Kevin C

I agree with Tom. If there are no NHCE's in 2003, the NHCE ADP for 2003 is not 0. The average of zero items is not zero, it is indeterminate. To take the average, you would have to divide by zero. Notice 98-1 spells out the prior year testing rules. It also says that the existing regs only continue in effect to the extent they are consistent with the new guidance. Under the prior year method, you are testing prior year data for NHCE's against current year data for HCE's. If you apply the exemption for having no NHCE's to mean no NHCE's in the current year, then you are actually using data for both the current and prior years for NHCE's in the test. I don't see that as being consistent with the rules of Notice 98-1. On the other hand, I think looking solely at the prior year NCHE population to determine if the exemption applies under prior year testing is being consistent with Notice 98-1. Even though we can't rely on them yet, it also doesn't hurt that the new proposed 401(k) regs support the position that under prior year testing having no NHCE's in the prior year is an exemption.

We deal mostly with prototype documents, both standardized and non-standardized. The standardized prototype we use allows requiring 500 hours OR employed on the last day of the year to receive the PS contribution, even if a 3% SHNEC is used. So now we have an IRS approved standardized prototype that may not have a 401(a)(4) safe harbor allocation method. But, having a 401(a)(4) safe harbor allocation method is one of the requirements to be a standardized prototype. I may be overreacting, but I think this is a huge problem, unless the IRS has rationalized another way to look at this issue.

I'll try to be more specific. From Notice 98-52: B. Use of Safe Harbor Nonelective Contributions to Satisfy Other Nondiscrimination Tests A safe harbor nonelective contribution used to satisfy the nonelective contribution requirement under section V.B.2 may also be taken into account for purposes of determining whether a plan satisfies §401(a)(4). Thus, these contributions are not subject to the limitations on qualified nonelective contributions under §1.401(k)-1(b)(5)(ii), but are subject to the rules generally applicable to nonelective employer contributions under §401(a)(4). See §1.401(a)(4)-1(b)(2)(ii). However, pursuant to §401(k)(12)(E)(ii), to the extent they are needed to satisfy the safe harbor contribution requirement of section V.B, safe harbor nonelective contributions may not be taken into account under any plan for purposes of §401(l) (including the imputation of permitted disparity under §1.401(a)(4)-7). My understanding of the general test is that all employer contributions are tested together in total. Are you saying that you apply permitted disparity to one piece of the total and not the other in the same test? From Rev Proc 2000-20, Section 3: .09 Changes to General M&P Plan Requirements --This revenue procedure makes several changes and clarifications to the requirements that apply to all M&P plans. Significant among these are the following: 1 Rev. Proc. 89-9 and Rev. Proc. 89-13 prohibited the issuance of opinion and notification letters for plans that contain or may contain multi-tiered benefit structures. This prohibition has been reformulated as a general requirement that the allocation or benefit formula in a nonstandardized M&P plan must satisfy the following uniformity requirements of the regulations under §401(a)(4) pertaining to safe harbor plans. In the case of a nonstandardized defined contribution plan, the allocation formula must be a uniform allocation formula, within the meaning of §1.401(a)(4)-2(b)(2) of the regulations, or a uniform points allocation formula, within the meaning of §1.401(a)(4)-2(b)(3)(i)(A). In the case of a nonstandardized defined benefit plan, the benefit formula must satisfy each of the uniformity requirements of §1.401(a)(4)-3(b)(2). In addition, each nonstandardized plan must give the employer the option to select total compensation as the compensation to be used in determining allocations or benefits and each nonstandardized defined benefit plan must automatically or by option allow the adopting employer to satisfy one of the design-based safe harbors described in §1.401(a)(4)3(b)(3), (4), and (5). (Of course, standardized plans and nonstandardized safe harbor plans continue to be required to satisfy design-based safe harbors described in the regulations under §401(a)(4).) Thus, for example, an M&P plan, other than a uniform points defined contribution plan, may provide for disparity in the rates of employer contributions allocated to participants' accounts provided the plan satisfies §401(l) in form. Exceptions to the uniformity requirements are provided for Davis-Bacon plans, plans that would fail to satisfy the requirement only because of the plans' top-heavy provisions, and plans that have continued to apply certain limitations under the Code that were repealed by GUST. I read that to mean that non-standardized prototypes are required to use 401(a)(4) safe harbor allocation methods. I also noticed that the prototypes we use do not have general test language in the base document. Most of our plans use prototype documents. My comment about about the 3% SH contribution possibly being considered a part of the CODA was not intended to imply that they are deferrals or that they should be treated as such. With mandatory disaggregation of 1) CODA, 2) match and 3) everything else, I'm just wondering if the IRS thinking is that the 3% SH belongs in the CODA portion for testing, not in the portion for everything else. It may be a little far fetched, but it would eliminate the problem with some standardized prototypes having to be general tested. If the IRS didn't miss the boat on this one, they had to have a reason for thinking it isn't a problem.

Interesting thread!!! Sorry, but I feel the need to stir the pot just a bit more. 1. With the 3% non-elective safe harbor contribution included in the general test, doesn't Notice 98-52 prohibit you from using imputed permited disparity in the general test? 2. Aren't standardized AND nonstandardized M&P plans required to use 401(a)(4) safe harbor allocation methods? The situation being discussed easily fits into the adoption agreements for the both the standardized and NS protoype documents we use. When the logic starts telling us that we have to 401(a)(4) general test some plans using standardized prototypes, it seems a good time to step back and look at the big picture. Did the IRS make a huge mistake in how they integrated safe harbor 401(k) provisions into the M&P program? Or, did we miss something in getting here? I have a difficult time accepting the idea that we can have a standardized prototype plan that can possibly fail 401(a)(4). I'm starting to wonder if the IRS considers the 3% non-elective safe harbor contribution as a part of the CODA. Consider the following: 401(k)(12)(A) IN GENERAL. --A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement -- 401(k)(12)(A)(i) meets the contribution requirements of subparagraph (B) or ©, and 401(k)(12)(A)(ii) meets the notice requirements of subparagraph (D).