Kevin C

Make sure you understand the actual services they will provide and what areas you are responsible for. Most of the "big fish bowls" don't provide all of the services needed for the operation of the plan. For example, are you going to be responsible for determining eligibility? calculating contribution amounts by person? identifying HCE and Key Employees? Are you required to certify their testing results? Does their contract place all the responsibility for everything on you? If you have the time and expertise to complete the services they don't provide, they may be a good fit. If not, you will likely have problems down the road. One example. One of our clients left us for one of your named "big fish bowls". They were a law firm with a deferral only 401(k) plan covering only the associates and a profit sharing plan covering everyone else. Both plans had plan years ending 1/31. The first ADP test the "big fish bowl" prepared included a space for them to sign certifying that the results were accurate and complete. They asked us to review the test for them. The test was for the calendar year and included all employees of the firm, most of whom were not eligible for the 401(k) plan. Other than testing the wrong time period and the wrong group of people, I guess the testing was ok.

Depending on how the plan got into this condition, you may have other more serious issues. How does a plan end up with the only asset being mortgaged real estate where the market value is less than the outstanding mortgage? What happened to the rest of the plan assets? Who did the plan buy the real estate from? Was the purchase price no more than fair market value at the time? Is the participant using or living in the real estate?

MJB, I agree with you. I think I have the client convinced to remove the <20 hrs exclusion going forward. But, looking at ERISA along with the regs, I've pretty much convinced myself they have no choice but to remove the <20 hours exclusion. Sieve, I still don't think it works. Employee A hires in at 10 hours/week and stays on that schedule. You would have A eligible year 1 and ineligible year 2, 3, ... Employee B worked 1,000 hours in year 1 and then goes to 10 hours/week at the start of year 2. B stays eligible in future years regardless of his hours in the preceding year. In year 3, A is ineligible and B is eligible, but both could be excluded under the regs <20 hours exclusion since they both worked less than 1,000 hours in year 2. But, the regs say if B is eligible, A must be eligible, too.

I think 1.401(a)(9)-5 Q&A 4 supports John's position. It says the rules for required minimum distributions during the participant's lifetime apply for distribution calendar years up to and including the year of death.

My concern has to do with the last part of 1.403(b)-5(b)(4)(i): I agree with Sieve that under ERISA, once you work 1,000 hours in a year, you would participate going forward. But, under the regs, the <20 hours per week determination for year 3 is based on hours worked in year 2. Suppose someone worked full time in year 1 and went to 10 hrs/week at the start of year 2. Under the regs, he would be deferral eligible for year 1 since he is expected to work 1,000 hours in year 1, eligible for year 2 since he worked 1,000 hours in year 1 and ineligible in year 3, since he worked < 1,000 hours in year 2. ERISA would make him eligible to defer in year 3. But, the regs also say that if one <20 hours person is allowed to defer, then all < 20 hours people must be eligible. We would have someone who could be excluded under 1.403(b)-5(b)(4)(ii)(E), who is eligible because of ERISA reguirements. It looks like that would mean this ERISA covered 403(b) would no longer be able to use the <20 hours exclusion. I hope I'm missing something. Sieve, your idea of differing eligibility for year 1 and later years won't work because of the quote above. MJB, your advice matches the IRS agent's advice I received recently. I will point out that the agent also said there are not any problems that can't be fixed. Their goal is to maintain the employees' tax deferred status. However, employer sanctions may apply to the correction. In our case, the eligibility issues affect a very small percentage of the population, so we should be able to self correct with no sanctions even with the issues being discovered during audit.

Oops! I was only thinking of one particular exemption. Non-electing Church 403(b)'s with employer contributions would also be exempt from ERISA.

Sieve, Do you see ERISA as requiring you to not use the <20 hours per week exclusion, or just modifying its use? I'm concerned about the part of the regs where it says that if one person in an excluded category is allowed to participate, then everone in that category must participate. We are in the middle of an IRS audit of a 403(b) where the <20 hours per week exclusion is the only unresolved issue. One of the agents involved does the training for 403(b) audits in our region. He told me that every plan he has ever audited that used the <20 hour per week exclusion has made a mistake in applying it.

If this is the only loan ever taken from the plan, why wouldn't they be able to correct using SCP instead of VCP? Even if there are few enough participants that one is a significant percentage, he is still within the SCP correction period for significant operational errors. Mark, Did they send you any paperwork with the loan check that listed a payment schedule?

If there are employer contributions, your 403(b) is subject to ERISA. The ERISA exemption is for deferral only plans that meet certain requirements. See FAB 2007-02.

Yes, you have to provide a copy of the entire document if they request it. A reasonable copying charge can apply. Penalties can apply if the documents are not provided timely. Look at the ERISA rights section of your SPD. It should say that they are entitled to request a copy of the plan document. If that isn't enough to persuade you, look at ERISA section 104(b)(4) and DOL Opinion Letter 96-14A.

Bill, that reg section has more in it than you are saying. I don't like the rules either, but they are what they are. Prior to 2006, we would have corrected by applying the excess to the next deposit. The rules are different now. I wasn't aware that EPCRS applied to "Oops, I put more money in the plan than I wish I had" situations. One thing I haven't seen addressed is whether there are any employer contributions under the plan that this deposit could be used towards. Do they fund the match each pay period? quarterly? annually? What about profit sharing? Safe harbor non-elective?

You can't use the excess towards the next pay period's deferrals. 1.401(k)-1(a)(3)(iii)© prohibits prefunding of deferrals. There is a corresponding rule for matching contributions.

The majority opinion seems to be that the qualified default investment alternative rules don't apply here because of the previous investment election. I disagree. The preamble of the final QDIA regs addresses their application after a change in service providers: The issue becomes whether or not the employer properly followed the QDIA rules. It's been a while since I've read the electronic disclosure rules, so I won't join that discussion.

If you want to see it in writing:

One way is by requesting a prohibited transaction exemption ruling from the DOL. The request includes a detailed description of what they want to do. The DOL issues an opinion about whether it would result in a prohibited transaction.

For GUST Prototypes, I was referring to Rev Proc 2000-20 section 8.03, 7.

Wouldn't that also mess up your ADP safe harbor? Why not just add a regular match in addition to the SH match and use 1.401(m)-2(a)(5)(iv) to give you more flexibility in your ACP testing? If you are not amending your safe harbor provisions, you should be able to retain the ADP safe harbor.

You can test 401(a)(4) on the basis of equivalent benefits if the plan document allows it. Note, GUST prototypes are not allowed to test using equivalent benefits.

If you are intending to have the additional match be included in the ACP safe harbor, I would say that adding the extra match is amending your safe harbor provisions during the year, which I interpret the regs as prohibiting. If you are intending to add an additional match that will be subject to ACP testing, then I would say you are not amending safe harbor provisions. For next year, add a discretionary match that complies with the SH rules to the plan along with the existing SH match.

Tom, (v) also mentions accruals under a DB plan. So, I guess that means an improper waiver would turn a DB plan into a CODA?

I think I understand why the IRS did it that way. Can you imagine trying to write regulations that would allow mid-year increases, but still prevent abuses by creative plan sponsors? It's much easier and much cleaner to just say you can't change the safe harbor provisions during the year. On your compensation proration solution, I don't see how you could do that during the year. At 6/30, how do you know what % of his total comp he has received so far if you don't know for sure what his total comp will be?

I think these provisions result from IRS concerns about potential abuses. The rationale for one of these rules is addressed in the preamble to the final regs: Sieve, In your case of starting with a 6% non-elective and then prospectively changing to 3% during the year, do you think they should still be able to keep the safe harbor if the change is made effective after the owner's comp reaches $230,000 for the year?

The PEO's we are seeing are companies that for a fee will process your payroll, benefits etc. for your employees. The paychecks are from the PEO, but the employer still controls the employees and does the hiring and firing. You are basically outsourcing most HR functions. One big advantage is that you become part of a larger group for insurance purposes. Other PEO's may be set up differently, but that is what we are seeing. A a few years ago, the IRS cracked down on PEO's that were claiming that common law employees of the participating employers were actually employees of the PEO. Each PEO set up a large single employer plan covering everyone. Now, they have to operate as a multiple employer plan. Each employer has the option of participating in the multiple employer plan or having their own plan. I've spoken with several doctors who intially said they have no employees. When you ask about the receptionist, nurses, etc. they say those are paid by *******, so they are not my employees. When you ask who hires and fires, sets salaries ..., the doctor says he does. Those doctors all used PEO's.

You will have to look to the plan document provisions for your answer. As noted, the plan could have been written to completely exclude the pre-break service in this situation. But, it was not required to do so. For example, the GUST prototypes we use allow you the option to exclude pre-break service for certain non-vested terms under the rule of parity only for determining vesting of the pre-break balance. But, it requires that all years of service apply to vesting of post-break accruals and all years of service apply for determining eligibility.

The issue is whether or not the renegotiation is treated as a new loan. If it is, then you must reestablish the reasonableness of the interest rate and that the new loan does not cause the participant to violate any loan limits. If interest rates are up since the loan was taken and account balances are down, things could get interesting if you have to treat the changes as a new loan. I was referring to item 1.c. on page 7.241 of the 2006 version of Sal's book.