John A

Does the former employee have evidence that he had a vested balance in the plan at one time?

This is a troublesome question to me, but the general IRS opinion I have encountered recently has been: If the terminated participant had a forfeiture (either due to receiving a distribution or having 5 1-year breaks), the terminated participant did not have to be made 100% vested. If the terminated participant had not incurred a forfeiture, the terminated participant did have to be made 100% vested. I believe there is also a court case in which the plan sponsor successfully argued that terminated particpants did not have to be made 100% vested because the business was shut down and so the participants would have had no opportunity to earn additional vesting service by rehire. If I remember correctly, the IRS only accepts this argument for the area of jurisdiction of the particular court, and not for anywhere else in the country. I don't think this argument works where a business is sold rather than shut down. Perhaps others can fill in details and chime in with their opinions. I'd like to know what the experience of others has been in answering this question.

If a plan sponsor has processed a QNEC in 1999 in lieu of corective distributions for 1998 testing results, does that QNEC amount need to be factored into the ADP for participants if performing a prior year test in 1999? My feeling is no, that one would use raw 1998 ADP's.

IRC401, It is clear to me that 5% of 415©(3) comp is one part of the gateway. What is less clear to me is what compensation (plan comp or 415 comp) should be used to determine the allocation rates (for 1/3 of the allocation rate of the HCE with the highest allocation rate). Must the allocation rate also be based on 415©(3) comp?

Okay, I'd like a little help with the very basics of applying the Section 415 limit to profit sharing contributions in a 401(k) plan. A 401(k) plan provides for deferrals up to 15% and a match that can be up to 6%. One NHCE defers 15% and gets the 6% match. The plan sponsor wants to make a 10% profit sharing contribution. 1. Can the plan sponsor make the full 10% contribution and return deferrals to the NHCE (whether the NHCE wants the deferrals returned or not) to satisy 415? 2. If the plan sponsor decides early enough in the year that it will make a 10% profit sharing contribution, can it limit all NHCE deferrals during the year in anticipation of the 415 limit to something below the limit set by the plan? 3. Stupid Question: Can the plan sponsor contribute 10% to everyone but the NHCE and contribute 4% profit sharing for the NHCE? 4. In general, how is a situation like this handled (other than by telling the plan sponsor that it might be wise to redesign the plan)? 5. Is there any type of official guidance that would prevent this type of plan design? Thanks!

Tom, thanks for a really decent brief summary. These questions come to mind as I read through the proposed reg: 1. Can plan sponsors rely on these proposed regs immediately? (I did not see anything that said yes or no, so my understanding of proposed regs in general would be yes. However, since the reg would not be effective until 1/1/2002, perhaps this does not matter.) 2. For any plan sponsor who wishes to adopt a new plan or amend an existing plan to be a new comparability plan, should the proposed reg rules be written into the document, or should this be delayed until the reg is finalized? 3. Does the compensation definition used to determine the allocation rate have to be the same as the compensation definition used for the 5%? 4. In the "broadly available separate plan" requirement, what does "assuming satisfaction of the average benefit test" mean? Does this mean that you start with the assumption that the aggregated plans pass the average benefit test (even if actual testing would show they did not meet the ABP test), and then test each plan separately under 401(a)(4)? Despite the questions, the reg seems to me to be a reasonable proposal.

It seems to me that it would be wise to put a note in the files of the plans that did not have a Sch. P attached to their 5500 filings about which plan had a Sch. P attached to its 5500 filing.

R. Butler, is there a reason you did not mention using QNECs to correct the ADP test as a 3rd way of complying? Brenda W, I believe failed ADP tests that are not corrected timely can be corrected under APRSC, and I think Rev. Proc. 2000-16 gives decent guidance as to how to correct. How would the client feel about QNECs for the NHCEs as a correction method?

Is there any reason that, as long as the plan document does not contain language preventing it, a 401(k) plan participant could not defer any $ amount up to the 402(g) limit from a single paycheck (presuming the paycheck is large enough)? So it would be theoretically possible for a 401(k) plan to allow a participant to defer $10,500 - or whatever the 402(g) limit is for the year - out of the participant's first paycheck for the year?

Is the following correct: If a plan borrows an amount equal to the cash value of a participant's life insurance policy minus the accumulated P.S. 58 costs, and then distributes (transfers the ownership of) the policy to the participant, the amount of the P.S. 58 costs is treated as a non-taxable (or after-tax) distribution, while the distribution of the borrowed cash to the participant is treated as a taxable distribution (or as an eligible rollover distribution). However, if a plan surrenders the policy for the cash surrender value, and then distributes this cash to the participant, the entire amount is taxable (and an eligible rollover distribution) - there is no basis for the P.S. 58 costs. I'm looking at Private Letter Ruling 8539066, and trying to figure out what it means to "convert the whole life insurance policies to their cash surrender value," and what event triggers the loss of tax basis in P.S. 58 costs. Is the P.S. 58 tax basis lost anytime the ownership of the policy is not transferred to the participant?

Time out! Putting aside my embarrassment: First, both many thanks and my apologies to those that have responded. As it turns out, I had the details of the original question incorrect, and I will get to what the correct details were, but first I want to address the question of a fixed profit sharing formula. I do work with an Adoption Agreement in which it is possible to make choices so that it would read as described below. The section of the document is called "Non-Integrated Fixed Formula - Non-Discretionary with Optional Profits Contingency." With certain allowable choices, the Adoption Agreement would read, "The Employer Regular Profit Sharing Contribution for each Plan Year will equal a fixed amount for each eligible Participant. The amount of the contribution will be 10% of Plan Compensation for the Plan Year. The Employer Regular Profit Sharing Contribution is not contingent on Net Profits. The Employer does not have the discretion to direct that an additional Employer Regular Profit Sharing Contribution be made for a Plan Year. Is this wording allowable? Can there be a "Non-Discretionary" profit sharing contribution? This particular adoption agreement makes me think yes. ------------------------------------------------------------ Now to correct the details in my original question: The question was described to me by a colleague and I was under the mistaken impression the plan was on the Adoption Agreement described in part above. It turns out the situation related to an individually designed plan. The actual details are: 1) It is a profit sharing plan and it is up to the sponsor’s discretion as to how much to contribute. 2) The employer profit sharing contribution is allocated according to a formula expressed as a formula with permitted disparity (integrated with Social Security). 3) An ineligible employee was included in the allocation (had not met minimum age and service). 4) The ineligible employee has not yet received a benefit statement, but a voice response system did reflect the incorrect allocation to the ineligible employee’s account. 5) This particular individually designed document seems to be silent about what to do when participation errors occur. Since the error occurred in the last few months, what should be done at this point? The possibilities being considered are: 1) Treat the amount that was allocated to this participant’s account as a forfeiture that will be allocated in the following year. Redo the allocation excluding this ineligible employee and subtracting the amount allocated to his account from the contribution to be allocated. Make sure all participants have received at least what they would have been entitled to in this corrected allocation calculation. Document the correction for the file, but do not do an APRSC. 2) Same as 1) but do an APRSC. 3) Same as 1) but do the current year allocation without changing the contribution amount (do not subtract the amount allocated to the ineligible employee). 4) Treat the inclusion of an ineligible employee as a mistake of fact and refund the amount allocated the ineligible employee to the employer (I have seen an Adoption Agreement that specifies treating the inclusion of an ineligible employee as a mistake of fact). 5) Other? So I guess the questions come down to: How should the correction be done when the document is silent (up to Plan Administrator?)? Can this be treated as a mistake of fact as seems to be implied by at least one adoption agreement I’ve seen (I had always been under the impression that this was very limited, and should only be used for clerical errors such as transposition errors like the one actuarysmith describes above)? Can or must an APRSC be done for this minor of a problem (minor in the sense that it involves a very small amount of money, basically one participant – the one ineligible, and will be corrected within about 3 months of the problem)? Again, my thanks and my apologies to those who have responded. While I think this thread has been more interesting due to my mistake, I did not intend to cause so much confusion.

No, I am not saying that the profit sharing plan is subject to minimum funding. The plan sponsor can certainly choose not to make a contribution at all. However, if the plan sponsor chooses to make a profit sharing contribution, the plan document specifies a fixed profit sharing formula of X% of comp., unrelated to profit. So the plan sponsor's choice each year is between $0 and $X% of compensation.

The fixed profit sharing formula is X% of comp., unrelated to profit. Sorry, I should have specified that in the question.

A profit sharing plan with a discretionary, fixed profit sharing formula has a last day rule. The plan sponsor funded the profit sharing formula during the year based on participants who were expected to be employed on the last day. Because some participants were unexpectedly not employed on the last day, the amount the employer contributed exceeds the amount of the fixed formula. What should be done at this point?

1) If an existing, calendar-year 401(k) plan distributed proper safe harbor 401(k) notices prior to May 1, 2000, and amends the plan to adopt the safe harbor method effective November 1, 2000, does an employee who terminated in September have to receive the safe harbor contribution (the employee met age and service requirements)? 2) If an existing, calendar-year profit sharing plan that did not have a CODA distributed proper safe harbor 401(k) notices prior to September 1, 2000, and amends the plan to add a CODA and adopt the safe harbor method effective October 1, 2000, does an employee who terminated in September have to receive the safe harbor contribution (the employee met age and service requirements)?

When does an employee cease to be an "Employee" for plan purposes? An employee is planning to have their last day of work be Friday, September 29. Saturday, September 30 is the last day of the plan year, and the plan requires a participant to be an "Employee" on the last day of the plan year to get the match. Saturday is not a typical work day for the company. If the plan document defines "Employee" as: a common law employee, does the participant get a match or not? Does it matter if the employee has accrued vacation time as of September 29? Can the Plan Administrator decide how the plan will be interpreted in this situation? Have other threads discussed this (or similar) issues? Thanks.

Follow-up questions: 1a) Could the participant write a check to the plan for the net amount (cash value minus PS-58 costs), and then distribute the policy? 2a) Could the plan borrow the net amount (cash value minus PS_58 costs) from the policy and contribute this amount to the participant's account, and then distribute the policy? Kirk, I'm just looking at the definition of an eligible rollover distribution. I'm not implying that the money has to be rolled over. Did I misunderstand your question, or does that answer your question? [Edited by John A on 09-27-2000 at 12:41 PM]

A plan participant wishes to rollover the full amount of his plan distribution to an IRA. He has had a life insurance policy in the plan. Am I correct that: 1) He can (providing it is not prevented by the plan document) choose to purchase the life insurance policy by writing a check to the plan in the amount of the cash value of the policy. 2) The total of the PS-58 costs that have been reported in the past will have to be paid directly to him as a non-taxable distribution. 3) The non-taxable distribution will not be subject to the 10% premature distribution penalty. 4) The remaining money after distribution of the PS-58 costs must be paid in an eligible rollover distribution?

Can a plan with a profit sharing contribution feature be amended during the last part of the year to exclude HCEs from the profit sharing contribution? If the only current requirement for the profit sharing contribution is a 1000 hour requirement and the HCEs have already earned 1000 hours for the year, but the discretionary profit sharing contribution has not yet been decided upon, can the plan be amended to exclude the HCES?

Is a hardship withdrawal or hardship distribution from vested match an eligible rollover distribution? It is clear to me that a hardhip distribution taken from the employee deferral source is no longer an eligible rollover distribution. I am not clear about whether or not hardship distributions taken under Rev. Rul. 71-224 from non-employee deferral sources are or are not eligible rollover distributions. (Does Rev. Rul. 71-224 allow distributions due to hardship from vested match, or just from profit sharing?) The language in the document I am working with is: "Upon at least 30 days' written notice to the plan administrator, a participant may make a withdrawal of all or any portion of his salary reduction account or the vested portion of his matching account at any time after he has attained age 59 1/2 or in the event of hardship, provided that any hardship withdrawal from a participant's salary reduction account shall not include earnings accrued after 1988."

Am I correct that, when Plan A is merged into Plan B, all participants that had been reported on past Schedule SSAs for Plan A (and have not yet been paid or forfeited) should be reported on the Schedule SSA for Plan A in the year of merger as Code C?

Cathy, is it available anywhere on the ASPA website (members only section perhaps) or was this something your office requested and received (in other words, not faxed to all ASPA members)?

http://www.benefitslink.com/IRS/index.shtml The above (right here in BenefitsLink) is the best I've found so far, but it does not include regulations, and is not quite comprehensive (for example, it leaves out Rev. Procs on magnetic media reporting for 1099s).

Does anyone know where I might find a list of all Rev. Procs (or legislation, rulings, etc.) that have affected 401(k) (or at least employee benefit) plans in 1999 and 2000?

Must a 457 plan contain language about 401(a)(9) minimum distributions? May a 457 plan make all required minimum distributions based on the life expectancy of the participant only (without giving the participant a choice to use joint life expectancy with a designated beneficiary)?