Richard Anderson

Employer is reducing staff by about 13%. He wants to 100% vest those leaving. Can the employer be more generous than the 20% rule? Could the document define a partial termination as a 10% reduction? [This message has been edited by Richard Anderson (edited 06-02-2000).]

Company A acquires Company B through stock or asset purchase and then merges the plans of both companies into one plan. Are the participant accounts from Company B's plan before the merger counted towards top heavy.

This New Comparability plan has three groups. The document says to reallocate forfeitures comp to comp, but is silent about which group or groups to allocate the forfeitures to. I think that forfeitures from group A should be allocated to group A only, otherwise I don't know any logical method to allocate between groups. Can I allocate the forfeitures only to the group that originated the forfeitures, or must the document be amended to be more specific.

If one or more 1099's are corrected due to incorrect amounts reported for the distribution, should the 1096 that accompanies the corrected 1099's show the number of returns as just those that were corrected, or should it be the total of all 1099's that were reported that year. Also should line 5, that asks the total amount reported with this Form 1096, include only the corrected 1099's or all 1099's for the year. The IRS instructions on corrections does not address this.

We issued two 1099's with incorrect distribution amounts. After we issue corrected 1099's, I'm unsure about what to do about the 1096 that was filed with an incorrect total. Do I file a corrected 1096 that has a new corrected total, that includes all distributions, not just those that were corrected? Or do I show on the corrected 1096 just the total of the two corrected 1099's? Also, the Form 1096 does not have a box to mark showing that it is a correction. Do I write "correction" on the Form 1096 or what? The two incorrect 1099's had no withholding, so the 945 does not need to be corrected. Is there anything else other than issuing corrected 1099's and 1096 that I should do. [This message has been edited by Richard Anderson (edited 03-21-2000).]

May all HCE's other than the company owner be excluded from the 3% non-elective contribution in a safe harbor 401(k) plan. The owner is 30 years old; cross testing doesn't work. The owner doesn't want to give the 3% contribution to any other HCE's, but wants it for himself. Is this within safe harbor rules, if all non-owner HCE's are excluded from the non-elective contribution.

If a 401(k) plan with a cross tested profit sharing allocation excludes participants with less than a year of service from the ADP test, must they also be excluded from the 401(a)(4) cross testing. Most of the participants with less than a year of service are young and are not deferring. They hurt the ADP test, but we need them for the cross testing. May they be excluded from the ADP test and not excluded from 401(a)(4) testing. [This message has been edited by Richard Anderson (edited 02-18-2000).]

The safe harbor contribution can not have any qualifying requirements. If the safe harbor contribution is a match, any participant who defers is entitled to the match, regardless of hours or termination. If the contribution is the 3% non-elective, then any participant is eligible for the contribution, there can not be any hours or last day requirement.

L Turner, here is my analysis of your post. LLP A and the PA's that own LLP A form an ASG with LLP A as the First Service Organization (FSO) and the PA's as A-ORG's. An A-ORG must meet both of the following: 1. The A-ORG is a shareholder or partner in the FSO. 2. The A-ORG regularly performs services for the FSO or is regularly associated with the FSO in performing services for others. LLP C is also part of the ASG as a B-ORG. A B-ORG must meet the following requirements: 1. A significant part of the B-ORG's business is performing services for the FSO. 2. At least 10% of the B-ORG is owned by highly compensated employees of the FSO or one of its A-ORG's. Thru attribution the HCE MD owners of the PA's are also owners of LLP C, therfore 2 above is met. The above analysis of course also applies to LLP B and the PA's that own it. Therefore, the ASG consists of LLP A as FSO with PA's as A-ORG's and LLP C as a B-ORG. The same analysis applies to LLP B and its PA owners and LLP C. Thus there are two Affiliated Service Groups: 1. LLP C, LLP A, and the PA owners of LLP A 2. LLP C, LLP B, and the PA owners of LLP B If LLP C provides management functions for LLP A and LLP B then there will be a management ASG of LLP A, LLP B, and LLP C. I hope this helps.

You do not pro-rate. If the employer existed for only a part of the look back 12 months, only those employees that earned more than 80,000 from the employer during that period will be HCEs based on compensation.

The requirement is for full plan year compensation. If a plan has quarterly entry dates, for example, and a participant enters the plan in the last quarter of the plan year, that participant will be entitled to a minimum top heavy contribution based on full plan year compensation, not compensation earned only while a participant. If the first plan year is a short year, the TH minimum will be based on 415 comp earned during that short plan year.

It would have to be contributed by 9/15 of the following year in order to deductible in the prior tax period. But, I believe that the plan has until 12/31 of the following year to make the TH contribution before it is no longer qualified. If the 1995 TH contribution was made by 9/15/96 it would be deductible in 1995. If made between 9/16/96 and 12/31/96 it would be deductible in 1996, but it would be timely contributed for qualification purposes. Therefore, I think the "failure" began on 1/1/97.

The ESOP does not distribute employer stock. Shortly, there are going to be some large distributions to employees that have a large amount of employer stock in their accounts. The ESOP portion of the plan does not have enough investments other than employer stock to make the distributions in cash, but the money purchase portion does. Can the money purchase plan and ESOP exchange assets (cash for stock)? Is this treated as stock bonus plan, and the stock from the distribution then can be reallocated to the money purchase accounts of active employees. This plan requires rebalancing of assets at the end of each plan year. After rebalancing each participant will have the same ratio of employer stock and other investments. Does this rebalancing also extend to the money purchase source? If this is one plan, I think it would. If it's considered two plans, then I don't know. [This message has been edited by Richard Anderson (edited 09-24-1999).]

IRC code section 409(h)(2) in part states: "In the case of an employer whose charter or bylaws restrict the ownership of substantially all outstanding employer securities to employees or to a trust described in section 401(a), a plan which otherwise meets the requirements of this subsection or section 4975(e)(7) shall not be considered to have failed to meet the requirements of this subsection..." Can the ESOP restrict stock ownership to only current employees? Client wants to transfer stock ownership of terminated participants to the accounts of current employees accounts. The part of 409(h)(2) that bothers me is that ownership can be restricted to employees or 401(a) trust. Stock allocated to a terminated employees account is in the trust until distribution. Does the employer stock have to remain in the account of a terminated participant until distribution?

I'm new to ESOPs. A client recently paid off ESOP loan, and now has a new document combining ESOP and money purchase plan. At the ESOP session of the 1994 ASPA annual conference R. Grant Williams has in his written material: "An ESOP that includes a money pruchase plan in conjunction with a stock bonus plan may have a combined deductible limit of 25% of payroll. (Two separate plans are necessary for a 25% limit if no credit carry overs are used.)" Does this mean that a money purchase - ESOP combination is considered 2 plans? Two 5500s? Also, can the money purchase part purchase employer stock from the ESOP part of the plan?

Revenue procedure 99-31 is specific on the date when earnings should began only for two cases. 1. If one eligible employee is excluded from a plan contribution that was made. 2. Exclusion of an emplyee from deferrals and the related match. The general rule stated in rev proc 99-31 is "the "period of the failure" is the period from the date that the failure began through the date of correction." When did the failure begin for a missed TH minimum contribution for the plan year ended 12/31/95? I believe that the 95 TH contribution could have been made on any date between 1/1/95 and 12/31/96, and no failure would have occurred. If the above is correct, did the failure begin on 1/1/97?

We have a takeover that the prior TPA missed that the plan was top heavy in 1995 and 1997. When I calculate the earnings on the 1995 TH minimum contribution, at what date do I start the earnings? Do I use the latest date that the contribution could have been deposited for deductibility purposes? Do I include the earnings in the 404 limit?

Thanks for your response. Can the two plans be combined in Excel after imputing permitted disparity in each plan? This would seem to violate the rule on maximum s.s. integration in only one plan. If the plans are combined before imputing permitted disparity, it would seem that you could then impute on the total. Is this correct? Or is the best that can be done, imputing disparity on only one plan and then combining them. If the two plans can be combined first and then permitted disparity imputed, this is what I have trouble with in Excel. Since covered compensation is different for different aged employees, it would require Excel to look up the values in a table (I think). I'm not familar enough with Excel to figure out a formula that uses look up tables to impute disparity. Is there an easier way to get Excel to do the imputed disparity calculation? [This message has been edited by Richard Anderson (edited 09-09-1999).]

We use Quantech for DC administration and Pentabs for DB. What software is available for aggregating a DB and DC plan for the general test? I could add the EBAR from the DC plan to the normalized benefit from the DB plan in an Excel spreadsheet, but imputing permitted disparity is the problem. Is there software for doing this?

A new comp plan has the following classes: Class A - Owners Class B - Non-owner division X employees Class C - Non-owner division Y employees Class D - Non-owner division Z employees If the plan fails the ADP/ACP and the employer wants to contribute QNEC to correct, can the document be worded to allow different QNEC contributions to different classes. Example: Class B - 2% QNEC Class C - 1% QNEC Class D - 0% QNEC If this is OK, would the document (volume submitter) wording be something like this: The Employer Qualified Non-Elective Contribution used to satisfy the Actual Deferral Percentage tests will be separately determined for each of the classifications of Participants.

I just read question 110 of the Q&A for plan defects. It covers exactly this situation. It appears the IRS will allow the hardship paperwork to be filled out with a retroactive effective date, and the employees must be returned the deferrals made during the 12 month period after the hardship distributions, plus earnings.

Can a cap be put on a matching formula, such as 50% of deferrals capped at 3% of compensation? There is no mention of a cap in the document. Following is the exact wording in the Volume Submitter document concerning the match formula: "For each Plan Year, the Employer shall contribute to the Plan: (a)......... (B) On behalf of each Participant who is eligible to share in matching contributions for the Plan Year, a discretionary matching contribution equal to a uniform percentage of each Participant's Deferred Compensation, the exact percentage, if any, to be determined each year by the Employer, which amount, if any, shall be deemed an Employer Non-Elective Contribution. ©......... (d)......... (e)......... We are advising clients that they can put a cap on the match, based on a percentage of comp for each individual participant, as described above in the first paragraph. I don't think that the document language above allows that, because if a cap is used then the match is no longer a "uniform percentage of each such Participant's Deferred Compensation." By the way, of course each year the cap we advise them to use may be a different % of comp, whatever puts the most match in the HCEs account. Adding a cap to a matching formula or varying the cap percentage changes the dollar amount of the match and the allocation to the individual participants. I don't see how this can be definitely determinable. Any ideas about if this is OK.

An employee terminates and receives a distribution of his vested account balance. The unvested account balance is forfeited. The participant is rehired two years later and repays the distribution. There are no current forfeitures to use to restore the participant's forfeited amount. The employer contributes the amount necessary to reinstate the participant's prior forfeitures. Does the contribution used to reinstate forfeitures count toward the 404 deductibility limits? It would seem to me that it should not, since it was counted already for deductibility purposes when it was first contributed to the plan. This just reinstates the original contribution. [This message has been edited by Richard Anderson (edited 09-05-1999).]

An employer has a DB plan and a New Comparability profit sharing plan. The DB plan is integrated with Social Security. The plans are not aggregated for 410(B) or 401(a)(4). 1.401(l) of the regs says that only one plan maintained by an employer may be integrated with Social Security. I take this to mean that the New Comp plan may not imput permitted disparity in the cross testing to satisfy 401(a)(4) if the DB plan is integrated. Am I correct? [This message has been edited by Richard Anderson (edited 09-03-1999).]

Yes, SBJPA allows testing age to be the social security retirement age. Some plan documents will define how the test is done. If the document defines the testing age as 65 or the plan's normal retirement age, then an amendment would be required in order to use a different definition for testing age.