30Rock

Possibly some take over plans that were still on a GUST document with their prior provider, otherwise most likely no. On this group the adoption agreement provisions were never changed mid year, client had to wait until next plan year which sometimes involved preparing 2 sets of documents.

I dont know if you were at the ASPPA Q&A's when the IRS was asked point blank if plan provisions could be changed, and given specific examples. They would not say yes. So I think there is no clear yes from the IRS at this point and an employer wanting a mid year change should be advised to act with caution.

thanks that is great!

This is 318 attribution for purposes of ownership of a corporation - parent is owner, step child works for him. Is step child an HCE and key employee? Only if there is attribution from step parent to step child.

Q & A #8 at the 2009 Annual Conference posed the question of mid year changes, IRS said no further guidance other than Notice 2007-59 which only permits addition of Roth and hardship withdrawals. IRS was also asked this question informally at the 2008 conference. IRS was not receptive either year to making comments or exceptions to the Notice.

I just wanted to verify - a step child would NOT be counted as a Child for attribution/ownership purposes unless legally adopted, is this the understanding?

Esther To the extent your employer made contributions to the plan, rather than deferred from your own salary, then employer contributions are treated as wages and subject to FICA payroll taxes at the time contributed since there was no vesting schedule. Therefore, you were responsible for the employee portion of the payroll taxes for each year and the employer was responsible for the employer share. Employer should have withheld both. If no withholding, then the employer has underwithholding issues. If withholding occurs now upon distribution, I believe it will be increased by the earnings on the contributions, so the payroll tax liability has increased.

Oldman I am copying an article from McKay Hochman on how to correct for ineligible participants, based on 401k plan rules. You can probably use the same reasoning on your 457 plan however it looks like only option 1 and 3 are approved correction methods. Option 3 will not be available since the 457b does not have forfeitures since most likely there is no vesting schedule or employer contributions. I would push for option 1. Option 2 would require direction from the plan and their legal counsel. ______________________________ Correction of Elective Deferral Contribution by Ineligible Employee Rev. 06/12/08, E-mail Alert 2008-8, 05/26/09, E-mail Alert 2009-7 Elective Deferral Contribution Made by an Ineligible Employee Correction The formal guidance that exists is in EPCRS (see option 1). Generally, EGTRRA preapproved prototype defined contribution plan documents now provide that the employer shall make any such correction regarding the employee's eligibility under one of the IRS approved correction programs. Although the GUST preapproved prototype documents had the IRS approval to use other methods, such as distributing the ineligible deferrals, the IRS has not approved these methods as part of the EGTRRA document, but rather refers the employer to the IRS approved correction methods. Employers adopting the EGTRRA prototype defined contribution plan document will no longer find options 2 and 3 below as plan provisions, although option 3 would appear to meet the EPCRS self-correction rules. 1. EPCRS procedure to retroactively amend the plan to include such an employee. 2. Distribute the elective deferrals and the associated earnings to the individual who made them in the plan year in which the discovery is made. This option should only be used if the document provides for it. Not available once the employer adopts the EGTRRA document. 3. Forfeit from the ineligible employee's account. Allocate the forfeiture as stated in the plan document. Reimburse the employee and adjust for earnings. -------------------------------------------------------------------------------- Option 1, EPCRS revenue procedure 2008-50 rules for retroactively amending the plan (from Appendix B, Section 2.07(3))[/b][/b] "(3) Early Inclusion of Otherwise Eligible Employee Failure. (a) Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan's minimum age or service requirements, or (ii) has completed the plan's minimum age or service requirements but became a participant in the plan on a date earlier than the applicable entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan's actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies §401(a) at the time it is adopted, (ii) the amendment would have satisfied §401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees. (b) Example Example 27 Employer L maintains a 401(k) plan applicable to all its employees who have at least six months of service. The plan is a calendar year plan. The plan provides that Employer L will make matching contributions based upon an employee's salary reduction contributions. In 2007, it is discovered that all four employees who were hired by Employer L in 2006 were permitted to make salary reduction contributions to the plan effective with the first weekly paycheck after they were employed. Three of the four employees are nonhighly compensated. Employer L matched these employees' salary reduction contributions in accordance with the plan's matching contribution formula. Employer L calculates the ADP and ACP tests for 2006 (taking into account the salary reduction and matching contributions that were made for these employees) and determines that the tests were satisfied. Correction: Employer L corrects the failure under SCP by adopting a plan amendment, effective for employees hired on or after January 1, 2006, to provide that there is no service eligibility requirement under the plan and submitting the amendment to the Service for a determination letter." Option 2 Not available on EGTRRA plan document Option 3 Although not in the EGTRRA document, this method would appear to be fine under EPCRS self-correction guidance. Taxable Year Excess and earnings should be taxed in year returned to employee. Excess and earnings should be included in payroll and included in the W-2 for the year of reimbursement. Impact on Participant / Employer Participant’s W-2 had been reduced by the elective deferral and the refund of the elective deferral is reported on a 1099R. Participant’s W-2 will be affected. If Not Timely Corrected If not corrected within 12 months of the contribution, file under VCP or self-correct under SCP. If not corrected within 12 months of the contribution, file under VCP or self-correct under SCP. Tax Reporting / Notice 1099R issued for affected participant(s). Correct W-2 for affected participant(s). Other Tests If the ineligible participant's deferrals had been included in the ADP test, the test would have to be done over without those deferrals. If the ineligible participant's deferrals had been included in the ADP test, the test would have to be done over without those deferrals. To learn more, call 1-973-492-1880 or e-mail info@mhco.com. © 2010, McKay Hochman Co., Inc. All rights reserved.

A plan has 100% vesting right now, all HCEs are under this schedule and all NHCEs. To change vesting to a 3 year cliff, you could do this for new hires as of July 1. There is no cut back in vesting. However I believe you to test the plan under BRF testing. As long as the prior better schedule covers at least 70% of the NHCEs then you are ok correct? IF not then you can run the nondiscrim class. test and use the safe harbor %.

I found my answer in ERISA OUTLINE - Chapter 3 - Accruing Benefits, Part 1, Section II, Part L Allocation of forfeitures from a participant's account 1.c.2) What if a plan with a discretionary contribution formula uses this approach for allocating forfeitures? Where the contribution formula is discretionary, but the plan provides for the allocation of forfeitures to reduce employer contributions, there is no required contribution to reduce. How then should such a plan provision be applied? A presumption is made that the employer has "reduced" the amount of its discretionary contribution by the amount of the forfeitures. The forfeitures are then allocated in addition to the "reduced" discretionary contribution made by the employer, except to the extent section 415 prevents a current allocation of the forfeitures (see Chapter 5). If the employer decides to make no contribution for the plan year, the forfeitures are still allocated for that year. Therefore, there is no practical difference in the way forfeitures are allocated under a plan with a discretionary contribution formula, regardless of whether the plan states that forfeitures reduce employer contributions (as described above) or are allocated as additional employer contributions (as described in 2. below). (But see the discussion in the text box regarding a contrary view taken by some practitioners.) Contrary view believes that employer has greater flexibility. Some practitioners take the view that when the reduction method is used in a discretionary contribution plan, the employer has control over how to “dole out” the forfeitures. For example, under the facts described in the example in 1.c.3) below, the employer would decide how much of its contribution is being “reduced” for the plan year and use only that portion of the $11,000 of forfeitures. Under this view, the employer could decide that its intended contribution for the year is $0, and choose not to allocate any of the forfeitures, resulting in a deferral of the allocation of the forfeitures to next plan year. Our belief is that such discretion would violate the general requirement to have a definite allocation formula in a profit sharing plan, as prescribed by Treas. Reg. §1.401-1(b)(1)(ii), and would violate the annual allocation rules prescribed by Rev. Rul. 80-155, unless other statutory limits (e.g., IRC §415) prevented the full allocation of the forfeitures.

I have more information. This is a forward DROP plan where the employer funds it for 3 years prior to the date the employee actually terminates. The formula for funding is based on the DB plan formula. The contribution is going into a DC plan. My question is - what type of document do you need for this? WHat is this allocation called? Is it money purchase, or fixed nonelective contribution? Or is there legally a contribution type in governmental lingo called a DROP contribution and certain attorneys know how to draft this plan?

Hi Bird The plan froze at the end of 2008 and all accounts were 100% vested. However, there were forfeitures, I assume from employees who terminated in 2008 with unvested amounts. The way the plan was restated is that all sections collapsed and the plan has a box Frozen checked, distribution options are available, 100% vesting, and that is about it. So the base plan says forfeitures should be applied in the Plan Year they arose (2008) or the plan year following (2009). The plan should have stipulated that forfeitures would be reallocated and how. Since no further contributions were made to the plan, the forfeitures could not be used to reduce anything, and there have been no expenses. How can I apply them as 2009 contributions? Can they be applied this year, 2010, the year the error is discovered? What happens in the case of an active plan with discretionary contributions where one plan year the employer does not make any contributions - is he forced to make a contribution so that forfeitures can be applied, or can forfeitures carry over year to year until there is a contribution?

Is there such a thing as a 401(a) plan that only accepts DROP money - which I believe is rollover money from a state defined benefit plan when an employee retires. I believe a money purchase governmental 401 plan can ACCEPT DROP rollover money. But you still need a written plan and a fixed MPPP contribution correct? Can the plan have a 0% MPPP formula and thereby only accept DROP money? Not sure of the advantage of this arrangement versus the employee just rolling the DROP to an IRA? Any thoughts?

Thanks! The base plan states that forfeitures will be applied as of the last day of the Plan Year in which they arose, or if necessary, the last day of the following Plan Year. So I guess we can do either. If I do the latter it will be for the 2009 Plan Year, and that is still timely for 415 purposes since it is only May. Since the plan is frozen it means NO contributions of any source are being made (client has a 403b plan now and the two plans cannot be merged). It appears I need to unfreeze the plan for one year - not sure I can retroactively do this. Since the authority on how to use the forfeitures is stated in the base plan I think rather than restate the adoption agreement I can just reallocate these forfeitures as nonelective via a board resolution?

Let me clarify the issue. The prior plan document, before the plan froze, had both nonelective allocated pro rata and matching contributions. Forfeitures were used to reduce future employer contributions. After the plan froze there have been no further contributions, hence the forfeitures have not been used. Yes the plan should have been amended when it froze to reallocate. So now, the forfeitures sit in a suspense account. What is best way to clean up - amend the plan to provide a nonelective contribution for 2010 and then reallocate the forfeitures? Thanks for any suggestions!

I agree. Plus I think we are off point a little. My actual question is not a mandatory contribution question. It is simply can a plan set a minimum of 3% in order to get into the plan. If you do not elect to contribute 3% you are not allowed to participate and you cannot elect a lower %. This could have a discriminatory impact on the NHCEs who may only be able to contribute 1 or 2% therefore failing effective availability. Also the true "mandatory contributions" are not a CODA, they are nonelective contributions that do not count towards the 402g limits. Therefore, effective availability is not an issue. I think I answered my own question! Thanks for making me think!

Oh yes I see that now, I agree. Separate 415 limits should apply

I think there is an exception - even tho they are not a controlled group, when there is 50% common ownership I think you aggregate the 415 limit, so his limit in both plans is really $46,000 (2008) or $49,000 (2009). Need to check out 415 aggregation and 50% controlled group status

Recline - that is a fantastic comment and point you make. Where did the IRS state that a 6% mandatory amount is alright, in a PLR or Q&A? Thanks!

"We" is the vendor I work for. You know I cannot go further with that one!

Thanks so much!

Is there a problem with a plan setting a minimum deferral % of lets say 3%? I recall an issue with maybe effective opportunity for the NHCE's, but maybe there is a range that is considered reasonable? Have others encountered this issue?

Do you think any type of fiduciary implications come into play under state law? Could the employer be held liable by the IRS or a participant claim that the employer had the duty to monitor the loan program and the loan limits, and by not doing so have jeopardized their retirement savings? We have employers who refuse to monitor loans when there are multiple vendors, and I am wanting to know if they do not have some liability? Appreciate any guidance!

I have a plan where the current document allows for withdrawals of rollover monies at any time. Client wants to eliminate all in service distributions. I realize that this is a protected benefit but am confused on how to protect it - do I protect the right to in service withdrawals or rollovers for all participants, even if they have never rolled money in, if so this means that I can really only eliminate the right for new hires after the date of the restatement?

What fiduciary obligations if any does the sponsor of a governmental 457b in Florida have regarding offering loans when there is more than one vendor and the vendors are not monitoring the loan limits? If a participant exceeds the loan limit under 72(p) there are tax consequences to the participant. What about for the employer - prohibited transaction rules under ERISA and the Code do not apply. All I can think of would be state law fiduciary issues regarding not monitoring the loan program and thereby jeoparding participants' retirement savings? Any ideas?