Fred Payne

Client's attorney failed to terminate his MP plan in year 2002 before he signed onto a multiple employer plan that is 401(k) and cross-tested. Since the 401(k) is a Safe Harbor Plan and he deferred, there are funding obligations to two, but not paired, plans. First step I assume is to figure his and his staff's contribution to the Money Purchase Plan. Next step I assume is to calculate the cross-tested calculation. When I do so, does the MP contribution get factored into the calculation of the EBAR? If his total contribution could have been made into the cross-tested Plan, he would have only passed the cross-test resorting to the Average Benefit Percentage Test. (He fails the Ratio Percentage Test.) Your expert guidance is appreciated as always.

The first custodian's account--the one for which assets have been reported--is a co-mingled pool and all gains and losses have been properly allocated. The second custodian's account--the one for which assets have NOT been reported on--are participant-directed accounts. What other issues might exist? #1. No known erroneous disclosures other than the SAR. I do need to determine if participants who had received a distribution from the second custodian were not provided with the proper tax notices. #2. Concerning the assets not reported on the 5500, each particpant had participant-directed account and received statements for it. Thus, no problems with allocation of gains or losses. #3. No incorrect distributions amounts per se. Some who requested distributions mibght not necessarily have received all of their account balance if they didn't receive a distribution from the second custodian. (I still have to sleuth this out.) They would, however, still continue to get statements on their individual accounts from the second custodians and presumably would know they still have assets there. I did see where at least two people who received distributions from the second custodians have not received distributions from the co-mingled account (and here again, they continue to receive statements to that affect.)

In reviewing assets of new client of ours, forms 5500 for years 1999 through 2001 did not include some assets that had been held by a second custodian. (Client apparently thought the asset statements they received from this second custodian were for a 403(b) plan that had been frozen when they started up a 401(k).) Do we just file amended 5500's for all these years, or is there a voluntary correction program we need to pursue? Thanks.

Assume a 401(k) Safe Harbor Profit sharing Plan that elects the 3% non-elective contribution (SHNEC) to satisfy ADP. Sponsor makes an 8.22% PS contribution integrated with social security. 1 of the 3 NHCE’s terminates with greater than 500 hours and is entitled to the 3% SHNEC, but not any additional profit sharing allocations due to 1000 hour and last day employment conditions. The 1 NHC's total plan allocation rate is 3%. The only HCE receives a 14.50% allocation rate (11.50% 401(a) including integration and 3% SHNEC). All other NHCs receive a 11.22% allocation rate (8.22% 401(a) plus 3% SHNEC). Since all 3 NHCE’s benefit with at least a 3% accrual rate, 410(B) coverage passes. However, since one NHC only received the 3% SHNEC vs 11.22% for the other 2 NHCs plus the HCE, it has been suggested to me that the allocation formula for the PS plan is no longer a designed-based safe harbor and would need to be tested for non-discrimination under the General Test. The rationale is that the SHNEC is considered a 401(a) contribution. Your opinions are greatly appreciated.

AndyH: Your last post was clear and precise. And it's what I had thought was the case. I was just confused by the wording on a previous post of yours thinking it might have said something contradicting your last post which, as I said, was clear and precise.

I agree that you can disaggreagte the adp/acp test. And I would run the a4 test "aggreagted" as you had. So I think we're on the same page. AndyH's comment cofused me as to the ability to run the a4 test in a disaggregated fashion. I just never knew that the a4 crosstest could be disaggreagated or even how you would do it if you could.

Andy H: You've confused me with your comment: "The cross test includes the otherwise excludables OR it can be done by separately testing the otherwise excludables. Either way regardless of how ADP testing was done." Are you suggesting that there can be some disaggregation when conducting this test? I understood that the ADP test is a distinct test from the cross-test of the PS. One really doesn't have anything to do with the other. The PS Cross-test is done with only one coverage group. For the PS cross-test, I first determine who is included in my coverage group. If they are excludable, they are out, pure and simple. Howver, if--and this I found important--if they have received a matching contribution from the 401(k) or are to get a PS match EVEN IF THEY ARE OTHERWISE EXCLUDABLE, they are in the PS crosstest's coverage group. The issue for me is if they are in the coverage group, are they considered benefitting or not. If they do not benefit (i.e., an active participant who termed with more than 500 hours), they are included in the denominator for my coverage ratios and average benefit percentage tests, but they are NOT included in the numerator nor do they get a PS contribution. All Participant's matching contributions IF NOT A QNEC OR SHNEC will not factor into the Ratio Percentage Test or the Nondiscriminatroy Classification test, but they will be considered in the Average Benefits Test. If I pass the Ratio Percentage Test, the PS cross-test is over. I just have to make sure I passed the ADP and ACP tests. If I need to perform the Average Benefits Test to pass the cross-test, then the match of the "otherwise excludable" becomes a factor (as well as their inclusion in the coverage group.)

Tom: Please confirm my understanding: Isn't it correct that this ee--who is not benefiting--is part of the coverage group, and as such, is an important factor in determining the NHC Concentration ratio? Let's say that each rate group cannot pass the Ratio Percentage Test. The Plan needs to then pass the Average Benefits Test, the first step of which is for each rate group to pass the Nondiscrimination Class test. The Safe Harbor Midpoint is the bogey each rate group must exceed to pass the Nondiscrimination Class test. The Safe Harbor Midpoint is determined by the NHC Concentration Ratio. So even though the ee doesn't get a contribution, one must still pay attention to that ee when conducting the tests. If that participant had been termed, she's still in the coverage group. Right? But if she had had less than 501 hours and had been termed, she would be excluded from the coverage group. Right?

Company A's 401(k) PS Plan currently requires 1 Yr of Service, 1,000 hours for eligibility. Plan Entry date is the first day of the year in which eligibility requirements are fulfilled. Thus, entry is retroactive. Company A would like to amend its plan such that Entry Date is now the following January 1 or July 1. Will such an amendment only affect those hired after the date of amendment, or will those existing employees as of the date of amendment who have not yet fulfilled the 1 yr, 1,000 hours be subject to the new Entry Date as well? Thanks.

In 1992, the DOL published Final Regulations Regarding Participant Directed Individual Account Plans to advise fiduciaries on appropriate action to seek the protection of 404©. ( 57 Federal Register pg 46906, published on 10/13/1992.) This publication stated that particpants and beneficiaries when submitting investment instructions had the "opportunity to obtain written confirmation of such instructions." Now if the participant makes investment elections through the internet, he or she gets a confirmation number and/or can print out the screen. In this instance, I think we're in compliance. If we wanted, we could also print a Relius Confirmation report and mail it. But what if they send a written request to our office and we enter the instructions through the Census Screen, Allocation % tab? I've been told the Relius Confirmation report does not run when trades are entered in this fashion. (My partner runs the Relius system so I might not be using the correct terminology.) Can someone volunteer how they handle this issue? Thanks.

2muchstress is referring to the "Maybe Notice." I thought the Maybe Notice had to be given according to the time lines as a non-maybe notice. And once they make the decision to amend by November 30, they must give a notice then of their decision then.

Tom: Here's a question related to the ABT. Let's say I have a Safe Harbor 401(k) Cross-Tested Plan that includes a last day of the year employment requirement for Allocation purposes. Participant A termed in August and is not entitled to a Profit Sharing contribution but since he did defer into the 401(k) while employed, he gets the 3% SHNEC. Particpant A is not included in coverage when conducting the Ratio Percentage Test. Let's say it fails. Now I have to pass the ABT, the first part of which is the Non- Discrimination Classification Test for each Rate Group. Question #1: Does Participant A get included in either Part 1 or Part 2 of the ABT test as you have outlined it? Question #2: If the Plan had passed the Ratio Percentage Test, is it correct that my only administrative test is to make sure that Participant A received his 3& SHNEC? Thanks as always for your expertise.

Let's say no.

I'm curious about your statement of an effective date of 2/1. My understanding is that if the Plan does not already have a CODA, the Sponsor can give the Notice as late as 10/1 and have the effective date of the Plan 1/1. Thus a participant can make deferrals in the 4th quarter based on full year comp.

Whoever provided you with your plan documents should provide you with ancillary forms. If you have a Safe Harbor plan, the notice for 2002 was due 12/1/2001. And the notice for plan year 2003 was due 12/1/2002. If you're scrambling to give a notice now, you're too late. You don't have a Safe Harbor for year 2002 or 2003.

W-2s provide for an indication if the Employee is "covered" by a Qualified Pension. This helps the participant to determine if his or her IRA contribution is deductible. If a Plan allows immediate eligibility to defer in to the 401(k) but has a Year of Service requirement to receive a nonelective or matching contribution, is the Participant who would otherwise be excludable for Coverage Testing of the Employer contributions still considered "covered" when it comes to completing the W-2? Yes, I know I must still include such a participant in the ADP test. Thanks.

I spoke with an ERISA attorney specifically on this issue. Here's what he said could be done. For a Plan year ending 12/31, a CODA could be established in November for 2002 and assume a prior year ADP and ACP of 3%. Give a SH Notice on 12/1 and convert to the plan to SH for 2003. If a CODA is established in December for 2002, you cannot convert it to SH until 2004 because you failed to meet the 30-day Notice requirement. No gray area in his opinion. Here in December, a Sponsor either can set up a new SH for 2003 with no CODA in 2002 or a traditional CODA for 2002 and 2003 and go SH ion 2004.

I'm relatively clueless on SEPs. What do you mean by a "non-model SEP document"? And if they have such, what would be the ramifications? Thanks.

Company A has an existing SEP and some funding for current year has been occurred. A new cross-tested PS Plan has been added for current year effective 1/1. I know contributions and deduction limits are looked at on an aggregated basis, but what about the cross-test itself? If the Profit Sharing allocations pass the Ratio Percentage test, I think I'm home free. But if the cross-test can only be passed by undertaking the Average Beneffits Test, do I ignore the SEP contributions when performing the ABT? A SEP (and a SARSEP for that matter) are not "qualified plans" and I think I need not aggregate them for the cross-test. Am I correct?

Now that the disqualifying issue is cleared up, what about actuarysmith's statement that since it is now past 4/15, the distribution of the year 2001 excess should NOT be distributed?

Participant Jones just now informed us that in Plan Year 2001, he deferred $4,000 in excess of his 402(g) limitation due to deferrals he made in the 401(k) plan and 401(B) plan respectively of two separate employers. Since the Plan we administer paid no match, he wishes to make the corrective distribution from our Client's 401(k) Plan. (Our Client's Plan is a 401(k) Safe Harbor using the 3% SHNEC so there's no ADP or ACP issues for us to deal with.) Assume we make the distribution yet here in 2002, adjusted for gains/losses. Anything special we must do with the 1099 to indicate that, one, the 402(g) violation was in year 2001; and two, the problem is the Participant's and not the Plan's violation? The Plan pays no excise tax. Correct? Participant handles his penalties for excess contributions on his 1040. Correct? Thanks.

Tom, are you suggesting that there are some actual rules of thumb other than "those who are to get the highest allocation should be 10 or more years older than everyone else"? I've always thought of cross-testing as generally unexplicable. I'm frequently surprised once the numbers are run if a census works or not. Too much reliance on the "black box."

I've seen charges by an attorney for conducting the cross-test at $500 for plans with 50 or less participants and $1,000 is 51 or greater. The TPA is to accept the cross-test (and presumably the atty's determination of the coverage group) as gospel.

My impression is that, from previous threads, there is a disagreement as to whether or not classifications can be established using people's names. Has anyone received a FDL in which people's names were used?

Thanks for the link!