AndyH

The situation I had in mind was one company with say 200 employees with a K plan who owns a subsidiary with 20 employees who have no plan. Is there anything prohibiting the larger company from adopting the safe harbor provisions for it's employees only, excluding the small subsidiary from eligibility for any plan? In this case, the "employees eligible to defer" and "NHCEs eligible to defer" are only in the larger company.

Q&A #10 from the 1994 gray book may be helpful to this discussion.

The relevant notices speak to "Employees eligible to defer" in terms of those who must receive the safe harbor. I have a similar question unresolved to my satisfaction regarding class exclusions (for example, providing the safe harbors to one company which is part of a controlled group, provided it can satisfy 410(B)). Our inhouse legal beagles say yes, you can do both, because there's nothing definitive that says you can't. I'd be interested to hear other interpretations of either question.

Thanks for the response. I understand that including a participation requirement is still uniform. That's clear in the regs. What makes no sense to me in a DC plan is projecting the earnings for 4-5 more years for someone participating at a late age, then converting that accumulation back at a lower annuity rate. That creates distorted results, which don't make sense to me. The participation requirement makes sense for DB plans, but I don't see the logic of using this for testing in DC plans. It helps with vesting, but vesting's not being tested in a cross test. Anyway, thanks again for the response. t se

Ther group includable in the ADP test is not the same as the a(4) test. In the ADP/ACP, you're testing the K&M. In the a(4) test, you're testing the discretionary. Therefore, you use the eligiblity for the discretionary, and the statutory exclusions for than group, e.g. T <501 hours. If the a(4) test must go to average benefits because one rate group is less than 70%, the K people must be brought in using that eligibility criteria. You can, however try permissively disaggregating based upon the maximum age/service if this helps, which often does not.

The Pension Answer Book Q&7 clearly states that the limit is 25% for a non-profit, although there is no cite given.

Our interpretation is that the amount up to the PBGC guaranteed level is immediately deductible, but the remainder should be deducted over 10 years. Of course,we also tell the client to confirm this approach with their accountants.

I find the language in the regulations to be unclear. For a cross tested DC plan, at what age are contributions converted to benefits when a plan, for example defines NRD as later of 62 and 5 years of participation. Assume a new participant becoming eligible at age 61. Is testing age 62 or 66? What about year 3 when the participant is age 63 but has a NRD of 66? I know this is the wrong Board, but would the answer be different for a DB which gives post NRA actuarial equivalent increases?

Does this mean that we have to issue SARs each year, whether we eat oysters or not? Will the format have to be changed?

I agree with Tom. The documents should specify which plan, and then which money type has priority. Some plans will refund the deferrals first, some will limit the employer contribution. Unfortunately, some point to each other, or each to itself, in which case I'd be inclined to give priority to the one subject to minimum funding (MP), (then fix the discrepancy).

I would appreciate opinions on reliance on failsafe provisions for cross tested plans which do not pass 401(a)(4) without failsafe allocations. I am aware than the IRS is often requiring failsafe provisions to be removed upon application for FDLs, but many are approved. Lets assume that a plan is established in 1997, has failsafe provisions, and passes by a reasonable margin. Then several NHCEs terminate, and it fails for two years, and does not appear likely to pass in the future. Is it an option to continue using failsafe allocations, which typically are much cheaper for the client than redesign? Would there be grounds for disqualification if it is no longer designed so that it projects to pass? Opinions? [This message has been edited by AndyH (edited 02-09-2000).] [This message has been edited by AndyH (edited 02-09-2000).]

The IRS notices on Safe Harbor Plans seem to define the requirements in terms of "eligible employees" or "employees eligible to defer". If a company is part of a controlled group, can only one company participate in a safe harbor plan (assuming 410(B) can be satisfied, or separately satisfied if each has their own plans, one of which is not a safe harbor)? Can a safe harbor plan exclude employees by classification?

Just to elaborate, you don't have to "cross test" by using equivalent benefits. You can also test on a contributions basis.

Thank you for the reply. Could you clarify your statement that the plan must pass coverage by the ratio percentage test if someone is excluded by name. Why? Are you saying that average benefits is then not an option? Yes, I was referring to a situation with cross tested discretionary allocations combined with the nonelective safe harbor.

Is it permissable to exclude HCEs from the Employer nonelective or match in a safe harbor plan, but allow them to defer? Is is permissable to exclude one of several HCEs by name or classification? A problem can arise with young HCEs in a cross tested plan, which raises these questions. Opinions?

Thank you Tom. Agree 100%.

Jim Holland said at the IRS Q&A session at ASPA (10/99) that conversion of a PS plan into a safe harbor K plan mid year is NOT permitted under current guidance, but that it will be allowed, retroactively to 1999. He indicated that guidance would be forthcoming. I have not yet seen it. P.S. He also said that doing this through a second (new) plan is ok, i.e. then merging. [This message has been edited by AndyH (edited 01-06-2000).]

Tom, thank you for the response, but I'm not completely following you. I've since looked into this a little more, and I think I have the answer, but would appreciate affirming or dissenting opinions. I think the answer is that the a(4) test would be done using the eligibility requirements of the discretionary component, excluding employees that are both statutorily excludable and not benefitting. The average benefit percentage test (part of the a(4) test) would include all employees, nobody excludable, because that aggregated "plan" has no age or service requirements. This is because we have to use the lowest age/service conditions of any aggregated plan in the testing group. I don't think we can exclude or dissaggregate because the K "plan" does not contain the statutory exclusions. Maybe I'm wrong, but that's my current take on the rules. I know this is different from the ADP testing rules, because now NHCEs can be excluded from the ADP test entirely if they don't meet the statutory exclusions. Comments?

Thanks for the feedback, Mo. We read it the same way, but it's helpful to hear other interpretations.

If a cross tested discretionary plan with a 1 year service requirement also has a K provision with immediate eligibility, does a terminee with 499 hours who deferred need to be included in the Average Benefits Test (if needed as part of a(4)). Said another way, who must be included, anyone satisfying the eligibilty requirements for any aggregated plan?

Any problems with offsetting a discretionary contribution (salary ratio, age weighed, tiered, whatever) by a 3% nonelective, such that all participants get at least 3%, but younger employees might get only 3%. This would be in lieu of an A + B approach. Obviously this would be subject to the general test, and the money types would be separately tracked for vesting, payment options, etc. I wonder about benefits, rights, and features, for example as a potential problem, in the case where the discretionary portion is available in-service. Thoughts?

I agree with all the responses. I think that failure to pay the full safe harbor amount results in plan disqualification. Any amount above the deductible limit is probably subject to the 10% penalty tax.