401king

A plan has 10 HCEs. Total refund needs to be $5000.00. Our software (DATAIR) suggests $500 to each HCE (all maxed out). Are we allowed to refund the entire $5,000 to a signle HCE if that's what the company & individual wants? (There is an owner & wife who both maxed out - Wife is willing to take the full $5,000 refund).

With a Hardship, you must exhaust all other options first. The participant couldn't take a hardship, then take a loan. Would have to take a loan, then a hardship. They should get more money this way, if the major of the loan is taken from an employer contribution source.

What does happen to the accrued interested once it is offset?

I have a plan where we are presenting options to an employer, and the best one is providing a discretionary match of 100% on 6% of salary. This passes the ACP test, but I'm being lead to believe that any match in a safe harbor plan must meet the ACP-Test safe harbor guidelines (no greater than 4% of comp; not matching over 6% of salary). Can I have a completely discretionary match in a Safe Harbor Profit Sharing plan, as long as I pass ACP? Or must it abide by the ACP-Test SH Match rules?

Nothing to cite, but we had to look it up once and it was determined that it would be considered an employer contribution if funded before the paydate.

I think the safe harbor rule says something to the effect of "7 business days of the date it would have otherwise been paid to the employee." So, the paydate.

We've had pretty good luck with https://www.employeelocator.com/index.html. $10 per person. Takes just a few days for the results.

What is the age of the owner? May be an option to rollover the Roth balance to a Roth IRA if he can meet in-service distribution requirements.

They could amend to the lower Basic match for the 2012 plan year beginning 10/1/2012, correct? As long as they do so by 9/1 and provide the timely notice.

Thank you for clearing that up for me!

I guess what I'm most unsure of is: Does a section 129 DCA fall into the definition of a Cafeteria Plan? If so, I would know to include it as 125; if not, I would think to exclude it as our documents have no option to add back 129 contributions.

Company has a 125 plan with FSA; they recently added a DCA component. I am told they are in separate buckets so the employees can take advantage of the contribution limits for each separately. Their payroll provider says the DCA contributions should not be included in compensation when determining the salary deferral amount. I cannot find anything to support that. It's my first time dealing with DCA accounts; are all DCA Section 129? Are all Section 129 excluded for plan purposes (no reference in documents to 129)? Example: Salary: $105,000.00 DCA contributions: $5000.00 Deferral Election: 6% Payroll company says deferral should be calculated net of DCA contributions, or $6,000.00 (instead of $6300, based on gross pay). Thanks in advance!

I think you'll need to indicate ownership percentages and company contributions to the employees.

Thank you for the clarification, Kevin. It seems I was steered wrong by our document provider years ago (asked this exactly same question about 3 years ago). After reading a few pages from the IRS, namely http://www.irs.gov/retirement/article/0,,id=232330,00.html, it appears that you must allow Roth contributions before you can accept any other Roth funds (including a direct rollover or in-plan conversion).

Yes, the plan can accept Roth rollovers while excluding Roth deferrals. edit: Assuming the document permits Roth rollovers.

It must be at least 12 months from the date the assets were completely distributed from the previous plan. I think the only other catch is that the plan year for a Safe Harbor Plan must be 12 months. So, you could not do a short plan year for the initial year of the new SH plan. Easy fix is to have the plan year be 01/01/2012 - 12/31/2012 -- but based on what you said it sounds like they may think they're signing up for a short plan year. If you want to go 01/01 - 12/31 you must be sure the assets were distributed from the previous plan by 12/31/2010. So you're looking at two 12-month rules: 1) 12 months from the distribution of previous assets; 2) new plan year cannot be a short plan year. edit: Way off on 12-month requirement for new plan. Got mixed up with removing a safe harbor mid-year by doing a short plan year (which does not work).

This may be off-topic, but why would a plan allow a participant to contribute on a non-Roth after-tax basis when Roth contributions are available?

Okay, so let's assume there is growth to show that the result is the same - a higher net balance. $10,000 over 30 years at 6% would yield $57,434.91. If the contributions were made pre-tax, the net value (after 25% taxes) would be $43,076.18. If the contributions were made after-tax, the net value would be $57,434.91. Basically allowing 25% extra of the account to grow tax-free. The same net result as if he had contributed $13,333.33 in pre-tax funds, but the scenario assumes a $10k max to pass ADP so the individual cannot get that much in there. Not necessarily the best plan for someone in a high tax bracket, like a lot of HCEs, but some may be in low enough brackets to warrant Roth contributions. Who knows where the brackets will fall in 10-30 years, anyway. It's the exact same logic as saying someone who wants to max out would net a higher benefit contributing Roth. The only difference is that in this case the "max" is limited by ADP.

The math, though, does make sense for HCE to contribute on a Roth basis (if everything else is constant). For instance, assume they would pass with the HCE contributing $10,000. He could make that contribution on a pre-tax basis ($10,000 straight). Or, he could make that contribution on a Roth basis ($10,000 after taxes). Both would lead to the same ADP. Traditional: Assuming a 25% tax bracket & no growth (you can factor in growth, but the results are the same), he would have $10,000 in the account at retirement but pay $2,500 in taxes; only $7,500 net, but contributed $10,000. Roth: Assuming a 25% tax bracket, $10,000 Roth contribution would be like contributing $13,333.33 in traditional money. As he would, at retirement, still have $10,000 to live on ($2,500 more than if he did pre-tax). If the goal is to have more to live on at retirement, Roth may be better for an HCE who would be subject to refunds. If the goal is tax-savings, then it's best to forget I said anything. The hard part is convincing them that the tax savings now isn't better than the extra money at retirement - it's the [indeterminable] variables that will prove which is better. This math also holds true for individuals trying to max-out their 401k contributions. They will net greater results (with respect to how much they have to live on at retirement) if they contribute on a Roth basis.

The insurance company may be able to quell any concerns.

You are aright on the 50% QNEC, but you do not need to then match the QNEC. http://www.irs.gov/retirement/article/0,,id=212043,00.html

In our documents, the safe harbor eligibility provisions are separate from the deferral, match, PS elig. provisions. But, there are only two options - provide SH to each employee who is eligible to defer (standard for us); or, provide SH to employees who have completed 1 year of service and are over age 21 (which makes the plan subject to TH). If we were your TPA, we would have setup the plan so that the SH eligibility meshes with deferral eligibility - at least that's our standard setup. The 6 month provisions would only apply to discretionary contributions. With that said, as Tom Poje pointed out - testing the plan separately as otherwise excludable should get you through 401a4 at least WRT that employee.

I would consider a distribution to be something that is only a taxable event for the participant. Whereas a withdrawal may include fees & expenses, loans, etc. With that said, I use them interchangeably as well if a client begins the conversation with, "I need to make a withdrawal."

Does anyone here have a handy reference guide for the current states that require state tax withholding on retirement plan distributions? I'm having a hard time confirming which states require it, and a harder time searching through state websites to find out if they require, and at what rate. Thanks in advance!

ER will generally imply that it is employER money. It appears to be funds from a deferred compensation plan, which is usually 100% vested. But, like ERISAtoolkit said, this should be defined in the plan documents. Who asked for the distribution? Is it possible they would have more knowledge about the source of those funds?