Kevin C

Age discrimination is the phrase I had come to mind. I also wonder if it would smell close enough to the plan design described in the Carol Gold memo to face a risk of the IRS deciding it was a discriminatory plan design. I wouldn't be comfortable with a plan design that aggressive. We typically pair the new comp allocation with a 3% SH, so the gateway requirement would prevent them from doing what the OP discusses. It would be interesting to see the difference in employer contributions between the OP design and new comp + 3% SH + max deferrals.

This one was supposed to be a direct deposit, but it's being blocked by the bank the custodian uses to make the payments. We've had distribution checks flagged before and they won't send the check until the hold is lifted. So, it's more like the check was requested and possibly written, but not mailed. The distribution can't be reversed. The bank holding the funds will not send them back to the plan. I don't know what happens to the funds, but I would expect them to end up at Treasury. This is the 6th payment we've had flagged this year. The information they ask for varies by person, but it's usually one or more of the following: full name, address, date and place of birth, nationality, citizenship, employer's full name and address and detailed purpose of payment. Sometimes, they also ask if the person ever lived in a certain country. When the participant provides the requested information, the bank releases the payment.

We had a terminated participant's distribution get flagged by OFAC and received a request for additional information before the distribution could be paid. That's never been a problem before, but this participant stopped responding to e-mails, the phone number she used while employed is no longer working and no one who worked with her knows where she is. The bank holding the funds is now proceeding with their blocking procedure for this payment. She will have to prove to the government that she is not on their restricted list to get her funds. Question is, does this affect the 1099-R reporting? She elected a direct distribution and the 20% withholding was deposited. The blocked amount is the net payment. Has anyone dealt with this before?

That kind of provision is pretty common for determining years of service for participation. I've never seen it used for vesting service.

Elapsed time isn't without its problems, too. Part-timers who wouldn't vest if you count hours do vest and repeated rehires can have additional service counted under the service spanning rules.

You didn't miss anything. They don't understand how hours based service works. Counting hours does vest faster than elapsed time, but not not like that. With a calendar year plan, someone at 40 hours per week hired on 7/1/2015 will end up with 3 years of vesting service by 7/1/2017. At 2080 per year, that's 1040 hours from 7/1/2015-12/31/2015, 2080 for 1/1/2016-12/31/2016 and 1040 from 1/1/2017-6/30/2017, So, it's possible to get 3 years of service in a 24 month period.

What I got out of that IRS response works out to if the participant resigns effective 12/30, they are not employed on the last day of the year. However, if they resign effective 12/31, but their last day actually working was 12/30, they are employed on the last day of the year. As they said, it's determined by when the employment relationship ends, not when they last worked. In some cases, those two events are on the same date, in others they are not. The lesson here is to be careful when your write your resignation letter

They are beyond the time period to deposit annual additions for the 2015 year, so the only way a 2015 contribution can be done now is under EPCRS. The SH contribution is required, so it definitely needs to be corrected. If it isn't corrected, the plan is disqualified. If the PS contribution was discretionary, I don't know if it can be corrected. Rev. Proc. 2016-51, Section 6.02(4)(b) says that corrective deposits are considered annual additions for the year being corrected, but the normal rules under Section 404 regarding deductions apply. With a correction being made now, I read that as you would allocate for 2015, but deduct in 2017. I'm not a tax person, but I would agree with you that they should not have deducted it for 2015 when it wasn't deposited.

If you intend for the SH match to satisfy both the ADP and ACP safe harbors, I would complete the document to reflect that both were intended to be satisfied. Your document provider should be able to help you with that. As John noted, it is possible to have a safe harbor match formula that meets the ADP safe harbor requirements, but not the ACP safe harbor requirements. I wouldn't want the document to say we did not intend to satisfy the ACP SH if we do.

Our VS document has a provision that automatically rescinds the designation of the ex-spouse as beneficiary upon divorce, unless the participant makes a new beneficiary designation naming the ex. It's not your question, but does their plan document have a similar provision? If it does and the ex-wife is out of the picture, who would be the beneficiary?

Tom, if your hypothetical person receiving commissions is an NHCE, amending or automatically reverting to gross comp retroactively for the year would cause the plan to fail to satisfy 1.401(k)-3(c)(6)(iii). That would need to be corrected by retroactively allowing deferrals from previously excluded compensation. In that case, you would have a missed deferral opportunity as part of the correction. This is different from your previous scenario because in this one, it would not have been possible for this person to defer enough to receive the maximum match under the revised SH match provisions. In your previous scenario, they could have deferred enough to get the maximum match even using gross comp, but chose not to. I agree that they might have deferred more if they had known, but the SH regs have rules for plan imposed limits on deferrals, not rules based on how much each participant decides to defer. As I've mentioned before, you can always be more generous in your correction, if that is what you want to do.

ASC.

Our VS document has a fail-safe provision that says if you elect a safe harbor compensation definition that fails to satisfy 414(s), safe harbor compensation becomes gross compensation for the plan year. If any of our plans have this problem, we don't need an amendment and the correction is covered by our opinion letter. The -11(g) amendment I suggested does the same thing as our document's fail-safe. If you are not comfortable with that, you can always use a more generous correction.

Austin, in the case you describe, I think you would need to either give them a match on the bonus payroll based on their deferral election rate, or true up the match at the end of the year. Tom, I don't think the IRS would object if the match correction was calculated assuming the participant's deferral rate had applied to the bonus payrolls. But, I still don't see a missed deferral opportunity unless they retroactively create one with the corrective amendment. Let's try this from a different angle. If a plan does not allow deferrals from bonuses, but the SH match formula applies for the plan year using gross compensation, does it still satisfy the safe harbor rules? I think it does. Using gross compensation as the safe harbor compensation definition would satisfy 414(s). 1.401(k)-3(c)(6)(iv) says the deferral compensation definition must be reasonable under 1.414(s)-1(d)(2), but does not have to satisfy 414(s). I'm looking at the corrective amendment as retroactively changing the plan to be like this.

Tom, Sorry, but I'm not understanding your reasoning. The rate of match is the match divided by deferrals. Your example has someone deferring 3% of gross-bonus or 2.7% of gross. Either way, match divided by deferrals is 100% since the formula yields a 100% match regardless of which compensation definition you use. Obviously, someone who deferred more than 3% of gross-bonus would receive more match using gross comp. John, there have been discussions on -11(g) in previous years and -11(g)(2) does not list the only reasons an -11(g) amendment can be done. If you look at the preamble to the final regs that added it, they make it clear that you don't need to fail anything to do an -11(g) amendment. The nice thing about -11(g) for SH plans is that the amendment is treated for purposes of 401(a) as having been adopted and in effect as of the first day of the plan year, (1.401(a)(4)-11(g)(1)) so there should not be any problems with the safe harbor rules. If you look at 1.401(a)(4)-1(b)(2)(ii)(B), it requires 401(k) plans to satisfy 401(k)(3).

While I think you could probably include a QNEC for missed deferrals because someone might have deferred more if the SH Match compensation definition would have been different at the beginning of the year, I don't think you have to do so. The failsafe provision or corrective amendment should only be changing the compensation definition for the safe harbor match, not the compensation definition for deferrals. If the plan did not allow deferrals from bonuses, there is no missed deferral opportunity. As I mentioned before, the safe harbor match will need to be recalculated using the new compensation definition. If you amend the compensation definition for deferrals retroactively to include bonuses, then I can see that you have retroactively created a missed deferral opportunity. But, why would anyone want to do that?

Whether the document has failsafe language or you have to do an -11(g) corrective amendment to change the SH compensation definition, the safe harbor contribution will have to be recalculated using the new compensation definition if they want to remain a qualified plan. I would expect most documents to have some sort of failsafe provision. If not, a corrective amendment will be needed. We use ASC and their documents revert to gross comp if the SH compensation definition used fails 414(s).

I agree with both.

There is a slight difference between Appendix A.05(9)'s less than 3 month exclusion and the brief period exclusion under Appendix B 2.02(1)(a)(ii)(F). Under Appendix B, the failure must end in the first three months of the plan year (the participant being able to defer for the last 9 months of the plan year is required). Under Appendix A, the failure must last less than 3 months. In this case, assuming a calendar year plan, I read "last week" as referring to a March payroll, so they should be able to use either method. I wasn't thinking of this difference in methods when I responded above, but unless my assumption of a calendar year plan is incorrect, I still feel the Appendix B 2.02(1)(a)(ii)(F) correction method is available. Appendix A .01(2) starts off with "Correction methods permitted in Appendix A and Appendix B are safe harbors. Correction methods permitted in Appendix A and Appendix B are deemed to be reasonable and appropriate methods of correcting a failure. Both Appendices set forth various correction methods that may be used to correct a failure, depending on the facts and circumstances. A Plan Sponsor may choose any correction method by which the plan can satisfy the eligibility requirements. ..."

If you are referring to the prohibited transactions excise tax, I don't know. However, if the IRS discovers a problem while the plan is under audit, that normally puts you under Audit CAP, which includes a negotiated sanction. That would be separate from any excise tax that applies.

Under Rev. Proc. 2016-51, section 2.02(1)(a)(ii)(B)(2), "elective deferral failures" include the failure to correctly implement a deferral election. The correction I cited above specifically refers to 2.02(1)(a)(ii)(B) which includes both (1) referring to not allowing eligible employees to defer and (2) referring to not correctly implementing a deferral election. So, yes, I'm sure this correction method applies here.

There is a pre-approved correction method for a brief exclusion from deferrals in Rev. Proc. 2016-51, Appendix B, 2.02(1)(a)(ii)(F). https://www.irs.gov/irb/2016-42_IRB/ar12.html

I ask their CPA how they split it for their tax returns. With employer contributions deposited during the year, about half of our clients give us K-1 numbers that are already reduced by the employer contributions for the employees. We also see a variety of methods used to allocate those costs between partners.

cdavis25, don't forget the all or nothing rule in 1.403(b)-5(b)(4)(i). Even if the <20 hours per week exclusion works initially, one mistake and they lose the ability to use that exclusion. Considering you usually discover the mistake well after the fact, that can be an expensive problem. Peter, that is interesting. I did notice the July 2016 date for that section. I've heard that once-in-always-in is included in the pre-approved 403(b) documents. For ERISA covered plans, it solves the conflict between ERISA and the 403(b) regulations. I just wonder how that will be enforced before the new documents are effective. Our current 403(b) document mirrors the regulations, which taken literally, do not read as once-in-always-in. That would be my suggestion, provided they pass 410(b) for the match.

Employees who are eligible to defer under a 401(k) Plan of the Employer can be excluded from a 403(b) under 1.403(b)-5(b)(4)(ii)(B). Does the 403(b) plan use this exclusion? If so, what are the eligibility requirements for the 401(k)?