Belgarath

Thanks, yes, I know that each person in own group would do the trick, and in fact this is what we proposed to employer. But they are adamant that they don't want that type of discretion to appear in the document - it has to do with employee communications, and an internal non-qualified bonus system, etc., etc., which I understand. So I just wanted to overcome my brain cramp and confirm that this would require general testing. Thanks for your input.

A client has a rather unusual request as to the profit sharing allocation methodology. The client would like to to able to: 1. allocate in the same dollar amount per Hour of Service for each Participant; OR 2. in the same ratio as each Participant's comp bears to the total of such comp of all Participants; OR 3. a combination of both. With complete flexibility to mix/match, or choose between one or the other. Although both methods 1 and 2 are, individually, design-based safe harbor allocation methods, I believe the flexibility to mix and match takes it out of design-based safe harbor status. Am I nuts, or am I correct? (technically, I suppose the answer to both could be yes...)

Thanks Kevin. Yeah, isn't this fun? I also saw the tax withholding piece in the Pub. 531, but I agree, that doesn't help here. For credit card tips, I think everything works fine. They are run through payroll as regular wages. It is just the cash tips that are turning everyone's hair gray. Your point about universal availability for catch-ups is well made, but I suppose a pretty reasonable argument can be made that the cash tips, once received, cannot be "paid" to the employer for subsequent deferral. On a less theoretical basis, looking at what actually happens in "real life" - I suspect there are very few employees who truly report 100% of their cash tips. I can't imagine that even if allowable, they would take income that escapes tax reporting altogether, and pay it back to the employer just so they could have the opportunity to defer taxes (and later pay them) on income they wouldn't otherwise report anyway! But I suppose they might want to for all or some of the amount that they actually do report... Oh well, I guess we'll just have to give it our best shot, and let the employer decide what is "reasonable." Employers virtually NEVER listen to our recommendation to discuss with ERISA counsel prior to making such a decision.

P.S. - I know this is a very old reference, but possibly useful nonetheless: From the Pension Actuaries and Consultants Conference in Washington, D.C., on October 9, 1997: ASPA: A 401(k) plan is established by a restaurant. Under IRS rules, the restaurant is required to add tip income to the W-2 of the employee. An individual employee elects to contribute to the 401(k) plan but the amount of the designated deferral is greater than the participant's paycheck (base salary) from the restaurant due to the very large tip income, but still less than all applicable limits for deferral. Is the employee able to give the additional funds to the employer for depositing into the plan? It seems perfectly acceptable, but acknowledgment from the Service would be very helpful in a number of cases that already exist. IRS: The employee is NOT able to give the money back to the employer and have them deferred into the 401(k) plan. If the employer collects the tips (such as on a credit card slip), then it can still be deferred. But if the employee has the funds, then it is too late to defer it since the employee already has it. The amount of the deferral cannot be more than the amount of the actual check.

Thanks for the response. I can see how this would work in a pooled tip situation. But I'm having difficulty seeing how it could be reasonably managed in a non-pooled cash tip situation. I can't find a citation for where an employer is REQUIRED to provide for a deferral procedure on cash tips, although I can see why it would be reasonable to somehow require it. Do you know of any specific guidance/citations? I checked IRS Pub. 531, but this wasn't any help. Anyone have any practical solutions to this thorny problem, that have been blessed by the IRS? I saw one "solution" proposed where tips were excluded from the plan definition of compensation, but there are HC's involved who receive zero tip income, so this would be a discriminatory definition of compensation. As to the other question, do you think the match would be the $20 or the $40?

We don't have many clients where tips are an issue, so this hasn't come up. So, plan defines comp as W-2. It does not exclude tips - which would likely be discriminatory anyway. The safe harbor match is an enhanced 100% up to 4%. It is calculated on a per payroll basis. I'm fine with understanding that you can't defer on tips, (these aren't pooled tips) cause the employee has already received them. But the employees have to report their tips to the employer, who will then include them on the W-2 as taxable, etc., at the end of the year. How does this mesh, in real life, with the safe harbor requirement? Is there a citation for not including the tip income in this situation when calculating the match? It would seem like if the tip income is reported to the employer regularly, then a match would be based upon the total income, including tips, for that payroll? Example - employee has a 10% deferral election. For a given paycheck, EMPLOYER compensation is $500, and there is $500 of tip income, for a total reportable amount of $1,000. So employee deferral for that payroll is ($500 x 10% = $50). Is the safe harbor match on that payroll ($500 x 4% = $20) or is it ($1,000 x 4% = $40?) I lean toward the $40 since I don't see a legitimate basis for excluding it, yet it seems like an absurd result. For an employer Profit Sharing contribution, it seems like it would be based upon total compensation, so it would be based upon the $1,000 when it is eventually made - agree? Disagree?

P.S. - I'm envisioning an exclusion that might be something along the lines of the following: For any Plan Year which is determined to be a “nonallocation year” as defined in Section 409(p) of the Internal Revenue Code and Section (XXXX) of the Plan, any employee who would be ineligible to receive an allocation due to their status as a “Disqualified Person” for such Plan Year. The document is being drafted by an ERISA attorney, so this will be addressed by legal counsel, but in the meantime, if anyone has any thoughts/experience/opinions regarding this issue, I'd appreciate it. Anyone ever seen a plan with similar provision that has received a D-letter from the IRS?

Dumb question - suppose you have a leveraged ESOP that you know will fail 409(p) testing in first and probably many subsequent years. You can exclude these people. Is there any reason that the exclusion must be irrevocable? In other words, most plans now seem to have standard "non-allocation year" language to prevent a prohibited allocation. But is there any reason, from a plan design standpoint, why they can't just be put in an excluded class, and amend the exclusion out of the plan once they reach the point where 409(p) testing can pass? Or, can they NOT be excluded, and just rely on the non-allocation year language so that they in effect just don't receive an allocation for as long as a non-allocation year would come into play?

IMHO, probably not. Such a feature might inspire them to contribute more, or roll money into the Plan from another account if the Plan permits rollovers. That's based upon "gut feeling" and without doing any research on what is truly "required" for this disclosure.

Love it!

"Our clients are going to go mental." Geez, Austin, you are lucky. All of ours are already mental!

Absolutely deserved!

Seems reasonable. Another possibility, depending upon payroll system flexibility, might be to adjust (reduce) the deferral taken out of paycheck for as long as it takes to equal the extra loan repayment, then increase the deferral back up to the original level.

As to when it is a "pattern" - I don't think there is a bright line standard. Good old facts and circumstances. As to the second question - first, is your question regarding a BRF? 'Cause I think the section you are citing refers only to a BRF correction. (g)(3)(i) says that you must satisfy the requirements of (g)(3)(ii) through (vii) "..whichever are applicable." (g)(3)(vi) refers specifically to a BRF correction. So assuming you are talking about a BRF, I'd vote for it having to run through 2014. The regulation says after the "date" of the amendment, not the "effective date" of the amendment. Reasonable people might well disagree with my interpretation.

Going from memory (so, so dangerous) I seem to recall that the IRS stance is perhaps more strict than the law, or at least a reasonable interpretation of the law. I'm remembering that the IRS says your vested percentage prior to the amendment applies not only to benefits accrued at the time of the amendment, but also to FUTURE benefits accrued. While this is arguable, most people don't want to fight with the IRS. So if prior schedule is 1 year 50%, 2 years 100%, and you have 1 year vesting credit, then plan is amended to 6-year graded, then your vesting percentage for year 2 and year 3 allocations will also be 50%, then it will be 60% for year 4. (it is certainly easier this way - whether correct or not!) But this is from memory, and not based upon any current research.

Thanks. Maybe this only happens to me, but sometimes when I'm in the middle of 16 things, I get a question to which I really know the answer if I'd just take a deep breath and clear my head, but instead I give it a quick thought with a small part of my so-called brain, and suddenly find myself confused. Very annoying...

Wow, it has been a long time since I've looked at one of these. Trying to refresh my memory. They want to amend/restate MP plan to a PS plan. Calendar year MP plan, with a 1,000 hour AND last day requirement. The 204(h) notice has to be given (large plan) at least 45 days prior to the effective date of the amendment. So, let's say they want to avoid a MP contribution for 2015. As long as the "effective date" of the amendment is, say, March 1, so that no one can have reached 1,000 hours, is there any problem? They haven't "accrued" anything under the MP plan at that point. (Actually, as far as that goes, the amendment should be allowable up to December 30, 2015, as long as the Notice is provided at least 45 days prior to that, right?)

Got it! Thanks.

Thanks. Regs are 54.4975-7(b)(8). I think I'm probably worrying about nothing, but I'd rather make sure than miss something crucial.

Thank you both! But I'm still a little confused (obviously) - the language in the regulations I referenced seems to say that at least for the principal only method, annual loan repayments are required. Is this correct? Or does it actually mean that it must "provide for" at least annual payments, but if you prepay, that satisfies the requirement as you have discussed? I assume it is the latter, but I just want to make sure. Does your prepayment scenario apply only if the principal and interest method is being used? Is there additional guidance that clarifies this further?

I have always been under the impression that in an exempt leveraged ESOP where the proceeds were used to purchase the stock from the owners, in order to avoid the prohibited transaction rules there must be a release from encumbrance EACH plan year based upon the loan repayment schedule. The repayment schedule must be at least as rapid as either the principal only or the principal plus interest method, as per 54.4975-7(b)(8). Is there any legitimate circumstance whereby such a leveraged ESOP can NOT release shares for a given plan year? (Not talking about plan termination or bankruptcy/insolvency situations either, just "normal" ongoing plans.)

What's a Cubs fan? I thought the last big asteroid strike made them extinct.

Just to muddy the waters - how about he opens up a solo(k) plan rather than a SEP, make a token Roth deferral, have the plan allow VOLUNTARY AFTER TAX contributions, and immediately convert the voluntary contributions to Roth. Doesn't lose anything for deductions, since he was going to pay income tax upon converting to Roth anyway. All under the approval of tax/legal counsel, of course.

I would make the restatement effective 1/1/2014, BUT, in the Appendix A, make sure the Profit Sharing Allocation method is effective 1/1/2015.

Not necessarily. 1.403(b)-5(b)(4) permits certain exclusions without violating the universal availability rule.