Dan

I have a client interested in adding a NQDC plan because their 401(k) plan always fails ADP generating large refund. The employer is large and safe harbor is prohibitively expensive. They will limit deferrals into the NQDC so that they will not exceed 402(g). Then transfer enough deferrals into 401(k) to pass ADP. This seems to be in-line with the new regs on 409A. With this type of wrap plan, when it is time to transfer out of the NQDC into the 401(k), how is the actual transferable amount calculated? I am new to NQ but haven't found any information on this point. Would we transfer shares at cost or at the value at the time of the transfer?

This something that we do from time to time. If taking the non-taxable loan would create a hardship, then the plan trustee instructs us to process the hardship and forgo the loan. We just make a note in the file to that effect. The purpose of the requirement is to alleviate hardships in the least painful way possible.

Can a plan sponsor rely on a participant's written certification regarding the amount required to satsify a hardship or should the plan sponsor have written documentation to verify the amount? In days gone by, we told plan sponsors that some kind of documentation of the hardship amount was necessary. A medical bill, eviction notice, etc. But I haven't been able to find anything definative that such documentation is necessary. Was that just a conservative approach to plan administration or is written proof required by a regulation, revenue ruling, etc somewhere?

Actually, you can require 2 years of service for entry as long as all employer accounts are fully vested upon participation. If the plan isn't designed for two years of service, then the annual date is fine as long as the entry date is retroactive so no participants exceed the 18 months.

Why would you run an ADP test on a plan that is safe harbor?

I think you can use automatic enrollment either for new employees only or for new employees and all who have previously made no election.

We just loaded V 11 last weekend. There were several small things that need to be corrected, but nothing earth-shaking. Updating this early is probably like being a beta tester. It's not for everyone. But we have a number of clients doing the Roth and V 11 provides that functionality. We loaded V 10 early last year and were glad because of the extra features. We do a lot of cafeteria plans and there were a lot of upgrades for it too. We use STN for trading and we needed to deal redemtion fees. V 10 had that support. I often worry about being on the "bleeding edge" of technology. We have a dedicated IT person whose job it is to install, test, and fix the system. And she is such a valuable asset to our team in so many ways. I am glad she works with us. We rely on the technology to improve our efficiency and it continues to do that. We like to move forward almost as quickly as possible. Plus given our trading platform, we have other issues that drive our needs too.

Didn't it used to be that a discretionary match could satisfy the ACP Safe Harbor test as long as the ADP Safe Harbor was met, match rates for HCEs were the same as NHCEs, deferrals in excess of 6% were disregarded and the match was capped at 4% of compensation? But the final 401(k) regs don't allow the allocation condition.

This is from the Relius FAQ's. Subject: Fees Question: How are assets calculated for asset fees? Answer: For fees, any insurance, loan or receivable accounts are automatically excluded, so you would need to back those amounts out of the query/report total. Since you can exclude specific other sources & investments from fees, the next step would be to check the fee settings for Asset in plan specs to see if there are any other sources/investments that need to be backed out of the query/report total. Also in fee specs, check the following: whether Exclude fully paid out from fees is selected (if so, any ee with exclfeecd=Y will need to be backed out of the query/report total). Hopefully none of the excluded ees would have loans or insurance or receivables, but check to be sure you don't back those amounts out twice (ditto any sources or investments the user has excluded from asset fees). whether the Include pending in assets checkbox is selected (if so, those will need to be backed out of query/report total). whether the basis is Trade or Effective date -- that you will have to compare against your report settings, to be sure they are both set the same way. Hope that helps!

I think mbozek is correct, generally, with the following exception. If the plan uses data for a Prior Year ADP test in a year that is open to audit, then they can reach back into that prior year and audit it as well. This has been one of the arguments for using current year testing.

Thanks, jaemmons. Each division is a separate company for tax reporting purposes. However, they are separate divisions of a large company. The participant got two W-2's for 2004. My take is to only include his wages with the top heavy division.

There was common ownership between the divisions but not to the level of controlled group or affiliated service group. There are key employees in each division but no common key employees.

I have a plan that tests its divisions separately. During the year, a participant worked most of the year for a division that wasn't top heavy. During the year, he transferred to a small division that is top heavy. Should the allocation be based on full year comp with the company or part year comp with the small division.

If the taxpayer was supposed to receive the RMD by December 31, 2004, but was distributed when discovered on January 7, 2005, does the taxpayer file for the 2004 tax year or the 2005 tax year?

First, for 2003 you have to classify $2000 of the $14,000 as catch-up. Similarly, you have to classify $3,000 as catch-up for 2004. Otherwise there is a 402(g) violation for each year. As I read ERISA Outlines, Sal seems to indicate you can staddle the plan year end when assigning the catch up. That makes sense if you consider that testing failures can be reclassified to create a passing test. Hope that helps.

I was always told that if a plan required less than one year of service (ie six months of service) then they could place no requirement on the hours worked. I confess I never took the time to do the research. But I am reading a document that says "An Employee must complete 1000 Hours of Service within the 6 month time period following the Employee's Employment Commencement Date. If the Employee does not complete the stated Hours of Service during the specified period of time, the Employee is subject to the One Year of Service Requirement." I'm not comfortable with the law firm that drafted the document because a previous MPP document they did reportedly allowed in-service withdrawals. Is this provision ok?

The instructions indicate the form can be used for US citizens or their estates. I don't know if that applies in the case you mention.

Why not let trustee complete W-4P to instruct what to withhold?

Owner of a firm dies in 2003, before RMD began. Owner names each of two children as equal beneficiaries. One child takes the owner's position at the firm. So that child is now a Key Employee. Other child is not employed by the firm. Both children elect payments over their life expectancy. Distributions to beneficiaries will begin in 2004. Will Beneficiary/Employee's remaining balance be included in Top Heavy Test for 2005? My expectation is no, but I am having trouble finding reliable guidance. Thanks for any help.

A bank client's owner died. He left a large account balance. His beneficiaries are non-spousal. The beneficiaries are younger and wish to be paid on a life expectancy basis. The plan allows investment in insurance products, so is there any reason why an annuity couldn't be purchased as a mechanism for the plan to make these payments? Thanks, Dan

I have a client that is toying with the idea of raising the plan's minimum loan amount from $1,000 to some higher amount. They are trying to reduce the quantity of loans. They have already restricted loans to one per participant but do not want to restrict loans by circumstance. We explained that the plan would have to pass discrimination testing each year. We would charge quite a bit to do the testing. But they are still hanging on to the notion. They want to know what would be the correction if they failed the test during some year. I haven't found any guidance to answer their question. Is anyone familiar with type of circumstance?

We are merging two 401(k) plans on 7/1/04. Both plans are calendar. Firm A acquired Firm B and is now merging B's plan into A's plan. Do we test B's plan over the short plan year?

We have a former client that is currently being investigated by the DOL. The plan trustees were married to each other and the divorce must have been nasty. Each is uncooperative with the other. The auditor has been very amiable and helpful, in spite of the fact that one of the trustees has ignored a DOL subpeona for records. The auditor's primary concern has been getting the plan terminated and participant's their benefit.

I would say no because a deemed distribution in not really a distribution from the plan. It is just a distribution for IRS tax collection purposes. The plan must still maintain the loan balance (and accrue interest) until a distributable event occurs. Then the loan is treated as distributed from the plan along with the other distributed benefits. But since the 1099 was issued on account of the deemed distribution, it is not re-issued and the accrued interest basically disappears.

You are correct, unless the plan contained money that was contributed "after-tax," it was not tax free. The distribution could be penalty free if the participant is 55 years of age (or older) and separated from service. IRC Sec. 72 (t)(2)(A)(v).