JDuns

May a plan be drafted providing a discretionary profit sharing contribution to all employees who (a) are employed on the last day of the prior plan year, (b) are credited with at least 1,000 hours in the prior plan year, and © are still employed on the "credit date" which would be approximately two months into the current plan year? It is clear that a plan can require both a last day and 1,000 hours requirement (1.401(a)(4)-2(b)(4)(iii)). However, I cannot find any authority permitting or prohibiting the "still employed on a second date" requirement. I believe that this would not be permitted but I need some authority to back me up. Any help out there?

To summarize the responses assuming that companies A and B were unrelated prior to the transaction in 2002 that made them a controlled group, A sponsored a plan prior to the transaction and B did not. For A's employees - vesting service will commence on the date A's plan was established (in the 1980s), unless the employee was hired after that date. For B's employees - vesting service will commence on the date of the transaction (when they become a member of the controlled group). If B had adopted a plan before they became part of the controlled group, vesting service would be counted for B's employees from the date the plan had been established. A's plan could grant more service (so long as it meets the non-discrimination requirements for granting pre-participation service) but could not ignore vesting service between the date of the transaction (in 2002) and the date B's employees are brought into the plan (in 2004) because all service within the controlled group must be counted (pursuant to -5(b)(3)(iv)(B).

My post was intended to point out that - unless the plan language limits comp to the 401(a)(17) limit for all comp except deferrals (as stated in the original post) - the plan must either cut off both the deferral and the match when the employee hits $200K or neither the deferral nor the match. Interpreting the plan one way for deferrals (allowing the employee to defer 4% of $300,000), the plan would need to match 50% of all of the deferrals ($6,000 total match) rather than matching only on the deferrals attributed to the first $200,000 of compensation (so matching only $4,000).

Because the prior employer did not sponsor a plan, I believe the pre-acquisition service may be disregarded under IRS Reg. 1.411(a)-5(b)(3) (especially i and ii). In the example for a merged plan that had been sponsored by two employers, the employees of each of the constituent employers were credited with vesting service from the date their prior plans had been adopted. And years of service with the employer for periods when no plan or predecessor plan has been maintained may be excluded. Combining these two concepts, I can argue (I think correctly) that the service must be counted from the acquisition. If the acquired company had a plan, I believe that the service must be counted from the date that plan had been adopted.

Most plans I have seen do not distinguish in the comp definition between the maximum comp for deferrals and the maximum comp for other plan purposes. If (as with most plan documents I have seen) the compensation definition is the same for both types of contributions and the plan document uses the same language (a participant can defer 1% to 15% of Compensation and participant will receive a match of 100% for the first 3% of Compensation deferred) I believe that the plan must either both allow the deferral and match ($12K deferral and $6K match in the example above) or cut off both ($8k deferral and $4k match). Only where the plan document specifically distinguishes the compensation definition can you reach a $12k deferral and $4k match (which I believe would be the correct interpretation under such drafting).

Employer (A) has a plan that they have maintained for many years for their employees. In 2002, they acquired (stock acquisition) another company (B) that did not sponsor any retirement plans. Company B employees will not commence participation in A's retirement plan until 2004 (when the transition rule expires). Can anyone craft an argument that vesting service for B's employees is not required to be counted before 2004? I can get to starting vesting service at the date of acquisition but can't get to a later date. Thank you for your help.

Does anyone else read the new regs to effectively require a safe-harbor plan to match contributions and to do the ACP test on the match? Thanks for your input!

The old system e-mailed me when there was a reply post so I apologize for not responding before now. If catch up contributions are not matched, classification of contributions between regular deferrals and catch-up becomes critical. Assume a person earning 100,000 wants to maximize deferrals (defer 14% of pay during 2003), if you assume that no contribution is a catch-up until a limit is exceeded, then all 14% of the deferrals from the first 22 pay checks are regular deferrals (matched), part of the 23 pay deferral would be regular deferral (matched) and the remainder of the 23 pay deferral and all of the 24-26 pay deferrals would be catch-up contribution (unmatched). If instead a portion of all 26 pay deferrals was classified as catch-up, the employee would receive the maximum available match. BTW, it is possible for a HCE (earning more than $240,000) to defer less than 5% of pay and still reach the $12,000 annual contribution limit. I realize the plan cannot consider more than 200,000 of pay in total but many providers consider this limit at year end and not during the year. Amanda, it sounds like you will be in effect adding a year end gross-up match if a catch-up deferral is reclassified as a regular match. Did you decide against matching the catch-up contributions as a financial decision, because of the discrimination (violating the higher rate of match) issue, or for other reasons.

I am still struggling with whether a safe-harbor 401(k) plan that wants to allow participants to make catch-up contributions may or must provide matches on those contributions. For purposes of this question, assume that the plan matches deferrals on with each payroll period (and does not make a year-end gross up) and that the plan matches 100% of the first 3% and 50% of the next 2%. If the catch-up contributions are not matched, how contributions are categorized during the year becomes critical. The IRS requires that all NHCEs be able to obtain the match to retain the safe harbor and if contributions are not deemed to be catch-ups until after a limit has been reached (generally the 402(g) limit), by definition the NHCE would not be eligible to receive the full match. If the catch up contributions are matched (to avoid the administrative issues alluded to above) and the catch-up contributions are disregarded for purposes of testing but the match is not, does that mean that an electing HCE has a higher rate of match than under 50 NHCEs (blowing the safe-harbor by violating 401(m)(11)(B)(iii)). Thank you for clarification.

We have found a vested participant was not legally working in the US. However, we have determined that she has a vested right to receive these benefits (just as she has a right to a final paycheck reflecting wages for her actual work). The question then becomes what to do with her vested account: (1) Pay her benfeit and report the distribution using the inaccurate SSN - I am very uncomfortable with this option. (2) Tell the participant that no distribution will be made until she presents us with a valid SSN or TIN. (So long as the participant has a balance in the plan, we must pay admin fees so this option is not ideal). (3) Do number (2) but then treat her as a lost participant (even if we know where to find her) and forfeit her benefits to the plan, to be restored if she later presents her valid SSN or TIN. The problem with this is how to handle the required withholding and reporting on 1099-R and SSA on form 5500. Does anyone have any other suggestions or opinions on the options listed above?

We have found a vested participant was not legally working in the US. However, we have determined that she has a vested right to receive these benefits (just as she has a right to a final paycheck reflecting wages for her actual work). The question then becomes what to do with her vested account: (1) Pay her benfeit and report the distribution using the inaccurate SSN - I am very uncomfortable with this option. (2) Tell the participant that no distribution will be made until she presents us with a valid SSN or TIN. (So long as the participant has a balance in the plan, we must pay admin fees so this option is not ideal). (3) Do number (2) but then treat her as a lost participant (even if we know where to find her) and forfeit her benefits to the plan, to be restored if she later presents her valid SSN or TIN. The problem with this is how to handle the required withholding and reporting on 1099-R and SSA on form 5500. Does anyone have any other suggestions or opinions on the options listed above?

We have found a vested participant was not legally working in the US. However, we have determined that she has a vested right to receive these benefits (just as she has a right to a final paycheck reflecting wages for her actual work). The question then becomes what to do with her vested account: (1) Pay her benfeit and report the distribution using the inaccurate SSN - I am very uncomfortable with this option. (2) Tell the participant that no distribution will be made until she presents us with a valid SSN or TIN. (So long as the participant has a balance in the plan, we must pay admin fees so this option is not ideal). (3) Do number (2) but then treat her as a lost participant (even if we know where to find her) and forfeit her benefits to the plan, to be restored if she later presents her valid SSN or TIN. The problem with this is how to handle the required withholding and reporting on 1099-R and SSA on form 5500. Does anyone have any other suggestions or opinions on the options listed above?

A participant with an account balance less than $5 has not completed a beneficiary designation and dies. The terms of the plan provide that the benefit would be payable to the participant's estate. However, I have been told that the participant did not have any assets and they did not intend to obtain a separate estate tax ID number. The TPA is indicating that they cannot pay the benefit without the estate's TIN. Any suggestions on how to handle this distribution?

Please forgive me if I am beating a dead horse but I am still not sure I agree. I do agree that 414(v)(3)(B) states that a "plan shall not be treates as failing to meet the requirements of section 401(a)(4) ... by reason of the making of (or the right to make) such contributions. So I agree that the code section would support the exclusion of catch-up contributions (but not any match attributable thereto) from the general test. I am a little concerned that the regulations do not say that (or even imply it). I note that Proposed regulation 1.414(v)-1(d)(3) (titled - "availability of CU contributions") states that the catch up contribution does not violate 1.401(a)(4)-4 "merely because the group of employees for whom the CU contributions are currently available." I read this reg. section as there is not a BRF issue when offering CU contributions. The reference to 401(a)(4) is conspicuously missing from 1.414(v)-1(d)(2) "contributions not taking into account for certain nondiscrimination tests".

Do you have any authority for the opinion that the catch-up contribution is disregarded when performing the general test?

I am trying to determine the factor used to convert DC contributions to an annuity for purposes of the average benefits test. Last year, the actuary stated that the 7-1/2% + gam 83(unisex) conversion factor was 9.5237. This year, they increased the interest assumption to 8-1/2% but still indicated that they were using gam 83 (unisex) and stated that the conversion factor was 9.6156. Since when interest rates increase, the conversion factor decreases, I was trying to find the "right" factor. Several years ago in connection with a different calculation, the same actuary gave me the 9.4903 conversion factor at 8-1/2% and GAM83 (without reference to male, female, blended, unisex or any other variation). My assumption is that they used a different variant of the GAM 83 mortality assumptions to get that number. Thank you for your help in confirming that the 9.6156 factor they used would appear to be incorrect.

The proposed regulations under 414(v) indicate that catch-up contributions are disregarded for a number of tests, however, 401(a)(4) is not on that list. My question is: can the catch-up contributions be disregarded when doing the general test?

What is the age 65, immediate annuity to lump sum conversion factor assuming 83 GAM (unisex) and 8 1/2% interest? I have been told both 9.6156 and 9.4903 In the future, how would I combine interest and mortality assumptions to verify the correct conversion factor?

Assume a company has two plans (a DB and Safe Harbor 401(k) plan). Does the addition of catch-up contributions have any impact on the safe-harbor status? I assume that if a plan has only the safe harbor match (100% match on first 3% deferred and 50% match on next 2%) and no excess matching contributions, it doesn't actually matter whether or not the catch-up contributions are matched because it would never apply. E.g, an HCE earning $200,000 or more contributing 5% (and getting the full match) would be contributing only $10,000. Therefore, to max out and make catch-up contributions, he would have to be making un-matched contributions. (Note that I am ignoring potential differences depending on the timing of the contributions during the year). So I conclude that a safe harbor plan can permit catch-up contributions, whether matched or unmatched, without blowing their safe harbor status (and it would be administratively easier to make the contributions matched). Do you agree? A last aside, any guesses when the proposed catch-up regs might be finalized?

It is my understanding that, even if you set up two IRAs, you must also provide a surety bond or letter of credit for an additional 25%. For example, the unrestricted amount for year 1 is $100,000 and the lump sum would be $1.5 M. The HCE could establish one unrestricted IRA holding $100,000, one restricted IRA holding $1,400,000 and provide a surety bond for $350,000 (possibly more if investments decrease in value). This "solution" is not palatable to the HCE so we are searching for another alternative.

For purposes of this question, an employee is not able to receive a lump sum payout because of 1.401(a)(4)-5(B) and plans to work until he dies. The plan provides that a surviving spouse may receive either the account balance converted to an annuity based on her life expectency or a lump sum. Please confirm that the surviving spouse is also restricted from receiving a lump sum because she would be receiving a death benefit not funded by life insurance on behalf of a restricted employee. Are there any options other than: (1) take an annuity, (2) provide a surety arrangement fro 125% of the lump sum amount pursuant to Rev. Rul. 92-76; or (3) amend the plan to add a new distribution option that is an annuity with a cash refund feature. Thank you for your thoughts!

For purposes of this question, an employee (in the top 25) will not be able to receive a lump sum payout due to 1.401(a)(4)-5(B) and plans to work until he dies. The plan provides that survivng spouses receive the account balance converted to an annuity based on her life expectency or a lump sum Please confirm that the surviving spouse is also restricted from receiving a lump sum because she would be receiving a death benefit not funded by life insurance on behalf of a restricted employee. Are there any options other than: (1) take a life annuity, (2) provide a surety arrangement for 125% of the lump sum amount pursuant to Rev. Rul. 92-76 (3) amend the plan to add a new distribution option that is an annuity with a cash refund feature. Thanks for your thoughts

Two plans were invested in a master trust. When dividing the trust into separate trusts (one for each plan) and allocating assets between the new trust, trust A received $200,000 of assets properly allocable to trust B. Trust A had losses for the time between the transfer and the present, while trust B has earned money. For purposes of this example assume that trust A actually holds $170,000 of the original $200,000 excess but trust B would have held $205,000 if it had received that excess. We are trying to determine the amount trust A should transfer to trust B: $170,000 (the amount it has left of the original transfer), $200,000 (the amount originally transferred), $205,000 (the amount B would have if it had received the original transfer), or something else. Note that both plans are overfunded, although A is less well funded than B. Thank you in advance for your input!

Has the DOL agreed that a plan adopting one of the interest rates specified by the IRS in Notice 96-8 can avoid making the whip-saw calculation? If the Treasury stops issuing 30 year t-bills (as a colleague tells me they have been threatening for years - note that the recently stopped issuing 1-year t-bills), do you think that all of the "safe-harbor" rates (that the IRS established to approximate the 30-year t-bill rate) would need to be revisited?

It appears that all of you concur that (a) If the individual got the check but did not cash it (for any reason), the distribution was completed and the proper treatment would be to reissue the net check and not change the original 1099r. (B) If the individual did not receive the distribution, amend the original 1099r to show $0, apply for a refund of the original withholding, reissue the net check ($1600 in the example), redeposit the withholding ($400 in the example) and issue a new 1099r. Note that (a) is the answer our former TPA applied for all lost participants. None of you suggested the answer recommended by our current TPA (amend the original 1099r to show $0 but withholding, reissue the net check for $1600 and issue a new 1099r with no withholding). Note also that the new TPA would change the answer on the 10% penalty if the second distribution would qualify even if the first would not have. Do I need to take issue with the new TPA?