AKconsult

The whole purpose of the PLR discussed here is that the employer was asking for an opinion that in providing a nonelective contribution based on the employee having made a student loan payment, that there was not a violation of the contingent benefit rule. The IRS agreed that providing a contribution based on the student loan payment was NOT a match, so there is no concern about a violation of the contingent benefit rule. We use the ASC document and the attorneys there have said that if the document contains new comparability formula where each person is in his/her own group, and in fact the employer is providing a nonelective contribution based on student loan payments, that fits within the document, no amendment needed.

Our adoption agreement gives employers the option to exclude compensation from nonsignatory related employers. I am trying to understand the practical implications of that selection. From what I can find, I believe that regardless of whether this selection is chosen, there are some plan purposes for which you must combine all compensation from related employers: 415 testing top heavy minimum contribution calcs determining HCEs and Keys calculating deduction limit minimum gateway allocation rate group testing I believe that for ADP/ACP testing, the plan can choose to only use pay from the participating employer(s), as long as 414(s) testing is passed with that definition of pay, EXCEPT there is a requirement for HCEs that all pay/deferrals must be combined for testing in every plan in which the HCE participates if the companies are related. So it seems that the only practical implication of excluding pay from nonsignatory related employers is that it lets the employer calculate employer contributions on just pay from the participating employers (except for top heavy/gateway). Is that correct? I may be totally off base on this

Yes, in looking at this again, I agree the Regulation does seem to indicate that if a plan that uses a match that satisfies ACP still needs to run an ACP test due to after-tax contributions, the ACP test can also include matching.

In addition, a plan that satisfies the ADP safe harbor requirements of §1.401(k)-3 for a plan year using qualified matching contributions but does not satisfy the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for such plan year is permitted to apply this section by excluding matching contributions with respect to all eligible employees that do not exceed 4 percent . The above just means that if the plan uses a match that satisfies ADP but that does not satisfy ACP, then when the ACP test is performed, the plan may run the test by using all the match or is permitted to disregard the match that does not exceed 4%. So it gives you a couple of options on how to run the ACP. However, for the plan in question, the safe harbor match is 100% of 6%, which satisfies both ADP and ACP, so I believe the above language is not applicable because this is not a case where the match does not satisfy the ACP test. So, the only thing that will be in the ACP test is the after-tax contributions.

The plan is a multiple employer plan with 2 employers. The employers are related, BUT not enough to be a control group or ASG (attorney has already opined on this). One person owns 99% of company A which is a partnership and a small % of company B, which is a Corporation. He receives compensation from both entities. Both entities offer a basic safe harbor match, no other employer contributions. Can this person split his deferrals between the 2 entities and get a full match from each entity? I am going back and forth on this. Because both entities are in the same plan (even though it is a multiple employer plan) do we would have to combine his pay and calculate just 1 match? I read that there is one combined 415 limit, but what if the owner received $285,000 in pay from each entity and deferred $13,000 from each entity and received $11,400 match from each entity? He would not be over the 415 limit. I think this would be OK if each entity had a separate plan, but is there anything about the MEP that would prohibit the full match from each employer?

Shuo, if you are thinking of starting up a plan for your new business, there are some things you will want to consider with respect to this issue of terminated employees leaving money in the plan. 1. You can write the plan to say that if the terminated employee's account is less than $5,000, then if they do not affirmatively elect to withdraw their money, the plan will force out the account. It will be paid to the employee in cash if it is less than $1,000 or rolled over to an IRA if over $1,000. 2. When the employee terminates, immediately give him the necessary paperwork/forms to request a withdrawal. Make it as easy as possible for him to process the payment. You can also make a point of sending distribution reminders to terminated employees each year. The benefit of having the terminated employee remove the money from the plan is that the company may be paying fees on those people, to the recordkeeper or the TPA, which you can reduce by getting those accounts out of the plan. The biggest issue I see with having terminated accounts sit in the plan is that over time, as people move, the employer no longer has valid addresses for those employees and they become "lost" and as the plan sponsor you have a responsibility to be sending certain required notices to those employees, which you are unable to fulfill because you don't have a good address for them. So I think you do want to try to encourage them to move their money once they terminate. But, legally, to the extent that the account is over $5,000, you cannot force them to withdraw the money until retirement age. Some employees will choose to leave their money in the plan because the investment fees may be lower for them there than what they would pay on the open market. Just be very diligent in keeping up-to-date address info for terminated employees who do choose to leave their money in the plan.

What Treas. Reg. 1.401(k)-3(c)(4) is getting at is that the rate of match for the HCEs cannot be greater than the rate of match for the nonHCEs. I think it would be permissible to exclude bonuses from the match calculation to the extent that the 414(s) compensation test can be passed (which may be problematic). In a situation where employees are allowed to defer on a bonus payment but the matching contribution is NOT being calculated on the bonus payment, the only way that the Regulation will be satisfied is if the match for all participants is determined by first determining the employee's deferral % for purposes of the matching formula by excluding the bonus (even though the employee deferred on the bonus). For example: if an employee is paid $60,000 plus a $10,000 bonus, and he elects to defer 3% to the plan, his deferral would be $2,100 (3% of $70,000). However, to determine his match, you would have to assume his deferral % is 3.5% ($2,100/$60,000). If the plan uses a basic safe harbor match, he would receive a match of $1,950. As long as all the match calculations are done this way, you haven't violated the Regulation. Again, the compensation test would have to pass, though.

Thank you both!!

We took over a 401k plan that has an adoption agreement that shows plan number 001. However, the 5500 filing shows the plan as having plan number 002. Apparently 001 was an old DB plan that is now terminated. This goes back many years - at least as far back as 2008 I can see that the document and the 5500 have not had the same plan number. The 5500s are correct - the plan document is incorrect. How do we correct for the wrong plan number on the document? We can fix the plan number on the upcoming Cycle 3 restatement - do I have to go back and correct for prior documents? This plan started in 1990, I don't know if the document has always been wrong or what... Thanks!

One other thought on this - be extra diligent to ensure the security of the inmate and the account. Inmates are typically in a cell with other people, or in some instances there might be as many (like 40) of them in a large bunk room. And there is a constant concern of other inmates stealing your mail and going through your belongings. So if you get a completed form back telling you to deposit the money into a bank account, you need to be sure that is legitimate.. You need to make sure any instructions you are receiving are actually coming from that inmate. So maybe the best way to handle that is to reach out to the prison family advocate for that facility or directly to the warden's office and ask them to monitor the process and make sure the information is actually getting to the inmate and that the inmate is really the person you are dealing with. LOTS of shady stuff goes on..

I unfortunately have some personal experience with this as I have a family member who was incarcerated for many years. As noted above, there are limits as to how much money a person can hold in his prison account, typically $200 - $500. So if the distribution is larger than that, it probably won't go into a prison account. The prison account is something the inmate can use to buy things in the prison - toiletry items, concessions etc. (despite what most people think, prisoners don't have everything given to them, they actually do have to buy certain items or they just do without)… So just send the distribution forms to the inmate to complete. If it were me, I would probably provide a phone number that he can call to ask any questions about his options, You probably can't call him, but he can call you. Then just help the inmate walk through the distribution process. If he has a bank account or IRA that the money can be deposited into, that would be your best bet. FYI - not everyone is prison is a serial murderer. Sometimes people just make bad decisions. But they are still people like me and you and often times need some extra help navigating these kinds of situations because of the limited communications in the prison, the fact that they usually don't have email, so they are using snail mail, etc. So you need to expect the process will take a little longer than it typically would.

The only vesting errors addressed in EPCRS relate to employees who were paid out too little because of a vesting error. In this case, the benes received too much, so it is an overpayment. Under EPCRS, the correction for an overpayment from a DC plan is to try to have the overpayment repaid to the plan. If not repaid, the employer must contribute the difference to the plan, adjusted for earnings. In addition, the Rev Proc does say that an appropriate correction method for an overpayment would be for the sponsor to adopt a retroactive amendment to conform the document to the plan's operations. However, the amendment must apply to all employees eligible to participate in the plan. There is a list of reasons in Appendix B for which a retroactive amendment may be made for only specific affected individuals, but I don't think this would qualify. I think the amendment in this case would have to apply to all employees.

Does the plan allow hardship withdrawals? The safe harbor hardship rules allow for a distribution to pay for the funeral of a parent, spouse, child or dependent.

Q: Can a plan sponsor adopt the special distribution under the CARES Act and offer the benefit only to terminated employees? A: Yes, HOWEVER, this would create an optional form of benefit that would need to be tested under BRF testing if there are any HCEs who get it. If the plan adopts CRDs then the participants who take the CRD will not be subject to 20% upfront withholding. If the plan does NOT adopt CRDs then a terminated participant who takes a distribution will be subject to 20% upfront withholding. However, if the participant meets the requirements to be eligible for a CRD, then they are exempt from the 10% early withdrawal penalty and can spread out the taxes for 3 years and they have 3 years to roll the money back into the plan or IRA. This will be determined when the participant files his/her tax return.

For employers with participant directed accounts, we are thinking that if there are no allocation requirements, then the employer could go ahead and pre-fund the contribution for the first few months of the year. For example, a safe harbor match or safe harbor NEC that is typically made at year-end could be funded into each participants account based on compensation thorough end of May (or whatever), then at the end of the year, the employer would just fund the remaining 7 months. Also, I am not sure why an employer would not be able to set up a bank account in the name of the plan and deposit the contribution funding into it before the 8 weeks is up(?). This is typically perfectly acceptable. Once the money goes into the account in the plan's name it is a plan asset and must be used according to the terms of the plan. So at year-end that money could be used to fund an employer contribution.