jaemmons

Assuming the only contributions made for the plan year are those which are used to satisfy IRC 401(k)(12) and/or 401(m)(11), the plan is not subject to the top heavy requirements (i.e.- minimum contributions)

Michael, You are correct that the 402(g) limit is a calendar year limit, so there is no proration during a short plan year. What does the plan document define as the "limitation year"? If it is the calendar year, you do not have a prorated 415 $ limit ($41,000) for the short year. Generally, if the limitation year is the calendar year, a change in the plan year does not result in a change in the limitation year, which would result in a prorata reduction in the applicable IRC plan limits. Unfortunately, the compensation limit (IRC 401(a)(17)) is prorated, regardless of what the plan defines as the limitation year, because you are using a period which is less than 12 months for compensation purposes.

I see your point. Thanks

Thanks Tom, I thought there was a section in Sal's "library" but I did not dig enough. In relation to the three plans I outlined, they all appear to have schedules which provide for benefits to vest at least as quickly as the top heavy schedules (fully vest after 3 years of service), so it appears that they would all satisfy the "deemed equivalency" rule under Reg. 1.401(a)(4)-11©(2). If one of the plans had a non-top heavy schedule, I would perform a BRF test. I know you don't have all relevant facts and circumstances, but do you agree that if a plan contains schedules which provide a vesting of benefits at least as quickly as the minimum vesting schedules under IRC 411(a)(2) & 416(b)(1), there would not appear to be any discrimination. Again thanks for your replies and assistance.

Thanks Tom, I agree that there might be some issues with your scenario, but effectively the owner and other employees will all be fully vested at the same service level. This is actually the point where I question what are we to test when comparing vesting schedules for potential BRF problems? Do we look at each schedule on a year by year basis, which does not make sense to me, because vesting is based on future years of service.?. I had always thought that the "manner in which benefits vest" is not considered a BRF which would need to be tested. Your example gives way to other 401(a) problems, but if the facts and circumstances can support the decision to maintain separate vesting schedules (e.g. - high turnover and associated admin costs with processing distributions and forfeitures), do we really have a BRF issue with vesting (especially if all ee's fully vest at the same service level)?

Controlled group has 3 plans, each of which contains the following vesting schedules: Plan A - 3 year cliff Plan B - 3 year graded - Year 1 - 33% - Year 2 - 66% - Year 3 - 100% Plan C - 3 year graded - Year 2 - 25% - Year 2 - 50% - Year 3 - 100% Since all employees fully vest after 3 years of service, does anyone see any problems with keeping these schedules? If one of the plans had a 6 year graded schedule (e.g. -2/20), would this make a difference, and if so, would you be testing how many participants would have the right to fully vest after 6 years? My thinking has always been to look at the maximum time period someone can become fully vested, in determining whether there would be a potential for discrimination. Thanks for any reply.

This is for a plan being reviewed for 2003 testing. I don't know why the client wants to treat it as an annual addition for 2004, but I wanted confirmation that I am not overlooking something which would allow them to do so. Make sense?

Client plan & fiscal years end 12/31/2003 They wish to make a profit sharing contribution in Feb '04 based on 12/31/2003 comp, but have it credited as a 2004 annual addition. I believe the contribution is deemed to be an annual addition for 2003 because it is being allocated as of 12/31/2003. Does anyone see anything which would contradict this conclusion? thanks

If a tax-exempt organization sponsors a 403(b) for salary deferral purposes, but makes matching contributions to a 401(k) plan, is the 401(k) plan subject to ACP testing? I believe it is, but just need some clarification. Thanks

Plan failed 12/31/2002 test and was using prior year nhce %'s. Client wishes to correct using the QNEC method, under the Self-Correction program under EPCRS. I need some clarification as to who is considered an "eligible non-highly compensated employee" for the QNEC. Can we use the plan's allocationi formula, which is currently a "bottom-up" approach or do we need to give the corrective QNEC to all employees who were eligible to defer in 2002, regardless of the plan's eligibility provisions for QNEC's.?.

Blinky, My logic is based on what compensation is used for adp testing purposes when you have statutory exclusions. The entry date is used to determine who would be included in adp testing. If a participant has a theoretical entry date past their actual entry date, you still must use compensation paid during their period of actual participation (assuming the plan uses this definition for adp) for determining individual adr's. Thus, even though you can use the statutory exclusion to determine who is in your "minimum gateway allocation group", their individual allocation rates should be based on the compensation used for the respective allocation (i.e.-profit sharing, top heavy). Am I wrong in this analysis?

Tom, With the PS having a two year wait, there is still confusion as to whether or not the allocation rates for those who only received top heavy minimums is based on their comp from their theoretical entry date or allocation comp for top heavy purposes. I thought that the entry dates are only to be used to determine who meets the 21/1 yos requirement during the year for 410b purposes, and not to determine allocation rates under the cross-testing regulations. Allocation rates are then determined based on the compensation used for the specific allocation (i.e.- top heavy uses full year and profit sharing uses from date of entry). Am I wrong with this analysis?

Thanks for the reply. I have another question. The profit sharing contribution has a two year wait. For those participants who do not yet meet the two year requirement but have a year of service and received a top heavy minimum, is their allocation rate for minimum gateway purposes based on full year comp (since this is what their top heavy benefit was based) or can it be determined based on the participation compensation from "theoretical" entry date (i.e.-entry date if they had worked one year). I remember reading something which leaned toward the latter of the two, but I cannot remember where I read it. Any thoughts??

Plan is top heavy for 2003. Eligibility for 401k is immediate but a two year wait for PS. Top heavy was given to all ee's who were eligible for 401k. This resulted in minimum gateway allocations above the 3% top heavy minimum. Can a plan at this point carve out the otherwise statutorily exclused ee's (i.e.-age 21 and 1 yos) and only provide minimum gateway increases to those who would have met the 1 year and age 21 during the plan year? If so, does the plan document need to contain language to limit top heavy minimums to only those who meet IRC 410(a)(1)?

In order for a rehire to have forfeited benefits restored, is a plan required to contain a "buy back" provision, as outlined in 1.411(a)-7(d)(4)((iv)? I have a plan with an individually designed document which calls for a restoration of forfeited benefits without requiring the rehired participant to pay back any distributions, and is requiring the establishment of a separate account for tracking vesting on these amounts upon rehire. ???? Let me put my question another way: If a plan document does not contain the repayment language, am I correct in stating that a plan cannot immediately forfeit a participant's non-vested accrued benefit because the plan does not fully satisfy the "cash out" provisions in 1.411(a). From my interpretation of the Regulations, it seems as if the non-vested portion would remain in the participant's account, unavailable for current forfeiture usage (i.e.- reallocation, other restorations, payment of plan expenses, etc.).

Initial plan year is from 10/1/2003 thru 12/31/2003. I know that the 415 $limit is not prorated, but what about 401(a)(17) and the integration level? From my understanding, the compensation limit under 401(a)(17) and the maximum permitted disparity level are to be prorated if contributions within a dc plan are based on compensation during this short period. Is this a correct assessment? thanks for any replies

If a 100% owner and his spouse (who is an employee of the corp.) are divorced during the current year, is the spouse considered an hce for the current year? I would think so, because even though the stock attribution rule no longer apply after the divorce, they did apply before the divorce. When does stock attribution no longer apply after a decree of divorce?

I have a new plan which covers 5 companies that are considered members of a controlled group. Last year, the prior TPA performed separate testing for each "division". Am I missing something which would allow for this? I did not think that you could restructure a plan and test separately with respect to related employers, when they are covered under the same plan. I know that as long as each member maintains a separate plan and is not aggregated for 410(b) purposes, they are tested separately. Does anyone know of any reason as to how they could be tested separately under the same plan?

Yes, if they are deposited to the same money type on your administration/record-keeping system.

Assuming all other requirements are satisfied when they come back from military service, in order to accrue benefits under USERRA, the hours and compensation used for allocation accruals must be based on a reasonable estimate of what he/she would have earned had they not left for military duty. In some circumstances where the "rate of pay" cannot be reasonably estimated, the employer should use an average from the 12 months prior to the leave. If his average 12 month hours is > 500, a 2003 forfeiture allocation should be earmarked for his account. I do not think the forfeiture amount is physically allocated to their account until they have returned to the employ of the employer and satisfied all other notice and leave requirements.

Hours and compensation are based on the "rate of pay" the employee would have been entitled to had they not left for military duty. If the rate of pay cannot be "reasonably" determined, the employer must take an average of the compensation and hours over the prior 12 month period ending on the date they leave for military services. I believe it is discussed in Section 4318 of Title 38 to the United States Code.

Actually, the adp test will pass before and after the "paper shift".: adp hce - 6.5% acp hce - 3% adp nhce - 3.5% acp nhc3 - 1% Initially fails, and need to refund 1% of hce adp% After refunds adp hce - 5.5% adp nhce - 3.5% PASSES acp hce - 3% acp nhce - 1% FAILS After borrowing down adp for BOTH hce's & nhce's to bring adp for nhce's to 2% adp hce - 4% acp hce - 3% + 1.5% borrowed from adp = 4.5% adp nhces - 2% acp nhce - 1% + 1.5% borrowed from adp = 2.5% PASSES PASSES

As per the 401(m) regulations, you may borrow elective deferrals for usage in ACP testing only if the ADP test passes prior to and after the "paper shift". However, if excess contrib refunds are processed to correct a failing adp test, logic would suggest, based on the Regulations, that deferrals can be borrowed to help a failing acp test pass. Does anyone agree/disagree with this thinking?

IRC 415 compensation does not exclude comp prior to participation. Therefore, if your document uses only the comp paid while a participant for allocation purposes, you need to request full year compensation.

You might want to look at IRC 404©(3), as amended by EGTRRA Section 616. I don't know of any advantage to the corporation for contributing to an ESPP than a 401(k). Without know the details of how the ESPP is structured, one major difference is the possibility of dividend deductibility within the ESPP. However, this does not constitute an "advantage" but an additional deduction for the company (assuming they meet the requirement in EGTRRA Section 662) for deductibility.