Laura Harrington

No, you do not add box 4 to 14A to determine net earnings from self-employment. If you follow the instructions for completing the Form 1065, and the K-1 attachment you will see that the guaranteed payment is already included in the number listed on line 14, Code A. http://www.irs.gov/pub/irs-pdf/i1065.pdf

The beneficiary account may need to be included in the test, depending upon when the participant died and whether or not the participant is a former key employee. See Treas. Reg. 1.416-1, T-12. The regs do not specifically mention how to handle QDRO accounts, but it is generally presumed they should be treated the same as death beneficiary accounts.

No, I do not know the reasoning behind doing it this way. I was just asked to research whether or not Company A, B, C and D employees can take a distribution. A,B,C and D are not going to have a DC plan going forward. Company E does not have any other DC plans Thanks! Laura

Company A is owned equally by three other entities: B, C and D. All 4 companies adopted one 401(k) plan. 80% of the assets of Company A are sold to Company E. 80% of the Company A employees are also transferred to Company E as part of the sale. Company A continues to exist with the other 20% of the assets and employees. As part of the sale, Company E agrees to become successor plan sponsor of the Company A, B, C and D 401(k) plan. Company A, B, C and D will no longer be participating employers in the plan. For the 20% of employees who stayed with Company A, there has been no severance from employment. They are still working for Company A. In order to distribute the 401(k) assets from the plan that belong to the Company A, B, C and D employees is it necessary to spin-out the portion of the plan with their assets into a new plan and then terminate that plan? I read through some prior posts and it was suggested a few times that since Companies A, B, C and D are no longer participating employers in the plan, that distributions could occur. But this does not make sense to me. Discontinued sponsorship in the plan I suppose could be construed as a plan termination of sorts with regard to just those entities, but I do not think you can terminate only a portion of the plan. Does anyone have support for the conclusion in the prior posts? Or support that you cannot distribute due to "plan termination" if the entire plan is not being terminated? Thank you! Laura

IRC 411(d)(3) says all affected participants must be 100% vested upon plan termination, but the law does not define "affected participant". The IRS has taken the view that an affected participant is anyone who has not forfeited their nonvested interest in the plan as of the termination date. See GCM 39310 and FSA 1992-1023-1. As WDIK said, you need to check the plan document to determine when forfeiture occurs. For example, the plan document we use says forfeiture of the nonvested benefit occurs after 5 consecutive breaks-in-service or after a cash-out distribution. An individual who is 0% vested is deemed to have a cash-out on their date of termination unless they are eligible for an employer contribution at year-end, in which case the forfeiture occurs as of the first day of the following plan year. If your TPA was on top of forfeiting nonvested balances timely, then it is likely that those terminated employees who still have an account balance are "affected participants" who became 100% vested on the date of termination.

bdeancpa, a periodic distribution is not an eligible rollover distribution if it is part of a series of substantially equal payments over the life or life expectancy of the plan participant, over the joint or joint life of the participant and a designated beneficiary or over a period of 10 or more years. See IRC 402©(4)(A). If the distribution you selected for testing meets this criteria, then the payment is not eligible for rollover and the 20% mandatory withholding does not apply. The withholding for periodic payments not eligible for rollover is determined the same as withholding on wages. See IRC 3405(a)(1).

There is nothing in the Code or the Treas. Regs. that limits the use of the average benefit test to only plans that have employer contributions. Are you thinking that because the Code says that the ADP test is the only method that can be used to show that the amount of deferral is nondiscriminatory, that you may be prohibited from using the average benefit test since the only contributions are salary deferral? Remember, you are not testing for nondiscrimination; you are testing for coverage. Coverage and nondiscrimination may be related to each other, and in many ways rely on each other, but they are two separate requirements.

Is there wording in the plan document that says absolutely, no matter what, the plan must pass coverage using the ratio percentage test and the average benefit test is not an option? Assuming this wording is not in the plan document, then there is no reason why you cannot try the average benefit test before you resort to retroactive amendments and QNECs.

If company B acquired company C in an asset sale, Company B does not automatically assume responsibility for the plan that was sponsored by Company C prior to the sale. Unless the purchase agreement states otherwise, Company C is responsible for terminating the plan. The employees from Company C have a severance from employment with regard to Company C and, if the plan allows distributions upon severance from employment, can take a distribution. If "NewCo" does as you say and becomes the successor plan sponsor for the Company C plan, then the new employer has assumed responsibility for the plan and the Company C employees are no longer considered to have a severance from employment with regard to Company C. The new employer also assumes responsibility for anything that happened in the plan prior to the date they became successor plan sponsor. This is why in asset sales the new employer generally does not want to assume responsibility for the seller's plans as part of the transaction. From an employee standpoint, I do not see an advantage or disadvantage either way unless there are provisions in the Company C plan which the employees do not like (which can probably be changed by just a plan amendment). But from an employer standpoint, I would make sure that due diligence is done before assuming responsibility for Company C's existing plan to ensure there are no issues which could come back to haunt the new employer down the road.

The withholding rules on non-periodic distributions which are not eligible for rollover have not changed.

Treas. Reg. §1.401(k)-3(g)(1)(ii) says the following: "The reduction or suspension of safe harbor matching contributions is effective no earlier than the later of 30 days after eligible employees are provided the notice described in paragraph (g)(2) of this section and the date the amendment is adopted;" I read this to say that the effective date of the suspension of safe harbor match cannot be effective until the later of: 1) 30 days after the notice is provided or 2) the date the amendment is adopted So if the employer wants to stop safe harbor match August 1, 2009 the notice needs to be provided by July 1, 2009 and the amendment must be signed on or before August 1, 2009. I have seen commentary (including in Sal's ERISA Outline Book) that interprets the regulations to say that the effective date of the suspension of safe harbor match cannot be effective until the later of: 1) 30 days after the notice is provided or 2) 30 days after the amendment is adopted I would interpret the regulation this way if it said "effective no earlier than the 30 days after the later of the date the eligible employees are provided the notice described in paragraph (g)(2) of this section and the date the amendment is adopted;" What is your opinion? Does anyone know of commentary from the IRS which verifies how the regulation should be interpreted? Thank you! Laura

Thank you for the information and the analysis of the impact of the court's decision.

Did the employer adopt the plan that the attorney drafted (i.e. sign the plan document)?

Using cross-testing for the ABPT test does not require you to meet the gateway minimum. Gateway minimum is only required if you use cross-testing for the rate-group test.

There are 3 separate requirements that have to be satisfied: 1. Coverage: anyone who benefits under 401(m) is treated as benefiting. Whether they are eligible for only one of the matches or both is irrevelvant. 2. Nondiscrimination in Amount, aka ACP test: test all the match together. 3. Nondiscriminatory availability of each rate of match: You need to do the benefits, rights and features testing to determine if each rate of match is available on a nondiscriminatory basis.

If the plan has employer contributions it is no longer exempt from Title I.

I agree with you. I do not think it is between the IRS and the participant either. But the IRS' answer did not help much, as it appears to tell the questioner they did not have to ask for additional evidence unless they had knowledge that the participant was lying. I work for a TPA. We have recently started a service for some of our 403(b) clients where we actually approve and disapprove hardships for the employer. We are setting our policies concerning documentation. The question posed to me by the manager of this department was whether we should require someone to prove that a residence is their primary residence in the case of eviction, foreclosure or casualty repairs? Also, should we require someone to prove that damage done to their property was due to a casualty. As you know, neither the Code nor the regulations provide specific guidance on issues like this one. I am trying to determine what would be "reasonable evidence". I am considering recommending that if the address of the residence for which the eviction or foreclosure notice applies or if the address of the residence for which the casualty repairs are being made match the address we have on file as provided by the employer, then no further documentation will be needed. But if the address does not match, we should require additional proof, such as a utility or phone bill addressed to the participant at that address. Does this sound reasonable?

Thanks PensionPro. That is the only statement I could find. I just wasn't sure if that was what they were referring to. It almost seems too good to be true. In the original question an IRS auditor said the plan administrator did not have enough evidence. But the answer from the IRS appears to be that unless you have knowledge to the contrary you can rely on the employee's representation.

The IRS Q & A from the 2008 ASPPA annual conference included the following: Question: "A plan's audit revealed insufficient plan administrator documentation of the actual hardship distributions on file. The benefits manager disputes this responsibility, saying it is between the individual and the IRS. Are there any minimal requirements that plan administrators must conduct before allowing a hardship withdrawal? " Answer: The plan must have sufficient information to adjudicate a claim. Reasonable evidence is needed. See, e.g., regulations relating to Katrina hardships for what you need to show. I cannot find the regulations the IRS referred to. I read KETRA and IRS Notice 2005-92. Can anyone help? Thanks! Laura

Can you explain what you mean by ACP split testing method? This terminology is not familiar to me.

You are not reading it incorrectly. If the formula is as it was typed in the original post, then those with income over the taxable wage base are receiving less than pro-rata.

I think this is a safe harbor permitted disparity formula. In fact, I think this formula is poorly written and is not giving the highly paid individuals any additional benefit. The formula you described is commonly referred to as a step-rate formula: X% of compensation up to the integraton level plus Y% of compensation in excess of the integration level. The maximum disparity allowance in a safe harbor formula is the lesser of the maximum disparity percentage (5.7%, 5.4%, 4.3%) or the base contribution percentage. In a step-rate formula, X is the base contribution percentage and the disparity is Y-X. In your example, the base contribution percentage is 8.75%. 5.7% (the maximum disparity percentage since the integration level is the taxable wage base) is less than 8.75%, so the maximum disparity allowance is 5.7%. In your case Y-X must be equal to or less than 5.7%. 5.7%-8.75% = -3.05%, so it definitely falls within the guidelines. However, as you can see, the formula provides no additional benefits! A better formula would be 8.75% of compensation up to the taxable wage base and 14.45% of compensation in excess of the taxable wage base. In this second formula, the base contribution percentage is 8.75% so the maximum disparity allowance is still 5.7% as previously illustrated. Y-X (the disparity provided by my formula) must be equal to or less than 5.7%. 14.45%-8.75% = 5.7%, which satisfies the permitted disparity safe harbor.

Peter makes some very good points. The only way to prove it would be to ask for the same type of documentation that an IRS auditor might request in order to validate the claiming of someone as a dependent on a tax return: receipts, custodial agreements, etc. Who wants to weed through all of that? Certainly not me! The consensus I received from this message board, as well as other research, was that people simply rely on the participant's statement unless they have knowledge to the contrary. That is good enough for me.

IRC 408(p)(10) provides transitional relief in this situation. The transition period begins on the date of the business transaction and runs through the last day of the second calendar year following the calendar year in which the transition occurred. In order to be eligible for the transitional relief there must be no significant changes in coverage under the SIMPLE plan and the exclusive plan rule must be satisfied except for the situation caused by the business transaction. Laura

I don't agree that this plan does not satisfy the permitted disparity safe harbor under 401(l). The regulations do not say that the maximum disparity has to be 5.7%, it says it cannot exceed 5.7%. Treas. Reg. 1-401(l)-2 (b) Maximum permitted disparity--(1) In general. The disparity provided for the plan year must not exceed the maximum excess allowance as defined in paragraph (b)(2) of this section. In addition, the plan must satisfy the overall permitted disparity limits of §1.401(l)-5. (2) Maximum excess allowance. The maximum excess allowance for a plan year is the lesser of-- (i) The base contribution percentage, or (ii) The greater of-- (A) 5.7 percent, reduced as required under paragraph (d) of this section, or (B) The percentage rate of tax under section 3111(a), in effect as of the beginning of the plan year, that is attributable to the old age insurance portion of the Old Age, Survivors and Disability Insurance provisions of the Social Security Act, reduced as required under paragraph (d) of this section. For a year in which the percentage rate of tax described in this paragraph (b)(2)(ii)(B) exceeds 5.7 percent, the Commissioner will publish the rate of such tax and a revised table under paragraph (d)(4) of this section.