Medusa

Can anyone explain the significance of the following from EGTRRA? "SEC. 632. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO DEFINED CONTRIBUTION PLANS. (a) EQUITABLE TREATMENT.— ... (2) ... (B) by striking paragraph (2), and © by inserting ‘‘or any amount received by a former employee after the fifth taxable year following the taxable year in which such employee was terminated’’ before the period at the end of the second sentence of paragraph (3).

James and Tom: Thank you for your very thorough responses. We will probably advise the client to err on the side of caution in this case. M.

Yes, I was caught up in LCAT's issue and did not properly read your question. Richard is correct in his analysis.

This has been asked before by others, but with no responses, so I'll take another shot at it: Can a safe harbor match or nonelective contribution be made in employer stock instead of cash? I could find nothing precluding it. Any guidance appreciated. Thanks, Medusa

Sampat, in my opinion, the biggest hole is that it still does not comply with Notice 98-52. By making a 3.5/1 match on 6% of compensation, the total match is 21% of compensation, which clearly does not comply. My suggestion at this point is that you have a professional work up some numbers for you, instead of trying to do it yourself. This area is a minefield for the inexperienced. My personal opinion, especially now that the Three Eyed Fish has run numbers, is that you can't get anywhere close to doing what you want to do.

Sampat, The 5% gateway is for "new comparability" (aka "cross-tested") plans - which is what you would have.

What about Notice 98-52 Section VI B,4,b? "A plan fails to satisfy the ACP test safe harbor for a plan year if the plan provides for matching contributions made at the employer's discretion on behalf of any employee that, in the aggregate, could exceed a dollar amount equal to 4 percent of the employee's compensation."

By the way, Sampat, one problem you will run into with your 25%/3% scenario is that it doesn't comply with the cross-testing regulations, so at minimum you would probably have to bump that 3% up to 5%.

LCAT, although this satisfies the ADP safe harbor, I don't see how it satisfies the ACP safe harbor.

Sampat: As stated by Blinky, the arrangement you describe would have to pass the 401(a)(4) general test because it does not meet the safe harbor design requirements. Blinky points out that in 2002, the deduction limit, currently 15%, goes up to 25%, whereas the annual addition limit, currently 25%/35,000, goes up to 100%/40,000 (assuming your plan year is the calendar year). 401(k) deferrals still count as annual additions. To get $11,000 deferral plus a full 25% of pay, your compensation before the deferral would have to be no more than $116,000 ((40,000 - 11,000)/.25). If it is more than that, you will bump into the $40,000 limit and will not be able to get the full 25%. If that does not present a problem, AND if you can pass the general test, you should be able to do what you describe.

We have a client whose plan currently has a 401(k) component and a pro-rata nonelective contribution component. They want to add a third component, which would be a point allocation based on compensation and service points. Because of the demographics, they don't stand much chance of passing the general test. Their intent is to have this component be a non-design based safe harbor (uniform points plan), and to satisfy the average allocation rate test. The problem is, they won't be able to do this if they count all past service for the purpose of determining points. They only want to include service since the effective date of this component. Does anyone know if there is a way to do his without bouncing it out of safe harbor? Capping the total number of points doesn' t help because it affects a couple of NHCE's as well. I am also assuming that the points component and the pro-rata component can be treated separately for 401(a)(4). I figure if they could accomplish it in two separate plans, why not in one.

There is some discussion of this issue in Correcting Plan Defects Q & A column (Question 116). You might want to take a look at it.

To my knowledge, the definition of a master trust is "a trust holding assets of the plans of one employer or a group of employers under common control." I do not think that it anywhere has to actually be referred to as a master trust, in order to be one. We have more than one situation where the employer sponsors 2 defined contribution plans. They share a trust as specified in the document, although nowhere is the term "master trust" used. We are treating these as master trusts. In fact, it has been helpful, because we cannot split up the reportable transactions by plan. The arrangements are with a bundled provider who has established separate "sources" for each plan, but the schedule of reportable transactions is not split up by source. Filing a 5500 for the MTIA solved our problems in this area.

I believe that's correct. Crazy, huh?

And it is also full year for the purpose of determining 415© maximum annual additions.

I have a cross-tested money purchase plan with quarterly allocations. Contributions are 5% of aggregate compensation for employees employed on the last day of each quarter; these are then allocated on age-weighted basis. The key individual takes quarterly compensation of $32,500. However, in the second quarter he received a $68,000 bonus, which he won't receive in quarters 3 and 4. 1.401(a)(17)-1(B)(3)(iii)(A) seems to indicate that I can't consider more than $42,500 per quarter. As a result, he will get less for the year with the quarterly allocations than he would have with an annual allocation. Am I reading the reg correctly? The result makes no sense to me.

Is anyone aware of any guidance as to how long a time is "reasonable" for purposes of 72(p)(2)(B)? I have a participant who is applying for a 20 year loan for acquisition of a dwelling unit now that is intended to become the principal residence in 18 months (individual is intending to live there after retiring in 18 months). Is 18 months a "reasonable time"?

In a past life as a TPA, we did sign the occasional 5500, knowing full well that we shouldn't. This occurred in cases where the form was completed at the last minute, for whatever reason, and then the plan sponsor ended up being out of town on the day it needed to be signed. FWIW, there were never any repercussions. We always had the plan sponsor sign an amended return as soon as possible, then filed that to supercede the return that we signed.

I'm confused. If they never worked 1000 hours in an eligibility ocmputation period, they did not complete a year of service, so are excluded pursuant to your original statement. I agree that if they did satisfy eligibility but then failed to accrue a benefit due to hours, they should be coded as an active participant, but that does not sound like the case here. It almost sounds like you are saying they completed a year of eligibility service when they did not.

Partially for this reason, and partially for other reasons, I have found that when taking advantage of the deferment, I often have to go back and amend the first year's return to conform to the audit report.

Here is a differing opinion on whether an incorrect standardized prototype gets tossed out of standardized prototype status. I really don't know the answer for sure. http://benefitslink.com/boards/index.php?showtopic=9640

If the plan wasn't a standardized prototype, you could refer to the IRS Western Key District's EP/EO Newsletter (Fall 1998). Their conclusion was that you would have to provide the greater of 10% of compensation through the freeze date, or 7% for the whole year. Not all practitioners take this approach, by the way. However, my understanding is that with a standardized plan, you must use a 401(a)(4) safe harbor approach for allocating employer contributions. This would require a uniform rate of contribution for the whole year. Thus I believe you are stuck with the 10%.

Actually Andy, I'd begun to think you were following me!

How the final regulations will turn out is anyone's guess, but the following from ASPA's comments to Treasury on the proposed regulations: It should be clarified that gateway allocations in a year are necessary only for employees benefiting in that year. It should be clarified that for this purpose employees who would not benefit in the absence of special top-heavy rules are deemed not benefiting.

A standardized plan should require a contribution for all except htose who terminated with less than 500 hours of service. So you are correct, either the document is being misread, or the Service let something get through that shouldn't have. I have one like that, where the Service let a standardized prototype get through that doesn't require all related employers to adopt the plan.