John A

I would suggest you get help from a third party administrator on this. The rules for the 402(g) limit seem to be pretty straightforward, but the 415 limits for 403(B) plans are somewhat complex. The 402(g) limit applies to all salary deferrals from both 401(k) plans and 403(B) plans. The limit was $10,000 for 1999 and is $10,500 for 2000. So if an employee defers $5,500 into the 403(B) plan, the employee is limited to deferrals of $5,000 into the 401(k) plan for the year 2000. The 415 limit applies to all additions to the employee's account, which includes both employee deferrals and employer contributions. The 415 limit is the lesser of $30,000 or 25% of compensation. Up to 12/31/99, it appears that this limit was applied separately to 403(B) and 401(k) plans, so that it would be possible for some employees to have total additions of $60,000 between the two plans. This was apparently linked to IRS Code Section 415(e), which has now been repealed. So it is possible that, for the year 2000, the limit will have to be applied by combining the plans. There are quite a few special rules about the 415 limit relating to 403(B) plans and I do not know a lot about 403(B) plans, so I again suggest you get a professional to help you through the rules. Still, I hope I've given you a starting point. Good luck.

I would suggest you get help from a third party administrator on this. The rules for the 402(g) limit seem to be pretty straightforward, but the 415 limits for 403(B) plans are somewhat complex. The 402(g) limit applies to all salary deferrals from both 401(k) plans and 403(B) plans. The limit was $10,000 for 1999 and is $10,500 for 2000. So if an employee defers $5,500 into the 403(B) plan, the employee is limited to deferrals of $5,000 into the 401(k) plan for the year 2000. The 415 limit applies to all additions to the employee's account, which includes both employee deferrals and employer contributions. The 415 limit is the lesser of $30,000 or 25% of compensation. Up to 12/31/99, it appears that this limit was applied separately to 403(B) and 401(k) plans, so that it would be possible for some employees to have total additions of $60,000 between the two plans. This was apparently linked to IRS Code Section 415(e), which has now been repealed. So it is possible that, for the year 2000, the limit will have to be applied by combining the plans. There are quite a few special rules about the 415 limit relating to 403(B) plans and I do not know a lot about 403(B) plans, so I again suggest you get a professional to help you through the rules. Still, I hope I've given you a starting point. Good luck.

Are you asking if compensation with a different, unrelated employer should be used? If the employee participates immediately on hire, you certainly would use all compensation from hire date. What compensation would there be prior to hire date?

Forfeitures reduce future employer contributions. Also, note that the following from PLR 8750061: "Sep. 16, 1987 This letter constitutes notice that conditional waivers of the minimum funding standard have been granted for the above-named money purchase pension plan for the plan years ended June 30, 1984, June 30, 1985 and June 30, 1986. ... The company experienced a shortage of cash and available working capital for the fiscal years ending June 30, 1984, June 30, 1985 and June 30, 1986. During the same period, the company realized a reduction in net income. The plan was amended to reduce contribution to the pension plan effective July 1, 1986. A partial plan termination occurred on June 30, 1986. At that time, all participant's accounts became non-forfeitable. --------------------------------------------- So it appears that in this PLR, a partial termination was found to have occurred due to an amendment to a money purchase plan reducing future contributions. I'm not sure how to interpret the partial termination date being June 30, 1986, but June 30 is clearly not the effective date of the amendment. It almost appears that you would consider the partial termination to have occurred on the last day of the plan year preceding the effective date of the amendment. Other opinions?

For purposes of this question, please assume that a DC plan can be found to have a partial termination due to a significant reduction in future benefits (a "horizontal" partial termination). Assuming a DC plan has a horizontal partial plan termination, and the plan amendment which reduced the money purchase plan contribution from 10% to 5% was adopted October 28, 1999, effective Nov. 1, 1998, which date would be used to determine who to vest - October 28, 1999 (the date the amendment was signed), Nov. 1, 1998 (the date the amendment was effective) or October 31, 1999 (the plan year end as of which the contribution was allocated). The plan has a 1000 hour, last day rule to receive the contribution. If a DB plan has a horizontal partial termination, is the partial termination (and the date of required vesting) consider to have occurred on the adoption date or the effective date of the amendment (or some other date)?

This is a subject that has been discussed a few times before, and I’m wondering if anyone knows of anything new and what people have been doing in practice. If anyone is going to the 2000 EA meeting, could you follow up on this? The previous threads on the topic have pointed to: The 99 EA Gray Book. "QUESTION #30 Other DC Issues: Application of Maximum Compensation Limit In a 401(k) plan, does IRC Section 401(a) (17) preclude the following? A. Employee A earns $300,000 annually. He enrolls in 401(k) calendar year plan in August, after earning $175,000. He defers $10,000 for the balance of the year. B. Employee A earns $300,000 annually. He participates in a calendar year 401(k) plan making monthly deferrals of a flat dollar amount of 1/12 of $10,000 in 1998, even though his pay exceeded $160,000 before he was done making elective deferrals. C. Same as B, but deferrals are a percentage of pay (3.33333%). RESPONSE All of the above are acceptable, assuming the plan is not drafted in such a way as to prevent it. In situation C, for example, a plan provision permitting deferrals expressed as a percentage of compensation but not permitting deferrals expressed as a dollar amount could not accommodate deferrals on pay in excess of $160,000. Where the plan permits deferrals expressed as a dollar amount specified in the employee's salary reduction agreement, the reference to a percentage in the individual agreement is irrelevant." -------------------------------------- Assume a plan document permits deferrals of up to 15% of compensation and does not mention allowing deferrals of specific dollar amounts. Does the response above mean that, for this plan document, the Employee in Situation A may not make deferrals, and the Employee in Situations B and C is limited to $5,333.33 (3.33333% times $160,000)? Does anyone have a plan document that has a provision allowing deferrals of a specific dollar amount per period? The response seems to indicate that a provision like that in the plan document makes Situations A, B and C o.k., even if the actual election form states a percentage of compensation. If the plan document has a provision like this, does this make it possible for the Employee in Situation A to receive a matching contribution? Would the answer be different depending on whether the match was based on deferrals (50% match, for example), or compensation (50% of the first 6% of pay deferred)?

Does anyone have, or know where I can find, the address where a check for withholding would be mailed for California state tax withheld from a 401(k) plan distribution?

Company A, which maintains a 401(k) plan, is sold to Company B, which also maintains a 401(k) plan, on July 1, 1998. The 401(k) plans will be merged May 1, 2000. Both plans are calendar-year plans. Can anyone give me a general overview of how testing is done in 1999 and 2000? How is the former ownership of Company A treated (important for key employee definition, not used for HCE determination?)? Does company A's plan have to be tested for 1/1/2000-4/30/2000, or is it combined with the plan it is merged into and tested for all of 2000? If this is too open-ended a question to ask here, does anyone know of an article that has been written on this issue? Thanks for any suggestions you might have!

Unfortunately, my answers below are just educated guesses, but for what they're worth: 1) I assume the firm now have to make a 3% contribution for associates into the 401(k) plan. Is that correct? Yes, that's correct. 2) Is there a way around this prospectively?. It does not appear that the 401(k) can be terminated and a new plan started includng associates/non-keys only because of the successor plan rules combined with the fact that there is an existing profit sharing plan covering more than 2% of those who were eligible for the 401(k). I don't know if there's a way around this prospectively. 3) If the 401(k) Plan was "frozen" so no future deferrals were allowed, would a top heavy contribution still be required because of the frozen plan's aggregation with the profit sharing plan and the fact that keys are getting 3% or more into the profit sharing plan? Yes. 4) If you prospectively eliminate participation of the keys in the 401(k) would you then have to wait 5 years for mandatory aggregation not to apply? I don't know. 5) Any other ideas? No. I'm sorry I can't be more helpful on these.

Please help resolve a disagreement in our office. One person believes that the determination of whether a plan termination occurred due to a significant reduction in future benefit accruals (a "horizontal partial termination")only affects DB plans. Another believes this determination could also affect DC plans. For example: If a money purchase or target benefit plan is amended to reduce the contribution formula (say from 10% to 5%), one person believes there is the possibility that the IRS would consider this a partial plan termination. The person's analysis states that this would occur if the potential for a reversion of assets to the employer (i.e. future forfeitures exceed future contributions) increases. Each person has reviewed IRS Reg. 1.411(d)-2(B) and various court cases. Which person do you think is correct?

It is pretty clear from many other threads that top-heavy compensation is full plan-year compensation. However, should the full plan year include time during the year in which the employee was a union employee? The plan for non-union employees is top-heavy. A union employee becomes a non-union employee during the plan year and immediately participates in the non-union plan. Should this participant's top-heavy contribution be based on time both as a union employee and as a non-union employee, or only time worked while a non-union employee?

An employer would like to change the loan provisions in their plan document to force terminated participants to pay back any outstanding loans within 30 days of termination of employment. Right now, the plan document provides that participants who have terminated employment with outstanding loans may continue to make loan payments. It seems clear that this change can be made on a prospective basis. Can the change apply to 1) current terminated participants who are making payments on their loans, 2) current active participants who have outstanding loans? So if a current active participant with an outstanding loan terminated employment next year, could that participant be forced to repay the loan under the change in the plan document loan provisions?

The 5310-A instructions say not to file a Form 5310-A if 2 or more DC plans are merged and a. the sum of the balances in each plan prior to the merger equals the fair market value of teh entire plan assets, b. the assets of each plan are combined to form the assets of the plan as merged, and c. immediately after the merger, each participant in the plan has an account balance equal to the sum of the account balances the participant had in the plans immediately prior to the merger. Is this exception met if Company A sells a division to Company B and all of the above would be true if Company A's plan only covered the division being sold?

Has anyone had a leased employee participate in the recipient's 401(k) plan? If so, what procedures were used to handle the leased employee's elective deferral contributions? Were the contributions withheld from the amount the recipient paid the leasing organization?

No matching contribution is involved, just the discretionary profit sharing contribution. I believe I agree with your answer. The conclusion is that, no matter what the plan sponsor communicated, since the profit sharing contribution was not made by 8 1/2 months after the end of the plan year, there cannot be a contribution for the plan year ended in '99. If statements have been given to participants, then corrected statements will need to be provided. And if the plan sponsor filed showing a deduction, an amended return will need to be done.

Is it permissible to have the following plan document provision: If the Employer matching contribution that would otherwise be contributed or allocated to the Participant's Account would cause the annual additions for the Limitation Year to exceed the maximum permissible amount, the amount contributed or allocated shall be reduced so that the annual additions for the Limitation Year shall equal the maximum permissible amount. Does this provision cause a problem if it results in reductions in match for NHCEs but not for HCEs?

The plan year ended 05/31/1999 has a receivable PS contribution of $5,000. The $5000 is still receivable as of today, 2/22/00. The plan sponsor had a money crunch and wants to not make the receivable contribution. Can the plan sponsor choose to not making the receivable profit sharing contribution? Can the plan sponsor choose to not make the contribution if 1) the deduction has been taken or 2) statements have been passed out to the participants? If the deduction has been taken and/or statements have been passed out, what corrective steps need to be taken? What options does the plan sponsor have?

An employer did not take 401(k) deferrals out of bonuses for at least 5 years. The plan document did not exclude bonuses from the definition of compensation. For the most part, the bonuses are small amounts, but pretty much everyone got one each year. Any thoughts as to whether this could be corrected under APRSC or which IRS correction program would be most appropriate?

A participant submitted a deferral election form, which the plan sponsor also signed, in July of 1999. The participant just noticed that deferrals were not being withheld from the paycheck and informed the plan sponsor. The plan is a calendar year plan. What is the correction?

Here's a good answer from the Journal of Pension Benefits, Volume 6 Issue 1, Autumn, 1998: Tax-Exempt Entities— Sharing Profits in a Not-for-Profit By KEVIN J. DONOVAN Considerations for tax-exempt entities contemplating maintaining a profit sharing plan. A question that often appears on the Pension Information Exchange (PIX) is whether or not a tax-exempt entity is subject to a 15 percent limit for contributions to a profit sharing plan. Generally, the answer to this question is no, a tax-exempt entity is not subject to this limitation; therefore, a tax-exempt entity could maintain a profit sharing plan that provides for a fixed contribution of up to 25 percent of each participant’s compensation. Alternatively, in a discretionary profit sharing plan, a contribution in excess of 15 percent of participant compensation could be made, as long as the amount allocated to any participant’s account does not exceed 25 percent of his or her compensation. DEDUCTION LIMIT The genesis of the question is of course the 15 percent deduction limit found in Internal Revenue Code (Code) Section 404(a)(3). Under this section, an employer’s deduction for contributions to a profit sharing plan is limited to 15 percent of the compensation paid to the beneficiaries under the plan during the taxable year. To the extent that contributions exceeding this amount are made, a 10 percent penalty tax is imposed. [iRC § 4972] Generally, however, this penalty is not applicable in the case of a tax-exempt entity. An exception applies in the case of a tax-exempt entity that has been subject to the unrelated business income tax (UBIT) or such an entity that is part of a controlled group with a taxable entity. [see 5 J Pension Benefits 3 for a discussion of penalty taxes and tax-exempt entities.] Whether the entity is taxable or not, the deduction limit under Code Section 404 is just that—a deduction limit. Unlike the individual limit on annual additions contained in Code Section 415, the limitation under Section 404(a)(3) is not a qualification issue. [iRC § 401(a)(16)] That is, an employer who contributes more than 15 percent of participant compensation to its profit sharing plan is not subjecting its plan to disqualification (unless, of course, the terms of the document specifically forbid such a contribution, in which case there would be a disqualifying defect for failure to follow the terms of the document). It is merely subjecting itself to a penalty tax. A tax-exempt entity’s profit sharing plan may therefore clearly allow for contributions in excess of 15 percent of participants’ compensation to its plan without risking disqualification.

Chester, we disagree about whether or not it's logical and that's o.k. The IRS agrees with you and that is obviously much more important than my humble opinion on the mattter. But I truly would be interested in knowing whether you exclude participants who were paid lump sums on the first day of the plan year from your beginning of year participant count - do you?

Chester, you said, "Well, John that is an original and creative explanation." Only in our employee benefit world would it be considered "creative" to argue that the ending count for a prior period should equal the beginning count for the current period. In most worlds, having the numbers be different would be the "creative" way to count. You also said, "I would doubt very much that the IRS would buy that reasoning." You're probably correct. The IRS' way of doing things does not necessarily have to be reasonable, so they probably would not buy reasonable reasoning. You ask, "If participants enter the plan on the first day of the plan year, why would you not want to include these people in your BOY count?" I would ask you, if assets are added on the first day of the plan year, why would you not want to include those assets in your BOY assets? And my answer to your question would be that I would not want to include the new entrants because including them forces the completely illogical result of having a beginning count of the current period different than the ending count of the prior period. You say, "I know we have been instructed at prior EA meetings from IRS personnel to include people who enter the plan on the first day of the plan year." I appreciate the information. I had not heard that the IRS had provided any type of guidance on this. Do you happen to know of a particular transcript that contains the guidance? You say, "So, if you are not currently doing that, I would politely advise you to start doing so!" I appreciate your being polite. Our firm does currently include entrants on the first day in the beginning of year count, but I still believe it is illogical to have a beginning of period count not equal the end of the prior period count. Do you agree with richard that participants who leave on the first day should be excluded from the count (for example - 10 participants on April 30, the end of the plan year, no new participants May 1, 1 participant paid a lump sum on May 1, beginning of year participant count would be 9)? I'd also like to know if anyone has ever had the DOL or IRS reject or challenge a 5500 that excluded entrants on the first day of the plan year from the participant count.

Answering my own question: Yes under both pre-SBJPA and post-SPJBA: IRS Reg. 1.401(m)-1(B)(3)(ii) and IRS Code 401(m)(5)©. Sorry for asking - the 401(k) Answer Book only lists the ADP test under restructuring. Oh, and I did mean restructuring for statutory eligibiliy in this question, not any other types of restructuring.

Can restructuring for eligibility be done for ACP testing purposes or is it restricted to ADP testing? Cites from formal or informal guidance would be appreciated.

I don't think there's only one answer to this question and I'm pretty sure people do this differently. Some people would say that the counts should be the same end of prior year and beginning of current year. The argument would be that (taking a calendar year plan as an example), the end of the prior year was midnight December 31, and the beginning of the current plan year is midnight December 31. Taking that view, no new participants have entered as of "the beginning of the plan year." Any new entrants on January 1 would be additions during the year. The other view is that (again taking a calendar year plan as an example), the "beginning of the plan year" is January 1, and anyone that became a participant January 1 should be included in the count at the "beginning of the plan year." I do not think I have ever read any guidance that clearly said one of the 2 above ways was correct, and I think either way might be o.k. as long as it is used consistently. I have not found anywhere in the 5500 instructions that clearly said one of the 2 above ways was correct or incorrect. The first view makes more sense to me as it corresponds better to beginning of current year assets equaling end of prior year assets. (If new assets January 1 are not counted, why should new participants January 1 be counted?) If the IRS or DOL has ever indicated a preference in formal or informal guidance, I'd appreciate it if someone would share it.