actuarysmith

Jaemmons- When you say "just give out the notice and make up the $" - I like Tom's suggestion, I think that going with the 3% non-elective looks a lot less likely to cause trouble. It is totally non-discriminatory. With all that said however, in our firm we just tell them that since they missed the timely notice requirement, they will have to wait until the following year to become safe harbor. By the way, sometimes you can soften the blow by letting them know that while they are not technically a safe harbor, a 3% QNEC might solve most of their testing problems anyway. It has the look of being "safe harbor like" without actually taking a chance of violating the rules.

My first reaction was similiar in nature to the last reply. However, with a slightly different twist to it- If you allow the safe harbor plan to "go forward" in light of the late notice on the basis that you are still allowing for participants to make the max deferral on full year comp, and get the employer match........ Who will actually do this? Predominately it will tend to favor HCE's. Many NCE's will not be able to "adjust their deferral % upward" to make up for the lost time. They simply can't afford it. this might be deemed to be discriminitory in terms of the BARF rules. (Benefits Availability Rights Features - Clients love learning that Acronym!) Is not providing a notice a form defect or an operational defect? It is not strictly a plan document, but it IS part of the plan's documenation. If it is a form defect, then you would not be able to use a self-correction technique. If it is an operational failure, an approach like that last post might work.

Either Kirk said the same thing as I did - or I am misunderstanding his response. The audit for the short plan year is still required. It is just that you allowed to postpone that audit and include with the following full plan year audit. You are not excused from the audit requirement - it is just deferred. Aren't we saying the same thing?

WDTDS??? (What does the document say?) The plan document addresses whether you are using hours, or elapsed time. Further, if you are using hours it will stipulate actual hours or some equivalency. Further, it will state whether vesting is based upon anniversary of employment, or plan year. Without knowing what your specific document says, no one can answer your questions........................

You are correct on all counts - the audit is still required, just deferred.

The DOL has published guidelines on what can and cannot be paid from plan assets. In general, routine plan administration expenses involved in preparing the form 5500 tax return, ADP/ACP & Top Heavy testing, benefit statements, etc. are allowed to be paid by plan assets. As far as whether $1,000 (on a $17,000 balance) is reasonable is tough to say. How many participants (eligible - I don't care how many contribute) are there in your employers plan? If it is a relatively small plan (i.e. small number of participants to "amortize" costs) it may be reasonable. It also may be that the plan recently amended "restated" the legal documents for GUST & EGTRRA. These expenses may have been passed through to the trust as well. This means that not only are you playing 1.5 - 2.0 years normal admin fees - you may also be footing the bill for some plan document or design costs.

Ditto- I don't have a cite, but I agree with your analysis. It has always been my understanding that a qualified plan had to cover employees other than owners to be afforded asset protection from creditors under ERISA. I think that this is probably a misinterpretation by the vendors.

Wow! Looks like you got a great answer from a man who knows his stuff............. (Mike)

My opinion, for what it's worth is that ASPA is more widely recognized Nationally. However, NIPA is rapidly becoming well recognized on the West Coast. In addition, I think that the NIPA exams and study materials are much more practical.

I would take the view that it was their status as of the allocation date.

Since you are not located in my neighborhood I'll pass along a name. American Funds has an independant TPA platform called "Recordkeeper Direct" that works quite similar to Nationwide, Manulife, etc.

I wonder if there might be some way to self-correct this problem. Let's suppose that the rules had not changed (EGTRRA) and you discovered that a loan had been granted to a shareholder employee by accident. You probably could have attempted to self- correct by documenting it - and then had the shareholder employee repay the loan immediately. (I am not sure whether it would be the outstanding amount, or the full original loan - probably outstanding amount). Finally, you would make note of whatever process you were putting in place to assure that this mistake did not happen again. Using the same logic, have the shareholder employee "Repay" the outstanding loan and then turn around and take out a new loan for the same amount. The amort period and interest rate may or may not be different. (I think that you would need to make the amort period the same as whatever was left on the original loan, rather than starting a new 5 year (or whatever) amort period). However, you would have a loan origination date that is post-EGTRRA. The shareholder-employee would have the use of the same amount of money. If the interest rates have changed, you may have a modified payment amount prospectively. One pitfall may be that if the prior loan was very large, the amount available for a new loan might not be large enough to meet the need. Any other thoughts on this approach?

I concur with Fredman. Why can't they "hold their horsies?" and vest like everyone else. In the event one or more of them terminated prior to being fully vested, they could handle the issue in one of several different ways. 1. They could terminate the plan and make everyone 100% vested at that time. 2. They could handle the forfeited amount "outside" the plan. For example, the departing owner could receive a cash bonus (possibly grossed up for taxes) equal to the amount forfeited. 3. They could handle the forfeited amount in the terms of the buyout agreement. For example, the sale price on the owners shares could be "adjusted" to reflect the amount forfeited. Just some food for thought..................

Are they going to run him through the normal payroll (and issue a W2 at the end of the year?) or are they going to treat his wages as 1099?

Wow, I'm surprised nobody has chimed in on this one yet............. First of all, can you even say that someone is vested in something prior to the effective date of the plan. What exactly could they be vested in until there actually is a plan? I am pretty sure that the prototypes would only allow you to say something like everyone employed on the effective date is subject to a certain vesting schedule, and thereafter subject to another schedule (with the appropriate application of the Grandfather clause - of course). You may have to just slap an amendment on the plan right after it is started up - I can't remember if the prototypes allow you to specifiy different vesting schedules. The part of all of this that I have the most trouble is reconcilling it with 1.401(a)(4)-4© Effective availability of Benefits, Rights , and Features. This particular vesting "scheme" seems like a clear violation of the intent of this section. Any other thoughts out there?

I would concur with your analysis that nothing needs to be done. However, you may want to carefully read your loan policy statement and make sure that it does not include language that prohibits shareholder-employees from taking loans.

See 401©(2) - it defines earned income.

Depending upon how the document is written, you may get the same result either way mathematically. For example, if forfeitures reduce the match, I think you get the same result as if you treated the contributions as new money to the plan. If the forfeitures are allocated in addition to the emloyer contribution, then I think you get a different result. If you are trying to "prove" a point to the sponsor - I would probably try the following line of reasoning. 1. a forfeiture is defined as an amount that has been accrued or earned by the employee, except for the completion of the years of service required by the vesting schedule. 2. a participant terminating employement in the current year, has not accrued the right to the employer contribution in the current year. Therefore it is not technically part of their balance upon which the vesting schedule would apply. 3. These "pre-allocated" matching contributions should be treated as advance employer contributions to be applied against a future contribution, not allocated as forfeitures. I am sure we have all toiled against the "we've always done it that way" mentality. I always try to get the client to focus on how we should do it from now on, and not worry about how it has been done. (unless it could disqualify the plan upon audit, of course). Does anyone else out there have an opinion on this? Are we splitting hairs? Does it really matter which way you do it??

I don't have a cite, However I know for certain that Sub-S shareholder employees cannot count K-1 (or pass through) for retirement plan purposes. Only earned income subject to payroll taxes is considered. You might want to check 414(s). This section deals with compensation. Also see, 415©(3)(B). Finally see 401©(2). Come to think of it - I guess I do have cites! Don't they make some kind of cream or oitment to get rid of that?

This may not specifically address your exact question - but we try to advise clients that wish to "match as you go" to avoid the 1,000 hour last day requirement for this very reason. Once you explain that the vesting schedule still applies, and you explain the difficulty in the calculations for participants who terminate, most often they will agree to forego the EOY 1,000 HRs , etc. routine. (This has been my experience). As far as whether or not your "forfeited" match is really forfeited or not - I guess I have not focused on this before. My opinion (given free - and worth as much!) is that since they have not accrued the right to the match in the year of termination, that it is NOT a forfeiture. I suppose that means that you would have to deal with it like an advance employer contribution. It may or may not be deductible right away. Rather than allocating it as according to the forfeiture protocol in the document, I would have the employer "short" a future match and use it up.

If it is a first year takeover plan, you will need a loss calculator!

Ahhhhh, Mike Preston must have been to a seminar put on by Larry Duetsch (spelling). He talks about penguins and seals alot. Or, maybe Larry got the analogy from Mike..............

You can do precisely what you want to do in a new-comp plan. Use a non-standardized prototype and put the Sole-Prop into allocation group A. Put all other employees into group B. Guess what - your testing passes already! (since the Sole-Prop in Group A is an HCE). I would not fool around with the election not to contribute, etc. My understanding is that this is irrevocable. The only way for the Sole-Prop to contribute for himself under that arrangement would be to terminate the plan and setup a new plan without the election. Good Luck!

Mike- I am pretty sure that "AHA" is spelled "AHA" ! Yeah, I see your point. BTW, we do not use the old hard-coded formulas that specify percentages in our documents. I was just showing the allocation %'s for illustration. We put together proposal illustrations during the sales process and work through those with the clients near the end of year. Often, they become quite focused on a specific dollar amount or percentage of pay that they will recieve (i.e. $35,000 or 20% etc.) They also have a sense of how the other allocation groups will stack up. And you are right, frequently there are a couple of key young participants that provide the basis for passing the testing - it is not just any youngen' (I don't know how to spell that........) So we now have the Preston - Smith Theorem that states that "The volatility of the allocation rate groups is inversly proportional to the number of participants in each rate group". I want to see this on actuarial exams soon! Wow, we could become famous or something! Anyway, I am all out of fruit salad, licked the bowl clean. I guess I'll have to go have a couple of beers now instead. At least those lame jokes I tried to pull earlier will start to sound a little funnier.

I am almost to the bottom of my fruit salad. I'll try to say what I am trying to say one more time (did that make sense to any of you? it didn't really to me either). At the risk of sounding like a complete bowl of fruit myself (Ok, I agree - we are past that point.............) I agree with Mike Preston. n+1 groups is more flexible than n groups no matter what the groups are defined as. What I mean, is that when you are setting up your plan, and you show your client the following scenario- Group A - Physicians 20% of pay Group B - Clinic Directors 10% Group C - All others 5% of pay Let's assume that they reply with , "WOW that's great, that is exactly what we wanted" . If group C is reasonably large (relative term) then it is not too likely that you will have to come back next year and tell them that Group C requires a 8% of pay allocation to pass ABT. On the other hand, if you have a plan that is set up as- Group A - Physicians 20% of pay Group B - Clinic Directors 15% of Pay Group C - Registered Nurses 12% Group D - Orderlies who like Fruit Salad 7% Group E - Orderlies who hate Fruit Salad 6.5% Group F - Receptionist 6.0% Group G - all Others 5.0% I would agree you have a much more flexible plan. However, I would advise extreme caution in how this plan design is communicated to the sponsor. When that very young orderly who hates fruit salad gets mad and quits, it may result in Group E requring a 9% of pay allocation rate to get your testing to work. (He was one of only two orderlies who hate fruit salad. The other orderly is 50 years old) We would probably all think that the plan still worked pretty well. But we all have clients who feel that there is a certain pecking order and they do not want to violate this in the amounts of retirement plan contributions. Neither do they want to be surprised by large changes in the contribution amounts. They might be upset that Group E had to be treated better than Group D. I know this is a silly example, and quite trivial. I know that many clients would be fine. I am merely trying to explain why I still feel that it is best to recommend to a client to think of the minimum number of rate groups to get the job done - YES the plan is a little less flexible, but the numbers tend to be more stable from year-to-year. Alas, I have come to the bottom of my fruit salad............ I will take leaf of you all and peel out of here, it's the pits .......................(Whew, it's either not early enough or not late enough for such a bad pun to be funny. Sorry ;) )