Kevin C

Sounds like we use the same auto-rollover provider Larry does. They also accept auto-rollovers of less than $1,000. All of our plans that auto-roll apply it to all balances under $5,000. That takes care of the problem of terminated participants with a small balance who disappear.

If you are looking for a document provider with a pre-approved ESOP, ASC, FIS and FT William and possibly a couple of others have them. The IRS has a list of the cycle 3 document sponsors on their website. If you are looking for a firm that is sponsoring an ESOP document from one of the document providers, they are also on this list. If you look at the FFN for a document on the list, characters 8 and 9 tell you which document provider's document they are using. ASC = BH, FIS = 07 and FT William = FT. https://www.irs.gov/pub/irs-tege/ppa_listdc3.pdf You can get some of the other sponsorship lists here: https://www.irs.gov/retirement-plans/list-of-preapproved-plans

Will the new company be part of a controlled group or affiliated service group with the existing company? There is an exception to the 3 month initial plan year requirement for a "newly established employer". But, note that the term "employer" under the 401(k) regs includes members of a controlled group or affiliated service group. I don't think the new entity would be a "newly established employer" if it is part of a CG or ASG with a pre-existing employer. The definition of successor plan uses the same definition of "employer" from 1.401(k)-6.

With prior cycle documents, we've given clients who terminated after the new documents were available, but before the restatement deadline, the option of either restating or terminating with an amendment (using the termination amendment from our document provider). Most of them chose to avoid restating. In the OP situation, I would have the client adopt a termination amendment.

I agree with this description of what the seller could have done prior to the sale and that more options would have been available prior to the sale. But, the transaction the OP describes has already happened. First of all, the IRS has never issued guidance dealing with mergers of safe harbor plans. 1.401(k)-3(i) was originally reserved for it. But, it just says Reserved. For those who think 1.401(k)-3(e)(4)(ii) doesn't apply after the transaction has taken place, what do you see that indicates this is only available before the transaction? With no guidance available, our only choice is to use a reasonable, good faith interpretation of the code and regs. Let's change the OP situation a little. Suppose after A closes on the stock purchase of B, that A terminates Plan B shortly thereafter. Plan B will have a short final year due to the plan termination and it looks to me the termination was in connection with a transaction described in 410(b)(6)(C). So, under 1.401(k)-3(e)(4), it can be safe harbor for the final year. But, wait. Under 1.401(k)-1(d)(4), Plan A is considered to be an alternative defined contribution plan of the "employer" as of the date Plan B is terminated. That means the plan B termination is not a distributable event. So, what happens to the balances of the active participants in Plan B? While the regs don't directly address it, if Plan B is going away and you can't distribute the balances of the active participants, I don't see any option other than merging their balances into Plan A. I don't see anything in 1.401(k)-3(e)(4)(ii) that says it doesn't apply if any of the balances can't be distributed due to the plan termination. So, I don't see that it is affected by the balances going to Plan A after the plan termination. The big question is do you get the same result in the very similar situation of Plan B being merged into Plan A after the stock purchase? With no guidance on merging SH plans, it's a judgment call.

If this was easy, everyone would be doing it. Thanks for the reminder to look at the examples.

No, they both elected to defer the same percentage of "compensation" under the plan's compensation definition specified for salary deferrals. Safe harbor compensation is the compensation used to determine the safe harbor match. There are different rules for the compensation definition used for salary deferrals. In your example, safe harbor compensation excludes bonuses and the compensation definition for salary deferrals includes bonuses. See the description of the basic SH match in: As mentioned before, the safe harbor compensation definition must satisfy 414(s). The compensation definition used for salary deferrals only has to be a reasonable definition of compensation within the meaning of §1.414(s)-1(d)(2).

The limitation in 1.401(k)-3(c)(4) compares HCEs and NHCEs who defer the same percentage of safe harbor compensation. You are comparing two individuals who are deferring the same percentage of the compensation definition used for deferrals. Those two compensation definitions are not required to be the same. Assuming that base pay meets the requirements to be safe harbor compensation, in your example, they are not both deferring the same percentage of safe harbor compensation. The HCE is deferring $5,200 with safe harbor compensation of $130,000, which is 4.0% of safe harbor compensation. The NHCE is deferring $5,200 with safe harbor compensation of $120,000, which is 4.33% of safe harbor compensation. If the NHCE in your example deferred $4,800, they would both be deferring the same percentage of safe harbor compensation. The NHCE would receive a $4,800 match and both would be receiving a 100% match. (5,200 / 5,200 = 100% and 4,800 / 4,800 = 100%). Of course, if the two in your example are the only two participants, base pay would not satisfy 414(s) and a different compensation definition would have to be used for safe harbor compensation.

As mentioned, the safe harbor compensation definition used to determine the safe harbor match must satisfy 414(s). 1.401(k)-3(b)(2). You will have to test each year to see if the compensation definition excluding bonuses satisfies 414(s). If it doesn't, a correction is needed. Our VS document automatically changes the safe harbor compensation definition to gross comp if the definition used doesn't satisfy 414(s). The safe harbor regulations address the compensation definition used for deferrals in So, it is possible to have the compensation definition for deferrals be different than the safe harbor compensation definition used to determine the safe harbor match. There are other requirements for restrictions on the amount NHCEs can defer in the other parts of 1.401(k)-3(c)(6). The cited restriction on HCE match in 1.401(k)-3(c)(4) compares the possible rates of match (match / deferrals) for HCEs and NHCEs who defer the same percentage of safe harbor compensation. Unless you have a really unusual safe harbor match formula, the safe harbor match should be determined using the amount of the participant's deferrals and his/her safe harbor compensation. With a typical safe harbor match formula that applies to everyone, I'm not seeing how you could have different rates of match for participants who defer the same percentage of safe harbor compensation.

A SH plan terminating mid-year remains safe harbor for the short final year if the termination is in connection with a 410(b)(6)(C) transaction or the employer incurs a substantial business hardship. If you don't meet one of those criteria, you have to satisfy the rules for reducing or suspending the SH contribution in 1.401(k)-3(g), which means it is not safe harbor for the short final year. You said he isn't planning to sell his business. Will he be selling the assets of the business? See 1.410(b)-2(f). If not and the SH is important, he should consider terminating at the end of the year.

Amendments for SECURE and CARES are both due by the end of the 2022 plan year (2024 for governmental plans). So, EVERY plan will be amended, regardless of their choices on CRDs. I expect our document provider to include provisions for both laws in the same interim amendment. The question really should be "will this need to be reflected in the 2022 interim amendment?". To answer that, we'll have to wait until our document providers release their interim amendments. With our document provider, if it does go into enough detail to include this, it should be just a matter of checking an extra box in the amendment. That would mean the employer has to sign the interim amendment rather than having it adopted by the document sponsor. But, I don't see that as significant enough to drive an employer's decision about what to do with withholding for qualified individuals.

Maybe. Does your plan document specify the withholding rules that apply to each type of distribution? Our 401(k) VS document doesn't. Unless the IRS gives us guidance otherwise, I wouldn't expect a procedural change to something that isn't addressed in the plan document to require an amendment. If the withholding change is contrary to your document language, I would expect an amendment to be required. However, my point was that a plan is not required to implement other CARES Act provisions before the plan can treat distributions to qualified individuals as CRD.

It depends on what you mean by implementing CARES Act Provisions. A plan that has not adopted any of the additional distribution options available under the CARES Act can, but is not required to, choose to treat distributions to qualified individuals as COVID related distributions, as long as it is applied consistently. What does the plan want to do? Notice 2020-50, Section 2C: https://www.irs.gov/pub/irs-drop/n-20-50.pdf

Actually, the rules apply based on the amount of the distribution. It looks to me like the distribution amount in this case would be $970. As noted, if the market goes up and the distribution ends up being more than $1,000, it gets auto-rolled. We use an auto-rollover IRA provider that accepts amounts under $1,000 and have the auto-roll provision apply to all distributions not in excess of $5,000, so we don't have this issue.

If the goal is to stay safe harbor, then the amendment can't be done mid-year. If they did the "maybe not" safe harbor notice, they can amend mid-year to change the SH Match from a plan year calculation to strictly payroll-by-payroll. However, doing so is a reduction in the safe harbor match, which puts you under the rules in 1.401(k)-3(g). Since you are talking theoretical, if the plan was safe harbor in the prior year, it can be amended to have a short plan year and start with a payroll-by-payroll match formula at the beginning of the new plan year. With the short plan year, it isn't a mid-year amendment. The plan is safe harbor for the short plan year if it satisfies 1.401(k)-3(e)(3). I doubt it would be worth the trouble, but it is possible.

I had a similar situation a few years ago. The conclusions I reached from the regs and code were that the refund does get reclassified as catch-up as of the end of the plan year, but that does not reduce the amount the participant can defer for the calendar year. Our valuation system treated it the same way. Using your numbers: $6,500 of the refund is reclassified as catch-up as of 4/30/20. The plan's determination of catch-up does not affect the participant's maximum deferrals [see 402(g)(1)(C)]. So, the catch-up eligible participant can still defer $26,000 for calendar year 2020. If the catch-up eligible participant defers $26,000 from 5/1/20 - 12/31/20, all $26,000 of it counts in the 4/30/21 ADP test since the plan has already used the entire $6,500 of 2020 catch-up for that participant as of 4/30/2020.

Maybe. When the IRS reversed course and allowed forfeitures to be used towards safe harbor contributions, our document provider advised that a plan providing that forfeitures increase allocations to participants needed to be amended before participants have satisfied the allocation conditions for receiving the allocation of forfeitures to avoid a 411(d)(6) violation. Depending on the plan terms and the timing of when the non-vested balance was supposed to be forfeited, 411(d)(6) may be an issue.

The SECURE Act put the restriction into 401(k)(12)(F). I don't think the IRS has the authority to change it. However, if they haven't stopped the SH match yet and are willing to change plan years, they can switch to the SHNEC after the short plan year. Under 1.401(k)-3(e)(3), they can stay safe harbor for the short plan year if they are safe harbor for the plan year before it and the 12 months after it. It doesn't require that they be the same safe harbor for all of those plan years. If they already stopped the SH match, they can change plan years and be SHNEC going forward as long as the first SHNEC plan year is 12 months.

I think it would depend on what the document says. Our current VS 401(k) document says this:

I don't think we are ever going to agree on this. The preamble to the final 415 regs addressed the issue with deferrals: I read that as confirming that the participant's deferral election can apply to compensation amounts in excess of the 401(a)(17) limit. But, it doesn't say the same thing about the match. The plan document's match formula will say which compensation is used to determine the match. If you use compensation in excess of the 401(a)(17) limit to calculate the match, you have violated 401(a)(17).

I would change that slightly. To recharacterize the entire ADP correction amount as catch-up, it must be less than or equal to the unused portion of the catch-up limit for the calendar year in which the plan year ends, as of the last day of the plan year. For example, if the catch-up eligible participant defers $26,000 in January 2020, you can't recharacterize any of the 4/30/2020 ADP correction as catch-up because the participant has already used up the entire 2020 catch-up limit before 4/30/20. While that kind of situation may be rare, I have seen it happen.

You are both assuming that the OP's document contains language that addresses the issue, but I read the original description as saying it doesn't. I would be surprised if the document doesn't address it, unless perhaps the document was provided by a payroll company. The bottom line is that you have to allocate the match the way the document says it is allocated. The problem formula would be one that provides that the match for each pay period is determined solely by deferrals and compensation for that pay period, with no exceptions. With such a plan, once you have used $285,000 of compensation to determine match for 2020, how do you allocate additional match to that person for 2020? If you use compensation for a later pay period, you are using compensation in excess of $285,000 to determine the match. If you consider compensation for prior pay periods, you aren't following the terms of the plan. I always recommend to clients that their document have the match be determined based on the plan year. Our VS document gives the employer the option of depositing it during the year. For those who deposit during the year, we true-up the match each time the match is calculated. If you don't use some sort of true-up, then two people with the same compensation and the same deferrals can have a different match depending on the timing of their deferrals.

When $3,000 of deferrals are recharacterized as catch-up at 4/30/19 due to the failed ADP test, that also reduces the regular deferrals from 1/1/19 - 4/30/19 that count towards the 402(g) limit by $3,000. The end result is that the participant still gets to defer the full 402(g) limit plus the catch-up limit for the calendar year. To me, that result makes sense because the individual's maximum deferral is not affected by the plan's determination of the catch-up [see 402(g)(1)(C)]. A calendar year plan is a little different because a participant who defers $25,000 in 2019 has used up all of the 2019 catch-up limit before the end of the year. 402(g) triggered catch-ups are not used in the ADP test. Also, if there is a refund due, the full catch-up limit has already been used, so none of the refund can be recharacterized. With the participant having $6,500 recharacterized as catch-up at 4/30/20 from a failed ADP test, that means all of the participant's deferrals from 5/1/20-12/31/20 are included in the PYE 4/30/21 ADP test. The participant still gets to defer up to $26,000 for calendar year 2020.

No. The ADP failure at 4/30/2019 causes $3,000 of his 2019 deferrals from 1/1 - 4/30/19 to be classified as catch-up as of 4/30/19. So, as of 4/30/19, the participant has $5,600 of regular deferrals and $3,000 of catch-up. The next $ deferred in calendar year 2019 are regular deferrals until another $13,400 has been deferred. At that point, the participant has $19,000 of regular deferrals and $3,000 of catch-up. The next $3,000 deferred for 2019 is catch-up. At the end of the calendar year, the participant has $19,000 of regular deferrals and $6,000 of catch-up. For the deferrals from 5/1/19-12/31/19, $13,400 is regular deferrals (and counts in the PYE 4/30/20 ADP test) and $3,000 is catch-up. The timing rules in 1.414(v)-1(c)(3) will tell you when certain amounts become catch-up. Examples 5 & 6 in 1.414(v)-1(h) deal with fiscal year plans.

You are mixing sections from the site. This only refers to stopping deferrals when the compensation limit is hit, not the match. The section before it is very clear that you have to follow the plan's match formula. Our VS base document allows for a discretionary match equal to the true-up contribution that would have been required if the match was based on annual compensation. The document language makes it very clear that this applies to all eligible participants. What you are describing is a true-up that only applies to those over the 401(a)(17) compensation limit. Like most things in this business, it boils down to "what does the plan say?" The difference between true-up and no true-up can also affect those under the compensation limit. The easy way to avoid those issues is to use a true-up.