John Feldt ERPA CPC QPA

Mike is right, the terminated with 500 hours rule cannot be applied to someone who is benefiting, it also can't be applied to someone if the plan has no allocation conditions. The one and only way to leave out someone who terminates with under 500 hours is if they received no benefit for the plan year and it was solely because they failed to meet the plan's allocation conditions. Treasury Regulation 1.410(b)-6(f): (f)Certain terminating employees - (1)In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if - (i) The employee does not benefit under the plan for the plan year, (ii) The employee is eligible to participate in the plan, (iii) The plan has a minimum period of service requirement or a requirement that an employee be employed on the last day of the plan year (last-day requirement) in order for an employee to accrue a benefit or receive an allocation for the plan year, (iv) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement, (v) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (f)(1)(v), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year), and (vi) If this paragraph (f) is applied with respect to any employee with respect to a plan for a plan year, it is applied with respect to all employees with respect to the plan for the plan year.

The catch-up limit for 2017 is still $6,000, but the 415 limit is now at $54,000. Thus a total of $60,000 is possible in 2017. A catch-up deferral can go above the 415 limit. Note that the owner's wages could be as low as $54,000 and still allow a total of $60,000 if at least $6,000 is done as an elective deferral, but that’s another side topic. So, where is the basis in the law? Let’s look at the law, as passed by Congress, Internal Revenue Code Section 401(m)(1), which states: In general. A defined contribution plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee contribution for any plan year only if the contribution percentage requirement of paragraph (2) of this subsection is met for such plan year. Be sure to look at the term employee contribution – this is a voluntary after-tax contribution. This is not the same as a salary deferral election which is defined as an elective deferral. Thus, employee contributions (same thing as voluntary after-tax contributions) are lumped into the same nondiscrimination bucket as matching contributions. Seems clear. The rest of that section of the law goes on to explain a little about ACP testing with the limitations and it provides for the Treasury Secretary to write regulations (yes, the regulations apply too). So that is the basis under the law. As to all the details, I personally find the regulations to be clear about including after-tax contributions in this test, no ambiguity about that question. Look at Treasury Regulation 1.401(m)-2. Please note that the law has a clause to allow the regulation to interpret the law, and unless the regulation contradicts the law, the regulations are generally treated as having the weight of the law. After-tax contributions have been around for decades, so I have not heard that there was any confusion about this. Who, or where is this confusion stemming from?

Is there any guidance for determining the associated match (ADP refunds also cause match forfeitures/refunds) when the match formula changes during the year? The plan matched per payroll at one rate for the first 6 months, then increased the match somewhat for the next 6 months.

Suppose a plan document was drafted and executed to allow both pre-tax and Roth deferrals, but the sponsor wasn't ready to handle Roth yet internally so the initial enrollment materials did not show that Roth was even available, but the SPD did describe Roth. About 3 months after the plan had been in effect, they communicated that the Roth deferral option was not available to the participants. What do eligible employee participants "get" or what is the correction?

Many times the plan administration system is linked through some database connection to the provisions in plan document. In order to keep things efficient (to keep administrative costs down), it seems reasonable to restate to the new provider's document if that is the case.

Yes, some advisors and plan sponsors have read articles about making voluntary after-tax employee contributions to qualified plans. As pointed out above, these articles leave out some important points. After-tax contributions must be tested for nondiscrimination (the ACP test), even if the plan is a safe harbor 401(k) plan. That means: if zero NHCEs contribute true “after-tax employee contributions”, then the HCEs can only put in $0.00 of after-tax contributions – thus the HCEs all get a full refund back of their after-tax contributions, and if refunded too late, it is subject to a penalty. In my opinion, after-tax employee contributions should be found mainly in: An owner-only plan where the owner’s compensation is low, but the owner is sitting on a pile of cash. The after-tax contribution is needed to reach the 415 limit because the overall deduction limit is 25% of pay. A non-profit entity with no HCEs (or any plan with no HCEs for that matter). Any entity with only HCEs High skill organizations where the “NHCEs” are actually quite highly paid and those NHCEs have average deferrals that are already significantly higher than the deferrals of the HCEs without an after-tax option. Also note that after-tax employee contributions are also part of the general test for nondiscrimination under Internal Revenue Code Section 401(a)(4) – treated like a match or deferral for purposes of the average benefits test. The articles out there almost always leave out the testing problems associated with after tax contributions. They imply that this is a new concept or an obscure loophole, but it’s nothing new as mention above. After-tax has been around for longer than 401(k) plans have been around. I would not recommend including the after-tax provisions in a plan that has the typical NHCE group, but if the Employer really wants it, I recommend the HCEs not use the after-tax feature in its first year. After that first year-end, run the test to show just how much after-tax the HCEs would have been able to keep in the plan. And bill them for your extra time. You might find that some investment providers are pushing an after-tax “emergency fund” idea. The rank and file contribute after-tax and they can withdraw it at any time (yes, after-tax can be withdrawn any time). The downside of this concept is the withdrawal fee. If the distribution fee is perhaps $65 and the NHCE has an after tax balance of $650, well that’s a 10% cost to get the money back. Banks fees are much less than that. In-Plan Roth In contrast to after-tax contributions, In-Plan Roth Rollovers and In-Plan Roth Transfers (Roth conversions) are not subject to the ACP testing described above because they aren’t contributions. If the plan has both In-Plan Roth Rollovers and In-Plan Roth Transfers, the participant can convert all or any portion of their vested pre-tax balance into Roth, including balances from employer contributions, even if they are not eligible for a distribution. The IRS actually has a nice explanation of the details. https://www.irs.gov/Retirement-Plans/Designated-Roth-Accounts-In-Plan-Rollovers-to-Designated-Roth-Accounts Here is a case study with after-tax: S. Corp Owner/employee: Age 51 Eligible W-2 compensation: $60,000 Plan type: 401(k) only – owner only plan – no other employees Assume the owner’s reasonable compensation is only $60,000 (W-2 compensation). Perhaps additional income is also provided from S Corp dividends, but that can't count for plan compensation purposes. The deduction limit is 25% of $60,000, or $15,000. However, the 415 contribution limit for 2017 is $60,000 (the lesser of 100% of pay or $54,000, plus catch-up deferrals). Even with elective deferrals included, the maximum pre-tax contribution available is only $39,000 ($24,000 + $15,000), leaving $21,000 of the contribution limit unused (see figures below). By adding an after-tax contribution option, this business owner now has the ability to put more money away for retirement in the 401(k) plan by utilizing the entire 415 limit including catch-up deferrals. You'll have to scroll, probably, to see the figures below to the right, but its $24,000 deferral, $15,000 profit sharing, and $21,000 after-tax. Elective Deferral (includes $6,000 catch-up): $24,000 Employer Profit Sharing (limited to 25% of pay): $15,000 After-tax Contrib. (can convert to Roth): $21,000 Total Contributions: $60,000 I hope this helps.

They could have executed an amendment to adopt prior year testing with the 3% option, but the signature execution deadline was the last day of the first plan year.

$300 applies if you are only correcting loans for these 10 participants and no other plan errors. It's $300 even if you don't use any of the standard correction checkboxes for your method for fixing the loan.

February 5

IRC 412(d)(2) does not allow a plan sponsor to violate IRC 411. I suppose you could ask the Secretary of Treasury if they will allow you to reduce the benefit.

An unforeseeable emergency is not the same as a hardship. Thus, a distribution due to unforeseeable emergency does not mean the hardship rules are invoked. However, as noted above, check the terms of your plan documents to make sure you are following its terms. If there is no requirement to stop deferrals in the document, then how will you justify the stopping of deferrals?

A SIMPLE has an exclusive plan requirement under Treasury Regulation1.401(k)-4(c): (1)General rule. The SIMPLE 401(k) plan must be the exclusive plan for each SIMPLE 401(k) planparticipant for the plan year. This requirement is satisfied if there are no contributions made, or benefits accrued, for services during the plan year on behalf of any SIMPLE 401(k) planparticipant under any other qualified plan maintained by the employer. Other qualified plan for purposes of this section means any plan, contract, pension, or trust described in section 219(g)(5)(A) or (B). The entities you describe almost certainly are one affiliated service group and are therefore treated as one single employer, and if they have a SIMPLE anywhere, everyone must be eligible and no other plan can be in place. If another plan is established by an employer in the group, it invalidates the SIMPLE contributions made for that year.

Yes, that does not violate the 415 limit. The over 50% PS allocation and nondiscrimination testing is a separate issue.

Here is SunGard's, I mean, FIS's take on this: "It is important to note that to apply these changes, plan documents will need to be amended to remove the language that restricts the use of forfeitures to fund safe harbor contributions. FIS Relius will be preparing good-faith amendments for this purpose in the near future. Since this change is discretionary, an amendment would need to be adopted by the last day of the plan year to which it applies. In addition, an earlier amendment might be needed to avoid violating the anti-cutback rules (IRC §411(d)(6)) depending on how forfeitures are handled under a plan sponsor’s current plan. For example, if the plan provides for the reallocation of forfeitures, then amending the plan to reduce contributions could violate the anti-cutback rules if participants have already satisfied the conditions for sharing in the reallocation of the forfeitures." Their full explanation: IRS Relaxes Rules on Use of Forfeitures to Fund Safe Harbor Contributions

I don't see a contribution deadline for the top-heavy minimum in the code and regulations. You might not actually need to add missed earnings. Be careful about the timing of the deduction and the treatment for 415 limits.

This would be an optional interim amendment - discretionary, not mandatory. The IRS can argue that plans could retain their existing restrictions on forfeitures if they wanted (crazy, I know). But are we suggesting that later this year an optional interim amendment can be adopted, and that amendment could have a retroactive effective date of January 1, 2016? That would allow sponsors to ignore the current written language in the document that existed in the plan as of 12/31/2016 for the 2016 plan year. Do you believe this also allows a plan sponsor to ignore the rule that requires discretionary amendments to be adopted by the last day of the plan year? Is there regulatory precedence?

Where did they say this? If a calendar year DB plan terminates July 31 and it is all paid out November 30, it can still be combination tested for nondiscrimination with the ongoing calendar year 401(k) plan? Did they cite an authority?

When did the plan first restate for PPA? Then look at your basic document. It probably says that that starting with the first plan year after the PPA restatement is first executed, that forfeitures cannot be used for allocations of QNECs, QMACs, or safe harbor. If that is in there, with no additional clause added like "unless otherwise allowable", then your plan won't let you use the proposed regulation language until you amend the document since you must follow the terms of the plan. Yes, your plan can be more restrictive than the rules would allow.

From the 2000 Annual ASPPA Conference: 22. Company A has 11 nonexcludable employees; one HCE and 10 NHCs. Four of ten NHCs leave employment during year after working more than 500 hours. Plan requires end of year employment for allocation. Coverage ratio is therefore 60%, which meets the non-discriminatory safe harbor at 1.410(b)-4(c)(2). Plan also passes the average benefits percentage test of 1.410(b)-5 (e.g. on a cross-tested basis). Plan still must cover reasonable class per 1.410(b)-4(b) to pass the average benefits test of 410(b)(2). Question: is “those employed on the last day of the plan year” a “ reasonable classification” for purposes of 1.410(b)-4(b)? IRS: Yes. From the 2001 Annual ASPPA Conference: 46. The average benefits test for coverage testing consists of the nondiscriminatory classification test and the average benefits percentage test. To satisfy one part of the nondiscriminatory classification test, it is necessary to determine if the classifications are reasonable based on objective business criteria. Do participants employed at the end of the plan year constitute a “reasonable classification” under Treasury regulation 1.410(b)-4(b)? IRS: No. Our opinion is that it is not a reasonable classification.

I agree. I would say you are also not protected against government action against you even if the client signs a "hold harmless" letter for your actions. Meaning if you knew that your actions were assisting a client commit fraud, you are now stepping into the same sinking boat that your client is in. When it sinks, the hold harmless letter won't stop you from sinking too.

Maybe I misunderstand, but isn't 415 compensation limited to reasonable compensation for services rendered to the employer? Thus making their 415 limit zero? So regardless of their W-2, if the reasonable compensation is $0, then any allocation is over the 415 limit. If that's correct, you do have issues with going over the limits.

Yes, you have to exclude the 3% SH from the portion that is imputing disparity. You could not integrate using the 3% SH even if the plan had a hard-wired integration formula, right? So you still get the same results, but still noting Mike's comments above.

From what I hear, Congress actually has bipartisan agreement to change the default from paper to electronic. But, they say, we just need to convince one lobbying organization to agree with that. So maybe in 30 years or so we'll get that to happen.

Also note, a payment under the terms of a QDRO from the plan to the alternate payee will be taxable to the alternate payee. But if there is no QDRO, and a participant payment occurs which is signed over to the alternate payee, well then the participant gets taxed on the payout, not the alternate payee.

Why does the IRS think these NHCEs benefits need to be increased? If it is to pass 401(a)(26), then prepare your calculations to show the value of the annuity payable at NRA and show that it is "meaningful". If it's because they believe the plan fails 401(a)(4), then show how 401(a)(4) passes without their requested amendment. If it's because the plan is terminating and you are trying to allocate all the excess to the owner, then good luck with that.