QNPG

Because of the administrative burden of having to amend all SH plans to add the provision at the end of every plan year.

Prior to the proposed regulations issued May 18, 2009, there was no way to stop the safe harbor guaranteed NEC during the plan year, other than to terminate the entire plan. Effective immediately on May 18, 2009, a plan may reduce or eliminate the safe harbor NEC during the plan year, provided the following steps occur, and provided the employer has a substantial business hardship as defined in Code Section 412©. To do so: The plan is to be amended to remove the safe harbor NEC provision. The employees are to be provided a notice 30 days in advance of the safe harbor contribution being discontinued. The employees must have a chance during the 30-day period to change their deferrals. Prorate the 401(a)(17) compensation limit Although safe harbor contributions are made for a portion of the year, ADP and ACP testing will apply for the entire year. The proposed regulations also provide that the supplemental notice requirement is satisfied if each eligible employee is given a notice that explains: the consequences of the amendment reducing or suspending future safe harbor NECs; the procedures for changing CODA elections; and the effective date of the amendment. The reduction or suspension may be effective no earlier than 30 days after the notice is provided to all eligible employees. For a plan that is amended to reduce or stop the safe harbor contribution mid-year, when the safe harbor contribution is calculated for the portion of the year that it is to be provided (from the beginning of the plan year until 30 days after the notice is provided); the $245,000, 401(a)(17) compensation cap, must be prorated. Further, since the safe harbor contributions were not made for 12 months, the plan will be subject to the top heavy rules of section 416. see below. Also, to reiterate, the plan is subject to ADP and ACP testing for the entire year. The business must be incurring a substantial business hardship as defined in Code Section 412©: "For purposes of this section, the factors taken into account in determining temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan) shall include (but shall not be limited to) whether or not— (A) the employer is operating at an economic loss, (B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned, © the sales and profits of the industry concerned are depressed or declining, and (D) it is reasonable to expect that the plan will be continued only if the waiver is granted." This would apply to NHCEs as well as HCEs (or just HCEs)

Usually QNEC contributions fall under the same allocation requirement as the profit sharing contributions. Read your document for the alloc requirement. It may follows the PS OR uses the standardized 500 hrs or last day.

If the amendment affects a 401k Plan, I would say yes since it is impermissible to retroactively defer.

Sieve, I didn't consider the exception since I thought the requirement that there be no direct ownership was violated. (husband owns 100% of one and certain % of the other) Am I missing something?

Thanks, I really needed a good laugh.

BG, I read most of your posts...but who am I

If the contracted employees are paid by 1099, they would be ineligible to participate. Is that possible?

I thought the successory plan rule pertained to 401k plans and the ability to defer to that successory plan? If the plan terminates prior to purchasing the other company, why wouldn't it be eligible for rollover?

Benefit, right or feature. The additional match is listed in that Tres. Reg that I quoted previously. You could so long as you do not match deferrals in excess of 6% of comp and match itself does not exceed 4% of compensation.

Please see 1.401(m)-3, particularly section (d). You would fail to satisfy the requirements of 401(m)(11) with formula written above causing at least ACP testing. (not to mention a BRF test)

Since the plan document calls for the match to be allocated based on annual deferral and compensation figures, the amount that is funded each month does not ultimately determine how the match is allocated. You would look at the amount of match contributed for the plan year, and allocate it based on the annual deferral and compensation figures, based on the plan document. The amounts funded each month do not have a direct bearing on how the match is allocated. Under the terms of the plan document, the right to the match has been accrued by the participant(s) and funded for at least one person setting the allocation formula.

Question # 1. The way we understand the 133 1/3 rule is that we look at the annual rate that generated the total benefit, e.g., I can provide a benefit of $100 per year of past service benefit with past service limited to 5 years. Past service is defined as service prior to the effective date of the plan. The total past service benefit at the effective date of the plan will be $500.00. In testing for compliance of the 133 1/3 rule, I would be looking at the $100 not the $500. Question #2. Yes. The regs stipulate that a cash balance must comply with the 133 and 1/3 rule. Question # 3. See answer to item # 1.

Chapter 5 - Section 415 Limits, Section II, Part D, Correcting excess annual additions of the ERISA outline: -------------------------------------------------------------------------------- 1. EPCRS correction method for excess annual additions. Section 6.06 of Rev. Proc. 2008-50 prescribes the correction method for “Excess Amounts,” which are defined to include excess annual additions under a defined contribution plan. The effective date of Rev. Proc. 2008-50 is January 1, 2009. Prior to 2009, the EPCRS also was available to correct excess annual additions, but the regulations under IRC §415 (prior to the finalization of amended regulations on April 5, 2007) also included corrective mechanisms. See 2. below. Cross-reference tip. A complete discussion of the EPCRS procedure is provided in Section VI of Chapter 15. The corrective mechanism for excess annual additions is also addressed in that section. 1.a. Excess annual additions relating to elective deferrals or after-tax employee contributions. To the extent that the excess annual additions relate to elective deferrals or after-tax employee contributions, the corrective mechanism is to distribute the excess amount (with attributable earnings). See section 6.06(2) of the EPCRS Procedure. An ordering rule is prescribed for making the correction when the violation involves IRC §415:> ✔ First, distribute unmatched after-tax employee contributions (if any) ✔ Second, distribute unmatched elective deferrals (i.e., both pre-tax elective deferrals and designated Roth contributions), except to the extent that the elective deferrals are properly characterized as catch-up contributions (see 1.a.4) below) ✔ Third, distribute matched after-tax employee contributions, where the excess is apportioned between after-tax employee contributions and the associated match, based on the matching formula (e.g., if the match is 50% of the contributions, then the excess is apportioned on a 2:1 ratio of after-tax employee contributions and related match) ✔ Fourth, distribute matched elective deferrals, where the excess is apportioned between elective deferrals and the associated match, based on the matching formula. The portion of the excess attributable to matching contributions under the third and fourth steps above is deducted from the employee’s account balance and allocated in accordance with the Reduction of Account Balance Correction Method described in 1.b. below. 1.a.1) Example. A 401(k) plan allows for elective deferrals, both pre-tax and Roth. After-tax employee contributions are not permitted. The plan matches 50% of the first 6% of compensation deferred. Henry has excess annual additions totaling $6,600. Henry made elective deferrals totaling $15,000 for the limitation year. Henry’s compensation is $200,000, so only the first $12,000 deferred was subject to matching contributions, and the remaining $3,000 of elective deferrals were unmatched. All of Henry’s elective deferrals were pre-tax elective deferrals. Under this correction method, the Henry has made enough deferrals to use the distribution rule described in 1.a. above to correct the IRC §415 violation. Only the second and fourth steps described in 1.a. above apply, because there are no after-tax employee contributions allowed under the plan. To correct $6,600 of excess annual additions, $5,400 of Henry’s elective deferrals are distributed and $1,200 of his match is forfeited and corrected under the Reduction of Account Balance Correction Method described in 1.b. below. This is determined as follows:> (1) Total amount of elective deferrals: $15,000 (2) Amount of elective deferrals subject to match: $12,000 (3) Match on amount in (2): $6,000 (4) Excess annual additions: $6,600 (5) Unmatched elective deferrals to be distributed: $3,000 (i.e., (1) minus (2)) (6) Remaining excess after step (5): $3,600 (i.e., (4) minus (5)) (7) Remaining excess attributable to elective deferrals: $2,400 (based to 2:1 ratio of deferrals to match, or 2/3 x the amount in (6)) (8) Remaining excess attributable to match: $1,200 (based on 2:1 ratio of deferrals to match, or 1/3 x the amount in (6)) (9) Total corrective distribution: $5,400 (i.e., (5) + (7)) (as adjusted for earnings) The corrective distribution described in (9) is adjusted for earnings. The remaining $1,200 of the total excess annual additions, which is attributable to match (as shown in (8)), is subtracted from the account under the Reduction of Account Balance Correction Method described in 1.b. below. 1.b. Excess annual additions attributable to other amounts. To the extent the excess annual additions are attributable to employer contributions (i.e., matching contributions and/or nonelective contributions), the Reduction of Account Balance Correction Method prescribed in section 6.06(2) of the EPCRS Procedure applies. Under this method, the affected participant’s account balance is reduced by the amount of the excess annual additions (as adjusted for earnings). If such amount would have been reallocated to other participants in the year of the failure, then the excess amount (as adjusted for earnings) is allocated to such participants in accordance with the terms of the plan. If such amount would have not have been so allocated, then the excess amount (as adjusted for earnings) is placed in an unallocated account and used to reduce employer contributions (other than elective deferrals ) for the current year or, if necessary, subsequent years. In the example in 1.a.1) above, the $1,000 of matching contributions that is considered to be part of the excess annual additions is corrected through this Reduction of Account Balance Correction Method. This method is really a blending of Method #1 (to the extent reallocated) and Method #3 (to the extent credited to the unallocated account for allocation in subsequent years) that had been prescribed by the old IRC §415 regulations, as explained in 2.b.1) and 2.b.3) below.

IDP document = Individually designed document a.k.a. not pre-approved by the IRS as to the form of the plan.

Is it permissible to recognize past service for benefit accrual purposes in a cash balance plan? My instict is to say no since upon choosing the cash balance addendum in the IDP DB document the entire benefit accrual section, which contains the provisions for crediting past service, is greyed out. If my insticts are correct, I'd appreciate someone explaining WHY??? Thanks for any help!

Under Code Section 414(b), if a company is a member of a controlled group for any part of the year, it is a member of the controlled group for the year, so in my humble opinion, you would be required to test them together for 2010. I do not think that Section 410(b)(6)© transitional period applies to the top heavy requirements. From Chapter 11, part H of the ERISA Outline: 2. How to calculate the prior year ADP or ACP of the NHCs when there has been a plan coverage change in the testing year. If a plan coverage change occurs, and the plan is using the prior year testing method to perform the ADP test (or ACP test), the plan must determine how many prior year subgroups are to be represented in the prior year percentage that is used by the plan. If there are two or more prior year subgroups, the weighted average ADP (or the weighted average ACP) of those prior year subgroups is used as the ADP (or ACP) of the NHCs. See section VI.B. of Notice 98-1; Treas. Reg. §1.401(k)-2©(4)(i) and §1.401(m)-2©(4)(i) and section VI.B. of Notice 98-1. 2.a. Definition of a prior year subgroup. A prior year subgroup consists of all NHCs who, in the prior plan year, were eligible employees under a 401(k) arrangement (or 401(m) arrangement, in the case of the ACP test) maintained by the employer and who would have been eligible employees under the plan being tested if the plan coverage change had first been effective on the first day of that prior year. See section VI.D.2. of Notice 98-1; Treas. Reg. §1.401(k)-2©(4)(iii)(A) and §1.401(m)-2©(4)(iii)(A) and section VI.B. of Notice 98-1. Company X maintains two 401(k) plans. Plan #1 covers its employees in Dallas. Plan #2 covers its employees in Kansas City. The two plans are merged. The resulting plan is Plan #1. This is a plan coverage change. For the plan year in which the merger occurs, the Dallas employees represent a prior year subgroup under Plan #1. They were eligible in the prior plan year (i.e., the 2004 plan year) for a plan maintained by the employer (i.e., Plan #1) and, had the merger occurred in that year instead, they still would have been eligible for the plan being tested (Plan #1). The Kansas employees represent a second prior year subgroup under Plan #1. They were eligible in the prior plan year for a plan maintained by the employer (i.e., Plan #2) and, had the merger occurred in that year instead, they still would have been eligible for the plan being tested (Plan #1). Since, in the Dallas employees and the Kansas City employees were covered by two different plans in the prior plan year, they represent two different subgroups. Therefore, if Plan #1 uses the prior year testing method for the plan year in which the merger occurs, the weighted average of the prior year ADP and ACP from both Plan #1 and Plan #2 will have to be taken into account. See the example in 2.b.2) below for an illustration of how the weighted averages are calculated.

Where a plan benefits employees of two or more employers that are not related within the meaning of IRC §414(b), © or (m), the plan is a multiple employer plan, and coverage and nondiscrimination testing must be performed on a disaggregated basis. See Treas. Reg. §1.410(b)-7©(4) (employees of each unrelated employer are “disaggregated populations” - see §1.410(b)-7©(4)(ii)©). This also applies to ADP and ACP testing. The following are the only things for which a multiple employer plan maybe treated as a single plan: 1. Eligibility. In IRC §413©(1), the plan must apply the minimum age and service requirements under §410(a) as if the employers are a single employer. For example, service with all the participating employers is counted in determining an employee’s eligibility to participate in the plan. 2. Exclusive benefit rule. In IRC §413©(2), the exclusive benefit rule is applied as if the employers are a single employer. This permits the allocation of contributions and forfeitures across company lines without violating the rule that an employer's contributions must be made for the benefit of its employees and former employees. The exclusive benefit rule is discussed in Chapter 3B (Section XII) of the ERISA outline. 3. Vesting. IRC §413©(3) treats the employers as a single employer for vesting purposes. For example, service with all the participating employers is counted in determining an employee's position on the vesting schedule. See Chapter 4 (Section IV, Part F) of the ERISA outline. 4. Section 415 limits. If a plan is maintained by more than one employer (i.e., a multiemployer plan or a multiple employer plan), benefits and contributions attributable to a participant from all of the employers maintaining the plan must be taken into account. See Treas. Reg. §1.415(a)-1(e). To apply the IRC §415 limits with respect to a participant, total compensation received by the participant from all of the employers maintaining the plan is taken into account, unless the plan specifies otherwise. See Chapter 5 (Section V, Part F) for more details. For example, in a multiple employer plan that is a defined contribution plan, the compensation from all the participating employers is aggregated to determine the participant's §415© limit and the annual additions in the plan with respect to all the participating employers are aggregated to determine if the limit is exceeded. If the employers had maintained separate plans this rule would not apply, and the section 415 limits would be separately determined for each employer because they are not part of a related group. Hope this helps.

My two cents: My first concern was whether it was a BRF issue but it is not. "Benefits" for purposes of the availability tests does not encompass the allocation or benefit formulas under which the participants accrue benefits under a plan or the requirement to receive such contribution/benefit. Those allocations or benefits do not have to be available on a nondiscriminatory basis, but the allocations or accruals must satisfy the nondiscrimination test. My guess would be to make sure it satisfied 410(b) rate group test - don't see a problem with that either since you're favoring NHCEs. I would also make sure your document could provide for a different allocation requirement for different classes of employees. May require entire restatement if the document doesn't support that option on its pre-approved format.

Sure! I do a lot of research for my company so I knew where to look.

Does this help: The following examples, taken from the regulations, illustrate the special gateway test and the alternatives. 5.e.1) Example - DB plan does not cover any NHCs. An employer maintains two plans, one DB plan and one DC plan. The DB plan covers only HCEs. The DC plan covers only NHCs. Since the DB plan cannot satisfy coverage on its own, because it covers only HCEs, it must be aggregated with the DC plan in order to pass coverage and nondiscrimination testing. The aggregated plans constitute a DB/DC plan for coverage and nondiscrimination testing purposes. Since none of the NHCs participate in the DB plan, there is no way for the DB/DC plan to satisfy either the “primarily defined benefit” test or the “broadly available” test. Therefore, the plan will have to satisfy the special gateway test or it will not be able to be tested on a benefits basis to show compliance with §401(a)(4). 5.c. What is the special gateway test for a DB/DC plan? The special gateway test referred to in 5.a. above, which is prescribed by Treas. Reg. §1.401(a)(4)-9(b)(2)(v)(D), requires that each NHC's combined normal allocation rate (i.e., the sum of the NHC's allocation rate under the DC plan and the NHC's equivalent allocation rate under the DB plan) not be less than a minimum percentage, based on the highest HCE rate. The highest HCE rate is the highest combined normal allocation rate applicable for any HCE who benefits under the DB/DC plan. If the highest HCE rate is 15% or less, then the minimum combined normal allocation rate for the NHCs is one-third of that highest HCE rate. If the highest HCE rate is more than 15% but not more than 25%, then the minimum combined normal allocation rate for the NHCs is 5%. If the highest HCE rate is more than 25%, then the minimum combined normal allocation rate for the NHCs is 5% plus 1% point for each five percentage points (or portion thereof) that the highest HCE combined allocation rate exceeds 25% (e.g., 6% if the highest HCE rate is more than 25% but not more 30%). Like the regular gateway contribution test that applies to a cross-tested defined contribution plan, the combined normal allocation rate may be calculated using any definition of compensation that satisfies IRC §414(s). 5.c.1) 7½% safe harbor alternative. In an important change in the final regulations, a safe harbor alternative deems the special gateway as satisfied if the combined allocation rate for all NHCs is no less than 7-1/2% of section 415 compensation, even if the special gateway would otherwise require a higher allocation rate. (In other words, the 5% test under the regular gateway contribution test is increased to a 7-1/2% test.) 5.a.2) Exception for safe harbor floor-offset arrangement. If the DB/DC plan consists of a floor-offset arrangement, it is not subject to the special gateway test if it is a safe harbor floor-offset arrangement, as described in Treas. Reg. §1.401(a)(4)-8(d) (as described in Part B.2. of Section VIII of this chapter), and the preamble to the final regulations confirms this as well.

I have currently submitted aproximately 40 CB/401k offset plans. This process began back in June of 2009. After two deficiencies from the IRS agent, we prepared the requested changes and sent them in and are now waiting for the first letter to be issued. I know that there is a buzz in the industry regarding the legality of these types of arrangements. Has anybody received a favorable letter on this arrangement? If so, how long did it take you to receive it? Any suggestions or guidance would be appreciated. Thanks, everybody.

The Corbel document will notify you that this is an error (during validation) when you try to impose a last day requriement on a payroll by payroll match. If I am not mistaken, the entire section pertaining to the EOY req would grey out when the payroll option is chosen. There is also some mention in the commentary to that question that it is not allowed.

I really enjoy the humor and REALLY enjoy the wide range of topics being discussed.