Belgarath

I had another thought - why not treat it as a mistake of fact? I know, I know, mistake of fact is very limited, etc., etc. - but it seems reasonable that in a sole prop situation, if a deferral amount is contributed based on an erroneous calculation of income, and it is subsequently discovered that there is no income, that it should qualify. Thoughts? P.S. - it turns out that the vendor apparently already refunded to Acme Sports, rather than to John Q...trying to confirm if this is true...

Acme Sports is a sole proprietorship. The John Q. Owner defers on a draw throughout the year. Contributes $24,000. After end of year, taxes get done, and it turns out he has zero earned income. So there's a 415 excess to be refunded. Should the check be made out to Acme Sports, or John Q. Owner, or does it not make any difference? Since he had no income from which to defer, it seems to me that it should go to Acme Sports - but then how does one report it on a 1099? Probably easier to refund directly to John Q. Owner, report on a 1099? With 10% withholding (unless he elects out of it)?

Right, so you have to actually do the testing in this situation. Thanks for responding.

So have I got this right - probably not... POP plan has salaried qualify after 1 month of service, and hourly after 3 months of service. Since the eligibility to participate for "that plan year" has everyone being eligible, does that mean it passes the reasonable classification? Or am I misunderstanding, and each "sub-class" must pass the safe harbor or the unsafe harbor test? Edit - Well, they wouldn't necessarily ALL be eligible for the Plan Year, if they were hired quite late in the plan year. So I suppose that you would have to do the safe/unsafe harbor testing, which normally would pass with flying colors anyway.

Hi Kevin - certainly this position is safe and unassailable. However, I've seen a lot of plans that, as long as they pass 414(s), do exclude bonuses, overtime, etc. One could argue that the regs don't actually preclude this - in other words, you can defer "eligible comp" up to the limits in 1.403(b)-4(c), and this doesn't violate the requirement. Sal has a reference to the 2010 ASPPA Conference where (in a Q&A session - not allowable as formal guidance, I know) the IRS suggested that it was ok as long as it passed 414(s) testing. Have you, ar anyone, had this issue addressed upon audit, and if so, with what results?

Thanks.

As an additional item in this area - an employer is considering doing something to provide higher benefits to lower income individuals. For example, say they have an HDHP with a $5,000 deductible, and maximum OOP of, say, $10,000. They are considering an HRA that would provide that no one would pay more than (x)% of income, and the HRA would pay all the rest. So if you make $20,000, your maximum that you'd have to pay would only be 1/2 of the maximum that would have to be paid by someone making $40,000. Seems like a nondiscriminatory way of doing things. Do you see any problems with it? I wasn't sure if, for example, another member of the household (such as spouse) was getting health insurance through a health exchange, if this would cause any problems?

Thanks. Now, suppose the only people enrolled in family coverage are HCE's - would this run afoul of 105(h) automatically, or is it just subject to normal testing? (I'm assuming the latter) - thanks again.

Can an HRA base the reimbursement levels upon health insurance status? By that I mean, can it be $1,000 if you are enrolled in the health insurance as a single, $2,000 if as a 2-person, and, say, $3,000 if you have family coverage?

Plan document appears to say otherwise, but I'm confirming that. Thanks for the suggestion.

Yes, but I don't understand what you are getting at. Are you saying that this DC plan may use average annual compensation for nondiscrimination testing, (i.e. use 2017 W-2 compensation for contribution amounts, but for testing those contribution amounts, use a 3-year average of W-2 compensation for 2015-2017)? I've always understood that yes, you can use different 414(s) definitions for contribution amounts and nondiscrimination testing, but they would be different definitions for compensation for that plan year, where the plan is using current year compensation for accruals.

The plan uses current year compensation. No fail-safe method is applicable if testing fails.

I've only seen two uniform points plans in my life. We've just been given a situation where such a plan failed nondiscrimination testing, cause the formula (which has apparently always worked well in the past) heavily weights contributions based on years of service. One of the owners retired unexpectedly one month into the year, and the plan waives the normal 1000/last day requirement for retirement on or after NRA. Since his comp was so low, (only one month comp) former owner gets something like 60+ % of pay, so the average for the HCE's is too high to pass testing. Although I don't have hard data, it appears that restructuring won't work, or at least not at a contribution level that is possible/palatable. (Query - does the prohibition against uniform points n one of the restructured plans apply if the plan is uniform points to start with, or does it apply only if you are attempting to restructure to a uniform points plan where it isn't ALREADY a uniform points plan?) Ok, so you go to rate group testing, which also fails. An 11(g) amendment could be done, but here's my question: when you do such an amendment for this type of plan, I assume that any corrective amount/increase to the necessary number of NHCE's must still be allocated (or calculated) on the uniform points allocation formula in the plan? Or to ask it another way, can you simply assign random amounts to random participants like you can in an "everyone in their own group" profit sharing plan, or must you somehow amend the plan to increase the formula for a select group of NHCE's, so that they get (x) points for each unit of compensation, rather than "y" units that they get under the current formula? I suppose it ultimately has the same effect, as the formula would be adjusted for those selected individuals to achieve a passing percentage, so it is ultimately the same thing. Ugh - if now going to the rate group test, is it going to have to pass gateway? Or is the fact that the basic formula is a uniform points allocation which isn't subject to gateway a saving provision? Or, is there a better way to do all this? I know the 11(g) amendments are pretty flexible, but I've never run into this particular situation. Thanks!

Thanks, but I'm not worried about current availability - that piece passes just fine. But the effective availability seems problematical. Are you saying that you think effective availability in this situation is ok? None of the new hires will EVER be able to receive the higher match. (Now, if some of the new hires were HC, then I might feel differently.) Thoughts?

The old different match rates conundrum. Employer wants to keep existing match level for all current employees, but use a lower match rate for all new employees. Passes current availability testing just fine (for now) but since current employees include ALL of the HC, I don't see any way for this to pass effective availability. Anyone have any bright ideas on this?

Just want to make sure I'm not misrembering - the 7-day "safe harbor" under 2510.3-122(a)(2) it is for plans with fewer than 100 participants at the beginning of the year. The 80-120 rule does NOT apply - it is for 5500 purposes only. I just saw it used for the 7-day safe harbor deposit rule for a plan with over 100 participants at BOY, so I want to make sure I'm not nuts before questioning this.

My non-expert opinion is no. There are certain exceptions in the regulations that allow election changes in various circumstances, but as far as I can tell, this isn't one of them.

Here's the excerpt from the regulation - emphasis is mine. This is why I'm concerned. (ii) An individual becomes a participant covered under an employee pension plan— (A) In the case of a plan which provides for employee contributions or defines participation to include employees who have not yet retired, on the earlier of— (1) The date on which the individual makes a contribution, whether voluntary or mandatory, or (2) The date designated by the plan as the date on which the individual has satisfied the plan's age and service requirements for participation, and (B) In the case of a plan which does not provide for employee contributions and does not define participation to include employees who have not yet retired, the date on which the individual completes the first year of employment which may be taken into account in determining— (1) Whether the individual is entitled to benefits under the plan, or (2) The amount of benefits to which the individual is entitled, whichever results in earlier participation. It seems to me that even if in an excluded class, you have satisfied the AGE AND SERVICE requirements for participation. Anyway, I thank you all for your opinions.

Flyboyjohn - the employer will not exclude any NHC's, hence my original question. I'm still concerned that the DOL regs bring in excluded employees who have satisfied the eligibility requirements. Any opinions on whether I'm interpreting the regulation incorrectly? A common sense interpretation seems like if you can't participate because you are excluded, you shouldn't be counted as a "participant" - but a literal reading can lead to the opposite conclusion. I'd love to be able to take the more liberal interpretation, and I wondered if anyone had wrestled with this particular situation before. Thanks.

Isn't that a bit strong? What if the employer wants to make discretionary matches in excess of 4% of compensation, just as an example? Can't do it if using the ACP safe harbor. What if they want to consider elective deferrals in excess of 6% of comp when determining match? Seems like you have more flexibility (potentially) if not using the ACP safe harbor?

Maybe we'll just set up two identical plans and permissively aggregate them for coverage/nondiscrimination testing. I generally dislike such an approach, but it'll actually save them money...

New plan to be effective 1/1/2018. Participant count will apparently be 101, so audit would be required. What if the 2 owners are excluded? Are excluded employees who have otherwise satisfied eligibility considered "participants" for BOY count purposes? The 5500 instructions don't seem crystal clear on this. If they don't have to be included, we could exclude the owners, then amend the plan, say, February 1 to bring them in. Seems a little too cute, and the consequences of not filing with audit if required are, of course, draconian. The phrase "earning or retaining credited service" in the 5500 instructions makes me nervous... P.S. - FWIW, it seems to me that under 2510.3-3(d)(1)(ii)(A)(2) you are still a participant, even if in an excluded class.

Gracias.

I don't work with these plans. Say a business has 500 employees, of which (pick a number - let's say 90) are highly compensated - say a giant medical practice, or a corrupt political campaign organization... Are these plans limited to a "select group of management or highly compensated employees" similar to a 457 plan, or are there no limits on who/how many can be covered? Please don't waste any time on this, as it is a quick general question. If it requires any research, PLEASE don't bother!! Thanks.

You know the old saying, "Common sense is the least common of all senses."