Mike Preston

Use restructuring. Slam dunk. Plan 1: Mom, Dad and 31 year old NHCE. Plan 2: Everybody else Each has ratio percentage in excess of 70% (actually, each is 100%), so 410(b) not an issue. Test plan 2 on the basis of contributions (everybody is getting 5%). Test plan 1 on the basis of cross-testing. 5% to 31 year old is equivalent to 68% for 63 year old, so I'd say that 15% is pretty safe.

A second plan is a common planning technique. In this way, all NHCE's are provided with an SPD that shows the formula allocation and the two HCE's are the only ones to see, hear or smell the plan that provides them with the top-up benefits. In some organizations, this is the only way to make such an allocation method "fly". My guess is that if you use accrued to date testing you can get substantially more in for the 2 HCE's.

You aren't reading the thread very carefully. One can eliminate benefits without violating 510. However, dismissing an employee predicated on the expense of the impending benefit is such a clear violation of 510 that I'm presuming you just missed this point.

PS. I'm assuming that 5/31 is the limitation year.

The purpose of the compensation information is to allow the IRS to both check the reasonableness of the benefits and to ensure that non-discrimination isn't an issue. If you really can't get the information, I would submit it without it and annotate the 6088 with an explanation as to why the information isn't being provided. Don't be surprised if the IRS accepts it. Don't be surprised if the IRS rejects it.

Assuming compensation is at least $44,000, the answers are yes to both questions.

Egads. Something tells me this comment was in a different form in SoCalActuary's head and it morphed into the above somewhere between the brain and the keyboard. Under no circumstances can you release the employee predicated on their potential accrual as being too expensive. That is, on its face, a violation of ERISA 510. Don't do it. But whatever you decide to do, PAX has the right idea.

I didn't think that a plan formula that was based on service but pro-rated on participation qualified as a safe-harbor? Then again, from the description given, I'm not sure that this is a plan that bases the benefit on service at all.

Most people think that following what the IRS tells us at conferences is at least arguably the correct thing to do.

Not "similar to", "precisely like".

It is almost impossible in most cases to determine, as contributions are being made, whether they are catch up contributions or not. Sure, for contributions in excess of the 402(g) limitation it might be possible, but for all other sources of catchup contributions, such as amounts contributed in excess of the adp test limitations or amounts contributed in excess of a payroll limitation (say, 6% of pay), you really can't tell whether the violation has taken place until the end of the year. Hence, the IRS has stated in their regulations on this subject that there is no need to keep track of contributions as they are made as being normal or catchup, since any determination being made during the year might (in fact is most likely to be) modified at the end of the year when the full facts are known. Further, the IRS has made it acceptable to meld catchup contributions into regular contributions as far as account balances go. For things like top-heavy testing and other account balance determinations, they have said that catchup contributions are included to the extent they aren't ejected from the plan. So there really is no reason I can think of why a plan sponsor would want to keep track, separately, of catchup contributions.

I think you are looking at the ramifications of this issue in a myopic manner. If the only issue was adp/acp testing, I might agree with you that using the higher threshold is very likely to help the testing, as those between the higher threshold and the lower threshold are likely to be high level contributors. But once the plan sponsor has determined HCE status, that is used for much more than just adp/acep testing. It is random as far as direction goes when we are dealing with the non-discrimination tests (other than adp/acp, although even those are not set in concrete). That is, in my prior message, I could just as easily have described a situation where the use of the lower threshold caused the plan to fail non-discrimination and the higher threshold would have allowed the plan to pass the tests. Whichever way you go, there is the possibility that had you gone the other way, the plan sponsor would need to provide larger contributions for the NHCE population in order to satisfy the 401(a)(4) or 410(b) tests. I will not buy into the red herring that the administrator making a determination as to which is the correct interpretation falls into the trap of a fiduciary violation by making the decision which reduces an employee's ability to defer. That is just bunk. There is a correct and an incorrect way of doing things. The IRS is inconsistent in their communication as to which is the correct way of doing this particular thing. I hope that once the IRS recognizes that their communication has been faulty in this area they issue something which gives plan sponsors comfort no matter which way they have done it through a given time frame and then they clarify which way they want the determination to be made from that point forward.

Boy, talk about mixing issues. It sounds like you want confirmation that they above satisfies 410(b). Sure it does. But it would fail 410(a). See the example in the regulations. And to answer your prior question, whether the plan has the average benefits test available to it for 410(b) (which, for the life of me, I don't understand why it would need it), it would depend on the provisions of the plan as to how the exclusion of the HCE and the 2 NHCE's was accomplished. Excluded by name? No way. Excluded by way of the description above, sure, but remember, that would fail 410(a) so it isn't much of a victory. If you want the average benefits test available, you need to ensure that the plan document provision which operates to exclude the ineligible participants does so on the basis of what the IRS calls a "reasonable classification".

"Just when I think I'm out, they d...r...a...g me back in!" What makes you think this is a "no harm, no foul" situation? Take 2006 for example. Let's say my plan sponsor decides that everybody earning more than $95,000 in 2005 is an HCE for 2006. Your plan sponsor decides that the threshold must be $100,000. Let's say there is an individual that makes $97,500 in 2005, and this person, by reason of the class he is in, receives no contribution (note: the class is not based on him or her being an HCE or an NHCE). On my non-discrimination test, this person is an HCE and the test passes. On your non-discrimination test, this person is an NHCE and the test fails. How is this a "no harm, no foul" situation?

Especially if you use compensation while a participant as your testing compensation! Note that I'm not crosstesting so the age means nothing.

I also suspect that there is a third way you can pass the average benefits test. If you run the test by excluding all people who are otherwise excludable, I think you will also pass. I didn't run it this way because there was a non-controversial (famous last words?) method available to you. But just as an exercise, you might consider breaking your population into two groups, one of which is statutorily excludable and the other isn't. Then run the average benefits test on those that are not statutorily excludable and see if it passes. As I said, I *think* it will. There are a number of people who have heard the mantra that there is always one and only one average benefits test and that you, perforce, include all benefits in that test. While this is usually the case, there is a somewhat complicated analysis that has been published on BenefitsLink before that makes it clear (to me, anyway) that when you are testing compliance with 410(b) by permissively disaggregating the statutorily excludables from the non-excludables, you also end up performing two ABT's in that circumstance. Note that we didn't even begin to get into issues such as using the accrued to date method!!!!!

As I suspected, it looks like the plan passes. You even have a choice as to which method to use. First, you can use a non-controversial method, if compensation of those eligible purely for the TH contribution is pro-rata for the year. Re-run your average benefits test on a contributions basis. Change the testing compensation to "compensation while a participant". Make sure your system has that information. In this case, assuming somebody was hired on or about 7/1/2005, they would be a participant for 3 months, but they would receive a TH allocation of 3% of entire year compensation, which results in the Average Benefits Test treating this person as if they were getting a 6% of pay contribution. Then, when you impute permitted disparity, they get an additional 5.7% on top of that. I am editing this message to highlight the fact that you need to determine actual compensation for the period of time that the individuals were participants in the plan, and that using a pro-ration (as I did) is not appropriate in a "real" test. If my numbers are correct based on what you sent me, you should find that the average benfeits test is something like 9.74%/12.72% = 76.57%. Therefore you pass the average benefits test and you therefore pass 410(b) with only 9 out of 16 NHCE's "benefitting" in the profit sharing portion of the plan. Second, you can use the method that I think works, but that the Nut says doesn't. That is, you test on the basis of benefits in your average benefits test (you can even not use "comp while a participant" if you want) and it will pass. My numbers are 4.34%/5.77% = 75.2% using full year compensation and 5.22%/5.77% = > 90% using comp while a participant. Are we having fun, yet? If you run the average benefits test on the basis that I have specified and still don't pass, send me your report output and I'll try to identify where your results are different from mine.

I can see no good reason for precluding a non-U.S. citizen from being the Trustee of a qualified plan. However, and this is just conjecture on my part, just like the assets of a qualified plan must be, in certain respects, domiciled in the United States, I would think the same would hold true for a Trustee. That is, it is necessary for qualified plan assets to be subject to the jurisdiction of the US district courts, unless the regulations carve out an exception. Hence, investing in foreign assets is pretty much, but not completely, limited to those securities which are traded on a US based stock exchange. Mutual funds can be established for this purpose. At the far and of the spectrum a special class of investment known as an "ADR" (I think I've got that right, but I might be off a bit) can be established to give the US Courts some jurisdiction. In any event, this requirement is set forth in ERISA Section 404(b) and the regulations thereunder. So my guess is that as long as the individual's actions are subject to being overseen by the US district Courts, I would think that person could be a Trustee. As the appointment of a Trustee is, in and of itself, a fiduciary action, I would think appointing a Trustee whose actions are not subject to being overseen by the US courts is a dangerous fiduciary action to take. I couldn't find, after a quick look however, any specific mention of the requirements for being a Trustee, though, so the above is just a guess.

Where did I mention DB/DC combo? Thanks for the chuckle. I suggest you contact the IRS in Washington to determine whether your interpretation is correct. Either that, or Mr. Tripodi directly.

Perhaps you should think about the process and imagine why an exact analysis on the figure provided would be impossible without knowing the earning piece and then jump in and answer it yourself; since you think you know everything. I would be surprised, based on the way the question was put, if the amount you assumed had earnings in it, was representative of anything other than deferrals to be refunded. I will leave it to others to determine whether your assumption was appropriate or not.

Yes, it must be reclassified; and leaves him a deferral limit of $20,000 (less the reclassified catchup amount) for 2006. This would be different had he deferred during the first part of 2006, as his deferral limit for the year would have remained at $20,000. I am scating around the numbers as I do not know the "earnings" portion of your figure. Can you explain how the "earnings" portion of the figures makes any difference, at all, to the determination of remaining catchups? Or how said portion might be relevant to the poster's question at all? She gave a figure of 1101.50. I didn't know whether that figure included an earnings calculation or not. If that figure was $1000 in contribution plus 101.50, then you must reclassify the $1000 as catchup for 2006 and the earnings remain. Hence, I scated around the numbers while the principles remain in tact. Didn't we have a discussion about cherry picking statements? If you (or anybody else, for that matter) make a statement that I think needs clarification, I will ask for that clarification. You can choose to provide it or not.

If the plan is so inclined, they can assist the participant in escaping the withholding. First, have the Trustee borrow from the policy such that its surrender value is essentially zero. Then have the participant obtain a participant loan from the plan in the same amount, and on the same terms, as the plan arranged with the policy (if possible). When it comes time for a distribution (one day later?) the plan will distribute the $80,000 as a rollover and a life insurance policy with little or no value, along with a participant loan in the amount of $20,000. The participant can then repay the insurance loan, restoring it to the condition it was in before all this took place. The distribution from the plan was not subject to withholding since the participant loan is a qualified offset.

Count me on the side of those who believe the directed trustee that does nothing more than notify the plan administrator of the potential default is at risk. Let's start with a threshold question: are the loan provisions available to the directed trustee? Outside the ERISA area, a directed trustee would be hard pressed to make a loan without seeing a copy of the documentation and maintaining a copy in their files. If we assume that the directed trustee has a copy of the loan, then I think the Trustee is required to apply to provisions in the absence of intervening instructions to the contrary from the plan administrator. I say the directed trustee should notify the plan sponsor of impending deemed distributions and follow through, including the issuance of 1099's, unless they get instruction to the contrary from the plan administrator.

I agree with the majority opinion that this is a "no big deal" and that the course of action should be a simple notification to participants with a method for them to obtain a new amortization schedule. Just one word of caution: the rules require that the date of the last payment of the loan under the new schedule not be later than the last payment that would have been allowed had the original loan been made for a 5 year period (in the case of a loan not for the purchase of a residence). Take a person whose 5-year loan is currently scheduled for a final payment on 12/31/2008. If you find yourself with Friday paychecks such that your last payroll in 2008 falls on December 19 and that the next payroll is January 2, you must ensure that the last payment on the new schedule is made on December 19, 2008, not on January 2, 2009. If you reschedule the loan such that the last payment is to be made on January 2, 2009, I think the IRS could rightfully say that you extended the loan beyond the 5-year repayment cycle and that the full extent of the loan became taxable when the reamortization was initiated.... sometime in 2006. I know this seems ticky-tack, but it is really a simple matter to ensure that this rule is followed.

Vicki, unless there is a reason to classify a portion of the deferrals made from 5/1/05 through 12/31/05 as catchups as of 12/31/2005, they aren't catchups as of 12/31/2005. You might want to get a copy of Sal Tripodi's wonderful worksheets on determining catchups in non-calendar year situations and then put them into Excel. You will have a fantastic tool at that point that can really bring clarity to questions such as this.