Belgarath

Yes, it is considered ERISA 403(b) and 5500's have been filed as required.

January 1, 2016 (I see now that Tom already answered this)

Interesting. I'm not even sure submission for a d-letter is necessarily required in this case - base document includes both MP and PS/401(k), so has required ACP language, and I think the MP formula can just be entered in the "other" option in the MP AA. But I'll have to look into it in greater depth. I'm just glad to know someone out there has at least seen the same thing! I'm sure there was a good reason for doing this way back when, but I'm having a hard time figuring it out...and it doesn't much matter at this point - have to play the hand you are dealt! Thanks Kevin.

Ran into a very odd (to me, anyway) situation yesterday. A non-profit corporation has an ERISA 403(b) plan, which is deferral only, immediate entry, with some excluded classes, but has the "fail-safe" language so that if anyone in these classes ever works 1,000 hours, they are in. The Money Purchase plan is unusual. 1 year/21 for eligibility, once eligible, no service or last day requirement to share. But, the employer contribution is a fixed 9%, but it is contributed ONLY to anyone deferring 3% or more to the 403(b) plan. It states that this contribution shall be considered a matching contribution for ACP testing purposes. Now, don't ask me why it was designed or set up this way in the dim and distant past - I have no idea. I think, in spite of the odd formula, that this satisfies the "definitely determinable" formula requirement of 1.401-1(b), but I haven't yet considered how this would work for coverage or nondiscrimination testing. Anyone have any thoughts they care to share, or have you handled/encountered one like this? Just had a chance to look at this in a little more depth for the first time. Turns out that (for now at least) coverage/nondiscrimination testing isn't even an issue, as there are no HC whatsoever! But based on the census/participation, looks like they would pass anyway. Strange case...

Well, as an example - IRS penalties for failure to timely file 5500 forms. Penalties may be imposed upon either the Plan Administrator or the Employer. See Treasury Regulation 301.6652-3(a)(3). And of course the DOL imposes penalties for late filing on the Plan Administrator. But I don't know if you are talking about an ERISA 403(b) or not. (3) Annual return of funded plan of deferred compensation. Under section 6652(f) the amount described in this subparagraph is imposed in each case in which there is a failure to file the annual return described in section 6058(a) on behalf of a plan described in § 301.6058-1(a) at the time and in the manner prescribed therefor (determined with regard to any extension of time for filing). The employer maintaining the plan is liable for the amount imposed with respect to a failure to so file the annual return in each case in which the employer must file the return under § 301.6058-1(a). The plan administrator (within the meaning of section 414(g)) is liable for the amount imposed in each case in which the plan administrator must file the return under § 301.6058-1(a). In the case of an individual retirement account or annuity described in section 408, the individual described in § 301.6058-1(d)(2) who must file the annual return under § 301.6058-1(d) is liable for the amount imposed with respect to a failure to so file the annual return. The amount imposed is $10 for each day during which the failure to file the annual return on behalf of a plan for a year continues. However, the total amount imposed with respect to a failure to file on behalf of a plan for any year shall not exceed $5,000.

Thanks Kevin - unfortunately, ours (Sungard VS in AA format) doesn't have quite such a clearly flexible piece of language. To paraphrase a bit, ours says that for purposes of the ADP test, the period for determining 414(s) compensation must be either the Plan Year or the calendar year ending with or within the Plan Year. It then goes on to say, "An Employer may further limit the period taken into account to that part of the determination period in which an Employee was a Participant in the component of the Plan being tested." The plan in question does exclude "pre-participation" compensation in the component of the Plan for which the definition applies, so it seems quite reasonable to test for ADP from July 1 only, but I do have a query in to Sungard to see if they concur.

I think I'm suffering from some sort of brain cramp. Probably normal Monday morning... New plan for 2015, non-safe harbor, current year testing. Deferrals were not permitted until, say, July 1. When running the ADP test, is it run using full year compensation, or compensation only from July 1? There's technically no short year. While it seems "reasonable" to only consider comp from July 1, I'm not finding regulatory support jumping out at me - but then, I'm probably missing something. Thanks! Hmm - under 1.401(k)-6, the 414(s) compensation may be limited to the period the employee is eligible, provided it is applied uniformly, etc...- but I would think that this would require the plan to exclude "pre-participation compensation" in order to use only comp. from July 1. Thoughts?

"Solo-k" is really just a marketing term - it is not a separate type of plan under the IRC. So a "solo-k" is whatever the document requires/allows, as determined by the vendor/entity that writes the document and administers the plan. If the plan permits and the vendor allows it, you could have any number of people in the "solo-k."

Thanks. Fortunately, I just reviewed the actual salary reduction agreements, which it turned out were NOT the IRS model, and the funding company's form specifies per "paycheck" rather than the IRS wording of per "pay period" so there's no ambiguity there!

More than 5%. P.S. as to the second part of your question, you are correct - HC for 2015, based on 2014 comp.

P.S. - this is a SIMPLE-IRA. You wouldn't think there is room for any interpretation here, but... The model salary reduction election provides for a flat dollar amount or a percentage to be withheld "...from my pay for each pay period..." Suppose you have someone who has elected a flat dollar amount - say $50.00. Once a year, they are paid a bonus, which is paid in a separate paycheck. Clearly the bonus must be considered when determining total compensation for purposes of calculating the 3% matching contribution and limit. But is (A) withholding $50.00 required, or (B) is it not required since the bonus was paid during a "pay period" when $50.00 was already withheld from "regular" pay? I'm inclined to think this could reasonably be argued either way. It matters in this situation because the employer botched the SIMPLE for years for a whole bunch of employees, and needs to file a VCP correction. So I can submit using interpretation (B) to see if the IRS approves, and fall back to (A) if they don't, but I don't want to bother with attempting (B) if I know it is a losing proposition. So, I just wondered if anyone has encountered this before, and if so, with what interpretation/results? Thanks.

"So, basically, if the plan fails ACP and it's not corrected in one year, ALL NHCE's eligible will have to get something? Often, this will lead to having to open up several to dozens to maybe hundreds of accounts with tiny balances. That seems a somewhat Draconian punishment." BG - I don't disagree, I just think that's what the correction in the Appendix requires. You can always actually submit through VCP to see if you can get the IRS to agree to giving only to people who deferred, but I don't like your chances, and the time and expense seem hardly worth it, even with the new reduced fees. However, I've heard anecdotally that the IRS has been pretty reasonable to work with on some of these VCP situations, so you never know...

Hi Gary - thanks for the response, but these former employees have been "located." Their addresses are known. If you feel comfortable with a non-responsive employee not being considered "located" that's fine, but the plan sponsor wants to get these contributions made and be done with it. As it so happens, subsequent to the original posting, the vendor decided they could modify some procedure or other and agreed to establish the accounts. But for future reference, thank you for your response.

BG - my reading and understanding is that you must give to all eligible NHC - you can't give it just to those who deferred.

Take a look at Revenue Procedure 2015-28. This gives you a roadmap.

While I don't remember specifically which state, I do remember that. It comes up on occasion, and no one pays any attention to it.

I did the following for myself a while back, because I also have a hard time remembering what is what. Hope it may be of assistance, and hopefully it is correct! I make no warranties... There is a potential problem for COVERAGE using the Average Benefits Test, due to the requirements of 1.410(b)-4(b), and whether the IRS believes that having each person in their own group is tantamount to “enumerating by name.” If they believe this, then the ratio test must be passed, because the average benefits test for COVERAGE requires a “reasonable classification” – and enumerating by name or having the same effect is by definition not a reasonable classification. When we are talking about the nondiscrimination testing under 1.401(a)(4) for rate group testing, there is a crucial difference. To satisfy nondiscrimination testing using rate group testing, each rate group must satisfy either the ratio percentage test (70%) OR the average benefits test. When determining if the average benefits test passes for a rate group for NONDISCRIMINATION purposes under 1.401(a)(4), it is a two part test: A. The nondiscriminatory classification test, and B. The average benefits percentage test. To pass the nondiscriminatory classification test, the coverage ratio must be at least equal to the midpoint between the applicable safe harbor percentage and the unsafe harbor percentage. The “reasonable classification test” does NOT apply – under 1.401(a)(4)-2©(3)(ii), the nondiscriminatory classification test including the reasonable classification test is deemed satisfied if the ratio percentage test for the rate group satisfies the midpoint test. So the 1.410(b)-4(b) problem never enters into the nondiscrimination testing, ‘cause when you pass the midpoint, it is deemed satisfied.

A good reason. Thanks.

I don't understand your response - maybe I'm the one who is missing something. So, employee has a deferral election in place - pick a number - 5%. Employer, for whatever reason, doesn't withhold the 5% on vacation pay for January through June. July 1, the employee terminates. Error is just now discovered. Excerpt from the Rev. Proc. below. I don't see how, with an employee who terminated employment months ago, that you can satisfy the requirements to be allowed to use the 25% method? I guess what I'm saying is that it appears to me that this isn't available for terminated participants, as you can't can't institute "correct deferrals" (and I interpret that to mean ongoing actual deferrals) of the 5% that was elected. Thoughts? 03 Description of modifications to encourage the early correction of Employee Elective Deferral Failures. (1) Safe harbor correction method for Employee Elective Deferral Failures that do not exceed three months. This safe harbor correction method creates a rolling correction period for Employee Elective Deferral Failures that do not exceed three months. Under this safe harbor, no QNEC for the missed elective deferrals is required provided that the following conditions are satisfied: (a) correct deferrals begin no later than the earlier of (i) the first payment of compensation made on or after the three-month period that begins when the failure first occurred for the affected eligible employee or (ii) if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification; (b) notice of the failure that satisfies specified requirements in new section .05(9)© of Appendix A of Rev. Proc. 2013–12 is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and © corrective contributions to make up for any missed matching contributions are made in accordance with timing requirements under SCP for significant operational failures (described in section 9.02 of Rev. Proc. 2013–12) and are adjusted for Earnings. See section 9.04 of Rev. Proc. 2013–12. (2) Safe harbor correction method for Employee Elective Deferral Failures that extend beyond three months but do not extend beyond the SCP correction period for significant failures. This revenue procedure creates a safe harbor correction method for Employee Elective Deferral Failures if the period of failure exceeds three months (or the conditions for the safe harbor correction method described in section 3.02 or 3.03(1) are not met by the Plan Sponsor). This safe harbor correction would permit the Plan Sponsor to make a corrective contribution equal to 25% of the missed deferrals (25% QNEC) in lieu of the higher QNEC required in sections .05(2)(b) and .05(5)(a) of Appendix A and section .02(1)(B) of Appendix B to Rev. Proc. 2013–12. In order to use this safe harbor correction, the Plan Sponsor must satisfy the following conditions: (a) correct deferrals begin no later than the earlier of (i) the first payment of compensation made on or after the last day of the second plan year following the plan year in which the failure occurred or (ii) if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification; (b) notice of the failure that satisfies specified requirements in new section .05(9)© of Appendix A of Rev. Proc. 2013–12 is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and © corrective contributions (including the 25% QNEC and employer contributions to make up for any missed matching contributions) are made in accordance with timing requirements under SCP for significant operational failures (described in section 9.02 of Rev. Proc. 2013–12) and are adjusted for Earnings. See section 9.04 of Rev. Proc. 2013–12.

As a matter of curiosity only - why would you have a 401(k) if you have $100,000 in W-2, and wish to contribute exactly $25,000? I should think a SEP would be the better choice. Granted that you have no 5500 forms until your assets are high enough, the document/amendment/update requirements alone would seem to tip the scales in favor of the SEP. But perhaps the investment choices are better in the 401(k)? Just wondering...

Rev. Proc. 2015-28 provides the new reduced correction amount for certain Elective Deferral Failures that extend beyond 3 months, but are corrected within the SCP correction period. However, in order to take advantage of this, technically correct deferrals must begin no later than.... and this isn't possible for a terminated employee. So just soliciting opinions - would you go ahead and use the reduced 25% QNEC, or would you go with the "old" 50%? Very small amounts involved - employer didn't withhold on same vacation pay.

Hi Bird - believe me, I understand. If they had never applied for a Trust ID # I'd probably agree with you. But since there is one out there, the possibility exists that a cross-checking program will be instituted at some point, asking, "Where is your 5500 form?" Hence my extra caution. But that's just my paranoid work mentality. I don't actually think I'd be paranoid if everyone wasn't out to get me...

While I understand Bird's pragmatic and reasonable approach, I'll take the other side. Filing a 5500 for such a plan is so easy, that I'd go ahead and file just to keep it squeaky clean.

It depends. If there is NOT a controlled group/affiliated service group, then yes. If there IS a CG/ASG, then you will have to look at everything in much more detail, including all employees of both businesses, compensation limits, 415 limits, coverage/nondiscrimination, etc... - including whether the SEP is an IRS model SEP or not. Based purely upon the ownership percentages you give, barring some attribution, there shouldn't be a controlled group, but there might be an ASG, which has the same effect. Odds are good that if you do have an ASG, the answer will be no.

Is the plan set up for general testing with everyone in their own group? If so, the required nondiscrimination testing is based upon their Plan compensation, and not ownership, but as long as it passes the testing, I don't see any problem. I'll be honest - I've never heard of this "disguised dividend" argument, and I don't quite understand how it makes any sense - you can only use W-2 compensation for plan purposes, so an employer discretionary contribution that passes testing based upon that W-2 compensation seems fine - seems like quite a stretch to call that a "dividend." I'll be interested to see if anyone else has run across this. Seems a little paranoid to me.