Kevin C

It depends. Does the plan have any amounts that were transferred from a plan subject to IRC 412? If the answer to that is no, did the plan comply with the 1.411(d)-4 regulations in effect at the time when the annuity form of payment was eliminated? The SPD may be important in showing you did comply with the regs.

Page R-2 of the 2006 instructions says that a separate Form 1099-R must be used to report a distribution from a designated Roth Account.

1.401(k)-3(g) addresses the reduction or suspension of safe harbor contributions during the year. A notice is required. If the plan is terminating instead of freezing, that is addressed in 1.401(k)-3(e)(4).

mrjones, The age/service requirements referred to in your cite are the requirements specified in 1.410(a)-3, not those specified in the plan. 6 months of service (or less) and entry on the first day of the plan year is a fairly common provision. If you require more than 6 months of service, then you must have at least semi-annual entry dates.

The article says "Long Term Contributors saw their savings grow from $67,785 in 1999 to $102,014 in the year 2005." That sounds like they are talking about increases in account balances, not investment return. The balance increased 50% over the period, but that increase would include new contributions. From 1/1/1999 through 12/31/2005 the S&P 500 index had an annualized return of 1.77% per year and a total return of 13.05%. I would be very surprised if the average 401(k) participant had better investment returns than that. A well diversified portfolio would have had much better returns for that time period, but I think an annualized return of 6%-7%/yr would still be considered well above average.

Now there are conflicting opinions from ASPPA. The ASPPA ASAP for 9/14/2006 (No. 06-30) says that if the DC contribution exceeds 6%, only the contribution in excess of 6% counts towards 404(a)(7). I hope some guidance is issued soon.

Most of the document providers have already released good faith amendments. If yours hasn't or if you don't use prototypes or volume submitter documents, Corbel has one available for a one time charge.

This is from the preamble to the final 401(k) regs: Complete removal of all of the ADP/ACP language seems overkill when language could be used to provide that ADP/ACP testing will not apply for a year if the plan contains a SH contribution. Hopefully, your document provider can work this out. If you are wanting the plan to default to testing if they mess up their safe harbor, you will probably have an uphill battle.

The original post said the owner wanted to max out, so the top heavy exemption for SH match plans will not apply. If the intent is to use the SH match to avoid having to make TH minimums, then it makes no sense for the owner to only defer the amount of the catch-up limit.

I think "NC Allocation" means new comparability allocation. If the owner is only going to defer $5,000, there isn't any point in doing a safe harbor match. Without a SH, if no one else defers, his ADP refund would be reclassified as catch-up. If you are thinking about the top heavy exemption for SH match, you will lose that when you allocate the PS contribution. Also, the SH match doesn't count towards the gateway. As previously mentioned, a 3% SH works well with a new comparability PS allocation. Catch-up is also triggered by the 415 limit, so you don't have to limit HCE deferrals to 0% (plus the catch-up).

Try proposed §1.402A-1 Q&A 5. I think it addresses the original question. Q-5. How do the taxation rules apply to a distribution from a designated Roth account that is rolled over? A-5. (a) An eligible rollover distribution from a designated Roth account is permitted to be rolled over into another designated Roth account or a Roth IRA, and the amount rolled over is not currently includable in gross income. In accordance with section 402©(2), to the extent that a portion of a distribution from a plan qualified under section 401(a) is not includible in income (determined without regard to the rollover), if that portion of the distribution is to be rolled over into a designated Roth account, the rollover must be accomplished through a direct rollover of the entire distribution (i.e., a 60 day rollover to another designated Roth account is not available for this portion of the distribution) and can only be made to another plan qualified under section 401(a) which agrees to separately account for the amount not includible in income (i.e., it cannot be rolled over into a section 403(b) plan). See § 1.403(b)-7(a) for the corresponding rule applicable to section 403(b) plans. If a distribution from a designated Roth account is instead made to the employee, the employee would still be able to roll over the entire amount (or any portion thereof) into a Roth IRA within the 60-day period described in section 402©(3). (b) In the case of an eligible rollover distribution from a designated Roth account that is not a qualified distribution, if the entire amount of the distribution is not rolled over, the part that is rolled over is deemed to consist first of the portion of the distribution that is attributable to income under section 72(e)(8). © If an employee receives a distribution from a designated Roth account, the portion of the distribution that would be includible in gross income is permitted to be rolled over into a designated Roth account under another plan. In such a case, §1.402A-2, A-3, provides for additional reporting by the recipient plan. In addition, the employee's period of participation under the distributing plan is not carried over to the recipient plan for purposes of satisfying the 5-taxable-year period of participation requirement under the recipient plan. (d) The following example illustrates the application of this A-5: Example. Employee B receives a $14,000 eligible rollover distribution that is not a qualified distribution from B's designated Roth account, consisting of $11,000 of investment in the contract and $3,000 of income. Within 60 days of receipt, Employee B rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of investment in the contract. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Employee B's gross income. (e) This A-5 applies for taxable years beginning on or after January 1, 2006.

This question came up in the middle of a thread a couple of months ago with mixed opinions. Prior Thread I think it depends on how you interpret Reg 1.401(k)-3(e)(1). I read it as saying you can't amend the safe harbor provisions during the year. Others apparently read it as saying you can't make ANY amendments to a SH plan during the year. The preamble to the regulations refers to this section with this paragraph: These final regulations specify that a section 401(k) safe harbor plan must generally be adopted before the beginning of the plan year and be maintained throughout a full 12-month plan year. This requirement is consistent with the notion that the statute specifies a certain contribution level for NHCEs in order to be deemed to pass the nondiscrimination requirements. If the contribution level is not maintained for a full 12-month year, the employer contributions made on behalf of NHCEs should not support what could be a full year's contribution by the HCEs. My 2 cents worth is that participation requirements are not part of the safe harbor provisions, so you can amend them. Tom Poje is going to get this question added to the IRS Q&A's at the ASPPA fall conference. Hopefully, we will find out more then.

It would depend on which days are being paid for in that paycheck. If they pay on Friday for service performed through the prior Friday, they would be ok. But, if the paycheck covers service through the paydate, it would be a problem if you deposited early on a regular basis.

I agree with Nate that it would not be a reasonable definition of compensation. 1.414(s)-1(d)(2)(iii) Limits on the amount excluded from compensation. --A definition of compensation is not reasonable if it provides that each employee's compensation is a specified portion of the employee's compensation measured for the otherwise applicable determination period under another definition. For example, a definition of compensation that specifically limits each employee's compensation for a determination period to 95 percent of the employee's compensation using a definition provided in paragraph © of this section is not reasonable. Similarly, a definition of compensation that limits each employee's compensation used to satisfy an applicable provision with a 12-month determination period to compensation under a definition provided in paragraph © of this section for one month is not a reasonable definition of compensation. However, a definition of compensation is not unreasonable merely because it excludes all compensation in excess of a specified dollar amount.

Bird, The strange thing is that this auditor is from the same office as the agent who did an audit last year on a takeover client of ours. The takeover client really had a problem with late deposits. That auditor was very generous on applying the deadline. His supervisors approved everything because they closed the case using the lost earnings amount he had me calculate. Kirk, The preamble to the final deposit regulations has a footnote that says the DOL uses the mailbox rule. (The preamble also says some interesting things about monthly deposits, but that doesn't apply here because they deposit each pay period.) The agent didn't dispute the mailbox rule, he just insisted on proof of when they were mailed. They used postage metered first class mail, so even if the custodian saved the envelopes, there would be no "proof" of when they were mailed. I found some information on the internet on average delivery times for first class mail. We'll see if that makes any difference.

We have a client facing a similar horror story. They have bi-weekly payrolls and send their deposits on the pay date. During the time period the DOL auditor is looking at, the client mailed checks for deferrals and loans to the custodian using regular mail. They now transfer the deposits electronically on the pay date. The auditor first insisted that the date the deposits were credited to the account was the deposit date. I sent the client a copy of the preamble to the final reg and highlighted the footnote that says the DOL considers the contributions to be segregated from the assets of the employer when the check is mailed, provided the check clears. The agent responded that they can't prove when they mailed the checks. He is claiming that anything not credited to the account within 4 days of the paydate is late. Over the 18 month time period, the auditor is claiming 12 bi-weekly payrolls were "late". One check was credited 10 days after the pay date, 3 were credited 7 days after, 2 were credited 6 days after and 6 were credited 5 days after. The checks were mailed first class on Fridays from Texas to Florida. The penalty amounts involved are trivial, but our client is upset about being accused of holding the contribution checks before depositing them. They are still fighting this, so we will see what happens. Does anyone know if they can request that the agent's supervisor get involved in the audit?

I think the issue about the amendment being discriminatory is tied to the timing of the amendment {1.401(a)(4)-5}. The determination is facts and circumstances, so everything is taken into account. The annual match rate issue you mentioned can come up even if the formula doesn't change during the year. Suppose I enter the Plan on 1/1 but don't start deferring until 7/1 and then defer 8% for the rest of the year. The Plan uses a SH match of 100% of the first 4% deferred on a payroll by payroll basis with no true up and the match is deposited timely. On an annual basis, I've deferred 4% and received a 50% match. If I had consistently deferred 4% all year I would have received a 100% match. Does that mean the Plan's SH match doesn't work? 1.401(k)-3©(5)(ii) says that a plan will not fail to satisfy the SH match requirement merely because the SH match is allocated separately for each payroll. Notice 2000-3 Q&A 2 said the SH match requirements could be satisfied separately for each payroll. The new regs don't have the same language, but I think they get you to the same place. If the match would satisfy the SH requirements separately for each payroll, it seems to me that the only reason you are seeing different annual match rates is that the Plan allocates the match separately for each payroll period. Please note that I am NOT saying you can increase the SH formula during the year. I read the regs as saying you can not change the SH provisions during the year.

Tom, I don't think that situation would change anything in my reasoning regarding the safe harbor. But, it would raise another issue about whether the amendment itself was discriminatory. If the only person added by the amendment was an HCE, I think it would be a problem.

I think the regs are saying you can't change the safe harbor provisions during the year, not that you can't change other plan provisions. The ADP and ACP safe harbor sections of the regs specify the contribution that all eligible NHCE's must receive. Eligible employees are those who are eligible to defer for all or a portion of the plan year. If all you are changing is the eligibility requirements for making deferrals, I don't see how that is changing one of the safe harbor provisions. This would be a good question for the next ASPPA IRS Q&A session. I'd also like to hear the IRS's opinion about whether you can increase the safe harbor contribution during the year. Tom, can you elaborate on the situation you are thinking would be a problem with the matching rates? If the matching rate is determined using full year comp, wouldn't the employee's deferral rate be determined using full year comp, too? 1.401(k)-3(e)(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.

No lookback calculation for 1996??? l 1996, Small Business Job Protection Act of 1996 (P.L. 104-188) P.L. 104-188, §1431(a): Amended Code Sec. 414(q)(1). Effective for years beginning after 12-31-96, except that in determining whether an employee is a highly compensated employee for years beginning in 1997, this amendment shall be treated as having been in effect for years beginning in 1996. Prior to amendment, Code Sec. 414(q)(1) read as follows: (1) IN GENERAL. --The term "highly compensated employee" means any employee who, during the year or the preceding year -- (A) was at any time a 5-percent owner, (B) received compensation from the employer in excess of $75,000, © received compensation from the employer in excess of $50,000 and was in the top-paid group of employees for such year, or (D) was at any time an officer and received compensation greater than 50 percent of the amount in effect under section 415(b)(1)(A) for such year. The Secretary shall adjust the $75,000 and $50,000 amounts under this paragraph at the same time and in the same manner as under section 415(d). 1.414q-1T says how the lookback calculation is done, including which year's HCE $ amount to use in the determination. You said in the previous thread that it is irrelevant because SBJPA changed the law. I disagree because portions of it are still consistent with current law. I provided a cite that says it still applies to the extent it is consistent with current law and current guidance and asked you to provide some sort of cite to support your claim that the entire reg no longer applies. If you read something in Notice 97-45 example 5 that says which year's HCE $ amount to use in the HCE determination, I can see that further discussion is pointless.

MJB, I guess I'm a glutton for punishment. I bailed on the previous thread, but it refuses to die. If the 1997 threshold has the SBJPA cola applied to it, how does the effective date for SBJPA 1431(d) make any sense? If the $80,000 threshold already applied to 1996, why would they need a special provision for determining HCE's in 1997? ( The IRS's guidance also appears to disagree with you. IR 96-43 released the 1997 cola amounts. Here is what is says about the HCE threshold: Contrast that with IR 97-41 announcing the 1998 amounts: Or the 2000 amounts in IR 1999-80: Of course, you still need 1.414(q)-1T to determine the appropriate amount to use for the lookback year calculation. You say it is no longer applicable, but I disagree. Notice 2000-3 says: I see you edited out a statement in your last post about lookback calculations not applying in 1996, so I guess you will admit it did. I don't see anything in SBJPA that changes the method for the lookback year calculation, it only changes thresholds and the items that need to be calculated. If you see something in SBJPA that would make the applicable part of the temporary reg inconsistent with current law, please provide a cite.

There are still some good regional TPA firms out there. I work for one of them. We also have a RIA company, so we do everything in-house. We are also a full service shop. Bigger doesn't mean better and it doesn't necessarily mean less expensive. Most plan sponsors don't have a clue what they are really paying for their plans. OK, really it is what the participants are paying for the plan. Lately, we have been mainly taking over plans that are with national insurance companies. By the time you piece together what the sponsor pays and all the contract fees and investment management fees the participants are paying, it's usually significantly more than we charge and we are not known for low fees. Then look at what some of the big firms won't do. How many plan sponsors do you know that are capable of determining plan eligibility and calculating contribution amounts? How about determining HCE's or reviewing and approving testing results? Most of the national firms we've seen require the client to do all that and spell in out in their contract that the client is responsible for everything. I've seen missed top heavy minimums, allocations to ineligible employees, incorrect allocations or none at all for eligible participants, incorrect testing and on and on. The national TPAs involved did not catch any of this because they didn't look at any of it. They just run what the client provides through their software and print out the results. Being small doesn't automatically mean better either. The goal should be to find a good TPA, not a big one or a small one. Participants are better off when the Plan is adminstered correctly at a fully disclosed fee level that the plan sponsor determines is reasonable for the services provided. I'll step off the soap box now.

It may or may not be a problem merging the plans mid year. Without the participant counts, we don't know for sure.

After a merger, both A & B participants would be in the same plan.

Are you saying the members of a controlled group are not treated as a single employer? 414(b) EMPLOYEES OF CONTROLLED GROUP OF CORPORATIONS. --For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)©) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary.