Richard Anderson

You may place restrictions on the QNEC; such as 1000 hour or last day. Therefore a person may be eligible to defer, but not be eligible for the QNEC.

I would like to offer a minor correction to John A's post. "I thought a contribution was only deductible if it was actually made prior to the filing of the tax return." The contribution is deductible if made by the due date of the return; the date of actually filing the return does not control timing of deductibility.

I agree with MWeddell that the "forfeited" provisionally allocated match should be used to reduce the next matching contribution, if possible. But we have many clients who do not give us any data until after the end of the plan year. In that case all matching contributions have already been deposited, so they can't reduce the next match deposit. In this case they allocate the "forfeited" provisionally allocated match to the remaining participants as an additional discretionary match.

I use the date of the check to the participant.

I heard this also (but not at ASPA), guy said he had d letters on several plans with the language.

If the account balance is more than $5,000 he can not be forced to take a distribution of his money from the plan. Therefore the answer is yes he may leave his money in the 401(k) plan, and wait until he is over 59 1/2 so he will not incur the 10% penalty. Another solution is to take a distribution from the 401(k) plan, but roll the distribution over to a US IRA, and leave the money in the IRA until reaching age 59 1/2.

"Richard, you posed two solutions, so you MUST not feel that he MUST be retroactively allowed to defer." You are right, I think either of the two will probably work, but I like # 1 better. Since it is impossible to retroactively defer, you must ignore something in this rule. You can ignore the retro part and enforce the YOS part. Or, you can ignore the YOS part. Which way is best for the employer and worst for the employee? Ignoring the retro part makes the employee wait a year before deferring and he misses any match on those deferrals (option 2). Ignoring the YOS part allows the employee to begin deferring immediately, and not miss out on matching contributions (option 1). Since option 1 is the best for the employee, I think it is the most conservative approach.

"What if he never completes the year of service? Then he never should have re-entered the plan and his deferrals never should have happened. Then what?" What if he completes a YOS without being allowed to defer? Now he retroactively must be allowed to defer, but you didn't allow him to? Now what?

I think there is no right or wrong answer to this. But, here's my thoughts on it. The retro entry after meeting a year of service makes no sense for 401(k) deferrals. So, if your plan document says that rehires enter retroactively to date of rehire after meeting YOS; you can interpret that in two ways: 1. Retro entry for deferrals makes no sense; therefore, for the deferral portion of the plan, the participant must be eligible to defer immediately upon rehire. 2. Retro entry for deferrals makes no sense; therefore, after meeting the YOS requirement the participant is allowed to begin deferring immediately. This option takes the position that since you can't retroactively defer, the retro requirement does not apply to the k portion of the plan. I think either method can be defended, although obviously method 1 is the more conservative of the two. This is a case where the plan administrator gets to interpret the plan document. When we help the plan administrator interpret their document, we encourage immediate entry for deferrals on rehire. If you think that interpretation 2 is valid, then no QNECs are required. If you believe interpretation 2 is wrong and 1 is the only correct interpretation, then the plan will need to be corrected and QNECs would be required.

In TracyAndrews' post "it is also important to make sure you are passing the coverage test when you put those participants in a zero % rate group." Under the proposed regs. I don't think you can have a zero% rate group. The gateway compares the lowest NHCE allocation to the highest HCE allocation. Therefore, an eligible NHCE could not get a zero% allocation unless no HCE received an allocation. Andy Treece is correct, these employees would have to be excluded from the plan entirely. Personally I think this is too aggressive, because the intent of the proposed reg. is to limit the range of skewing in favor of HCEs by insuring a minimum to NHCEs. This plan design is one way to bypass that intent. If we think up ways to bypass the intent of these regs, I think we can except more regs.

I don't understand the original question. Are you asking; do you include his balance as a key employee for the 12/31/99 determination because he became a key employee in 2000? If that is the question, then the answer is no.

I agree with rcline46, without any guidance on a deadline for TH contributions, EOY following is probably OK. But, be aware as Tom Poje points out, the 12/2000 contribution must be counted as annual additions for the 2000 plan year, since it was deposited to late to apply to the 1999 plan year.

I re-read the rules on employer stock, and here's my understanding. TRA 97 amended ERISA 407(B), and now the salary deferral portion of the plan is no longer considered to be an "eligible individual account" and now is subject to the 10% limitation. The profit sharing and/or match portion of the plan is an "eligible individual account" and therefore is not subject to the 10% limitation. But, if the salary deferral portion of the plan is participant directed, and the participant chooses the employer stock, then the 10% limitation does not apply. Is this correct?

Jean, Are you now doing the 2001 top-heavy test, using 12/31/2000 account balances and key employees as of 12/31/2000? That is my understanding of your question.

I've just been given a takeover plan. It's a balance forward 401(k) plan with quarterly valuations. I'm beginning with the 1st quarter of 2001. This 401(k) plan has about one-third of its assets invested in employer stock. Is this a problem? The plan is on a standardized CODA prototype document. All p.s. and match contributions to the plan have been in company stock. The only contributions that the employer has made in cash and not stock are employee deferrals and rollovers and QNECs made in the past to pass failed ADP tests. The deferral, QNEC, and rollover sources are employee directed with five investment choices (employer stock is not one of the choices). The other two sources, profit sharing and match, are employer directed and are 100% invested in employer stock. I thought non-ESOP plans are limited to 10% invested in employer stock, unless the employer stock was chosen by the participant within a participant directed account.

Tom, this guy still works there. He's not missing. If they need to locate him, he should be at his desk. (or the water cooler)

Once a person becomes a key employee their entire account balance is included in the top heavy test. You would not exclude the portion of the account balance that existed before becoming a key employee. Be sure to check the plan document. Many plans will specify that key employees also receive the top heavy contribution.

OK, back to my question then. If, when you look at comp for all 5 years, and now you don't count someone as key (who was a key last year because of being an officer), because now another officer has greater comp in that 5 year period: How do you treat the guy (or gal) that got bumped from being key? Is that person a former key? Non-key? Or still key (not because they are an officer, but because they were key in the prior period)? Has this been addressed in any of the IRS Q&As?

Treasury Reg 1.416-1 T-14 specifies that there is a maximum limit to the number of officers that will be counted as key employees. If the employer has less than 30 employees, the maximum number of officers considered to be key employees will be three. If the employer has over 500 employee, the maximum number of officers considered to be key employees will be 50. For employers with 30 - 500 employees the maximum is 10% of employees, rounded up to the next integer. Tom, the example in T-14 seems to say that only the current maximum will be counted as key. In the example, each year there are 50 officers, but each year they are 50 different officers. The example says to use only 50 as key employees, out of the total 250 officers (50 different key employees each year). This example has a total of 250 key employees for the 5 year period. 50 different officer keys each year. T-14 says "only a total of 50 individuals would be considered to be key employees by virtue of being officers in testing for top-heaviness..." But T-14 does not say what to do with the other 200 who were key employees because they were officers in prior years. In this example, I can't see that the intention is to count the other 200 as key because they were key in a prior year. Tom, in this example, do you think that there should be 50 keys or 250?

Thanks Tom, We spot check most things calculated by the software, but we manually calculate top heavy; always. Here's a top heavy question for you. Plan has no owners who are key employees, only officers. Each year the number of officer counted as key employees is limited by the 10% rule. For example, the employer has 38 employees and 6 officers, so the maximum officers counted as key employees will be 4 (38 x 10%, rounded up). But because compensation changes during the current year and 4 preceeding years, these 4 officers are not the same each year. Let's say employee D is a key employee in 1997, 1998, and 1999; but in 2000 gets bumped because another officer had higher compensation than him. Now the group of 4 officers that are considered key employees no longer includes employee D. Is employee D now a non-key employee or a former key employee? My guess is he is a former key and is disregarded in the top heavy test.

It appears I'm wrong. I put your example plan in our software and it calculates the maximum deduction as 53,250. Thanks, I learned something today.

That is/was my position. I'm checking to see if I can find a basis to defend that position, since others are not agreeing. Are there any examples in the regs. that cover this?

The deferrals should not be deducted from compensation in the first step. 200,000 gets limited to 170,000. No substarting of deferrals, either before or after the 170,000. 175,000 gets limited to 170,000, no subtracting of deferrals. Then add total eligible compensation, subtract total deferrals, then multiply by 15%. ((170,000 + 170,000 + 20,000) - 20,000) x .15 = 51,000). Deductible amount is $51,000. Your method incorrecting determines the deductible amount to be $53,250 ((170,000 + 165,000 + 20,000) x .15) If you want to calculate this on an individual basis, you can, but you will have to limit compensation to 170,000 first, then subtract deferrals. 200,000 170,000 -10,000 160,000 175,000 170,000 -10,000 160,000 20,000 20,000 0 20,000 Deductible amount is $51,000 ((160,000 + 160,000 + 20,000) x .15)

I may disagree. If you are calculating 15% deductibility on an individual basis, then adding these together for the total deductible amount, then I disagree. If this person were the only participant in the plan, the deductible limit would not be 25,500 (170,000 x 15%), it would be 24,000 ((170,000 - 10,000) x 15%). Are you calculating the deductible amount on an individual basis, and the adding these amounts together?

KateSmithMD, Here is an idea or two for you. If the employees are not deferring very much, a discretionary match may skew the contribution more towards the owner than will an integrated profit sharing contribution. But, in a safe harbor plan a discretionary match is limited to no more than 4% of compensation. Also, if the owner is older than the employees, has a cross-tested plan design been discussed? The 3% safe harbor contribution may be used in non-discrimination testing.