Kevin C

The 30 day notice requirement applies to the termination of a safe harbor plan unless there is either a 410(b)(6)© transaction or the employer incurs a substantial business hardship.

The -11(g) amendment is treated as if it were adopted and effective as of the first day of the plan year. See the -11(g) quote above. So, the corrective amendment will satisfy the amendment timing rules.

Safe harbor is how the plan is satisfying the ADP/ACP requirements.

The 414(s) failure causes the safe harbor 401(k) plan to not satisfy ADP/ACP, which is the sole means of satisfying 401(a)(4). That should make it eligible for correction via an -11(g) amendment. The -11(g) rules also take care of the problem with the safe harbor amendment timing rules. The amendment is treated as if it were adopted and effective as of the beginning of the year.

I don't think failed 414(s) on the safe harbor = ADP testing. If the plan says you will satisfy ADP/ACP using a safe harbor, but the plan does not, then you have a qualification issue. In a previous thread, it was suggested this could be corrected using an -11(g) amendment to change the compensation definition for the safe harbor. From the Final 401(k)/401(m) Reg preamble:

The 50% factor also applies for the correction of a failure to implement a deferral election. There is a similar correction method for partial year exclusions.

Bird's suggestion is to true-up the match calculation. Is the same thing being done with the NHCE match? I'm also curious about how you would handle it if this person making $490,000/12 = $40,833 per month deferred $5,000 a month. He would hit $16,500 in deferrals at $163K of comp. This situation highlights one of the advantages of using a true-up on the match calculation.

What does the document say? It can be done either way. 1.401(a)(17)-1(b)(3)(iii)(B).

It seems like this might be a good question for an IRS DC Plan Q&A session.

We had a participant inquiring about hardship distributions say that payments on a maximum loan were so high he wouldn't be able to pay his bills. After a discussion of the hardship and loan rules, he requested a $1,000 loan. Most of our plans, including this one, only allow one loan. A week or two after the dust settled on the loan, we got a hardship distribution request. At that point, he already had the maximum one loan allowed.

Austin, Are you talking about relying on the employee's representation THAT a loan would increase the hardship? Or, relying on the employee's representation of HOW the loan would increase the hardship? In most cases, I have trouble seeing how a loan would increase the current hardship. I see how the future loan payments could help create a future hardship. But, that's not really what the reg is referring to. For example, the participant needs a hardship for $10,000 in medical bills. How is a plan loan going to increase that amount?

Deferrals in excess of 402(g)/401(a)(30) become catch-ups as they are deferred. Catch-ups from ADP testing for the calendar year 401(k) plan become catch-ups as of 12/31. Catch-ups from the calendar year 401(k) plan's 415 testing become catch-ups as of the end of the 401(k) plan's limitation year. Catch-ups from 415 testing for the fiscal year PS become catch-ups at the end of the PS plan's limitation year. The catch-up limit applies for the participant's taxable year, which will almost always be the calendar year. For a catch-up eligible participant, they start with the full catch-up limit on 1/1. The timing rules determine when amounts are applied towards the catch-up limit, until either the limit is reached, or the taxable year ends. The next 1/1 you start again with a new limit. With two plans having different plan years, you are looking at for 415 each plan using amounts allocated during that plan's limitation year. The catch-up timing rules tell you when the catch-ups happen, so you know which limitation year they fall in for each plan's 415 testing. Catch-ups are not counted as annual additions under 415.

You should also look at the timing rules for catch-ups in 1.414(v)-1. It spells out when amounts are determined to be catch-ups in different situations. That will help you determine which fiscal year the respective catch-ups fall in. Before I get to your revised question, when is the PS contribution allocated? The reason I ask is you are listing $39,200 of PS allocated during the fiscal year ending in 2010, but only $29,400 of PS contribution allocated during calendar year 2010. I normally see PS allocations at the end of the plan year, so I expected these amounts to be the same.

Assuming there were no fiscal year end 2009 415 issues and the participant deferred at least $5,500 during the PS plan's 2009-2010 plan year, I think: The $1,000 from the failed ADP test becomes catch-up at 12/31/2009 so it is applied towards the 2009 catch-up limit. Total allocations for fiscal year ending 2010 were $54,500, including the $1,000 2009 catch-up. That leaves $53,500 to count as annual additions for 415. The excess, $4,500, becomes catch-up at fiscal year end 2010 and applies towards the 2010 catch-up limit.

Deferrals can't be prefunded [1.401(k)-1(a)(3)(iii)], so I don't see how you can treat forfeitures as deferrals. Also, amounts withheld from paychecks become plan assets as soon as they can reasonably be segregated from the assets of the employer. If they don't deposit the full amount, it looks to me like the employer is still holding plan assets, which would become a PT. As for reporting this, there is a question on the Form 5500 about PT's. You might also want to read up on paid preparer penalties.

I'm referring to a single PS allocation formula, that by itself would be 401(a)(4) safe harbor paired with a 3% non-elective 401(k) safe harbor contribution. For example: PS contribution integrated at the TWB, 500 hours or last day worked required to receive the contribution. 3% Non-Elective Safe harbor contribution, all eligible to defer receive. Compensation for both is 415© compensation. These provisions are allowed in our standardized prototype document. Since standardized prototypes are required to only allow 401(a)(4) safe harbor allocations, either the IRS decided the combination is 401(a)(4) safe harbor, or they made a BIG mistake. Either way, the standardized prototype has an opinion letter that can be relied on with regard to 401(a)(4), because that's what the letter says. Now, take these same provisions and put them in a NS prototype or VS document. With the statements I quoted from the opinion letter and Rev. Proc. 2005-16, I read it as saying the combination is still 401(a)(4) safe harbor. Mike's position is that this combination must be general tested. So, I see two possibilities: 1. The 401(a)(4) rules on multiple formulas apply here AND the IRS made a huge mistake with the GUST and EGTRRA standardized prototypes, OR 2. The IRS decided this combination is still 401(a)(4) safe harbor.

Mike, I agree the statement in the VS opinion letter isn't as detailed as it could be. I think the description in Rev. Proc. 2005-16 is a little more precise. I'm still having trouble with the concept that a PS/3% SH combination is 401(a)(4) safe harbor using a standardized prototype, but identical provisions in a NS prototype or VS are not 401(a)(4) safe harbor.

Mike, my point is that they have done this. Standardized prototypes allow a PS formula requiring 500 hours or last day to be paired with a 3% safe harbor. I understand that the regs say doing so requires general testing. But, we are supposed to be able to rely on the plan's opinion letter that says we satisfy 401(a)(4). There is similar language in the NS prototype and, as I quoted above, the VS opinion letters. This isn't something new. Our GUST NS and Standardized prototype opinion letters had the same language.

Sieve, The issue is 1.401(a)(4)-2(b)(4)(vi). Under that, (D)(1) requires that the formulas be available under the same terms to all employees.

Mike, haven't they sort have done that by allowing the SH non-elective and PS to have different requirements in a standardized prototype? The Opinion letter for our VS 401(k) plan says "Employers that elect a safe harbor allocation formula and a safe harbor compensation definition can also rely on an advisory letter with respect to the nondiscriminatory amounts requirement under Code section 401(a)(4)." If a plan using this VS document uses an allocation formula and a compensation definition allowed under a standardized prototype, I would say they have elected a safe harbor allocation formula and a safe harbor compensation definition. After all, standardized prototypes are required to only allow safe harbor options. If you can rely on the opinion letter with respect to 401(a)(4), why would you need to general test? Of course, that doesn't help if your document is individually designed.

We split our first one late last year. The audit fees have become so high it's actually significantly cheaper to operate two plans than it is to do an audit. We routinely see audit fees that are higher than what we charge for full service administration of daily plans, and we aren't cheap.

What kind of document is it? If it's prototype or VS, what does the opinion letter say about 401(a)(4)? For example, if it's a standardized prototype and the opinion letter says you can rely on the opinon letter with respect to the nondiscriminatory amounts requirement under Code section 401(a)(4), I think you have an option 3. Option 3 being rely on the opinion letter.

If you were discussing pre 2009, I agree. If you are talking post 2009, the situation is different. The regs say "... and, if any employee listed in paragraph (b)(4)(ii)(E) of this section has the right to have section 403(b) elective deferrals made on his or her behalf, then no employee listed in that paragraph (b)(4)(ii)(E) of this section may be excluded under this paragraph (b)(4)." I don't see anything in the regs that gives you an exemption if the person is required to be eligible to defer under ERISA, or if it was by mistake. If you find out about it in time, you just get the other <20 hour people to enroll. The correction for other people only happens if you don't find out in time to allow them to defer as soon as the one ineligible person deferred. I'd love to interpret that part of the regs as applying to plan design rather than operation of the plan. But, that's not the way we are seeing the IRS interpret it. And, unfortunately, the IRS agent we are dealing with is the one who trains other agents in our region for 403(b) audits. He also speaks at some conferences. If you've found something in Rev. Proc. 2008-50 that says you can correct by refunding deferrals to the ineligible person, please let me know where it is. The document we had for the years under audit said you refund deferrals if an ineligible person is allowed to defer. The IRS agent insists that we can not do that. I spoke with one of the attorneys with the big name company that wrote the document to get him to represent our client. He wouldn't try to convince the IRS the plan provision was valid, but instead suggested we offer to correct under EPCRS by retroactively amending to allow the one NHCE in question to defer. Since this was all pre-2009, that could be done under a good faith interpretation of the rules.

Yes, when ERISA forces you to allow deferrals from someone who could be excluded under the <20 hour per week exclusion, you violate the all or none rule, so you can't use the <20 hour exclusion. If your clients are like ours, you are likely to find out this happened well after the fact. Then, they get to retroactively correct the improper exclusion of everyone else who used to be excluded for <20 hours per week.

There is another kind of plan available to non-profits that allows requiring up to age 21 and a year of service, with semi-annual entry, for deferral eligibility. And, it isn't subject to "the most insane rule I ever heard in my life". And yes, I agree that rule is insane. Just because they are eligible for a 403(b) doesn't automatically mean that is the best plan for them. Sometimes a 401(k) makes more sense.