Kevin C

Before you cross test, make sure the testing method you are using is allowed by your document. GUST prototypes are not allowed to provide for 401(a)(4) testing on the basis of benefits. {Rev. Proc 2000-20 Section 8.03(7)}

Austin, Sal’s example is the same as example 5 from the regulations. But, that is a different situation than your example. In Sal’s example, the participant made deferrals in the 2006 calendar year before the 10/31/06 plan year end. In your example, there are no deferrals in the calendar year before the end of the plan year. I think that is an important difference. The real question from your example is if you don’t defer at all from 1/1/07 – 3/31/07 and have $5,000 of ADP refund reclassified as 2007 catch-up on 3/31/07, is there an unused catch-up amount available for deferrals made from 4/1/07 through 12/31/2007? I think that no further catch-up is available for deferrals from 4/1/07-12/31/07 because the full 2007 catch-up limit was previously used on 3/31/07. Look at 1.414(v)-1(3)©(1). The first sentence says: “(1) General rule. --Elective deferrals with respect to a catch-up eligible participant in excess of an applicable limit under paragraph (b) of this section are treated as catch-up contributions under this section as of a date within a taxable year only to the extent that such elective deferrals do not exceed the catch-up contribution limit described in paragraphs ©(1) and (2) of this section, reduced by elective deferrals previously treated as catch-up contributions for the taxable year, determined in accordance with paragraph ©(3) of this section. “ What you seem to be saying is that if you defer $0 from 1/1 – 3/31 and have $5,000 reclassified as catch-up on 3/31 from the ADP test failure, then you count $0-$5,000, or negative $5,000 in deferrals towards the 402(g) limit. It would be nice if the IRS thought it worked that way, but I don’t see how you get there from the regs. Now if, like in Sal’s example, there were more than $5,000 in deferrals from 1/1- 3/31, I do see how $5,000 of those deferrals would be treated as catch-up and not count towards the 402(g) limit.

Austin, The two items in asterisks are NOT the same. The first item is the portion of the 2008 deferrals that is treated as a catch-up. The second is the portion of the 2008 catch-up limit that has already been used. Your example shows they are not always the same amount. For your example, the portion of 2008 deferrals treated as catch-up is $0. The previously used portion of the 2008 catch-up limit is $5,000. The full 2008 catch-up limit was used up by the ADP test failure at 3/31/2008, but he had not deferred anything for 2008 at that point. Once his 2008 deferrals started, he had no 2008 catch-up available, so none of his 2008 deferral was a catch-up. Belgarath, In my version, the YTD is calendar year to date.

Austin, I think your formula for remaining deferrals is slightly off. The formula should be: 401(k) Max – Deferrals counted towards the 401(k) Max + Remaining catch-up limit. Or: 401(k) Max - (YTD 401(k) – YTD 401(k) treated as catch-up) + Catch-up Max – YTD catch-ups used. In your post 31 example, the 2008 catch-up limit is used up by the ADP test failure at 3/31/2008, even though he didn’t defer anything for 2008 until September 2008. I don’t see how any of his deferrals in September 2008 can be excluded from counting towards the 402(g) limit when he had used up the entire catch-up limit for 2008 before the deferrals were made.

That's correct IF the plan allows catch-ups and IF they are administering the plan imposed limit correctly. think2much needs to find out if the plan allows catch-ups. I used $230,000 of compensation in my example because that takes the plan imposed limit out of the picture. If they allow one eligible person to make catch-ups, then everyone eligible must be able to make catch-ups. I will be very surprised if the plan in question does not allow catch-ups. But it is possible that they don't allow them.

Plans are not required to allow catch-up contributions. But, if they do allow catch-up contributions, then the universal availability rule Tom referred to applies. In your plan's case, if someone age 50+ who makes $230,000 for 2008 will be able to defer up to $20,500 for 2008, then they are required to allow you to contribute up to 10% of pay plus the $5,000 catch-up.

1.401(k)-3(e)(1) is on point. I agree with Tom, there is no way to do what you want in a safe harbor match plan. (e) Plan year requirement (1) General rule. --Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of section 401(k)(12) and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of § 1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

Unless we get some specific guidance to the contrary, I would say no, you can't do that. You can't amend safe harbor provisions during the year. Second sentence of 1.401(k)-3(e)(1): In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of § 1.401(k)-1(b) if it is amended to change such provisions for that plan year.

Thanks, that makes sense. (I'm not an EA, I just want to get a handle on how the new LS calculation will work.) I was starting to think the LS value would jump significantly when you went from age 45 to 45 + 1 month or age 60 to 60 + 1 month. Now I see that it doesn't.

So, if the example is changed to employee age = 46 and NRA = 65, would it be: Calculate the present value at NRA with 12 monthly payments discounted at the second segment rate and the remainder of the expected payments discounted at the third segment rate. Then discount back to the distribution date using the second segment rate?

We have a client in the same situation and after reading Notice 2006-107, we felt that they were required to send the notice. Notice 2006-107 says that the diversification notice must be given to "applicable individuals". It defines the term as persons who are entitled to receive diversification rights. I don't see anything in 2006-107 that gives you an exemption from the notice in your situation.

It looks like you use the same prototype document that we do. You will need to look at the adoption agreement. The integration choices are:  b.1. Use Steps One through Four in Section 2.3.5 of Plan in all cases.  b.2. Use Steps One through Four in Section 2.3.5 of Plan only when Plan is Top-Heavy.  b.3. Use Steps Three and Four in all cases. Top-Heavy adjustments shall be made pursuant to Section 2.3.5(b).  b.4. Limit maximum disparity to _____% (Use when limiting disparity to less than the Maximum Permitted Disparity.) The choice that was selected will tell you how the contribution has to be allocated.

You can have an hours requirement in a prototype and use less than a year of service. How it works will depend on the options available in the adoption agreement and the language in the base document. Our non-standardized CODA prototype has the following option:  e. Minimum of ____ months of service in which the Employee is credited with ____ Hours of Service in each month, but in no event will the Employee be required to complete more than One Year of Service as defined at Section 1.2.91. If they are requiring 1,000 hours in 6 months, there must also be a provison to bring into the plan someone who completes a year of service, but doesn't meet the 1,000 hours in 6 months provision.

If she terminated before the end of the plan year, she doesn't get the top heavy minimum. The document should have language to that effect. There may be reasons other than the ADP/ACP safe harbor for the plan sponsor to want to use compensation prior to 9/1/07 in determining the 3% SH contribution. Can you ask the person who drafted the document? If the 3% SH was meant to use compensation back to 1/1/07, the issue should have come up when the plan was being drafted.

I think the rule Mike was recalling is part of the definition of catch-up eligible in 1.414(v)-1(a)(4). One part of the definition is that the employee is “eligible to make elective deferrals during the plan year under an applicable employer plan (without regard to section 414(v) or this section); and …” If you set the deferral limit to 0% for HCE’s and disregard catch-ups, how would they be considered as being eligible to defer? They have to meet the definition of catch-up eligible before they can make catch-up contributions.

Can you point me to something that says that? I'm trying to pull together information for a discussion in our office.

Please forgive a crazy question, but can you make the election period longer than the required 90 days? The deadline for the distribution/diversification/transfer is 90 days after the last day of the period during which an election can be made.

Unless we get some guidance to the contrary, I would say no, you can't amend a SH match formula mid-year, based on 1.401(k)-3(e)(1). (1) General rule. --Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of section 401(k)(12) and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in paragraph (g) of this section, a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of § 1.401(k)-1(b) if it is amended to change such provisions for that plan year. Moreover, if, as described under paragraph (h)(4) of this section, safe harbor matching or nonelective contributions will be made to another plan for a plan year, provisions under that other plan specifying that the safe harbor contributions will be made and providing that the contributions will be QNECs or QMACs must also be adopted before the first day of that plan year.

Does he have any section 415©(3) compensation for the 2006 year? Is any of that K-1 amount attributable to personal services he provided to the partnership?

Here's another cite. 404(a)(6) TIME WHEN CONTRIBUTIONS DEEMED MADE. --For purposes of paragraphs (1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).

If the amendment under discussion is a good faith amendment for the final 401(k) & 401(m) Regulations, I don't think you lose prototype status or reliance on the opinion letter of the prototype. From Notice 2005-95: Maintaining the Pre-approved Status of a Pre-approved Plan The Service will not treat the adoption of good faith plan amendments that reflect the qualification changes listed in sections 4 and 5 of this notice as affecting the pre-approved status of a master and prototype (M&P) or volume submitter plan. That is, M&P plans may be amended by the M&P sponsor (and, if applicable, the adopting employer) without causing the plans to fail to be M&P plans. Similarly, volume submitter plans may be amended by the sponsoring employer or the practitioner, if authorized under the terms of the plans, without causing the plans to fail to be volume submitter plans. In either case, the amendment will not result in the loss of reliance on a favorable opinion, advisory, or determination letter, if the amendment causes the plan to fail to satisfy § 401(a) and a retroactive remedial amendment is adopted within the applicable five or six-year remedial amendment cycle.

jpod, Why do you think the employee refused to part with the money she elected to put in the plan? I don't see anything in the post that says the employee caused the deferrals to not be taken from her check. As for a cite, how about 1.401(k)-1(a)(3)(i)? You are suggesting that the employee pay an amount to her employer so that the employer can deposit a salary deferral amount based on compensation previously paid to the employee. How does an amount paid from an employee to an employer become the result of a cash or deferred election? The document for the plan in question may also shed some light here. What does the document say about salary deferrals? I’m betting the document says something like the following: The bottom line is that the employee made the election and the employer failed to contribute the appropriate amount to the plan. If you want to convince me that the employee is responsible for correcting the employer’s mistake, you can point out the section of (EPCRS) Rev. Proc. 2006-27 (or any other published cite) that says the employee is responsible for correcting a plan sponsor’s failure to follow the terms of the plan document. In this case, at $40 per pay period, I would suggest the employer chalk it up as an inexpensive lesson that reminds them how important it is for them to fulfill their obligations to the plan. Of course, they should also review their procedures for implementing deferral elections and revise them as needed. As for your claim that the employer’s mistake results in a legally binding debt on the employee, my response would be to ask the employer produce evidence that there really is a debt. The additional funds owed by the employer are the direct result of the employer’s failure to follow the terms of the plan document. I seriously doubt the employee entered into any kind of agreement with the employer to reimburse the employer for its own mistakes.

jpod, I'd love to see the cite supporting for your statement. I'm wondering how the plan sponsor's failure to follow the terms of the plan document results in a debt owed by the employee.

For the Plan to be a match safe harbor in 2006, it must have been amended by 12/31/2005 to included the safe harbor provisions. The safe harbor provisions must also be in effect for the entire year (unless the plan terminates or they provide proper notice of the discontinuance of the safe harbor contribution). The 2006 notice was required to be provided a reasonable period of time before 1/1/2006, but the IRS has indicated in informal guidance at pension seminars that failure to timely provide the notice can be corrected by providing the notice at a later date. If they amended the Plan to provide a safe harbor match for 2006 it would have to be effective 1/1/06. The notice says "adopted" so it sounds like they amended the plan. They can only suspend the safe harbor match during the plan year if they provide at least 30 days advanced notice to participants that they are suspending the safe harbor contribution. The safe harbor contribution is a required contribution and can only be eliminated prospectively. We are less than 30 days from the end of the year and you haven't mentioned a notice of suspension, so they would not be able to stop the safe harbor match before the end of the 2006 year. Of course, that assumes they actually amended the plan to provide the safe harbor match in the first place. Even if the amendment was not done timely, it would have added a required contribution to the plan for 2006. For 2007, they can amend the plan to not be safe harbor. The notice by itself doesn't make the plan safe harbor. The plan has to contain the safe harbor provisions. As a participant, you have the right to examine the plan document, including all amendments. You can request a copy, too and they have to provide it. They can charge you a reasonable copying charge for a copy of the document. If you want to pursue this, you will need to find out what is in the amendments, if any, that were adopted.

There is one situation where a 12/1/2006 SH notice will apply to a 2006 calendar year. If they issued a conditional 3% notice a reasonable period of time before the beginning of the 2006 year and the 12/1/2006 notice is a supplemental notice, it will apply to the 2006 year. If they combined the 2007 SH notice with the supplemental notice for 2006, the same notice would refer to both years. Or, the notice could have been done incorrectly. We need more information on the content of the notice. helcul, What did the 12/1/2006 notice say the SH contribution would be and what plan years does it refer to? From your description, it sounds like the 2007 contribution was to have been a SH match, but what does the notice say about 2006?