Richard Anderson

Yes, unless the plan also allows post-tax contributions. The ACP test includes participants who are eligible to make post-tax contributions or who are eligible to receive a match during any portion of the plan year. This includes participants who are eligible, but choose not to defer or contribute.

A small employer sponsors a profit sharing plan. The owner is trustee. The owner is also the world's best investor. On a hot tip he used about 90% of the plan assets to purchase options. Lost about 60% of the plan assets. He wants to make up the losses to all of the participant's accounts, except for his own account. Can he make restorative payments to the plan based on his own determination that a fiduciary breach has occurred? If so, can the restorative payments be made to only non-key accounts? Are the restorative payments deductible for the plan sponsor? The DOL voluntary fiduciary correction program doesn't cover this; is there a program that would cover this, or does the fiduciary just wait for a DOL audit?

Rcline46 is correct, I don't know what I was thinking. If the match is discretionary, then the amount deposited in the account of a participant who does not meet the requirements for that contribution should be considered additional match and allocated to those eligible for the match. But, if the employer waits to deposit the match for the last quarter until it is known who has not met the 500 hour requirement, the "forfeited" amount can be used to fund the last quarter's match. If the employer wants to deposit the match quarterly, the best thing to do is to amend the plan to have no hours requirement for the match.

I believe the answer in general is yes. But, if someone gets a match in the first quarter of the plan year, then terminates in the second quarter with 500 or fewer hours; I see no reason that you could not forfeit his contribution immediately and use that amount to fund the second quarter's match amount. If you do that for each quarter, or at least before the final quarter's contribution is made; you may not have any non-deductable contribution at plan year end. But, if you make all quarter's contributions first, and then forfeit at the end of the year those with 500 or fewer hours, you will have contributed an amount that is more than can be allocated to participants. That excess is non-deductible and subject to the excise tax.

Be sure to read the document. Some plans may limit hardship distributions to elective contributions only; others will limit it to elective and rollover only; or it may allow hardships from all sources.

You can do exactly as you propose, but a cross tested money purchase plan alone does not have the flexibility of the MP - PS combination. For example, one year the contribution necessary to pass 401(a)(4) may be only 5% for the NHCEs, but the MP plan has a 10% contribution rate. The next year it may take an 11% contribution rate to pass. But, if employee demographics are not expected to change, the single MP plan will work, if flexibility is not a concern.

Tom, I assume you mean the 3% contribution is to a money purchase plan, with the rest of the contribution to a profit sharing plan. If my assumption is correct, What is the 404 deduction limit for these two plans? I think that it would be 15% for the profit sharing plan, plus the amount required for the money purchase plan, but limited to a maximum of 25%. If I'm correct, it might be possible that the amount of the contribution needed to get an HCE with $120,000 comp to the 415 limit will exceed the deduction limit of these two plans. Since 401(a)(26) no longer applies to DC plans, how about a money purchase plan that covers only the HCEs, with a contribution of $30,000 for each. The profit sharing contribution would be to NHCEs only, with the plans aggregated for testing.

Beth N, Starting with your 3 points, bottom up. 3. You are correct, the ACP is done exactly the same as if the match was uniform. 2. The 410(B) coverage test is also done exactly the same as if the match was uniform. Any participant eligible to receive a match is considered to be benefiting. For example if the match rate is 100% for division A and 50% for division B, a participant is considered benefiting if he or she is eligible for either the 50% or 100% match. You do not test each match separately for coverage. 1. Each rate of match must be tested to see if it is available on a nondiscriminatory basis. This is done similar to rate group testing using the general test to satisfy the 401(a)(4) nondiscrimination requirement for the amount of contributions or benefits. The difference is that instead of having a rate group for each HCE, there is a group for each rate of match. Each different rate of match must have an availibility ratio (% of NHCEs benefiting divided by % of HCEs benefiting) which meets or exceeds the safe harbor percentage for the plan. Tom Poje points out where to find examples of how to do the required testing.

If the formula in the document is 10% with a discretionary cap, I think that is acceptable. But, if the document has a discretionary percentage match of deferrals and also allows a discretionary cap as a percentage comp, then you don't have a definitely determinable formula. If you want to use a cap, then I think that either the cap % or the match % must be stated in the document.

Thanks, Tom and Hi back to you. I'll state the dollar amount in step one in the document, and amend before year end if needed. That means I'll have to run a preliminary a4 test near year end in order to know the best amount for step one. What problems, if any, would there be with amending the formula often (maybe even annually). Or, would this work? Have the amount in step a low dollar amount such as $100, then give an initial contribution that fails the a4 test. Then amend within 9 1/2 months to increase the dollar amount in step one.

The answer to your question will depend on the new employer's plan provisions. The rollover would not be eligible for distribution from the new employer's plan until a distributable event has occurred. A plan may (but is not required to) allow in-service distributions on rollover accounts. The employee needs to get a copy of the SPD for the plan of the new employer before he makes the decision to rollover. The SPD will state when distributions may occur.

In a tiered profit sharing plan can the contribtion allocation have the following three steps? 1. A flat dollar amount allocated to each eligible participant in the group that is descretionary (might be $300 one year, zero next year, $1,000 following year, ect.) 2. Any eligible participant in the group whose allocation in step one is less than 3% of compensation will receive an additional allocation such that the allocation for each eligible participant will be the greater of the amount from step one or 3% of compensation. 3. If any amount remains after step two, that amount will be allocated to each eligible participant in the group in the same proportion that each eligible participant's compensation for the year bears to the total compensation of all participants within the group for such year. The main question I have relates to whether the flat dollar amount in step one can be discretionary, or must it be a fixed dollar amount specified in the document?

Assuming a "reasonable error", is there a deadline (similar to March 15 for excess contributions and April 15 for excess deferrals) for distributing deferrals to correct excess annual additions? If there is a deadline, what are the consequences of distributing after the deadline? We just received census information on a 1999 calendar year plan in which one participant deferred 31%.

Assuming a "reasonable error", when must elective deferrals be distributed to correct excess annual additions? Is there a deadline similar to excess deferrals (April 15) or excess contributions (March 15)? If there is a deadline, what are the consequences of a late distribution of the excess? We have just now received census data for a 12/31/99 year end plan, and one participant deferred 31%.

RLL, Participants have the choice of cash or stock distribution, and they are expecting some employees to elect cash and others stock. The employer is prepared for the put options. The employer will purchase shares from the ESOP in order to cover those employee who choose cash distributions. There have been aquisitions during the year that may affect share value. There is no independent fiduciary.

A small closly held employer with a non-leveraged ESOP wants to terminate the plan before this year end, and begin distributions immediately. It is a calendar year plan. Must a new stock valuation be done, and if so, what date is the valuation for? The termination date?

The PWBA Press Release on 03/22/00 states " the three agencies have agreed that for filers whose 1999 Form 5500 Series would be due on or before July 31, 2000, the deadline for filing will be extended to Oct. 16, 2000, without filers having to file a Form 5558. Plans that have a 1999 Form 5500 that are due before July 31, 2000 would include those with short plan years. 8/31/99 is certainly before July 31,2000. If this was not the intention, why would they have included "on or before July 31, 2000" in the statement.

Isn't this one eligible for the automatic extension until Oct 16, 2000. All 1999 5500's due on or before July 31, 2000 have been granted an automatic extension by the DOL.

Lynn Campbell, top heavy minimum contributions do equal "benefiting." As JAREL and Tom Poje point out, a problem can arise if the plan is using the design based safe harbor to pass 401(a)(4). Under the safe harbor rules for 401(a)(4), there is an exception to the uniformity requirement for contributions, if the plan has multiple contribution formulas and one is the top heavy formula. But this exception to the uniformity requirement is available only if the plan can pass 410(B) coverage by treating an employee as not benefiting if his only allocation is the top heavy minimum. If the plan doesn't pass 410(B) by ignoring the top heavy contribution, it has not failed 410(B); it has failed the safe harbor 401(a)(4) rules. As prior posts point out, the plan may use other methods to pass 401(a)(4) non-discrimination; it just can not rely on the safe harbor.

I believe zero divided by zero equals 100% for Schedule T purposes.

The 10% early withdrawal penalty is imposed on the amount of the distribution that is includible in income. Therefore, the taxable portion of the distribution (the earnings) will be subject to the penalty, unless an exemption applies.

If the plan sponsor matches on a monthly basis, other than the ACP test, what would prevent the owner from deferring $10,500 in the first month, then declare a 100% discretionary match for that period, and then have 50% for the discretionary match for the other 11 months?

Thanks for the responses everyone. Ray, my understanding of the purpose of the Schedule P was that it started the statute of limitations for the protection of the tax exempt status of the trust; and that any tax imposed on the trust must be assessed before that statute of limitations occurs (3 years). Therefore, since the protection is for the trust, I felt that all fiduciaries of the trust would come under that protection, even if one or more were left off the schedule, either by mistake or because there was not room on the form. We have all heard the phrase "When all else fails read the directions." I just reread the instructions for Schedule P. Under the paragraph titled "Who May File" it says every trustee of a trust created as part of 401(a) plan. Schedule P is not required to be filed, hence the title uses the phrase "who may file." From the TPA's perspective the paragraph title would be "Who Should File." Therefore, since every trustee "may" file, I am going file as many Schedule P's as needed to include all trustees.[Edited by Richard Anderson on 07-29-2000 at 02:28 PM]

Plan has 6 trustees. The space provided on the Schedule P for trustees names is not large enough. I think that I should put as many of the trustees as will fit on the Schedule, and forget about the rest of them. Another administrator thinks that I should file 6 Schedule P's; one for each trustee. Another says to file 2 Schedule P's; one with 3 trustees on it; and another with the other 3 trustees. My understanding is that only one Schedule P is filed for each trust. What are others doing in this situation. Thanks for your help.

The compensation used for the 25% limit under 404(a)(7) is the same as that used for the 15% deduction limit for non-pension plans. In other words, deduct 401(k) and 125 deferrals, then apply 401(a)(17) limit, as Tom indicated. Treas. Reg. 1.404(a)-13(a) specifically addresses this. If one of the plans is a DB plan, then the deductible limit is the greater of 25% or the minimum funding standard under 412 for the DB plan.