John Feldt ERPA CPC QPA

I generally use the most recent valuation date that was available, but if the assets as of the date of plan termination are available, I prefer to report those amounts. In some cases, we have submitted the 5310 prior to the actual date of plan termination or even on the date of plan termination, so you have no choice but to use the most recent valuation of assets for that type of submission.

I agree with filing with $0 begin/end. The plan exists right - it was executed?

Under 2013-12, I think they limited that restriction to just QNECs for ADP/ACP test corrections.

So they can make an informed election.

I assume A is a NHCE. If so, then it seems okay to do this in my opinion. You are not changing the safe harbor provisions. You are not taking away anything that the existing participants would have otherwise received. The plan needs to satisfy nondiscrimination somehow, so giving this NHCE an allocation, as described, satisfies and is the purpose of 1.401(a)(4)-11g. Technically, you open the eligibility for that participant for the nonelective profit sharing only, and if you want to limit that only to the year ending 12/31/2013, you could do that as well, making not eligible in 2014. But if you'll need them in the design for 2014, then you could just let them in and keep them in.

You run the valuation at the beginning of the year. At the same time, you run the testing for the prior year. In your beginning of the year valuation, you also mention any 401a26 problems that might occur in the current year, you mention any 401(a)(4) problems that might occur in the current year. If the plan is not PBGC covered, you watch out for and mention any possible deduction limit issues that could apply in the upcoming year. For each of these you discuss any needed changes or make suggestions. In your case, did the new entrants cause a 404 limit issue or something - what was the problem?

And if the DB plan is subject to the PBGC coverage requirements, the combined plan 404 deduction limit under 404(a)(7) also goes away.

As noted above, some DB plan documents define it for top heavy "valuation" purposes.

We've done a few very late amender VCP filings, including TRA 86, GUST, EGTRRA. We did the TRA, GUST and EGTRRA documents and the interim amendments needed after EGTRRA. These have received approvals, and the only request from the IRS was to use a new listing to spell out each section of the code that was missed on the late interim amendments after EGTRRA. These were under 2008-50. Working on another TRA, GUST, EGTRRA as well, not submitted yet. All of these were money purchase plans handled without TPAs and each one found out they had a problem a distribution was to occur. In each case, the Bank IRA about to receive the rollover asked for proof the plan was qualified. How they found us was a different story. We recently came across one where the original plan started in 2002. No original signed document could be found (they got rid of it when the entire plan was restated in 2003 to change from PS only to 401k), but they found other signed evidence that the plan was timely adopted. Submitted under 2013-12, waiting for response.

No, unless the plan document is written to add that as a requirement.

You're welcome. That's what my boss says. Maybe he's just saying I write long answers when a short one could suffice....

Tom is right, of course. The example I provided was both restructuring and has over 70% in each rate group. Let's do an example without the restructuring: 2 owner HCEs, age 55 and age 45 4 NHCEs Testing the entire plan on a benefits basis (the ebar for the younger owner is higher than the ebar for the older owner) Rate Group 1 (Age 55 HCE): 3 out of 4 NHCEs are in the rate group of the age 55 HCE, and both HCEs are in that rate group, so that group is: ( 3 / 4 ) / ( 2 / 2) = 75% Rate Group 2 (Age 45 HCE): If only 1 out of 4 NHCEs are rate group of the age 45 HCE, you would get ( 1 / 4 ) / ( 1 / 2) = 50% That is not 70%, so you can either: run the average benefits percent test, or allocate more $ to just one of the other three NHCEs. In this example, the plan only needed to give $200 to one of the other 3 NHCES to get them in the age 45 HCE rate group. In contrast, it would cost the employer an extra $3,000 in employee benefit costs to get the average benefits test to pass. So with an extra $200 allocation, we now get 2 out of 4 NHCEs in the age 45 HCE rate group, so that group is: ( 2 / 4 ) / ( 1 / 2) = 100% Both rate groups are over 70% so the average benefits percentage test is not required. Of course the employer could still say, no let's allocate $3,000 extra instead of just $200 to one person. Sometimes the best option is to combine restructuring with cross-testing. Also look at the actual dates of birth: testing using age last or age nearest can make a noticeable difference - and be sure to impute disparity if the HCE comp exceeds the integration level. Remember to try testing using average compensation if the owner compensation drops and to look at the possibility of testing using compensation from date of entry if that will help you (or apply both of those assumptions). Or you can test using compensation with or without including deferrals in the compensation definition. Will the top paid group election affect the results - may want to look at that sometimes, if it's not past the end of the plan year. Even more fun is to test using the accrued-to-date method (using the annual method is an alternative). If a plan needs the average benefits test to pass, you also have the option of averaging the ebar for any individual in the average benefits percentage test (rare). And don't forget to check out the rate group banding option (rare, but more useful in larger plans). There are more testing options to name here, but who's really still reading this at this point anyway? Oh, and if your document is written without flexibility for testing, then forget most of that above - you'll have to follow the document and miss all the fun (sad face). When you add a DB plan (traditional or cash balance) into the mix, you also may need to try varying assumptions are differing crediting rates, A.E., mortality - sometimes 8.5% GAM71 gets you to a lower NHCE requirement, other times it's IAM83 Female with a post retirement rate of 7.5% (especially if using the DB benefits to satisfy a portion of the gateway). And watch out for the combined plan deduction limits if the DB plan is not subject to PBGC.

Yes, many times the demographics prove that a much less expensive option is to pick the one or two specific NHCEs and give them a little more PS if that gets all your groups over 70%. Sometimes it's as easy as saying: the profit sharing allocation this year is 5% of pay, but not less than $500. Of course the $500 minimum only affects a few of the lowest paid NHCEs, bumping their allocation rates into one or more of the HCE allocation groups.

Example: 2 HCEs: Owner at max pay, spouse at $25,000. 2 NHCEs: one young, one old. Each participant is in their own rate group (grouping by any other means limits your testing flexibility) Component plan #1: Owner and young NHCE: passes on a benefits basis: 100% of the NHCEs in that component plan are in the HCE benefit rate group. Component plan #2: Spouse of owner and older NHCE: passes on a contributions basis: 100% of the NHCEs in that component plan are in the HCE allocation rate group. Each rate group is over 70%. No average benefits percentage test needed. Gateway required for the whole plan however because cross-testing in one of the components.

For passing nondiscrimination regarding the nonelective allocations in the plan, if each rate group has a 70% or greater result, then the average benefits test is not needed for nondiscrimination testing regarding the nonelectives. This is a fairly common plan design: a low-paid spouse who works for the owner defers the max but gets a small (if any) profit sharing. If any rate group is under 70%, then to pass 410(b), the average benefits percentage test must pass and 1.401(a)(4)-2(c )(3) basically allows the nondiscriminatory classification test portion of 410(b) to be the midpoint between the safe and non-safe harbor percentages. Look at 1.401(a)(4)-2(c )(1): "The employer contributions allocated . . . are nondiscriminatory in amount . . . if each rate group under the plan satisfies section 410(b)." Is this not included in what you've read?

If each rate group passes at 70% or above, then the plan avoids the average benefits percentage test entirely. So the answer is: it depends.

Question 1 Must this Plan be tested under IRC 401(a)(4), The General Nondiscrimination Test? If so, must the General Nondiscrimination Test include “Rate Group testing”? The plan has allocations for HCEs and NHCEs, so the allocations have to satisfy 401(a)(4) somehow. There are many option in 401(a)(4) to prove a plan passes. Your situation seems to describe a typical plan that tests the contributions on a benefits basis (cross-testing), thus the gateway requirement. Keep in mind, the gateway only allows the plan to test the contributions on a benefits basis, it does not mean the plan will pass testing on a benefits basis. Sometimes additional profit sharing above the gateway is needed to actually pass the test. Many folks, consultants and advisors call the entire amount gateway even though, in your example, the 5% is really the gateway and the rest is profit sharing. Question 2 Are there any options available to pass general non-discrimination not using rate group testing? Look at 1.401(a)(4)-2(b). you'll find the testing is bypassed for plans that allocate pro-rata as a percent of pay, plans that allocate a uniform dollar amount per person (regardless of pay but not over 100% of pay), plans that use integration - an allocation formula based on permitted disparity, and plans that provide a uniform amount per unit of service in the plan year. Then look at 1.401(a)(4)-8 (cross-testing). In section (b)(1)(i)(B)(1) and (b)(1)(i)(B)(2), you'll see the broadly available allocation rates exception and the gradual age/service schedule exceptions. Question 3 What does it mean for an otherwise excludable employee to be “separately tested”? If the Plan required only 6 months of svc for a Safe Harbor Non-elective, would that same Otherwise Excludable Employee be entitled to a gateway contribution? Employees who are not age 21 and have not completed a year of service, or have done that but id not meet an entry date yet, are considered as "otherwise excludable employees" (the OEE group). Meaning, the statute allows those people to be excluded from the plan, but the plan chooses to let them in before 21 and 1 for some or perhaps for all purposes. These employees, if eligible for the plan, have the same rights as the other plan participants, but certain items do not have to be applied to them. For example, although the top heavy minimum does apply to them, the minimum gateway does not apply to them. So, if they are not eligible for profit sharing, then they will not get the gateway (does the plan require age 21 and 1 for PS purposes?). If the plan document you described gets them in after 6 months for PS as well, then since all of these NHCEs are in one group for allocation purposes, then they would have to get the same as all the NHCEs. They also could be describing a component testing option (restructuring) when they say "separately tested". That's in 1.401(a)(4)-9. Question 4 Is a Gateway contribution required for employees that have been employed less than one year/age 21 when the Plan requires a Safe Harbor Contribution for such employee? May those less than one year/age 21 employees be excluded from the 401(a)(4) General Test? No, the gateway is not required for the OEE group. If the plan has all NHCE in one rate group and it requires 21/1 to get into the PS portion of that rate group, then those only getting SH and or TH are not entitled to get the PS under the terms of the plan as you describe. Question 5 The General test shows that approximately 9% of payroll must be contributed for nHCEs in order to pass the rate group test. The employer , in 2013 and 2012 contributed less than the required 9%. The 2013 tax return has been filed. Can one make self corrective contributions for employees in 2014 to correct that error or must some other correction procedure be used. There are a lot of ways to pass nondiscrimination testing. Just because a report says 9% is needed, I'm fairly certain that someone could easily come up with a report that shows they pass at a lower rate, maybe even at just the 5% gateway minimum if enough historical data can be provided to run multiple testing options. Unless, of course, the report stating 9% was done by Tom Poje, Tom Finnegan, Larry Deutsch, Kevin Donovan etc. etc.

Understood, but usually the J&S requirements are not that big of an issue. A good point to mention though was the in-service age -- if you merge the MP into the 401(k), make sure the normal retirement age is not less than age 62. I am assuming the MP plan has a normal retirement age that is already age 62 or older. If not, you must have data that supports the lower age as being typical for the industry.

Termination of the plan requires that the plan assets all be distributed from the plan within a reasonable period after the formal date of plan termination. The IRS says 12 months or less is a reasonable time frame to distribute. Be sure the proper steps are taken to freeze and terminate, and then file the final 5500 after all assets are paid out. Consider the pricing for the new plan. A startup with zero assets tends to have a higher record keeper fee and/or a higher investment advisor fee than a plan that starts up with existing assets. If you establish a 401(k) plan and merge in the MP assets, you could probably negotiate a lower fee for the investment record-keeper/advisor.

Assuming you have a determination letter from the EGTRRA document: Based on what I am reading, and by looking at the 5310 for the same chart, I think they want almost all of the amendments included in the submission package. Exclude interim amendments that did not have to be adopted by the employer (I would think they had to have been adopted by the practitioner on behalf of the employer). Also, do not include any amendments that are effective after the PPA restatement period ends. As for the chart, I think the chart should only list the amendments that were interim amendments that had to be adopted by the employer or amendments after the EGTRA restatement that were not already part of the language in your pre-approved EGTRRA document when it was adopted. You are not to include amendments effective after the end of the PPA restatement period. Also exclude In-Plan Roth Transfer amendments (or any other interim amendments not covered by the cumulative list). If you did not get a Determination Letter with the EGTRRA document, you have more items to include in the submission package, but not in the chart. That's my guess, FWIW.

However, I forgot to mention that if an annuity payment gets elected, the present value of such annuity could easily exceed the cash balance account using current annuity rates. edit: to make it readable.

If the cash balance plan is not the plan providing the top heavy minimum benefit, and if the plan was not converted from a traditional plan, and if it does not have some other inherit larger benefit formula that might apply, and if it uses a crediting rate that is not greater than a market rate of return, then it is highly likely that the lump sum payable is equal to the cash balance account. edit: typo

I think both apply - one for the missed EGTRRA restatement, and another for the interim amendments needed after the EGTRRA restatement.

Regardless, the 10% penalty exemption can apply by attaching the proper schedule to the 1040. The 10% is not assessed or even withheld by the payor.

It's the IRS that waives the penalty. Even if the normal distribution code is used on the Form 1099-R, the participant can attach a schedule to their 1040 to claim that they are exempt from the excise tax. If you are the payor of the benefit, I do not think you are required to determine whether or not the 10% penalty exemption applies.