Alf

First, of course, check the plan document to see what it provides. Second, GUST amendments (or any compliance amendments required to maintain the plan's qualified status) can be paid out of the trust . I would begin to worry about the paying the expenses out of the trust if the employer is also making design changes that aren't requred to maintain compliance with required law changes. Then you have an issue about having to apportion the expense or having the sponsor pay all of it as a settlor expense that isn't properly charged to participants.

I'll have a hard time advising clients to disregard the IRS's letter and its reliance on Temp Reg 1.414(q)-1T, Q&A-3©(2). I think that the point will be moot pretty soon, though, if the IRS ever releases new regulations on the changes to the HCE rules.

You don't know what you are missing. On a side note, I seem to recall hearing that the C/R distinction is going away with the new 5500 forms. Does anyone know if this is correct?

There is no answer to this one. I have heard several people state that it is ok to treat the plans as having merged on the first day of the plan year. This would mean that the sub plan wouldn't test for the 1/1-5/30 year, but the parent's plan would have to take the sub's compensation and deferrals for that period into account in performing the parent's 401(k) testing.

The 401(a)(4) regs state that each rate of matching contribution is a separate benefit, right, or feature that must be tested. My guess is that you will have to look at each employee, calculate the actual rate of match they got, and then test the group of employees at each rate.

Although you can make the technical case that only 5% owners are HCEs, that will never fly with the IRS. If it were, a company could just reincorporate under state law each year and never have to worry about nondiscrimination testing. Other than knowing that you can't ingnore the prior employer's information, there is no guidance on what to do.

Yes. IRS Notice 98-1 states that a plan using the prior year testing method may adopt the current year testing method for any subsequent testing year without any notification or filing with the IRS.

Check the provisions of the plan document regarding the adoption and amendment of the plan by individual employers. I doubt that employers are required to adopt the plan "all or nothing," so I'll bet that individualized changes can be made by adopting employers. Of course, the changes will need to be carefully documented.

The payment can be limited to $2,000 if the amendment is drafted properly. 411(d)(6) protects the balance that is in the plan at the time of the amendment, not any future earnings on those amounts.

SC should be able to terminate the plan and distribute all of the accounts under the Section 401(k)(10)(A)(i) rule allowing distributions on termination of a plan. All of the Section 401(k)(2)(B)(i) distribution rules are independent of each other so, if you otherwise qualify for one of them, distributions can be made without respect to the same desk rule.

I am a little confused by the facts in your post. Is the sub really going to issue stock options in its own stock (this would be very unusual for a sub that is owned 100%)? Or the sub going to issue options in the parent stock (this is usually what happens)?

Yes. In addition to restoring the contributions, the employer would be liable for an excise tax under the Internal Revenue Code. This excise tax is 15% of the amount involved in the transaction for each year (or part of a year) that the transaction went uncorrected. If the Internal Revenue Service (“IRS”) issues a notice of deficiency or assesses the excise tax before the transaction is corrected, and additional tax of 100% of the amount involved is imposed. An employer that is liable for this excise tax is required to file an IRS Form 5330 to report the transaction for each year in which there was a violation and pay the applicable excise taxes. Also, the prohibited transaction would have to be reported on the plan’s Form 5500 annual return.

The electronic plan guidance that was released early last year does not specifically address cafeteria plans. Also, the recent negative enrollment revenue ruling refers only to 401(k) plans. So, there is not anything official that authorizes negative elections in cafeteria plans. Nevertheless, I have seen unofficial IRS statements that there is nothing that specifically prohibits negative elections for these plans.

The terms of the plan document will control. There will probably be several different definitions of compensation that are each used for different purposes. Carefully review each of these to determine whether or not these payments are included.

I don't know if anything that prevents him from participating. If he is a resident alien (which I assume he is), your plan probably makes him eligible to participate (you may already know this). As far as accessibility, the normal 401(k) distribution restrictions would apply to him. Therefore, depending on the terms of the plan, he probably will not be able to get distributions of his elective contributions until the plan terminates, he separates from service, dies, becomes disabled, etc.

Electing out of a 401(k) plan itself raises several questions, but if it is done properly and the employee does not get ANY contribution under the 401(k) plan (profit-sharing, QNEC, top-heavy minimum, etc.), they should be eligible to make a deductible IRA contribution. Of course, any employee can make a nondeductible contribution to a traditional IRA, even if they are active participants in a 401(k) plan.

I've always understood the rule to be that the employer has to offer COBRA coverage under the existing health plan arrangement, even if the qualified beneficiary lives outside of the service area. Then, if the qualified beneficiary wants to pay for COBRA coverage that can't be utilized, so be it.

You are correct. In order to disregard non-highly compensated employees eligible to participate before they have completed one year of service and reach age 21 for purposes of the ADP and ACP tests the following requirements must both be met: 1) the plan must satisfy minimum coverage rules taking into account only the employees who have not completed one year of service and are under the age of 21; and 2) the plan must satisfy a single ADP test comparing the actual contribution percentage for all highly compensated employees to the actual contribution percentage for non-highly compensated employees who are eligible to participate and who have completed one year of service and reached age 21. Therefore, the ADP test considers contributions by ALL highly compensated employees.

Yes, PAX is correct. I have heard others mistakenly state that the partial termination of a 401(k) plan is a distribution event, but they are WRONG. Full vesting is the only consequence.

I agree with Dook. If the leasing company was really the common law employer of all of the employees, it wouldn't be sponsoring a multiple employer plan. Nevertheless, assuming that the leasing company IS really the legal employer of the owners and that the leasing company and the recipient company are not aggregrated under the Code section 414 rules, there is no reason to deny loans to the owners because of the prohibited transaction rules. I don't think that a "co-employment" (whatever that means) relationship would change this answer unless the leasing company and the recipient were treated as one entity under Code section 414 rules.

Again, technically, no unallocated amounts can remain in a dc plan after the close of the plan year (except 415 suspense accounts). As far as I know, this rule has not been officially "bent" for any reason. I suspect that its presence in prototype documents is a result of oversight rather than conscious acceptance by the IRS. If not, I would sure like to know about it. If a plan has been frozen for 11 years, isn't it a permanent discontinuance of contributions (which is a full vesting event in itself)? A terminating plan should be amended to permit forfeitures to be applied against plan expenses and the expenses of amending and filing the plan with the IRS should be charged against the trust.

I agree, although I think that the plan language is terrible. You picked the easiest example by stating that the hire date was 1/1. The more interesting (and difficult) question was poised by Dawn when she asked about a 1/2 hire date.

Is there a third possibility? Why wouldn't the general rule about contributions being funded before the due date for the ENTITY'S tax return apply?

No, if the participant is (and remains) single (which I presume he is if he wants to name his fraternity as his beneficiary). If the participant is married, his spouse will have to execute a qualified consent in connection with the designation.

It sounds like the original administrative services agreement would control your recourse. Hopefully, it speficies the format and timing required of requests for the transfers of records. It also should address your recourse for a breach. Unfortunately, ASAs are rarely negotiated very carefully (except for the fee and expense provisions), so it may not help you much. We frequently have to 'ride' recordkeepers that are being phased out in order to keep the transisions on schedule, although they really do not have anything to gain from drawing the process out. Good luck.