ERISAnut

Not really. But the true essence of a true-up is to have the formula applied over a unique period extending beyond a single payroll period. It could be monthly, quarterly, semi-annually, or annually. I would seldom speak in absolutes as everything is ultimately subject to what the employer sees as less risky. Have seen two different employers take opposites sides on what one term written in a prototype document means. Whenever possible, I look first to avoid the issue. When not possible, as in your fact pattern where the employer has expense concerns, then there are other methods the employer would consider. However, a reduced retroactive match is NEVER an option (the seldom absolute) as it would violate 411(d)(6).

In order to true up, there would have to be one formula for the entire year. That formula should be the highest one. Hence, an amendment to add true-up (which is basically applying the formula on an annual basis instead of payroll period basis) should be retroactive to the beginning of the year (and should therefore be a higher formula to avoid any cutback). It is more of a sync-up prior to the true-up. What it does is create a pattern of amendments to avoid the issue and stay safe; especially when the additional dollar costs are deemed negligible to the company.

I can respect the conclusion as it as been a subject of debate in the industry since I entered many years ago. For consistency, in this instance, you should be sure your 410(b) test is properly adjusted to show him as not benefiting for ADP. You wouldn't want him included as benefiting for ADP but then not have him included in the ADP test; that wouln't be consistent.

I wouldn't necessarily agree with that. The plan is subject to prospective amendment at any time; even if contributions are discretionary and the employer through it's discretion decides to increase the match each year. The rate of match, in this instance, would be applied to all employees in the same manner. This, Sieve, is consistent with the current availability. We agree. The effective availability, being based on facts and circumstance, is just that; subjective in nature. It would be difficult to pose a compelling argument that this amendment timing would provide a significantly higher advantage to HCEs than NHCEs for this reason; since the same formula is being applied across the board during each payroll period. I am thinking of the case of a true-up match at year end. If provided, everyone is ensured exact same 'rate of match' for the year. If not, then everyone is still assured exact same 'rate of match' for each payroll period. A problem, in this case, would appear to occur if the true-up feature was only allowed for a distinct class of employees comprising of mostly HCEs. But, I am having the issue with the fact that this is merely a prospective decision. Outside of the amendment timing being discriminatory, I wouldn't think it would be a BRF issue. However, to find common ground, I would consider applying the additional match retroactively to the 1st of the year while adding a true-up feature. Most times, it will be the HCEs who max out early in the year and would be adversely affected, so this option may not be necessary. But, by the same principle, if the employer were to prospectively discontinue matching at some point in the year, wouldn't the same rules apply. I wouldn't believe this to be a BRF issue, but a mere strain on the ACP test. Just my opinion.

Hell, That is a good question. It has always been my understanding that the language in the plan must be brought current. Of course, an EGTRRA restatement may serve as a catchall in many instances, there is nothing to suggest that the actual restatement is a requirement.

Assuming the ABT was run correctly, what would be the issue? Does the employer have other plans; or is this the only plan and the ABT test was ran to include all sources of this one plan in order to pass. The key here is that once you pass a correctly run ABT, then you have proven non-discrimination for 410(b) for all plans of the employer. This may be a compelling argument not to test any further.

Under a strict reading of the code, he would be included in the test since he has met the eligibility requirements for deferring into the plan. Nonetheless, this is a very poor plan design. Regardless of the definition of compensation for 'employer match and nonelective' to apply such a restrictive definition to compensation allowed for deferrals isn't good planning. But, under a strict reading of the code, he would be included in the test.

Loaded question. Deposit timing and allocated contributions are two distinct things, especially when the deposit is made after the year end. Therefore, part of the contribution may be considered as allocated to the prior year (i.e. 15%) while the other 7% may be a prefunded amount for the current year. Here's the rub, where were the contributions actually deposited. If these funds were placed into the individuals accounts, then you have opened a can of worms where the argument is that the amount was allocated (and a minds changed) and now the employer wants the money back. This would appear to undermine the entire purpose of ERISA. Again, this is a loaded question. Detailed fact pattern please.

Probably should have started a SIMPLE IRA, but too late. He can still initiate a 401(k) for the current year as the SEP (nor 401(k)) has any exclusive plan requirements. You should ensure the SEP is written to a prototype SEP (not the IRS Form). From there, just continue to fund the SEP or (leave the $4,000 there) and begin funding the 401(k) and profit sharing. The SEP contribution is treated as if it were a profit sharing contribution for deduction purposes. No big deal, just pattern you moves not to run afoul of any rules. You'll be fine.

Wow. Do provide some more details. Was the owner the only participant (and did the employee take 70% of the owners funds)? Who was authorized signor for disbursements from the plan; was a signature forged?

The issue becomes a makeup contribution that must be made to the plan. Regardless of deductible contributions in the current year, this contribution is provided to correct an inaction in the previous years. When this is the case, it is typically deductible as a necessary business expense for maintaining the plan.

There is not way to make after-tax contributions into a qualified plan without the ACP test. There is no safe-harbor. The director can, however, make a non-deductible contribution to a traditional IRA. That's $6,000 for 2008 if she is over age 50.

My approach, as always, would be to break this monster up into various components; and deal with each individual component. 1) Plan provided for mandatory profit sharing contribution to employees. The contribution was not made where the participants were entitled to this under the written terms of the plan. We agree that the contribution must be made. We question whether or not there should be a make-up of lost earnings associated with those 'employer' contributions not being made timely. While this may be debatable, I would argue the affirmative as the plan document language would likely presribe a deposit timing (by tax filing deadline including extensions). Based on this language, it may be a safe argument to provide lost earnings. However, if the plan language merely stated that in order for the contribution to be deductible (which would not make sense as tax-law determines deductibility), then there may be an argument that there wasn't an determinable deadline on which those contributions were to be made (but you'll never hear me make this argument). 2) If the employer has taken a deduction for these contributions during those respective years, but failed to make those deposits, then the employer would have to amend their income tax returns for those years. The contribution, when made (assuming current year) will be deductible this year as a reasonable and necessary business expense of the plan (IRC Section 162) and not subject to the 404 deductibility limits. 3) 415 Limits. There is a provision within 415 on the deadline in which amounts must be made in order to be considered annual additions for the year. From memory, I think this would not apply where the plans language required the contribution (since it was not discretionary). Would need to research. 4) 5500. Would amend to reflect the accurate series of events. It is possible to include a contribution and then accrue it on the form 5500. But, over several years... May be a judgement call, but I will amend.

These are good. My question (out of pure curiosity) is that shouldn't it be relatively easy to obtain a determination letter from the IRS pertaining to the type of tax-exempt entity this is? One may already exist. This is usually the easiest way to ascertain whether a non-profit is a 501©(3). Why wouldn't the same process be employed to determine if the seminary in question is a church (or church controlled organization). I think it is, but question whether this is a reasonable process.

Well, there is really no way to correct as this constitued a failure to follow the terms of the plan. You cannot distribute the excess as such action would constitute another operation outside the terms of the plan, as there is no statutory authority to distribute the elective deferrals in these circumstances. So, without IRS guidance on the permissive steps to take, the employer would have to make a risk assessment as to whether this event is significant enough to file VCP. I typically have clients correct prospectively as this type of error is seldom seen as a flagrant violation. That would still be a matter of perspective.

Kevin1, The DOL Field Assistance Bulletin 2007-02 may be a good reference. It is mainly stating that the employer is limiting control in order to avoid ERISA responsibility. It gives a feel for what an employer should and shouldn't do when the intent is for the plan not to be subject to ERISA.

No, but I think it is at all rates. Where I was corrected by Sieve was that one participant can be considered to have several rates (but one highest rate). This highest rate is always the one in question. For instance, my statement that if someone defers a 10% and receives a 2% match, then his rate of match is 20%. However, that same individual had 'effectively' received that same 2% match at the point he deferred 4%. Under this scenario, his rate of match is 50%. Since 50% is the highest rate, then this is the one that creates an issue; because anyone benefiting at 50% automatically benefits at 20%. So, it is actually at each rate, but once you identify the HIGHEST rate, this should be what is tested. Stated differently, we could not argue in good faith (as I did) that this individual could be tested at 20% (because he deferred at 10%) when in fact his rate was at 50% (at the time he deferred at 4%). This may actually be a good question for the IRS at the ASPPA convention in October; "Define in exact terms what is meant by 'Rate of Match'.

Okay. Got it. I had my wires crossed. BRF doesn't end at the plan level, but prohibited transactions rules do. I was actually thinking of a case I had with loans a while back (at least that were my issue was applied when I crossed this bridge). It wasn't BRF, but prohibited transactions. I stand corrected.

We have a fundamental disagreement on when BRF comes into play. Let's assume that instead of after-tax contributions, the provision being question with respect to the two plans were the limit on deferrals. Let's assume the hourly plan (which failed 410(b)) provided a maximum deferral of the 402(g) limit while the hourly plan provided a maximum deferral of 10% of compensation. Would this be subject to BRF? Better yet, let's assume that the definition of compensation used for the hourly plan's ability to make elective deferrals is Base pay (excluding overtime) while the compensation used for the salaried plan is total compensation. Let's also assume, for argument sake, that the compensation failed the compensation ratio test. Would this be subject to BRF? I think BRF effectively ends at the plan level. However, if nothing else, this plan must be either permissively aggregated with another plan (or pass both the NDCT and ABT) in order to fly. But, how does such a provision that is uniformly applied over all participants of the particular plan become a BRF issue? I know there are different schools of thought on this issue, but see our differences of opinion as to where this line is drawn.

If the plans fail to pass 410(b) as stand-alone plans, and you must 'permissively aggregate' them in order to pass 410(b), then you would be precluded from performing ADP/ACP separately (and must aggregate there as well). You are not allowed to run ADP/ACP on a plan that does not pass 410(b) first. As for BRF, I think it is a non-issue as after-tax is a part of the plan. The fact that the plan fails to pass 410(b) doesn't create a BRF issue.

I do not believe it would necessarily be a BRF issue since it is dealing with a provision of a distinct plan. Even if the other plan fails coverage (but has an after-tax provision) and is 'permissively aggregated' with another plan (that doesn't have an after-tax provision); it wouldn't qualify as a BRF issue since this is a condition of the distinct plan provided the classification within itself is reasonable (i.e. salaried). I am assuming that the salaried plan is failing 410(b) due to a large number of Non-excludable NHCEs who are hourly.

The hourly individual are not 'benefiting' under 401(m) unless either of the following: 1)They are eligible to make after-tax contributions - (Which none are) 2) They are eligible to receive matching contributions - (Which they may be). The ONLY employees included in the ACP test (which tests matching and aftertax together) would be those who are 'benefiting' using the criteria above. So, depending on your circumstances, there may (or may not) be an issue. This is how you would decide.

The 20% withholding does not apply to IRAs, only qualified plans.

No. However, imposing a minimum loan amount in excess of $1,000 would be.

Spouse can always waive benefit to allow for the selection of another beneficiary. For plans subject to QJSA, there is a re-election period sometime between 32-35 (shooting from the hip); but the rules are designed to ALWAYS allow the spouse to allow the designation of another beneficiary.