Laura Harrington

In an asset acquisition, the seller retains responsibility for any benefit plans unless the purchasing employer explicitly agrees to become the succesor plan sponsor. So unless the purchasing employer agrees to be the sucessor plan sponsr, the deferrals would have to stop. If the purchasing employer agrees to become the sucessor plan sponsor, they would need to speak with the attorney drafting the acquisition paperwork to ensure this issue is handled properly. The attorney is likely to talk them out of becoming the successor plan sponsor because of fiduciary concerns over the administration of the plan prior to the date the new employer becomes succesor plan sponsor. If they did become the sucessor plan sponsor of Company A's existing 401(k) plan the purchasing employer cannot terminate that plan 12/31/2008 and setup a new plan effective 1/1/2009 because of the successor plan rule. I don't see any reason why they would need to setup a new plan effective 1/1/2009. They could just continue sponsoring the prior plan...if they become sucessor plan sponsor, it is their plan; no reason to get rid of it. If they absolutely insisted on setting up a new plan, then I would merge the old plan into the new plan.

If 100% of the assets of Company A (including the employees) are purchased, Company A technically no longer exists. The exclusive benefit rule says that the plan must be established for the exclusive benefit of the employees of the employer. Since the employer that sponsors the plan no longer exists, there can be no employees of that employer, so no deferrals can be made to the plan. The only option is for the purchasing company to become the successor plan sponsor of Company A's 401(k) plan, which, as you have already stated, they do not want to do.

That's unfortunate. Then yes, in order to be in compliance the plan should correct the ADP failure using one of the methods under the EPCRS program: one-to-one correction method or QNEC method. Have a great day.

Was the corrective distribution made within 12 months following the close of the plan year?

Compensation for general nondiscrimination testing is not defined in the plan document. I know that my method (i.e. actual compensation paid after date of entry) is the correct method, it is just sometimes difficult to convince others who have been doing it another way for many many years. I have tried Blinky's argument....show me where it says it can be done...but that is where the "well it must be allowed since the software company put it there" argument came into play. Perhaps I will contact the company and ask them to explain why they included that option. As both Blinky and Janet have stated, it may be there just for estimation purposes.

The software that we use to complete rate-group testing allows us to pro-rate a mid-year entrant's full year compensation to determine their post-entry compensation to use in the nondiscrimination testing. Personally, I am not comfortable with this and want my employees to determine (and if necessary, request from the client) actual compensation from date of entry through the end of the year. Apparently we have been using this feature for many years and there is a general belief that since the testing software allows it, it must be legal. Does any one have any thoughts, comments or even references as to the legality of simply pro-rating the full-year compensation to determine post-entry compensation versus determining actual post-entry compensation?

No. I base my opinion on Treas. Reg. §1.401(a)(4)-8(b)(i)(A) which refers only to the substitution of equivalent accrual rates for allocation rates in the determination of the rate groups, not on the determination of whether or not each rate group satisfies one of the tests under IRC §410(b). Treas. Reg. §1.401(a)(4)-8: (b) Nondiscrimination in amount of benefits provided under a defined contribution plan-- (1) General rule and gateway-- (i) General rule. Equivalent benefits under a defined contribution plan (other than an ESOP) are nondiscriminatory in amount for a plan year if-- (A) The plan would satisfy §1.401(a)(4)-2©(1) for the plan year if an equivalent accrual rate, as determined under paragraph (b)(2) of this section, were substituted for each employee’s allocation rate in the determination of rate groups; and (B) For plan years beginning on or after January 1, 2002, the plan satisfies one of the following conditions-- (1) The plan has broadly available allocation rates (within the meaning of paragraph (b)(1)(iii) of this section) for the plan year; (2) The plan has age-based allocation rates that are based on either a gradual age or service schedule (within the meaning of paragraph (b)(1)(iv) of this section) or a uniform target benefit allocation (within the meaning of paragraph (b)(1)(v) of this section) for the plan year; or (3) The plan satisfies the minimum allocation gateway of paragraph (b)(1)(vi) of this section for the plan year.

I'm surprised not everyone added that language. Fair enough. If your document allows you to amend on your clients' behalf, then I'm suggesting vol sub for all of your EGTRRA restatements. I'm surprised too. I was actually just quoting something I heard an IRS rep say on a webcast.

The one advantage that a prototype may have over a volume submitter is the ability for the prototype sponsor to amend the plan on behalf of the adopting employers due to law changes. Under the EGTRRA documents the volume submitter sponsor can amend the plan on behalf of the adopting employers if the plan document includes such language, but not all volume submitters contain this language. That is the only possible advantage I can see.

This is assuming the -11(g) amendment is amending the pre-approved lanaguge and not just making changes to an election allowed in the adoption agreement. For example, the retroactive amendment could be made to add more employees to the allocation by changing the excluded groups of employees or to increase benefits in the case of a fixed formula. Those types of amendments would not necessarily knock the plan out of reliance on the prototype letter.

Seems suspcious to me that you can get out of a top heavy minimum this way. However, I don't think you can use $0 for the nondiscrimination testing. See paragraph (5) below. §1.401(a)(4)-12. Definitions Plan year compensation - (1) In general. Plan year compensation means section 414(s) compensation for the plan year determined by measuring section 414(s) compensation during one of the periods described in paragraphs (2) through (4) of this definition. Whichever period is selected must be applied uniformly to determine the plan year compensation of every employee. (2) Plan year. This period consists of the plan year. (3) Twelve-month period ending in the plan year. This period consists of a specified 12-month period ending with or within the plan year, such as the calendar year or the period for determining benefit accruals described in §1.401(a)(4)-3(f)(6). (4) Period of plan participation during the plan year. This period consists of the portion of the plan year during which the employee is a participant in the plan. This period may be used to determine plan year compensation for the plan year in which participation begins, the plan year in which participation ends, or both. This period may be used to determine plan year compensation when substituted for average annual compensation in §1.401(a)(4)-3(e)(2)(ii)(A) only if the plan year is also the period for determining benefit accruals under the plan rather than another period as permitted under §1.401(a)(4)-3(f)(6). Further, selection of this period must be made on a reasonably consistent basis from plan year to plan year in a manner that does not discriminate in favor of HCEs. (5) Special rule for new employees. Notwithstanding the uniformity requirement of paragraph (1) of this definition, if employees’ plan year compensation for a plan year is determined based on a 12-month period ending within the plan year under paragraph (3) of this definition, then the plan year compensation of any employees whose date of hire was less than 12 months before the end of that 12-month period must be determined uniformly based either on the plan year or on the employees’ periods of participation during the plan year, as provided in paragraphs (2) and (4), respectively, of this definition.

I'm interested in the comment that in a prototype you do not have access to 401(a)(4)-11(g) amendments. Can you provide references that support this? Thanks!

Prior to RRA 98, hardships were eligible for rollover from any source of money for the most part (had to be a single sum distribution, which was generally not an issue). §6005©(2) of RRA 98 amended IRC §402©(4)© effective in 1999 to say that hardship withdrawls from 401(k) elective deferrals and 403(b) deferrals were ineligible for rollover. Hardship distributions from other sources (i.e. profit sharing) were still eligible for rollover. §636 of EGTRRA amended IRC §402©(4)© effective in 2002 so that no hardship distributions are eligible for rollover.

I recall this change occurred with EGTRRA. Pre-EGTRRA hardships from non-deferral sources of money were eligible rollover distributions.

By "415 Safe Harbor" I assuming that you are referring to the safe harbor definition of compensation under Treas. Reg. §1.415©-2(d)(2). This definition of compensation, referred to as simplified compensation, specifically states that the definition of compensation only includes the items listed in paragraphs (b)(1) or (2) of Treas. Reg. §1.415©-2. Therefore, it excludes the items listed in paragraphs (3) through (7), which would normally be included in the 415 definition of compensation. Paragraph (3) refers to medical and disability benefits includable in gross income under IRC §104(a)(3), §105(a) or §105(h). Since this paragraph is not part of the safe harbor definition under Treas. Reg. §1.415©-2(d)(2), if the maternity disability benefits you describe fall under IRC §104(a)(3), §105(a) or §105(h), that they are not included in the 415 safe harbor definition of compensation. If the plan is using that definition of compensation for deferral purposes, then an employee should not be allowed to defer from that pay. Treas. Reg. §1.415©-2 Compensation. (a) General definition. Except as otherwise provided in this section, compensation from the employer within the meaning of section 415©(3), which is used for purposes of section 415 and regulations promulgated under section 415, means all items of remuneration described in paragraph (b) of this section, but excludes the items of remuneration described in paragraph © of this section. Paragraph (d) of this section provides safe harbor definitions of compensation that are permitted to be provided in a plan in lieu of the generally applicable definition of compensation. Paragraph (e) of this section provides timing rules relating to compensation. Paragraph (f) of this section provides rules regarding the application of the rules of section 401(a)(17) to the definition of compensation for purposes of section 415. Paragraph (g) of this section provides special rules relating to the determination of compensation, including rules for determining compensation for a section 403(b) annuity contract, rules for determining the compensation of employees of controlled groups or affiliated service groups, rules for disabled employees, rules relating to foreign compensation, rules regarding deemed section 125 compensation, rules for employees in qualified military service, and rules relating to back pay. (b) Items includible as compensation. For purposes of applying the limitations of section 415, except as otherwise provided in this section, the term compensation means remuneration for services of the following types— (1) The employee's wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan, to the extent that the amounts are includible in gross income (or to the extent amounts would have been received and includible in gross income but for an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)). These amounts include, but are not limited to, commissions paid to salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in §1.62-2©. (2) In the case of an employee who is an employee within the meaning of section 401©(1) and regulations promulgated under section 401©(1), the employee's earned income (as described in section 401©(2) and regulations promulgated under section 401©(2)), plus amounts deferred at the election of the employee that would be includible in gross income but for the rules of section 402(e)(3), 402(h)(1)(B), 402(k), or 457(b). (3) Amounts described in section 104(a)(3), 105(a), or 105(h), but only to the extent that these amounts are includible in the gross income of the employee. (4) Amounts paid or reimbursed by the employer for moving expenses incurred by an employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are not deductible by the employee under section 217. (5) The value of a nonstatutory option (which is an option other than a statutory option as defined in §1.421-1(b)) granted to an employee by the employer, but only to the extent that the value of the option is includible in the gross income of the employee for the taxable year in which granted. (6) The amount includible in the gross income of an employee upon making the election described in section 83(b). (7) Amounts that are includible in the gross income of an employee under the rules of section 409A or section 457(f)(1)(A) or because the amounts are constructively received by the employee. © Items not includible as compensation. The term compensation does not include-- (1) Contributions (other than elective contributions described in section 402(e)(3), section 408(k)(6), section 408(p)(2)(A)(i), or section 457(b)) made by the employer to a plan of deferred compensation (including a simplified employee pension described in section 408(k) or a simple retirement account described in section 408(p), and whether or not qualified) to the extent that the contributions are not includible in the gross income of the employee for the taxable year in which contributed. In addition, any distributions from a plan of deferred compensation (whether or not qualified) are not considered as compensation for section 415 purposes, regardless of whether such amounts are includible in the gross income of the employee when distributed. However, if the plan so provides, any amounts received by an employee pursuant to a nonqualified unfunded deferred compensation plan are permitted to be considered as compensation for section 415 purposes in the year the amounts are actually received, but only to the extent such amounts are includible in the employee’s gross income. (2) Amounts realized from the exercise of a nonstatutory option (which is an option other than a statutory option as defined in §1.421-1(b)), or when restricted stock or other property held by an employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture (see section 83 and regulations promulgated under section 83). (3) Amounts realized from the sale, exchange, or other disposition of stock acquired under a statutory stock option (as defined in §1.421-1(b)). (4) Other amounts that receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the employee and are not salary reduction amounts that are described in section 125). (5) Other items of remuneration that are similar to any of the items listed in paragraphs ©(1) through ©(4) of this section. (d) Safe harbor rules with respect to plan's definition of compensation— (1) In general. Paragraphs (d)(2) through (4) of this section contain safe harbor definitions of compensation that are automatically considered to satisfy section 415©(3) if specified in the plan. The Commissioner may, in revenue rulings, notices, and other guidance of general applicability published in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter), provide additional definitions of compensation that are treated as satisfying section 415©(3). (2) Simplified compensation. The safe harbor definition of compensation under this paragraph (d)(2) includes only those items specified in paragraph (b)(1) or (2) of this section and excludes all those items listed in paragraph © of this section. (3) Section 3401(a) wages. The safe harbor definition of compensation under this paragraph (d)(3) includes wages within the meaning of section 3401(a) (for purposes of income tax withholding at the source), plus amounts that would be included in wages but for an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b). However, any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2)) are disregarded for this purpose. (4) Information required to be reported under sections 6041, 6051 and 6052. The safe harbor definition of compensation under this paragraph (d)(4) includes amounts that are compensation under the safe harbor definition of paragraph (d)(3) of this section, plus all other payments of compensation to an employee by his employer (in the course of the employer's trade or business) for which the employer is required to furnish the employee a written statement under sections 6041(d), 6051(a)(3), and 6052. See §§1.6041-1(a), 1.6041-2(a)(1), 1.6052-1, and 1.6052-2, and also see §31.6051-1(a)(1)(i)© of this chapter. This safe harbor definition of compensation may be modified to exclude amounts paid or reimbursed by the employer for moving expenses incurred by an employee, but only to the extent that, at the time of the payment, it is reasonable to believe that these amounts are deductible by the employee under section 217.

What is the definition of compensation in the plan document?

Here is a link to the Treas. Reg. you cited above: http://www.taxalmanac.org/index.php/Treasu..._1.401%28k%29-1 Unfortunately I do not think there is any specific guidance on this issue. I had a similar situation a few weeks ago except the participant was behind by 1 mortgage payment. She had no imminent threat of foreclosure (no notice of foreclosure from the bank, etc.). I told the employer there was no specific guidance, just what is stated in the regs, and then left it in their court to decide whether or not the employee qualified for a hardship distribution.

I was just about to post a reply retracting my first response. The truth is that I do not think the code or the Treas. Regulations are clear on whether or not the 403(b) deferrals should be included in the average benefits percentage test. I cannot find guidance that states either way. My firm tests them in the average benefits percentage test, although the argument could be made against including them. Unfortunately this appears to be one of the many "gray" areas in the retirement plan world.

From Treas. Reg. 1.403(b)-5(a)(1): (a) Nondiscrimination rules for contributions other than section 403(b) elective deferrals--(1) General rule. Under section 403(b)(12)(A)(i), employer contributions and after-tax employee contributions to a section 403(b) plan must satisfy all of the following requirements (the nondiscrimination requirements) in the same manner as a qualified plan under section 401(a): (i) Section 401(a)(4) (relating to nondiscrimination in contributions and benefits), taking section 401(a)(5) into account. (ii) Section 401(a)(17) (limiting the amount of compensation that can be taken into account). (iii) Section 401(m) (relating to matching and after-tax employee contributions). (iv) Section 410(b) (relating to minimum coverage).

Troy, unfortunately that is not an option. See except below from Treas. Reg. 1.401(k)-1(a)(4)(iv)(A): (iv) Application of nondiscrimination requirements to plan that includes a qualified cash or deferred arrangement—(A) Exclusive means of amounts testing. Elective contributions (including elective contributions that are designated Roth contributions) under a qualified cash or deferred arrangement satisfy the requirements of section 401(a)(4) with respect to amounts if and only if the amount of elective contributions satisfies the nondiscrimination test of section 401(k) under paragraph (b)(1) of this section. See §1.401(a)(4)–1(b)(2)(ii)(B).

Yes, the 403(b) deferrals are included in the average benefits percentage test. As to your second question, if the plan has employer contributions, I don't believe it can be a non-ERISA 403(b) plan.

Assume a 401(k) safe harbor plan utilizing the 3% nonelective feature. The plan wishes to restate to a prototype EGTTRA document. The plan has 1 HCE and 2 NHCEs. The plan divides employees into two groups for the profit sharing allocation: HCEs and NHCEs. Under the rules described in LRM #94, this plan can only have one NHCE allocation rate if they adopt a prototype plan. The plan also has an end of year requirement on the profit sharing contribution. NHCE #2 terminated during the plan year. The HCE revceives a 15% contribution. NHCE #1 receives an 8% contribution. NHCE #2 is not technically eligible for the profit sharing, but because they benefited due to the safe harbor nonelective, must receive the minimum allocation gateway. Therefore, they receive a 2% contribution to satisfy the minimum gateway. Would this plan violate LRM #94? Or should the "allocation rates" for this purpose be determined prior to the additional allocation necessary to satisfy the minimum gateway? Assume NHCE #2 was not eligible for the minimum gateway because they were an otherwise excludable employee under 1.410(b)-7©(4), but the plan is top heavy and an additional allocation had to be made to satisfy the top heavy minimum. Would the potential varying allocation rates due to the top heavy minimum cause this plan to violate the prototype rules for cross-tested formulas? Thank you! Laura R. Harrington