Kevin C

To add some detail to my post above: 1) 1.411(a)-11(c)(2)(I) says that participant consent to a distribution is not valid if a significant detriment is imposed on a participant who does not consent to a distribution. Receiving no investment gains for years after the year you terminate employment is a very significant detriment. So, any distribution of a balance over the cashout limit is being paid without a valid participant consent. 2) The plan document should have language saying how investment gains/losses are allocated. Even if it only says a reasonable method will be used, I don't see how allocating investment income based on compensation could possibly be considered reasonable. The only guidance I can find on reasonable allocation methods for something similar is FAB 2003-3. In part, it says "On the other hand, where fees or charges to the plan are determined on the basis of account balances, such as investment management fees, a per capita method of allocating such expenses among all participants would appear arbitrary. " Investment income in a pooled account is produced by the account as a whole, so it would be a very similar case to a fee determined based on the account balance. Allocating based on current year compensation would be at least as arbitrary as allocating per capita. I think the allocation method being used would be an operational failure as well as a fiduciary breach. 3) 1.401(a)(4)-1(c)(8) requires that the allocation of investment income be nondiscriminatory. Depending on the circumstances, this could also be a qualification problem.

I'll go a stronger and say no, it disqualifies the plan. The plan document should have language saying how the gain/losses are allocated. The formula used also means that terminated participants with balances do not get an allocation of gains/losses.

This answers your question. For a plan that uses a $5,000 cash out limit, if the distribution is more than $5,000, it can not be distributed without the participant's consent. In your case, the only way you will be able to cash out this person is if the vested account balance drops to $5,000 or less. There can be an exception if part of the vested balance is a rollover account, but that wasn't part of the OP. [411(a)(11)(D)].

I would take it back a step further and say the first step is to look at the participant's deferral election in effect for 2018 and determine how much he/she elected to defer. That may or may not be the same amount they "think" was deferred. Failure to follow the deferral election is an operational failure. When you know for sure what was elected, what was actually deferred and what was deposited for the participant, then we can help you determine what correction, if any, is needed.

EGTRRA changed 416(c)(2)(A) to provide that matching contributions count towards the top-heavy minimum. Of course, the plan needs to say that.

I'll agree the code section could have been written more clearly, but this issue has been settled for a long time. Our VS 401(k) base document describes it this way:

Catch-ups triggered by the 415 limit are not included in the ADP test. If that means the ADP test now passes, the refunds previously paid are overpayments and need to be corrected under EPCRS.

Austin, Neither. As the IRS response says, the determination is made based on the employer’s practice concerning the last day an individual is considered an employee. If a client says a termination date is 2/27/2019, that is the last day the person was considered to be an employee. Or, as I phrased it before, their last day employed. I don't care what their last day in the office was, because that information is irrelevant. It's actually more simple than what you are suggesting. Use the termination date the client determines is correct. You don't need to second guess them. As for your a) or b) question, a termination date of 12/31 is employed on the last day of the year and a termination date of 12/30 is not.

Austin, our clients must have missed that memo. I've seen a lot of end of month terminations/retirements when their office is closed on that day. If it makes you feel any better, I agree that the employer (HR if you prefer) ultimately decides when the employment relationship ends.

I would start the plan document search with the person/company who helped him set up the plan. That may or may not be the investment company. The pre-approved document sponsor is supposed to keep track of who is using their document, so I would expect them to have a copy of a signed document. If the investment company was not involved in preparing the plan document, I would not expect them to have a copy of it unless they are a Trustee. If a service provider has information, but refuses to send it, it's usually a matter of unpaid fees.

It's a picky distinction, but if you change it to the last day employed rather than last day worked, I agree with you. If you give your employer a letter saying you are retiring on January 1 and they agree to it, you are retiring on January 1, even if the 31st and 1st fall on a weekend and you don't work those days. We have this discussion with our clients when we find out a 70.5+ participant is planning to retire at the end of the year. Those who want to delay the initial RMD change their retirement date to January 1.

Not something I've done, but it's been discussed here before: https://benefitslink.com/boards/index.php?/topic/59412-person-has-no-document/&tab=comments#comment-262846 With the timing in your case, you might be missing two documents, plus some interim amendments. PPA Opinion letters were dated 3/31/2014. That doesn't necessarily mean the PPA document was available to be used on that date. It may have been set up using an EGTRRA document, which would have needed to be restated by 4/30/2016. This might be a good one to do as an anonymous filing if they can't find the original document.

The definition of Roth deferrals is in 1.401(k)-1(f)(1). Amounts originally contributed as employee after-tax contributions do not meet this definition. It would be worth looking at 1.401(a)(4)-11(g) to see if a retroactive amendment to extend the match to after-tax contributions would be allowed. Depending on who made after-tax contributions, you might have a problem with the nondiscrimination requirements in -11(g)(3)(v).

You may want to take another look at the plan's fail-safe provision. They typically only add back in people who are not benefiting due to an hours or last day requirement to receive the contribution. It's also typical for it to say that if you still fail ratio percentage after adding everyone back in, the plan is free to use any other available method to pass 410(b).

For a suspension of the safe harbor match during the year, ADP/ACP testing must be done for the full plan year using the current year testing method. 1.401(k)-3(g)(1)(i)(E) & 1.401(m)-3(h)(1)(i)(E). If the plan is terminating, we would need to know if it was in connection with a 410(b)(6)(C) transaction or if the employer has incurred a substantial business hardship 1.401(k)-3(e)(4).

Did the "guru" give the same reason? Or, a different one?

It uses the aggregation rules in 1.410(b)-7. I'm reading the first sentence of 1.410(b)-7(f) as saying it.

The most recent IRS guidance on mid-year amendments to safe harbor plans is in Notice 2016-16. In III 3.D, you can amend eligibility requirements mid-year to prospectively exclude employees who are not currently eligible. It should follow that you can also amend mid-year to make additional employees eligible. But, note that depending on your situation, the timing of the amendment might be considered discriminatory under 1.401(a)(4)-5. https://www.irs.gov/irb/2016-07_IRB#NOT-2016-16

It's not clear, but it looks like 1.401(m)-2(a)(6)(iv) may prevent what you want to do. Notice the "and" in the first sentence. I'm thinking it is saying that you can't use 401(k) deferrals in the ACP test that includes the 403(b) match because you can't aggregate 403(b) deferrals and 401(k) deferrals. It shouldn't be that easy to distort ACP testing for an employer eligible for both a 403(b) and a 401(k). Also, is the 401(k) deferral eligibility immediate for everyone?

We use ASC documents. While this provision would prevent the document from violating 410(a), I'm not sure it prevents you from losing reliance on the opinion letter because the adoption agreement was completed incorrectly. (Rev. Proc. 2017-41, Section 7.03 (3) & (4)) Most TPA's include a recommendation that plan documents be reviewed by counsel before signing. That might make it more difficult to pin the blame on them in court. Would a TPA claiming that the plan document is in compliance be considered practicing law? If the TPA has people with credentials, every professional organization should have in their by-laws that you will not do work you are not qualified to do. I know in practice that gets ignored as much as the speed limit signs in Texas, but it should be in the by-laws. One of our local competitors had their receptionist prepare their restatements and amendments. In our office, I either prepare or review every amendment and restatement. Most employers probably wouldn't appreciate the difference. Our clients do. I would place the blame on those involved in the document preparation, regardless of how many documents they prepare. If you are going to do it, do it right.

If the amendment is adopted by 2/28, I don't see why it wouldn't work. As you note, it may not be worth the trouble of having a short plan year.

Have you looked at the base document provisions for eligible employee and excluded employee? Our VS document has the following language in the section on excluded employees: Language like this would turn what you describe into what Austin describes.

I've heard people claim that the allocation formula can't be amended prospectively during the year after someone satisfies the allocation conditions for the year. If a cite is given, it's usually TAM 9735001. That TAM deals with a plan that tried to amend after the end of the plan year to retroactively change the allocation formula. Personally, I think it's a bit much of a leap to try to apply this TAM's conclusion to a prospective change in an allocation formula. As Tom notes, the contribution can be stopped during the year. However, the regs are clear that once someone has satisfied the allocation conditions for receiving a contribution for the plan year, you can't add additional allocation conditions for that year. That's what I read the OP as saying the client wants to do. One of Tom's examples also points out that the timing of the amendment could be discriminatory under 1.401(a)(4)-5.

There are differing opinions on exactly how it applies, but the regs say that once someone has satisfied the allocation conditions to receive a contribution for the plan year, it becomes a 411(d)(6) protected benefit. I would have the amendment be adopted by the end of 2019 and be effective 1/1/2020. It's buried in a list of benefits that are not 411(d)(6) protected in 1.411(d)-4 Q&A 1(d):

Not sure I follow what you are trying to say. Our VS document allows different eligibility requirements for safe harbor contributions than those used for salary deferrals. The only restrictions on eligibility for the safe harbor are that it can't be later than 21&1, semi annual entry and it can't be discriminatory. If you do so, the document requires disaggregation of otherwise excludables for testing. So, yes, it can be done, even in a pre-approved document. As you note, using different eligibility requirements does result in the otherwise excludable portion of the plan not being safe harbor because all of the NHCEs eligible to defer are not eligible for the safe harbor. So, for example, if a plan has immediate eligibility for deferrals and 6 months eligibility for the safe harbor contribution, the otherwise excludable portion of the plan would be subject to ADP/ACP testing even though some of the participants in that portion of the plan receive the safe harbor contribution. It's also been noted that the entire plan does not qualify for the TH exemption. Plan sponsors may have reasons other than testing for wanting to give some, but not all, of those with less than a year of service the safe harbor contribution.