Kevin C

Does the 15% deferral limit apply to everyone? Or, just to Highly Compensated Employees? If it only applies to HCEs, it could be to help with their discrimination testing. If it applies to everyone, it is likely a hold-over from a long time ago. Internal Revenue Code Section 414(v) has the rules that allow catch-up contributions. It is not required, but I can't think of any reason why plans wouldn't want to allow it. Once catch-ups are allowed, the universal availability rule I cited becomes a qualification requirement.

https://www.gpo.gov/fdsys/pkg/CFR-2014-title26-vol5/pdf/CFR-2014-title26-vol5-sec1-414v-1.pdf Try this. Section (e) starts at the bottom of page 1004 (4th page of the pdf) The cite I posted was copied from our on-line reference source.

There is also a universal availability requirement for catch-ups [1.414(v)-1(e)]. If they are going to allow catch-ups, all catch-up participants must have the effective opportunity to make the same dollar amount of catch-up contributions.

Almost all of our clients' plans have a $5,000 cashout provision that would apply before you could get to the point where a provision to forfeit the balance of a missing participant would apply. The only small balances that do not get auto rolled are those small enough that they would be completely eaten by fees when the funds arrive at the IRA provider. Those get forfeited if the participant can not be located.

jsample, I disagree. First of all, why would anyone voluntarily give up the right to receive a safe harbor contribution unless they receive something in return? An choice between benefits and cash is a CODA, unless it is a one-time irrevocable election as referenced above. The other problem is that once the contract is signed, the participant can't decide later on to defer unless the employer is willing to revise the employment contract. It is still a restriction on their deferrals that doesn't meet one of the exceptions listed in the regulations. That does bring up an interesting question. What happens if the employee signs the contract and later elects to defer in violation of the employment contract? Would ERISA 510 prohibit the employer from discharging the employee for violating the employment contract? Any lawyers out there with an opinion?

Yes, I agree with Belgarath. The last paragraph of my last post was in response to My 2 Cents, who asked a question while I was typing. These employees are eligible under the terms of the plan and according to the client, their employment agreement says they can not participate in the plan. I see that as a restriction on the amount they can defer, which means the safe harbor match requirement is not satisfied. I also see giving the choice between plan benefits and compensation as being a problem, since it would fit the definition of a CODA.

The reason I think the Safe Harbor is gone is the wording above. The prohibition does not refer to plan restrictions, just restrictions. In contrast, the exceptions listed after it refer to things the plan may limit. After sleeping on it, since the affected employees are otherwise excludable, the loss of safe harbor should only affect that portion of the plan, which only has NHCEs. They are not top heavy, so the negative impact of losing the SH may be minimal. I agree that approaching it as an improper exclusion would be best, but need to have a handle on what happens if they don't for the discussion. A plan provision excluding a class of employees isn't a problem as long as 410(b) passes and you don't violate some other rule (ie excluding part-time). In this case, they have enough other NHCEs that they could have excluded these two without any 410(b) problems. The SH rules say that all eligible NHCEs have to receive the SH, but don't impose any rules on eligibility requirements.

A client let it slip today that the employment contract for two of their new employees prohibits them from participating in their safe harbor match 401(k) plan. At their request, the plan (effective 1/1/16) has immediate eligibility and no excluded employees. So, both employees are participants. Both are non-owner doctors hired late enough in 2017 year that they will be NCHEs for both 2017 and 2018. I'm trying to sort though potential problems. So far, I have: 1.401(k)-3(c)(6)(i) says it's not a safe harbor match if there are restrictions on NHCE deferrals other than those listed. This doesn't fit any of the allowed restrictions, so I read it as goodbye safe harbor. I haven't seen the employment contract, but I will be shocked if it contains a one-time irrevocable election under 1.401(k)-1(a)(3)(v). Besides, the plan does not allow such an election. So, it appears we either have an operational failure or the employment contract provision is a CODA. Does anyone see anything I missed? or have any additional comments?

Peter, I'm not sure I get your point. Are you referring to needing to read and understand the coming restatement? Or, something else? We realized by 2008 that it wasn't possible to comply with both the regulations and ERISA when it comes to the <20 hour per week exclusion. We only had one non-Church plan that used the <20 hours per week exclusion prior to 2009 and it was amended to remove the exclusion effective 1/1/2009. There were several discussions here at the time.

And to make matters even worse, the <20 hours per week exclusion, first listed in 1.403(b)-5(b)(4)(ii)(E) has this restriction from 1.403(b)-5(b)(4)(i) So, the IRS regs say people go in and out of the plan based on their hours in the prior year, or you can't use this exclusion. But, doing so violates ERISA. Based on a recent discussion with our document provider, it appears the IRS is expecting a retroactive amendment imposing the ERISA once in, always in rule onto the <20 hours per week exclusion. That could be a problem for any non-ERISA 403(b) that actually followed the IRS regs for this exclusion. I'm really glad all our 403(b) plans are Church Plans that are not subject to the Universal Availability requirement.

Sorry, but his son's ownership makes him a 5% owner for RMD purposes. 1.401(a)(9)-2 Q&A 2(c) refers to section 416, which refers to section 318, which says he is considered to own the stock owned by his son. Was his son 100% owner in the plan year ending in the calendar year he attained age 70.5?

Powderhound, It would be better if you start a separate thread for your questions. Your 2010 loan was fixable in 2013. Unfortunately, it is most likely not fixable now. The IRS has a correction program that allows employers to correct loan problems, but only if you are not beyond the maximum allowable payment period for the loan. In most cases, that is 5 years from the date of the loan. Hardship distributions from your salary deferral account are limited to the actual amount you contributed, less any prior withdrawals. Earnings on the deferral account can not be distributed due to hardship. That probably accounts for the funds remaining in the plan, but you could have also had some employer contributions allocated after your hardship distribution was paid. When the plan changed service providers from AXA to Paychex, they could have required all participants to make new investment elections. Any participant who did not make an election would have been defaulted into the Qualified Default Investment Alternative (QDIA) under Department of Labor rules. If that is what happened, they should have given you a QDIA notice before the change. However, if they mapped funds during the change and you were not in a similar investment prior to the change, somebody has some explaining to do. If you paid taxes on the amounts reported on your 1099-Rs for the hardship distribution and defaulted loan, you should not have any problems with the IRS. If you didn't, they will show up eventually.

No, but 1.402(c)-2 Q&A 7 is a regulation cite saying that she can not roll her entire balance because part of it will be treated as her 2017 RMD.

The EOB says that contributions made because of an incorrect calculation of a participant's compensation are arguably included under the mistake of fact rules. It also cites PLR 200639003 as a specific case where the IRS said contributions made due to an overstatement of earned income for partners were made as a result of a mistake of fact. Lori, the prefunding prohibition says: I don't see how that would allow an amount deposited in 2016 to be used to fund a match based on services performed in 2017. You could add it to the 2016 PS contribution. I read what RBG quoted as saying you can't make additional contributions for 2016 while holding an excess amount to be used later.

We're going to have to agree to disagree.

I disagree. In the OP, the excess SH match was deposited during the prior plan year. I don't see how it can be used for a future year's contribution. There is also the prefunding prohibition for matching contributions in 1.401(m)-1(a)(2)(iii)(A). Does the plan have a provision allowing the return of contributions made due to a mistake of fact? Based on the described situation, I would say the options are to use it towards the prior year PS contribution or return it under the mistake of fact provisions, if the plan has one.

If it is rolled into the surviving spouse's 401(k), it would no longer be considered inherited. With IRAs, the surviving spouse can choose between rolling to his own IRA or rolling to an inherited IRA. There is a good description of the available options in the model tax notice:

From the Form 5500 instructions, referring to short plan years:

You don't mention his age. If he is under 59.5, it may be to his advantage to either leave it where it is or roll it to an inherited IRA. Either would preserve the death benefit exception to the 10% early withdrawal penalty.

If you are thinking of hiring employees in the near future, I would suggest you start with a regular 401(k) document and avoid one designed as a "solo 401(k)". As noted above, when the employees would enter the plan depends on the plan provisions. While it is just you in the plan, it will operate exactly the same way as a "solo 401(k)". When you get employees, it is also time to start looking into safe harbor 401(k). Different service providers provide different levels of service. Make sure the one you choose can handle the parts of the plan administration that you can't (or don't want to), especially when you add employees. That might include calculating contribution amounts, complying with deduction and annual additions limits, discrimination testing, coverage testing, preparation of Form 5500-EZ or SF, 8955-SSA. Some companies will do all of it for you and others will only do certain parts. Their service contract will tell you what they will do. It's much easier to do it right from the beginning than it is to go back later and fix problems.

Congratulations Mike! Definitely well deserved.

I agree the transition period should apply. 1.410(b)-2(f) clearly says that mergers are included under the terms “acquisition” and “disposition” in 410(b)(6)(C). Even if you think the definition of those terms above is different, the phrase "similar transaction" above should include a merger. If they continue the plans as is during the transition period, I think they have satisfied (A)(i) above. Your description sounds like no significant coverage change will occur. (A)(ii) shouldn't be a problem either, since the plan will continue as is. I'm assuming here that they met the Simple requirements before the merger, so it would have continued to meet the requirements if the sponsor had remained a separate employer. Those are the two requirements to be eligible for the transition period.

Doesn't this help?

It should say he exceeds 402(g) by $5,128.20. Deferrals in excess of Section 415(c)(3) compensation are not treated as catch-up. 1.414(v)-1(c)(1).

Assuming a calendar year plan, 402(g) triggered catch-up is $871.80. 415 triggered catch-up would be $3,546.15, for a total catch-up of $4,417.95. How much does your software say is in excess of 402(g) and 415? If it's small amounts, it may be getting a larger SE tax number.