John A

Are 403(B) plans subject to top-heavy requirements?

Anyone know where I could find a ballpark of the percent of 401(k) that do an annual match versus those that put in the match for each payroll period (counting only plans that do offer a match)?

As I read Revenue Ruling 71-224, distributions from the profit sharing source could be made prior to the 2 year/5 year in-service withdrawal rules since "provision may be made in profit-sharing plans for accelerated distributions because of such hardship provided that the term “hardship” is defined, the rules with respect thereto are uniformly and consistently applied, and the distributable portion does not exceed the employee's vested interest." The Rev. Rul. specifically refers to the fixed number of years requirement (which the IRS interpreted as meaning 2 years/ 5 years) and implies that distributions may be accelerated to less than this requirement for hardship. Agree? Disagree?

Can a plan exclude some, but not all, collectively bargained (union) employees? If so, can the plan exclude all union employees not covered by the plan for 410(B) coverage purposes, and include all union employees participating in the plan? What other issues should be considered due to the plan including some, but not all, union employees?

A small employer (less than 10 employees) sold her business in an asset sale. The owner is continuing as a consultant under the same name. The plain vanilla profit sharing plan was terminated at the same time the business was sold, and all participants were paid. Can the owner immediately start a SIMPLE plan?

Is there any guidance on who can be considered a family member for purposes of the hardship withdrawal rules and the funeral expenses example? Can a plan document define family member any way at all (2nd cousins counted, for example), should the definition under 414(q) be used, etc.?

Am I correct that an employee can defer under both a 401(k) plan and a non-model (prototype) SARSEP plan of the same employer provided that the 402(g) limit is not exceeded when deferrals from both plans are combined? Can an employer that maintains n IRS model SARSEP also maintain a qualified plan if each plan covers separate groups of employees (no overlap)?

One further question: when you redo the 410(B) test (for 401(a)(4) purposes) treating the individuals "as if they were not benefiting", are these individuals treated as includable but not benefiting, or can they also be treated as if they were excludable (if they met the other requirements for being excludable - terminated with less than 500 hours, etc.)?

Thanks, Lynn and K Johnson. So my understanding is: For purposes of 410(B), an employee who receives only a top-heavy contribution is considered as benefiting under the plan, and therefore is not an excludable employee (one of the requirements for being able to exclude certain terminated employees is that they do not benefit under the plan). So do 410(B) test including employees who only receive top-heavy contributions. If the plan is not relying on a safe-harbor formula under 401(a)(4) (a new comparability plan, for example), then the employee who only received the top-heavy contribution has no effect on the testing. If the plan is relying on a safe-harbor formula under 401(a)(4) (a uniform % of pay, for example), then 410(B) test must again be done excluding employees who receive only a top-heavy contribution, but this test is only for checking 401(a)(4), not 410(B). If test passes, then no additional 401(a)(4) testing needs to be done. If 410(B) test would fail when excluding employees who only receive top-heavy contribution, then 401(a)(4) testing must be done to show non-discrimination in amount, probably by doing cross-testing. In a plan that provided a 7% profit sharing contribution, this would be the same as testing a plan which specifically provided a 7% contribution to a certain group of employees and a 3% (assuming the top-heavy minimum is 3%) contribution to the different group of employees that only received 3%.

In a top-heavy plan, if a non-key employee receives only the top-heavy minimum contribution of 3% of pay (worked only 100 hours during year and so did not qualify for full contribution), is that employee considered to "benefit" for 410(B)? Reg. 1.401(a)(4)-2(B)(4)(vi)(D)(3)says, in part: "...the top-heavy formula does not fail to be available on the same terms as the other formulas under the plan merely because it is available to all employees described in §1.416-1, Q&A M-10 (i.e., all non-key employees who have not separated from service as of the last day of the plan year). The preceding sentence does not apply, however, unless the plan would satisfy section 410(B) if all employees who are benefiting under the plan solely as a result of receiving allocations under the top-heavy formula were treated as not currently benefiting under the plan. " This makes it appear that employees should be treated as not benefiting if they only get the top-heavy minimum. However, IRS alert guideling Explanation No. 5 says, in part "... However, if the plan is required to provide top-heavy accruals for the plan year, or if the plan takes future compensation increases into account in determining accrued benefits, the plan will have to be tested for coverage." Although this seems to refer to DB plans, it also seems to imply that top-heavy minimums would be tested under 410(B). So if someone only receives the top-heavy minimum contribution, are they treated as benefiting under 410(B)? Are they left out of 410(B) coverage testing completely? Thanks for any opinions.

http://www.segalco.com/corporate/pub-corpo...rate.cfm?ID=299 Any verification that Segal is correct? Are these limits definite or projected?

For a 401(k) plan, Code Section 401(k)(2)(D) makes it pretty clear that the cash or deferred arrangement cannot require 2 years of service for eligibility to participate in the cash or deferred arrangement. Is there any cite that makes it clear that a safe-harbor 401(k) plan cannot require 2 years of service to be eligible to receive the nonelective (3%) safe harbor contribution?

MR, I agree that your suggestion would certainly be an acceptable approach. However, it seems to doubly penalize the employer for having a safe harbor plan. If the plan were not a safe harbor plan, then Rev. Proc. 2000-16 makes it pretty clear that the correction would be to contribute the ADP for NHCEs or HCEs (whichever is applicable). So it seems like it should be enough to contribute the ADP without additionally contributing the safe harbor nonelective contribution. Alternatively, since it is the safe harbor contribution that enables the employer to not have to calculate the ADP in the first place, it seems like it should be enough to just contribute the safe harbor nonelective contribution. Any other votes for: 1) ADP plus safe harbor 2) ADP only 3) safe harbor only 4) other?

Lynn and pax, thanks for your repsonses. How does one allocate the $7,000 contribution when there is only $6,400 in the suspense account to allocate to the separate participant accounts? Or are you saying to allocate the $7,000 "on paper" and determine the allocation of the $600 loss "on paper" and then do the physical transfer based on the net result? Also, would your responses be the same if the participant accounts were participant-directed and valued daily?

How should the exclusion of an eligible employee from a safe-harbor 401(k) plan be corrected? Which IRS correction program should be used (APRSC, VCR)?

IRC401, thanks for the response. At the risk of sounding like an exam question, anyone willing to take a shot at what should be done in the following situation? Target Contribution calculated on 2/28/2001 for 2000 calendar year plan year: Employee A Target Contribution by formula $ 2,000 Employee B Target Contribution by formula $ 5,000 Total Required Target Contribution by formula: $ 7,000 Employer contributed: $3,000 on June 30, 2000, and $2,000 on November 30, 2000 to a suspense account in the plan. The June 30 contribution has lost $1,000 as of 2/28/2001. The November 30 contribution has gained $400 as of 2/28/2001. Total amount in the suspense account as of 2/28/2001 is $4,400. All investments are employer-directed, but each participant has a separate account (assets are not pooled). As of 2/28/2001, the employer plans to allocate the contribution to the participant’s separate accounts. What should the employer do as of 2/28/2001 to fully accomplish the contribution and allocation for the 2000 plan year?

I have read that it is projected to increase to $35,000, but I have not seen anything official.

Yes to HCE - check 1.414(q)-1T, Q&A 6. Yes to service check 1.411(a)-5(B)(3)(iv)(B) and Labor Reg. 2530.210(d).

From Oct. 6: Agencies Respond to Requests for Extension of Form 5500 Deadline The U.S. Department of Labor’s Pension and Welfare Benefits Administration (PWBA), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation (PBGC) today announced guidance for employee benefit plans who are unable to file timely Form 5500 Annual Returns/Reports. The guidance is being furnished in response to requests to further extend the filing deadline. After careful consideration of requests for a second extension of the Forms 5500 and 5500-EZ filing deadline, the agencies concluded that any further extension of the filing period would present significant processing issues. In March, the agencies granted an automatic extension to Oct.16, 2000 for those filers with reporting due dates on or before July 31, 2000. The agencies indicated at that time that they do not intend to impose late filing penalties for the 1999 Form 5500 or 5500-EZ in cases where, despite a good faith effort to meet deadlines, filings are delayed because of transition year difficulties. With the approach of the October 16 filing deadline for many plans, Leslie B. Kramerich, Acting Assistant Secretary for PWBA, said that “the department recognizes that new forms, a new filing system and delays in form-related software have presented challenges for many 1999 Form 5500 filers. It is our goal to facilitate compliance for this transitional year, not penalize good faith efforts of filers to deal with these challenges.” To this end, Kramerich announced that the agencies are encouraging filers who will be unable to meet their filing deadline to attach a statement to their filing explaining the reasons for the delay. “Where a statement establishes reasonable cause for the late filing, the agencies will not take any further action solely as a result of the late filing,” Kramerich said. The extension of time to file the Form 5500 and 5500-EZ discussed above does not operate as an extension of time to file the PBGC Form 1. Information relating to the PBGC Form 1 is available at http://www.pbgc.gov. or by calling 1-800-736-2444. Additional information about the automatic extension is available on the PWBA’s website at http://www.efast.dol.gov. Questions about Form 5500 filing requirements should be address to PWBA's EFAST Help Desk at 202/219-8770.

A plan has a target benefit contribution at year-end. The plan sponsor (employer) would like to submit a set dollar amount per month to the bank trustee to be invested. The actual allocation would still be an annual allocation but they would still like to remit funds to the trustee monthly. The money would be put into a suspense account, where the employer would direct the investments. In the case where the market takes a dive and they do not have enough in the account to allocate to all participants, they'd be required to submit additional money to cover the contribution. Would that additional money be deductible to the company? If the market went the other way and the account earned more than what was needed for the allocation, would the additional funds have to be allocated to all participants in the plan (not just those eligible for the allocation)? Can the employer set up an account in the plan? My suggestion has been to set up an account outside the plan, but the employer seems insistent on having the account inside the plan. Any suggestions?

Can money purchase plan contributions be reported on a cash basis on Sch. H and/or Sch. I? Can the money purchase plan be reported on a cash basis but contributions to the plan reported on an accrual basis? If a money purchase plan can report contributions on a cash basis, is it okay to show zero for contributions on Sch. H or Sch. I if the contribution for the 1998 calendar year is deposited in 1998 and the contribution for 1999 is deposited in 2000? Answer I got from the IRS was yes, and zero should be reported in above situation (of course, 1998 5500 would have had to show both contribution for 1997 and 1998 if both contributions were deposited in 1998). Does anyone use the "modified cash" method? What is this method?

We always recommend it but leave the final decision up to the client.

In a safe harbor 401(k) plan, are there any additional restrictions on hardship distributions? Can the plan provide for hardship distributions of deferrals in the same way as a "typical" 401(k) plan? Can the plan provide for distribution due to hardship (under Rev. Rul. 71-224)of the safe harbor 3% nonelective contribution?

What minimum service conditions can be set for participation in the 3% nonelective contribution for a safe-harbor 401(k) plan? What minimum service conditions can be set for matching contributions in 1) a "typical" 401(k) plan, 2) a "safe harbor" 401(k) plan? Is there any guidance other than Code Sections 410(a)(1)(A) and (B), and 401(k)(1)(D)?

A company has employees who are not citizens of the United States and who do not perform any services in the United States. The employees are paid in U.S. dollars although they are not subject to income tax withholding, FICA etc. The employees are not currently in the qualified plans of the company (a 401(k) and a defined benefit), which I think is OK since I believe they would be nonresident aliens. The question is: Can they be allowed to participate in the pension and 401(k) plans? If they can participate legally, are there other issues that would make it impractical?