30Rock

Right, and if you lets say 6 years under a graded schedule, you are crediting more than the employee really worked. I think this requires BRF testing. Also, is the 5 year rule a DC rule or DB rule. Maybe Mike Preston knows? What I mean is, how much prior service can you credit before you need to test - 5 years, or is this just for prior service in a defined benefit plan?? THANKS

Is there a problem granting 100% vesting when certain employees are hired and they previously worked at certain medical facilities and are now being hired by a certain employer, lets call it an anesthesilogy PA. If HCEs and NHCES of the group being hired are treated the same, there is no discriminatory treatment. But granting this group 100% vesting and immediate eligibility while new hires of the employer have to work 3 years for 100% vesting and one year to be eligible, creates BRF testing does it not? I appreciate any insights, thanks!

It is easy to terminate - they are individual contracts, and so anyone that does not consent gets the contract distributed out to them as a nontransferable annuity. The insurance provider would retitle the contract as an individual NTA (nontransferable annuity) which sits as a frozen contract, no new contributions.

There is another thread on benefitslink which I have attached below, that deals with this. Neither a 457 plan nor a 403b plan are permissible options under a Section 125 plan. If the employer contributes to either plan in lieu of the health option then the health plan becomes taxable to all employees - this would be the result upon IRS audit. Advice is to pay the health opt out in cash, and let employee decide whether to defer into either plan as a salary reduction contribution. http://benefitslink.com/boards/lofiversion....php/t2501.html

I found it! But not sure this really answers the question because note he says "they need not be top hat". Since the religious org is not subject to ERISA, they can offer the plan to all employees, or limit it to the top hat group. Keeping it "unfunded" appears to be the main issue. b)lines Ask the Experts – Church 457(b) Plans Dec 22, 2009 (PLANSPONSOR.com) -- December 22, 2009 (PLANSPONSOR (b)lines) – A plan provider notes: "If a nonelecting church, non-ERISA 414(e) organization sponsors an eligible 457(b) plan, it appears that this plan can be offered to all employees, rather than limited to a top hat group, since the plan is not subject to ERISA. However, 457(a) requires all non-governmental 457(b) plans assets to be unfunded." The provider asks: "Since the employer is exempt from ERISA, does this requirement apply to the 414(e) religious organization? Is the plan considered funded or unfunded? In addition, in general, do the 457(b) rules applicable to governmental plans or top hat plans apply - i.e. rollovers, age 50 catch-up, assets protected from the 414(e) organizations, plan loans?" David Powell, Groom Law Group, answers: First, note that many church organizations are not employers eligible to maintain a 457(b) plan. (See Code section 457(e)(13)). Only tax exempt organizations which are NOT churches or qualified church controlled organizations under Code section 3121(w)(3)(A) and (B) (usually, church hospitals, colleges, universities and nursing homes) may maintain 457(b) plans. Because such plans are exempt from ERISA as church plans, they need not be top hat. But if funded, they will run afoul of the constructive receipt/economic benefit rules and will be immediately taxable to the participants. Consequently, most use, at most, a rabbi trust where the assets are exposed to creditors of the employer. And they do not get the benefit of the rules applicable only to governmental plans, so no age 50 catch-up, no loans, and distributions are not eligible rollover distributions. They are essentially like other tax exempt organization 457(b) plans, just not limited to the top hat group. NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. PS editors@plansponsor.com

Thanks Oldman! How did you find that David Powell article?

NO they are not a 3121 church. They are a religious affiliated entity under 414(e) in the healthcare area.

I have a question on church and religious organizations and adoption of a 457b plan. I do not think a steeple church or QCCO under 3121 can sponsor a 457(b) plan. However, it appears that a 414(e) religious organization that is not a steeple church, can sponsor a 403(b) plan however since the employer is not subject to ERISA, the plan would be a deferred comp plan for all plans, and NOT a top hat plan. However, as a governmental plan, the features of the plan are similar to a top hat - ie no loans, no rollovers, no age 50 catchups Can someone confirm?? Thanks!

Thanks Oldman!

What are the thoughts on excluding leased employees? Does 414(n) apply to a 403b? I know a 403b plan can only cover common law employees, however after the statutory one year and other leased requirements, the leased employee is treated as a common law under qualified plan rules?

Oldman It looks like the PPA and HEART provisions are all optional for a top hat plan so if nothing was elected for 2009 then it would not be too late to amend the plan this year for the PPA provision. I agree the one HEART provision I forgot was the military distribution under PPA which HEART extended, although not the qualified military provision. This is optional too. Also - The disability and death provision does not apply to a employee deferral only top hat plan, because in most cases, the plan will already be 100% vested and employee funde And the 2009 WREA RMD suspension does not apply to a nongovernmental 457b plan

Are there any required amendments?

Is anyone aware of legislative amendments needed for a 457(b) top hat plan? I can only think of a couple optional provisions - ie adding beneficiary hardship distributions, and differential pay - the ability to defer from diffential pay. One is PPA one is HEART, I am not sure what deadlines apply?

Page 4 of this ASPPA ASAP on qualified plan amendments, optional and required, for 2009, has as optional PPA plan provision Announcement 2007-59 language on mid year changes to safe harbor plans - ie to add Roth or hardship withdrawal for beneficiaries. I find this interesting! Does this imply you need this language in the plan in order to make these 2 changes, as no other changes are listed. http://www.asppa.org/document-vault/pdfs/asaps/09-42.aspx

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?