ERISAnut

I see your confusion. What this provision is stating is that in order to get the maximum 5.7% allocation on the excess compensation of ($128,000), the allocation percentage for the base must be at least 5.7%. You may not allocate 4% on the base plus 5.7% on the excess. Remember, do not get confused in the changing definition of 'base compensation'. I typically use the entire $230,000 as base compensation (making the maximum allocation to excess comp the lesser of 5.7% or the allocation percentage applied to the base). Now let's suppose that my I consider base comp as $102,000 and excess anything above the integration level (as always). In such view, the maximum allocation to the excess compensation is the lesser of the lesser of twice the percentage allocated to the base or 5.7% plus the percentage allocated to the base.) Plugging in numbers, if the base is 10%, then the maximum excess is the lesser of 20% or 15.7%. If the base is 3%, then the maximum excess is the lesser of 8.7% or 6%. Does this help?

I think it is important to note that you are dealing with a imperfect process due to rules being written to allow things that are not adminstratively feasible. When this is the case, then the key is to not ponder what is legal, but instead adjust your process to operate within the framework of what it administratively feasible. There is not a recordkeeping system developed that accounts for this. Why not? Because it shouldn't be an issue. If you make the argument that because the new Regs allow it we will do it, then be prepared to spend additional hours addressing these issue with your clients. Simply avoid deducting deferrals from the last payroll after severance. This doesn't even require a change in the plan's language since the plan adminstrator may reasonably interpret the plan's provisions to say you are no longer an employee and therefore ineligible to defer. In such instance when this is CONSISTENTLY applied to all employees, the standard is that the interpretation may not be 'arbitrary and capricious'; and the IRS will never touch that one.

The easiest way to do this is to make a quick determination of whether the owner will receive the maximum integrated contribution (230,000-102000 x 5.7%) = 128,000 x 5.7% = 7,296. When will this be the case; when the base allocation (excluding the SHNEC) is 5.7%. (230,000 x 5.7%) = 13,110. This solves your integration aspect and everything else is prorata based on compensation. So, you know once the employee maximizes deferrals that there are an additional $30,500 in employer contributions needed to reach the 415 limit. How much of this 30,500 has been contributed by the SHNEC and other discretionary profit sharing. $27,306 (6900 + 13110 + 7296). Now, what percentage of the owner compensation is the remaining $3,194. (3194/ 230000) = 1.39% This 1.39% is added to the 5.7% base to get 7.09%. Therefore, your discretionary PS is 7.09% of base compensation plus 5.7% of excess compensation. Remember, base compensation is being defined as the entire $230,000. Once this formula is determined, you will apply it to your entire participant base (as this is your uniform formula which maximizes the highest paid HCE and then gets applied to everyone else). DO NOT READ FURTHER AS IT WOULD ONLY CONFUSE YOU: There are some that may consider base compensation is as the integration level. In such instance, the formula is 7.09% of compensation up to and including the TWB plus 12.79% of compensation exceeding the TWB.

I never find it useful to compare IRA functionality to Qualified Plans as it tend to add more confusion to a seemingly complex system of tax advantaged plans. The simple fact of the matter is that that qualified plan assets are part of a trust (a legal entity separate from the employer and employees) that is operated under the shield of ERISA. IRAs are not. As for the arguments for the fees for expenses incurred in the operation of a qualified plan to be paid by the individual employees (at their own discretion) would appear to undermine the notion that each separate account is still part of the qualified plan's trust. But, hey, this is a risk assessment that would ultimately be made by the owner of the company. Good luck.

You have to break issues like this down into simplified components. The confusion takes place when you attempt to combine them together while overlooking some fundamental rules creating the framework of a qualified plan. With that said, 'not a chance' is the answer to your question. 1) The fees being paid are paid by one of two methods; the plan or the plan sponsor. If the plan sponsor is paying the fees, then that is a plan expense paid for by the employer sponsoring the plan. If the plan is paying the fees, then that is a plan expense paid for by the investments inside the plan. 2) So cherrypick the employees and allow them the option of paying the fees from their own pockets while others do not would serve to undermine the governing principle that these assets do not belong to the participants; but belong to an ERISA protect trust that require they are used exclusively for the employees (and their beneficiaries). 3) Another argument against would be that this would be the equivalent of a contribution to the plan by a participant who wants the investments replaced when his account was hit with the fee; while other employees who are strapped for cash would choose to continue allowing the plan pay for their separate accounts.

I would use it in a heartbeat. The issue is that most prototype documents are not designed to allow the F&C method on the elective deferral source of funds; which is the only source of funds the hardship rules are written to restrict. Therefore, when dealing with Matching and Nonelective Contributions, F&C becomes as viable (and even more viable) than anything else. When you are looking at F&C on the deferrals, then you are looking at an individually designed plan.

To add a little emphasis to Tom's statement; whatever you do, consistency is very important. You typically want the process to flow smoothly by being designed as consistent. When you get into the world of 'include this one in the test for new year because he made a deferral, even though he was terminated in prior year' you have now opened the door to including everyone who received a final paycheck (and was eligible to defer) but didn't defer because they elected not to.

Terms like 'permit deferrals' and 'are not required to cease' would suggest that there is another choice available to the employer. That choice is to operate the plan to avoid this issue by ensuring no deferrals are made from amounts receive after the employee has severed employment with the company. Wouldn't that be the reasonable choice given the current circumstances? This would clearly qualify as another reason to NOT defer from post-termination payroll.

Any employees who have met the inital age and service requirements on 1/1/2007 are the number of participants on the first day of the plan year; even though the plan did not become operational until July. That is how I would determine the number.

The fiduciary responsibility is to ensure the loan is adequately secured at the time it is issued, and to continue to ensure the plan participants, as a whole, are protected from a loan that is not being repaid. Now, when viewing these rules, you have to account for all that has changed since these rules were first written. First, many plans now have daily valuation where the loans are adequately secured at the time of issuance by selling off the participants mutual funds and issuing a loan. Therefore, this transaction does not affect any participant in the plan other than the participant receiving the loan. While he receives cash from the plan, his accrued benefit remains unchanged since the plan assets in his account include a receivable of the loan amount. So, he doesn't pay. The other particpiants inside the plan are not adversely affect in any way by this. Now, the circumstances would be different in the event the plan is on a balance forward platform and the loan is a pooled asset. In such event, the plan administrator has the fiduciary responsibility to protect all plan participants from losses resulting from the non-payment. To guard against this, may traditional plans would not allow any subsequent distributions (i.e. inservice at 59 1/2) until the outstanding loan was paid off (either prior to application or by using the proceeds from the distribution). So, what is our fact pattern?

The series of events in your question are a little off base, which does make it confusing. You are not electing union benefits. You are electing to be a part of the union. Once you are part of the union, your benefits (of the union you are now part of) has been determined under a collective bargaining process. Therefore, you are a union employee whose benefits are subject to good-faith bargaining. If you are not part of the union, then you cannot receive the benefit being provided by employees of the union. You are putting the cart before the horse.

The issue with attempting to address the question is an inconsistency with the terminology being used. Your fact pattern suggests that the company is a partnership where it appears to operate as if it is an LLC taxed as a corporation. When considering K-1 when the entity is taxed as a partnership, only certain parts are considered 'earned income' to the owner while the remaining parts are considered passive income. However, if the entity is taxed as a corporation, then owner's benefit would be determined based on the W-2 compensation each owner takes; leaving all reported K-1 as passive income. To suggest that they are taxed as a partnership while an owner receives W-2 lends itself to questions as to whether the fact pattern is correct. While it may be, try to ask the CPA preparing the K-1 to determine which amounts will be subject to FICA. This will certainly reveal your benefits eligible compensation of each owner.

The loan procedures are already in place to govern the pattern of events surrounding a loan default. Contrary to popular belief, a loan default is simply when the borrowed fails to abide by all conditions in the loan contract. Failure to pay is simply one way, but a loan may go in default when the participant actually quits his job. Now that the loan is defaulted, the procedure is that the participant has a right to cure the default by paying the loan off in full (as typically the contract would state that the loan is considered due in full upon default). The issue here would imply that the loan contract would state that the loans are to be paid by payroll deduction. This in no way supercedes a payroll departments responsibility to honor the instructions of the employee who is due the funds. If such employee instructs the payroll department to discontinue any deductions, that is the authority; nothwithstanding any other agreements the employee may have. This becomes an issue of state law, not federal. The loan provisions are already written to address the federal end since the loan is considered 'adequately secured'. The loan policy may actually be written to not require payments be made through payroll deduction. In the event it is written, that doesn't supercede the garmishment rules of any state.

Austin, Your wording is very confusing but I think I get the essence of your question. You are correct that a hardship is 'deemed' to exist under the safe harbor conditions (regardless of whether the need is an immediate and heavy financial burden). Therefore, under such condition, the participant may take a hardship from the plan. Since the check is issued directly to the participant, there couldn't possibly be any control over what she actually does with the funds. Your question, however, seems to imply that she has a plan loan and simply wish to discontinue the payments of the loan. The method chosen to do this is to take a hardship from the plan instead of defaulting the loan. I have always maintained the position that the participant can simply send a written request to the payroll department to discontinue having the loan payments deducted from her payroll. Of course, the payroll department may argue that they have a legal right to continue withholding the loan payments; but the garnishment rules of the particular state may not support the payroll department (after all, the loan payment being withheld from payroll is not per a court order). As soon as this payment is discontinued, it would constitute a default on the loan; where the participant may cure by paying of the loan in full.

Sure you can. The only requirement for Safe Harbor is that the NHCEs receive it. Your issue would be to map the desired provision correctly on the plan document (assuming you are using a prototype). Most prototypes have boxes for excluding all HCEs and excluding HCEs who are Key Employees from the Safe Harbor Contribution. You may actually exclude any class of HCEs from the Safe Harbor Contributions, but must fit it correctly on your document.

Why is an elective deferral being withheld by someone who is no longer employed? You must actually be employed in order to make an elective deferral; not have been employed but actually employed at the time the compensation is to be received in cash or deferred into the plan. Therefore, if the participant terminated in 2006, but received pay in 2007, he shouldn't have had a deferral. Even though he is a participant in the plan, he is not an employee at the time the compensation is paid. It would be a good practice for your payroll department not to withhold elective deferrals after the participants have severed employment.

Correct. Each plan is continuing to operate as if the companies remain unrelated throughout the transition period. Each company will continue to identify their HCEs using their respective elections for Top Paid in order to do so. The reason the question never came up is that you cannot perform a coverage test without first identifying the HCEs; so that is considered a part of that coverage testing process.

Jim, This is purely a service issue. The legal function of the plan has been successful in dealing with those participants who simply do not respond. What Hancock (enjoyed him in the movie) is doing is simply notifying you that these are potential contacts for some financial advice or other services you offer (I am assuming you are a Financial Advisor). There are no legal issues. There are tons of fiduciary issues that do not need to be addressed as the system that is working is doing exactly what it was designed to do; invest the funds for those who simply do not respond.

Also, in the event your interpretation of the plan document leads you to any answer other than the fact his matching contributions must be reinstated, then you should seek another interpretation:-) Actually, they are required to be reinstated. If he was 40% vested and taken that balance at the time he left the company, then the plan may require him to redeposit the 40% vested amount he took in order to have the 60% forfeited amount reinstated. In this case, he was zero vested and cashed out. Therefore, upon his return, there is no vested match to redeposit. So, the plan is required to redeposit the entire match that was forfeited.

Earl, If I am reading your question correctly, you are asking if the HCE determination remains consistent during the TRANSITION PERIOD where one of the companies uses the Top Paid Election and the other doesn't. If this is your question, then your suggested answer in your initial posts are correct. Each plan will continue to determine HCEs under their respective methods. The underlying purpose of the transition rules is to continue treating the plans as if they are plans of unrelated employers. This will remain true through the end of the transition period or until there is some significant change in coverage. Is this what you are getting at?

While the 403(b) is subject to the universal availability rules, the church is exempted. Therefore, the church may cherrypick the employee who are eligible for the plan. The SEP IRA, on the other hand, does not have the functionality to exclude members by class. It is possible to include the ministers in the SEP, as well has allowing them to remain in the 403(b). They are separate for 415 purposes as well.

Mike Preston, you know all your rhetoric and pages of writing is attempting to explain something that isn't really complicated at all. Why even go with DB/DC combo suggestions when the issue is only one plan. Also, you should never attempt to imagine what I might in an attempt to give yourself some false credibility. I am sure by now you have contacted one of your local professionals and becamed enlightened to the fact that the mere application of an average benefits tested does not preclude you from having the meet the gateway requirements when cross-testing. Yet, you take that lame position with all the other inexperienced individuals and use my position to attack my character. Futher, you will now begin to reference my login name during your longwinded answers. You're weaker than I thought. But for yourself, and the rest of the viewers, please explain what your local experted educated you on the issues of gateway applicability.

Perhaps you should think about the process and imagine why an exact analysis on the figure provided would be impossible without knowing the earning piece and then jump in and answer it yourself; since you think you know everything.

Yes, it must be reclassified; and leaves him a deferral limit of $20,000 (less the reclassified catchup amount) for 2006. This would be different had he deferred during the first part of 2006, as his deferral limit for the year would have remained at $20,000. I am scating around the numbers as I do not know the "earnings" portion of your figure. Can you explain how the "earnings" portion of the figures makes any difference, at all, to the determination of remaining catchups? Or how said portion might be relevant to the poster's question at all? She gave a figure of 1101.50. I didn't know whether that figure included an earnings calculation or not. If that figure was $1000 in contribution plus 101.50, then you must reclassify the $1000 as catchup for 2006 and the earnings remain. Hence, I scated around the numbers while the principles remain in tact. Didn't we have a discussion about cherry picking statements?

I'm not sure I followed this one. Plan is a basic Corbel Volume Submitter plan. Neither hours or hire date would fly? Why not hire date? I could see having problems making this a one off amendment basing it on letting someone in early, but not if it was left for all employees. In this specific case I'd only be changing entry date to quarterly instead of semi-annual. Or was that not what everyone was suggesting. Based on your previous post regarding the 3 month entry, these early entrants aren't considered includable in your coverage ratio test for the profit sharing plan. Why would you want to amend to increase the employees who are statutorily excludable from the test due to not having a full year of service for plan eligibility? So, to actually amend to provide entry and subject they early entrants to being the the denominator when they are currently excludable would seem to overdo it. Are you properly excluding these individuals with less than 1 year of service from the coverage ratio test?