John Feldt ERPA CPC QPA

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.

Your document probably allows you to disaggregate, and it's likely a plan administrator choice. So if the under 21/1 group could help your results by including them in the cross-testing, you could bring them all in to the test and they all get the minimum gateway. If that does not produce better results, they can disaggregated, and as Tom indicated, they are part of their own test (likely on a contributions basis which requires no gateway).

Or, perhaps it could be better to ask that new 'spouse' to waive their rights in favor of the prior children. Could it be better for the business owner to find out now if fireworks will be the result, than to find out later on other perhaps much more important issues than just the money in the plan? Boy, this sure would be a fun/memorable topic to consult with sponsors each time you take over a plan or start up a new plan!

For example, if a plan has 5 participants and they just now realize that they did not fund the 2016 safe harbor, they are still within the 2 year period to correct a significant failure under SCP. Can they do that by making those SH contributions now, plus missed earnings? I would argue yes. Anyone disagree?

ACP and BRF

Nonelective is correct.

Other than the Church exception

Is that new? It states it was updated January 2018. I wonder which conditions they are saying can't be met. I have heard ERISA attorneys suggest that perhaps it would be sufficient to provide the notice and have it state that to make up for the missed deferrals, they save more outside the plan since they are no longer employees. The IRS website (unofficial guidance, I know) is indicating that type of notice is not an option?

Okay, I see in A-6, it states: "In the case of annuity distributions from a defined benefit plan, if any portion of the employee's benefit is not vested as of December 31 of a distribution calendar year, the portion that is not vested as of such date will be treated as not having accrued for purposes of determining the required minimum distribution for that distribution calendar year. When an additional portion of the employee's benefit becomes vested, such portion will be treated as an additional accrual." Thank you!

In 2016, 2 years before the plan was adopted.

A brand new DB plan is started 2-1-2018, plan year ends 1/31. It excludes years of service prior to 2-1-2018 for vesting purposes. Vesting is a 3-year elapsed-time cliff. One participant is also a 20% owner and they are 71 years old now. The owner becomes fully vested on 1/31/2021. The first RMD is the accrual on 12/31/2018, but it is not vested, so it gets added to the next year's RMD. The second RMD is the accrual on 12/31/2019 plus the prior unpaid (nonvested) RMD, but it is still not vested, so it gets added to the next years' RMD. The third RMD is the accrual on 12/31/2020 plus the prior amounts, but it is still not vested, so it gets added to the next year's RMD. By 12/31/2021, the participant must take the distribution of their RMDs. They terminate in 2021 and elect a lump sum payment. The RMD for a full lump payment can be calculated using the "Account Balance" method (like a DC plan). Can all of these RMD's be determined using the account balance method, or must the 3 prior year's RMDs be based on the DB annuity calculation method?

post probably meant "no owners"

CPA may be correct, maybe not. Perhaps a legal opinion from an ERISA counsel can settle things. You could show them Derrin Watson book, Who’s the Employer, as a starting point.

To place the plan into a form that satisfies coverage, the regulation is saying that the plan should adopt an amendment under -11(g) to state something like this: Resolved, for purposes of satisfying IRC 410(b) for the plan year ending December 31, 2017 for Plan 2, the NHCEs of Employer 1 shall become Eligible Employees for purposes of elective deferrals under Plan 2 solely for 2017 and a QNEC will be allocated to each such affected Participant equal to the product of A) such Participant's Compensation and B) the actual deferral percentage for the plan year for the group of NHCE Participants who are Eligible Employees with Employer 2. And with that in place, the written plan requirement is satisfied for being able to use -11g for a coverage failure. This places us into the debate about the literal interpretation, see 1.401(a)(4)-1(a) "In making this determination intent is irrelevant. This section sets forth the exclusive rules ..." vs. the subjective interpretation under 1.401(a)(4)-1(c)(2) that you quoted above. Since this is a coverage issue rather than nondiscrimination, does that help us? In the Carol Gold memo, the issue was covering short-service low paid employees. Let's argue that this hinges on the subjective interpretation of -1(c)(2). Let's analyze the statement: "The provisions of §1.401(a)(4)-1 through §1.401(a)(4)-13 must be interpreted in a reasonable manner consistent with the purpose of preventing discrimination in favor of HCEs". As stated, all of the HCEs in plan 2 will get their deferrals refunded because the prior ADP is 0%. So, with or without a 0% QNEC, where is the discrimination? If a $1, $10, $100, or $1000 QNEC was provided, how does that change the "discriminatory" nature of the plan?

Yes, I am aware that the 50% (or less) QNEC does not apply. The reference to 'substance' by the regulation is in the header of 1.401(a)(4)-11(g)(4). This seems similar to the header to -11(g) which is "corrective amendments" but nowhere in the body of the requirements does the IRS say that a failure must have occurred in order to apply -11(g). I know I may be stretching things there, but the requirement of 1.401(a)(4)-11(g)(4), other than the BRF section, is this: A corrective amendment is not taken into account in determining whether a plan satisfies section 401(a)(4) or 410(b) to the extent the amendment affects nonvested employees whose employment with the employer terminated on or before the close of the preceding year, and who therefore would not have received any economic benefit from the amendment if it had been made in the prior year. The NHCEs in the Plan 1 are incented to defer due to the safe harbor match. The deferrals for the HCEs in Plan 2 will be refunded since the NHCE ADP was zero. In these circumstances, what actual substance is required by these rules, which are designed to prevent discrimination in favor of HCEs?

Controlled group: 2 employers with their own 401(k) plans. No Profit Sharing. 401(k) coverage for 2017 fails. Plan 1 is safe harbor match, covers only 1 HCE and a lot of NHCEs. Plan 2 is not safe harbor, has no match, no PS, but covers 5 HCE owners and 1 NHCE, prior-year tested. The plans fail ratio percent test (result is under 10%). The plans cannot be aggregated for coverage testing. Seem that plan 2 needs to open up coverage to some of the plan 1 NHCEs by providing QNECs to until enough NHCEs are above the safe harbor percent and then run ABT. That QNEC is based on the 2017 ADP for the NHCEs in plan 2. The problem is that the NHCE in plan 2 did not defer in 2017, so the NHCE ADP for 2017 for plan 2 is 0% and thus the QNEC is 0%. Therefore, is there a reasonable argument that no action is needed for plan 2 to pass coverage for 2017? Note: the NHCE ADP in 2016 was also zero.

Revenue Procedure 2016-51, Appendix A.05(a): Safe harbor correction methods for Employee Elective Deferral Failures in § 401(k) plans or 403(b) Plans. (a) Safe harbor correction method for Employee Elective Deferral Failures that do not exceed three months. Under this safe harbor correction method, an Employee Elective Deferral Failure (as defined in section .05(10) of this appendix ) can be corrected without a QNEC for missed elective deferrals if the following conditions are satisfied: (i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;

Yes, that should be a standard part of the process. To be a QDRO, you have to be able to determine the amount. I agree with Larry. It's okay to reject the DRO if the data is not available to determine that amount.

Rev Proc 2016-51, section 4.04: A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under which excess annual additions under § 415(c) are regularly corrected by return of elective deferrals to the affected employee within 9½ months after the end of the plan’s limitation year.

TCJA changed Code Section 165(h) of the law that defined a casualty loss. That same section of the code is referenced in the safe harbor hardship rules. Under the new language, expenses for repair of damage due to a participant's principal residence would not be available for hardship unless included under a federally declared disaster area. Are folks modifying their safe harbor hardship procedures to restrict casualty hardship to comply with this?