Fred Payne

Tom: As usual, you had the answer. I spoke with an ERISA attorney just now on another matter. He confirmed what you said. In the test, I use only the comp while a participant but allocate the THM. Thanks as always.

Plan documents call for comp only while a participant. Two entered the plan at start of 4th quarter. They are included with others in an allocation group. Plan passes test based on Ratio Percentage Test using a 6% allocation and I have only including their 4th quarter comp. Because Plan is Top Heavy, they are entitled to the top heavy minimum. 3% of full year comp is more than the 6% of the eligible 4th quarter comp. Do I simply give them the larger of the two amounts without further testing? Or do I run the cross-test using a 3% allocation and their full year comp? If I have to do the latter, the cross-test fails at 3%. I have to raise the allocation back to the 6% rate to again pass the cross test--an amount that is twice the THM. Your comments are as always greatly appreciated.

Tom, As always, I greatly appreciate your comments. I've been using Relius to double-check the calculations I perform in a spreadsheet, and given the early 401(k) entry of this particular plan, my calcs were off on those participants who entered mid-year. Another question about whether Relius is handling things correctly. When Relius runs the Average Benefit Percentage Test, it brings into the population participants whom it excluded from the Ratio Percentage Test, specifically those who had less than 501 hours and were termed. (I test separately those who failed to meet Age and Service requirements.) If I have to perform the Average Benefit Percentage Test because of a Ratio Percentage Test failure, do I include the termed participants who had less than 500 hours and were termed? Thanks.

Tom: I spent some time sleuthing out how Relius will calculate the scenario I described. Relius will calculate the EBAR for the Ratio Percentage Test based on the 2nd half comp. No confusion in this regard. But Relius computes the EBAR for the Average Benefit Percentage Test in one step, and not two as you guessed. Relius takes the Total Allocation (PS and 401(k)), calculates the Annual Benefit Accrued using the Total Allocation and divides the Annual Benefit Accrued by full-year comp to determine the EBAR. If I calculate the EBAR for the 401(k) deferrals alone based on full year comp and add it to a separate calculation of the EBAR for the PS contribution based on second half comp, I get a much higher Total EBAR than using the Relius methodology. The totals of the Annual Benefit Accrued using your suggested method vs Relius's is the same. The difference comes about because the separately computed Annual Benefit Accrueds of the PS vs. the 401(k) contribution are divided by different denominators, one of which is significantly smaller than the other because it's only second half comp. The resulting EBAR of the calculation using the smaller denominator is going to be a lot higher as a result--as will the total of the two EBARS. Is Relius doing it correctly? Thanks.

Assume a cross-tested 401(k) with profit share eligibility requirements of 1 Yr, 1,000 Hours and 1/1 and 7/1 entry dates. For the participant entering 7/1, only comp earned in the second half is eligible for an allocation. The Plan, however, allows for participation in the 401(k) upon commencement of employment. The Average Benefit Percentage Test is needed to pass the cross-test. For the Participant who becomes eligible for a PS allocation on 7/1, only the 2nd half comp is used for calculating the PS contibution. However, do I use this participant's full year comp and full year deferrals when calculating the EBAR for the Average Benefit Percentage Test? If you think I should use full year comp and full year deferrals, would your answer be different if the Plan did not allow for immediate participation in the 401(k), but a participant could only defer starting the 1/1 or 7/1 after having met the 1 Yr, 1,000 Hours requirements? Thanks.

Tom: I'm still struggling. Please help me interpret the content of a Correction Methods Report I get from Relius, and some of my other confusions might clear up as a result. PER RELIUS: For year 2003 Paricipant X, one of three HCEs, deferred $13,455.09. The SBJPA Distribution Amount Prior to Catch-up is determined to be $4,797.37. $2,544.91 is recharacterized as a Catch-up contribution, resulting in a distribution to Participant X of $2,252.46 (prior to allocable income). So net deferral for Participant X is $11,202.63. You stated earlier that your "understanding is that catch-ups would not be included in testing (I suppose prior year catch ups would be included if one was using accrued to date)." When I perform the cross-test for Participant X, do I include $11,202.63 as Particpant X's deferrals because it is less than Year 2003's 402(g) limit? Or do I only include $8,950.17 (the $11,202.63 minus the $2,544.91 recharacterized as Catch-up per the Correction Method)? I am assuming the amount of the corrective distribution does not enter into the cross-test calulation at all. I'll have a follow up question, but I don't want to "muddy the waters." Thanks.

Tom: So that I understand your comments: Assume the correction for an ADP failure is that, from his gross deferrals of $14,000, an HCE gets a refund of $1,600, has $2,000 classified as a catch-up and has 402g limit deferrals of $10,400. When the cross test is run, all that is included in the various test is the $10,400. Correct? THanks.

Tom, Your answers always make my brain hurt. I need to work through this one. I think your answer is geared more to my second question. But what about the first question? In those situations in which the ADP is passed--whether or not it's a safe harbor plan--the catchup contributions are not included in the crosstest calculations, i.e, no part fo the Ratio Percentage Test or the Average Benfit Percentage Test. Is this correct? Thanks.

Two questions about 401(k) Catch-up Contributions and cross-testing. #1: Assuming there are no problems with passing the ADP, for the various crosstest cacluatlions I undertake, I can ignore all catch-up contributions. Correct? #2: This question assumes the answer to #1 is that I can ignore the catch-up contributions. But what if the ADP test fails? For example, Participant A deferred $14,500. For the initial ADP test, I assumed deferrals of $13,000 and $1,500 of catch-up. My ADP correction calcs results in a refund of $3,300 for a net 401(k) contribution of $11,200, $3,000 of which deferrals were reclassified as catchup contributions. When I run the crosstest, do I include only $8,200 in deferrals ($11,200 minus $3,000)? Or do I assume $11,200? Thanks.

Thanks, Tom. And thanks, Blinky. ERISA Outlines further states that the possible expansion of the coverage group arising from dual eligibility "will occur until all the employees subject to the more liberal eligibility rules have satisfied the more restrictive rules applicable to other employees." Corbel's PPD ERISA Research Guide gives a lengthy example in which this sort of coverage failure is illustrated. However since the example has for early entry under the dual eligibility provisions a hire date up through the last day of the first Plan Year, and since the only HCEs are hired in the first half of the first plan year, the coverage failure in the second plan year (because additional HCEs were hired in that year) can be remedied by disaggragating the plan and testing separately. (The HCEs fulfilled the year of service requirement and entered the Plan July 1 of the 2nd plan year.) If Corbel's example had had the HCEs being hired in the 2nd half of the first plan year, one could not have pursued disaggregation since no HCE would have met the more stringent eligibility conditions by the end of the second Plan Year. They unfortunately don't give an example of how to remedy coverage failure in that instance, thus prompting my questions.

I'll give Tom Poje a plug. In his book, Coverage and Nondiscrimination Answer Book, Q 6:14, he states that in the instance of dual eligibility I described, the "second set [of eligibility conditions] must, however, be tested as a benefit, right, or feature for current availability and effective availablility." He concludes that dual eligibility "will proably result in a group or employers entering the plan who would not have been eligible under a more restrictive eligibility requireemnt." I looked in the ERISA Ootline Book and Corbel's PPD Research library. All three of these sources agree that there can be coverage failure. I'm confident that is not in dispute. I'm more concerned about how to correct the failure. Is there something special to consider when it's a Safe Harbor Plan, or do I treat it as Blinky suggests? Since some HCEs are deferring very high percentages of comp under a Safe Harbor, Blinky's correction will be VERY expensive.

Tom: You say "grant allocations to those who did not benefit." Do I give an allocation to everyone in the coverage group, or to only that number of employees I need to have to pass coverage? If the plan is Basic Match vs. 3% SHNEC, do I give everyone who did not benefit a the Basic Match as if they had deferred sufficient amount to earn the max Basic Match? And what about Blinky's comments: giving a QNEC equal to average deferral rate? --Fred

Notwithstanding the unique situation, I have three newly established plans this quarter with dual eligibility. Whereas these business have not yet hired any new employees since the Plan's Effective Date, they have told me they will. Given current census and projected hires, all three of these businesses will most likely fail coverage. (I'll have to look at the Rate Group Testing possibility. THanks for that tip, Tom.) So I'm back to my original question. If I fail coverage in a 401(k) Safe Harbor--be it 3% SHNEC or Basic Match--how do I remedy the failure?

When a plan has more than one set of eligibility requirements, the exclusuion for employees who fail to satisfy the plan's age/service requirements applies to the LOWEST age/service requirements applicable to ANY employee benefiting under the plan for the plan year. Assume the Plan Sponsor started business October 1, 2004, and hired 10 employees that day (one of whom is an HCE). The plan sets up dual eligibity provisions that says anyone hired as of October 1, 2004, is in the plan. Anyone hired thereafter must perform a Year of Service of 1,000 hours and enters in the plan the following Jan 1 or July 1. Eight people were hired in December, 2004. These eight are in the coverage group because they meet the least stringent eligibility requirement of the dual eligibility, i.e., no service. Disaggregating plan for coverage purposes is not possible because no one has earned a year of service. Coverage fails.

Dual eligibility provisions allow an HCE (and others) to enter the plan by virtue of having been employed by the Effective Date. Employees hired after the Effective Date must meet 1 Year, 1,000 Hours service requirements. The HCE does not meet the more restrictive eligibility requirements until the 2nd year of the Plan. In the first Plan Year, all employees regardless of hire date are considered part of the coverage group because of the no-service requirement of the early-entry, Dual Eligibility provision (the least restrictive requirement.) Given the particulars of who was in the plan as of the Effective Date vs. those hired later, the Plan fails coverage. So what is the impact of failed coverage if the Plan is a Safe Harbor 401(k)? If a 3% SHNEC was elected, do all employees receive the 3%? Or just enough to past coverage? What if the Safe Harbor was a Basic Match? Who is entitled to a Match and how would it be calculated since all those hired after the Effective Date were not offered the chance to defer? I am sure to have follow-up questions based on your answers. Thank you.

Thank you for the lively discussion. I first looked to Rev Rul 2002-62. The problem is that using an alternate calulation method will not give the taxpayer the exact dollar amount of distribution that in fact occurred. Has anyone had any experience in receiving any relief from the penalty in a similar fashion to a relief of penalty from a failed RMD?

Client has an IRA from which she is withdrawing $4,800 monthly to avoid 10% premature distribution penalty. Four years into the withdrawal program, one of the funds from which sytematic withdrawals were coming from was depleted, leaving her $900 short for that month. Broker switched liquidations to a different fund for the next and subsequent months, but never made up the $900 shortfall. Consequently, her year 2003 distribution was short. CPA is saying she's subject retroactively to the 10% penalty plus interest. What has been others experience in trying to get relief from the penalty? With distributions at $55,600 annually for 4 years, the penalty will be in excess of $22K for missing $900 in distributions.

My question has been answered about including the MP contribution when conducting the ABT, but I want to understand the response correctly since it says I can use both sources in both tests. When I am calculating the EBAR that will be a factor in the Ratio Percentage Test, can I include as an Employer calculation the MP contribution? If I can include the MP contribution, can the MP contribution be a "credit" against the Minimum Gateway? The extreme example would be a MP contribution of 5% that might preclude any additional PS contribution to the NHCs while the HCEs alone receive 100% of the PS contribution. Thanks.

The Client had a Money Purchase plan for part of the year and had a funding obligation as a result. (And for those who will ask, Client's attorey failed to terminate the MP plan prior to start of Plan Year. There was no last day employment provision in the MP Plan.) For the full year, Client has a cross-tested PS plan. Client fails the Ratio Percentage Test given an X% PS allocation. When I perform the Average Benefits Test to see if the X% PS Allocation will pass, am I correct to include the MP allocation in this test? Thanks.

Here's another question about this plan. The refers to the MONTHLY annuity rate based on the UP-84 Table. I thought these factors were annual rates. Is there such a thing as monthly annuity rate tables?

AndyH: THe only reference in the Plan to this issue is that "a Participant who has reached Normal Retirement Age may elect to remain employed and retire at a later date. Such participatn will continue to participate in the Plan and will continue to receive allocations under Article 3." Article 3 is the formula I originally referred to. THe document offers me no guidance on the calculation of the Allocation Points for a participant over NRA.

We just acquired a plan that is age-based. The determination of the Allocation Points requires us to, first, multiply comp by the annuity purchase rate, and then, second, to discount step one by 8.5% from the participant's normal retirement age (age 65). THe result is the Allocation Points. I have a participant over age 65. Am I correct that her allocation points are simply the product of step one because no discounting is possible? Or does table "Adjustment to Actuarial Factor for Normal Retirement Age Other Than 65" somehow come into play? Thanks.

Mike: Yes, I'm trying to update my spreadsheet as I am running into a variety of situations in which I am not sure if I need to cover someone or in what test they must be covered. A day or two after my post, I saw this news update from Corbel that started to address the same questions. http://www.corbel.com/news/technicalupdates.asp?ID=230&T= At the bottom of the news item, they mention that in their Cross-Tested Specialty Workshop, they "will explain both how to calculate the minimum gateway contribution and to whom the plan must provide the gateway contribution. As an added bonus, we have created an easy-reference chart that indicates whether a participant is entitled to the cross-tested allocation, top-heavy minimum and the minimum gateway contribution in 19 different cross-tested plan situations (401(k), safe harbor 401(k), early eligibility, etc.)." I had already signed up for this full-day workshop, having taken the half-day workshop earlier this year. Hopefully this will answer all my questions. Thanks for your comments.

Blinky is perceptive. John would get a SHNEC because he earned comp. THe difference I wnated to portray is that one participant was excludable and the other wasn't. But would answers be any different if the Safe Harbor was a basic match and John didn';t defer?

Plan A is a 401K safe harbor with last day of year allocation requirements. Mary meets eligibility requirements, defers into the Plan but terminates prior to end of year. She's entitled to the Safe Harbor contribution subject to Minimum Gateway. John also meets eligibility, does not defer into the Plan and terminates prior to end of year. He receives no safe harbor contribution. Mary and John receive no PS contribution. If Mary or John worked less than 501 hours, they are not part of my coverage group. So do I ignore them completely for the various cross-test? If either worked 501 hours or more, is Mary considered benefitting for purposes of the Ratio Percentage Test, and if necessary, the Nondiscrimiation Class Test? Or do I only get to consider her deferrals and match in performing the Average Benefits Test? John, I presume, is still part of coverage group but not benefitting. Correct?