actuarysmith

Fred- I should have clarified my comments a little better. I do not disagree with you about having more rates for HCE's. The problem is too many rate groups (spreading the groups thin) with NHCE's. I have had clients that want to have target HCE's in 1, 2, or 3 different groups. Fine. But then, they want office managers, sales managers, and who knows who else in then next group, followed by wharehouse managers, clerks, etc. in the next group, followed by the receptionist, etc. etc. etc. in the next group. Then you show them this illustration in which the relative order between the groups works out fine (I.e A%>B%>C%>D% etc.) The problem with these lower groups, is that sometimes there can be one young NHCE that is allowing your testing to pass. They end up quiting, and the entire order of the universe (the plan) is upset. So to clarify what I really intended to say is limit the number of rate for NHCE's to the absolute minimum possible that gets the job done.

The original post may have said profit sharing only. If the owners objective is to maximize tax deductions while minimizing outlays on the staff, a safe harbor 401(k) with new comparbiilty cross testing provisions may be exactly what they need. In fact, the owner may be the only one that contributes to the 401(k) portion. Usually this approach results in the least number of dollars going to the staff, as compared to just a profit sharing plan - new comp or not. Without trying to sound like a sarcastic, smart aleck,-One of the reasons to hire an independent advisor is to figure what they need to meet their objectives - not necessarily what they come to you asking for.... most plan sponsors are not aware of what the code and regs really allow you to do. They normally get all of their ideas from places like Money Magazine - BTW, I am not knocking Money Magazine. I just use that as an example. The point is, the basis of all of their knowledge is a 3 paragraph article in some magazine, coupled with what their brother-in-law who is a stock broker told them once a long time ago........... Sorry, I know I am rambling. However, I also know that there are a very large number of people reading this that can relate.............. My apologies to anyone I may have offended. That is not my intention at all. I will go back to eating my fruit salad now....................(see earlier post)

Sorry, It was not my intention to offend every person that ever has, does, or will work for a bank. I know I made a blanket statement. It is true that all potential adminstrators (banks, insurance companies, wire houses, CPA's, and TPA's) all have their "bad apples". They all have their "good apples" as well. Archimage sounds like one of them (good apple! that is..........). Others may have different experiences than I - it's just that in all of the plan takeovers I have worked on (100's) I would have to say that in general, the bank plans have had the most "issues". I am certain that there are some banks out there that do a great job. BTW, I would also make the same comments about payroll companies. Ironically, many potential plan sponsors typically think of thier bank or payroll company first when deciding on a new plan. I don't want to come accross as sour grapes - I am just reacting based upon my experiences. All things being equal, TPA's in general are the top banana! (lol) All this talk about fruit is making me hungry. Since it is lunch time, I am going to get me a fruit salad!

First let me state that I am very biased (I am a principal with a TPA). Now that we have that out of way................ In the TPA industry, we almost universally regard banks (and some insurance carriers) as the "bottom of the barrel" in terms of plan admininstration. The documents are frequently filled out by someone with knowledge of investments (very little qualified plan knowledge), or some young buck right out of school with no practical plan experience. I agree with the comment that it would be very well worth spending $1,000 (or whatever) to have an independent retirement plan advisor help out. Further, most banks do not offer anything other than cookie cutter plans. It may very well be that this client (though small) might benefit from a cross-tested / New comp plan. Maybe integrated with a Safe Harbor 401(k). I would be willing to bet dollars to doughnuts (where did that expression come from anyway???) that you won't come up with that type of plan design working with a bank. P.S. I am not located in L.A., so I have no personal interest in this particular plan.

I think that jpod is right - if the participant chooses to leave his balance in the plan (i.e. not take an immediate distribution) then the employer cannot treat them as forfeiting until 5 yrs BIS, or distribution occurs. Any other thoughts?

One way to address this problem in the future is to write your loan policy so that payments can be made through payroll deduction only. This also prevents you from having to deal with outstanding loans from terminated participants. With them, the loan payments can get even more erratic. Then YOU have to do more work and charge more - and the clients don't typically want to pay because they just fired the poor sap who sent in the loan payment 2 months late.

I would venture a guess that nearly half of our cross-tested plans have 3 (or more) allocation groups. It seems that there is nearly always some reason to treat at least one participant (outside of the key execs group) differently. For example, an office manager, HR person, or even a son or daughter of one of the HCE's covered in the "A" group. All of the other non-"A" group employees are typically treated the same. Therefore, a very typical design would be Group A - Target Execs Group B- Someone or position that needs different treatment, and Group c - all other employees. As a practical note, we have some plans that have up to 6 or 7 groups (somewhat rare). I always encourage clients to select the absolute minumum number of classes that will get the job done. I explain that if you have too many groups (i.e. resulting in a small number of participants in each group) a relatively small change in the demographics from one year to the next can cause your testing to "Blow Up". Maybe this is more information than you wanted - in which case I apologize. Bottom line - I don't know where the software vendor derived the notion that most plans used only 2 groups. It sounds like they did not have a very sophisticated system and were trying to justify not having the "goods" to deliver to you. Good Luck!

There are two responses- 1. As far compensation is concerned, what does the document say? Compensation from entry, Compensation for full plan year?, etc. 2. Remember that in the first year (only) of a new plan you can deem the ADP of the Non-HCE's to be 3%, thus allowing the HCE's to contribute 5%. Code section 401(k)(3)(E). I believe that in order to use this rule number you have to be using the prior year testing rule.

BTW, you spelled "question" wrong..........................

Our firm has taken the position that you cannot use the "tack on" method in good faith if you already have an approved prototype document. Many of the document providers have already obtained approval letters. If your firm uses a provider that has not obtained a letter, you could probably use a tack on in good faith.

PAX- We are tracking on the same page. I would think that accruals earned AFTER the rehire are on the vesting schedule in effect with pre-break service being counted. Accruals at the time of termination (partial plan term) are 100% vested. Since we are talking about a DC plan (I think), all that really seems relevant after re-hire is new accruals.

Upon reviewing the regs, I am still under the impression that a re-hire would have their pre-break service credited NOT the 100% vesting. This is not the same as a vesting schedule change - in that case they get the better of the schedules. The underlying schedule (which still applies to all other non-terminating participants) has not changed. These participants had their previous distribution determined using a 100% vesting percentage based upon the partial plan termination. Upon rehire, the prior vesting service is reinstated and determines the current vested percentage based upon the more favorable vesting schedule (the one in the plan when they terminated, or the current schedule - if different). I do not believe that they automatically come back into the plan as being 100% vested, unless they have enough service to have earned it. Any other opinions?

RCK- thank you for the explanation. I had not thought about terminations not related to plant closing, etc. I believe that you are correct in that this group should not be given accelerated vesting since they were not affected. In terms of the 100% vesting, I will go back and read the regs. If a person is re-hired, how is it relevant that they received accelerated vesting on a previous plan distribution? It seems that it is the vesting credit (service) that is preserved, not the percent. Otherwise, you potentially have two people side-by-side where one has two years of service and is fully vested( the term rehire), the other has four years or service and is only 60% vested.

PAX - could you clarify what you mean by your response? 1.411(d)-2(B) and -2© seem to imply that only terminated participants (meaning those affected) receive the 100% vested treatment. The original post on this thread implies the same type of treatment. However, your thread sounds like you are correcting or clarifying the treatment proposed. It sounds to me like the person posting the question is handling the vesting correctly. Comments? Also, upon re-hire the past service would be credited - not necessarily the 100% vested status.

Mike- Thanks for the clarification! Now I follow what the hub-bub was all about.................. I re-read your original post and yes, you did answer the question after all.

I am not sure my comments were interpreted correctly. Nor do I think anyone answered the original question. I think that the original question had to do with Reg 1.401(k)-1(d)(3). The IRS has a prohibition against terminating a plan (a 401(k) plan) to create distribution options "articficially" and then setting up another 401(k) replacement plan. If this were possible, an owner or key exec could get around not having a distributable event (termination, retirement, death, disability, hardship, etc.) by termination of the plan. All I was saying is that the 12 month prohibition against setting up a succussor plan only applies to salary deferrals under a 401(k) plan - at least that is the way I read the reg. So, back to the original question. Because we are talking about a PSP, I don't think that the 12 month rule is applicable. My answer had nothing to do with vesting or whatever else the rest of you are talking about. I am sorry to be blunt and I hope noone finds my answer offensive. I may be way off base and Maybe I am the one who doesent get the original question!

I am not sure your "real" question was answered.......... The succussor plan rules (i.e. not reestablishing a plan within 12 months, etc.) only applies to a 401(k) plan, not a profit sharing plan.

Assuming that you are going to remove the cap anyway (due to EGTRRA), and assuming that allowing the 15% for 2001 does not result in any discrim or testing problems - Then, remember we are in the remedial amendment period. Let them keep the 15% + in the plan for 2001 and correct the plan documentation to properly reflect.

They are not included, therefore there is no zero divide problem.

At the risk of stating the obvious, either of these are possible. It depends which box you checked on your prototype. Did the employer elect the box that says there is no service requirement for employer discretionary contributions (if so, then you cannot amend to CT for the 2002 year). Did the employer states that participants had to accrue 501 hours for allocations? (if so, you would probably still be able to amend to CT for 2002 provided NO ONE has worked that many hours yet.)

I would concur with this analysis.

I seem to recall hearing or reading somewhere (can't remember when or where) that if you had a group of one as a result of a general definition (such as division, pay grade, officer, owner, etc.) you were okay. However, if you use an actual name so as to result in one person in the allocation group by definition, that the IRS could deem it to be a CODA. This would effectively reduce the maximum contribution potential from $40,000 to $11,000 or $12,000. Does anybody else remember anything like this? or am I experiencing early alzheimers?

I share Disco Stu's concern. Isn't the employer making the short tem loan on the assuption that the forthcoming loan proceeds from the plan are collateral? I know this may be getting technical, but until the loan is released, the funds are still part of the plan. They cannot be used as collateral against a loan. I know this doesen;t specifically answer DS's question, but it is another angle from which to look at the issue................. Also, would the employer be willing to do this for any employee taking a loan from the plan? Does this set a precedent? Could another employee claim discrimination if they also needed the funds in a hurry and the emloyer made them wait for the check from the plan?

I can see your concerns - I have run into similar issues. I think it just requires some extra diligence to make sure there is a valid election form on file. Two other thoughts - I believe that many prototypes allow the employer to elect to treat bonuses paid with the first 2-1/2 months of the close of the plan year to be treated as having been paid in the prior year. (For purposes of salary deferral) Also, many prototypes allow for a participant to have a seperate election with respect to regular bonuses paid during the plan year. By using a combination of these you would probably be okay with the sole prop who doesen't take any compensation throughout the year, and then takes it all in December.

FredR - I respectfully disagree with your conclusion. With the passage of EGTRRA, one person 401(k)s may make sense in at least a couple of instances. 1. Assume that your sole-prop earns $50,000. The 415 limit is lesser of $40,000 or 100% of pay. However, the 404 limit (25% of pay) bites you in the butt and limits this person to $12,500 in a profit sharing only plan. (I am ignoring s/e tax calcs and circular calcs to keep it simple). By adding 401(k) features, this person could defer another $11,000 to $12,000 into the plan. You have potentially doubled this persons annual additions into the plan!! I realize that not many people earning $50,000 would want to put half of it into a retirement plan, but it happens. Could have a working spouse or other sources of income. 2. another scenario is in the case of a one-participant DB plan. Assume a 50+ year old with high income. Since 401(k) deferrals don't count against your 404 limits, you could effectively add another $12,000 tax-deduction. (Assumes participant aged 50+).