Fred Payne

Company A is terminating its 403(B) plan to replace it with a 401(k) plan. I know the Plan termination is not a distributable event and its assets cannot be rolled into the 401(k). As participants terminate, distributions will be affected until either all assets are gone or the IRS allows for a distribution prior to employment termination. Here's my question: Must the Plan Sponsor continue to file a 5500 each year even with no contributions being made, either employer or employee? The 403(B) asset pool includes Employer contributions. Thanks.

Has the Covered Compensation Table for Year 2003 been published yet? If so, where can I find it? If not, when is it likely to be published? Thanks.

With a 401(k) Safe Harbor Cross-tested design, I have found the best strategy is to give the 3% non-elective vs the Basic Match. The Basic Match and a discretionary contribution are not included in the Ratio Percentage Test, and that's a negative in my opinion. The 3% non-elective allows the HCEs to max their salary deferals and it is included in the Ratio Percentage Test (although you cannot impute disparity on the 3% nonelective.) The 3% also counts toward the Gateway. Thus, the HCEs could get as high as a 9% contribution. The six percentage points of contribution over and above the 3% non-elective is not considered salary deferral and is not part of any ADP calulation. These contributions may fail the Ratio Percentage Test, in which case the Average Benefits Test comes into play. To passs the ABT, each Rate Group must first pass the Nondiscrimintion Class Test. If there is a testing failure, then either the NCEs must get less that 9% or the NHCs get more than 3%. Often times it is just one HCE that causes the failure. We try to carve out a separate group for the culprit to give him a lower contribution while the balance of the HCEs get the full 9%. If the Plan Sponsor wants only a 401(k) Safe Harbor 401(K), we like to determine if the addition of a crosstested PS might not just get the HCEs up to 6 extra percentage points of contribution.

Richard, you're right. My brain was not working that late at night. I was thinking that an HCE need not receive an allocation that satisfies the Gateway. If the plan was not top-heavy and the HCE was in its own allocation group, that allocation could be 0%.

HCEs are not required to receive a top-heavy contribution. You could have a cross-tested plan that allocates 0% to an allocation group that consists only of HCEs. If this young HCE was indeed the only participant in his allocation group, the prior TPA acted properly in allocating him only 1% to pass the test.

I think you run into problems when "voluntary" contributions in lieu of cash wages are construed as Employer nonelective contributions. Voluntary deferrals are what they are: salary defrrals that must count towards the ADP. Why not set up a Safe harbor 401(k) that uses the 3% nonelective contirbution? Your groups appear OK to me except Class I and Class II shareholders. Allocation Groups must be readily identifiable and I don't think that means a participant falls into one or the other based on a "voluntary" contribution. You can have different classes of shareholders that might get 6 1/2% vs 9%. The allocation rates you are suggesting ranging from 3% to 9% would pass the Gateway test.

No one brought up the Fixed Match! If the only one to defer happens to be an HCE, that HCE can receive a $40K contribution under a Safe Harbor 401(k) and the contributions qualify for the Safe Harbor and is exempt from the Top Heavy Rules! THe HCE gets to $40K with: 1. Employee Deferrals 2. A 3% Non-Elective or a Basic Match or an Enhanced Match 3. A discretionary Match 4. A Fixed match Only the Discretionary Match can be subject to allocation requirements and a vesting schedule.

I called my attorney on this one because I had a client call me with a 10/31 Plan Year End and wanted to set up yet this month a traditional 401(k) for current year and a Safe Harbor for next year. My atty says to do one or the other but not both. KJohnson's scenario is certainly permissable, however.

I've always understood the scenario KJohnson described is permitted and is the "solution" to Tom's warning about the inevitable failure of ADP in the next Plan Year. But what if KJohnson's scenario is even more aggressive? With only one payroll left in the Plan year and on the same day, notice is given to participants for a Safe Harbor 401(k) for the NEXT Plan Year AND a traditional 401(k) is set up for CURRENT year. Can this be done? Regs allowa new Safe Harbor 401(k) feature to be added to a Plan without a 401(k) provided Notice is given no later than the 1st day of the Plan's 10th month. Also, a Sponsor could give notice on December 20, 2002, for instance, that a Safe Harbor 401(k) is being established effective January 1, 2003, IF THERE IS NOT AN EXISTING 401(K) FEATURE TO THIS PLAN (NOR HAS THERE EVER BEEN). But what would prevent a Sponsor on 12/15/2002, for instance, establishing for the current year a traditional 401(k) and giving notice of the Safe Harbor for the next plan year? Is there a "drop dead" date similar to that of establishing Safe Harbor 401(k) plans for adding a traditional 401(k) feature in the curent year?

I have dozens of reasons why the Plan Sponsor should change its practice regarding the allocations, but many--particularly if doctors--insist they get their money allocated right away so they can get it into the market. And it isn;t just the match; it's often the nonelective contributions. My primary concern is if the IRS would object.

Many plans we see allocate contributions periodically during the year even though there is a last day of the year employment requirement. When a participant is terminated, we have to back out YTD contributions--a major hassle. We've gotten some of the sponsors to contribute to an unallocated account to accomodate their cash flow needs, from which we allocate to participants after t6he close of the year. But some sponsors insist on allocating to participants and backing out contributions if necessary. Aside from the HR mess it causes when money is taken from a participant, can anyone venture an opinion on the propriety of the practice? Isn't such a practice inconsistent with the terms of the document? How big a compliance problem might this cause?

I first searched the archives to see if this question had been answered. It had been asked, but no one gave an answer! If because of the lousy market we've all been enjoying a terminated participant's vested balance drops below $5,000, can the Sponsor affect an involuntary distribution from a DC plan? Let's assume for the discussion there is no rollover balance in the participant's account. My memory has it that if the balance was ever over $5K, the involuntary distribution was not possible. But something tells me that was changed (although I can't find a source.) Everything I read now refers to the "present" balance being under $5K. I suspect that the answer to my question is Yes.

Tom, do I read this correct? The IRS seems to be telling us not to submit prototype plans (and volume submitter plans) for FDLs, but for us to do so precludes VCO and some of SCP? Sounds like "Gotcha!"

The entry date is the 1st day of each calendar quarter

Merlin: What about in the instance of a brand new cross-tested plan? Would you submit for the FDL?

Can a Plan Sponsor set eligibility for participation at 1,000 hours and 6 months of service? I understand that if an Employee fails to work 1,000 hours, the eligibility then reverts to 1,000 hours and a Year of Service.

Concerning the need for a letter of determination, our attorney advised us that when money purchase plans are involved, a letter of determination is advisable.

We've been filing the 5500's, but showing the corp as sponsor. It was only with the completion of the forms to request the letter of determination that we were told his corp was previously terminated. Distribution to the Doc was delayed because of the creditor protection offered with an ERISA account. Recently his state of residence changed the law to provide that same creditor protection to IRAs.

Doctor shut down his corporation in 1998 after distributing all MP and PS account balances (fully vested) to his plan participants but did not distribute assets to himself or wife. Plan needs to be updated for GUST and terminated. We wanted to request letter of determination for termination but don't know what to do now that we've discovered Corp has been closed down. Suggestions?

Let's say same assumptions about plan specs but add that the number who satisfy allocation requirements for (a)(4) number 20 and those who have not yet met 1 YOS and Age 21 number 10. All 30 benefit under the SH 401(k) and receive the 3% SHNEC. That's clear. When testing my (a)(4) allocation, I'd hope my coverage group would just be the 20. From what you wrote, I assume this is correct. If I had 3 HCEs out of the 20, I would perform the Ratio Percentage Test on just 3 Rate Groups. If all 3 Rate Groups pass the Ratio Percentage Test, I think I'm done with my testing. What if one or more of the Rate Groups fail the Ratio Percentage Test? I must then undertake the Average Benefits Test. This is where I have my questions about coverage. Each Rate Group must pass the Nondiscrimination Class Test before conducting the ABT. Am I using the same coverage group as I did with the Ratio Percentage Test, i.e. 20 participants? Or do I now bring in all 30? To pass the Nondiscrimiation Class Test, I might have to decrease my allocations to the HCEs or increase them to the NHCs. If I choose the latter, do I only give an increase to the 20 or am I now testing for the 30 because the Nondiscrimiation Class Test is the first step in passing the ABT? If each Rate Group passes the Nondiscrimination Class Test, I can perform the Average Benefits Test. What is the coverage group for the ABT: 20 or 30? From the postings I have read lately, it seems that the Gateway requirements can increase the top heavy contribution to 5% when in other plan designs, the top heavy would remain at 3%. The essence of my question is does a failure of the Ratio Percentage Test of the Rate Gropus force a similar increase to 5% for those participants who otherwise would only have been eligible for the 3% SHNEC? If in all calculations of the cross-test of the (a)(4) I limit consideration to the 20, then I'm a happy camper.

I'm confused on a few points (more or less a permanent condition!) Assume plan is a cross-tested, Safe harbor 401(k). 3% SHNEC is elected. Immediate eligibility for the 401(k) but 1 YOS and Age 21 for (a)(4) contribution. Allocation requirement for (a)(4) is 1,000 hours and last day of year employment. Assume my allocation groups are HCEs and NHCs. Let's further assume the Plan is NOT top-heavy and even if it was, no participant would have had to get a top-heavy contribution. I'm confident that the Ratio Percentage Test is limited to the 3% SHNEC and the (a)(4) Contribution. From my reading of Belgarath's post, my coverage group for this test would exclude those who failed 1 YOS and Age 21 even though they are participating in the 401(k). But what of a previously eligible participant who was terminated in the testing year? Do I include them because they were benefititng under the 401(k)? I think so, but at most do they only get 3% SHNEC even if my cross-test demands a 5% Gateway contribution? Let's say I fail the Ratio Percentage Test, and I'm forced to perform the Average Benefits Test. Is my coverage group for the ABT the same as it was for the cross-test? "Yes" is the easy answer, forcing me to only make certain that those eligible for the 401(k) but failed 1 YOS and Age 21 get the 3% SHNEC. But if I include in the ABT everyone who was eligible for the 401(k), and the cross-test demands a larger (a)(4) contribution to the NHC group to pass, do I only give the larger (a)(4) to the (a)(4) eligible? Do my Rate Groups include this expanded coverage group for determining passing the Nondiscrimination Class Test, a prior condition for performing the ABT?

To expand on Blinky's answer, a Safe Harbor 401k plan in 2002 is also exempt from the top-heavy rules if the contribution includes the discretionary match (limited to 4% of comp) and a fixed match that cannot exceed a match on 6% of deferral. Thus, an HCE earning $200K could defer $11K, receive $8k in basic match, another $8k in discretionary match and $13K as a fixed match (118% of 5.5% of deferral) for a total of $40K. Even if no HCEs defer, no top heavy contribution is required!

I like pjkoehler's advice, but what if you are seeking a letter of determination for the termination of a plan? Are you not required to submit the original documents?

My experience has been different from that of actuarysmith's: the larger the number of allocation groups the better the ability to accomodate changes in demographics. One client of mine illustrates this. There are two groups, 12 in Group A and 80 in Group B. A new doc is scheduled next year to move out of Group B into Group A. But because of his relative young age, the resulting allocation to Group B must increase from 7.7% to 11% if Group A is to continue to receive its current 20% allocation. The new doc will get an increase of about $24K in contribution at the expense of a $50K+ increase in funding costs of the NHCs! Alternatively, I could keep Group B's funding the same but drop Group A's contribution to accomodate this "shift" in demographics. Adding a Safe Harbor 401k and having all of Group A defer the max drops Group A's allocation to 14.5%. I can consequently keep Group B's allocation with the shifting demographics to about 8%. But if I could isolate the new Doc in his own allocation group, I could skip the 401(k) and keep the allocation rates of Group A and B the same. Group C members will get an allocation somewhere in between. I think more groups give you the flexibility to maximize contributions for the greatest number of HCEs while minimizing funding costs to the NHCs. By isolating the HCEs with the potentially highest EBARs in a separate group, you can better avoid a "blow up." However, this begs the question as to the IRS' tolerance for such manipulation of contributions to large numbers of allocation groups comprised primarily of HCEs. Several attorneys I have spoken to warn against a potential characterization of the allocation to numerous groups that essentially have only one or two members as a "closet" CODA--even if the 401k feature exists. I see in another current post Tom Poje notes his having seen allocation groups identified by participant name. A Corbel attorney told me last week not to do that (although I would love to do this with impunity!) Ideally, I think the math of the cross test works best if there is significant latitude in identifying larger numbers of allocation groups for the HCEs. What are people's thoughts about this, particularly identification by name?

We have the Relius Internet Daily Valuation Module. In an effort to increase security on our network, we would like to move the Web server to a DMZ port on our firewall. The problem we've been having is that when we have attempted to do so, the port through which the Web server communicates to the Oracle server is constantly be reassigned rather than defaulting only to port 1521. Relius Tech supports knows other customers have had this problem, but cannot tell us how it has been solved. Who out there has solved this specific problem or has implemented an alternative solution to security? I'm happy to pay consulting fees to your firm or your outside network consultant. You can reply on the bulletin board, email me at fredp@RetirementAssets.com or call me at 800-757-2963. Thanks.