ccassetty

My question is on changing the top 20% or calendar year elections in determining HCE status. I know that during the RAP we had a "free ride" on making these elections and could utilize whatever gave the best results, then amend the document accordingly at the end of the RAP. However, most plans have already been amended, so the question is, when changing these elections going forward, when must the plan be amended to reflect those changes. Has the IRS ever provided any definitive guidance on this? Thanks to all who respond!

The combined total cannot exceed the reduced $50,000 limit either.

Here is my take on it. The pros of declaring 404© compliance are that 404© protects the fiduciaries from liability for market losses to plan assets that are a direct result of participant directed investments. With the recent market losses, we may have some court cases illustrating this protection (or lack thereof) in the near future. Of course this protection hinges upon all 404© requirements being met. 404© does not protect against liability for the fiduciary responsibility of choosing the investment options from which the participants may choose. Some say that brockerage accounts that allow the participant to choose virtually any investment even eliminates the potential liability for choosing investment options. I'm not necessarily disagreeing with that, but I believe there are issues with full compliance as far as required information that must be provided under 404© when there is a brokerage account situation. Some say that declaring compliance with 404© and then not managing to fully comply can lead to plan problems with the DOL for not following the document fully. Yes, this is a valid concern and full compliance is not easy to attain. However, my guess is, there is hardly a plan out there that has declared 404© that is actually in 100% compliance with it and I have yet to hear of a plan getting into trouble on that issue. I believe the DOL has bigger fish to fry. The pros of not declaring 404© is avoidance of the above non-compliance issue. In my opinion, the biggest problem with non-compliance is the loss of the protection afforded by 404©. Some have advocated trying to comply with the requirements of 404© while not actually declaring 404© in order to avoid the as yet theoretical DOL actions for non-compliance. The problem with this is, that compliance without declaring 404© will not provide any protection. One of the requirements of gaining the protection of 404© is declaring 404© compliance and providing the required notice to employees. Without this step, there is no protection. Let me hasten to add that, whether or not the plan decides to declare 404© compliance, any plan that allows participant direction is well served to comply with many of the 404© provisions simply because it's good policy to provide participants with as much information as possible to assist them in their investment decisions.

Re the rollover question: Only if he has experienced a distributable event. If he is able to withdraw the funds from the 401(k), I don't see any reason why he couldn't roll them into his own 401(k). However, I agree with tbreedlove that he can do better if he participates in both plans.

Yes, she can defer from her bonus. It's my understanding that if the bonus is paid after the end of the year, only the amount of the deferral can be counted as compensation for the year for which the deferral is made. The rest of the bonus will be counted as compensation for the year in which the bonus is paid. This may or may not be a problem depending on the situation. Please somebody correct me if I'm wrong. I would want to make sure that the other employees are given the opportunity to change their elections for their bonuses not just to have their same election apply to the bonus. There is a difference. If the bonus is paid after the end of the year, the plan document must have this provision. No, you may not integrate the 3% safe harbor contribution. You can put in an additional PS contribution that may be integrated, but the 3% safe harbor cannot be used in the calculation.

The final loan regs are pretty clear about the ability to extend the pay off date of a loan if it was originally for less than the five years. However, the language, (at least to me ), is pretty muddy regarding a loan that would qualify under the mortgage exception. If a participant took out a loan to purcase a principal residence that would have qualified for the 5 year mortgage exception, but the participant chose to set up the loan to be repaid in 5 years, and later a) takes a leave of absence or b) wants to refinance the loan, can the latest permissible term be the later pay off date the participant could have had on the loan because of the mortgage exception? If yes, would this extended pay off date be available in the case of a refinancing only if the new loan also qualified for the mortgage exception? Thanks to all who respond! Carolyn

If I'm reading your question correctly, the check was cut after the participant was rehired, in which case it is not permissable. If the check was cut prior to the participant's rehire, then it is permissible. Once the participant is rehired, there is no distributable event, you can't make a distribution on account of termination to someone who is currently employed. You should ask for the check back or put a stop payment on it. Carolyn

I don't think there is any reason why you can't do this, but I think that, administratively, it's going to be a mess. (just thinking out loud here) If you have comp definition from date of entry, and the plan year is 5/1 through 4/30, what will the plan's definition of compensation be for 401(k) testing? It seems to me that you would have two partial year comp figures and one whole year comp figure. you would have 5/1 through 4/30 for those already in the plan, 7/1 through 4/30 for those that enter on that date and 1/1 through 4/30 for those that enter on that date. Then for ps allocation, you would have to have compensation from 11/1 through 4/30 for those that enter on that date. Most employers I've dealt with get confused with one mid year entry date. I'm not sure if you could use the 11/1 through 4/30 compensation for 401(k) testing and ignore the other entry dates in order to simplify, but clearly that would play games with the percentages, artificially inflating the percentages for those that enter on 7/1 and artificially reducing the percentages for those that enter on 1/1. And, what if someone was not eligible for the 11/1 entry date but was eligible for the 1/1 entry date, what then? I know I would not want to explain (or defend) this to an IRS auditor. Section 1.401(k)-1(g)(2)(i) says you can use the calendar year that ENDS within the plan year for determining compensation for testing purposes. For the 2003-2004 plan year you would be using 2003 calendar compensation. Of course, if the employer provides the safe harbor notice and makes the 3% non-elective contribution, then all these compensation questions would be a non-issue. But it's too late to do that for the 03-04 year. What is the employer trying to accomplish by doing this, will changing the entry dates accomplish it, and is that result worth the extra administration hassles that will go along with it?

I would just want to be certain that the other staff have truely been given the opportunity to join the plan. It sounds fishy that none of his staff would take the Doctor up on the matching contributions. Better be careful that there isn't some kind of coercion or other deception going on. If, in fact, the other staff have legitimately opted not to participate, then the good Dr. can get the $12,000 deferrals and the $8,000 safe harbor match based on an assumed salary of $200,000 and $0 for staff. No other issues, those that opt not to make deferrals are still considered benefiting for 410(b), and as you noted, Top Heavy is not an issue. This assumes a timely safe harbor notice was provided.

All of the above are eligible for reinstatement of their forfeited account balances. In order to allow the forfeiture of a 0% vested participant prior to a five year break, your document probably has language that states that a 0% vested participant is deemed to have received a distribution upon termination of employment. If they come back prior to a five year break, this "distribution" must be repaid prior to reinstatement of the forfeited account balance. Since there was no actual distribution, the deemed distribution is deemed to be repaid.

If the plan has an institutional trustee, there is no requirement for a separate checking account. However, I'm interpreting your question to mean that somebody at the plan sponsor level is/are Trustee(s) of the plan. In that case, I would also tell them to set up a separate account. I can't find anything directly on point, but Reg 2550.403a-3©, last sentence says that "Upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan....." How can the Trustees have exclusive authority and control over plan assets if those assets are routinely commingled in the employer's checking account that has other, non-trustees with authority to draw checks from the account? If thats not enough, in plans without an institutional trustee, the investment house may make distribution checks payable to the Trustee rather than to the participant. Then the Trustee will turn around and cut a check to the participant. The paper trail that will be left without a separate account is: The plan deposits money in the employers checking account (could this violate the rule that no plan assets can benefit the employer?) and then the participant gets a check from the employer, not the plan (did the participant get their distribution or did they just get a bonus from the employer?) Some might argue that the trustee could simply endorse the check from the investment house over to the participant, but sending an endorsed check through the mail is pretty scary. Granted, I haven't worked with non-institutional trust clients for many years, so this may not be very common any more. But I would verify with the investment house how they will make out the checks just to be safe. I'm interested to see what others come up with. Hope this helps.

My vote would be that he can't do it. I don't see anything in either 414(u)or USERRA that provides for an exception to the requirement that deferrals be made from future payroll.

Boy is my face red. However, on the bright side, this takes away the perceived contradiction. Again, this is just my opinion, but I think employees should be included in the test in the year they leave for military service. Remember, in the year they leave, there is no guarantee that they will become eligible for the make up contributions upon return. Thus, it seems appropriate to include them in the test as participating but not benefiting, because, as you pointed out, you cannot exclude them under the terminated with less than 500 hours of service exclusion. However, this brings up an interesting point. If the test fails and these employees are given an additional contribution as a result, can that contribution be credited against the make up contribution when the employee returns? I would think so. The flaw in this line of reasoning is that the employees who receive the additional contribution may not be the employees who left for military service, thus costing the employer more than it should have when the employees return and get the make up contributions. No easy answers.

How does your document say forfeitures are to be used? If it allows them to reduce employer contributions, I don't see why you couldn't use them towards the top heavy.

Last sentence of 1.410(b)-1(b)(1) says "The percentage requirements of this subparagraph refer to a percentage of active employees, including employees temporarily on leave, such as those in the Armed Forces of the United States, if such employees are eligible under the plan. However, The definition of Employee under 1.410(b)-9 is "Employee means an individual who performs services for the employer who is either a common law employee of the employer, a self employed individual who is treated as an employee pursuant to sention 401©(1), or a leased employee (not excluded under section 414(n)(5))who is treated as an employee of the employer-recipient under section 414(n)(2) or 414(o)(2)." These seem to contradict each other to some extent, so I will certainly be interested to hear what anyone else has to say about this. Without further guidance from the IRS, (and this is just my opinion) I would not include them in the testing unless they did, in fact, work for part of the year prior to leaving to serve in the military. I'm basing this on the definition of an employee as one who "performs services", if the employee has been absent for the entire year, he or she has not performed services, and therefore would not be considered an employee for testing purposes. It just makes sense. 414(u)(1)© basically excludes the make up contributions, when they are finally made, from any discrimination testing. Why would you include those on military leave in the testing while they are absent, at which time they are not eligible for any contributions, and then exclude the make up contributions from testing when they return and become eligible? Like I said, I hope others will contribute their opinion. While we are on the subject of USERRA, I have a question about calculating the compensation on which to base make up contributions when the employee returns to work. The whole idea of USERRA is to make the employee whole as though they had never left. It is clear that when the employee returns, he or she must be placed in a higher position and higher salary than when they left if it is reasonably probable that the employee would have received the promotion or higher salary if they had not left for military service. The definition of compensation for calculating make up contributions includes the wording " at the rate the employee would have received but for the period of service ". This could easily be read, in light of the so called escalator principal, to require that these same promotions and increases in salary be incorporated into the calculation of this assumed compensation calculation. Any thought on this would also be appreciated. In all the USERRA summaries and Q&A pieces I've read, I haven't seen this addressed.

Counting the employee as terminated would not be appropriate. This is what the law says, bold added by me for emphasis. § 4316. Rights, benefits, and obligations of persons absent from employment for service in a uniformed service (a) A person who is reemployed under this chapter is entitled to the seniority and other rights and benefits determined by seniority that the person had on the date of the commencement of service in the uniformed services plus the additional seniority and rights and benefits that such person would have attained if the person had remained continuously employed. (b)(1) Subject to paragraphs (2) through (6), a person who is absent from a position of employment by reason of service in the uniformed services shall be-- (A) deemed to be on furlough or leave of absence while performing such service; and (B) entitled to such other rights and benefits not determined by seniority as are generally provided by the employer of the person to employees having similar seniority, status, and pay who are on furlough or leave of absence under a contract, agreement, policy, practice, or plan in effect at the commencement of such service or established while such person performs such service.

The so called "dollar in-dollar out" QNEC option is meant for plans that failed to make required corrections of failed ADP tests prior to the final deadline for doing so. This was a compromise option added by the IRS. Originally they had said the only option available was a QNEC. Under this "dollar in-dollar out" option the required refunds must be made to the HCEs and an amount equal to the refunds must be made to the NHCEs as a QNEC. There is no new option to make a QNEC to the NHCEs equal to the amount of the required refund and then not have to make the refund. Any QNEC made in place of a refund must be equal to an amount that will bring the ADP of the NHCEs up to the require level to pass the test.

Archimage Your email is a little unclear as to how this happened. If this is a trueup situation you don't need to make any changes provided the plan document allows the employer to calculate the match on a payroll by payroll basis. If the employer did, infact, calculate the match incorrectly, you can't penalize the participants that received too much by taking the entire overage out when there has been a loss. If it were me, I would calculate how much the over contributions are currently worth taking the losses into consideration and take that much out of the accounts, then have the employer make up any difference that is needed to be deposited for those who got shorted. If the accounts that are to receive additional contributions had gains, the employer will need to make these up as well. The key is to make everyone whole as though the mistake had not happened. If the document, in fact says that the match is on a payroll by payroll basis, then these adjustment calculations should be done on that basis as well. A lot of extra work. If the employer isn't willing to pay for it, then just do LIFO calcs based on total deferrals and comp. If the plan document does not specify payroll by payroll calculations, then the document should be amended to allow the employer to calculate the match in this manor so that trueups will not have to be made each year. Make sure the calculations for all of these corrections stay in file in case of audit and work with the employer to make sure the match will be calculated correctly from now on.

JennNew You should reissue the 1099R See reg 1.401(k)-1(f)(7) example 1 I don't believe its required, but if the plan made a direct rollover on behalf of the participant, I would send a copy of the notice to the rollover institution as well as to the participant since you have that information readily available.

OK, I'm confused. Maybe I'm reading it too literally, but my copy of section 613(d) of EGTRRA says: "Definition of Top-Heavy Plans - Paragraph (4) of section 416(g) (relating to other special rules for top-heavy plans) is amended by adding at the end the following new subparagraph: (H) Cash or deferred arrangements using alternative methods of meeting nondiscrimination requirements -The term "top-heavy plan" shall not include a plan which consists solely of- (i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), and (ii) matching contributions with respect to which the requirements of section 401(m)(11) are met." This seems to limit this exception only to plans that consist solely of the deferrals and safe harbor match and does not seem to extend it to the 3% non-elective. Please tell me what I'm missing.

Also remember that the top heavy minimum contribution allocation must be based on total year's compensation. If the 3% safe harbor is to count for the top heavy contribution, it must be based on total year's compensation. You could put in the 3% 401(k) safe harbor minimum based on the partial year's compensation, but then there would still need to be an addition PS contribution to bring the non-keys up to the minimum 3% top heavy based on total year's compensation. This way, the additional top heavy minimum could be subject to the plan's vesting scale.

The 402(g) deferral limit is a calendar year limit. So, if this is the first plan year, in theory, the participant could put in $11,000 in December of 2002 and an additional $12,000 from January through November of 2003. Of course this is all subject to the 415 and plan limits and discrimination testing, but your question just involved the 402(g) limit. If this is not the first plan year, the same general rule applies. In December 2002, the participant could put in an amount equal to $11,000 minus whatever deferrals were made January - November 2002 plus the participant could put in the full $12,000 from January - November of 2003.

There is no officially sanctioned fix for this that I am aware of, however, I would suggest that you contact the issuing company and ask for options. Some companies will retroactively reissue policies to lower face amounts and refund premiums in excess of the incidental limits. To do this you will need to determine in which year the policies first exceeded the incidental limit and reissue the policies back to that year. Remember that the incidental limits must be met at all times, not just in total. Putting term life insurance inside of a qualified retirement plan is not a good option. In the first place, all the premiums are taxable each year, defeating the purpose of putting it inside of a tax shelter. Second, the premiums increase each year, making it likely that all participants, sooner or later, will violate the incidental limits (at least the 25% limit if not the aged money limit). Just my opinion, but I would get all of the term policies out of the plan once the current incidental limit problems have been fixed.

Chris, You didn't mention the plan year, if it's a calendar year, your OK starting the safe harbor 401(k) on March 1. I mention this only because of the minimum three month requirement. I see no reason why the client couldn't continue to have a 1 year/age 21 requirement going forward. With this eligibility requirement you will have to have at least twice a year entry or better (quarterly, monthly, daily) upon completion of the eligibility requirements. I won't hazard a guess as to what is the most common. It is clear that it is perfectly OK to provide the safe harbor contribution based on compensation counted only from the entry date of the employee. The guidance also provides for the employer to provide for immediate entry for deferrals but provide the one year wait for the safe harbor contribution. Your message isn't clear as to whether the employer is considering keeping the "first day in which" requirement, but certainly this is, IMO, something you should very forcefully steer them away from. Why this option is even available in prototype 401(k) plans is beyond me. Other than that, you just need to sit down with the sponsor and determine what they are trying to accomplish and set the eligibility accordingly within the allowable options. Hope this helps:) Carolyn

I went back and read the aforementioned ASPA ASAP and it indeed does say that you can't refinance to a lower interest rate. I could be missing something but Q & A 20, example 2 in the final regs addresses utilizing a lower interest rate and I don't see anything there that would prohibit that as long as the loan meets all of the other requirements. The example there even shows the loan payments being reduced to reflect the lower interest rate. Could someone please help us out and point us to the missing piece of this puzzle? Thanks!