Brenda Wren

Have a client considering the addition of 401(k) safe harbor language to his existing top heavy PSP. He is concerned about the financial commitment in lean years. Question: If we design the plan and the notice to commit the Safe Harbor contribution to only NHCE's, can we amend that provision during and/or after the plan year to include the HCE's? As a solely safe harbor plan, appears that we don't have an issue with the HCE non-key employees not receiving a top heavy contribution in a plan year in which the HCE's are excluded from the safe harbor contribution.

I had this exact scenario occur on a case we consulted on a few years ago that was being audited by the DOL. At the time I had a relationship with the local IRS auditor. The biggest concern to me was that the terms of the plan had not been followed. The IRS auditor (he was not involved; I just asked him anonymously of his opinion) said that if the case was referred to their office, the likely correction would be a 6% contribution to everyone, not just those that deferred. The logic was that the contribution was really a profit-sharing contribution, not a match. However, the DOL was auditing for different reasons and didn't care much so the case was never referred to the IRS. My two cents for what it's worth!

Does the hurricane relief apply to the failure to correct a June 30, 2004 ADP test by 9/15/04?

Blinky, what is the source of your information regarding the 10/15 deadline for the annual addition? I don't recall ever reading or knowing about that rule.

Thank you Belgarath and FundeK! Actually, that was what I wanted to hear. Not that I have the time or energy to do all that work, but I don't think it's right just to simply make it "go away" with the 2003 funding. I believe the participants are due additional money. And yes, it is significant since there are only around 30 participants. The problem appears to be at least 5 years old and possible 7, way outside the self-correction time period. Thanks again.

UPDATE - Historical valuation for 2001 shows that forfeitures had already accumulated to $35,000 as of 12/31/00. On the surface, it does not appear that we have a partial termination issue. For now I am concluding that forfeitures have been building up year after year beginning in 1999. Fellow practitioners out there - please provide your opinion. To review the issue, I have inherited a 401(k) plan with over $60,000 in unallocated forfeitures. I need to provide a recommendation to the client on the best way to fix this problem. In 2001 there were over $15,000 generated in new forfeitures and there was no employer contribution allocated, therefore nothing to reduce anyway. I see this as more than a deduction problem. What would you do? Am I overly concerned?

Thanks for the input guys. I think I am overly concerned envisioning the DOL hammering the client about violating the rule "cannot exceed the amount required to meet the immediate financial burden".

Thanks, Brian. Living in Florida, I never think about state taxes. This guy lives in Arizona; I have no idea if they have a state income tax or not. He makes around $50K. But I have no clue about other income or deductions. Are you saying that you would gross up the amount....25% for taxes plus 10% for the penalty to arrive at $8430 and therefore process the hardship at the original $8,000 he requested? I normally wouldn't belabor such a silly thing as this, but I've been dealing with IRS and DOL auditors lately and it seems my clients are having to justify at great length every tiny thing they do upon audit.

I understand that (1) hardships can be used to purchase a primary residence, (2) hardship withdrawal amounts can be grossed up for taxes and penalties and (3) withholding is optional. I have a hardship withdrawal on my desk with a Good Faith Estimate indicating that the ee needs to bring $5,480 to home purchase closing. The participant is requesting $8,000 with no withholding. The client is looking to me to bless the amount needed to satisfy the "immediate financial burden". Since no one really knows the tax liability, i.e. tax rate, until the end of the year (except the rich folks, of course) is there any guidance from IRS on the appropriate tax rate to assume when grossing up the hardship distribution for taxes and penalties? I am inclined to recommend 15% plus 10% which would put the actual hardship distribution amount at $7306.67, but I really have no basis for that thinking. Also, not that I want to make up rules, but it doesn't seem logical that an employee can elect to have the distribution grossed up for taxes and penalties, then turn around and also elect no withholding. Of course, logic is not law or guidance for that matter! Sal's book says "reasonable". What would you do?

But what is the point? What does a deemed IRA offer than a 401(k) deferral doesn't?

Can anyone briefly explain the purpose of the "deemed IRA"? When these were first introduced, I recall hearing the experts indicate that they didn't really see much use for them. But now I see a lot of guidance that I honestly haven't taken the time to read. Any thoughts?

Fortunately, upon closer look, it does look like the fees came from the forfeiture account. Now I'm concerned that the reason there is so much money in the forfeiture account is because of a layoff in 2001. So we have possible termination in operation issues to consider now. But assuming there is not a termination in operation, I think there could be potential issues in years in which the employer funded their 404 limit and the excess was never reallocated. There is a DB plan, too. And even if there is not a termination in operation, and the forfeitures are legitimate, I still see a significant problem upon audit, even if 404 limit wasn't reached. If the employer chose to fund a contribution (and take a deduction) before allocating forfeitures, the forfeitures had to be reallocated in that plan year. Wouldn't you agree?

We just took over the admin of what appeared to be a nice, clean cross-test 401(k). However, we just discovered over $60,000 in unallocated forfeitures that apparently have been building over the years. Document says to reduce plan expenses, then contributions, then reallocate. According to prior administrator, these forfeitures were held in suspense "for future plan expenses". Although it appears they have been deducting quarterly fees as well! Looking for opinions here....due to the multitude of plan years involved, it would cost a fortune to go back and reallocate, make distributions, etc. Not to mention time I don't have. Appears that the most practical solution is to use the forfeitures to fund the $50,000 contribution for 2003 that hasn't been funded yet and reallocate the rest. Of course, I would bring this to the attention of the client and let them know of the potential problem upon audit. Refusing to take the case is not an option, so please don't offer that opinion! Thanks for any input.

Loan repayments CANNOT be pre-taxed! If they could, we'd all be doing it! Demosthenes, I think you misunderstood the original question. And, by the way, the only money that is getting taxed twice from the after-tax repayments in the loan interest, NOT the loan principal. The client of jkharvey will find no such research to support his opinion that loan payments can be made from pre-tax dollars!

I have a rehired participant who would like to "buy back" his forfeiture. Does he have to repay his employee deferral in addition to his employer monies to buy back the forfeiture? The document doesn't seem to make a distinction between the money types, so I would assume the answer is yes.

Yes, there is a comparable rule.

Ok, folks. Over 100 of you have looked at this post....where are your opinions? Don't be bashful!

We added 401(k) provisions to an existing profit sharing plan in 2003. They were added in November, 2003 and we anticipated using the 3% assumed deferral rate for the prior year to get through the testing hoop. Of course, all of the doctors immediately deferred $10,000, but the employees were only able to defer small amounts for the remaining 2 months. ADP test passes, of course, using the assumed 3% prior year NHCE ADP. Doctors would now like to fund additional employer contribution(s) to achieve maximum $40K. By funding a 100% match, we can achieve another $10,000 towards the $40K and significantly reduce the remaining PSP contribution for the staff. This appears to be permissible, but would you do it? Is it too abusive? And obviously, with such a low ADP for 2003, we anticipate amending the plan to current year testing method in 2004.

Tom, I was anxiously awaiting your input. But I still cannot grasp why I would need to test the plan under 401(a)(4) in a safe harbor designed plan, i.e. integrated, after I have passed coverage under 410(b). What if I had 2 out of 10 NHCE's not benefiting? Obviously, this passes the ratio test under 410(b), but I have 2 NHCE's receiving 3% and 8 HCE's receiving 10%, therefore, 2 allocation rates. Am I still required to test under 401(a)(4) in this scenario?

see similar posting by rmwright

Tom, I agree with you regarding the coverage testing. I learned recently from Relius Support that if someone receives a safe harbor 3% nonelective contribution, they are considered "benefiting" for coverage purposes, contrary to receiving a 3% top heavy benefit only. Doesn't sound right, but I guess it is! Six of one, half dozen of the other if you ask me! However, I believe the question pertained to an integrated plan, so gateway is not an issue nor 401(a) nondiscrimination testing.

We rarely recommend to clients that they exclude bonuses from allocation compensation unless we are fairly confident that the 414(s) compensation nondiscrimination testing will pass each year. However, in the case of a Safe Harbor match plan (or a deferral/match plan for that matter), I'm thinking that even though compensation is defined as ALL compensation, the plan could result in discrimination another way. The Datair prototype document has a specific option for allowing participants to defer on their bonuses. There are 3 options: (1) deferral on bonuses is permitted, (2) deferral on bonuses is not permitted and (3) a special election will be made. We have typically asked our client which option works best for their situation and the way they handle the logistics of paying bonuses. BUT, if the plan is also a safe harbor MATCH plan with no "true-up" provision, match calculations are made each payroll period, and the client selects #2, couldn't this result in discriminatory operation of the plan? (yes, we asked Datair and the initial take on it was "no")

They were married 9/17/93 and separated in May, 1999. I guess when he enrolled in the plan he didn't feel very married!

We had an unusual set of circumstances arise. The good news is that we are dealing with less than $1,000 in benefits, so very little exposure is involved here. Participant enrolled in a 401(k) plan 2 years ago, indicated he was unmarried and designated his sister as his beneficiary. He died unexpectedly, one week before his divorce was finalized. The divorce was ultimately finalized after his death. Should the benefits be paid to the designated beneficiary or the ex-wife?? I'm thinking ex-wife since the beneficiary designation could be considered invalid since she didn't consent to the designation of another beneficiary. There are no children and the sister was designated as the beneficiary of his life insurance policy. Trustee would like to honor the request of the participant if at all possible.

Under the new EGTRRA definition of a key employee, is it a 5% shareholder or a MORE THAN 5% shareholder?