Mike Preston

Let's do the math before we start scaring the plan sponsors! Given the statistics previously posted, it is not very likely that the plan is top-heavy, unless the average compensation of the non-key employees is something like $14,000/year. While I guess it is possible, it isn't on the radar in a plan like this. Here we know, based on the postings of Codi, that there is one key employee making around $43,000 who, in the first year of the plan, deferred 10.5%, or around $4,515. You would have to have the other participants, whosse ADP is already identified as 5.25% with respect to the 4 NHCE's that are deferring into the plan, defer a grand total of less than $3,010 in order for the plan to be top-heavy. For $3,010 to be less than 5.25%, the salaries would need to be less than $57,333.33 for those four employees, in total, or less than $14,333.33 on average. Yes, I know that it is theoretically possible that a very low earning employee has a high deferral percentage and that would skew the numbers significanlty. So, the post isn't entirely off-base. But, mbozek, this guy is already going through hell, let's not make it worse than it already is!

If the investment contract has such a loophole in it, then the participants are perfectly within their rights to exercise the options available to them, and certainly telling them about their options in not contrary to anything I can think of.

I don't see anything which supports the "if you use the ABT, then the gateway must be provided to all plans" position. Unlike 416, which has a clear reference in the regulations, IIRC, to the fact that if a plan is used to support another plan under 410(B) it is part of a required aggregation group, there is no corresponding provision for the gateway. Furthermore, if you use the ABT, you can (must?) exclude those under 21/1 from it! The logic for that has been previously posted a number of times, and even the IRS now agrees to it, I believe! So all roads point to exactly the opposite. I was at the ASPA Summer Academy. I didn't hear Jim state that the gateway had to be provided to those under 21/1 if the plan was tested separately with respect to excludables and non-excludables. He certainly didn't say it while he and I were on the podium together in the final session. The preamble is about as clear as it can be, IMO. Thanks, Tom.

Andy, can you point me to the cite for the top-heavy only participant in a safe-harbor plan not being considered benefitting for 410(B)? At this moment, I'm skeptical.

There is just too much we don't know. Another thought is the one-year rule. This individual wasn't marrited for the full year when taken away. Does that impact the determination? I like the question about whether it is a governmental plan. Another thing to consider. Again....call an attorney! I guess the alternative would be to plan on submitting the whole thing to the court for a determination. Inter plead it and let the court decide? I don't know. Maybe you need to call an attorney to decide whether that is a viable option or not!

Failure to provide a designation form that conforms to the rules of the plan? Dated improperly? Improper spousal consent? I don't know? All I know is that I would want an attorney telling the Plan whether it appeared to be valid or not!

Not as far as I can tell. Was this a trick question? See 1.401(l)-2(B)(2)(i). I suppose if the formula you mention is an allocation formula and not a contribution formula and the amount contributed is just enough to give folks 4.5% + 4.5% above $16,000 it might satisfy the general test on contributions. But then again, I seem to recall that the general test doesn't allow any integration level other than the wage base. Nonetheless, the resulting contributions might still satisfy the general test on benefits.

You should probably get to an attorney in advance of being contacted by the widow. While I *believe* that the terms of the beneficiary designation will ultimately be the ones that the plan follows, there are a number of questions that all sides will no doubt want to have answered before the final decision is made. If you already have your ducks all lined up, the process may go smoother. The biggest issue, of course, will be whether the beneficiary designation you have was valid when executed. If i were the widow, I'd want to confirm or deny that one first. Then there is the potential that the divorce decree invalidated the designation in some manner. Probably not, but then again..... There are probably other issues to deal with, such as those that might be specific to your circuit court. In any event, if anything ever called out for the need of an attorney to advise a Plan Administrator, this is it.

So, for the 12/31/2001 limitation year applicable to the 401(k) plan you would take into account, in addition to the 401(k) plan annual additions, the MP allocations with respect to the 6/30/2001 year (assuming a single allocation date of 6/30/2001), measuring everything against 12/31/2001 415 compensation. For the 6/30/2002 limitation year applicable to the MP plan you would take into account, in addition to the MP annual additions, the 401(k) "allocations" made during the 12 month period 7/1/2001 through 6/30/2002 - this would be employer contributions and forfeitures plus deferrals and matching contributions allocated as of any date in the 12 month period, measuring everything against 6/30/2002 415 compensation. I strongly suggest that somebody review RR 79-5 to see whether the plans have a problem with their overlapping limitation years, as I haven't reviewed that RR in a number of years. Hence, it may be ok, it may not.

No.

Yes.

The easiest way to deal with this is to draw it out. For each limitation year that you have, count all annual additions in that limitation year and make sure they don't exceed the limitation year's maximum. Annual additions count as of their date of allocation: 401(k) when contributed, match and other employer contributions when allocated. So, the question I have is: what limitation years are you dealing with? Are both plans using a calendar limitation year? Are the plans using a limitation year that corresponds to the plan year (that is, overlapping limitation years)? I think it is Revenue Ruling 79-5 that gives the blueprint for overlapping limitation years. As I recall, the rules are somewhat restrictive in that having multiple limitation years in multiple plans of the same type (401k and MP are both defined contribution plans) is not universally available. Are these individually designed plans with determination letters? Or are they prototypes where no real legal counsel helped in their establishment? Or somewhere in between?

I agree with KJohnson. It turns on the definition of plan assets. I see two regulations. One dealing with investments. The other dealing with participant contributions. I see nothing dealing with receivables of employer contributions.

Checking the LRM's, we find the following: "The plan must also specify a reasonable period at least once each calendar year during which a participant may elect to terminate an election or to modify the amount or frequency of his or her Elective Deferrals. " Hence, there doesn't seem to be a legal requirement, from the IRS' perspective. However, it is generally considered bad for participants to restrict their ability to eliminate deferrals. Maybe an employer might want to do this in a plan where deferrals aren't being encouraged (such as a safe-harbor plan), but otherwise, I wouldn't think it a terribly good idea.

In normal circumstances, it would be considered a contribution. However, if it is somehow found that there was a fiduciary breach by entering into the contract in the first place, restitution to the plan participants would not be considered a ontribution. It is somewhat difficult to convince everybody involved to volunteer that there was a fiduciary breach. When everything is explained, for some reason, people just don't want to belly up to that particular bar. Besides, it is a very unusual plan that can't handle the restitution as a contribution and still pass muster under the non-discrimination tests of the code. Of course, if the plan is a prototype that doesn't support disparate benefit amounts, or the plan sponsor is unwilling to amend the plan in order to allow it to support disparate benefit amounts, then I guess the plan sponsor can't do what it wants to do.

You hit the part of my first response that I wrote and then erased! I meant to put it back, but forgot. If you go through the priority categories, you very, very rarely end up with anything other than what a normal allocation under 80-229 will allow you to do. Only if there is a very longstanding plan with significant early retirement benefits, and HCe entitled to those early retirement benefits, do you even approach anything other than the owners are last in line. At least that has been my experience.

I don't know whether you are intentionally trying to obfuscate the issues or not. But you seem to be doing an awfully good job, nonetheless! I don't know, maybe it is we rather than you. No matter. I'm not saying that an individual that is terminated with less than 501 hours at the time that the plan is merged would be entitled to a benefit. If I implied that, I take it back. Now, will you take back your implication that there are are potentially some active people who would not be entitled to a benefit?

Does the plan have the safe harbor rules with respect to hardship? If not, I would think that it most certainly satisfies the general definition. Besides, I'm a little bit curious. Is this person still employed? If not, wouldn't they be eligible for a regular distribution at some point? Or is there some sort of delay with respect to termination distributions (not payable until after 1 year break in service, for example) that the participant is trying to finesse with a hardship? If you implement the safe-harbor rules the participant must fully exhaust their ability to borrow from the plan before a hardship can be granted. With a slight twist, even the safe-harbor rules might be satisfied. Just have the place he is currently under house arrest insist on a rental payment or else they will evict. Wouldn't that satisfy the need?

There is no requirement to 100% vest upon a merger from a MP to a PS plan. The IRS just recently came out with a clarification on this very point. Many practitioners believed that it was necessary to 100% vest when a MP was merged into a PS. I wasn't among them, so I'm particularly happy that the IRS agreed with me. ;-)

Another souce of comfort might be some private letter rulings or tax court cases where there have both been significant minimum funding violations and, yet, no assertion as to the existence of a prohibited transaction based on said violations. For example, see PLR 9146005. That one seemed to be particulary concerned, from the IRS' perspective, with hitting the taxpayer from every conceivable angle. But nary a mention of a prohibited transaction related specifically to the funding deficiency. That particular ruling seems to stand out because the prohibited transaction rules were considered when dealing with aspects other than minimum funding. Seems the IRS had a perfect opportunity to layer the prohibited transaction aspect on if they felt they could.

For purposes of 411d6, I think a merger is very much a freeze or termination. Again, you are implying that a merger can be used to prevent these people from receiving a benefit to which they are entitled. I disagree. Perhaps you would like to clarify?

Sorry. I was interpreting your first comment to imply that those who were not terminated were in a categeory where they could receive nothing for the year. I agree with you that as of the time of the freeze or termination if an individual is already terminated and did not work more than 500 hours in the year, that individual is not entitled to a contribution. Do you agree that those who are active as of the date of the freeze or termination, even if they have less than 500 hours are entitled to contribution for the year?

Since the plan does not have an end of year requirement, if the plan is terminated or frozen now, the requirement is zero hours, isn't it?

Unless there are other issues involved, Paul Schulz, who is the head of the IRS determination letter program, indicated at the ASPA Academy last month that non-conversion cash-balance plans should not be held up. If you have a cash-balance that is not a conversion and is just sitting at National Office, a simple email to Paul may get it sent back from National to continue its way towards a determination letter.

No.