Mike Preston

However, (i) is more troublesome than (ii) for the multi because if a non-multiemployer plan has been previously terminated, then the multi is disqualified.

I'm not sure I agree with any of this. If the document defines the ADP test, then one performs the ADP test in compliance with the document if that document has a letter of determination. If the document is deficient, it is always a choice whether to amend it or attempt to rely on 7805B relief. So, first things first, what does the document say? Are you in the RAP? Was there an LOD?

I'mgoing to go with Blinky on this one. I'd present it to the folks at EPCRS on its face and see if they will allow it. Something tells me that in this case it isn't that long of a shot. Maybe even a letter from the client to the investment firm laying out the basics of the engagement would do. That would be a better document than a napkin, wouldn't it?

In general, empoyment date classifications are reasonable. However, there is always the chance that the coverage group before is so heavily weighted to HCE's and the group after is void of same that the IRS might take exception. Best to sumit.

Cash or Deferred Arrangement. See regulation section 1.401(k)-1(a)(2)(i) - Definition of Cash or Deferred Arrangement..... an arrangement under which an eligible employee may make a cash or deferred election with respect to contributions to, or accruals or other benefits under, a plan that is intended to satisfy the requirements of section 401(a) (including a contract that is intended to satisfy the requirements of section 403(a)).

You can do all of these things within the confines of the document. I have a distinct prejudice against waivers of all kinds. I think the IRS, if she (as the tax court refers to it) chooses to do so, can make mincemeat out of any of them. Yes, I've seen them in operation. I've even reviewed some of them and noted that they are sometimes in compliance with various document provisions. But I always recommend, if given the opportunity to do so in advance, that they be avoided like the plague. All this talk about how to make them work, and in what circumstances they work would be much better spent on how to avoid them and how to ensure that the plan document's provisions are modified so as to provide the same result. Think of waivers as penguins jumping into the water and the IRS as a leopard seal. Many penguins survive. Unless they run into a leopard seal.

I would think that this is the exact situation where the requirement for the audit makes sense. Hire a CPA. Since there is only $50,000 in other assets, once the audit is done one year, the audit a second year should be a breeze. Unless, of course....well, let's not go there......

If the ortodontia bill was legit (that is, it was an invoice for services actually rendered, rather than an invoice for services to be rendered in the future) The employer is wrong. You need to gently move up the ladder from the individual you spoke with until you find somebody who knows a bit more about how a medical flexible spending account is supposed to work. You might want to find out who they use for an outside advisor and talk to them. Of course, it may not be possible to get that information. If the bill is for services to be rendered after date of termination, then you need to get your hands on the document that controls the plan (generally known as the "Plan Document") as that can have varied rules with respect to what happens to covered services incurred after date of termination, but prior to the end of the annual period. It can also have provisions affecting the continued payment of "premiums." Further, there might be some COBRA issues involved. Finally, my understanding of cafeteria plans is a bit dated and without doing research the above is my opinion. Maybe somebody who deals with these things day in and day out can clarify a bit more. Good luck.

I see your point. I don't have time to pull the regs this morning, but my gut feel is that if the safe-harbor is being used to satisfy the top-heavy requirement, then it is not solely being used to satisfy the ADP safe-harbor and will therefore cause the individual to be considered benefitting for purposes of the gateway. But, I like your interpretation better.

What part of "yes" would you like to be reiterated? ;-)

But if they are getting a top-heavy 3% doesn't that count as benefitting?

This is the reason that some practitioners state a preference for the 1/1/97 general effective date. I _think_ that the IRS position on it is that since you are sending in documents since the last LOD was issued, that they are reviewing the plan for compliance since then. In fact, there have been other threads posted here indicating that the IRS seems to be going back farther than a plan sponsor wants them to. So, I'd say the likelihood is that they are reviewing back to the earliest effective date in the document.

Setting up a 401(k) plan just so folks who are older than 50 can make a $1,000 contribution seems a bit extreme. I hope there are enough of them to make it worthwhile.

I'm not sure that all mass-submitter type plans follow the route that I'm about to discuss, but I think the IRS has stated at various conferences that it is their preferred method of dealing with things. While you can certainly do it the way you describe, the method I'm thinking of establishes the first day of the plan year during which the GUST restatement takes place as the general effective date of the restatement. The document itself has specific effective date language for provisions that are required by law to have effective dates prior to the general effective date of the restatement. If done in this manner, you then include in the GUST restatement the elections which are in effect as of the general effective date of the restatement and let the natural operation of the plan prior to that date superimpose the provisions in effect prior to the general effective date. Where it gets murky is where a Plan Sponsor may have operationally applied different provisions between 1/1/97 and the general effective date of the GUST restatement. For those things (such as the election of the top 20% rule, the look back period in the case of non-calendar year plans and the use of either current or prior year testing among others) which might have gone back and forth during the period in question, I usually suggest that the document be modified to reflect those in some way. Others argue that there is no need to have them reflected in the document, as they believe they can be implemented by administrative election for periods before the general effective date of the restatement. I guess we'll find out if somebody talks about an audit experience they've had dealing with the issue. Of course, if the mass submitter document does not allow for this preferred procedure, one is most likely going to be required to have the restatement include the changes since the effective date. You'd have to check with the plan document provider to see which way is indicated.

Much and I agree with you. Short of setting up two plans and then going through some carelully planned (i.e., administratively cumbersome) procedures for monitoring 410(B), I think you've got it.

If I understand your question, you are inquiring about a plan year that begins in 2002 and you are talking about the gateway necessary to use the cross-testing rules. Right? Assuming so, then you can provide the 5% only to those that satisfy the 1 year age and service requirements. Those who don't meet the 1 year age and service requirements are allowed to be excluded from the gateway. Does that help a bit?

Let me get this straight. You admit to never having worked as a Plan Administrator for a TPA before and yet the testing for the year was subject to review only by you? If you are solely responsiible for this, then your employer is completely and totally out to lunch. Strong letter to follow. The fact that you have taken the initiative to come here and try and resolve this issue speaks volumes. If you get fired for this, or any other error which is the direct result of your organization not having an effective review procedure in place, you are probably well rid of THEM and most likely will be welcomed by another organization. Now, do the right thing by this client and suggest to the firm that the client be informed as soon as practicable (I fully recognize that the delivery of this news is something that needs to be handled delicately). Here's an off the wall suggestion. Take a look at Q&A T-24. In the first year of a plan, unlike other years, the top-heavy determination INCLUDES all amounts allocated as of "a date in that first plan year." There is absolutely no limitation on the timing of when the funds are actually contributed. Soooooooooooooooooo, let's assume that your 5th HCE is a "favored employee". Let's assume that by now, he or she has become quite valuable to the company. Maybe they would like to provide for an allocation to that individual for the 3/31/2001 plan year. In fact, an amount which takes the plan out of top-heavy status???? Can this actually be done? I don't know. It would depend on the plan's language and how an ERISA attorney might advise in light of all the facts and circumstances. Maybe the firm could actually end up making lemonade out of lemons??????

Does a prior plan exist? You determine the top-heavy ratio as of 3/31/01, in part, by adding back any distributions that have taken place over the last x years for both key and non-key employees. Look up in the 416 regs exactly what years to add back if a prior plan exists. If it does and the prior plan's distributions were heavily weighted to key employees such that any reasonable person would have predicted that the plan would be top-heavy no matter what the new contributions were during the 4/1/00 - 3/31/01 year, then at the least you can blame it on the person who designed and installed the plan! Is there another plan of the employer? I know it is unlikely, but I have to ask. If so, aggregate to determine top-heavy. Are there any union employees? If so, is there a union plan? Can the union plan be aggregated? I haven't looked this up lately, because I haven't needed it, but I seem to recall there were some circumstances where it was possible. Now, to your questions. The employer contribution Safe-Harbor Notice needs to be given in advance. So, I'm afraid the 4/1/00-3/31/01 and the subsequent two plan years aren't able to take advantage of that. However, if the plan was at all close to passing, then it wouldn't require a full 3% contribution at this point to make it pass, either, I wouldn't think. It is not too late to contribute for the 3/31/01 year and come under the EPCRS' self-correction mechanism. If you determine the plan is top-heavy, the sooner the client is made aware of the issue, the better off your firm will most likely be. Good luck.

But if it is an employee benefit, and the IRS has specifically stated that the plan is not held liable if they accept an amount that turns out to be from a plan that isn't qualified (See the first part of that Q&A 14), they have to be, er, well, uh.... don't make me say it..... to require an LOD. Especially given the fact that the IRS is trying to discourage LOD filings by encouraging mass submitter providers.

I can certainly see a plan sponsor choosing not to implement catch-up contributions for 2002. It is only $1,000 per person over age 50 and there frankly may not be enough people in that category to justify the administrative overhead. Nonetheless, if they decide to go forward, I think they are making more work for themselves trying to police this in advance. The regs allow the plan sponsor to do the testing first and reclassify anything as catch-up after the fact that would otherwise have violated a rule. Trying to anticipate that in advance seems like a major headache to me. It also seems like it won't necessarily work. That means they go through the effort and don't really have anything to show for it. I'd advise against it unless I heard a good reason for it.

AHA! (How do you spell that expression?) Having just finished lunch (I'll let you guess!), I might now understand your position. In most plans (certainly not all) the definition is more along the lines of: Group A - Physicians Group B - Clinic Directors Group C - Registered Nurses Group D - Orderlies who like Fruit Salad Group E - Orderlies who hate Fruit Salad Group F - Receptionist Group G - all Others where the percentages are decided after we have given advice to the client. In the case where the percentages aren't cast in concrete, you have more flexibility. The basic point you are trying to make, which I think is that the volatility of the results is inversely proportional to the body counts in each group is pretty close to the mark. I probably wouldn't word it quite that way, but it is a valid point. What I think is more relevant is the specific bodies being used as foundation. I've seen a case with 400 participants, but there is one HCE (youngish) that requires exactly two NHCE's in the highest contribution category be below age 25. The rest of the test doesn't matter. You need those two specific bodies to make the test work. And it really doesn't matter whehter those folks like fruit salad or not, or whether they are part of a very large group.

Try 1.401(a)(31)-1; Q&A 14.

I think I need a fruit salad. ;-) I'm going to weigh in on what I think is the opposite side. More groups equal more flexibility. Whatever level of flexibility exists for n groups, that flexibility is enhanced with n+1 groups. Whether the groups selected result in the optimum flexibility is subject to the demographic shifts you mention.

What would the employer's rationale be for asking that the employee make an election prior to the beginning of the year? The proposed regs give much more flexibility. I'm curious why the employer would want to limit this flexibility?

Thanks for the cites.