Laura Harrington

First a disclaimer...I am by no means an expert on this issue. I just know enough to raise the issue for your to explore. But yes, it is very possible that those employees are employees of the plan sponsor and not the leasing organization. This especially true in situations where the entire workforce is being leased back to an entity. Look up Rev. Proc. 2002-21. This Rev. Proc. deals with plans that are sponsored by the leasing organizations, but it will show you that what I am saying is recognized by the IRS as being a possiblity. Good luck!

It is very likely that the employees are actually common law employees of Company EFG and not of the leasing organization at all. Have you explored that possibility?

Yes, the coverage rules say you must include in the coverage ratio those who met the lowest age/service requirements (i.e. 6 months of service) but the issue is generally negated by using the otherwise excluable rule to complete compliance and coverage testing.

The safe harbor 401(k) plan does pass the nondiscriminatory classification test so we suggested to the other TPA that they try passing coverage for the safe harbor 401(k) plan using the average benefits test, but they think this other route is the better solution.

The client is aware of what is happening and wants us "all to get on the same page" which boils down to they want us to agree with the other TPA's solution.

We are the TPA for a non safe harbor 401(k) plan. The plan sponsor is a member of a controlled group with another entity that sponsors their own 401(k) plan. That plan is a safe harbor match plan. The client asked us to do a projected coverage test to determine if there will be any issues for the 12/31/2009 plan year. The ratio percentage test for our plan (the non safe harbor plan) will pass. The ratio percentage test for the other plan fails, miserably. The solution offered up by the other TPA is to aggregate the two plans for coverage. I don't think this is allowable due to Treas. Reg. 1.401(k)-1(d)(4)(iii)(B): B) Plans with inconsistent ADP testing methods. Pursuant to paragraph (b)(4)(ii) of this section, a single testing method must apply with respect to all cash or deferred arrangements under a plan. Thus, in applying the permissive aggregation rules of §1.410(b)–7(d), an employer may not aggregate plans (within the meaning of §1.410(b)–7(b)) that apply inconsistent testing methods. For example, a plan (within the meaning of §1.410(b)–7(b)) that applies the current year testing method may not be aggregated with another plan that applies the prior year testing method. Similarly, an employer may not aggregate a plan (within the meaning of §1.410(b)–7(b)) using the ADP safe harbor provisions of section 401(k)(12) and another plan that is using the ADP test of section 401(k)(3). The other TPA says that the safe harbor plan is just not going to rely on the safe harbor provisions for the 2009 plan year, thus we can aggregate for coverage and do an ADP/ACP test on the combined plans. I just don't think it is as simple as saying we decided not to rely on the ADP safe harbor provisions for the plan year. The only thing I could think of is if they say they are going to suspend the safe harbor match for the year and rely on ADP testing. After giving a 30 day notice before suspending the match the other plan would have one payroll before the end of the year. Any thoughts?

I assume the owners are not catch-up eligible or that the plan does not allow catch-up since you did not mention it? Laura

The general nondiscrimination test must use compensation that satisfies IRC 414(s). If you do not include the employee's compensation from the non-adopting employer does the plan satisfy the 414(s) compensation ratio test? If yes, then you do not have to include it when calculating the EBARs. If no, then excluding it is not an option. The 5% test of the gateway minimum is based on 415 compensation which would include compensation from the non-adopting employer. The 1/3 test references 414(s) compensation so it depends upon whether or not the compensation ratio test is satisfied if you do not consider the compensation from the non-adopting employer. I guess I should caveat that whether or not you can exclude the compensation for the non-adopting employer for the nondiscrimination test depends upon the plan document. Most plan documents that I see indicate that any definition of compensation that satisfied 414(s) can be used for nondiscrimination testing, but I imagine there are documents out there that are more limiting.

Calendar year plan with safe harbor nonelective feature. Plan provides that are employees are eligible defer and receive safe harbor nonelective contributions after completing one month of service with quarterly entry dates. Employer wants to amend the plan to provide that employees are eligible to defer after one month but are not eligible for the safe harbor nonelective contribution until they completed 1 Year of Service with quarterly entry dates. They only want the amendment to apply to employees who are hired after the date the amendment is signed. They plan to sign the amendment ASAP, prior to the end of the 12/31/2009 calandar year. Is this a permissible change since the change in provisions does not affect anyone who is already a plan participant? They have not been provided a safe harbor notice yet since they are not plan participants (or even employees at this point) so is the issue about making changes mid-year in a safe harbor plan irrelevant? P.S. I am aware of the issues with regards to testing the group of employees who are not eligible for the SHNE if there is an HCE who falls in that category. Your opinions are appreciated. Thanks! Laura

For some reason I had in my head that the reason they did not want to consider Company C was because it would make the coverage test fail. I don't know why I assumed that. A change of less than 1% probably could be argued to be insignificant, but I don't know of any specific guidance that would support that conclusion. Do they typically rely on the 3-year testing cycle?

I have subscription access to www.tagdata.com and was able to locate it there. Here is the text from Rev. Proc. 93-42 that discussed the 3-year testing cycle. I do not think you cannot rely on this rule as there has been changes in the employer's workforce (i.e. the addition of another company in the controlled group). SEC. 5. THREE-YEAR TESTING CYCLE An employer may rely for the two succeeding plan years on the tests substantiating that a plan complies with the nondiscrimination requirements for a plan year if the employer reasonably concludes that there are no significant changes subsequent to the test (e.g., significant changes in plan provisions, the employer’s workforce, or compensation practices). For this purpose, whether a change is significant depends upon the relative margin by which the plan has satisfied the nondiscrimination requirements in the most recent year in which the plan was tested and the likelihood that the change would eliminate that margin. If there is a significant change in one plan provision, the effect of which can be isolated from the effect of other provisions, the employer may continue to rely on the prior test during the interim two years, provided that the employer can demonstrate that the effect of the amended plan provision is nondiscriminatory. Employers using the three-year testing cycle for purposes of substantiating compliance generally must treat the year in which the final regulations under sections 401(a)(4) and 410(b) of the Code become effective with regard to the plan as a year of significant change requiring actual testing. However, if a plan first complies with these regulations in a year prior to their effective date, then the employer may treat that year, rather than the year in which the regulations are first effective, as a year of significant change for purposes of beginning the three-year testing cycle.

1. The GUST and EGTRRA prototypes we use allow for this, although they are not Corbel documents. The wording you are looking for will be something along the lines of allocating the contributions to each participating employer separately. In our GUST prototype it was an option in the adoption agreement in the contribution sections and in our EGTRRA prototype it is on the the Participating Employer adoption page. 2. In addition to ACP testing you will need to demonstrate that each rate of match is available on a nondiscriminatory basis. This is sometimes called Benefits, Rights and Features testing. 3. Yes, each company could have different match formula assuming you can amend the document to allow for it and the benefits, rights and features testing is satisfied.

You do not have to go through VCP in order to do a retroactive amendment to change eligibility. EPCRS provides for retroactive amendments to change eligibility in these situations through SCP. However, I believe you do have to submit the amendment for a determination letter. Of course, SCP may not be available in your situation if the failure is significant and not corrected within the 2 year period. So then VCP would be the only option for a retroactive amendment.

Yeah, the lowest requirement would have to be used for determining total EE counts in the test unless you apply the otherwise excludable rule, which probably isn't going to help, otherwise your original test would have passed. If the ABT fails you have the option to do an 11(g) amendment. It doesn't sound like you are going to be able to come up with a cheap solution to this problem!

Thank you for confirming this for me! Does anyone know if an existing 401(k) or DB plan will be able to be converted into this new type of plan? Or if a client already has a 401(k) and a DB plan, will they be able to merge them to become a DB(k)?

I do not work with DB plans, although I have some knowledge of them (enough to pass the ASPPA DB test anyway). I just want to make sure I am reading this wording from Notice 2009-71 correctly: A special rule applies in the case of an applicable defined benefit plan that meets certain interest credit requirements under § 411(b)(5)(B)(i). Such a plan is treated as meeting the minimum benefit requirement with respect to any plan year if, for the plan year, each participant receives a minimum pay credit to his or her hypothetical account. The minimum pay credit must be not less than the percentage of compensation applicable to the participant in accordance with the following table: Participant’s Age as of Beginning of Plan Year 30 or less: 2% Over 30 but less than 40: 4% 40 or over but less than 50: 6% 50 or over: 8% This is talking about a cash balance plan, correct? Thanks! Laura

When I first read this question a few days ago I was wondering how your 401(k) coverage test was passing but not your 401(m) coverage test if you had applied the fail-safe provisions. The fail-safe wording I have seen in multiple protoype and volume submitter documents does not limit only adding in those who are deferring when the 401(m) coverage test fails. The fail-safe wording generally says the accrual requirements do not apply (or apply on a limited basis) if the ratio percentage test is not passed, hence the reason some documents refer to these provisions as the suspension of accural requirements. Since you are suspending the accrual requirements you can count anyone who would have received a match if they had deferred. So if your 401(k) ratio test is passing, your 401(m) test should be passing after the fail-safe provision as well because it should be the same numbers (unless eligibility is different). If your document has wording that limits only adding in those who deferred, it would be the first time I have seen such a provision. Also, a prior post indicated that if you have fail-safe wording you cannot use the average benefits test. This is not entirely true. It usually just means you cannot use the average benefits test until you have applied the fail-safe provisions (i.e. determined benefits by suspending accrual requirements). If the coverage test is still failing you can still try to satisfy coverage using the average benefit test.

That is my understanding as well. I think the only way to accomplish what they want to do is to setup a 401(k) plan. They then increase everyone's hourly wage by the prevailing wage fringe amount and then let employees choose how much to defer into the plan. The 401(k) plan would not even be a Davis Bacon plan since from the standpoint of satisfying the Davis Bacon requirements, the employer would be using the cash option. Unfortunately this means they will owe FICA/FUTA on all of the prevailing wage fringe, but that is the price they will have to pay in order to accomplish their objective.

We are the TPA for an employer who sponsors a money purchase plan. The only contributions made to the money purchase plan are prevailing wage fringe contributions. The employer would like to give the employees the option of receiving their prevailing wage fringe benefit in cash or have it contributed to the plan (or a combination thereof). I know that the employer can satisfy the prevailing wage fringe by making an additional cash payment to the employee or by making a contribution to a plan, but they can allow the employee to choose between the two? To me this screams CODA as I do not know of any exception to the CODA rules for Davis-Bacon plans.

Anyone? Is the lack of reponse because I've stated the obvious and no one wants to make me feel like an idiot by saying so? Or is it because everyone is as confused as I am as to how to satisfy the Schedule C fee disclosure rules with regards to open brokerage accounts? Laura

For the rank and file employees, it is all contributions including 401k. For the partner, reduce by the match and profit sharing, but only reduce by his own 401k contributions if the definition of compensation is net of deferrals.

I've continued thinking about this issue since I posted it and have read and re-read the Schedule C instructions and the FAQ so many times I almost have them memorized. I have come to the conclusion that Q5 of the DOL's FAQ on Schedule C is not saying that the definition of indirect compensation is limited with regards to open brokerage accounts, but rather that the service-providers who have to be reported as receiving indirect compensation with regards to the open brokerage accounts is limited. Does anyone have thoughts on this interpretation? Laura

Question #5 of the DOL's "FAQs About The 2009 Form 5500 Schedule C" says the following: Q5: Are the requirements to report indirect compensation on Schedule C different for participant-selected investments through “open brokerage” windows? “Open brokerage windows” in self-directed 401(k) plans allow plan participants to invest in a wide range of funds, stocks, bonds and other investments offered through a designated broker for the brokerage window. Although the requirement to report indirect compensation applies to participant-selected investments from a range of investment alternatives under the plan, in the absence of any other guidance, Schedule C reporting can be limited to direct and indirect compensation received by the designated broker(s) and other brokerage window providers, transaction fees in connection with the purchase, sales, or exchanges made through the brokerage window, and any other plan-related fees. This limitation on reporting for Schedule C purposes does not relieve fiduciaries from obligations to prudently select and monitor designated brokers or other brokerage window providers in a brokerage window option under the plan. I'm probably missing something obvious, but exactly what is it that the open brokerage accounts are being exempted from reporting?

Plan has a self-employed individual who deferred monthly from his guaranteed payments. Match was calculated at the time the deferrals were made based on the guaranted payment amount. From 1/1-5/31 the match formula was 100% of SD up to 1% of compensation. From 6/1/-12/31 the match formula was 100% of SD up to 1.5% of compensation. Now that we have the information from the K-1 to calculate actual compensation, we need to determine what his match contribution should actually be versus what the client calculated throughout the year. Any idea how to compensate for the match formula that changed throughout the year? I have considered pro-rating the earned income and applying the match formula that was in effect at the time each deferral was made to the pro-rated amount. Or can we say that since compensation is deemed paid as of the end of the year, that the match can be based on 100% of SD up to 1.5% of compensation? Another person in my office suggested calculating the average amount of compensation that was matched throughout the year and applying that match formula (i.e. 100% of SD up to 1.29% of compensation). Any thoughts on the most accurate way to calculate this match? Thank you! Laura

We use TAG. I submitted a question on 7/9 and had a response on 7/10. I had additional questions concerning their response, so we had correspondence on 7/10, 7/13 and 7/14. I have not submitted any questions since then. Seems like last week I saw a post where someone had submitted a question to them weeks in the past and had not received a response.