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Over the years I have encountered plan consultants who perform cross testing using very different methods, some directly contradicting how others do it, some not knowing what the numbers mean and just assuming the computer did it right. I learned some of the basic rules regarding cross testing long ago, but after seeing such inconsistency among professionals, I would like to not only go over the basics but also become familiar with more involved designs, including cross testing for 401k plans. I've looked for online instruction/classes without any success. I would also welcome written instruction, especially if it includes examples. What type of resources and training is available for this purpose?

I would tend to say it's allowed. My reasoning would be that you could ask the same question about the many mutual funds that impose a $3,000 minimum initial purchase - it's likely that not every participant would be able to meet such a threshold.

Thank you all for your responses. The permanence aspect is a valid point and the employer has been informed that they shouldn't go more than just a few years before they make another contribution. At the heart of the issue is how the administrative cost will increase exponentially if the plan goes from having just 2 participants to several hundred. To Masteff's point, a cost analysis has determined that it would be less expensive to pay for the ongoing admin on a 2-life plan than to terminate the plan and then start up a new one once the employer goes back to just having 2 employees. As mention of a frozen DC plan was made, it appears that doing so is possible. However, since I've heard people refer to a plan as being frozen only because contributions are not being made, can this be taken to mean that it's OK for an amendment to also prohibit new employees from entering the plan?

A company sponsors a 401k plan where the two owners are the only participants (they are the only employees). They are planning on hiring dozens of people within the next few months and were wondering whether it was possible to "freeze" the plan via amendment so that these employees cannot become participants even if they would otherwise satisfy the plan's eligibility requirements. They do not want to terminate the plan because they will probably be back to just employing the owners in about 5 years, at which point they would "unfreeze" the plan and resume making deferrals and profit sharing contributions. Even though it's very likely that the overwhelming majority of these new employees will not defer and, therefore, not have any account balances in the plan, they would rather not have them participate as it would significantly increase the plan's administrative cost. Is it possible to do this?

Also, I believe if the compensation that can be considered for plan purposes is SE income, it's valid to do so since finalized totals usually cannot be determined until after the close of the year making deferrals allowable right up until the filing deadline (the deadline if SE income is involved would be 4/15).

A client recently mentioned that they received a 2012 1099-DIV for his qualified plan's account that incorrectly shows the earnings as being taxable. Although there is ample time for the investment firm to file a corrected form with the IRS, they are refusing to do so, claiming that they were never informed that the account was a non-taxable one, even though it has always been titled under the plan's name with the plan's trust ID number. The client even checked on the account's original application the box indicating that this will be a retirement plan account. The reasoning given by the firm is that years ago when the account's application was submitted, an additional box should have been checked indicating that the client believes the account is exempt from information reporting to the IRS (instructions for that box were very general and simplistic, with no details as to what type of reporting they were referring to). The client did not check the box because he knew he had to file 5500s every year and 1099Rs if distributions occur, and thus the account would not be exempt from information reporting. The investment firm is not acknowledging that the instructions for the box were vague and will only say they do not correct 1099 forms if it's the result of client error, as they deem this to be. Even if the client was "wrong" in not checking some box with poorly worded instructions on the application years ago, they will not accept that it may have been a misunderstanding and that they are now being given correct information that should result in a revised 1099 (they have been generating 1099s showing taxable earnings every year, but the client did not notice until now). The only help they can offer is that staring with the 2013 reporting, the earnings will be shown as nontaxable since the client sent them a W-9 showing the plan to be exempt the other day. Given that they now have accurate information and that the filing deadline has not passed yet, their reluctance to correct the 1099 seems to be a violation of the firm's responsibility - they are reporting a significant tax liability to the IRS that does not exist and will not do anything about it. What recourse does the client have? Is he forced to somehow file a corrected 1099 form himself (although finding one to fill out may be problematic)? Are there government agencies or watchdog groups that can be contacted for assistance and who can determine whether the firm is acting inappropriately?

A qualified plan is terminating and one of the participants who terminated many years ago cannot be located - her last known address is not valid and her SS# is not known. The amount due to the participant cannot be rolled over to a safe harbor IRA since a SS# is needed to do so, and presumably the SSA locator service cannot be used. The amount due is about $1,400, so hiring a private service to locate the individual may not be prudent since that would probably consume the majority of the benefit due, and it would seem very unlikely she would be found given the lack of available info. Are there any better options other than 1) escheating the amount to the state, or 2) paying it all out as 100% withholding? Are there any financial institutions that can set up an IRA without a SS#?

A plan was originally designed years ago with a 5-year cliff schedule and a 3-year cliff for top heavy years. When the plan was restated for EGTRRA in 2010 the vesting provisions were changed to say that a participant's interest will vest according to a 2/20 schedule, but for amounts contributed prior to 2007 the original cliff schedules would apply, specifically stating that the 3-year cliff schedule would apply for top heavy years prior to 2007. The plan actually operated liked this beginning with the 2007 plan year, although the doc wasn't amended until the EGTRRA restatement (the TPA said an amendment wasn't needed at the time and it was OK to wait until the restatement). The plan first became top heavy in 2011. There's a participant who terminated in 2008 with a very large account balance, the great majority of which was allocated to him prior to 2007. At the end of 2006, he only had 3 years of service and his entire balance was 0% vested under the old schedule. The small contribution he received in 2007 was vested under the 2/20 schedule and when he terminated in early 2008 he had a total of 4 years of service. From 2007 through 2010 he was shown being 0% vested in the large pre-2007 amount and 40% vested in the tiny 2007 amount. Now that the plan became top heavy in 2011, I am wondering if the vesting language, which is literally written as simply as I've described above, is adequate and whether it would be correct to still consider the pre-2007 amounts 0% vested? All help is greatly appreciated.

A plan was originally designed years ago with a 5-year cliff schedule and a 3-year cliff for top heavy years. When the plan was restated for EGTRRA in 2010 the vesting provisions were changed to say that a participant's interest will vest according to a 2/20 schedule, but for amounts contributed prior to 2007 the original cliff schedules would apply, specifically stating that the 3-year cliff schedule would apply for top heavy years prior to 2007. The plan actually operated liked this beginning with the 2007 plan year, although the doc wasn't amended until the EGTRRA restatement (the TPA said an amendment wasn't needed at the time and it was OK to wait until the restatement). The plan first became top heavy in 2011. There's a participant who terminated in 2008 with a very large account balance, the great majority of which was allocated to him prior to 2007. At the end of 2006, he only had 3 years of service and his entire balance was 0% vested under the old schedule. The small contribution he received in 2007 was vested under the 2/20 schedule and when he terminated in early 2008 he had a total of 4 years of service. From 2007 through 2010 he was shown being 0% vested in the large pre-2007 amount and 40% vested in the tiny 2007 amount. Now that the plan became top heavy in 2011, I am wondering if the vesting language, which is literally written as simply as I've described above, is adequate and whether it would be correct to still consider the pre-2007 amounts 0% vested? All help is greatly appreciated.

Thank you for your response. A 401(k) plan was one of the types that were being discussed, however they would prefer a PSP, as deferrals don't appeal to the contributing partner (it seems he isn't concerned about decreasing his personal tax liability). To 'exlude' the 2nd partner, perhaps a PSP can be set up that has an allocation group created for each participant (like a new comparability plan), and the decision every year is made to give 0% to Partner 2 - cross testing would pass since there are no NHCEs. Also, the doc would indicate that TH min benefits are only given to non-keys so that Partner 2 wouldn't require an allocation.

Partner 1 of a partnership wants to sponsor a plan but Partner 2 does not want to contribute at this time (they own the company 50/50). There are no other employees. Having Partner 2 sign a waiver of participation may not be the best option, as Partner 2 may want to start contributing somewhere down the line and such waivers I believe are irrevocable. Would it be acceptable for the plan doc to just use the name of Partner 1 as the definition of 'Eligible Employee', and then amend the definition once Partner 2 is ready? Thanks.

Most likely it does - a discrimination issue at the very least. Generally in such a plan, every participant should have the same opportunity to invest in every investment available in the plan - I couldn't see this happening with the car, or there being similar cars offered to the rest of the participants. BTW, the car shouldn't be used for personal reasons if it's owned by the plan, i.e., it shouldn't be driven or displayed, only stored, and, of course, be professionally appraised on a regular basis.

If a plan is being amended to eliminate its loan provision, is there a minimum number of days that must elapse between its adoption and effective dates? Also, is it acceptable to notify the participants no later than the amendment's adoption date? My understanding of protected benefits under 411(d) is that a participant loan provision is not considered to be an optional benefit and can be removed from a plan, as opposed to, e.g., an inservice distribution provision. All help is greatly appreciated.

Thank you both for responding. I'm glad the coverage aspect was brought up. I think that normally, even if a participant chooses not to defer, they are still considered to be benefitting because they have the choice to defer. It sounds like signing a waiver changes this? I know this setup may sound less than ideal for a 401k - it was established originally to accept a large RO of illiquid assets. The elderly owner is hoping to create permanency with just deferring a catch-up contribution every year (so testing won't be an issue). It's true that bonding is generally inexpensive , but the illiquid assets mentioned above are nonqualifying assets, making coverage rather pricey. We generally refer plans to a company that specializes in offering ERISA fidelity bonds who have cautioned us that most insurance companies that provide business liability policies onto which such a rider can be added will not cover nonqualifying assets.

There are 2 participants in a 401k plan, the owner and an nhce, and no other employees. Although the nhce has said he'll never elect to defer, it seems that the owner will still have to obtain a fidelity bond since it's technically an ERISA plan. Would the bond still be required if the nhce signed an irrevocable waiver of participation?

Couldn't the plan issue a 1099R using either codes 1,2 or 7, with the critical item being the amount reported as taxable? For example, if a plan purchasing an annuity from an insurance company to pay a participant is considered a non-taxable event, the participant would still be the recipient, zero would be shown as taxable, and the insurance company would then issue a 1099R for any taxable amounts or 1035 exchanges made afterwards, even if they're made in the same year as the initial annuity purchase.

After our neighbor was done showing us the new sports car he just bought his wife, my wife sighs and says "Why can't I have something shiny and new that can go from zero to 200 in a flash?". The next day I bought her a bathroom scale.

Thank you for the quick reply. The plan's investment policy does allow for 3rd party loans and, knowing the owner, he can justify the loan's prudence and produce collateral. Can it be considered a valid 3rd party loan even after the employee enters the plan since, technically, the plan did not lend money to a participant - or must it be now considered a participant loan? Not sure of the balance forward reference - I'm not familiar with that type of plan - this one is a traditional 401k which can have either/both participant and 3rd party loans. For the IRA loan, it is definitely the owner's IRA holding a loan to an employee who later became a 401k participant. I should clarify that either the IRA made the loan directly to the employee or the IRA acquired an existing debt that the employee had. The IRA is being held by a company who's known for holding assets that most IRA custodians wouldn't (or couldn't) normally hold, so I'm not surprised to see a note in one of their IRAs - perhaps this is one of those oddball situations. The owner's IRA, which owns a loan to an employee who is now also a participant in the plan, is being rolled over into the plan - sounds like it shouldn't pass the smell test but I can't point to any specific rule being violated. As for where I find these people, I guess I'm just lucky that way - I've been asked that question many times, especially after I've asked a colleague "Have you ever seen this in a plan......"

An employee (neither an owner, officer or relative of one) borrows money from the company 401k plan shortly before he is eligible to partipate. Is this construed to be a participant loan once the employee enters the plan? No payments or accrued interest have ever been shown on the loan, which I suppose could be acceptable if the loan is considered to be just a third-party loan that's structured as a balloon note. This same employee evidently has another loan that is owned by the owner's personal IRA. This IRA is currently being rolled over into the plan mentioned above. It does not appear that this would be a prohibited transaction since the employee isn't a party in interest - would this transaction be legally acceptable? All help is greatly appreciated.

For the amendment to be effective for 2010, it should have been signed before any participant became eligible for a 2010 accrual, e.g., before the participant worked 1,000 hours during the year if that's what's needed for an accrual. A 2010 BOY val, however, would be unaffected.

A Form 5307 is being filed for a determination letter regarding a volume submitter DC plan that is being restated, and the question has come up as to whether or not the employer would be exempt from the applicable IRS user fee. The form instructions for the 8717 say that the plan would be exempt if it "was first in effect no earlier than January 1 of the tenth calendar year immediately before the year in which the submission period for the plan's current remedial amendment cycle begins" Is this submission period considered to have started on 5/1/10 and will end on 4/30/16 since the deadline for the EGTRRA restatements was 4/30/10? If this is the case, the plan would seem to qualify for the exemption, as its effective date was 11/1/01 (and it's an eligible employer). In other words, plans effective 1/1/00 or later can be exempt from the fee - is this accurate?

A company with an existing PSP wants to start a SEP so that it can contribute to one specific employee who's not eligible for the PSP yet. Would all employees be eligible to participate in the SEP or can you just specify a class of employees to be eligible (e.g., owners' spouses)? All other employees would get a comparable allocation in the PSP. The PSP has a 1 year eligibility requirement while the SEP would have a 6 month requirement. There would only be 2 employees who would qualifiy for the SEP but not for the PSP. If most employees cannot be excluded from the SEP, would it be possible to 1) have those two employees waive participation from the SEP, and 2) not contribute to the other employees in the SEP since they would be getting comparable allocations in the PSP? I imagine you would have to combine both plans to do the crosstesting (since the PSP is a new comparability plan). All help is greatly appreciated.

Right - this would seem to make the PTE n/a in this case. I imagine another option may be for the ER to refund the plan for the reimbursement and have the plan pay the participants - yes, they would get paid twice, but at least the amts are small and the distributions would be made correctly. Do you think this would fly if the refund is made with interest within a year? The doc's "mistake of fact" provision only addresses return of contributions and is silent on erroneous payments.

A prohibited transaction, no? The immediate issue is whether or not to file 1099s - we're leaning towards not doing them since it wasn't the plan that paid the terminated participants. Luckily it was for a small amount ($300 between 2 participants, both under $200 apiece in a plan with about 40 lives). Technically, I suppose a 5330 s/b filed (perhaps guaranteeing an audit) and an IRS correction program should be used (is self-correction permissible for this?), but as a practical matter I can't imagine plans go through all this for the amount in question. What's the best way to handle this, especially the 1099 situation?

I believe the bond requirements are applied to the total plan assets and do not offer relief based on who has what asset in their account. BTW, they should at least "offer" the stock to all participants to minimize liability (but, as I've seen to be the norm, they'll make it sound terribly unappealing so they don't invest in it).