John Feldt ERPA CPC QPA

DB/DC combination. Eligible Employee (HCE, but not key) enters both plans 1-1-2016. They accrue benefits for 2016. Now, both plans are amended to exclude this HCE (but not key) by classification effective 1-1-2017. Not eligible for deferrals, match, PS or anything, and not eligible for DB. The plans are not frozen. Owners and NHCEs and other HCEs are still eligible and accruing in both plans. A colleague is arguing that continuing additional top-heavy minimums must be accrued even after 2016 by this HCE even though they are fully excluded, assuming they meet the top heavy accrual requirement (1000 hours for DB or last day for DC). Based on grey book 2001-35. The written plan language appears to require the participant be an eligible employee to earn a TH minimum accrual. Essentially meaning they must earn a top-heavy year of participation to accrue additional top heavy minimum accruals. If they are now excluded by class, they can't earn any more years of top-heavy participation. My colleague states that this HCE became a "participant" on 1-1-2016 and that fact requires the plan to provide top-heavy minimums to comply with the law/guidance, since they are still a "participant" with accounts and/or benefit accruals from the 2016 plan year. The document might not have a formula for them for any more normal accruals, but the plan would not meet the law’s requirements if the top-heavy minimum was not provided, causing a qualification issue. Your thoughts on this?

For now, just your new entrants need the notice. But annually, I think it is technically required for all those stay auto-enrolled (deferrals are being withheld but they've never made an election to have deferrals withheld). Of course, all new entrants who also will be auto-enrolled if they make no election will certainly need to be notified prior to entry. So, even though your plan is starting with 1-1-2017 with new entrants only, given time, you will have both new entrants and prior auto-enrollees that should get the notice. If tracking that is troublesome, you could provide the notice to everyone, assuming the notice language won't confuse anyone.

So the speaker did not say "it depends on the language of the amendment and the language of the existing document?"

And the caution is to check your plan document (the basic document especially if applicable) to see that it does not somehow override what you are trying to do when you write up the amendment to begin excluding those that had previously entered.

Does the document define how the prevailing wage is to be counted? For example, as a QNEC (to help with the ADP test) or as an other "profit sharing" nonelective? If yes, then this will help you determine how it gets treated for in-service. But keep reading. Are any non-prevailing wage contribution types offset by the prevailing wage contributions? If so, then the amount that is used toward the offset must be treated as the contribution type it is offsetting. For example, if the prevailing wage contributions are used to offset the 3% safe harbor nonelective, then the portion used to offset that SH requirement must be treated as a SH contribution for purposes of determining the restrictions for in-service distributions.

The question sounds like something the CPA or other compensation/tax advisor should answer. If the idea is to avoid FICA, you'll find quite a few cases where the IRS won in court over unreasonably low compensation when large corporate dividends were paid to owners. Consider whether or not the compensation paid, coupled with the actual work being performed and the company dividend being paid - all in concert - will the IRS see this as reasonable, or as some type of tax avoidance?

I see what you mean, the instructions say, yes, in all caps: DO NOT USE THIS FORM IF ANY PARTICIPANT IS DECEASED OR THE FAILURE INVOLVES A BENEFICIARY OR IF BENEFITS WERE NOT PAID OUT TIMELY AT NORMAL RETIREMENT AGE. IF YOU CANNOT USE THIS FORM, ATTACH A WRITTEN NARRATIVE TO FORM 14568 AND PROVIDE THE NECESSARY INFORMATION REQUESTED BY THAT FORM) Based on that statement, perhaps you could still use the form 14568 with an attached a narrative and submit it with the $500. Try marking 8a of Form 8951 and enter $500 in the blank. If they come back and explain that you must pay more, withdrawing the application should still be an option.

"Can you show that all employees who wanted to stop deferrals after you eliminated the match had an opportunity to do so?" I think the IRS would ask if they were given the opportunity to increase their deferrals to make up for the newly absent employer safe harbor contributions. I find it somewhat interesting how they tend to think the opposite of what many of us would generally think.

That's pretty much what I thought too, until I heard the IRS speak about this during the DC Q&A at the ASPPA Annual conference in 2015. I think Don Kiefer (sp?) mentioned that even if you have each person in their own class that you still look at the facts and circumstances to see if the actual excluded (zero allocation) group is a reasonable business classification. Then I fell out of my chair. Of course that's just a verbal IRS unofficial opinion.

Depends. If the plan also has automatic enrollment, then you only have the match to make up. Otherwise, take a look at Section 3.03 of Revenue Procedure 2015-28. There it depend on whether or not you provided a notice within 45 days after the deferral problem was fixed (but they still owe the full match regardless). 3.03 (1) Safe harbor correction method for Employee Elective Deferral Failures that do not exceed three months. This safe harbor correction method creates a rolling correction period for Employee Elective Deferral Failures that do not exceed three months. 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)© 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 © 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. (2) Safe harbor correction method for Employee Elective Deferral Failures that extend beyond three months but do not extend beyond the SCP correction period for significant failures. This revenue procedure creates a safe harbor correction method for Employee Elective Deferral Failures if the period of failure exceeds three months (or the conditions for the safe harbor correction method described in section 3.02 or 3.03(1) are not met by the Plan Sponsor). This safe harbor correction would permit the Plan Sponsor to make a corrective contribution equal to 25% of the missed deferrals (25% QNEC) in lieu of the higher QNEC required in sections .05(2)(b) and .05(5)(a) of Appendix A and section .02(1)(B) of Appendix B to Rev. Proc. 2013-12. In order to use this safe harbor correction, the Plan Sponsor must satisfy the following conditions:

Is this then the crux for your conclusion: Taxpayers may rely on these provisions (that is, the provisions that the proposed regulations would permit a taxpayer to apply before the proposed applicability date for these regulations) in order to satisfy the nondiscrimination requirements of section 401(a)(4) for plan years beginning on or after January 1, 2014 So, would you argue that a match could count toward the gateway in a DB/DC combo design could for the 2014 and 2015 plan years even though the regs weren't provided until 2016?

My reading is that the DB/DC combo testing using the average NHCE match toward gateway cannot yet be applied.

And keep in mind that the SPD and notices would need to be written in a manner that the participant can understand, so writing this in the plan document in a complex manner to get to the exact fixed match would require you to override that language within the notices and the SPD.

The proposed regulations have a section that talks about allowing a DB/DC combo plan to utilize the average NHCE match (but not over 3%) as being counted toward the minimum gateway. When can that portion of these proposed regulations be relied upon? The Proposed Applicability Date section says: Except as described below, these regulations are proposed to be applicable to plan years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers are permitted to apply the provisions of these proposed regulations except for those described in section III of the Explanation of Provisions portion of the preamble for plan years beginning before this proposed applicability date, but not for plan years earlier than those beginning on or after January 1, 2014. Accordingly, the ability to rely on a provision of these proposed regulations for periods prior to the proposed applicability date for these regulations applies to the disregard of certain defined benefit replacement allocations in cross-testing; the exception from the minimum aggregate allocation gateway with respect to certain closed plans; the special testing rule for benefits, rights, and features with respect to certain closed plans; and the rule applying the ratio percentage test to a rate group in the case of a benefit formula that does not apply to a reasonable business classification. Taxpayers may rely on these provisions (that is, the provisions that the proposed regulations would permit a taxpayer to apply before the proposed applicability date for these regulations) in order to satisfy the nondiscrimination requirements of section 401(a)(4) for plan years beginning on or after January 1, 2014, and until the corresponding final regulations become applicable.

To determine if employees have accrued a meaningful benefit, it is my understanding that the average benefit accrued over the participants years could be used for purposes of the calculation. Also, it is my understanding that a fresh-start calculation could be applied.

Are you suggesting that this might be a potential violation of 410(a) for the non-benefiting divisions? Requiring more than 1 YOS to get an allocation? If the plan is written to explicitly exclude all other divisions from PS eligibility, then would that solve the reasonable classification problem?

Is there another possible exception, depending on the terms of the plan, for forceouts of any size balance for terminees who are past NRA and had entered the plan more than 10 years ago? If they don't respond to make an election, I think the plan's terms could be written to require a force out.

Unlike an elective deferral under 402(g) where a partner in a partnership must make the election no later than the last day of the plan year, what is the timing requirement for an after-tax election? Can a partner, in November 2016, write a check and say that it is an after-tax contribution for 2015, assuming no written after-tax election was in place by December 31, 2015?

If the fixed match is set to about 90 cents for each dollar deferred, you'll be slightly overstating the minimum fixed match, so the discretionary would be slightly less than 4%. Before you do that, go back a few years and check the results on how that would have worked. You could also find Tom Poje's limit projection spreadsheet and see how it might look into the future. Well, at least until tax reform passes and the rules and limits all get messed up!

Also note that Derrin discusses this in questions 9:4 through 9:9 in Who's the Employer, 6th edition. You may want to look at 9:8 in particular where they tried to make a controlled group by using options but set such a high price that the government ignored the option.

He only has the option to buy once it reaches $100 per share, not before then? Does that mean he cannot exercise the right at this time? If so, I am not sure you have an attribution. I think that occurs once the option-holder has an unrestricted option to buy. Or, are you saying he currently has an unrestricted option to buy it all at $100 per share?

The 404a disclosure is required, but to technically apply 404 (c ), which is voluntary and not required, the employer has to provide a notice that it intends to comply with 404©. I believe that notice could be provided in the SPD - I do not see an annual requirement.

If the account is not vested, I think the nonvested portion of the RMD is added to the next years' RMD. I did not look this up, but that is my recollection. So if the DB plan has a 3-year cliff schedule, uses the later of age 65 or 3rd anniversary of entry for NRD, and excludes years prior to the plan establishment for vesting purposes, then any RMDs for the over age 70.5 owner which are not vested are thus not paid but they are carried forward to increase the next years' RMD. Correct me if I'm wrong, but that's my memory on this. As to the solo-k topic here. If you're a TPA that tracks time spent by client, you might be surprised by how much hand-holding these owner-only plans actually need - especially in the first several years, and very much especially if they are also doing their own investing (no advisor - they're paying the TPA, so how can they afford an advisor too, right?), and even more so when it's time to end the plan. They can really eat up a lot of your time. Remember, they usually don't have staff to help them, so once they find you are reliable and straight forward about how to handle their plan, they call and ask you for all kinds of help, such as "How should I be filling out this investment form for the plan?", "Who do I write the check to?" "How does the distribution withholding work and how do I get that paid to the IRS?". And when a contribution deadline is approaching you might have to remind and explain multiple times and in various forms why you need the data request completed and returned. Perhaps it would be better for someone else to take a crack at these plans. Maybe I am wrong about this, but I am not convinced these plans truly help the bottom line of a TPA, other than it can build relationships that turn into additional future business. IMHO, FWIW.

If you want the QNEC relief described in Revenue Procedure 2015-28, then a notice is needed. See pages 5 - 10. https://www.irs.gov/pub/irs-drop/rp-15-28.pdf

Also, how does a fiduciary satisfy the requirement that certain fees paid from plan assets must be reasonable if they don't have a sense of what folks are paying for such services? Does that imply some sort of benchmarking is needed perhaps?