John Feldt ERPA CPC QPA

And the Social Security database is not always accurate. We found that sometimes the oldest retirees had problems with their SSN and their spouse's SSN being mixed up, meaning a participant or beneficiary calls in to the SSA to report the death of their spouse, but the SSA database was marked to show the caller as deceased instead. This also might have to do with the fact that some of the oldest SSA recipient's spouses were not issued social security numbers when social security payments started. One of the larger (17,000+ participants) plans that we worked with had us use PBI for all deferred vested participants, retirees in pay status, surivivors in pay status, and the designated surivivors for all J&S chosen forms of payment. This may be more that you would need to check for your plan, but this plan had a joint and reversionary option where the J&S benefits increase to a higher level after the death of the designated spouse (if they died first). We received a quarterly report. http://web.pbinfo.com/ We also did not always trust that report either, but it was very useful and provided good details. Regardless, we were careful on how the letters to participants were crafted if they that showed up in the reports. We were not just immediately stopping payments simply because they showed up on the report.

This makes me think of a non-uniform PS allocation, just a different conversation occurs: Employee 1 says "Hey, how about that profit sharing contribution, my old company never did that." Employee 2 replies, "Huh? What profit sharing, you mean the company match, right?" Employee 1 says "No. I'm not deferring, so I don't get a match." Employee 2 replies, "Really? I'm going to call Tom Poje and ask him what's going on here." Tom Poje says "You should change your deferral so you only get a 2.99% of pay matching contribution. Have nice day."

The nonelective portion of the plan must satisfy 410(b), so if the TH minimum was fully satisfied with the match, then they are not entitled to get the gateway unless 410(b) becomes a problem. Of course, you have to watch out for any HCEs who are not key - they would also need to get a match equal to 3% of their total 415 wages. So, in your example, if you truly have 4 NHCEs out of 5 that all get an allocation of at least 3% of their total 415 wages as a match, and IF only 1 out of 5 HCEs get any nonelective allocation, then you pass 410(b) for the nonelective portion of the plan. And if the one NHCE who is not getting a match also happens to be a nice demographic to use for cross-testing, then you have some really nice, but really specific and rare demographics. Of course, if any of the nonkey HCEs or any of the NHCEs stop or reduce their deferral below the amount needed to get a full 3% of pay as a match, then any top heavy minimum will bump them up to the gateway in addition to any match they were getting already. If any new employees are hired or if anyone leaves, that could also cause issues. Aren't you glad that the 401(a)(26) regulations are not applicable to DC plans? Maybe someone can post cite from the 1.401(a)(26) regulations that spells out where DC plans are exempt from those rules, just for the readers here.

Generaly, all NHCEs get the minimum gateway if any testing includes benefits testing. In your example, you have one component plan consisting of 2 people: the targeted HCE and the lowest cost NHCE (based on age and pay) - this component is tested on a benefits basis. Then, you have a second component plan with the other 4 HCEs and the other 4 NHCEs - this passes on a contributions tested basis. Even though this component plan is not cross-tested, they must receive the gateway because another portion of the plan is benefits tested (unless some other rare exception under 401(a)(4) applies to allow you to avoid the gateway). The gateway is a planwide minimum, not a component minimum. This avoids the ABT because each HCE rate group is over 70%.

If you're working on a DB/DC combo, watch out for the highest HCE rate for purposes of determining the minimum gateway. If you decrease the testing rate, the present value of the accrued benefit tests as a higher HCE rate (lower rates produce higher lump sum values). So as your HCE allocation rate increases the minimum gateway could increase. For example, suppose at an 8.5% interest rate the "HCE rate" for testing is 26%. This makes the combined plan minimum gateway contribution be 6% of pay for the NHCEs. Now, if the testing interest rate is 7.5% instead, the "HCE rate" for testing might now be 34%, making the cross-over into the next higher minimum gateway, in this example from a 6% minimum gateway to a 7% minimum gateway. Sometimes just a lower post-retirement interest rate will get the changes that you need, while avoiding the jump by 1% into the next gateway. There are also some instances when a different mortality table for testing will help the results. But generally, testing by using either GAM71 Male or by using IAM83 Female will probably be enough (but not always). If you have a DB plan in the mix, you should also consider carefully which mortality tables and interest rates you'll be defining for your actuarial equivalence, and if it's a cash balance plan, consider the crediting rate and how that rate and the mortality affect both 401(a)(26) and 401(a)(4).

Of course, you must first pass the coverage test under Interal Revenue Code Section 410(b). To properly run this test you need to answer a few questions first (here are just a couple of them): 1. Are the two companies a controlled group (who is the other 50% owner and how are they related to you)? 2. Are the two companies an affiliated service group? If the two companies are considered to be an affiliated service group or a controlled group, then you must consider the employees in both companies when determining whether or not coverage passes. As ETK indicated, just because you have a controlled group (or an affiliated service group), that does not require both companies to be covered by one retirement plan. If you can still pass coverage with one company excluded, then you are not required to cover that company. As you can imagine, Congress makes exceptions to the rules and they (or the folks at the Treasury Department) make exceptions to the exceptions, and so forth - which can change everything mentioned above. Also, certain plan documents might require all members of a controlled group or affiliated service group to be covered by a plan if just one employer adopts such plan. So, be careful out there!

Okay, my penance will be to provide some citations: I'll just point to the preamble to final 401(k) regulations: A. General rules relating to the ADP test ...Section 401(k)(3)(F), as added by SBJPA, provides that a plan benefiting otherwise excludable employees and that, pursuant to section 410(b)(4)(B), is being treated as two separate plans for purposes of section 410(b), is permitted to disregard NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A). Thus, the regulations permit such a plan to perform the ADP test by comparing the ADP for all eligible HCEs for the plan year and the ADP of eligible NHCEs for the applicable year, disregarding all NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A). Because section 401(k)(3)(F) is permissive, the final regulations follow the proposed regulations and do not eliminate the existing testing option under which a plan benefiting otherwise excludable employees is disaggregated into separate plans where the ADP test is performed separately for all eligible employees who have completed the minimum age and service requirements of section 410(a)(1)(A) and for all eligible employees who have not completed the minimum age and service requirements. Basically, a new plan of a new employer automatically passes. Other rare circumstances too. I hope that helps.

-sigh- Thanks Tom!

All the employees are tested in the under 21/1 group. OEE allows you to test two smaller "plans". One being the over 21 and over 1 year group, the other being under 21 or under 1 year group. Normally, only NHCEs end up in the under 21/1 group so it automatically passes. But that is not the case here - with the facts you have provided, they have an HCE so it must be tested.

1.401(a)(4)-8(b)(2)(i) indicates that the accrual rates are the result of normalizing the increase in the account balance divided by the number of years in the measurement period in which the employee benefited. 1.401(a)(4)-8(b)(2)(ii) allows you to just use the current year as the measurement period and to ignore gains/losses/expenses. I think a frozen DB plan with accruals that occurred during any part of the measurement period would be included in such accrued-to-date testing.

In a DB plan, employer contributions are not tested for nondiscrimination. Instead, the benefit accruals are tested. For the average benefits percentage testing: 1) Annual Testing. If the annual testing method is used, then the annual allocations in the DC plan and the annual accruals for the DB plan are both included. The DB figures are all zero so they don't change the results. 2) Accrued-to-date testing...yeah...hmmm. Well, I am not so sure what happens if you are trying to test using the accrued-to-date approach. If that is the case (it probably isn't), then I have not looked up this answer - maybe this will drum up additional comments. I would guess that you must include the DB plan's accrued benefits with the testing of the DC plan's account balances.

A prospect says they have a DB plan and that they are a "cash basis" S Corp filer. Plan year and business tax year are the same. They believe they must fund the contribution by the end of their fiscal year in order to get a deduction on their business tax return that covers that same year. They state that any amounts contributed after the end of their plan year, even if they are for purposes of minimum contributions, can only be deducted in the year the contribution is actually made. Does this sound right?

Bill, the 50% owner of the corporation, buys the other 50% from his sister Mary in mid-2009. He does not have enough cash to do this, so his sister holds a promissory note (more on this later). The company has a calendar year 401(k) plan. Mary is an employee and is still an HCE in 2010 due to her prior ownership. Mary did not retain any repurchase rights, but she held liens/collateral interest in her company shares, the building, some land, etc. as security for the promissory note from her brother since he did not have the cash to pay for her shares outright. Mary's wages have always been only about $50,000 per year so she is not an HCE due to wages. Is Mary an HCE in 2011? Is Mary an HCE in 2012?

Watch out for the SPD language if you have a system generated SPD. We had to do a lot of manual SPD modifications for a recent plan we did like this. Also, the checkboxes on any current 403(b) plan are not like the checkboxes for a prototype DC plan or a vol sub DC plan formatted with an adoption agreement. Instead, all 403(b) plans are currently individually designed (even if it uses an adoption agreement and a basic document). No IRS agent has provided approval for the 403(b) language you are using right now. So you might not have the kind of restrictions listed in your adoption agreement like you usually see for a pre-approved adoption agreement. FWIW.

Although somewhat rare, a 403(b) plan could be written such that it only has employer contributions - no deferrals. So, yes I think it is possible to have a January 1, 2013 effective date as long as your deferral effective date is current or prospective. Will your document allow for that?

The proposed regulations allow a fixed 5% rate. Since these are not final regulations, you might be able to use a higher rate and say you used good faith compliance that your rate did not exceed the market rate? Some say the final regulations might allow a fixed rate of 5.5% (the 415 interest rate). We'll see soon, hopefully.

Derrin Watson recently did an advanced topic in cross-testing session at the SunGard Advanced Pension Conference in Chicago where he had about 7 or 8 slides which included a good explanation and a good example. He credits Tom Finnegan of The Savitz Organization for his assistance. Not sure if this topic might be in any of the ERISA workshops SunGard is doing, but if you have any SunGard product, perhaps you could ask Derrin for a copy of those slides and see how it goes. Or maybe test using highest consecutive 3-year average compensation, or highest 4-year average, or 5-year, etc. Or comp from date of entry. Or if you need testing fixed for just a year (or a few years), perhaps accrued-to-date testing might help.

To get the maximuim, shERPA is right: 25% of $134,000 = $33,500 (maximum deductible employer contribution is 25% of eligible compensation). This amount is not subject to FICA tax. plus a $17,500 deferral. This is subject to FICA. This amount is not part of the 25% employer deductible contribution limit. The deferral is deducted by the employer as employee wages (regardless of whether the employee chose to defer as Roth or pre-tax). Total $51,000 If the employee was born on 12/31/1963 or earlier, they can also defer an additional $5,500 in 2013. The $5,500 is treated like a deferral above. Total $56,500 Assumes no other deferrals made that are subject to the 402(g) limitation, since the 402(g) limit is an overall individual limit, not just a single plan limit.

Okay, and the silly example should have used 60.01% as top heavy, not just 60%. The dividing zero by zero thing is more tongue-in-cheek for me, not for serious consideration - it's an obvious mathematical logic fallacy. Your mathematical proof is certainly more pursuasive: can $0.00 exceed 60% of any balance, including zero? Certainly not. Good thing the rule is not equal to or exceeds 60%.

Also, but probably not your concern, you may want to mention to your client that it's assumed the CPA has advised them regarding reasonable compensation. There are many tax cases out there where the IRS comes in and declares certain amounts really are wages. Since that could, in turn, affect the plan, it might be worth mentioning.

Not a QNEC. Under the 401(a)(4) regulations, "plan" has special meaning. See the definition in 1.401(a)(4)-12, which refers you to 1.410(b)-7. There you find that the portion of a plan that is a section 401(k) plan and the portion of a plan that is not a section 401(k) plan are treated as separate plans. Similarly for match (401(m) plans). So when 1.401(a)(4)-11(g)(3)(vii) applies and it used the term "401(k) plan" it means only the deferral portion of a 401(k) profit sharing plan. That subparagraph requires the correction for a 410(b) failure with respect to the plan's deferrals to be done using a QNEC. I see no other section in -11(g) that requires a QNEC. That being said, are you trying to provide additional "profit sharing" (nonelective) to pass testing but the folks getting the extra PS are terminated non-vested? If so, then you would have an issue with 1.401(a)(4)-11(g)(4) regarding the substance requirement. Is this why they are asking for a fully vest allocation?

No to the first part - the 5500 count is not determined by counting only those who defer and/or counting just those with accounts. I remember something about perhaps ASPPA having asked the DOL to consider changing the accountant's opinion requirement to be applied, at least for 403(b) plans, to only those plans with over 100 participant accounts? Maybe I was just dreaming that they asked the DOL about this? Anyway, we have seen this exact problem and the solution presented was to go back and get audit reports for the Form 5500 and file under DFVCP. It's just not the kind of advice that wins over a prospect.

Perhaps implementing a 500 hour rule for accrual would help the plan going forward? Unless, of course, that then prevents enough terminate participants from helping the plan pass 401(a)(26).

I'll make a general statement: you must consider all benefits of all the employer's "plans", and that includes each component of this plan, but you can ignore certain mandatorily disaggregated plans. So this employer probably just has the one "plan", right, a 401(k) profit sharing plan with match? You run one average benefits percentage test for that entire plan. You can run that on a benefits basis or on a contributions basis. If your document does not require otherwise, you test using average compensation, current compensation, compensation from date of entry, using any definition of compensation which passes 414(s). You can test with imputed disparity, you can average some employees' benefit rates, you can use various mortality and rates from 7.5% to 8.5% differing for pre/post as an assumption, you can use nearest age, last age, you can try accrued-to-date testing and rate banding, plus many other options until you can't stand testing anymore. You do not run an average benefits percentage test for component #1 and then another for component #2. Component testing does not in and of itself change the result of the average benefits percentage test (but your assumptions and methods certainly can and do). If component #1 tests the nonelective contribution as a benefit payable at the testing age (cross-tests), and if the HCEs rate groups do not each pass with a 70% pass rate, then your average benefits percentage test for the plan must be at least 70%. And yes, the average benefits percentage test must include the other "plans". Those "plans" include the deferral "plan" and matching "plan" within the overall "plan". I hope this helps?

If the plan only has HCEs, the usual profit sharing or 401(k) document with each participant in their own allocation class should be easy enough. No cross-testing (or any 401a4 testing) needed if the only eligible employees are HCEs. Assumes the plan passes coverage.