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ESOP passes the 1/3 test. However, by the time forfeitures are reallocated to participant accounts on the last day of the plan year, the plan is no longer leveraged because the loan has been repaid by returning the shares to the employer (the plan is terminating). Can the forfeiture allocations be excluded from annual additions under section 415 (pursuant to Reg. 1.415©-1(f))? On one hand, the forfeitures (when they occurred) were forfeitures of employer securities that were acquired with the proceeds of the loan. On the other hand, by the time the forfeitures were reallocated to participants, the reallocated amounts were cash.

What should a plan administrator do if it sent out a notice to interested parties that was premature? The plan administrator thought it would file a determination letter filing on a certain date, and sent out the notice to interested parties accordingly, but now has determined that it needs additional time to file the application. Should it send another notice out stating that the first notice is withdrawn, or should it ignore the first notice and send a second notice when it is time to file?

Thanks to all for your helpful answers. It is now clear to me.

If a plan participant defaults on a loan which is treated as a deemed distribution and reported as such, what happens when the participant later takes an actual distribution of his account balance (assuming he never repaid his loan after it was deemed distributed)? For example, if a participant had a deemed distribution of $5,000 and upon actual distribution of his account balance the account consisted of $60,000 cash and the $5,000 loan receivable, does the participant receive the entire $60,000 cash or is the loan receivable offset so that the participant receives only $55,000 cash upon distribution? If the former is true and the participant is to receive $60,000 cash, why does anyone ever pay back a loan after a deemed distribution? If the latter is true, how is the amount taxed considering that the regs provide that the participant has no basis in his plan related to the $5,000 deemed distribution and appear to provide that the participant has $60,000 of gross income.

What happens to an unallocated account holding excess annual additions when the plan terminates? Are the amounts in the unallocated account allocated to participants? If so, what is the tax treatment of the allocated funds? The funds were initially removed from participants accounts because they were in excess of the 415 limits (and could therefore not benefit from the tax advantages of the plan), but are they now supposed to be allocated to such participants regardless?

Are you saying that under 409A amounts which should have been taken into gross income in closed years should be taken into income in the first open year? Do you have a cite for that under 409A?

An employer intended for its deferred compensation plan to be a 457(f) plan, but no substantial risk of forfeiture was built into the plan. Employer and employees believed the plan allowed the taxation to be deferred to a later year, so the amounts were not taken into gross income in the year deferred, even though there was no substantial risk of forfeiture. This error occurred over 5 years, so the 3-year statute of limitations has run with respect to a few affected tax years. When should the amounts be taken into gross income with respect to tax years for which the SOL has already run? Two theories: 1. Include in gross income in the year the money is distributed from the plan; or 2. Include in gross income in the first year for which the period of limitation has not run. In other words, if the period of limitations is still open with respect to Years 3, 4 and 5 of the failure (but is closed for Years 1 and 2), report all amounts deferred under the plan for Years 1, 2 and 3 in Year 3. Does anyone know how to handle this situation?

I have read earlier posts regarding the possible inapplicability of Code section 457(f) to federal credit unions, and these earlier posts seem to suggest that no nonqualified deferred compensation plan can be maintained (under any section of the Code) by federal credit unions. Regardless of whether section 457(f) applies, shouldn't a federal credit union be able to maintain a deferred comp plan subject to Code section 409A? If 457(f) does not apply, does that mean no deferred comp plan may be offered? Is there any section of the Code that anyone can provide that indicates a federal employer cannot provide a nonqualified deferred comp plan?

Thank you for sending that language. What are your thoughts about the fact that our amendment is not being timed in order to capture HCEs when they are NHCEs because of the lookback year, but rather, it is timed based on the corporate transaction? Also, do you have any thoughts based on the additional facts I provided in my latest post? Thanks again for your help.

What is the EOB? I would like to look at that. I have not found anywhere that discusses the type of discrimination you mention (where employees are only NHCEs because of the look back year), but that was my initial concern and the reason I posted. Let me clarify that these amounts are not totally arbitrary and are being given to all former employees of Company Y who become employees of Company X (NHCEs and HCEs). The amounts are based on an estimate of the amount of pension benefits each employee would have received from new employer Company X if Company X had implemented a pension plan to cover the employees (based on the terms of the pension plan by which employees were previously covered at Company Y). With respect to the "definitely determinable" allocation, is it not definitely determinable if there is a schedule of the individuals' names and dollar amount to be allocated to each individual? The nonelective contribution would be worded in the plan amendment to be limited to individuals affected by the purchase of Y's assets by X, to be allocated in accordance with the attached schedule.

Currently the plan does not provide for nonelective contributions. Company would like to amend plan to allow for one time discretionary nonelective contribution to be allocated according to a schedule which would be attached as addendum and include individual's name and dollar amount to be contributed to plan. The dollar amount would be calculated so as not to exceed annual additions limit.

Company X acquired the assets of Company Y, including certain employees. Company X promised Company Y that it would pay a certain dollar amount to each acquired employee in connection with the sale, and the dollar amount owed to each acquired employee pursuant to this agreement varies by employee. Company X wants to contribute these amounts to its 401(k) plan as a nonelective contribution, only up to the annual additions limit. The employees have no legally binding right to the money and will not be allowed to make an election. The employees are not HCEs for the year in which the contribution would be made because they had no compensation from the employer during the look-back year. Is this type of one-time nonelective contribution to a group of NHCEs allowed? Is there a way to word the allocation formula of such a nonelective contribution so that it will work (concerned about the allocation formula being definite and predetermined in accordance with Reg. sec. 1.401-1)? This seems somewhat analogous to mandatory contribution by the employer of unused vacation pay to a 401(k) plan as a nonelective contribution, which has been approved by the IRS as long as nondiscrimination requirements are satisfied.

How does the minimum coverage test apply to 401(k) and (m) portions of a plan? Reg sec. 1.410(b)-8(a) seems to provide that the 401(k)/(m) portions must pass the test as of the last day of the plan year, but Rev. Proc. 93-42 sec. 3.08 provides that a plan with salary reduction and matching contributions can use snapshot testing (as of any day of the plan year) to comply with the minimum coverage testing requirement. Which day (last day or snapshot day chosen by employer) should be the testing day?

A controlled group consists of a parent (Company A) and subsidiary organization (Company B). Each entity has its own 401(k) plan. Employees of Company A are eligible to participate only in the Company A Plan and employees of Company B are eligible to participate only in the Company B Plan. Company A Plan provides richer benefits than Company B Plan. Is it correct to count only Company A employees as eligible employees when running the ADP and ACP tests for the Company A Plan and only Company B employees as eligible employees when running the tests for the Company B Plan? In other words, assuming the two plans separately satisfy the minimum coverage test, is it correct to assume that exclusion of Company B employees from eligibility in the richer Company A Plan should not affect Company A Plan's ability to pass the ADP/ACP tests? In addition, is there any reason why these two plans might be considered one plan for testing purposes (i.e., mandatory aggregation)?

Yes, but there is an overriding amendment that overrides any plan provision that is inconsistent with the above eligibility language, so it is completely unclear which of the base plan doc provisions now apply. The plan is an individually designed plan with a prototype form of document.

What I entered above was the only language in the plan regarding eligibility. I believe the provision was intended to impose a one h/s + 6 months service requirement (rather than a 6-month entry date provision).

Plan provides that an employee shall be eligible to participate on the 6-month anniversary of the employment commencement date or the reemployment commencement date, as applicable, provided he has completed one hour of service and is employed on such 6-month anniversary date. I interpret this to mean that if a person quits before the 6-month anniversary date and is rehired thereafter, the 6-month period begins to run again, even though the individual previously performed the one hour of service that was required to become eligible. I am assuming that the intent was to use the hours of service method of counting service (with a 6-month eligibility computation period and one hour of service requirement). Is this allowed under the law? Can a rehired employee be required to start over earning 6-months of service when he/she already earned the required one hour of service during his previous period of employment? My general understanding was that a rehired employee who had performed the hours of service required (one hour, in this case) prior to termination of employment would become a participant on the rehire date (assuming the rehire date falls after the 6-month anniversary) because the employee does not have to be employed at the end of the six months to get credit for the hours worked during such 6-month period. Reg. 2530.200b-1(b) provides in relevant part In general, employment at the beginning or the end of an appliable computation period or on any particular date during the computation period is not determinative of whether the employee is credited with a year of service...for the computation period. Rather, these determinations generally must be made solely with reference to the number of hours...which are credited to the employee during the applicable computation period. However, Reg. 2530.200b-1(b) also provides the following: It should be noted, however, that in certain circumstances, a plan may provide that certain consequences follow from an employee's failure to be employed on a particular date. For example, under section 202(a)(4) of the Act and secton 410(a)(4) of the Code, a plan may provide that an individual otherwise entitled to commence participation in the plan on a specified date does not commence participation on that date if he or she was separated from the service before that date. Does this provision of the Reg. mean that the plan can start over counting the 6 months of service for a rehire because the plan provides that the individual must be employed on the 6-month anniversary date in order to become eligible to participate? Alternatively, perhaps in this case the plan document can be more restrictive about counting hours of service prior to a termination of employment since the plan provides more liberal eligibility provisions than the mimimum service requirements (i.e., only 1 hour of service in 6 months rather than 1000 hours of service in 12 months). Thoughts?

Thank you for your response. You stated that coversion must be done with great care. What pitfalls should be avoided and what issues should we consider? It seems that Reg. sec. 1.411(d)-4 Q&A-2(b)(2)(iii)(D) Example (1) would allow an ESOP (1) to first be amended to be a profit sharing plan and to remove the employer stock fund as an investment option under the plan and (2) later, after the plan has ceased to provide for an employer stock investment option and all plan accounts only contain cash, to be amended to eliminate the right to a distribution in the form of employer stock. Do you have any thoughts on this? Also, I am curious, is there a way to look at other plans' determination letter applications to see what arrangments have been approved by the IRS?

We are considering converting an ESOP to a profit sharing plan and redeeming all the employer stock in the plan for cash. Is there any reason why this would not be allowed under section 409? After the conversion of the ESOP to a profit sharing plan and the redemption of the employer stock for cash, the employer would like to amend the plan to eliminate the option to receive distributions in employer stock. Would this violate the section 411(d)(6) cutback rules or does Reg. sec. 1.411(d)-4 Q&A-2(b)(2)(iii)(A) provide an exception to the cutback rules that would be applicable in this situation? Does an ESOP that converts to a profit sharing plan continue to be subject to the section 409(h) distribution requirements?