Mike Preston

Yes, you are allowed. In fact, it is the default. With the exception of the allowable alternative testing method mentioned in my last post, any HCE which would be otherwise excludable falls into the otherwise excludable group. If, when you test your otherwise excludables, it fails because of the HCE (or HCE's) included, you either invoke the alternative mentioned or you abandon testing your population as two separate groups. First, you are continuing your confusion about what it means to be otherwise excludable. It isn't "the HCE group" that you exclude them from, it is the entire testing population that you exclude them from. So, it depends on whether said under 21 family member has deferred. If they made 2000 and deferred 1900 (not an uncommon thing) then it is usually best to have them remain otherwise excludable, have the test on the otherwise excludable fail and then refund this poor young person's deferrals. Otherwise, if the alternative mentioned in my last message is invoked or if the plan is tested as a whole (without segregating the plan into two populations) this individual's deferral percentage will no doubt cause the test to fail. And even worse, since refunds are based on "he or she who deferred the most", this individual will no doubt be allowed to leave all of their deferrals in the plan, while an older HCE who deferred more (such as the $15.5k limit) will suffer a refund when there might not be a refund to this individual at all if the plan were tested based on otherwise excludable/not otherwise excludable.

Oh, boy, you are gonna love this....... yes, you are allowed to put the HCE into the otherwise excludable group. However, there is a special rule, solely for testing the HCE deferrals against the NHCE deferrals which ALLOWS you (but does not require you to) aggregate the otherwise excludable HCE with the non-otherwise excludable group. Are we having fun, yet?

410b, first of all, let me say that this discussion is a breath of fresh air. It is wonderful dealing with somebody who doesn't have the taint of learning what a predecessor from within the industry has been doing previously. You are, quite rightly, relying solely on the actual language of the plan, the SPD, the Code and the regs. And you are insisting that they be taken as written. Bravo. On the other hand, welcome to our world. We are constantly dealing with ambiguities in the combination of the plan, the SPD, the Code and the regs and somewhere, somehow, we have to disambiguate. Sometimes it just ain't fun. This is one of those times. There are two issues, as I see them. First, you really need to get an opinion from counsel regarding the plan's administrative practice of denying a new participant the right to defer until the beginning of the first quarter after they are eligible. I will be so bold as to suggest that even if counsel can find room to support what you have done in the past, that you change that practice as soon as you possibly can; possibly by amending the plan so as to make clear that the change is being caused by a conscious decision and not just a seemingly arbitrary modification to the plan's administrative practices. OK, that issue is dealt with and needn't be discussed again, if you don't want to do so. The far more complicated issue is who can be considered "otherwise excludable" (let's use the real terms, if we can, since you are coming at this from a "let's use the real rules" perspective; it will help disambiguate as much as is possible). We agree that a NDT can be run based on segregating your plan's population into two groups, where group 1 is those that are "otherwise excludable" and group 2 is everybody else (or, if you prefer, non-excludable). The definition of "otherwise excludable" is found in the regulations under IRS Section 410(b). You might want to find Regulation Section 1.410(b)-6 and read it. It is kind of long, so I won't repeat it here, but it is entitled "Excludable employees". Here is one of the sections that bear on this issue: "The effect of this rule is that employees who would be excludable under paragraph (b)(1) this section (applied without regard to section 410(a)(1)(B)) but for the fact that the plan does not apply the greatest permissable minimum age and service conditions may be treated as excludable employees with repsect to the plan." At issue is how to determine "the greatest permissable minimum age and service conditions". You certainly acknowledge that the age conditions of your plan are not the greatest permissable. You have indicated that you think your plan's service conditions are identical to those that are the greatest permissable. You have indicated that since 410(b)(4)(B) doesn't mention entry dates that such dates can't be considered. I suggest you read 410(b)(4)© which specifically mentions entry dates. The regs carry this forward. But it is still less than perfectly clear what is meant because 410(b)(4)© states: "An employee shall not be treated as meeting the age and service requirements described in this paragraph until the first date on which, under the plan, any employee with the same age and service would be eligible to commence participation in the plan." Believe it or not, that section seems ambiguous to some. Some read it as you have asserted: you must use the plan's actual entry dates for dividing between those who are statutorily eligible and those who are not. But others read that section (and the corresponding regulation section) to incorporate a theoretical definition within the plan of that which would delay participation until the last legal moment; which would be the use of semi-annual entry dates. You need to decide which you are most comfortable with (you ARE the client, after all) after consultation with your advisors. I can tell you that many a test has been performed using the statutory entry dates as a substitute for the plan's entry dates in testing otherwise excludable. As I have stated in a prior message, there is not agreement at the IRS as to which is the proper construction. You are certainly within your rights to take the approach you think most conservative.

You newfound subscripting capability is indeed a thing of beauty!

There is a confusion here. Maybe more than one. Maybe more than two. 1) The testing company has indicated that the actual entry dates are semi-annual (that would be 5/1 and 11/1). But you have also indicated that "Plan entry dates are monthly." Both can't be correct. Which is? I'm going to assume that the entry dates for the plan are indeed monthly and that the testing company has used the semi-annual entry dates solely for purposes of determining whether a participant can be carved out. As others have pointed out, you can not find agreement, even at the IRS, as to whether the superimposition of semi-annual entry dates solely for the purpose of determining whether an individual can be carved out is acceptable. Depending on what industry conference you might have attended in the past three years, you will find an IRS representative, possibly on tape, indicating one way and you will find another IRS representative, also possibly on tape, at another conference indicating the opposite. There are no citations I'm aware of which provide a more formal IRS view on the choice and the IRS view on both choices. By the way, this issue has been around for years and years and the IRS has flipped and flopped on it for years and years. It is hard for me to imagine that the IRS, if push came to shove, would hold fast to either approach as being the only legitimate alternative. But as also pointed out, you, as the client, can ask that the test be done in the most conservative manner, if you wish, and the testing company should be able to do so, even if it is at additional cost. 2) Assuming that the testing company's description is solely for carve out purposes and that monthly entry dates are required by your plan's document, I also note that you have stated that the employer processes enrollment forms quarterly. If I understand you correctly, this is a qualification failure. That is, if an employee hired in February of 2007 would be eligible to enter the plan on 3/1/2008 and that employee is not given an opportunity to commence deferrals until 5/1/2008, then the plan has not operated in accordance with its terms. If this is a correct description of what is going on then the EPCRS (Employee Plans Compliance Resolution System) provides for a correction, which you should embark upon. This may involve corrections for many years and be quite expensive. If the correction is necessary and the plan sponsor finds the default correction prohibitively expensive, you might give consideration to applying to the IRS for an alternative correction under EPCRS. Competent legal counsel should be engaged if you find that correction is necessary, in either event. 3) You have indicated that there are certain participants who are being carved out, but you haven't given us an example birth, hire and work history for anyone carved out in this manner. You hit upon one category, that would be those hired in the last quarter of the year (2/1 through 4/30) who are not actually allowed to defer until the next year (5/1 following the 12 month anniversary of the 2/1 through 4/30 hire date) who definitely should be carved out if the actual entry dates are quarterly (but see the above item if the entry dates are actually monthly). If the entry dates are monthly, then those carved out would be those hired 4/1 through 4/30 of the year before. However, it is possible that those individuals aren't in your database at all. Note that if the entry dates are indeed monthly and if the employer has been inappropriately excluding those from deferring once they have entered the plan until the next quarterly processing date, you will find that these individuals will be reflected in the final test exactly as if they were properly carved out. This is because the default correction under EPCRS is to have the employer make a corrective contribution to these individuals equal to the average of the NHCE deferral rate (with an adjustment for lost earnings). Hence, the actual NHCE average will be the same as if they were excluded. So, can you confirm which is the correct definition of entry under the terms of the plan and whether or not the employer has inappropriately been precluding people from deferring between their actual plan entry date and the next quarterly processing date?

Why am I still concerned about the fish? Let's presume that the basic formula is 50% accrued over 33 and 1/3 years, which is the 1.5% multiplier. There is another formula/level is there not? The one that provides the uptick to 50% at 65/15? The more I write about this the more I think that it does, in fact, satisfy the 3% rule. But I agree with your initial assessment.

Keep in mind that some prototype and volume submitter sponsors received their advisory opinions later than 9/30/2002. A proper adopter of such a plan would have a GUST RAP that ended at the end of the 12th month after the advisory opinion was issued. I believe there were some that were issued as late as 4/1/2003. Such an adopter's GUST RAP would have ended on 4/30/2004.

Because it doesn't satisfy any of the three accrual rules? Why do you say that the first paragraph describes a benefit that satisfies the 3% rule?

Is that true for 415 purposes, too?

Almost. With respect to the ability to claim a deduction, I certainly concur. However, the plan could very well define compensation in a way that results in this individual getting credit for $200,000. Yes, I know this would be at odds with his 415 compensation (which would require aggregating) and therefore if a DC plan the annual additions limit would be zero, but in the case of a plan which uses average compensation there might, just might, be some use of the individual Schedule C's income. If, for example, you had a DB plan that was set up specifically to include compensation from the entity which was covered by Schedule C #1 and specifically to exclude compensation from the entity which was covered by Schedule C #2, there could be a reason, or two, to use the bigger number without offsetting it by the loss. On a more practical level, however, and in the absence of such a particular set of facts, I agree with what has been posted.

Huh?

Don't think so.

Yes.

Au contraire. Much to my surprise, over the years, I have received a number of comments vis-a-vis sessions which indicate that people are disappointed because I have advocated what they see as excessive conservatism. Scarey, huh? I guess those are the folks that are disappointed when they go to a class on how to play Russian Roulette and find that the instructor doesn't advocate more than one bullet.

You can't. Not with only that information. You might be able to get close, but since the statement is by definition ambiguous, I wouldn't waste my time. Your dad should be able to submit a request to human resources for an estimate of what his retirement benefits will be. That estimate should show the specifics of each alternative he has and allow him (with your help) to select the benefit that is best for him and your mom. Once you get the figures from them, feel free to post followup questions, because sometimes the amounts and benefits shown can be a bit confusing. Of course, that is not to say that if you have further questions now you can't post them. Of course you can. It is just that it is unlikely (in my opinion) anybody will be able to offer anything concrete without additional information. You might also want to snag a copy of the Summary Plan Description. That frequently has some very useful information.

See, that is a major issue. If Jamaica Boy's comment is to be construed strictly, it doesn't matter whether the folks being taken to zero are HCE's or NHCE's. As I understand it, the issue isn't a4, it is ADEA and that law doesn't give a free pass to HCE discrim, like a4 does.

potential trubble

Not just > 0, but large enough to be considered benefitting for 401(a)(26) purposes. This requires a "meaningful" benefit.

Gee, my name is now synonymous with "worst case scenario"? But, yes, if you can run a test (*ANY* test) on the basis which hurts the most and it still passes, it should satisfy any IRS/DOL auditor.

What rule are you speaking of, specifically?

I'm wondering if there isn't something in EPCRS that would help you. I don't have time to read it from cover to cover with this particular fact pattern in mind, but maybe you do, Andy. Maybe floating the question by Joyce Kahn would make sense. Certainly not paying the benefits when due could be construed as an operational failure.

In some of the 412i cases that are being processed, the IRS is "allowing" the taxpayer to consider the plan as always having been a "regular" db plan. Some deductions are maintained when that method is employed.

I think you might want to peruse the Grey Books. I seem to recall that somebody said (Jim?) that it was ok to pay the person out as if it were a qualified plan and roll the money. No need to reopen the plan (and all those 5500's are soooooo pesky). But I'd want ERISA counsel's blessing before doing something like this unilaterally.

Don't disagree. Don't have time to look it up.

I think that rule went away with the new 404(a)(7) stuff.