Mike Preston

The plan may not have been top-heavy for 2000. Generally, in the first year of a plan, the determination date is the last day of the plan year. In the first year of the plan, there is an exception to the general rule that one only counts contributions made before the determination date. See 1.416-1-Q&A T-24. In this case, for 2000, if you counted just the QNEC, would the plan have been top-heavy? If not, then I think the 3% contribution to those not eiligible for QNEC may not have been required. And, in fact, may have been misallocated. Since the determination date for the second year is genearlly the same date as the determination date for the second year, I would think that if the plan wasn't top-heavy for 2001, it isn't top-heavy for 2002. However, EGTRRA sayd that you determine key employees differently so there may be a difference. Usually, though, it will work such that if a plan is top-heavy in 2001, then it has a chance of not being top-heavy in 2002.

I'm not sure I agree with your premise. It seems to me that if a key employee participates in a SEP, then that plan is part of a required aggregation group under T-6. I think the implication under T-8 is that one may aggregate plans that are not already part of the required aggregation group, such as multi-employer, multiple employer and simplified employee plans and would not normally be part of a permissive aggregation group because one does may be in a position where there is no desire (or ability) to aggregate under 410(B). But that doesn't mean that SIMPLE IRA's are necessarily treated the same as SEP's in this particular case. But I think history is on the side of treating them the same. If one looks at the 401(k) LRM's the definition of a distributable event includes the termination of the plan and the establishment of a SIMPLE or a SEP doesn't scuttle the event. Not that this is directly on point, but it is interesting that the Reg upon which the LRM is based was not updated to include SIMPLE IRA's. Have you checked the history of Q&A's at the various conferences (ASPA, EA) to see if this question has been asked of the IRS?

Sort of. But maybe not. First, check the loan policy and the note itself. Does the plan require repayment through payroll reductions? That is, if someone terminates employment does the loan have to be repaid in the absence of an immediate rollover to another plan that will accept the loan? In the absence of repayment or rollover does the plan force a deemed distribution (offset to the account balance)? If so, then I would think the DRO would violate the terms of the plan in that the participant is not eligible to have a loan repaid through means other than payroll withholding, so the plan needn't offer this to the alternate payee. Of course, maybe somebody can come up with an explanation of why the plan would need to offer this, even though it looks to me like a violation of 414(p). Second, the collateral for the loan is probably the participant's account balance. The DRO would have to specify that the AP's surviving loan is collateralized by the AP's share. That may not be something that the Plan Administrator will be happy with. Third, if changes are made to the collateral, as in #2, does that constitute a renegotiation? I wouldn't think so, especially considering the IRS' PLR position on changing loan provisions to enable continued loans in spinoff and merger situations, but one never knows. As the Plan Administrator I'm not sure I'd be willing to underwrite it and it probably doesn't make sense to apply for a PLR. All in all, I'd see if there isn't some other way to skin this cat. But, if the loan doesn't require payments through payroll withholding and the AP account balance is more than sufficient to feel comfortable with the collateralization, and the amount of the loan to the participant that remained could be safely taken had the participant chosen to repay the loan first without triggering a violation of 72(p), then it just may fly under the radar.

"A VS Practioner failed to timely file its 401(k) VS Plan by 12/31/00. Unless an employer adopts or certifies adoption of a different, timely filed M&P or VS Plan, doesn't the VS plan of the employer in effect become an individually designed plan that (assuming a 12/31 or 1/31 year end) must adopt the GUST amendments by 2/28/02?" Sounds right to me. "Does this Plan have to be submitted for a determination letter on Form 5300 by 2/28/02?" Yes, unless as you note above, they obtain an extension. "If not, can the plan adopt a snap on GUST Amendment, wait for the late filed VS Plan to be approved, then restate using the late but approved VS Plan, and then submit for a determination letter?" I don't think so. I mean, they can do it, and it would be better than doing nothing, but they would be a late amender.

I see no reason why NRA has to be defined between 59.5 and 65. However, most 401(k) plans do so because deferrals and QNECS and QMAC's can't be distributed before 59.5 on an inservice basis, even if the NRA is less than 59.5. Yes, if NRA is 59.5 through 65 and a participant reaches that age, they are entitled to a distribution.

You got it, Andy. The much more interesting question is whether there can be multiple AB tests when a plan sponsor tests under 410(B) by separating into those statutorily eligible and those not statutorily eligible. I don't want to re-write the long message I wrote on this subject a while back, but suffice it to say that the IRS has informally indicated that there aren't, while a strict reading of the regs indicates that there must be.

"I think the client must either submit by 2/28, be able to extend under the exceptions (e.g., located below canal st in NYC) or adopt a prototype or practioner plan by 2/28." Or the client could adopt a certification by 2/28.

The only a4 test applicable to the 401(k) plan is the ADP test. Any other plan (profit sharing contributions) is mandatorily disaggregated from the 401(k) for a4 testing. So I'm hardpressed to come up with any tie between the two. Maybe some application of benefits rights and features, but not regular a4 testing of non-deferrals, non-matching company contributions. Am I misunderstanding?

The answer is yes, it would have been $11,000 even if EGTRRA had not passed, but I'm not sure that those who deal with these things for the Great State of California care about technicalities like that. They seem to think that the limit should be $10,500 whether it would have stayed at $10,500 or gone up to $11,000 in the absence of EGTRRA. Hopefully, we will find that the California legislature passes conformance measures so this whole thing will become moot.

How about the form itself? In the upper right hand corner of, for example, the Form 5500 you can find the words: "This Form is Open to Public Inspection." Turning to the SSA, it says: "This Form is NOT Open to Public Inspection" Will that do? It certainly is enough for me.

Sounds fine to me. There is no need to amend by 2/28/2002 if you would prefer to just have them sign a certification. One of the changes that a lot of prototype/volume submitter providers submitted last year pursuant to the new cross-testing regulations was an option for age-weighting a plan. Many of those plans are still awaiting IRS approval of the (I think) pre-Oct. 22 submitted changes. Not that the two are necessarily related, but both points seemed mentionable.

Yes, it is permissable. Yes, the plan must provide for it as an allowable option. Most plans probably don't have the language in place that would enable this automatically, so an emendment is most likely required. However, it is possible that the language of the plan gives the Plan Administrator enough discretion that such could be paid without reuqiring an amendment. Section 415 limits are quite tricky when dealing with benefits that are partially paid in a lump sum, so if somebody is close to the maximums under Section 415 then one should tread with great care. Also, recognize that benefit forms are a "benefit, right or feature" that must be made available to a non-disccriminatory class of participants. That usually means that if it is implemented, you will have to allow it to all who are entitled to benefits.

I agree with QDROphile. I does appear that somebody, at some level, thought that a participant's investment elections would somehow create two separate deferral elections for the two separate plans. I'd want somebody to look at those participant election forms. Without some clarifying language (it wouldn't have to be very lengthy) it might be that the salary deferrals are all going into the original, non-ESOP portion of the plan. That will be a nasty administrative surprise someday. I'm pretty sure that isn't the intent. Assuming though, that you can somehow construe the participant elections to be valid with regard to the ESOP contributions, it still looks like the ability to make a salary deferral into the ESOP was first established in 2001. However, a quick read of IRS Notice 98-1 indicates that the definition of "successor plan" includes the ESOP. Hence, it doesn't appear that you have the ability to use prior-year testing as if the ESOP were the only plan of the employer and as if 2001 were the first year of the plan. Instead, it looks like the result will be that you end up using the NHCE percentages of 2000 in your 2001 test. I'd want to make sure that 98-1 is read all the way through with the specific facts of these plans being kept in mind, though, before concluding that to be the case. But if the deferral elections can't be construed as creating a deferral election with respect to the ESOP, the whole discussion is moot anyway.

"especially in our wacky 9th circuit! " Now there is something everyone can agree on! After Michael v. Riverside Cement Co. Pension Plan how can anybody possibly disagree? Kathleen, I don't disagree with you that there is the possibility that some court will find the facts in a similar situation to be an ERISA 510 violation. I would hope that they wouldn't, though.

Question 28. Presume a business maintains 1 plan that has a mix of 401(k) deferrals, matching contributions & profit sharing contributions. If in 2002, the only contributions are deferrals and a 4% (dollar for dollar) safe harbor match, would this plan be considered top-heavy if key employee balances exceed 60% of plan assets? i.e., does the presence of a profit sharing option preclude use of the new rule deeming safe harbor plans not top heavy? What if in addition to the above, previous forfeitures get reallocated? The thing that is throwing me is the exact wording of EGTRRA: "The term top-heavy shall not include a plan which consists SOLELY (emphasis added) of a CODA which meets the requiremts of 401(k)(12) & matching contributions with respect to which the requirements of 401(m)(11) are met." What exactly is meant by the word "SOLELY"? No other contributions in that plan year? No other contributions permitted? A: This is an issue that is not resolved. Look for guidance by the end of the year.

If the employer was reducing 2002 compensation in order to essentially pay the company back for an unanticipated 2001 top-heavy contribution I agree that it is a potential 510 violation. That isn't the case here. In this case, the employer has just been notified that the cost of employee benefits for the year will include a specific amount, probably 3% of compensation. The employer is prospectively modifying compensation so that the combined expense associated with the employ of this individual is consistent with what they believe this individual is worth to the organization. If we take the point you make about legal entitlement and examine it under the facts of the case, it is possible, although unlikely, that the entire 3% top-heavy contribution for 2002 has already been established at the point in time that the reduction to compensation was implemented. It is also possible that the 3% top-heavy contribution has not yet become a legal entitlement because the top-heavy contribution is the lesser of 3% or the amount that a key-employee has been allocated as of that date. If this weren't a 401(k) plan, then the legal entitlement on the date in question would probably be zero. Given that this is a 401(k) plan, even if we find that a key employee has made a deferral during 2002 it still becomes difficult to establish what the legal entitlement is as of a given date, before the end of the year. Is it the greatest percentage deferral (plus match) to date for any key employee? Or should there be some recognition that top-heavy minimums are not determinable until the end of the year in question, and are based on full-year compensation? Throw in the possibility of a key employee terminating early in the year and maybe being rehired before the end of the year and I find it very difficult to establhish what a top-heavy minimum will be before the last day of the year. But maybe a key employee has deferred more than $6,000 on the date in question, thereby ensuring that the top-heavy minimum for 2002 is at least 3%. Around and round we go. I still belive that if a court decided to extend 510 in this case that it would be a travesty. But it is fact dependent. My original comment was that the employer should be ok only if there wasn't some document tieing the employer's hands. For example, if the employee was offered a job at $83,333.33 per year plus benefits and now the employer is deciding to reduce compensation because benefits are higher than anticipated. Even then, the employer should, IMO, be able to present evidence relative to the permanency of the original document. In the end, though, in this case, the employee was entitled to a certain amount of compensation and that compensation didn't carry with it any top-heavy contribution for 2001. Now that the employee is entitled to a top-heavy contribution in 2002, the aggregate that the employee is entitled to should be something subject to a new negotiation.

Depending on the compensation level of the individual, couldn't this be done in a regular DB plan? It will take two years to get the accrual where you want it, though, because of 415 limits. If the individual isn't an HCE, then a DB plan could be set up just for him and wouldn't violate 401(a)(26) becuase of 1.401(a)(26)-1(B)(1)(i).

I haven't seen any. However, I'm not sure I even understand why that question was asked. Seems pretty clear to me that if you have anything outside of k12 or m11, you are hosed. About the only thing I can think of is that the IRS is supposed to be kinder and gentler these days, so we are hoping for a "liberal" interpretation. If we get it, great. I certainly won't complain. But the language seems so clear to me that I will at least be a tad surprised.

I think it is garratt. http://www.law.emory.edu/10circuit/july97/...6-1470.wpd.html

I think we were both reading between the lines. It is just that we ended up reading different things. My interpretation was that an ESOP was added and that a participant is given the choice as to how much of their deferral election they wish to make in cash (i.e., to the original plan) and how much of their deferral election they wish to make in stock (i.e., to the newly created ESOP). Otherwise, they would have stock in two plans and would need to move the stock from the first plan to the second plan just before a dividend is declared in order to allow all of the dividends to be deductible under 404(k). Since I don't think that is a likely design, I made the assumption that new monies going into the ESOP would be from stock contributions pursuant to deferral elections and not from further transfers. Maybe Brian can clarify the original post?

Once you get into ERISA 510 you are dealing with purely legal theory and not IRC. So, while that subject is technically the purview of attorneys, in my opinion, it would be a total and complete travesty to interpret ERISA 510 in that manner. ERISA 510 has 3 major clauses. The first deals with a participant exercising a right. That isn't happening here. The second deals with a participant being precluded from exercising a right. That isn't happening here. The third has to do with testifying and that isn't happening here. If taking into account the sum total of an employee's compensation and benefits is not allowed when setting prospective compensation levels then ERISA has, plainly and simply, been extended beyond what is rational.

It sounds to me like the employer established a "new" plan in 2001 with respect to stock contributions. You should have the same options you would have had with respect to any new plan established in 2001. That is, if you want to use prior year testing, you use 3% for 2001 and then for 2002 you use the results from 2001. I'd look over 98-1 though, to see if there isn't anything in there that deals with the establishment of a new plan on the heels of one that already exists to see if there aren't some general limitations.

I can't recall any specific court case or cite that is directly on point. I believe, however, that the IRS has consistently stated from the podium that this is the correct position. I don't have time to look it up this morning, but I also thought that there was the ability to use compensation earned during the calendar year that ends within the limintation year as 415 compensation. But I might be misremembering that, as I haven't worked on a case that used it, so I never have had to verify that in operation. But, if that exists, the extrapolated result you posited would be perfectly ok, even if the compensation wasn't deemed to be earned on 12/31.

When I read those sections, I don't see a restriction on the limitation year. A sole prop that has a 1/31/xx limitation year typically uses compensation paid during that limitation year as 415 comp. For this purpose, as with partnerships, earned income is deemed to hit on the last day of the tax year (in this case 12/31/2001) which falls in the 2/1/01 through 1/31/02 limitation year. Maybe I missed something but why do you find the argument unpersuasive.

Me, neither. The only rounding rules I've found are: 1) HCE counting for 20% rule (can round up, or down, as long as reasonable) 2) 410(B) ratio-percetnages (1.410(B)-9), must use percentages to two decimal place accuracy. (1/100th of one percent) 3) ADP/ACP by participant are also rounded to two decimal place accuracy (1/100th of one percent)