John Feldt ERPA CPC QPA

Is the argument that the adoption of a new plan is treated like an amendment to the existing plan or plans of the employer? Even if the plans are not identical? (For example, one allows deferrals and safe harbor, the other does not allow either) The rules distinguish between a discretionary amendment and the adoption of a new plan, as the rules apply differently for amendments than for the adoption of a new plan. See Rev Proc 2016-37, section 15.04. And if it is the adoption of a new plan, not an amendment, what prevents it from applying a different method for allocations than the existing plan? I know some attorneys who might argue you can just adopt another type of PS in the existing document, if the language allows, and not bother with another plan (for example, to avoid the pro-rata no conditions allocations in the existing plan). Vesting changes under 411(a)(10) appear to only apply to an amendment to the plan, so that’s why the new PS only plan is suggested. Of course, if there is evidence or citation that such a new plan is really just an amendment to the existing plan, let’s go over that. I’m not sure if this helps or changes anyone’s opinion. Maybe calling a new plan an amendment is not the argument being made here?

I think Excel was commercially developed. That should do the trick, plus at least a 50 hours of billable time.

Contributions under 408(p) are included under IRC section 415(c)? I am looking for that in 1.415(c)-1 and I’m missing that. Must not have read far enoug!

Probably not. Was one of the businesses the result of a recent transaction that would fall under 410(b)(6)(C)? If not, and if they are a controlled group or affiliated service group, then you don’t combine for 415. Instead, all the SIMPLE contributions are all treated as excess IRA contributions for the years in which both plans are in effect.

That’s not the issue as I see it. The new plan is counting all the predecessor service, but is the statement above saying the new plan cannot adopt a 6-year vesting schedule using all that service? If so, where’s the citation for that?

The new PS plan would count service before the plan for vesting, but what citation prevents that new plan from using a 6-year graded vesting schedule?

Or, if the document allows, perhaps declare no profit sharing, but the plan will override that with a top-heavy minimum requirement. Be sure to check if the plan document only gives top-heavy to the nonkey employees or to everyone, I’ve been surprised a few times to see it apply to all employees. Next, if cross-testing, the DC plan may also override the top-heavy allocation for the NHCEs by requiring a gateway minimum. Too bad for the key employees and HCEs, not getting a high PS amount, but this might be good enough to avoid setting up an extra retro plan, to pay for it, administer it, to also write a merger agreement to merge, and to do the merger. Be careful if this is a professional service employer and the 6% contribution limit applies. If for some crazy reason, a key employee is not getting a match, they might have to declare some small profit sharing amount for everyone just to get a small allocation in their so their compensation can be counted in the 6% contribution limit, then after that add the top-heavy and the gateway to the others. i have seen a lot of takeover 401(k) plans that have 100% immediate vesting for profit sharing, so if that is against the employer desires or if they do want a higher profit sharing amount for the owners (if there is room to do so) then they would need to adopt a retro PS only plan with a vesting schedule and each participant in their own allocation rate group. When the plans merge, have the merger agreement state that this new plan will be the surviving plan in order to retain the vesting schedule. Sounds really easy, right? Be sure to bill properly for all of that!

If I had a nickel for every takeover where the coverage testing had only considered the employees eligible for the plan instead of all the employees of the Employer under 414(m) etc., I’d have a bag full of nickels.

Plan A coverage = (9/20 NHCEs) / (2/2 HCEs) = 45% Plan B has no HCEs covered, so plan B coverage is an automatic pass, and we assume it has the same safe harbor as plan A to allow aggregation with plan A if necessary to get plan A to pass coverage. Plan A’s 45% result is greater than the safe harbor percentage for coverage, which is 27.50% based on the concentration percentage, but it’s less than 70%. So without aggregation of plans, the average benefit test for coverage is necessary. Does plan A satisfy the nondiscriminatory classification test of 1.410(b)-4? Meaning, does it cover a reasonable business classification? If not, and you aggregate the two plans to get plan A to pass coverage, you must now also aggregate the two plans for purposes of nondiscrimination testing, and if allocations are tested on a benefits basis (cross-tested), then the gateway minimum allocation does apply. Shut you want plan A to pass coverage without aggregation with B so you can avoid the gateway in B. If you do have a reasonable business classification defining who is covered by plan A, then you run the average benefit test. You can run that on a benefits basis or on a contributions-basis. You need that to be 70%, and if it is, then Plan A passes coverage without aggregation with plan B, and no gateway applies to Plan B even if Plan A is cross-tested.

Seems okay to me.

Does this possibly create multiple rates of match that could require BRF testing?

Yes. Assuming the plan covers a reasonable classification under 1.410(b)-4(b) and also meets the safe harbor percentage under 1.410(b)-4(c)(2), the average benefits test prong of the coverage test can be done on a contributions-tested basis or on a benefits-tested basis. The gateway minimum only applies if, after passing coverage, you run the nondiscrimination test on a cross-tested basis (or a component is cross-tested). Meaning, the method used to pass coverage does not trigger a gateway minimum.

Isn’t this addressed in Rev Proc 2021-30?

The plan document would state that it’s discretionary. It can also state the upper limit of the match and any limit for deferrals that will be considered for the match, but more importantly, the document will state if the match is intended to be tested for ACP or exempt from ACP. If tested for ACP, the plan then must identify current or prior year testing. If the plan indicates it will be tested, you must follow the terms of the plan. If the plan indicates it intends to be exempt from ACP testing, for a discretionary match, the employer can use that discretion to decide the percent of the deferral for the match formula, the match limit, and the largest percent of pay deferral that will get matched, but that does not all have to be in the plan document. But keep in mind that the safe harbor notice must also describe this match to allow it to be exempt from ACP testing. So if the plan provides a 3% safe harbor nonelective, and they don't give any safe harbor notice before the beginning of the plan year (it’s not required for a safe harbor nonelective), then the match will not be an ACP-free discretionary match. There is an exception to that. If the 3% safe harbor is a QACA, and they don’t provide the safe harbor notice (it’s not required), they can still provide the ACP-free discretionary match if the plan provisions have it available. Strange, but true. I’ve never come across that in practice however. If the safe harbor notice is generated from your plan document system, then I personally prefer to enter as much info in the plan document to help with the match description in the safe harbor notice, but not so much that it would require an amendment, destroying the discretion that we want the employer to retain.

And keep in mind that nonkey employees who fall into the “otherwise excludable employee” group in 2024 (OEEs) are not required to receive the top-heavy minimum for 2024, assuming that’s what the plan sponsor will be adopting in their good-faith interim amendment. This is new starting in 2024. Lou is correct that you can’t add a safe harbor match mid-year to a plan that already allows deferrals. Is that what actually happened with your plan?

Yes. The discretionary match is limited to 4% of pay, the formula for the match must ignore deferrals over 6% of pay, the rate of match cannot increase as deferrals increase, cannot have any allocation conditions, must be described in the safe harbor notice, the plan must have provisions for the match, it must not allow any HCE to receive a higher match than any NHCE at the same rate of deferral, to name a few requirements. it can be subject to a normal vesting schedule, such as 6-year graded.

You asked: what if we reallocated the excess up to every participant's 415 Limits and there was still $200,000 leftover in excess assets? Would you say the remaining excess could then be transferred to a QRP? Once all participants are at the 415 limit and paid out, to fully terminate the plan, the excess must revert, and I would argue a portion of that reversion can be a transfer to a QRP. Now whether the IRS agrees, that’s a separate question. Counsel is advised.

Suppose all the plans have the same provisions and same investment options. You are fine to aggregate them for testing. The solo plans are a non-public EZ filer, which may be the goal here. If so, go for it. Charge appropriately, of course.

Defers enough to get at least 3% match? Seems okay to me. Follow the terms of the plan documents of course.

Technically the funds are company assets anyway, so either way should be okay.

Another we possibility might be to disclaim the check. We’ve already spent $95 worth of time discussing it!

If I were an actuary, I would be tempted to respond to the question with, “Some of us are beyond help, but thanks for asking.”

Agree. It’s not uncommon to see these firms make these mistakes, it happens a lot.

ASG, of course. But maybe they should get a legal opinion just to make sure. Maybe they know a law firm that employs an ERISA counsel. Happens a lot, surprisingly, although anecdotally I see it more with medical professions.

Who wants to herd a hundred cats, I mean, sole proprietorships?