Brenda Wren

I have a cross-tested 401(k) that is NOT top heavy and is NOT a safe harbor. Plan covers over 100 employees and we have a number of different classifications. We are considering a zero allocation to one classification that includes HCE's as well as another classification that includes NHCE's. I think we will pass cross-testing. As I read the 401(a)(4) regs, which reference the 410(B)(3) regs as to who is "benefiting" for cross testing purposes, it does not appear that I have to give each a minimum gateway contribution. Again, plan is not top heavy and not safe harbor, so no one will be "benefiting" in that regard. The plan does not exclude these classifications, we simply want to exclude them on a year-by-year basis depending on how the numbers work. Has anyone run into this situation? My software (Relius) seems to agree with me and is giving me a "pass" on the gateway test even though I have many otherwise eligible NHCE's receiving zero.

Can a participant refinance the terms of his participant loan simply to reduce the interest rate? I think I understand that refinanced loans, to the extent they are maxed out at $50,000 or 50% of the vested balance, must maintain the same maturity date. But ASPA ASAP 02-23 dated 12/6/02 seems to indicate that you cannot change the interest rate of the original loan. If this is correct, is there any workaround, i.e. pay off the first loan then get a new loan?

I would say no, too, but I was hoping to find someone say "yes" based on the fact that the Notice could not be provided before the plan was set up. A bit aggressive and probably not do-able. But would your answer change if the K plan was set up on 12/1/02 with the Safe Harbor 2003 Notice being given on that date also?

Yes, I realize that. I don't think I am communicating very well. If I establish a CODA for 2002, can I still utilize the safe harbor features in 2003, OR was 12/1/02 the notice deadline for 2003....keeping in mind I did not establish the CODA until 12/10/02?

Thanks for your reply, but I don't want to be a Safe Harbor for 2002. I am confident that I can set up a NON-SAFE HARBOR 401(k) for 2002, regardless of the length of time left in the year. I just have to test or utilize the 3% assumed prior deferral rate for NHCE's. The question is will this kill the safe harbor for 2003 because I have not satisfied the 30-day notice requirement?

Is it too late to establish a 401(k) plan (not utilizing the Safe Harbor provisions, but rather the 3% assumed deferral rate for prior year) on 12/10/02 for the 2002 plan year AND be a Safe Harbor for 2003? Would your answer change if the establishment date was 12/1/02 (thus meeting the 30-day Notice requirement for existing CODA's)?

Thanks Michele. That was my understanding, too. But the good-faith amendments provided by IRS don't spell it out that clearly. And they mention the 3-year service rule under 411(a)(10). The attorney for for our document provider wasn't able to give us clear guidance either. Thanks for your input.

How do you correct a failed coverage test for a 401(k) plan that excluded a classification of employees? Looks like I need to benefit at least 2 more employees. Assume no matching contribution was made, only employee deferrals. Document only provides direction about who should benefit, not how they should benefit.

We continue to struggle with the options provided under EGTRRA to apply the 2/20 schedule to our existing 3/20 schedule plans. Definitely easier to apply 2/20 to all matching balances as of 1/1/02. But for the client that doesn't want to, what are his options? (1) Can he continue to apply the 3/20 schedule to anyone who terminated prior to 1/1/02? (2) Can he apply the new more rapid schedule to SOLELY 2002 matching contributions and beyond? Or would this create a 411 (a)(10) problem for those employees with 3 years of service?

Excess CONTRIBUTIONS (ADP refunds), not to be confused with excess deferrals which are 402(g) violations, are taxable to the participant in 2001 (the first year they could have been contributed). So yes, technically the participant is supposed to amend his personal tax return for 2001. But I can tell you that I have many clients that ignore this rule because of its stupidity and unnecessary extra work (in their opinion). They simply code the 1099-R with an "8" and move on. However, I do have a few clients that will follow the law and wait until 9/16 to distribute the refunds; pay the excise tax and thus avoid the problem with their employees.

Let's see if I can clarify the original question. Discretionary profit sharing contributions that are accrued at year end are EXCLUDED from the top heavy test. We all agree on that (I hope!). Are safe harbor contributions that are accrued at year end excluded or included? Argument for exclusion - safe harbor contributions are technically profit sharing contributions and the plan is not subject to minimum funding. Argument for inclusion - safe harbor contributions are commitments as of 12/1 and therefore mandatory as of 12/31. Does anyone know for sure?

Are the accrued safe harbor nonelective contributions counted in the top heavy testing? I have a case where it makes a difference and would appreciate any references. My "vote" is yes since it is a commitment prior to 12/31.

Bandb, thanks for your input. I handled it as an asset transfer, but the auditor has a different opinion. As I recall, it was somewhat difficult to get cooperation from PayChex in transferring the assets....they fussed about the same desk rule, 12-month rule, plan termination, etc. But they finally did transfer the assets when we explained that it was simply an asset transfer. So, no, we did not allow participants to make distribution elections. I think your last question, "Is this a new plan or a continuation of an old plan?" is the question for the day. I DON'T KNOW!?! Perhaps a hybrid! From the document perspective, it looks like it was handled as a continuation. From the reporting perspective, I thought it was more appropriate to show as a transfer, particularly because no Schedule H was filed in the prior year. I really wish I had a definitive answer here because I hate these situations where the TPA and the auditor are in disagreement. Also, we wanted the client the engage an ERISA attorney to draft a new document upon our engagement, but client insisted that was unnecessary...."they already had a document".

How do you handle a situation where a large employer (over 100 participants) came out of a multiple-employer plan (PayChex) in 2000 and transferred existing assets to their own trust. Client insisted they utilize their existing plan document with PayChex. Reviewing the document, I couldn't see why they couldn't use it. Plan name was the ABC 401(k), not PayChex 401(k). Then the issue arises on how to handle the 5500 reporting. In 1999, Paychex filed the 5500 and Schedule H based upon ALL participating employers. Only a Schedule T was filed on behalf of my client (as well as all other participating employers of course). So when I prepare Schedule H for my client for 2000, do I show beginning balances even though the assets at that time were in a separate trust inside the multiple-employer plan? Or do I show beginning balances as zero and a transfer of assets from another plan? Does the answer to this question depend upon the document issue above? :confused:

CGBS - Manulife will not default the loan until they are advised to do so by the employer. As a TPA, I feel obligated to bring this to the attention of my client. But I don't find out about it until it's too late. I have given Manulife a "wish list" and one of the things I asked for was a report detailing loans and the last date a payment was received. Perhaps if enough of us fuss, we can get some action!

Thanks, Tom. So your opinion is they are Former-key, right? Does that mean I take their distribution out of both sides of the fraction...disregard it all together? Or does that mean as a former-key, their distribution remains on the key side?

The two partners owned more than 5% in 2000, but not on 12/31/00 and not at all in 2001. I understand under EGTRRA that 2001 is the lookback year for identification of key status....Notice 2000-56.

I have an odd situation I can't seem to figure out even though we have received guidance on this issue from Notice 2001-56. A law practice "divorced" in 2000 and 2 of the 3 partners received distributions in 2001. The 2 partners owned no stock in 2001. I understand that distributions in 2001 are taken into account for the 2002 top heavy determination. But are the former partners considered Key, Non-key or Former-key? It doesn't appear that they would be Key under EGTRRA (no stock ownership in lookback year), but it seems odd that I can use their distributions to essentially bring the plan out of top-heaviness. Any thoughts?

We've probably all come across it. I don't know of any relief. Many employers choose to pay the excise tax to avoid this headache for employees. Just another STUPID rule if you ask me.

Thanks, T-Bone. Do you think it would be unreasonable to ignore the controlled group issue altogether for the transaction year and test the plans separately? In my case, the purchasing company has no desire to make any changes with regard to anything concerning the plans. They say "business as usual". In fact, I only assume another plan exists because the purchasing company is so large (thousands of employees).

KateSmith, I don't have an answer for you, but am very interested in this topic. I have not been able to find any guidance on exactly how you are supposed to test a plan in the year of an acquisition. Like you, I am the TPA for the company that was acquired. I have found that there appears to be some relief in the transaction year and the year following as far as coverage goes, in that you can treat the plans separately, but this relief does not extend to nondiscrimination testing. I also noticed that Ilene Ferenczy is doing a session on this exact topic at an upcoming seminar. Maybe she's out there somewhere and can help us??? In my case, a merger of the two plans will not occur in the transaction year and is not even being considered at this point. I think that's a moot point anyway.

Check out thread on 7/27/01: http://benefitslink.com/boards/index.php?showtopic=10923 By the way, I believe Corbel has since changed their position on this matter.

Does anyone know for sure when the 415 limit increase (100% to $40,000) kicks in for non-calendar year plans? The Corbel webcast speaker's opinion is that it kicks in for plan years ENDING in 2002. I believe his opinion is based upon the COLA adjustments for IRC 415 being effective for plan years "ending in". If this is correct, that would mean 401(k) plans with a June 30 year end could start deferring 100% of comp now. However, I have also consulted with local ERISA attorneys and they do NOT agree. EGTRRA is not a COLA adjustment. Any other opinions out there?

Exactly when do the new top heavy rules kick in for calendar year plans? Since the determination is made at year-end for the next plan year, would the new calculation actually affect the 2003 plan year rather than the 2003 plan year?

Employee is complaining to employer on 3/15/01 that there were no 401(k) deductions from his paychecks during 2000. Employer is unable to find written modification of his deferral election. But employee isn't concerned until tax time. Employer argues that because (1) employee didn't "notice" this for 24 pay periods and (2) he was invested aggressively and would have suffered market losses anyway and (3)there was no match applied to the deferral that the employee has not suffered. What, if anything, to do?