stephen

How do you calculate the Top Heavy percentage where one of the Key employees (now legally dviorced) has transferred half of his account to his ex-wife (the alternate payee)? He is a more than 5% owner. She has never been an employee. In this case the plan is not top heavy for 2001 even if her balance is included. I'm just curious. It seems to me that her balance would not be included as she wouldn't meet the definition of Key employee (as she was not an employee). However, if she was an employee her balance would be included for the look back period as she was a more than 5% owner during 2000.

12/31/02 -12/30/03 The new rules apply for plan years beginning after 12/31/01.

Jon and deathbycashcall, How do you feel about taking a loan from the 401(k) plan to be used as a down payment on a house? Thank you for the insight on the double taxation applying to the interest portion only!

Have you considered other options, for example making a QNEC. (If the plan allows for this option) I agree with pax- this is not a valid reason for taking money out of the trust. I imagine the DOL view regarding this type of distribution (to avoid Top Heavy status) would be quite grim.

Not necessarily. I have had clients who elected to allow the paid otu terminated participants become 100% vested and had other clients who said they have been paid their correct amount. I have generally asked the attorney for the plan to advise the client on that decision.

Generally, if a participant feels there is something amiss in a plan and they contact the DOL directly the DOL will investigate. There are fines involved for the late employee deposits. You say Daily Access will verify the old monies prior to taking them over so it appears there will be some auditing by the new recordkeeper. You may want to wait and see what happens with Daily Access and their takeover process before calling the DOL.

In the last few months there was a post with a cross testing excel workbook in it where the individual who posted it was looking for input from others. Would this be what you are looking for?

yes, the son is a more than 5% owner by family attribution since his father owned more than 5% last year.

I'm not sure about the two weeks notice and it's relationship to the COBRA coverage. However, when you get your COBRA notice pay close attention to the dates listed in the notice and pay your premium no later than the timeframe listed. In your situation it may be a good idea to send the payments via certified mail so you have proof as to when the payments were mailed. If the payment is late the employer can deny the coverage. Also note COBRA is not required for small employers.

There seems to be several issues here: 1) Salary deferral deposits are to be made no later than the 15th business day of the month following when they are deducted or sooner if administratively feasible. Our clients who have weekly payroll we have advised to make weekly deposits. 2) My presumption is this is a small plan (under 100 participants) or an annual audit would be required by the 5500. It may be a good idea to have the plan aduited before transferring to the new TPA. 3) Hopefully, the new TPA knows the state of the plan and is prepared to invest the time and resources to correct the problems.

Thank You agin MGB for your insight on these matters!

The 5558 and 5500 must be postmarked by the deadline date. You may want to send them certified mail.

To sdolce and Blinky, The plans I mentioned are with my prior employer. I would expect the owners involved to increase the staff contribution to 5% and continue maxing themselves at $35,000 (soon to be $40,000). The owners will still be getting better than 50% of the total contribution. They did not purely use the plan as a tax sheltering device they also viewed it as a way to attract and retain employees. To Tom, The plans I mentioned were allocated pro rata based on comp for many years and therefore were not top heavy when I administered them. Therefore, there was not a requirment for the 3% minimum contibution. I'd be interested to hear your opinion on the new 5% contribution.

Yes it is legal. Would you even need to class exclude the son? Would he be eligble for a contribution working less than 1,000 hours? It may make sense to adopt a integrated Profit Sharing plan with 401(k) feature (which you may want to set up as a safe harbor plan). Without having more information it's hard to say. There is a nice article in the most recent Journal of Pension Benefits (I think it was written by Larry Starr) regarding this type of set-up. As for is it ethical - well that's up to the individual to decide. I've had clients change their profiit sharing formula to a cross tested formula where the owner was getting 60-70% of the total annual contribution to the plan and the staff was getting less than 3% contribution (the plans were not top heavy). I'm glad to see the new cross tested regulations stop these skewed allocations.

Thank you for your help.

The 25% limit applies for plan years beginning after 12/31/01. Therefore, for your example it will apply for the plan year beginning 10/1/02. There have been lots of great links via BenefitsLink regarding EGTRRA. I would suggest you start your search there.

Read your Summary Plan Description to find out what their normal distribution policy is. In a 401(k) plan the plan can be set up to make you wait until you reach age 65 before paying out.

It is my understanding that for plan years beginning after 12/31/01 we will include participant deferrals as compensation. Does this also include cafeteria deferrals? e.g for 404: Compensation: 40,000 Deferrals: 2,000 Cafeteria: 3,000 Old way Comp: 35,000 New way Comp: 40,000

I believe once the contribution has been allocated it's too late to claim it's a contribution for the following year and unless the document allows you to reduce the contribution by the excess amount you are stuck with the penalty. If the contribution has not been allocated or if the document allows you to reduce the contribution amount the contribution can be allocated and deducted in the year it was contributed.

Sadly, there are people who will read this article and cut back their deferral percentages on this basis.

You cannot use the "deemed 3%" for the second year of ADP testing. You must use the actual NHCE numbers from the first year. (Chapter 11 Section XII G.1.f p 11.258 of the ERISA Outline Book 2001 Version) Have you considered setting up Safe Harbor 401(k) using 3% non-elective 100% vested contribution?

Are the participants recieving statements showing these "temporarily allocated amounts"? If they are it leads to a whole range of possible problems: "You didn't pay me what it said on my statement." Whoever is paying participants out could overpay them. What happens to the earnings/losses associated with these deposits (especially if they are in segregated accounts). By "overfunding" the Money Purchase plan you could have amounts deposited that cannot be applied and therefore cannot be deducted for the year.

Thank You again MGB.

During the ASPA webcast in the chatroom the following question was asked and the response was given at a later time: Do the new vesting schedule apply only to matching contributions made after 12-31-01? Yes, only to contributions made after that date. My understanding was that for anyone who worked at least one hour during 2002 the new minimum vesting schedule (3 year cliff or 6 year graded) would apply to ALL employer matching contributions in the plan (existing, current and future contributions). What do other people think?

AndyH I also thought I heard the same response during the webcast but am unsure and hope to hear it from another source. It would make sense for them to use the same methodology...