Dougsbpc

Is it possible to use an age other than the NRA or SSRA to normalize benefits when cross-testing? For example, suppose you are cross-testing a DB and DC plan. Could you use age 70?, 75? Also, is it possible to limit post-NRA APRs to age 65? Thanks.

A defined benefit plan once had 5 participants and all but the owner were paid their vested benefits 4 years ago. We have been filing a 5500 just reporting one participant. Is it possible to switch to a 5500-EZ now as the plan only covers the owner? Thanks.

Have a cross tested 401(k) plan with about 50 participants. Have always felt comfortable using accrued to date based on average comp. Is it permissible to use accrued to date based on current compensation and permitted disparity? Thanks

We switched over to paperless a few years ago. We just use Adobe Acrobat Pro. We set up a folder for each client and then sub-folders such as 2010 Admin, Participant Loans, Beneficiary Designations, etc. This tends to work very well as almost all software now allows you to print pdf. And we just scan any outside paper documents that come in.

It would sure seem that a plan would pass 401(a)(26) if at least 40% of eligible participants had accrued benefits that were at least .5% per year. The problem may be in 1.401(a)(26)-3©(2) Prior benefit structure. Part of this states " a plan will not satisfy this paragraph © if it exists primarily to preserve accrued benefits for a small group of employees and thereby functions more as an individual plan for a small group of employees".

Suppose you have a small defined benefit plan with 6 participants that has existed for 5 years. The benefit formula is 5% of FAC x YOP. All participants have accrued a benefit of 25% of their average salary. The 100% shareholder of the company (also a plan participant) wants to start a 401(k) plan for all employees and provide a mandatory employer contribution of at least 7.5% of salary every year. If the defined benefit plan were amended to continue 5% for shareholders and .5% for all others, would the plan fail 401(a)(26) going forward if there were no new participants? Both plans together would easily pass 401(a)(4). I know the safest way to go is a fresh start with each employees frozen accrued benefit + .5% going forward. This is the way we will go, but if the plan instead did not have an A+B formula, would it fail 401(a)(26)? No employee other than the owner would have a positive accrual going forward for quite some time. However, all employees would have accrued a benefit of at least .5% for each year of participation under the plan.

We administer a 401(k) plan with about 60 participants. The plan sponsor is a partnership that is owned by 5 corporations. Each of the corporations employs one physician. They are all related employers and considered an affiliated service group. Each of the corporations adopted the plan as participating employers. One of the corporations will now drop to a 3% interest in the partnership and the physician who is employed by that corporation (and the 100% shareholder) will only have salary of about $20k per year for the next 5 years. Will that physician still be considered an HCE going forward? In other words, is he considered an HCE because of his ownership in his corporation? Thanks

Given that payrolls are generally run 3-5 days prior to the actual paydate, it's perfectly reasonable to not start the suspension until the following pay period given your fact pattern. Many corporations who get data electronically from their TPAs often only receive a file once a week or even less often; many of them would not have received this change in time. I'd worry that doing something retroactively on this would create an undesirable precedent about how quickly the company implements deferral changes in the payroll system. Thanks for input, masteff. We have decided to let it slide since it was merely 5 days after the withdrawal took place.

Yes the deferral was made five days after the withdrawal took place. We caught it and reminded them to stop all contributions. Since the withdrawal and deferral dates were quite close, I'm hesitating having them withdraw and reimburse the contribution unless its necessary or could potentially cause problems.

A participant recently took a hardship distribution. A portion of the withdrawal was taken from his Salary Deferral benefit, and as such he is not allowed to make salary deferral contributions to his self directed account for 6 months following the date of the withdrawal. Employer went ahead and deducted the contribution from his paycheck anyway. Do we let it slide or reimburse the participant? Note: Sal-Def Contribution amount is approximately $75.00

Tom thanks for your take on this. So if aggregation is not chosen for testing plan A: 1. Plan A needs to use ABPT to pass coverage. By definition, this requires consideration of all contributions of all participants from all plans. This does not mean aggregation was chosen, since aggregation is required. Coverage passed. 2. Next, when testing for nondiscrimination, the ABPT is exactly the same as in #1 above. Rate group test includes accrual rates for all employees who would meet min age and service. Plan A participants who received a nonelective contribution with positive accrual rates, and plan B participants who did not benefit under plan A with 0 accrual rates. Is this correct?

Suppose you have two 401(k) plans sponsored by one company (no QSLOB exists). Assume the plans are not top heavy and they have nondiscriminatory classifications. As far as Employer Contributions: Plan 1 - Covers all employees hired before xxxx date - Provides 15% to owners, 5% to all others Plan 2 - Covers all employees hired after xxxx date - Provides 2% to all participants - There are no Key or HCE's in this plan It is our understanding that the 5% gateway would not have to be provided under plan 2 as long as each plan passes 401(a)(4) and 401(b) independently. Plan 2 passes both independently. Plan I will pass 401(a)(4) independently but requires the average benefit percentage test to pass coverage. Per 1.410(b)-7(e) all plans that could be permissively aggregated under paragraph (d) must be aggregated for this purpose. Paragraph (d) last paragraph indicates "if an employer treats two or more separate plans as a single plan under this paragraph, the plans must be treated as a single plan for all purposes under section 401(a)(4) and 410(b)". Does this mean that you must treat both plans as one for 401(a)(4) and 410(b) just because one plan needed the average benefits percentage test to pass coverage? Thanks.

It has always been an interesting question. We tell all small business owners that sponsor a DB plan to take some salary even if they have not had a good year and will have to stretch to make the contribution. Here is the definition of Hour of Service in the document: “Hour of Service” means: (a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment. These hours shall be credited to the Employee for the computation period(s) in which the services are performed and not when paid, if different; I think this definition of Hour of Service is a good one as it indicates that hours shall be credited during the period services are performed and not necessarily when paid if different.

Suppose the pay was $25,000 for 10/1/06-12/31/06, but then the high 3 average for all years of service 2006-2011 was $200,000. Then the 415 % of pay limit would be $200,000 x YOS x 10% including a year for 10/1/06-12/31/06? Sometimes when an employer starts a business they can work 3 months and have no pay during that time and work 16 hours a day 7 days a week (oh do I remember). Of course most employers could not afford or want a DB plan for many years after that. Could that period of time be counted for the 415 % of pay purposes?

Suppose you have a small DB plan that was effective 1/1/2007 and only requires 1 hour of service per year of participation to accrue a benefit. Also, suppose the company was started 10/1/2006. Several employees worked more than 1 hour prior to the effective date of the plan (from 10/1/06 to 12/31/06). A Year of service for benefit accrual purposes is defined as the completion of one hour of service. The plan provides a benefit of x% of average salary for each year of participation. Each participant has 5 years of participation. The 415 pct of pay limit should be average salary x years of service. Can the period 10/1/06-12/31/06 be counted as a year of service for 415 pct of pay limit? Thanks.

Top heavy profit sharing plan that is cross-tested. Each participant is in his/her own group. My understanding is that HCEs need not get a gateway. However, if the plan is top heavy and they are employed on the last day, they must get 3% to satisfy TH min. Does then require them to get 5%? I would think not. Thanks.

Back many years ago (around the time of the Paul Schultz memorandum (2002) we administered a combo DB and DC plan). Combined, they passed 401(a)(4) and 410(b) but provided less than 1/2% of pay for one group in the DB plan. The IRS audited the plan and claimed the DB plan failed 401(a)26 because benefits were considered unreasonable. Their solution was an 11g amendment to provide 1/2% of pay per year of participation for any participants the plan sponsor wanted to choose as long as 40% accrued reasonable benefits. They were very clear that ONLY an 11g amendment would allow retroactive correction. I believe they also mentioned that an 11g amendment could be used to correct demographic failures of 401(a)4, 410(b) and 401(a)26 as long as they were executed within 9 1/2 months following the close of the plan year. Unlike the case that was audited, this plan not only needs to provide a benefit of at least 1/2% of pay, it needs to select who that individual is, and that person is an HCE and is excluded from participation by the terms of the plan. Can you instead bring in NHCEs who have not met the plan's eligibility requirements? The HCEs would have met eligibility requirements (1 year and age 21), they are just excluded by class. I would think that if one of them is brought in, you have no discrimination problems as all who have met eligibility requirements are HCEs.

In this case they do have two more nonhighly compensated employees who have not yet met the eligibility requirements. There is every expectation that they will eventually enter the plan. I think that if the plan were designed to fail there would be a problem with definitely determinable benefits. However, the design that is in place is objective. It just happens that all of the eligible NPs for this year are HCEs. Any disagreement?

Thanks for the replies I don't see where this would be a 415 problem as this plan only has two participants and they only ever intend to make small employer contributions. So for 2011 they will make a safe harbor and employer contribution of 3% of salary. That would not bring any participant close to their 415 limit for 2011 even though we need to also include the 3% safe harbor that was intended for 2010.

Took over a small DB plan that excluded two physicians by name and highly compensated nurse practitioners. For the past 5 years, they have only had 4 physicians who met the eligibility requirements. All were HCEs and Keys. The plan passed 401(a)(26) in past years as 2/4 = 50%, which is greater than 40%. They now also have 3 nurse practioners who met the eligibility requirements. All happen to be HCEs and are therefore excluded from the plan. Any problem with bringing in one nurse practioner through an 11g amendment to pass 401(a)(26) even if they would be an HCE and in an excluded class? Would it be possible to do this every year? Thanks

A small safe harbor 401(k) plan timely distributes the 3% SHNEC notice on November 15, 2009 for the 2010 calendar plan year. The employer filed the corporate tax return 3/15/2011 and did not fund or deduct SHNECs. In fact, they still have not been funded. He simply forgot, even though we told him to back in January. My understanding is that SHNECs can be funded up to 12 months after the end of the plan year. So if they are are funded this week: 1. Do any earnings need to be calculated and funded for the late deposit? 2. Would the safe harbor contribution be deductible for 2011 or 2012? If 2011 he will need to amend the corporate tax return. Thanks.

A small DB plan was frozen 3 years ago. The plan had provided 3% of pay per year of service. The company now wants to unfreeze the plan and simply restore the 3% pay for each year of service (including the years the plan was frozen). Is this considered a benefit increase to an HCE and therefore cannot be part of the cushion amount?

There is one employee in the plan who already has a term policy and her health is not the greatest. The agent wants the plan to be able to purchase her policy. I guess what you are saying is that there is no advantage to term in a plan because the ps-58 cost will essentially be what the premium is.

Thanks for the responses. Yes. Would it not be discriminatory if the company owner had whole life and everyone else had term? Perhaps not if everyone was offered whole life and term and each made their choice? Could an employee have the plan purchase / assume her term policy already in force or would this be a prohibited transaction? I know this often happens the other way around but such policies usually have cash value and the purchase price is related to the cash value.

We inherited a 401(k) plan (had been a profit sharing plan for years) where only the company owner has whole life insurance as part of his account balance. Apparently none of the other 7 participants had ever been offered insurance. The agent now wants to offer policies to the 7 participants. However, he wants to offer term policies. Is this possible? Would this not be a discrimination issue since the owner has whole life and employees would have term? Thanks.