Laura Harrington

Does anyone know if this is still the case? If the plan satisfies the coverage requirements using the ratio percentage test, but has to rely on the average benefits test to pass the rate-group test, can I just do the Demo 6 submission? This is my first Demo 6 (or 5 for that matter). The plan is spinning out from a multiple employer plan and the legal counsel for the multiple employer plan is requiring the plan to be submitted for a determination letter and to submit for a Demo 5 and a Demo 6 before they will transfer assets. Makes no sense to me since the plan is restating into our volume submitter doucment, passes the ratio percentage test with ease and has been a cross-tested new comparability plan for several years. A lot of make work for nothing in my opinion! The instructions for the Demo 5 say it is not available for plans that satisfy the ratio percentage test. I do not want to include the Demo 5 if it is not even needed. Thank you for your help, Laura

The Form 5500 instructions have a portion that lists what forms a small pension plan may be required to file. Schedule D is on this list. Here is a link to the instructions. See pg 9. http://www.irs.gov/pub/irs-pdf/i5500.pdf Laura

Another argument in favor of the conclusion that A,B and C are not part of one controlled group is the interpretation of IRC 1563 by the Supreme Court in the U.S. v. Vogel Fertilizer Co. which stated that when determining if the 80% common ownership test is met, the common owner must have at least some ownership in each business being tested. Only Mr. G has ownership in A,B and C. Since he only owns 78% of company C, the 80% common ownership test is not satsified.

I guess I should not have assumed this was a calendar year plan! If this is a calendar year plan than my answer stands. IluvNewComp: in your example did the two people put in the $41,000 all during the same plan year (e.g. 7/1/2007-6/30/2008)?

Catch-up is treated the same for both HCEs and NHCEs. You will use $15,500 for both.

The rules under 72(p) are for determining whether or not the loan is a taxable distribution. These rules are separate from the prohibited transaction rules. Under 72(p), if the loan exceeds 50% of the vested account balance the excess is a taxable distribution. In order for the loan to not be a prohibited transaction, no more than 50% of the vested account balance can be used as collateral. Therefore, allowing a loan in excess of 50% of the vested account balance does not create a prohibited transaction assuming additional collateral was obtained. The plan loan program should outline what can be accepted as additional collateral.

If a broker-dealer sponsors a qualified plan that covers employees of the broker-dealer, can they serve as their own broker of record for the plan? The plan is self-directed. The broker of record for the plan does not actually execute any of the trades as the TPA firm uses a trading platform to do all of the trading. In a typical arrangement the broker of record for the plan would receive a piece of the 12b-1 fees, commissions, etc. Does this qualify for one of the PT exemptions if no commissions, trailers, etc. are paid to the brokerage firm? Laura

Exactly the same wording as quoted above.

I was on maternity leave from mid-January to a few weeks ago. While I tried to stay abreast of what was going on in the retirement plan arena, I have to admit that I was slightly pre-occupied with my darling daughter and probably missed a thing or two! I want to confirm the status of the DOL's three-part fee disclosure initiative: The proposed regulations for the participant-fee disclsoures under ERISA 404(a)(5) and the service provider disclosures under ERISA 408(b)(2) were not finalized and have been put on hold indefinitely. Part III of the initiative, which affected the Schedule C attachment to the Form 5500, has been finalized. No changes have been made to the 1/1/2009 effective date or the scope of these rules in light of the new administration. Did I miss anything? Thank you! Laura

I rarely ever deal with 11(g) amendments, but I've 3 situations come across my desk within just two weeks that may require these amendments! Here is the one I am dealing with now: 403(b) plan with discretionary New Comparability feature. 3 groups. Groups 1 & 2 are made up of HCEs. Group 3 is all of the NHCEs. For sake of the conversation let's say Groups 1 & 2 received 12% and Group 3 8%. We are doing the 12/31/2008 plan year end work, although we did not restate the plan to our document until 1/1/2009. The document in effect as of 12/31/2008 states the plan will satisfy the gateway rules using the broadly available allocation option. Why it was drafted this way is beyond comprehension, but that is indeed what it says. The allocation does not satisfy the broadly available allocation option, so cross-testing is not an option. The plan cannot satisfy the rate-group test using the allocation rates or allocation rates with permited disparity, so based on the allocation of 12% to HCEs and 8% to NHCEs, the general nondiscrimination requirements are not satisfied. Obviously, we could raise everyone in Group 3 to 12% to correct the violation without an 11(g) amendment. But let's say the client wishes instead to retroactively amend the plan. If we were using the minimum contribution gateway (i.e. lesser of 1/3 of highest HCE rate or 5%) the gateway would be satisfied. The rate-group test would also pass using accrual rates. Could the plan be retroactively amended to state that the gateway will be satisfied using the minimum contribution option? Or does the amendment have to state that certain NHCEs will be raised to 12% in order for the test to pass?

Yes, our prototype does allow us to put everyone in their own group, but then there is a caveat about how many groups you can have since it is a prototype document. I mis-spoke when I said this particiular client was using a prototype document. It is actually a volume submitter document. Our prototype and volume submitter documents look (and read) almost exactly the same.

This is a prototype document, so there is the concern of making it an individually drafted document. Could the -11(g) amendment retroactively change the plan so that everyone is in their own group? That would fit within the confines of their prototype document and allow us to do what the actuary has asked. In my opinion, the idea that the plan can retroactively amend their document to change the allocation formula even though the current document provides a way for the general nondiscrimination test to pass seems contrary to the requirement that there be a definite allocation formula. A few people mentioned the deductibility issue with -11(g) amendments. Does anyone have a cite for this? Thanks! Laura

No, only NHCEs.

I have no idea why the plan document would call the different match made to the HCEs a "safe harbor" contribution. It clearly does not meet the safe harbor requirement. However, I don't think it matters because only the NHCEs have to receive the minimum in order for the plan to satisfy the ADP safe harbor. In order to avoid the ACP test: 1. ADP safe harbor must be satisfied. DONE 2. Matching contributions cannot be based on compensation in excess of 6% of compensation. DONE 3. Discretionary matching contributions cannot exceed 4% of compensation. DONE 4. Rate of match for HCEs must not be greater than the rate of match for any NHCE. DONE In my opinion no ACP test would be required. P.S. Even if the ACP test was required, you have the option of testing all of the match, not just the match that did not meet the ACP safe harbor requirements.

One of our client's has a PS plan and a DB plan. My firm does not administer the DB plan. The PS plan is a discretionary New Comparability plan with the employees divided into 4 groups based on job function. The two plans are aggregated for coverage. The DB actuary completed the general nondiscrimination testing. He did the testing assuming a 7% nonelective contribution to the NHCEs plus an additional amount for just two individuals, which he stated had to be given in order for the general test to pass. These two individuals are not in a group by themselves for the profit sharing. The PS plan document says that the profit sharing contribution will be divided equally by compensation within each group in the plan document. So by completing the PS allocation as requested by the actuary, we will violate the PS plan document. My question is whether or not we can do an 11(g) amendment when there are other ways to resolve the failed general test without doing a retroactive amendment (i.e. raise everyone in that group to the higher percentage)? 11(g) provides an option to retroactively amend a plan to correct a nondiscrimination failure. But can you consider the nondiscrimination test to be failing in a discretionary PS plan before you have exhausted all of the options? Thank you, Laura

John, thank you for your reply. I know that Treas. Reg 1.401(k)-1(d)(3(iv)© allows the employer to rely upon the employee's written representation that the need cannot be reasonably relieved through insurance, liquidation of assets, etc. when a plan is using the facts and circumstances definition for determining the amount of financial need. I cannot find any references that say we can rely on written representation of the employee when determining whether or not a need exists. Do you know of any support for this? Thanks, Laura

Good morning. Hope everyone had a wonderful Easter weekend. If an employee requests a hardship because of expenses for a dependent, do you require the employee to prove that the named individual is their dependent? If so, what documentation would you request? Thanks, Laura

Are all of the HCEs owners? Or are some HCEs due to compensation only? If you have some HCEs due to compensation only, using the top-paid group definition of HCEs might help.

1) No, you cannot correct a coverage failure by taking away a benefit that has already accrued, even if you want to take it away from the HCEs. The only way to correct a coverage failure is to amend the plan retroactively so more NHCEs benefit or to increase the contributions to the NHCEs so that the average benefit percentage test passes. 2) No. Even if the coverage test is failing and/or each rate of match is not available on a nondiscriminatory basis, you cannot correct a coverage or a nondiscrimination failure by taking away a benefit that has already accrued, not even from the HCEs.

Controlled group has separate 401k plans for the two related entities. One plan has safe harbor match, the other plan has no employer contributions. Because of this I do not have the option of aggregating for coverage. The non-safe harbor plan has no HCEs, so coverage is automatically passed. The ratio percentage test for the safe harbor plan is failing, so the average benefit test was completed. The nondiscriminatory classification test passes, however, the average benefit percentage test does not. The plan document allows for discretionary QNECs to be given to only the NHCEs employed on the last day of the plan year. However, most of the NHCEs terminated in 2008. Under Treas. Reg. 1.401(a)(4)-11(g) can the plan adopt a retroactive amendment to remove the last day requirement so that more of the NHCEs are eligible for the QNEC? This would reduce the total dollar amount of the QNEC because the youngest NHCEs are the terminated ones and we are using accrual rates for the average benefit percentage test.

Can someone point me in the right direction for finding the document requirements for 403(a) qualified annuity plans? Do they follow the same rules as qualified plans, including the same restatement timing? Thank you! Laura

Read IRC 416(g)(4)(H) which contains the requirements for a safe harbor 401(k) plans to be deemed not top heavy even if the top heavy ratio is greater than 60%. In order to satisfy the exemption the plan must consist solely of deferral, safe harbor contributions and match that satisfies the ACP safe harbor. If the exemption is met, it does not matter that your safe harbor nonelective was allocated on compensation after date of entry. The plan is deemed not top heavy and no additional contributions must be made to satisfy the top heavy minimum. When these rules went into effect back in 2002 there was some question as to whether or not a discretionary profit sharing feature in the plan document would prevent a plan from being eligible for the exemption in years that they decided not to put in a profit sharing contribution. Revenue Ruling 2004-13 clarified that a plan with a discretionary profit sharing feature could still meet the exemption in years that no profit sharing was allocated as only the contributions and forfeitures allocated for the plan year have to be considered. Based on the data you have provided, I think this plan meets the exemption.

Are there any other employer contributions (i.e. profit sharing, match, etc.) for the plan year? Or are the only contributions deferral and safe harbor nonelective?

I imagine your trainer just did not explain herself very well. I doubt she meant to tell you that if the NHCE % was higher that the test would fail. Here is what the regs say is required in order for the definition of compensation to be nondiscriminatory. Treas. Reg. 1.414(s)-1(d)(3): Nondiscrimination requirement--(i) In general. An alternative definition of compensation under this paragraph (d) is nondiscriminatory under section 414(s) for a determination period if the average percentage of total compensation included under the alternative definition of compensation for an employer’s highly compensated employees as a group for the determination period does not exceed by more than a de minimis amount the average percentage of total compensation included under the alternative definition for the employer’s nonhighly compensated employees as a group. Simply put, it says the HCE average percentage cannot exceed the NHCE average percentage by more than a de minimis amount. (The definition of de minimis is found nowhere in the regs, but 3% is generally accepted to be considered de minimis). Basic math application: If the HCE average is 95% and the NHCE average is 96%, the HCE average does not exceed the NHCE average by more than 3%. Therefore, the definition of compensation would be considered nondiscriminatory. Laura

A potential client wants to setup their prevailing wage plan so that the prevailing wage contribution offsets the safe harbor match and the profit sharing contributions. The profit sharing formula would be new comparability. Our volume submitter document can handle this setup, but I have a question about how the offsets affects the rate-group test. The prevailing wage contribution is a nonelective contribution, so typically I would include it in the rate-group test. But if the prevailing wage contribution offsets the safe harbor match, should I include the portion of the prevailing wage that offset the safe harbor match in the rate-group test? The entire prevailing wage contribution would still be a nonelective contribution and deposited in the prevailing wage source, not the safe harbor match source. Thank you in advance for your help.