Belgarath

I'd treat as a 415 violation, which can generally be corrected under SCP. Appendix A(.08) of Rev. Proc. 2002-47 states that the correction can be made "using a method similar to that described under 1.415-6(b)(6)(iv)."

I can't give you a cite for this - it is only my opinion, in general, not knowing the specifics of timing, etc. Let's say the PPT occurred in 2002, and you are doing a 12-31-2002 valuation. The individual is rehired in 2003, and is immediately eligible. I'd say that since the PPT occurred in a prior year, you'd have to count him as 100% vested as of 12-31-2002. And this cannot then be taken away. If the PPT and rehire take place during the same plan year, then it seems tricker, and I don't have much of an opinion without thinking about it for a while!

FWIW - I called the IRS a couple of weeks ago, and received a return call last Friday. The IRS rep said that in the year they leave, you exclude them from all nondiscrimination testing, including rate group testing, EVEN if they receive a regular allocation based upon the plan's requirements. Since this is what we had decided to do anyway, it was some comfort to hear it from the IRS, even if not in an "official" release. I was so harried on Friday that I never thought to ask if the IRS was planning any written release of guidance.

The following excerpt is from IRS Announcement 94-101, and their audit guidelines. This is just an indicator that they might investigate more closely - I agree completely with Mike that there's a lot of gray area, and "facts and circumstances" determination. Also, I do not know if IRS has updated their audit guidelines for this issue. IRS-ANNCMT, PEN-RUL ¶17,097N-44, IRS Announcement 94-101, I.R.B. 1994-35, August 29, 1994., IRS plan examination guidelines , (Aug. 29, 1994) PART 01 OF 02. (2) Discontinuance of Contributions (a) IRC 411(d)(3) requires that, in the case of a plan to which IRC 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such discontinuance, to the extent funded as of such date, or the amounts credited to the employees accounts, must be nonforfeitable. (b) A determination that contributions have been discontinued and the date upon which such discontinuance occurred requires a consideration of all the relevant facts and circumstances. See Reg. 1.411(d)-2(d). © A discontinuance of contributions may occur even though some amounts are contributed by the employer under the plan if such amounts are not substantial enough to reflect the intent on the part of the employer to continue to maintain the plan. A discontinuance becomes effective, and full vesting will become applicable, not later than the last day of the taxable year following the last taxable year for which a substantial contribution was made under the plan. Note: If the employer has failed to make substantial contributions in 3 out of 5 years, and there is a pattern of profits earned, specialists should consider the issue of discontinuance of contributions.

Let's see...first, I don't think 1.410(b)-1 would apply, as it applies prior to 1994. Beyond that, I'm still groping. As far as the compensation question, FWIW, I'm of the opinion that the employer isn't necessarily required to take into account increases in pay. But, if they were contractually guaranteed, this might be a poor argument! Likewise, if a 3% raise was given across the board, to rank & file employees, it might be hard to justify denying it under USERRA. If a salaried employee, where raises are given based upon performance, whim of the employer, etc., then I think it would be reasonable not to assume an increase. As a rule of thumb, I'm of the opinion that you give the benefit of the doubt in favor of the employee. What's your opinion on the 70% test in the year in which military service begins? Suppose plan has 1000 hour/last day, but employee only works 700 hours. Do you exclude them? Or better yet, they leave with less than 500 hours. If they can't be considered "terminated" then I can't find statutory support for excluding them. And yet it doesn't seem reasonable to include them as not benefitting, and possibly cause employer to fail testing, when the employer must subsequently give them contributions if they qualify. Sort of a doubly-whammy on the employer. So it seems most reasonable to me to exclude them altogether. I just feel uncomfortable with this without some IRS/DOL guidance, or at least affirmation from some of the gurus out there.

Nope - would have to be W-2. See Durando decision, as well as PLR 8716060. Probably other references as well...

I find that clients and their "advisors" often refuse to believe me when I tell them this. Refer them to ERISA 4041(e) if they do - that usually quiets them down!

Thank you, Carolyn. That's the same answer that a couple of us cameup with yesterday when discussing the problem. What we didn't resolve was the following - to get down to brass tacks, how do you include these people for the 70% test? 1. Do you exclude them altogether, even though they don't fall into a "statutorily excludable" category? In other words, do they fall into an "other" category which the nondiscrimination statutes didn't address, and you exclude them from both the numerator and the denominator? 2. Do you include them as eligible, but not benefitting since they do not receive a contribution? 3. Or, do you include them as eligible and as benefitting? Although #1 seems more reasonable from a common sense point of view, I'm just not sure how to approach this. I'd love to hear any opinions on this.

Right. They aren't eligible for EZ filing, unless they are spouses.

No rule that I'm aware of which specifically names these items, but it would be such an obvious violation of the fiduciary prudence rules that you might just as well surrender to the DOL in advance!

I found this thread interesting, as yesterday I was wrestling with the question as to whether to consider them "terminated" (with an asterisk) or not. It isn't merely an academic question - if they are actually terminated, subject, of course, to all subsequent reemployment rights under USERRA if they qualify, then they would also be eligible for a distribution. If they are NOT terminated, then it would be an impermissible distribution. The statute simply doesn't address these everyday administrative questions, so you are left to take your best guess at a proper interpretation. If you simply consider them terminated, like any other participant (until such time as they qualify for USERRA rights upon reemployment) then the issues generally become clearer - they are included in testing as applicable, they are eligible for a distribution, etc.) - but what about reallocating forfeitures? I would interpret this to be that no forfeiture occurs, since no break in service. Has anybody spoken with DOL/IRS officials about this issue? Any word on any guidance or opinion, either formal or informal?

Dave, I was clicking on the "new topic" button. I was in the general retirement plan section of the message boards, and couldn't post a "new topic." So I tried elsewhere, which evidently worked, although I have no idea how! So, could you kindly explain what is now the proper procedure if I wish to enter a new post under a particular area of the message boards? Thanks in advance.

I'm obviously doing something wrong. When I try to post a new thread, I get a reply "Sorry, you are not authorized," etc...... and it tells me to log in and enter my password. When I do, and try to start a thread, I get the same thing all over again. Never had this trouble before, but I'm completely hopeless as a computer user, so maybe someone can tell me how to use this new-fangled software to post a thread. Thanks!

Ok, and thanks much for the input.

Hi again - no, the proposed amendment wouldn't be for "10% of bonuses," although it has that net effect in this situation. (This isn't even a plan we administer, just doing a favor for an accountant, but it's a good question to get straight in my head anyway.) The amendment would be to remove the existing exclusion of bonuses in the plan definition of compensation, which would, in effect, increase the contribution for all participants IF the employer contributes the additional amount. But I can certainly see where this could backfire, if the employer kept the contribution amount the same, then it would be a cutback. I think this would be a lot cleaner in a Money Purchase plan. If you take the approach that it is ok as long as the additional amount is contributed, then I should think they'd want a very specific corporate resolution, increasing the contribution by the appropriate percentage for each affected participant. Any other thoughts on this?

Hi Mike - the employer would actually be increasing the contribution - so if he contributes 10% of pay, for example, it would give a higher allocation to any NHC who received a bonus. Wouldn't take anything away from anyone else. So the purpose is to pass, without including overtime and commissions - just the bonus. As far as standing alone, I believe, perhaps mistakenly, that it doesn't apply under (g)(3)(v)(B) if the correction is to conform to a safe harbor? What's your take on this? Thanks again.

Have a PS plan, that excludes bonuses, commissions, and overtime. Three separate "check" boxes in the adoption agreement. They fail the testing this year by excluding bonuses, but would pass if you include bonuses. The plan is silent on the correction method if you fail. Two schools of thought here. One is that you could do a retroactive amendment under 1.401(a)(4)-11(g) to include bonuses, you pass, end of problem. Another is that absent specific plan language, you would automatically have to "revert" to total compensation. And that therefore any retroactive amendment that would limit compensation at all, as with first method(because overtime and commissions would still be excluded) is a cutback and you can't do it. I'm leaning toward the first interpretation, which seems more reasonable, but I'd appreciate any thoughts on this. Thanks.!

No, I don't think so. There isn't any notice requirement for a plan termination on non-pension plans. And as far as any notice specific to the discontinuance of the safe-harbor, even if you took the approach that you must do this for non-elective the same as for a matching safe-harbor, what would the consequences be? You're already dropping out of safe-harbor status for termination year, so it seems like a non-issue. FWIW. One other stray thought crossed my head - what about top heavy? If the plan isn't using 415 comp as a definition of comp, then the 3% might not be sufficient to satisfy top heavy. And since you are dropping out of safe-harbor status, then top heavy would apply.

I do agree with what I think you are saying, which is that the safe harbor nonelective contribution can be based only upon compensation up to the date of termination. However, I also think plan termination may bring up another problem: Since the safe harbor is only available if you have a full 12 month plan year, (unless a new plan, etc.) then I think you get thrown back into ADP/ACP testing for the year of termination.

Mike is right. Run!! Just as a side note - I'm only going from memory here, and don't have a citation, but I believe that in pre-92? years, an UNINCORPORATED PARTNER could actually make the deferral election up to the due date, including extensions, of the partnership return. I don't remember what piece of legislation or regulation changed this, but I absolutely agreew ith Mike that you can't do it now. Wait - I do have a citation - 1.401(k)-1(a)(6)(ii)(B). Perhaps this old rule is being remembered (and incorrectly, since it didn't apply to S-corps) by the advisor.

Actually, it is permissible in a profit sharing plan. See 1.401-1(B)(1)(ii).

Yes. See specifically 1.401(B)-1(a). Also Revenue Ruling 81-114.

To be honest, I never gave it a detailed reading. But I seem to recall that there was something about a limitation to 10% of the plan assets. Did you notice anything about this? With the numbers you give in your example, if it IS limited to 10%, then I don't think it would qualify. But you might want to double-check this.

And in addition, FWIW, you can take a loan for more than 50% up to a de minimis 10,000. For example, if your vested account balance is 12,000, then you can take a loan for up to 10,000. Watch out for this, however, as most PLAN documents I've seen don't allow this. For good reason, since it requires additional collateral, as you still can't use more than 50% of your vested account balance as collateral. But I have seen a few documents that allow it.

The separation from service must occur after age 55. Actually, the IRS has said that as long as the separation from service occurs during the calendar year in which you attain age 55, that this would qualify.