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John Feldt ERPA CPC QPA

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Everything posted by John Feldt ERPA CPC QPA

  1. John Feldt ERPA CPC QPA
    Employer has 1 HCE (the owner) and 75 eligible NHCEs. Wants to adopt a 3% safe harbor 401(k) plan. Owner's compensation is normally paid as $120,000 base pay and $150,000 year-end bonus. The NHCEs receive tips amounting to about 50% of their compensation. If the plan excludes bonuses and tips for purposes of all allocations, would this still retain its safe harbor status? If so, it seems like the employer is getting away with a safe harbor contribution of only 1.5% of compensation. We understand that it might eventually become top heavy with all the turnover they have, but that could take several years.
  2. John Feldt ERPA CPC QPA
    Okay, I see your point, just not certain how the IRS would view that.
  3. John Feldt ERPA CPC QPA
    Was "the plan document" signed before or after the plan's administrator sent the notice? Before. Does anything in "the plan document" treat the notice as incorporated by reference or otherwise made a part of the terms of the plan? No. Consider that what you think of as "the" plan might not be the only one of possibly several "documents and instruments governing the plan[.]" ERISA section 404(a)(1)(D). Not overly concerned about how the DOL views it, more concerned about the IRS - keeping the plan's tax-qualified status. Presumably, the SPD does not list a 3% default deferral election either. (Just thinking about what might affect participant deferral decisions.) SPD shows 3% What does Revenue Procedure 2007-44 actually allow, amendment-wise? Section 15, example 2: Example 2: ...On July 1, 2010, Employer M starts to operate the plan in a manner which is inconsistent with the written plan document but an amendment to reflect the plan change when made retroactively effective would not violate § 411(d)(6). This change is unrelated to a change in qualification requirement or published guidance. To conform the plan document with the plan’s operation, Employer M adopts an amendment by December 31, 2010 that reflects the change in operation and such amendment is adopted in good faith with the intent of maintaining the qualified status of Plan X.... The amendment would be retroactively effective as of July 1, 2010 and Employer M must correct its operation to the extent necessary to reflect the corrective amendment.
  4. John Feldt ERPA CPC QPA
    A draft document was prepared for review/discussion last fall. This draft document contained a 3% default deferral. Upon final discussion, the client chose to use a 4% default deferral for automatic enrollment starting January 1, 2016. The materials provided to the participants from the investment provider all explained how a 4% deferral would begin if no contrary election was made. However, the plan document that was executed still had a 3% default deferral instead of 4%. It is a calendar year plan. The issue was just now noticed. The question is: Does this necessitate a VCP application to properly fix, or is possible to adopt the 4% in an amendment now, retroactively effective January 1, 2016, as long as it is adopted before the last day of this plan year?
  5. John Feldt ERPA CPC QPA
    I will credit these two old IRS responses as having been found by TAGDATA: From the 2000 Annual ASPPA Conference: 22. Company A has 11 nonexcludable employees; one HCE and 10 NHCEs. Four of ten NHCEs 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. edit: typo
  6. John Feldt ERPA CPC QPA
    Now, suppose the plan is pro-rata or integrated, has a last day requirement, 2 of 6 NHCEs quit, and the document does not have an automatic failsafe. Can the plan run an average benefits percentage test - meaning, does the fact that they terminated put them automatically into a reasonable business classification in that case? If not, then why have a failsafe option in the plan? If it does, then why wouldn't that also apply in a plan that allocates to each person in its own rate group?
  7. John Feldt ERPA CPC QPA
    BG150. Yes, I agree. Perhaps a small plan would do it just to remove from testing consideration anyone who quits with under 500 hours (maybe they just apply only a 500 hour requirement though). As you know, you can exclude those terminees from the test count entirely if the sole reason they didn't get an allocation was because they failed to complete a condition, but you can't leave them out if the only reason is because the employer chose not to allocate any to them. Belgarath. Bizarre, yes. So last fall at the ASPPA annual conference, there's an IRS speaker (Kieffer?) saying that you still have the facts and circumstances as an option to look at even if the plan puts each person in their own class. Saying if the employer has a reasonable business criteria for not providing the allocation, then the plan could still run an average benefits test and not be stuck with the ratio percent test. I immediately cleaned out my ears after hearing that.
  8. John Feldt ERPA CPC QPA
    I know this has been discussed a few times, but anyway: Suppose a profit sharing only plan, not top heavy, has the profit sharing allocations with each participant in their own rate class. Assume 6 NHCEs and 1 HCE - all eligible for the plan. Also assume the plan has a last day requirement in order to receive an allocation. 2 NHCEs quit - both worked over 1000 hours. The document does not show an election to apply any "automatic fix" provisions for a ratio percent coverage test failure. Running an average benefits percentage test for coverage essentially requires a classification that is reasonable and is established under objective business criteria. Would this plan be allowed to run the average benefits percentage test for coverage purposes? Or, must the plan resort to a 1.401(a)(4)-11(g) amendment to make the plan pass the ratio percent test for coverage? Would the answer be any different if the plan had no allocation condition (no last day requirement)?
  9. John Feldt ERPA CPC QPA
    For the folks that begin to use these services, please use some caution. I used this service from PBI some years back when I was with a former employer. A large company had being doing their own plan administration internally and they outsourced the work to us, a specialized service provider. They had been using PBI which provided periodic reports on potential deaths of plan participants. Just be aware, these are only potential deaths, not necessarily actual. Database entry errors do occur, especially at social security. We found that it was not uncommon for person that called social security to report the death was the person that got coded in their system as deceased. So be careful when writing your initial and follow-up correspondence. Probably don't start with a letter of condolences only to have the "deceased" actually call you back a bit upset about rumors of their demise.
  10. John Feldt ERPA CPC QPA
    https://www.asppa.org/News/Article/ArticleID/5805/Good-News-for-412-d-2-Amendments As you all know, it looks like the IRS sided with law over regs in the issue of plan qualification (a late FYI), but funding and deduction still remain as issues. From the article: In December, the IRS issued an internal memorandum instructing EP Determination and Examinations employees that an amendment made in the first 2½ months of a year that increases benefits for service in the prior year does not adversely affect a plan’s qualification. The memo advises that this type of amendment is not a “discretionary amendment” that must be adopted before the end of the prior year, provided the amendment was not “operationally effective” until after the end of that prior year. This, of course, describes a typical “412(d)(2) amendment.” We are very pleased that this aspect of our 412(d)(2) concerns has been favorably resolved.Funding and deduction concerns regarding 412(d)(2) still have not been addressed, and probably will not be resolved in the near future.
  11. John Feldt ERPA CPC QPA
    Are there special rules that might apply to a collectively bargained plan for allocation condition purposes? In this takeover plan, the collective bargaining agreement was found to have required that the match be allocated on a monthly basis and that the participant work 120 hours in a month to get the match for that month. This would exceed the annual 1,000 hour DOL rule that typically applies.
  12. John Feldt ERPA CPC QPA
    New safe harbor plan was executed timely to begin deferrals and safe harbor on October 1, 2015, plan is a December 31 year-end. They failed to offer deferrals until sometime in November. Under Revenue Procedure 2015-28, if the problem is found and deferrals start in the 3 month period, no QNEC is needed for the missed deferrals assuming the proper notice is provided? Seems like that's the case since an Employee Elective Deferral Failure includes a failure to afford an employee the opportunity to make an election. Agree?
  13. John Feldt ERPA CPC QPA
    You can ignore the first 6% of eligible compensation contributed into the DC plan for purposes of the combined plan deduction limit, essentially allowing you to put in 31% overall. Assuming the eligible compensation is truly $2,300,000, and if they put in and deduct $420,000 for the DB plan (assuming that is not more than the DB maximum deductible), this leaves $293,000 for employer contributions into the DC plan. Lastly, if this $293,000 in the DC plan does not exceed 25% of eligible compensation in the DC plan, you are okay,
  14. John Feldt ERPA CPC QPA
    And for the DB plan, you can require 1,000 hours, but not a last day. So if the participant is: participating both plans (DB and DC) works 1,000 hours in the plan year terminates before the last day of the plan year the document states the TH minimum is provided in the DC plan the DB plan states participants in both plans will receive the TH in the DC plan the DC plan states participants in both plans get 5% of pay top heavy, but requires they be there on the last day Is the last day requirement for the 5% top heavy overridden due to the combo arrangement, or Is the TH minimum not needed due to the last day requirement (TH is satisfied without 5% of pay), or Is the top heavy provided in the DB plan for that final year of participation? Again, one must look carefully at how the documents are worded.
  15. John Feldt ERPA CPC QPA
    Under that same Q&A, can the plan that offers a lump sum and allows payments in cash or in-kind be amended to eliminate the "in-kind" payment option?
  16. John Feldt ERPA CPC QPA
    See Derrin's post on the Q&A column here at http://benefitslink.com/m/qa.cgi?db=qa_who_is_employer&n=294 Some excerpts: Question 294: Can an individual employer make a $12,000 retirement plan contribution for a domestic employee? The employer does NOT have any trade or business. He is actually an 87 year-old retired gentleman. Answer: Yes, he can make a $12,000 contribution. He can contribute more if he wants. But the issue is somewhat more complex. You don’t have to have a trade or business to be an employer. As an employer, can he sponsor a plan covering the domestic employee? Yes. There is nothing that limits plan sponsorship to trades or businesses. Any employer can sponsor a qualified plan. Can the gentleman deduct his contributions? No. They are personal expenses, just as the domestic’s salary is a personal, nondeductible expense. So, is there a problem with the gentleman sponsoring a plan? Yes. Not only does he face making the contribution without receiving a deduction, he is also subject to a 10% nondeductible contribution penalty under Code §4972. The problem is that the nondeductible contribution penalty is forever. You’ve heard of the gift that keeps on giving. This would be the gift that you keep paying for, for the rest of your life. You have to repay the penalty ever year until you can deduct the contribution, which the gentleman will never be able to do. Is there an alternative which allows him to avoid the 10% penalty? Yes. Code §4972(c )(6) allows him to set up a SIMPLE 401(k) or a SIMPLE IRA for the employee. Contributions to the SIMPLE will not be subject to the penalty tax.
  17. John Feldt ERPA CPC QPA
    Maybe they could offer the exams once every 5 years instead, now that the 5-year IDP restatement cycle is removed from their task list.
  18. John Feldt ERPA CPC QPA
    If you set it up to begin on December 31, and only the owner will have compensation (year-end bonus) paid that day from which a deferral can be made, then I think you have a problem for that plan year ending December 31. Assuming you have some NHCEs that would have been eligible to defer if they had also received wages on December 31.
  19. John Feldt ERPA CPC QPA
    Can a nonprofit maintain both a SIMPLE IRA and a 457(b) plan in the same year?
  20. John Feldt ERPA CPC QPA
    If you determine that a disqualifying issue has occurred, inform the employer of the issue, the consequences, and the options for correction.
  21. John Feldt ERPA CPC QPA
    No, not if you apply the actual earnings on their accounts. But yes, if you use the DOL rate. How much actual earnings difference is there?
  22. John Feldt ERPA CPC QPA
    I think it can, if you have actual rates, use actual earnings rates. Otherwise look at Revenue Procedure 2013-12, Section 6.02(5)(a) where I think it says in cases where using an actual rate of return is either not available or the cost to determine the actual rate of return would exceed the difference - those situations allow you to use the DOL VFCP calculator rates.
  23. John Feldt ERPA CPC QPA
    I think their sister document, PPD, has language like that. Hmm, I wonder where they got the idea. I talked to Robert and he is aware of this.
  24. John Feldt ERPA CPC QPA
    Perhaps the plan document could be written to say that if the plan intends to utilize the safe harbor top-heavy exemption, that any allocation of forfeitures would be applied as an ACP-free discretionary match following all the rules that apply for an ACP-free discretionary match. And the basic plan document could say that this allocation could be applied regardless of whether or not the adoption agreement itself even provides for such a match.
  25. John Feldt ERPA CPC QPA
    This is an old thread, but there was some discussion about this last week at IRS DC Q&A session. Isn't there a requirement that a tax-qualified profit sharing plan must be a deferred compensation plan, so the accounts are not just readily accessible to be withdrawn as soon as the funds are contributed? If that's a requirement, would a vesting schedule be enough to still allow a low age like 21 to be utilized as the criteria for in-service eligibility? Any other thoughts on this out there?
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