4/1 – 12/31/06. That makes a total of 20,000 for calendar year 2006. But, you only let him defer 17,000 for the year. After the 3,000 ADP refund was reclassified as catch-up, you would be limiting his regular deferrals to 14,000 for the year. You would only let him do a catch-up of 3,000, which would violate the universal availability requirement because other participants would have the effective opportunity to do the full 5,000 in catch-up. Now, change the example to: 1/1 – 3/31/06 deferrals of 0 ADP failure at 3/31/06 with the 3,000 refund reclassified as 2006 catch-up. He has not made any 2006 deferrals as of 3/31/06, so I don’t think you can treat any of his 2006 deferrals as catch-up. He can still make 15,000 in regular deferrals for the remainder of the year and he has 2,000 of catch-up remaining. So, he can defer 17,000 for the rest of the 2006 year.

I'm saying that whether that person can defer $15,000 or $20,000 for 2006 depends on the amount he deferred between 1/1/2006 and 9/30/2006. If he deferred at least $5,000 from 1/1 - 9/30, then he can contribute a total of $20,000 for the year because $5,000 of his 2006 deferrals are re-classified as catch-up. His contributions for the remainder of the year would all be regular deferrals. If he deferred $0 from 1/1 - 9/30, then he used up his 2006 catch-up before making any 2006 deferrals. He is limited to $15,000 in regular deferrals for the remainder of 2006, because he had no catch-up available at the time he made his 2006 deferrals. I don't think you can re-classify any of his 2006 deferrals as catch-up if he has not made any 2006 deferrals at the time the catch-up limit is used up by the ADP test. I think the answer is to either time your deferrals better or go Safe Harbor.