John Feldt ERPA CPC QPA

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.

So this does not become a benefit right or feature that needs testing, when ten years later, the HCE is the only one who has this?

Perhaps this boils down to the definition of the "first plan year" under 416. If you argue that for purposes of 416, the 2011 year is truly the "first plan year", then the plan could be considered as not top heavy in 2012. On the other hand, if you argue that 2012 is truly the "first plan year" because no funds had been deposited to mark the beginning of the plan's trust yet for 2011, then the plan could be considered as top heavy in 2012. I don't see any guidance to this specific issue. Would I be able to stand in front of an auditor and say 2012 is not top heavy and keep a straight face? Maybe, but I would rather discuss the situation with the client and see if they think it may be worth getting a legal opinion, but definitely let them decide the route to take here. Either way chosen, it works out mathematically: 6 / 2 = 3, as proof of this: 2 x 3 = 6 0 / 0 = 59.9, because 59.9 x 0 = 0 (not top heavy) 0 / 0 = 60, because 60 x 0 = 0 (top heavy)

I do not disagree.

No later than the last age in the actuarial chart? Maybe FAPInJax meant there is no maximum age, but left out the "no"?

I doubt the IRS would approve a basic document to have language in it that allows an allocation condition to the gateway. I seriously doubt ASC would write it that way too. That does not mean you can allocate any extra PS above the gateway however, because that would be a profit sharing allocation, which you stated has a 1000 hour requirement. Put each person in their own class and remove the allocation conditions. When each person is in their own class, you could still choose to not allocate PS to those with under 1000 hours and/or are employed on the last day as long as all the nondiscrimination tests and coverage is met.

Very useful, yes - thanks!

Okay. I should also add that any steps taken should not further the plan's operational error. For example, a document I am looking at does not default the plan into "test mode" for ADP purposes if the employer merely fails to give the SH notice. The document indicates that the employer can utilize EPCRS, including SCP, VCP etc. to fix any errors. Thus, it could be another operational error if the plan forged ahead, ran an ADP test, and just made refunds to the HCEs. In this document, the only way that could be correct would be if the employer, decided that was how EPCRS would have it fixed for that year. The actions to fix must also align with the document. edit to say: Aw, PensionPro beat me to making that point.

Maybe the punishment is the mere payment to the IRS for the VCP application. Calendar year plan. Suppose the first payroll of the year is on January 31. The employer hands out the notice on the 2nd of January, just 29 days before that first payroll - yes it's too late anyway, regardless. What is the harm in asking the IRS under VCP to allow the plan to be considered as safe harbor for testing purposes for that year? Certainly they could say, "no way, Jose, we won't agree to the fix you presented here." But it seems reasonable to at least ask, and that certainly does not mean you must ADP test, perhaps they will agree with some other way to give the plan its fix for the year.

First, a minor point: the SH notice deadline is, according to the regulations, due within a reasonable period of time before the first day of the plan year. The IRS will not question a notice provided at least 30 days and no more than 90 days before the beginning of the plan year, but I have not personally seen them try to challenge a notice given 25 days before the beginning of the plan year. As long as the plan's written language itself did not require the 30 days, you have no operational error for giving the notice with less than 30 days to go, but you do fall outside the "we're definitely safe" zone, into the "I wonder what an IRS agent may think of this" zone. No big deal here. Now to the real question: What if you have the language in the document but you didn't give the notice? You have an operational error. What does the plan say in it to fix operational errors? I'd bet it might mention the EPCRS program. Anyway, the plan has failed to act in accordance with its terms. If you discover this problem just a few days after the beginning of the plan year, and if the employer is otherwise eligible for self-correction (has procedures and has reliance on the document language), then perhaps the employer could argue that this is self-correctable by merely giving the notice right away. If so, then document the error, document the steps taken to "fix" it and when it was fixed, and document the procedural change so it can be prevented from happening again. If the employer does not think SCP is the way to go here, then they could submit a VCP application with their mea culpa and offer to the IRS something they think the IRS might agree with, almost anything can be tried here, and you won't know what they will truly accept until you show them all of the facts and explain the circumstances to them. Maybe the worst option is for the employer to do nothing about it and play Russian roulette with the plan.

I would agree. If something happens that subjects the participant to require a gateway (such as a 3% SH allocation, or a top heavy minimum allocation, or a forfeiture allocation), then the gateway minimum for this participant should not be offset by the cash balance accruals that are credited to the other NHCEs.

There is no such thing as a safe harbor match that is contingent solely upon the issuance of a participant notice being provided each year. If a plan is going to provide a safe harbor matching contribution to avoid the ADP test and presumably the ACP test, the safe harbor match provisions must be in place in writing before the beginning of the plan year and a notice must be provided a reasonable amount of time prior to the beginning of that plan year. Thus, as Tom also stated, for the plan to be a safe harbor match plan, some written plan document language or plan amendment language must say it is. A mere statement saying the plan might provide a safe harbor match - indicating no SH match occurs when no notice is provided, and a SH match is contributed if the employer provided the notice, should not be sufficient to satisfy the regulations as it places the safe harbor provisions outside of the written terms of the plan and into certain actions that are discretionary by the employer.

Yes, although not all of them must benefit at 0.50%. Under 401(a)(26), at least 40% must have "meaningful" benefits, that's where the 0.50% comes in. For larger plans it's just 50 employees instead of 40% of the population. For a small employer, if the only 2 employees meet the age and service rules, then at least 2 employees have to have meaningful benefits. In contrast, under 401(a)(4), as discussed in the posts above, we just look for anyone who is merely "benefitting" - which is any accrual. For 401(a)(26) we must count the number of NHCEs whose benefitting amounts are "meaningful". The IRS generally believes this means the participants need to get an accrual in the form of an annuity payable at the participant's normal retirement age of at least 0.50% of pay in order to be "meaningful". This is not a regulatory minimum, it is from internal IRS documents on what they think "meaningful" should be. Again, as before, the 0.50% is an annuity (the accrued benefit) as converted from the cash balance credit, not the actual lump sum cash balance credit itself. So, in the example given where a recent design provided a 2.20% pay credit in the cash balance plan, it turns out that this provided a meaningful benefit to 50% of the employees. edit: typo

Some examples and comments to clarify Lou and Tom's comments above, and to expand on this topic: In a recent design proposal, a 2.20% of pay hypothetical cash balance credit resulted in an average of only 0.57% of pay for this offset - the offset varies based on the plan's NHCE demographics. In another design, a 2.1% of pay cash balance credit to all the NHCEs except one, who was given a 40% of pay credit, resulted in an average offset of 3.2% of pay for the NHCEs (the one NHCE was the sibling of the 100% owner). So, for example, suppose your cash balance plan provides a hypothetical credit equal to 2.2% of annual pay for each NHCE with 1,000 hours in the plan year. The gateway is a percentage of pay as an allocation. Thus, the 2.2% of pay benefit must be converted into its equivalent accrued benefit using the plan's definition of actuarial equivalence, then converted into a lump sum value at the testing rate (do not impute disparity on this, per 1.401(a)(4)-9(b)(2)(v)(E)). I think there may be some that disagree about whether you must convert to the lump sum at the testing rate, but that's not the point here. This lump sum is divided by pay in order to get an equivalence DC-like allocation for gateway purposes. At this point you have each NHCE's individual equivalent value for their cash balance credit, let's say it ranges from 0.38% of pay to 0.73% of pay and the average is 0.57% of pay. You now have at least three options: A) Directly offset each NHCE by their individual equivalent values for their cash balance credit. This is based on the literal reading of Treasury Regulation 1.401(a)(4)-9(b)(v)(D)(1). This can result in a non-uniform DC allocation from 6.77% to 7.12% of pay, because each NHCE age produced a different offsetting value. Under this option, those not in the cash balance plan have no offset and those eligible in the cash balance plan who are receiving no cash balance accrual also have no offset. Employer's tend to prefer uniformity, so this method is rarely applied. B) Give each NHCE 7.50% in the DC plan. This is based on Treasury Regulation 1.401(a)(4)-9(b)(v)(D)(2). This may be easiest, and is probably fairly common. C) Average the equivalent values from the cash balance plan and offset all of the NHCEs who benefit in the cash balance plan. In Treasury Regulation 1.401(a)(4)-9(b)(v)(D)(3), it says "a plan is permitted to treat each NHCE who benefits under the defined benefit plan as having an equivalent normal allocation rate equal to the equivalent normal allocation rates under the defined benefit plan for all NHCEs benefitting under the plan." Thus, only those benefitting in the cash balance plan are offset. In this example, the resulting DC plan allocation is 6.93% of pay and the DB plan's 0.57% takes care of the rest, albeit the 0.57% is actually a pay credit of 2.2% of pay! Note: Suppose the DB plan did not have a 1000 hour accrual requirement, or suppose it only applied the 1000 hours as a requirement for HCEs (the largest benefit costs). If that was the case, then each NHCE can get the offset, resulting in a lower uniform allocation and perhaps 401(a)(26) will be a bit easier to pass, even if young NHCEs leave employment before working 1000 hours.

Will any participants elect an annuity form of payment? If the plan has to purchase any annuities, it seems likely that will use up some excess.

So unless you absolutely have to test these contributions on a benefits basis to pass, no gateway is necessary. If you find some other option to pass 401(a)(4) without the cross-testing, you reached your destination without taking the road through Tom's magical land.

Is the one person an HCE? Probably is, right, so then the fee applies: the small plan IRS-user fee exemption does not apply if the plan has no NHCEs. The 5300 user fee is actually $2,500 (it used to be $1,000 a while back). Why would you put a one person plan into a cash balance document? If the 1-person is a non-HCE then it depends on how old the plan is to determine whether or not it has to pay the user fee.

If the 401(k) plan is established, the SIMPLE gets in trouble and no more SIMPLE contributions can be made. The money going into the 401(k) plan is permitted, but no more can go into the SIMPLE. Here's the IRS fix it guide: http://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-Fix-It-Guide-–-Your-business-sponsors-another-qualified-plan

And, does it matter if the owner and spouse are in a community property state, where the spouse is automatically considered to be a 50% owner of everying their spouse owns?

See attached, it now references all of c with d1 and d2 (3rd page, first full paragraph). fab2013-2.v2.pdf