Kevin C

You said asset purchase, so provided Company A and Company B are not related, the new plan covering only former employees of Company B would not be a successor plan under §1.401(k)-2(c)(2)(iii) and would be able to have a short initial plan year of at least 3 months under 1.401(k)-3(e)(2). This one is not as clear and there is more than one way to approach it. Notice 2016-16 III D 2. says you can do a mid year amendment to make an "otherwise permissible change under eligibility service crediting rules ..." with respect to those who have not yet entered the plan. A fairly common optional provision in pre-approved plans is to have employees acquired in a 410(b)(6)(C) transaction not be considered Eligible Employees until after the end of transition period. I see this as an "otherwise permissible change under eligibility service crediting rules", which means the Notice says it can be amended prospectively mid-year. Others may disagree. Another option would be to amend Plan A mid-year to exclude the former Company B employees by classification. Would that be considered an "otherwise permissible change under eligibility service crediting rules"? 1.410(a)-3(d) says that plans can use criteria other than age and service to determine eligibility. I think that makes a class exclusion an "otherwise permissible change under eligibility service crediting rules". I think it's worth noting that if Company A had set up New Company B with the acquired assets and employees, the acquired employees would not become participants in Plan A unless New Company B adopted Plan A and I don't think we would be having this discussion.

Plan language may also affect the timing of an offset. Our VS document says:

I read it differently. The minimum investment is $500,000. If the plan assets enable X to meet the minimum investment requirement, I don't see how this could be anything other than the use of plan assets for the benefit of X, a disqualified person and a PT under 4975(c)(1)(D). You really need to be discussing this with an attorney who is well versed in the prohibited transaction rules.

I remember a question like this at one of the ASPPA DC Q&A sessions years ago. The IRS representative's response was that you needed to be consistent in treating the credited service. If you counted it for eligibility, you needed to also count it for determining otherwise excludable. I've looked through my prior years of ASPPA stuff, but haven't been able to find it and don't remember which year it was.

If I'm reading this right and the plan's definition of compensation excludes amounts received post severance, does this definition satisfy 414(s)? While we have never used it, our VS document allows the exclusion of compensation paid after termination of employment, but cautions that doing so may cause the plan to fail to satisfy 414(s). With our typical plan having much higher turnover among NHCEs than among HCEs, I would expect it to be difficult to pass 414(s) if you excluded post severance compensation. IF the compensation definition does satisfy 414(s) and the participant has zero plan compensation for 2017 under the plan's compensation definition, wouldn't the safe harbor contribution be zero as well? If the compensation definition doesn't satisfy 414(s), the compensation definition for the safe harbor contribution will need to change. Our VS document automatically changes the SH compensation definition to 415(c) comp if the specified definition fails 414(s) for the plan year.

What does the plan say? (Sorry about that). Our VS document specifically says that the automatic rollover rules apply to "a distribution that may be made without Participant consent upon attainment of age 62 or Normal Retirement Age". The plan document may have the answer you need. While FAB 2014-01 only applies to plan terminations, it does include a reminder that "...under section 404(a)(1)(D) of ERISA, fiduciaries are required to act in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Titles I and IV of ERISA." It also says that rollover is the preferred distribution option and that "Section 404(a) of ERISA requires plan fiduciaries to consider distributing missing participant benefits into individual retirement plans. ...". The FAB includes unresponsive participants in the term "missing participants". It seems to me that a mandatory distribution at NR Age is similar enough to a mandatory distribution on plan termination that the same reasoning would apply.

Your OP indicated the owner wanted to fix this, which I took to mean he has already decided to not play audit lottery. I'd rather not speculate on how likely it is that the IRS would discover this on their own. While the 2010 year for Plan 1 should be closed, what about the participant's 2010 tax year? Is there a statute of limitations for unreported taxable income? Does the excess IRA contribution carry forward to later tax years, through and including this year?

??????? Under the regs, an amount deposited before the services are performed is not deferrals. Say the owner defers $1,500 per month, gets paid for the entire month at the end of the month and deposits contributions 1/3 of a month early. Since the deposit precedes 1/3 of the service, 1/3 of the "deferral" deposit isn't deferrals. That makes 1/3 of the deposit ($500) a profit sharing contribution. That in of itself may not be a problem, but it also means that only $1,000 of the elected $1,500 of deferrals for the month has been deposited. If she tries to count $500 of the next monthly deposit as covering the last $500 from the prior month, it will be a late deposit. So, another $500 deposit on or after the end of the month would be needed to avoid late deposit issues. I'll be the first to agree that in this case, the rule is silly, but it is what it is. The mess can be avoided by depositing on the pay date, or possibly by documenting somehow that payroll is paid 1/3 of a month in arrears. While it may be unlikely to ever come up, if it does become an issue, it will be about 2 years or more down the road, which makes clean-up more difficult and usually more expensive.

The problem is that timing of the adoption of Plan 2 resulted in the termination of Plan 1 not being a distributable event. See 1.401(k)-1(d)(4). Rev. Proc. 2016-51 6.06 (4) has the pre-approved correction for an overpayment from a DC plan. The participant can repay the overpayment, adjusted for earnings. With Plan 1 no longer in existence, I would be inclined to try using the actual return on the IRA as the earnings adjustment. With the amount of time that has passed, this would fall under VCP. The Rev Proc is clear that an overpayment is not eligible for rollover. It doesn't specifically say that correcting it by returning the overpayment eliminates the tax consequences, but that would make sense because after a full correction, there should not be an overpayment. If the rollover amount was substantial, you might want to consider an anonymous VCP filing. I think I would suggest that the correction is to roll the entire IRA into Plan 2. That puts the plan and participant back to where they would have been if the error had not occurred. Audit lottery has it's risks. Since the overpayment was not eligible for rollover, it should have been taxable in 2010 and was an excess IRA contribution. That could get nasty.

The prefunding prohibition for deferrals is here: For your example of the company with pay dates on the 5th and the 20th that covers services through the end of the prior month or the 15th, respectively, they are fine depositing when they finalize payroll, since that will always be after the date all of the services for that payroll have been performed. For the attorney example, it may not be clear. Since it's a corporation, the applicable question is what period of service is covered by the monthly payroll? The deposit needs to be after all of the services covered by the payroll have been performed. With only the owner on the payroll, I could see that the question may not have come up before. The safest option would be to deposit at the end of the month when the paycheck is issued. But, depending on the situation, depositing on the 20th may be acceptable.

Have you tried using alternative exclusion provisions for determining the size of the top paid group under 1.414(Q)-1T Q&A 9 (b)(2)? Sometimes increasing the size of the top paid group by one or two can make a big difference in the test results.

This part says they can determine the profit sharing contribution separately for each person. The allocation must pass discrimination testing. But, the rules are designed to prevent discrimination in favor of HCEs. There is nothing in the rules that prevents discrimination against HCEs. So, yes, they can decide that you do not get a profit sharing contribution for 2017 and still give it to other HCEs.

The only reg I can think of that addresses work-study students is the 403(b) reg listing of special types of excludible employees, see 1.403(b)-5(b)(4)(ii)(D). If the sponsor wants them excluded from the plan, I would suggest the plan be amended to specifically exclude them.

It is possible to exclude some highly compensated employees from the safe harbor contribution, but give it to others, IF that is what the plan document says. The document we use has an option in the adoption agreement that lets you give the safe harbor contribution to highly compensated employees who are not key employees, but not to the other HCEs. I don't see why they couldn't exclude HCEs who are not employed on the last day of the plan year, but provide it to the other HCEs. However, the plan document must say they can do it. The plan provisions should be described in the SPD, but the plan document language will determine how it works. As a participant, you have the right to request a copy of the plan document, but they can charge a reasonable copying charge. The plan sponsor is also supposed to have a copy of the document available for inspection. If you want to proceed, you should request a copy of at least the plan document sections dealing with the safe harbor. It wouldn't hurt to ask if they have an electronic copy of the document.

The supplemental notice is only required if they are going to be safe harbor for the year. bobby, what CEW is referring to is a way the regulations allow a plan sponsor to decide during the plan year if they will be making the 3% safe harbor contribution for that year. They send a safe harbor notice before the beginning of the plan year that says they may make the 3% safe harbor contribution for that year. Then, they have until December 1 to decide if they will be safe harbor for the year. If they do make the safe harbor contribution, they are required to send a supplemental notice by December 1 saying the 3% safe harbor contribution will be made for that year. Do you still have the safe harbor notice they sent you around November 2016? The SPD language isn't clear because it first says they will make the 3% safe harbor contribution, then it says they may amend during the year to provide for the contribution. To make things more confusing, some plan documents have provisions where the 3% safe harbor contribution is only made in years they provide the supplemental notice to participants. If you can get copies of the safe harbor notices for the 2017 year, they should tell you what is supposed to happen.

Here's the reg Mike is referencing.

While it's not official guidance, the IRS has information on their website dealing with corrections for late safe harbor notices. The notice in the OP wasn't late, but I think the listed correction for a late notice with participants still informed of plan features and allowed to defer would also be applicable here. Revise plan procedures to try to prevent it from happening in the future. https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-failure-to-provide-a-safe-harbor-401k-plan-notice Fixing the mistake The appropriate correction for a late safe harbor 401(k) notice depends on the impact on individual participants. For example, if the missing notice results in an employee not being able to make elective deferrals to the plan (either because he was not informed about the plan, or informed about how to make deferrals to the plan), then the employer may need to make a corrective contribution that is similar to what might be required to correct an erroneous exclusion of an eligible employee. On the other hand, if an employee was otherwise informed of the plan’s features and the method for making elective deferrals, the failure to provide notice may be treated as an administrative error that would be corrected by revising procedures to ensure that future notices are provided to employees in a timely manner. Example: In the facts above, Rainbow must evaluate the impact of not providing its eligible employees a safe harbor notice. The correction might be different for each affected employee. As illustrated in this example, the failure to provide notice could require treating the individual as an excluded eligible employee or simply revising an administrative procedure for an existing participant.

1.411(d)-4, Q&A 2 (e). It's almost at the end of Q&A 2.

You haven't said when this happened. If it was within the allowable SCP correction period in Section 9.02 of the Rev. Proc. for significant failures, then you can skip the determination of significant/insignificant and use SCP. If not, then you need to determine whether the failure is insignificant under Section 8.02 to see if you qualify for SCP, of if you need to use VCP. The correction methods in the Rev. Proc. are pre-approved. See 3.01 and 6.02(2). If they are eligible for SCP, but want written confirmation from the IRS that the correction is appropriate, then they can file under VCP.

I thought not counting the ESOP shares towards 5% ownership comes from 318. 1.401(a)(9)-2, Q&A 2(c) sends you to 416 for the definition of 5% owner. 1.416-1, Q&A T-17 sends you to 318.

I read it as referring to a change in eligibility requirements. To me, the phrase "eligibility service crediting rules" includes what must be done to be credited with enough service to enter the plan, when the employee receives credit for that service and the entry date. For example, a plan can provide that an employee is credited with a year of eligibility service as of the last day of the 12 month eligibility computation period in which he/she is credited with 1,000 hours of service, with semi-annual entry. I think most of us would just call it "eligibility requirements".

It's in the current EPCRS Rev. Proc., just a little hard to find. (Emphasis added)

Yes, I mean not counted at all in the (a)(4) test, but she received the TH minimum based on her full year comp. After going around in circles, that seemed the most reasonable option to us.

I agree that she was an employee in 2015 and eligibility service starts from her initial employment. If they have excluded her as a non-resident alien, they have been improperly excluding her from the plan. The statutory exclusion is for non-resident aliens with no US source income, so it doesn't apply.

We had the same situation a couple of years ago. We ended up excluding the person with zero entry date compensation from the (a)(4) testing. Another option might be to test using full year compensation. That thread is here: