Brenda Wren

Thanks for your reply jpod; I believe there may be a language or cultural barrier, but that's not the issue. Even if everyone participated, the bundled provider is including audit services at no extra charge. Admin services are quoted at about $1,000 plus $40 a head. Investments are offered at less than 1% asset charge and include lifecyle and risk-based model portfolios.

We recently reviewed a 401(k) safe harbor match plan for possible takeover. The plan sponsor was disenchanted with her current TPA for being unresponsive and unwilling to "hold her hand". They employ about 400 employees, have about 120 eligibles and about 30 participating. The first thing we noted was that the plan was very close to an audit....a very big surprise to the client as an audit will likely add $5,000 - $7,500 to their annual costs.....a lot for a little tiny plan with only $300,000 and 30 active participants. She found that her payroll provider could offer her a very flexible plan with a pretty good investment lineup for reasonable TPA fees that INCLUDED the audit! Anyone have an experience with this type of bundled competition? Can clients really get basically a free audit by using a payroll provider plan?

We are starting to receive calls from brokers eager to sell these things. I don't really see the appeal in automatically enrolling employees so that you can fund a free match for them, but I guess others do! Seems to me a regular safe harbor match plan would be the better alternative if you are willing to commit to employer contributions from the start. The automatic increases are cumbersome, too, so unless the client is willing to do a lot of work on their end, they might as well enroll at 6% to start with. Hope they don't come looking to me to do this for them! I don't see how a TPA can help unless they go into the payroll business! Comments? Vesting - seems everyone is much more excited than I am about 2 year cliff vesting. What am I missing here? If you design your plan to keep costs down, i.e. use maximum eligibility requirements of One Year, Age 21 with dual entry, by the time someone enters the plan they'll have 2 years of vesting.....unless you use the "elapsed time" method for calculating vesting years. We administer about 500 plans and only 2 of them use elapsed time. Speaking of elapsed time.....seems we're not the only ones that use the 1,000 hours method. I believe it is by far the most common method used in the southeast region of the country...maybe other areas as well. But why is the 1,000 hour method so much more common? Seems elapsed time would be easier, take longer to vest and have a meaningful effect with the new Automatic Enrollment Safe Harbor plans. Comments? While I'm on my soapbox......seems to me that automatic enrollment is a good thing (aside from the safe harbor rules) and it is important to increase the retirement savings rate of employees. But as long as you are permitted to "blow your wad" when you terminate employment, NOTHING will be accomplished in the long run. Money in, money out with no real results. Retirement savings rates may appear to go up but not retirement account balances. The same people that don't bother to fill out the enrollment forms are the same ones that will take a lump sum distribution at the first opportunity.

We had several clients this year that could/would not make their Safe Harbor contribution commitments by the extended due date of their tax return. Other than the obvious lost deduction, what are the consequences to the employer and the plan if the contribution is made by 12/31/07? What if the contribution is not made by 12/31/07? I would think that as long as the contribution is made within 12 months after the plan year that all is well...deduction could be taken for 07...plan still qualified...no ADP testing required. But if the contribution is not made by 12/31/07 the plan would be disqualified. Assuming plan is not terminated, would ADP testing apply and if so, at what point?

Hmmm...is Monday, the 17th too late? What's up with Saturday?

Just rec'd 2 more today....both filings were on freeerisa.com. We have probably rec'd over a dozen of these letters. Some of the plans had been terminated many years ago. One had changed EIN's and was reported correctly. Some of the inquiries referred to plan numbers that did not exist. But the ones rec'd today were active plans, timely filed, correct plan numbers, correct EIN numbers. Appears to be no pattern. But clearly the signals have been crossed between DOL and IRS.

Working on a takeover case and couldn't figure out which officer at the company had been signing the 5500 for the last 3 years......turns out it was the former TPA! Apparently, the practice at that firm was to have the client sign a POA (Form 2848) at the time the Annual Request letter goes out. I've never seen that practice before and just wondering if this creates a huge potential liability for the TPA. Anyone ever seen this before?

Company A purchases Company B in early 2006. Company B becomes a wholly owned subsidiary of Company A. It is a stock sale. Company B adopts Company A plan and employees are given credit for prior service and allowed to participate in the Company A plan right away. Are the employees of Company B who earned more than $95,000 in 2005 HCE's in Company A's plan for 2006? If so, can they be placed in the "otherwise excludable" group? Sal's Book (2005 edition) addresses this issue with a caveat that future guidance could change his "reasonable" interpretation. I don't have the 2006 edition and the 2007 will not be available until March.

Two employees own 50% each of the company. One of them dies on 12/1/05. His stock is immediately purchased by the other owner. So the surviving partner owns 100% of the stock on 12/31/05. The deceased partner's son is employed by the company. Is the son an HCE in 2006?

Profit Sharing plan is established 1/1/05 and 401(k) deferrals commence 3/1/05. Does the 3% nonelective fully vested contribution have to be based on 12 months compensation or can it be limited to the 10 months the salary deferral features of the plan were in effect?

MJB, I can see from your previous posts on this subject that we agree on this issue. I am referring to CPA auditors. Thankfully, now we have official guidance from IRS that a "brief exclusion" does not require correction.

The auditors took the position that according to the language in the plan document and the salary reduction agreement the employer failed to operate the plan in accordance with its terms when they failed to apply deferral elections to bonus paychecks. I don't recall if the issue boiled down to "per paycheck" as indicated on the salary reduction agreement or the fact that the document didn't specifically address if bonuses were subject to 401(k) withholding. The ERISA attorney was consulted and the document language was corrected going forward. But the auditors relied upon Rev Proc 2003-44 for guidance in correcting what they perceived as an operational defect. The whole thing frosted me because I thought they were taking an extraordinarily, unnecessary conservative approach to a non-issue. No one was harmed and according to the client, the participants did not want deferrals applied to their bonuses and it was never an issue until the auditors made it one. The examples in both Rev Procs address a different issue.......when an employer fails to even offer the 401(k) to a participant.....an entirely different scenario in my opinion.

Appears that Rev Proc 2006-27 issues new guidance and replaces the old UNFAIR guidance of Rev Proc 2003-44. When an employee is not given the timely opportunity to participate in a 401(k) it looks like new guidance says the correction is 50% of the missed deferral, not 100%. There also appears to be some new guidance for "brief exclusion" that requires NO correction. Wonder if the "brief exclusion" can be applied to situations where the employer failed to deduct 401(k) deferrals from special bonus payrolls??? That issue seemed to be a pet peeve of all the auditors I dealt with last year.

Tom, to clarify, let me repeat what I think you are saying. A top heavy safe harbor plan that limits the safe harbor contribution to only those with a Year of Service is NOT exempt from the top heavy rules. Furthermore, the plan is required to fund top heavy minimums for ALL eligibles still employed at year-end (not just those in the excludable group). However, assuming EGTRRA good-faith amendment correctly in place, the safe harbor matching contribution can be used towards satisfying the top heavy minimum. I agree, although the answer is even worse than I thought! Even worse for my client, the plan has immediate vesting for PSP contributions!!!

Thanks, Tom. I did look it up and you're right....there is no free ride on top heavy for the excludable group (Corbel Technical Update 1/30/04 and 3/13/03). If the top heavy plan had provided the safe harbor match to everyone there wouldn't be an issue, right? But since it didn't, which is the correct fix?.....3% to all subject to vesting or SH match to those that deferred? The Corbel technical updates referenced above are leading me to the 3% for all which obviously is not the answer I want to hear!

Thought I would chime in here as this question relates to my question of the day. First of all, I don't think it is appropriate to say "you don't have to test a plan for top heavy if it is solely safe harbor". All plans should be tested every year......whether or not you need to fund additional contributions to satisfy the top heavy rules depends upon whether or not you are indeed "solely safe harbor" for the next plan year. Just took over a case that did exactly that......did not perform top heavy testing for 05 so until I do the test myself I don't know if the plan is top heavy for 06. In 06 we are planning to fund a discretionary contribution on top of the safe harbor. Question: This takeover plan also allowed employees to defer after 3 months, but only gave the safe harbor match to those that had a Year of Service. I don't know yet for sure, but assuming the plan is top heavy for all prior plan years, the plan has not satisfied the top heavy requirements for the otherwise excludable group. Would the correction be (a) provide 3% top heavy minimum (subject to vesting) to all members of the excludable group or (b) provide the fully vested safe harbor match to the members of the excludable group who deferred?

Does anyone remember when the participant loan regs were issued that required principal and interest repayments at least as frequently as quarterly? 86? Anyone recall the specific tax act?

So you're saying that if the IRS decided to disqualify a plan and Sch P had been filed every year, they could only go back 3 years, not from inception of the plan?

what tax?

Does anyone know exactly why we all file Schedule P's? I think a common thought out there is that somehow it starts the statute of limitations for IRS audit. I know this can't be true because IRS auditors go back as many years as they want when they discover recurrent operational defects. Also, when you terminate a plan, you have to go back 6 years to show operational compliance. I suspect filing Schedule P protects trustees (not plan sponsors) from something, I'm just not sure what. Since most of our plans are trusteed by the business owner who is also the Plan Administrator and Plan Sponsor, is it necessary to file Schedule P and what is the benefit?

I am not using it on ESOP's. In my opinion it is redundant and not what the DOL is looking for with this code. And like you said, it is not a requirement in ESOP's to purchase employer stock.....they just have to be primarily invested in ER stock.

So, it's strictly a document issue. The interest portion of the contribution is considered part of the 415 annual addition in a leveraged S-corp ESOP unless the document allows the use of current market value. Is that correct?

Stephen, in your first example you said the contribution of $25,000 released 200 shares at $100 per share. Is the remaining $5,000 of the contribution interest on the exempt loan? Or is it the difference in the current market price vs the inventory price, i.e. encumbered price?

There are many posts on this subject. I believe you'll find Notice 2003-44 helpful. Although I don't agree (at all!) with the IRS fix for this situation, apparently the "anyone but the employee is accountable" attitude of the IRS and DOL is that not only does the employer need to fund the missed deferral for the employee, but the match and earnings, too! So all you have to do if you're an employee is hope and pray that your employer screws up and not only will you get the fatter paycheck, but you'll get a big windfall when they finally figure out what they've done. If you're real lucky, they'll give you earnings on the fund that produced the highest return! I've heard that the IRS has been criticized for their position and may be changing it in the future......50% of the missed deferral, 100% of the match. Still not good enough in my opinion.

Thanks, Stephen. Unfortunately, I'm still confused. I use Relius software. Although there is no money in the cash account of the ESOP and no cash contributions were made, I did what you said and allocated the full $300,000 to cash just so that I could determine if anyone was hitting their 415 limit. There was one. His allocation of the $300,000 (including the interest on the loan) was cut back from $38,000 to $28,000 due to participation in the other 401(k) plan. However, not taking into account the $10,000 cutback, the value of the shares he is receiving is only $23,000. So from his perspective, he deferred $13,000 into the k-plan and is receiving employer stock valued at $23,000 for a total benefit of $36,000 for the year.....far from $41,000. It would appear that I am going to have to show the full contribution of $300,000, expense the interest, then "purchase" the shares so that I can run an accurate 415 test and also explain to the plan participant why his contribution was cut back. So what I'm saying is that if the interest on the loan is part of the 415 limit, it would appear that I HAVE to have it reflected in the allocation. In a C-corp scenario I have always considered the interest on the loan as a normal business expense and have not reflected it on the valuation at all. I realize that for 404 purposes the interest is excluded in a C-corp scenario and included in an S-corp scenario. I guess what I'm not understanding is the extension of these rules to 415. Comments? Help?