Mike Preston

It may not be recognized until the year it becomes effective. Hence, it would not be recognizable in the 2002 valuation. It can be taken into account in the 2004 valuation. See RR 77-2 (cite from top of head, if anybody thinks it is incorrect, please provide correct cite).

I think kocak hit the nail on the head. Neither plan will be SH for 2003. Your SH design will be a SH for 2004, though.

It depends. If the intent is to follow the document and return the excess, I would use the lower amount in the test. If the intent is to use the IRS correction procedure in order to allow the excess amount to stay in the plan, I would use the actual amount.

True, but only if "the coverage under such plan is not significantly changed during the transition period (other than by reaosn of the change in members of a group) ..... " 410(B)(6)©(i)(II)

I think the gist of it is that the plan sponsor wants to set up a plan with certain features. Those features are consistent with the SH rules. Recognizing that one can't have a "true" safe harbor because of just what you are mentioning, this discussion is about how to perform the required ADP test for 2003, which of course in a true SH plan there would be no need for!

If you have HCE's participating in both plans, then each of the plans will take into account the deferrals and compensation of the HCE for the entire year. Check out 1.401(k)-1(g)(1)(ii)(B).

On the one hand, you have the practicalities of the situation making it seem like it is anything but cost effective to provide for the distribution. On the other hand, you have the fiduciaries of the plan charged with administering the plan in accordance with its terms. I think the fiduciary concerns win. Pay them. Cost of doing business, if you will.

If a timely correction is available to you, then taking advantage of that correction mechanism is not unbecoming. In fact, if it is less costly, it is most becoming. Certainly self correction will be less costly administratively, although it has the potential of being more costly as far as benefits go. Therefore, unless you feel that you can negotiate a better correction through the pending application I see no reason to add it to the compliance statement. On the other hand, if you have a costly correction staring at you, it may be best to attempt to negotiate a less expensive correction.

Well, if you are going to correct your numbers, so my response looks wrong, I guess I should correct my numbers, too, huh? Let's reword the above (which was based on $6,000 and $5,000, to $6,000 and $4,500). If you need to give back $1000, then all $1000 would be taken from the 90% owner and since that person is over 50, all $1000 would be characterized as a catchup. If you need to return anything up to $1,500 then $1,000 would be catchup and the balance would be refunded. If $1,700, then $1,000 would be characterized as a catchup from the 90% owner, $500 from him would be refunded and then $100 would be refunded to each. What part of my original response is inconsistent with the "correct" answer you received from another source, other than relying on your inconsequential numeric errors?

Have you checked out 98-52? I think you will end up with two plans, each of which will have to perform ADP testing on the deferrals received during the year. You may aggregate the two plans for ADP testing is you choose. To the extent HCE's participate in both plans, their compensation and deferrals count in both ADP tests. Whether you use current year testing or prior year testing for the plan that has the 12 month plan year is the same decision you would have made had you not created the second K plan. The testing for the second plan is what I would need to review 98-52 to determine.

With an appropriate adjustment for earnings.

If you are testing the plans separately, yes with respect to the rate group test, no with respect to the ABT. If you are testing them together (which it sounds like you should do because they pass when tested together), then no. Note that you can test the DB and the DC completely separately (wthout considering each other) even for the ABT if you want to.

My understanding is that the IRS believes the "no comp" rule applies to NHCE's as well as HCE's.

I haven't either. But the net result seems non-discriminatory to me. Of course, we might ask what the document says about how to calculate refunds of matching contributions.

You have stated my previous understanding correctly. I sure would like Blinky's understanding to be clearly laid out somewhere, though. If you have amended for GUST, your RAP appears to be extended only if you submit. Just like a regular 401(B) RAP. That is, adopt a plan by last day of plan year. Submit by due date of tax return and the IRS will allow you to amend up through the date that is 30 days after their determination letter is issued (to cover things that might have been identified as "proposed" in the DL process). But, if you don't submit, you can't modify the terms after the end of the year, unless there is a special exception such as 412©(8).

I understand. However a word of caution might be helpful. Some people believe that a resolution, in and of itself, no matter what it says, can not function as an "adoption" of any specific language not embedded within the resolution. Glad you had a lawyer do it, because it is clearly a legal issue.

Perhaps an analogy would help. Assume you have an employer with 10 employees, all of which are statutorily eligible. Of the 10 employees, there are 7 HCE's and 3 NHCE's. Let's assume the document language is such that one of the NHCE's is not eligible for the plan, based on a clearly reasonable business class. This one NHCE is not in the plan, has never been eligible for the plan and will never receive a benefit in the plan. Nonetheless, this NHCE _is_ taken into account under the tests that we must perform. That is, the ratio percentage of the plan is only 66%. If this plan doesn't satisfy the ABT, this plan will not pass coverage. Let me state it another way. If an employer allowed enough individuals to sign irrevocable elections such that the plan would fail 410(B) coverage, the only alternative for the plan sponsor would be to shut down the plans. They wouldn't be qualified. Tough result, but I think consistent with the regs.

Glad it worked out.

Why isn't it looking good? What is the difference between what you have described and what I described?

I somehow feel that that -12 approach is what the IRS intended. But it certainly isn't clear.

I don't disagree that they are treated as not benefitting. However, they are not excludable and therefore "count" in the testing. They may count as zeros, but they count.

I'm not sure your method works, rcline46, but I guess it is better than nothing. SS (S___t S________?), the IRS has made it clear that an adoption of an amendment and restatement is just that... and amendment and restatement. If your new adoption doesn't have the EGTRRA language in it, well, it doesn't have the EGTRRA language in it.

By the language of your own post, the changes you made to the document are effective 1/1/2003. That, in and of itself, is not going to change your method of compliance for 2002. So, a change is needed in order to use a different method. It is a bit unclear as to when such a change would have needed to have been made in order to be "ok". Make the change, submit it, and you should get an LOD, along with 7805(B) relief.

I'm not sure Jerome understood the nature of the question. Either he did, or I do. But I don't think both of us do. If he did, just ignore me! As you point out, the ADP/ACP tests for both plans will consider this individual as having $100,000 in compensation (using the term earnings to mean compensation is frequently confusing) and as having deferred $11,000. From that, all things flow. Also, the plan document might actually have an indication of how the refunds are to be handled in this case. I can see a possible problem in that it may be necessary to refund more than the $4,400 to this individual to make the "dollar down" correction, if we presume the starting point is $11,000. Hmmmmmm.....gotta go check my document..... Darn....nothing in there....guess the reg is all we have. So, I would say that unless your document has clear rules to follow that you have to do something "reasonable." You have to give back the appropriate number of dollars, between all the HCE's (this person _is_ an HCE, right?). Whether you start this person at $11,000 or $4,400 when determining the amount of the dollar down adjustment doesn't really matter, as long as the total number of dollars given back to HCE's is correct. Good question.

Also note that the BRF rules in the a4 regulations have some (clear?) guidance on what to do when a BRF is discriminatory. Obviously, going back and retroactively lowering the account balance minimums necessary for a particular investment is not practical. But 1.401(a)(4)-11(g)(3)(vi)©(2) essentially gives a plan sponsor until the very last day of the year to make an amendment to eliminate a discriminatory BRF. In this context it could be analogized to an option that is not part of the plan document itself (such as an account balance minimum) by calling for the elimination of the option on or before the last day of the plan year. Doing the math, as pointed out above, seems somewhat trivial so the ability of a plan sponsor to understand whether an option needs to be eliminated or not certainly exists. I still think it unlikely that a minimum imposed on all accounts by the investment provider, to the extent not significantly discriminatory is not likely to be challenged. In this regard, I think it is exactly what we get paid for to provide advice to a client that says when an area is black and white, and when an area is grey, and, if grey, what the likelihood of having a problem is. If we are uncomfortable with predicting such a likelihood we can always pass the buck to plan counsel.