John Feldt ERPA CPC QPA

Depending on the facts and contribution types in the plan, perhaps they would agree with a conversion a 457(b) for the deferral portion of the plan and to a 401(a) for the employer contributions. Or better yet, was the plan adopted and in effect before May 6, 1986?

If some NHCEs receive zero allocations, they are treated as excluded from the plan, so be sure you aren’t inadvertently violating the maximum age/years of service exclusion. For example, if the decision is made to only allocate to participants with five years, then the plan isn’t meeting the requirements unde IRC 410(a).

A pension plan, subject to IRC 412 provided a timely 204(h) notice in January 2018 stating the plan will be frozen, no more benefit accruals, effective March 31, 2018. The amendment was provided to the employer at the same time with a March 31, 2018 effective date. We just received the signed amendment back, and it was not executed until May 10, 2018. How is this amendment treated? As freezing the plan on its date of execution, May 10, 2018? Or is the amendment treated as not in effect? What additional action should be taken?

This is informal guidance taken from the IRS website link shown in the above post. Some may argue that it is not required to be followed (at your own risk). Correct deferrals finally begin by the first payment of compensation made on or after the earlier of: The last day of the second plan year after the plan year in which the failure first began for the affected employee, or the last day of the month after the month the affected eligible employee first notified the plan sponsor; and Within 45 days of being given the opportunity to make salary reduction contributions (or the commencement of auto-enrollment contributions), the affected participant must receive a special notice. See Appendix A.05(9) discussed in Rev. Proc. 2016-15 for details as to the specific content that must be in this notice. If the participant terminates employment before the notice is provided, then this requirement has not been met.

Yes, and if the IRS agent's manager disagrees (only Eligible Employees can have an entry date), you just negotiate the smallest possible sanction under audit cap.

From Rev Proc 2016-51: Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan’s minimum age or service requirements, or (ii) has completed the plan’s minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. Depending on the IRS agent that audits the plan, you could have an issue. Some agents are very strict about this and say that the language above is very specific about age or service or entry dates, and is not applicable to correcting an excluded class. Perhaps the employer should think that over and consider the option to refund the deferrals and placing any ER allocations in a suspense account?

Ask your document provider to be sure. They may have a different answer for cash balance vs a DB plan that is already on their preapproved document.

Takeover of an existing 401(k) plan on a vol sub document. The plan has 500 hours but no last day requirement for its discretionary pro-rata profit sharing formula. The owner's spouse has a business with no employees, just self-employed, but is not a participating employer in the plan. They are a group under common control, they do not meet the spousal exception. They want to add the spouse's business to the plan as a participating employer, but want the profit sharing allocation under that business to be a different percentage. Meaning the plan sponsor can allocate X% but the newly added employer could allocate Y%. Issues?

I can't speak as to whether or not it increases the likelihood of an audit, but I am not much of a gambler. More often I've seen PBGC audits of terminated plans rather than IRS audits of terminated plans. If it is a cash balance plan, I highly recommend either restating to the pre-approved document prior to termination, or submit to the IRS under form 5310. For example, I have seen a few agents question the definition of accrued benefit in a cash balance plan as they do not find the existing definition to be written exactly as their manual describes.

There is no cite because there is no requirement that any plan be restated upon termination. They can choose to restate and it may be very wise to restate, but the IRS does not require wise choices.

A SIMPLE automatically covers all of the employers of the controlled group. Check the language in the document about who is considered to be the employer and the language should be found there.

If this is attempted with a qualified plan you’d have to look at IRC 410(a). Regardless of having the allocation apply only to the NHCEs, if it’s based on 5 years of service, you may have violated 410(a) if the other NHCEs under 5 years get zero PS. Or is the plan established to only cover the one NHCE? 409A could only cover top hat employees - would they be in that group? Maybe the short-term deferral solution is the best option to fit their goals.

Okay. The difference being that 411 prevents you from cutting back, and likely the plan document has some buried language in there that provides for the prevention of such a cutback. 411 does not prevent you from adding extra benefits.

In your example, 411 protects the allocation rights, but amending to put each person in their own rate group is still not a problem as long as the resulting allocation allocates comp to comp for that year. No cutback. But we're not talking about a discretionary profit sharing issue here. If the plan has promised, under its terms, to provide a safe harbor match, then somehow also adopts an amendment that promises a 3% nonelective for the same year, are you saying that 411 does not apply to protect the 3% for those participants? I agree that under VCP anything might be possible if you have good facts and circumstances to present. I also agree that the 3% promise is not a correctly implemented safe harbor provision as described, it has all kinds of problems there. But upon audit by the IRS, I hold little hope for success that we can just tell the IRS agent to just ignore that amendment, that the employer has zero obligation to fund that. Are there really any IRS agents that would allow such language to be ignored?

Also, with the change in tax rates starting in 2018, the company may have chosen to make a much larger contribution for 2017. For example, an extra $100M contribution for 2017 could reduce the corporate taxes by $35M for 2017, but that same $100M contribution, if made for 2018, might only reduce the 2018 corporate taxes by $21M. If they had the cash available to do that, it makes a lot of sense tax-wise.

Larry, maybe they don’t have the enrollment materials coordination done yet with their recordkeeper. Or perhaps they want to roll it out after a scheduled company-wide enrollment party. meeting.

Some interesting ideas here. Some make it sound like you can ignore adopted plan language under the argument that the adoption of those provisions were done in a way that did not fully satisfy the law or regulations. Have any of you had success arguing to an IRS agent, upon audit, that the plan sponsor can ignore the benefits promised by an amendment they adopted because the amendment without the proper timing or without the proper notices? If not, have you had success with that argument under a VCP application?

You could amend the plan to exclude these non-key HCEs from all aspects of the plan. Next plan year they’ll have no deferral options, but they will not be required to receive any employer contributions either.

You may want to look over some of this. It says, for example, 415 and vesting rules differ (I assume that means the document language would likely fall outside that of a pre-approved document): https://www.irs.gov/irm/part7/irm_07-011-006

OP said: "401k plan has an enhanced safe harbor match of 100% up to 6% of compensation." My understanding of 401(k)(12) is that this matching formula means the plan is not subject to ADP testing (assuming notices are provided timely and the contributions are timely made, etc.). I don't see where the regulations say that the added extra match eliminates the ADP safe harbor, even if the extra match is based on deferrals over 6% and tiered. Yes, the ACP safe harbor is certainly not met and BRF testing is needed. What part of the 1.401(k)-3, ADP test safe harbor, am I not interpreting correctly? For example, my understanding was that you could write in a safe harbor match of 100% of 8% of pay and still be ADP safe harbor, just not ACP safe harbor.

Have your tax preparer look at Form 5329 to see if you might be able to at least avoid the 10% excise tax, if applicable. edit: typo

Okay, perhaps hoping to stoke up those fireworks each time would be having too much fun at work. I really enjoy fireworks though.

They are doing QACA match. That gets you out of the ADP test. On top of that, they want to match an extra 0% from 0% of pay deferred to 7% of pay deferred, then match 50% on deferrals from 7% to 10% of pay deferred. That subjects the match to ACP testing. You test all of the matching contributions under ACP, including the QACA match. Alternatively, you are permitted to exclude the first 3.5% of pay matched from that ACP test, see 1.401(m)-2(a)(5)(iv): (iv) Matching contributions taken into account under safe harbor provisions. A plan that satisfies the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must satisfy the requirements of this section because it provides for employee contributions for such plan year is permitted to apply this section disregarding all matching contributions with respect to all eligible employees. In addition, a plan that satisfies the ADP safe harbor requirements of § 1.401(k)-3 for a plan year using qualified matching contributions but does not satisfy the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for such plan year is permitted to apply this section by excluding matching contributions with respect to all eligible employees that do not exceed 4 percent (3 1/2 percent in the case of a plan that satisfies the ADP safe harbor under section 401(k)(13)) of each employee's compensation. If a plan disregards matching contributions pursuant to this paragraph (a)(5)(iv), the disregard must apply with respect to all eligible employees. But you might see a better ACP test result by testing all the match together.

Well, that does sound a lot like multiemployer plan language being added, and if it actually is a multiemployer plan, they cannot rely on that document's pre-approved opinion letter or advisory letter.

Revenue Procedure 2016-51 removed the term "rolling" and the requirement is stated as follows: Under this safe harbor, no QNEC for the missed elective deferrals is required provided that the following conditions are satisfied: (a) correct deferrals begin no later than the earlier of (i) the first payment of compensation made on or after the three-month period that begins when the failure first occurred for the affected eligible employee or (ii) if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification; (b) notice of the failure that satisfies specified requirements in new section .05(9)(c) of Appendix A of Rev. Proc. 2013-12 is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and (c) corrective contributions to make up for any missed matching contributions are made in accordance with timing requirements under SCP for significant operational failures (described in section 9.02 of Rev. Proc. 2013-12) and are adjusted for Earnings. See section 9.04 of Rev. Proc. 2013-12.