david shipp

Since you are dealing with a 401(k) plan you don't have full flexibility to terminate the plan and distribute the assets, depending on the nature and timing of the acquisition. If the transaction was a stock purchase, and the transaction has been completed, the acquired company is now part of the controlled group. This means that the existing 401(k) plan (or any other non-ESOP DC plan of the purchaser) will be considered a successor plan if the acquired employees are allowed to participate in the existing plan within 12 months of the acquisiton (note that there is an exception if less than 2% of the acquired employees are allowed to participate). Having a successor plan in existance means that distribution is not an option on plan termination. The assets must be transferred to the successor plan. If the acquisition transaction involved a purchase of assets rather than stock, a distribution to participants could be possible if the plan contains the necessary language and the acquiring company is not considered to have become the sponsor of the plan of the other employer as a result of the transaction. (This generally assumes that the selling company still exists, independent of the acquiring company, and is maintaining the plan for remaining employees, at least in the short term.) As you can see, there are a number of interpretive issues involved in the determination of options. It would be best to have the plan's tax counsel involved in the determinations. Allowing distributions where not permitted can have some fairly unfavorable consequences.

The IRS reserved the issue of HCE determination in merger and acquisition situations when the regs were issued, and they haven't provided any additional guidance since then. As a result, a plan administrator must do what is "reasonable." In your situation you indicate that Co. B purchased the assets of Co. A. As a result, there is no relationship between A and B. Co. A employees became new employees of Co. B on the asset purchase date and have no compensation history with Co. B. All Co. A employees are therefore NHCEs with respect to their first year of participation in the Co. B plan. I don't believe there is ever annualization of compensation for either 414(q) or 401(a)(17) purposes. There may be proration when a short plan year is encountered (the flip side of annualization), but in this case we just have employees entering the plan mid-year and that specifically does not require proration (e.g., see 1.401(a)(17)-1(B)(3)(iii)(B)) [if the transaction had been a stock purchase, Co. A employees would still be employed by Co. A and their compensation history would have applied in determining the HCE group for the combined companies.]

The MEA calculation is employer-specific and information regarding contributions made to TSAs sponsored by other employers is not needed. (see 1.403(B)-1(d)(2))

So, bottom line, Puerto Ricans are NOT nonresident aliens, and ARE included in 410(B) testing and have 414(s) compensation (albeit not U.S.-taxable)?

Do, thanks for the clarification. I should have said "first 6%" to be clear.

In order to qualify for the ACP safe harbor, total match must be limited to 6%. This could include only "non-ADP safe harbor" matching or both ADP safe harbor and additional match (the non-ADP safe harbor match could be subject to vesting). Where the ADP safe harbor is met with a non-elective contribution, the 6% limit on matching still applies since it is an ACP safe harbor issue. (Also, note the 4% limit on matching under ACP safe harbor if matching is discretionary.)

No one else is stepping forward so I'll give this a shot . . . Sec. 7701(b) defines a nonresident alien as one who is neither a citizen nor a resident of the U.S. My encyclopedia tells me that Congressional action in 1917 made Puerto Ricans U.S. citizens, ergo, they aren't nonresident aliens. I think the confusion arises because for income tax purposes, Puerto Ricans are subject to their own income tax code and thus Puerto Rican income is generally not U.S. income in the taxable sense. Figuring out how this carries through in various benefits-related areas is currently beyond me!

This may or may not be the issue, but in a prototype environment, the LRMs indicate that ADP and ACP testing must be performed on the same basis.

I believe that the general disallowance of consumer interest deductions overlays the whole issue. For example, interest on a loan of purely employer money wouldn't be deductible unless it was a principle residence loan that was secured by a lien on the residence. If the security was the account balance, the interest wouldn't be deductible even though the loan was for the purchase of a house. In addition, if the loan was for a house and it was secured by a lien, it still wouldn't be deductible if it was to a key employee or was made from elective deferrals.

Carol, although I have not seen any discussion of the issue, I have intepreted Notice 89-23 to allow the exclusion of employees from TSA salary deferral eligibility if they are covered by an eligible 457 plan or a 401(k) plan. Part III of N89-23 states "Individuals who are excludable employees (see Part V for definition of excludable employees) may be excluded in determining whether a 403(B) annuity plan satisfies this safe harbor." (the 403(B)(12)(ii) "cover everybody" safe harbor) In Part V, specifically B.3.d, the definition for excludable employee in the case of the 403(B)(12)(ii)safe harbor includes employees who are participants in an eligible 457 plan and employees who are eligible to participate in a qualified CODA. Please take a look and let me know your opinion.

I believe that Beavis is correct, and you get there through the 1099-R instructions dealing with handling a loss in the return of excess contibutions. While this doesn't specifically say "415 excess," I think the analogy can be drawn and, absent other direction, this is a reasonable path to follow.

Notice 89-23 provides that, while all employees must generally be given the opportunity to defer under a TSA, certain otherwise eligible employees may be treated as excludable in determining if this requirement is met (N89-23,III). In your case, the applicable category of excludable employees is those who are eligible to participate in a 401(k) plan (N89-23,V.B.3.d). As a result, you could exclude those eligible for the 401(k) plan from participating in the TSA. However, if any employee who is excludable is allowed to participate in the TSA, all employees in that category must be allowed to participate. It sounds like your plan design wouldn't jibe with that requirement. By putting the match in the 401(k), I am assuming that you want everyone to be eligible for the 401(k), and that those who were employed on 1/1/99 would also be eligible to make TSA deferrals. If this is the case, all employees would have to be eligible for TSA deferrals. Given this operation, I'm not sure it would be beneficial to grandfather TSA deferral capability. One possiblity might be to exclude the HCE group from participating in the 401(k) plan and keep them in the TSA program. You would also need to put a match back in the TSA. In this manner, your HCEs would be contributing under the TSA plan and there would be no ADP test. The match would still have to meet coverage and the ACP test, however, and that might require aggregation with the 401(k) for that purpose. (This is just off the top of my head and you will have to do some analysis of N89-23 to see if it holds up on review.)

Reg. sec. 1.219-2 deals with "active participation" for IRA deduction purposes. Generally, you are an active participant in a DB if you are eligible (opt-out has no effect). In a DC plan, the opt-out would effectively keep you from being an active participant and the W-2 would be completely accordingly. (Opt-out means completely, no forfeiture reallocation.) Note that the applicable plan year to look at is the plan year ending in the employee's taxable (calendar) year.

Note of caution, take a look at the plan language. For prototypes using standard LRM language there may be a problem. The LRM language dealing with (a)(17) states, "the annual compensation of each participant taken into account for determining all benefits provided under the plan for any plan year shall not exceed $_____." This would appear to be drafted in a way that could limit deferrals. For example, if I have elected to defer 5% of pay and I earn $160,000 in the first six months, my deferrals are $8,000 and I appear to have "used up" my available deferrable compensation. Based on IRS informal answers, such as the above, it appears that one might be able to modify the (a)(17) limitation in an individually designed plan to exclude compensation for deferral purposes, but I haven't talked to anyone who has gotten a letter with that kind of modification. I'm sure prototype sponsors will try to get such language approved in the next round of filing. [i don't know why the formatting is messed up.] [This message has been edited by david shipp (edited 01-07-99).]

It is possible for the opt-out election to be revocable without being considered a CODA. The key will be whether there is a correlation between participation and salary. The IRS 401(k) Exam Guidelines indicate, in Definition of a CODA, that it is a facts and circumstances determination. Specifically, ". . . if there are facts and circumstances that suggest that the changes in salary have nothing to do with the elections, it may not be a CODA." Where the opt-out election seems to lead to increasing and decreasing compensation, as in the example provided in the Guidelines, an agent would likely consider it a CODA and the only way out would be an irrevocable election. If the decision didn't directly result in changed compensation, for example an NHCE would rather have an IRA than a small pension contribution, the opt-out would not have to be irrevocable just to avoid being classified as a CODA. From a plan administrative standpoint,however, you may not want people popping in and out on a regular basis, thus arguing for an irrevocable election.

To Do, my assumption here would be that the second layer of match is available to the same group receiving the safe harbor match. On that basis I don't think there would be a BRF issue.

To Do, my assumption here would be that the second layer of match is available to the same group receiving the safe harbor match. On that basis I don't think there would be a BRF issue.

You can put a layer of forfeitable matching contributions over the ADP safe harbor matching contribution, the question is, "will the forfeitable matching contribution be subject to ACP testing?" It would appear that if the total matching contribution (ADP safe harbor plus a layered match subject to vesting) meets the limitations of section VI.B.3 of Notice 98-52, the ACP safe harbor would be satisfied. For example, if a plan provides the ADP safe harbor match, and also provides a forfeitable match equal to 50% of the first 6% salary deferals, I think the conditions of VI.B.3 are met. (I also think the forfeitable match could be discretionary if the additional condition under VI.B.4.b, limiting a discretionary match to 4% of compensation, is met.) While the examples in the ACP safe harbor section ( VI.D) deal with a layer of forfeitable matching contributions over an ADP QNEC safe harbor contribution, I don't see anything that would prevent layering a forfeitable match over an ADP matching safe harbor contribution and still achieve an ACP safe harbor. This is obviously an matter of interpretation and I would look forward to validation (or repudiation) from others. With respect to the enhanced match, it is best looked at as "front-loading." You may increase the match % and decrease the percentage to be matched as long the total match is at least as great as required under the basic formula. You can't, however, decrease the match % at any level and still meet the "as great" requirement. For example, if you provide a 150% match on the first 3%, you are providing a total matching contribution of 4.5%. Under the basic match you would be providing a total match of 4%. This meets the requirment since you are equaling or exceeding the match required under the basic formula at every level. A match of 80% of the first 5%, while providing a total 4% match overall, fails the "as great" requirement for salary deferrals between 1% and 4%. At 4%, the match is 3.2% which is less that the 3.5% required by the basic formula.

ERISA 204(h) only applies to defined contribution plans to the extent they are subject to minimum funding standards. So . . . a 401(k) plan is not required to give 204(h) notices. FYI, IRS has just issued final 204(h) regs. Click here to link to them.

Notice 98-52 provides guidance on new 401(k) safe harbors. Section V.B.1.c.ii, Restrictions on Types of Compensation That May Be Deferred, specifies that the definition of compensation from which deferrals can be made must be a reasonable definition of compensation under 1.414(s)-1(d)(2) (but need not meet the nondiscrimination requirements of -1(d)(3)). Is this a requirement that is applicable only to safe harbor plans, or has it been the rule applicable to all 401(k) plans? Heretofore, I have interpreted 1.401(k)(a)(4)(iv), Application of nondiscrimination requirements to plans w/CODAs, to say that general discrimination is met through the ADP test and that availability of deferrals is met through 1.401(a)(4)-4(e)(3)(iii)(D). This last section indicates that the availability of each rate of deferral is determined by calculating the deferral rate based on the plan's definition of compensation "regardless of whether that definition satisfies section 414(s), but also treating different rates as existing if they are based on definitions of compensation or other requirments or formulas that are not substantially the same." I have interpreted this to mean that a plan meets the availablity requirement if the same definition of deferral compensation is used for all participants, and that the definition did not have to meet 414(s) in any part. How does the provision in Notice 98-52 practically affect the definition of eligible compensation that plans can specify for deferral? Can commissions be excluded under the "reasonable definition" of 1.414(s)-1(d)(2)? This section provides that "irregular compensation" can be excluded. Are commissions "irregular compensation?" (It is understood that the ADP testing definition of compensation will have to satisfy 414(s).) As a sidenote, it appears that a 414(s) definition of compensation must be used in determining the amount of matching contributions, which could be a problem if deferrals are based on a non-414(s) definition. Still working on this one.

"ERISA Guidelines for Plan Payment of Plan- Related Expenses" by Gallagher and Shore in Tax Management Compensation Planning Journal (I don't have the date but I think it was the first issue in 1992). "Use of Plan Assets to Pay Plan-Related Expenses" by Deering in the Oct. 1993 ALI-ABA Outline for the Pension, Profit Sharing, Welfare and Other Compensation Plans Seminar.

Just went through the same discussion. Couldn't find anything specific from the IRS but the concensus of administrators I talked to was that any distribution made under the DC calculation process of the 401(a)(9) regs would be a "periodic" payment and thus subject to withholding as a periodic payment (standard wage withholding, default - married with 3 exemptions). Practically, it would appear that the nonperiodic approach of 10% withholding would actually over-withhold in all but the largest distributions so there may not be much payor liability for using this approach.

Follow this link to the Reish & Luftman Q&A column on plan defects, and specifically their response to using the SVP for 402(g) excesses that are not returned in a timely manner. Q66 Also take a look at questions 67,68 an 69. [This message has been edited by david shipp (edited 11-18-98).]

FYI, the following is from the preamble to the final regs on direct rollovers and rollover withholding (TD 8619): "d. Direct Rollovers to Qualified Defined Benefit Plans The definition of eligible retirement plan under section 402© includes all qualified trusts (defined contribution plans and defined benefit plans) as well as qualified annuity plans under section 403(a) and individual retirement plans. For purposes of section 401(a)(31), section 401(a)(31)(D) provides that the only qualified trusts that are treated as eligible retirement plans are defined contribution plans. Commentators asked whether a plan may permit direct rollovers to qualified defined benefit plans. The final regulations clarify that the limitation in section 401(a)(31)(D) applies only for purposes of determining the scope of the requirement under section 401(a)(31), while the definition of eligible retirement plan in section 402©(8)(B) controls the types of plans to which direct rollovers are permitted. Thus, under section 401(a)(31), a plan is required to offer a direct rollover to any defined contribution plan, and is permitted (but not required) to offer a direct rollover to a qualified trust that is a defined benefit plan. In addition, the final regulations clarify that an eligible rollover distribution that is paid in a direct rollover to a defined benefit plan is not subject to withholding."

Yes, a 1099 should be issued. The repayment could be made in pre-tax dollars (e.g., IRA rollover), or it could be made in after-tax dollars. In Q&A sessions, IRS reps have opined that a plan should accept both. (While the repayment doesn't cause a 401(m) issue, it could be problematic from a tracking standpoint where a plan doesn't otherwise accept after-tax contributions.) Someone could try writing a plan that limited payback to pre-tax $$ to see what the IRS would say.