John Feldt ERPA CPC QPA

I think Notice 2007-28 confirms that the 31% would be deductible. See Q&A #8. Make sure the DB contribution is only for mimimum funding and watch out for "eligible compensation".

I think Nationwide has a platform to handle 457(b) plans, but they usually use a TPA firm to do the admin work. Make sure the 457(b) only covers a select group of management employees, be careful. We use a law firm to draft the documents for the 457(f) plans. edited for typo.

Their plan document should have the language for this, in conjunction with its amendment for the final 401(k) regulations. 1) I think under the final 401(k) regulations, the ACP test is required if the plan imposes allocation conditions on any matching contributions, regardless of whether it is a fixed match or a discretionary match. But check the document/amendment. The pre-2006 rules had the 6% deferral matching maximum and the 4% maximum match amount, but the 4% limit only was applicable to discretionary match. 2) Safe Harbor contributions are 100% vested. You mentioned that they are doing the 3% nonelective contribution. If they are doing that, why are they also providing another Safe Harbor contribution (a match)? They would not need to do both to be considered safe harbor. If the match you mention is really just a fixed matching formula, and not a true Safe Harbor 401(k) match, then it would not have to be 100% vested.

You're welcome. By the way, you may as well adopt a 2-years of service entry requirement and provide immediate vesting and base the "contribution credits" on years after date of entry. They will "miss" one year of benefit accrual that way. Since you can't use 6-year graded schedule, it appears to lower the NHCE true cost (the amount paid out from the plan). Well, this lowers the overall ultimate NHCE cost, except when they quit between year 2 and year 3. Do a projection for 5, 6 or 7 years and look at the total account balance at that time compared to the plan without the 2 years of service entry requirement. If most NHCEs will quit during year 2 for your employer, or if keeping the ultimate NHCE costs down are not your objective, then just put in the usual entry dates and a 3-year cliff vesting schedule.

At the Annual ASPPA conference, Larry Deutsch asked Jim Holland how the 2 years is counted when running the valuation, suppose the valuation is a beginning of year valuation. Jim appeared to indicate that the valuation date is when we are determining the liabilities, so any amendments in the 2 prior before the valuation year would be disregarded. I can't remember if it was Larry or someone else who pointed out that the 412(c )(8) would allow us to count amendment in the current year then? Jim said no, and this now made it look like 3 years of amendments cannot be included when the language specifically states two. Jim Holland then left it as needing formal guidance.

Thanks Austin, I'll verify what actually happened in 2006 wrt deferrals.

In order to do the initial calculation and produce such a low RMD, was the plan required to have a payment option of a "100% j&s annuity guaranteed for 26 years (per ULT) with 4.99% COLA"? Probably a dumb question, I know. Also, I assume ULT = Uniform Life Table (which is how the 26 years was chosen so that the gurantee period does not exceed the life expectancy), is that correct?

If they receive 5% of 415 compensation in the DC, then they have met the top heavy requirement based on the scenario you describe. Be careful about compensation, 416 requires 415 compensation which can be different from the definition used for allocations. So, as long as 5% of 415 compensation is allocated, then you have met the TH minimum.

At the 2006 ASPPA annual conference Lisa Morjiri-Azad, from the IRS Office of Chief Counsel, Washington, D.C. stated that you cannot use the semiannual dates unless the plan defines the entry date that way. Craig Hoffman (the moderator) disagreed very strongly, as did the audience. We have not yet seen anything official in this regard.

This is in section 701 of PPA. The effective date section at the end of 701 has this: (3) VESTING AND INTEREST CREDIT REQUIREMENTS- In the case of a plan in existence on June 29, 2005, the requirements of clause (i) of section 411(b)(5)(B) of the Internal Revenue Code of 1986, clause (i) of section 204(b)(5)(B) of the Employee Retirement Income Security Act of 1974, and clause (i) of section 4(i)(10)(B) of the Age Discrimination in Employment Act of 1967 (as added by this Act) and the requirements of 203(f)(2) of the Employee Retirement Income Security Act of 1974 and section 411(a)(13)(B) of the Internal Revenue Code of 1986 (as so added) shall, for purposes of applying the amendments made by subsections (a) and (b), apply to years beginning after December 31, 2007, unless the plan sponsor elects the application of such requirements for any period after June 29, 2005, and before the first year beginning after December 31, 2007. Assuming this really is a different plan, not just an amendment of an existing plan, then if your cash balance plan did not exist on June 29, 2005, it must adopt at least a 3-year cliff vesting schedule from the start of the plan. Cash balance plans established before June 30, 2005 can wait until 2008 to change their vesting schedule.

Thanks, Archimage, I like your answer (not just because I like the result of course)! Here's that section of the regulation: 1.401(k)-2(a)(1)(ii): "HCEs as sole eligible employees. If, for the applicable year for determining the ADP of the NHCEs for a plan year, there are no eligible NHCEs (i.e, all of the eligible employees under the cash or deferred arrangement for the applicable year are HCEs), the arrangement is deemed to satisfy the ADP test for the plan year."

I'm not sure about the 5%. In the client meeting last year, they indicated that their one employee would certainly not work over 1000 hours, and thus never become eligible. Our first reaction had been to suggest safe harbor, just to be sure, but they didn't buy it.

Thanks, your help is very much appreciated.

A new 401(k) plan is effective 1/1/2006. For the 2006 plan year, only the 2 HCEs had met the eligibility requirements (and they deferred the full 402(g) limit). On January 1, 2007, one NHCE enters the plan. This plan is currently written to use the prior year testing method. If this new entrant is the only NHCE for 2007 and they defer zero for the year, what is the maximum percent that the HCE's could defer for 2007?

Blinky, Here's all I was able to dig up from the regs: 1.410(b)-4(b) Reasonable classification established by the employer. --A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification. and 1.410(b)-4(c )(3)(ii) Factual determination. --A classification satisfies this paragraph (c )(3)(ii) if and only if, based on all the relevant facts and circumstances, the Commissioner finds that the classification is nondiscriminatory. No one particular fact is determinative. Included among the facts and circumstances relevant in determining whether a classification is nondiscriminatory are the following -- (A) The underlying business reason for the classification. The greater the business reason for the classification, the more likely the classification is to be nondiscriminatory. Reducing the employer's cost of providing retirement benefits is not a relevant business reason. (B) The percentage of the employer's employees benefiting under the plan. The higher the percentage, the more likely the classification is to be nondiscriminatory. (C ) Whether the number of employees benefiting under the plan in each salary range is representative of the number of employees in each salary range of the employer's workforce. In general, the more representative the percentages of employees benefiting under the plan in each salary range, the more likely the classification is to be nondiscriminatory. (D) The difference between the plan's ratio percentage and the employer's safe harbor percentage. The smaller the difference, the more likely the classification is to be nondiscriminatory. Is the cite your suggesting from subparagraph (A) above? If so, I'm still not convinced that a hire date works.

For the DC plan(s) 415 limit: The $4.80 per hour contribution that goes into the DB plan does not count as an annual addition for purposes of the 415 limit for the DC plan(s), unless the DB plan provides for and somehow considers these amounts as after-tax voluntary contributions (unlikely). For the 415 limit in the DB plan, your actuary can help you with that. In a DB plan, the benefits accrued are limited by 415, not the contributions.

A prospect with a 32 participant DB plan indicated to us that: 1. Their plan does not allow any more new entrants hired on or after [date]. 2. The usual benefit accrual formula continues for all who entered the plan before [same date]. To me, it seems likely that this plan will eventually fail the ratio percent test when testing all employees who would normally have have entered without regard to #1 above (it might already fail, I have yet to see the data). When that happens, even if we run an average benefits test, how will such a plan continue to satisfy 410? I'm not sure that a 'hired after' date works as a reasonable business classification... Can we just ignore all of the employees hired after [date] when we do the coverage tests? If so, where's the code/reg or other cite for that? If the benefit accruals were frozen, sure, but that's not the case here. Am I missing something?

Well, the beginning of that link sure was interesting (if you're a math major). 21 / 7 = 3 Why is this true, well because you multiply both sides by 7 and get 21 = 3 x 7 So, 0 / 0 = 19 um, well, to prove that we multiply both sides by zero and we get 0 = 19 x 0 yeah, sure. So if you include them in the test (but please don't) then you can say it is equal to any result you need as Tom Poje indicated, but the IRS won't buy it (if they ever look into it). Since I wasn't watching this board in Feb 2004, I missed out on the singalong, bummer. Oh, and sorry Lynn (from Feb 2004), 0 / 0 can be any number you want (not the same as undefined, but instead, it's indeterminate). Undefined would be any number divided by zero, other than zero itself. If 1 / 0 = Z then Z has no option where 1 = Z x 0, thus Z is undefined. Man, that was fun!

If you look in the code, you'll find the answer as IRC Section 45E references IRC Section 408(p)(2)(c )(i) in order to define the term "eligible employer" for this purpose. 408(p)(2)(c )(i)(I): "The term "eligible employer" means, with respect to any year, an employer which had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year." To me, that looks like it's based on the number of employees, not the number of participants.

The top section of Form 8717 allows the employer to certify that they are an eligible small plan, thereby paying no fee to file a Form 5300, 5307, 5310 or 6406. This user fee exemption currently applies to any DC plan established on or after January 2, 1997 and to any DB plan established on or after January 3, 1996 (due to the way in which the remedial amendment periods have been established by the IRS). I am not aware of any additional required filing fee to obtain the determination letter if you qualify for the new small plan exception. The cost of filing is your own cost to prepare the proper forms and proper attachments. Under IRC Section 45E, the credit is limited to 50% of the first $1,000 in expenses. This is the credit that is available in the first credit year and each of the 2 taxable years immediately following the first credit year. The credit cannot exceed $500 per year and it's nonrefundable, meaning you may not generate an income tax refund for the credit. The Employer must have 100 or fewer employees and the Plan must have at least one non-highly compensated employee (NHCE) participating in the plan.

If the 401(k) plan is over the 100 participant threshold (or eventually goes over 120 if it's currently under 100 now), then an accountant's opinion would need to be attached to the Form 5500. Currently, 403(b) plans are exempt from this. That accountant's opinion will cost of a few thousand dollars or so. As TLGeer asked, what extra (better) features do they think they can get by switching to a 401(k)?

We have resorted to writing the language ourselves to modify the Sungard language. When we talked to Steve Forbes at Sungard, he indicated that they did not have language that they could simply provide to us (even though we are on their maintenance plans for DB and DC prototypes and for their DC volume submitter). He recommended that the Gateway amendment page be modified (of course). For each DB/DC combo, we pay close attention to that gateway language. Depending on how the plan design is finalized, we have added language to use 7.5% (or language for something less if we are offsetting the gateway by the DB accruals, or other language as needed). Then, because of our changes, we have new clients sign that amendment when they adopt the plan.

1 Does the company that provided you with the prototype continue to act as the sponsor of your document, meaning: have they kept it up-to-date with all IRS-required amendments (minimum distribution amendment, mandatory distribution amendment, final 401(k) / 401(m) amendment, etc.). If not, then your prototype determination letter has lost its reliance. 2 Have they timely provided you with the summaries of material modifications for these amendments for you to distribute to the participants and to include with the SPD whenever it is handed out to a new participant? 3 If your plan is a safe harbor plan (to avoid ADP and ACP testing, and possibly to avoid the top heavy test), have you been providing the required notice timely each year? If you have, did you make the necessary changes for your 2007 Safe Harbor notice when the language could no longer refer to the SPD for vesting and withdrawal provisions? If the plan is a safe harbor 401(k) plan, does the plan have allocation conditions for the company discretionary match (if you have a discretionary match)? - the Final 401(k) / 401(m) regulations would still require an ACP test for such match if you kept such conditions. 4 Speaking of testing, if the plan is not a safe harbor 401(k), are you doing your own testing? That would be the ADP, ACP, and top heavy tests? If so, does someone in your firm review these tests to make sure they are correct (peer review)? 5 Also, do you check the 415 annual addition limits, 402(g) deferral limits and the 404 deduction limits? Are those also peer reviewed? 6 Do you have someone annually review the operation of the plan to make sure that it conformed to the written language of the plan document? Is their work also peer reviewed? Well, this list could go on for several more pages, but I think you get the idea. I am gald to see that you are having a specialist look at the plan. Remember, these things need to be done every year, not just once in a while. For a very low annual fee, all of the above plus a whole lot more gets done and peer reviewed by professionals who make their living solely by loving the qualified plan code and regulations. Ok, maybe not really loving the code and regs, but enjoying the challenge at least! I would wager that your hourly billable rate multiplied by the number of hours it would take you to truly do all of the above correctly would far exceed the low price fee of most TPA firms. Please be aware that the IRS has a correction program in place (EPCRS) and when they find something wrong upon audit that could have been voluntarily corrected by going to EPCRS, they are not always kind and gentle about the fee (sanction) for the plan's noncompliance. They usually start at the maximum and negotiate down from that point. If you find something wrong in the plan, be sure to read Revenue Procedure 2006-27 (my copy is a mere 116 pages long). This procedure explains how to minimize the cost to the company to fix a problem, be that a document failure, an operational failure, a demographic failure that causes you to fail a 401(a)(4), 401(a)(26), or a 410(b) test, or an overall employer eligibility failure (which is when a company adopts a plan that they are not truly eligible to adopt). One thing that remains the same for qualified plans: change - the laws will change and the guidance provided by the IRS or by the DOL will also continually change how plans must be operated. Be sure to stay on top of these all the time (as you know PPA2006 added a lot of new law for qualified plans and the guidance has been trickling out ever since and will continue until at least 2011. Have a nice day!

As a side note, if not all of the participants in the MPP are 100% vested, and you don't want to vest them 100% when you merge, then be sure that the surviving plan retains a vesting schedule applicable to the accounts coming over from the MPP when they are merged in (or make the vesting faster if you want).

Unless I'm missing something, it looks to me like they can roll to an inherited IRA where the IRA is titled as mentioned in either Q&A-13 or Q&A-16, and based on your example, the payment method must continue on as is - it cannot be modified. So the only benefit might be a different array of investment options in the IRA. I also think the plan can only do this if it is amended to allow non-spousal rollovers. The provision is voluntary (Q&A-14), so you will not have until 2009 to adopt an amendment if you want to apply this now. I'd like to see other comments on this as well.