Brenda Wren

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?

Fortunately, it looks like ASPA was on top of it....I just read their comments on today's newsletter. We can only hope IRS listens. In the meantime, I think our firm will be OK; we use the Datair documents which very clearly have the "trigger" language in them. Thanks to those who commented....even the jokesters and editors!

Tom, any thoughts with regard to the Safe Harbor match question? If you stop mid-year, do you still get the free pass?

Based upon all of the guidance we received and interpreted from the IRS since 1998, up until July 2003, we understood that a safe harbor plan could be operated on a year-by-year basis. The safe harbor features of the plan would be "triggered" upon the timely notification to employees. If you missed the notice deadline, your plan would revert back to normal plan terms, i.e. you would have to test the plan for discrimination. Lately there has been talk that you cannot use the ADP test as an alternative to making the Safe Harbor contribution. From what I understand, the IRS is taking this position to avoid possible abuses where it may look like a test will pass on its own, so the client decides not to fund the safe harbor contribution. Didn't they have this figured out BEFORE they gave us repeated guidance that safe harbor plans could operate on a "year-by-year" basis? Or when they came up with the so-called "maybe" notice? Where is this new school of thought coming from, the proposed final 401(k) regs? And if so, why do they appear to be enforcing their position now instead of after the regs are finalized? I understand the IRS is even having some practitioners remove the ADP testing language from safe harbor GUST restatement documents that are seeking IRS approval. How can they do this?? Haven't they already approved prototypes that were NOT written like this, i.e. DATAIR? All of this flies straight in the face of the "year-by-year" theory, the "maybe" notice, the ability to stop the safe harbor match. I have no clue how to advise clients about this. In the case of the 3% nonelective contribution, what is the point of the notice? Why give it out at all if you have to fund the contribution anyway? Does the "maybe" notice have a place at all anymore? In the case of the SH match, can you stop the match with 30 days notice? If you do, do you still get a free pass on the ADP since your plan no longer has ADP test language in it? Is anybody else having as much trouble with this issue as me?

I guess it's my bedtime, too. I guess you aren't too concerned about HCE status for next year. So we're down to the 415 annual additions test and a "general" verification of the match calculation in your specific example. But even so, if it were my case, I would ge the comp and the hours, too! Plans change and get amended all the time.

Bonzo, I understand your question completely and have asked myself the same question. If the safe harbor match calculation is done by the payroll company and the allocation date is every pay period, there is no way that you can verify that the match calculation was done correctly at year-end, unless you are receiving payroll feeds and verifying this each and every pay period. Obviously, you're not or you would have the compensation figures. Nor do I think it is necessary for you to verify the payroll provider's calculations. I would have a hard time justifying my time and costs for "auditing" the work of the paid payroll provider. Now if the document required year-end "true up" calculations, of course you would need the comp in that instance. However, all that said, you need compensation to determine the HCE status for next year. You also need it to run the 415 annual additions test. It is also helpful to "generally" verify the accuracy of the match calculation. I resolved that since I have to have other employee census information, i.e. hours, termination status, new hires, etc., I might as well ask for the compensation too, even though in many cases I know 415 is not an issue and I know who will be an HCE next year.

OK, what's the latest here? I've searched and read many historical threads on this topic, but cannot ascertain for sure whether this is a poor plan design or not. Is a top heavy plan required to provide top heavy minimums to otherwise excludable employees who are allowed to defer, but are not receiving the safe harbor contribution? I believe the argument is based on the definition of "solely safe harbor" and whether or not you can claim that status since you have participants in the plan not receiving the safe harbor contribution. What is Sal's latest position?

I am a TPA. We have a plan filing as a large plan filer for the first time for 2002. This is a PSP, trustee-directed balance forward plan with 10 managed accounts held at two brokerage houses. At the client's request, several years ago we stopped providing a full accounting of the trust assets due to the exhorbitant trust accounting costs. Instead, we prepared a condensed version of the accounting to produce the financial statements. We reduced the time involved from 20 hours to about 4. We treated each managed account as a single investment. We accounted for all monies coming into the trust, out of the trust and transfers in between the managed accounts, but made no distinction between unrealized and realized gains. After all, this was no longer required on the new Schedule I. Knowing that 2002 was an audit year, we discussed the issue with both the client and the auditor and asked if this condensed method of trust accounting would be enough to complete the audit. The auditor said it would be, but cautioned us that since the 5500 Sch H did require a distinction between the unrealized and realized gains on the 5500 which was our responsibility, that the decision to perform the full accounting would need to be made by us and the client. The client decided that they were not willing to spend $2,000 to come up with an accurate distinction of these numbers since it all comes out in the wash anyway. All that said, now we have the issue of the Schedule H attachments referring to Assets Held for Investment and Reportable Transactions. The auditor is looking to us to provide those schedules. I attended a session at the ASPA Summer Conference on this issue and specifically asked the speaker whose responsibility this was. He said it was part of the audit and therefore the auditors responsibility. But the auditors are claiming that they are engaged to audit the 5500, not prepare it, and these are 5500 attachments. Well, I would argue that the audited financial statements are also part of the filing...should I be responsible for those, too? Certainly not. I have also asked other TPA practioners and they all indicated that these schedules are normally provided by the auditor. Any thoughts or opinions on this issue would be most appreciated, particularly from experienced auditing firms. By the way, the reason this has escalated to such a big issue is because there are literally thousands of stock and bond positions held at year end.

This is a bit old, but thought I'd add my thoughts. Yes, she qualifies for the exemption from the penalty, but you must withhold 20% on the entire lump sum balance, including the outstanding loan, when you pay her out.

#2 is your best option. Yes, there is a line item on 1040. The distribution is reported on 1040 (actually even direct rollovers are supposed to be reported on 1040), but the taxable amount is reported as 0 if he rolled over the entire amount, including the tax withheld, within 60 days. #3 is also an option. No, it's not considered after-tax. The entire distribution would be reported on 1040, but only 20% of it is taxable.

Just looking for opinions and thoughts here....Would you say that an S-corp ESOP that doesn't allow distributions to terminees until after the stock acquisition loan is fully repaid abusive? Probably not, but would your answer change if the note was a 30-year note? Would it cause further concern if the plan provided for 5-year cliff vesting with no credit for service prior to the plan? Is a 5% fixed loan rate reasonable? Would you be involved with a case like this in any way?

I guess I shouldn't have said "exclude". In these plan designs, client wanted to allow these higher paid employees to participate in salary deferrals, and was also willing to do 3%. Now I'm finding that if the plan is top heavy or a safe harbor plan, they have to give them 5%. So then I thought if I had kept the old MPP, the plan where I was making the safe harbor or the top heavy contributions in the past, I could have remained at the 3% contribution requirement and avoided the gateway requirement. Would you agree?

Now that we've all merged our tandem plans into one and made our MPP plans go away, I'm wondering if we need them back! We have many 401(k)cross-test plans that were designed to exclude a group of employees (i.e. dental hygienists or associate attorneys). Now we are being required to fund not only the 3% contribution top heavy or safe harbor contribution, but possibly an additional 2% to satisfy gateway. I'm thinking that if we placed the SH or THM contributions in a separate plan, we could get around gateway. Am I missing something? Of course, the costs of establishing a separate plan and maintaining it might make the point moot, but wish I had thought of it before we terminated our MPP's! Any thoughts?