Kevin C

1.401(a)(31)-1 Q&A 1 looks relevant.

I have trouble seeing how eliminating cross testing will cause mass plan terminations in the small/micro plan market. I'll buy reduced employer contribution levels, but not plan terminations. With a safe harbor match, an age 50 owner with $245,000 in compensation can defer $22,000 and receive a $9,800 match. The employees only receive the SH match. In our clients' plans, the SH match averages less than 3% of covered payroll, but let's assume it is 3% on average. So, the owner gets $31,800 and the employees get 3% of pay on average. If the owner hires his/her spouse, it gets even better. Either way, it's still a lot better than an IRA. And, it wasn't that long ago that the 415 limit was $30,000.

Since you brought out the SOAPBOX, this bill may be the least of our worries. Did anyone else see the Government Accountability Office report in the Benefitslink news section about three months ago? http://www.gao.gov/new.items/d09642.pdf The report discusses alternatives to our pension system. There is a summary of what they consider the four main alternatives on page 74 of the .pdf (page 69 of the report). Two of the alternatives amount to a direct government takeover of the private pension system. One alternative includes government management of the pension system. The other option replaces 403(b) and 401(k) plans with a Super Simple Saving Plan. A government agency is running simulations on a government takeover of the private pension system. Now, that's scary.

The cross testing ban gets all the attention, but the bill also includes a provision that only vested contributions for NHCE's would count under 401(a)(4). That seems an underhanded way to require 100% immediate vesting. We have a number of clients who feel strongly that a vesting schedule is a critical part of what they want their plans to accomplish. They use the vesting schedule to provide a huge incentive for newer employees to stay.

It would depend on what the document says. Our EGTRRA documents allow an option to have it be "As designated under the Salary Reduction Agreement or other written procedures adopted by the Plan Administrator."

The plan should have language about when participants can make changes in their deferral elections.

I don't recall any additional guidance in the year since my post. I tend to be conservative with my interpretations where the guidance isn't clear-cut. You are welcome to follow your own interpretation. Will your QDIA possibly have reinvested interest, dividends, capital gains, or proceeds from investment related lawsuit settlements? The required content of the notice contains information that is useful to terminated participants who never made an investment election for all or part of their balance. I'd rather be safe and send them the notice.

Even if they have a determination letter, the letter only applies to the form of the plan document. A determination letter will not bless the stock purchase. They still have operational issues and PT issues to deal with as outlined in the IRS memo.

If the plan's termination date is in 2009, I agree those with zero balances would not be participants at 1/1/2010. The plan's deemed cashout language for those with zero balances may not address the situation. But, they are eligible for a distribution on the termination date and are not entitled to any future payments. I'd say that means they are considered as paid on the termination date.

Don't forget that if any HCE's are eligible under both plans, you will have to count their combined deferrals and match in both plans when you test separately. See 1.401(k)-2(a)(3)(ii) & 1.401(m)-2(a)(3)(ii).

The term in the final regulations is "alternative defined contribution plan". A profit sharing plan would be an alternative defined contribution plan, so it can't be established until a full year after the final distribution of assets from the 401(k).

Look at the plan's definition(s) of compensation. It should tell you. Our documents say to use compensation actually paid during the period.

One Trustee's refusal to act will jeopardize the qualified status of the plan. I think the other Trustee has an obligation to act to protect the participants, regardless of what the plan and/or trust documents say.

The plan document language determines what the match is. Of course, if they want to be a QACA SH, the plan provisions must comply with the safe harbor regulations. If any eligible NCHE receives less match than this, they are not SH. Deferring 6% of compensation results in a 3.5% of compensation match. Your client's understanding of the match would not comply with the SH rules. 1.401(k)-3©(4) says the match for an HCE can't be any higher than the match provided to an NHCE at the same deferral level. That would cause a problem if there were higher match levels for those with longer service. One other issue. It sounds like the SH notice didn't accurately describe the QACA SH matching contribution. If the plan document is set up to be QACA SH, then you have an operational failure because the notice requirements were not followed. Of course, we have no guidance on how to correct this specific failure. I would start by looking to see how many of the new participants each year elected to defer 3%. That will give you an idea of whether or not the incorrect notice affected the new participants' deferrals levels.

Here is an excerpt from the PLR I referenced.

Here is a section from the preamble to the revised final regs published 2/24/2009.

Doesn't the uniformity requirement in 401(k)(13)©(iii) require the same default deferral rate and increase structure to apply to all participants who have not made elections? And, don't forget the limits on HCE matches in 1.401(k)-3©(4) still apply. I'm not sure how you would make it work unless you are just using two different formulas for the QACA match. Even then, all of the HCE's would have to receive the lower match. But, I've always thought the QACA automatic increase requirement was reason enough to avoid using a QACA.

I think that approach works, but I am not sure if it is the only option.

Even if coverage testing doesn't initially pass with two plans, the permissive aggregation rules of 1.410(b)-7(d) may allow you to keep the plans separate, but test them together.

This cite would not make any sense if they were required to be excluded from plans. If you have a prototype document handy, look at the choices for defining eligible employees. I don't remember ever seeing one that did not allow the inclusion of non-resident aliens with no US source income. It's older, but PLR 8144028 has a discussion on the topic.

You will want to look at 1.411(d)-3 and 1.411(d)-4. The de minimis timing change rule in 1.411(d)-4, Q&A 2 (b)(2)(ix) will help if you can live with changing the timing by no more than two months. It's six months for in-service distributions.

There is an anti-cutback rule exception that will help. A defined contribution plan can eliminate an optional form of payment if it continues to provide for a lump sum distribution that is otherwise identical to the optional form of payment being eliminated. See 1.411(d)-4, Q&A 2 (e). If the LS distribution is literally payable on the first MRD due date, but the annual installment is payable at any point during the year, it won't work. The LS timing has to be identical to the timing of the first installment under the optional form of payment being eliminated.

If they don't fit into any of the allowed exclusion categories, they must be allowed to contribute. If you don't give this group any communications about the plan, I think you have a problem with effective availability of the deferrals (see 1.403(b)-5(b)(2)). We had a recent IRS audit of a client's 403(b) plan where the agent said that anyone who was eligible but did not receive the enrollment package was improperly excluded from the plan. And, don't forget the all or nothing rule now in effect for the statutory exclusions. See 1.403(b)-5(b)(4). If they make a mistake and let one person defer who could be excluded under one of the stautory exclusion, they lose the ability to use that exclusion. You did not mention if this was an ERISA covered plan. It appears that an ERISA covered plan can not use the <20 hour per week exclusion. For those that are not competent and have guardians, I would expect the paperwork to go the guardian.

The housing allowance does not count as Section 415© compensation. See 1.415©-2(b) and note the phrase "to the extent that the amounts are includible in gross income ...". But, you are not required to use 415© compensation to allocate contributions. The compensation definition used to allocate contributions does not even have to satisfy 414(s). Discrimination testing must be performed using a compensation definition that satisfies 414(s). See 1.414(s)-1(a)(2). Section 415© compensation is a 414(s) safe harbor compensation definition, but there are other ways to satisfy 414(s). What definition of compensation does the plan use for determining contributions?

Take a look at Examples 5 & 6 in 1.414(v)-1(h). They both deal with non-calendar year plans. Here is a similar post: http://benefitslink.com/boards/index.php?showtopic=38597