AndyH

If I understand the rules correctly, with some help from Tom Poje of this board, you can't do this in the manner you've indicated. I think you could do it by treating it as a separate component plan, as you suggested, but in such case I think each component needs to have a ratio percentage of 70% or higher, but this wouldn't be a problem if your otherwise excludable group is less than 30% of the total (assuming you have no HCEs in that component). I suppose it could, but in many cases it would not help your test, since the second component plan most likely includes the youngest people who are most likely to help the test. Tom, do I have this right? You can wait till after 3/15!

Many of our plans have the top heavy benefit be offset by the act equiv of a dc allocation, but I haven't personally designed any that have that provision. I think sdolce's comments about using the cross testing assumptions are very good points.

I don't know why, but I have rarely seen plans that give partial credit for vesting. I'm not sure why that is, perhaps to minimize recordkeeping. Even most (single employer) union plans that I've seen that give partial credit for benefit purposes have all or nothing vesting service. Any comments on that? I suspect it's just an unneeded hassle.

Scott: In my experience, these are more common with non-profits, who tend to have less HCEs and less turnover. Plus, the HCE's often have less service than the average employee. I agree that the benefits, rights, and features testing is required. It is often easily passed with a non-profit or any company meeting the above description, but in a regular company when the owner has the longest service, it's a flunker.

Paul, a couple of people in my office just wrestled with this same issue, in relationship to how to determine average comp in a DB plan (for 415 purposes)for such a person. For what it's worth, they (chief actuary and chief legal counsel) concluded that an "employee" should at least earn minimum wage, therefore the spouse was not an employee. This was just an off-hand conclusion, nothing researched. I'm not sure if I agree with that or not, but it's the opinion of two people I respect, and it's somewhat consistent with ERead's comments. Also, I mentioned on another thread or board that at the IRS Q&A session at ASPA's 10/2000 annual conference, the answer provided to a question about how to treat a partner with negative earned income in a general tested ps/k plan was that he/she was not in the tests (not a zero); does this mean not an employee, I wonder in the IRS' eyes? I don't know if that helps, and I don't recall any cites being given, but I presume there might be something supporting this answer that might affect your situation. I'd like to hear comments from attorney's who might have some info on the definition of "employee" that might be helpful.

I'd present the options to the client(s) and let them duke it out. But, first make sure they can be aggregated. They need to have the same plan year ends and virtually the same benefits, rights, and features, or you'll have to test those within each plan and it may fail. So, make sure aggregating them is an option first, then I'd leave it up to the client(s) to decide.

David, I've learned from links here that the answer is yes, but to exclude somebody on a "random" (i.e. by name) basis, you need to pass the ratio/percentage (70%) test. I've since researched this and agree. Summarized, this type of eligibility criteria would not qualify for the average benefits test for coverage purposes under 410(B), so you need to pass the r/p coverage test. If you are talking about the spouse of the owner, then she's/he's an HCE and it's easily passed. Hope this helps. Good question.

There is no question in my mind that Tom is correct (as usual), and that he has cited the correct authority. I have read this interpretation clear as day in at least 10 analyses of this subject.

It should be treated as a prepaid for the next year and the 10% penalty tax applies.

... or general test it on gross wages.

I agree it's discriminatory, although off hand I can't think of under what provision-maybe benefits, rights, and features. Or, possibly it could be deemed discriminatory in operation due to unequal timing of deposits. My company's documents do provide for preliminary allocations based upon preliminary compensation, and for true-up's at the end, so while it may be a document problem, it may not be. I've handled these (always Doctors!) by creating a holding account, then at the end of the year sweeping contributions and income (plus or minus) to each entitled employee. It is a major hassle, but I think it's the only correct way to handle this, unless the plan does not have a last day provision and a reasonable estimate can be done for each employee at the same time.

I'm not sure I agree. I don't have it with me, but you should look at the 5500 definition of participant. I know the 1998 definition said it included a person "earning or retaining" credited service. You might technically have to include anyone who was a participant during the year who did not work less than 501 hours. Bad design. Either way, have it changed.

There are many options. One that I used to use when I worked for a smaller firm was Intac Actuarial Services. Contact Max Rosenberg (President). I don't have their website but I know it can be obtained by a search for the company. They are in New Jersey (Ridgewood). Max is a great guy. If you are talking about small company, relatively inexpensive software, please give Max a call. His system should be one of those you consider. My current company uses a more sophisticated system. Max calls it "big plan software". He's a straight shooter, and his company has been around for a while. I have no affiliation with them. I just used to use their system, and I recommend it for small plans. Feel free to tell him Andy from RI recommended his system.

That makes sense. I was second guessing myself about the basis. Thanks for the input.

You might have a 415 issue. I have a similar situation that I've been wrestling with. I think the 415 limit for, say, someone retiring in November would be based upon the first day of the plan year in which the retirement date falls (i.e. the preceding calendar year, not the current calendar year). Hopefully I'm wrong, and somebody can convince me of that, but that appears to be the case. Mine is a 7/1-6/30 with calendar year pay, so I think it would be a problem for somebody retiring in May, but not July. Yours is not as easily avoided.

IRS Q&A 1 from ASPA 10/2000 conference may be helpful. Question is about treatment of partners with negative earned income in a 401(k) plan subject to general testing: How to treat? Answers: For ADP test, Not a zero. Not in test. For 401(a)(4), same answer. I would think this is essentially the same situation.

I would think that Employer A would have the obligation to determine what money is going into it's fund and what the nature of the money is. Employer A should require a written designation of what the money is for. It can't just accept money from any source without determining that it is acceptable under the plan. If money is coming out of an IRA, wouldn't the employee have to sign some sort of withdrawal form, and as part of that form designate the nature of the withdrawal. I would think this would generate coding on a 1099, but in any event it is the employee's responsibility to claim it as income or as deferred income as a result of a rollover. If the money is coming out of a plan of Employer B, Employer B would have withdrawal forms requiring a designation of where it's going and what type of distribution it is (i.e. direct rollover ), again resulting in a 1099 based in part on the employee's representation. But, again, the responsiblity is still on the Employee to declare the proper taxable income. If the money comes from a person's checking account, I would think that the employee would need to inform Employer A that a certain check is a repayment. Otherwise, Employer A has no way of tracking the repayment for forfeiture restoration purposes. I agree that the potential exists to bypass taxation by making misrepresentations, intentionally or not. But, that's where the fallback responsibility is, on the employee. I would think that it doesn't matter to Employer A what the tax implications to the employee of the repayment, just the purpose of the money going into it's plan. Just one opinion as a result of struggling with the same issues before. These were my conclusions.

I think Tom is right. Actually, I'm certain that Tom is right. Then again, that's not exactly going out on a limb, since I haven't found Tom to be wrong yet. But, be careful of his answers on April 1.

Yes, done as if each group subject to a different vesting schedule were in it's own plan.

I would think the answer is no, since the document probably says the contribution is due by the due date for the sponsor's tax return(s). But, couldn't you accomplish the same thing by filing an extension, then filing on time. Then I think the due date is the due date (including extensions) for the tax return, which is where they want to be. I'd suggest you check the language in the document about when the contribution is due.

Yes, but the current MRD is a part of the prior accrued benefit, which has already been fully paid out.

I agree it's 3% for the whole year, part fully vested and part subject to whatever the top heavy vesting schedule is.

I think you'd test it by determining the ratio percentages of each group subject to a different vesting schedule, as if they were different plans, then determine if each ratio percentage equals or exceeds the safe harbor percentages contained in the regs, in the same way that you would test different match formulas in a 401(k) plan.

Interesting idea. But,for 415, wouldn't you have to add back in prior distributions (calculated at different rates), convert them to current accruals at the current GATT rate, pay out the difference (total accrued less converted prior distributions)? Just a thought. That could get tricky. I'm not sure that would equal the current contribution.

I agree completely with MoJo. I've struggled with this before in a DB plan. I haven't seen a document that specifies the source of the money (though I'm sure there are some). The money being designated as a repayment takes on the properties of the initial payment (i.e. taxable and subject to the rules related to the original payment). I don't think it in any way is a rollover. If it comes from pre tax money, then a 1099 should be issued by the financial institution from where it came, and that should be reported as a distribution (not a rollover) on the individual's tax return. If it's not a rollover, it's taxable. Same for a conduit IRA. If it comes from after tax funds, I think it's taxable when paid out again. It still may be very worthwhile for a DB plan, or possibly any other plan if it restores a forfeiture, but makes no sense in other cases. I don't think that repayment and rollover belong in the same sentence. It comes from whereever it comes from, but it's taxable when re-distributed. Just one opinion. I haven't found anything in print on this.