Bri

Does anyone have any experience with using Davis-Bacon / Prevailing Wage fringe amounts to fund cash balance plans for employees? Here's the setup - Sponsor has about 100 employees, and probably 75% of them work Davis-Bacon jobs, and they get serious fringe amounts. Like, amounts between 10k and 30k per year are not uncommon. We use them in their 401(k) test, for instance, and the representative contribution rate for targeted QNEC purposes is a very nice 16%. Anyway, the sponsor (or at least his CPA) was intrigued by the idea of a cash balance plan to get the owners (in their 50s) significant plan amounts. (Actually their DC plan is standalone 401k except for the Davis-Bacon amounts.) They don't even need all the D-B amounts in their ADP test, which would allow us to use still a bunch of them for 401(a)(4) testing between two plans. (DC plan would have individual allocation rates, basically being the D-B amount.) Could they steer some of those prevailing wage fringe amounts into a cash balance plan design? Figure we'd give most staff people a 3% of pay contribution credit and a 5% interest credit each year. For the majority of the folks, their fringe amounts would cover either or both of those additional accruals. Any issues preventing this? Is it really different from funding a DC plan's allocations with the Davis-Bacon amounts? I could imagine any particular labor regulatory board not being thrilled with funding their interest credit that way (although is that even necessarily true?), but I'm not sure I see much difference between putting $5,000 of Davis-Bacon money as a contribution credit into their DC account versus funding a cash balance contribution credit for them. Am I missing something (obvious or not)? Plus, the Davis-Bacon amounts are currently in the low twenties as a percentage of 404 payroll, so perhaps a CB plan alleviates some deductibility concern, too. (And would be PBGC.) Sponsor figures if he's got to contribute the 3% on top of what they're already going to get for their fringe, it's a dealbreaker, but if he can split the fringe between the two plans (required amount to CB, the rest as DC), he'd be more willing to proceed. Thanks. --bri

Too bad this is 2016 and not 2017 - Maybe coulda just -11g the excess above 23.164%. Otherwise you've got one HCE getting a little extra but an NHCE getting even more extra, so I think that might have flown.

I would suggest amending the plan in the future (before the first plan year you know will be TH, if possible) to provide the safe harbor match to non-key HCEs in addition to NHCEs. I've seen that in some adoption agreements, at least.

The catchup limit definition includes a reference to 415 wages, I believe, where you still can't have your regular deferrals + catchup deferrals exceed your wages. So if it's going to stay in the plan, it would have to be re-categorized as a profit sharing allocation. Then as his annual additions exceed his wages, some of the 401(k) being re-categorized as catchups. (But now the total 401k amounts are not greater than wages.)

Well, you don't have a case where money was withheld from a participant's pay and held onto by the plan sponsor. But rather the money wasn't withheld from pay at all. So I think that takes it outside the range of that question, since they're not so much "participant contributions".

I would probably review the plan document, just to shore up the wording of "payroll period" or "per paycheck" basis, how it exactly states that the match gets calculated. I could see an argument for either answer. And then if it's still open-ended, the Plan Administrator has to make the call, and stick with it as it might affect each individual participant going forward.

I, as an ERPA, get to pick the beer for the office on Fridays. But really, I think it's just stuff like that....VCP applications, determination letters, and audits of plans other than any actuarial calculations.

So the amounts being used to repay the loans aren't being included in their taxable income each week? (Either fringe or not)

What's the actual problem? Starting the successor plan too soon? Plan 1's termination at least provided a distributable event for the rollover.

Good point, Tom - I was still thinking in my head of a plan where there was going to be extra HCE PS anyway (like a "3 and 9" setup).

I'm not sure why you'd give any "little bit extra" as safe harbor rather than just profit sharing. At least as PS, you could impute disparity on the rate in any potential 401a4 testing

Then the excess portion represents an ineligible IRA contribution - get it out of the IRA with its allocable earnings

Personally, I think of GTR. When the heart rules the mind....

And of course, an optional in-service withdrawal would be an eligible rollover distribution with 20% withholding. A real RMD would not be.

Is "prime plus one" hard-coded into the loan procedures (or document) for the plan? Or is that just "what you normally do"? (I'm thinking of a "failure to follow the plan terms" operational error.)

Does everyone bring the dollar amount of the bond out to the nearest 10% dollar, then? I always wondered if the DOL looks and says, "Wow, a bond for $185,234...."

Sounds like vendor/platform issues, perhaps? I usually tell them what they've got coded wrong in their systems, when explaining if they're doing it wrong.

I recall at the first ERPA conference in Chicago in 2010, that we indeed did get an hour of credit for learning about how to get more CE. The woman from the IRS (I think it was Deborah Lorning, but not sure) mentioned she's not sure she would have approved such a class after the fact.

And if it IS a controlled group, the DB plan MUST cover both of them (for 401a26 purposes, presuming no other employees to consider)

I usually find that box 5 includes the 401(k) but not the SubS health, while box 1 has the SubS but not the 401(k). So it ends up being neither number.

Exactly. I think he's stuck until age 70½ or he re-retires. I suppose he could get creative and borrow half....

Is the sole prop the only key employee? If so, then if no Key is getting any annual additions....

They can apply a contribution as annual additions for 2017 as long as it's made with 30 days after their tax filing deadline. (415 rules) If so, they could take both contributions as a 2018 deduction, but I believe both amounts would be combined for the 404 calculation on the maximum.

I'd like to examine that "half a month" concept further. Does an 11/30 plan year end only have until February 14th? What if the checks are written before noon on the 16th? Having a plan checking account would have at least let the plan issue checks on the 15th, and worry about truing everything up with the custodian later....since I'm sure that's what the IRS would want to see under examination.

If you're missing only a handful of people, does the "feature" of early contributions nevertheless pass 410(b)?