Dougsbpc

We have a PS plan where we are using accrued-to-date for 401(a)(4). One participant reached NRA and took an in-service distribution of all but $10,000 of his account back 3 years ago. I assume we need to add back his distribution to his balance when testing correct? Thanks much

What is the definition of uniform and reasonable? Although not certain, we contend that a safe harbor plan would be considered as providing benefits on a uniform and reasonable basis. Owner employees need not benefit for a plan to be a safe harbor plan. Therefore, as long as all participants other than the owners benefit on a uniform basis, you may satisfy 1.401(a)(26)-5.

Thanks for the replies Blinky I guess one option for us is to submit these plans for a determination letter. If the IRS determines the DB plan does not meet the minimum participation requirements because the two HCE's do not benefit in the DC plan, they will let us know.

Everett Thanks for your answer. In this case I can just have the HCE's get the same % contribution as the NHCE's in the DC plan. I guess it really doesnt matter as the total benefits from both plans (for the HCE's) will be approximately the same as if they were receiving $0 in the DC plan. Just curious though, would a safe harbor DC plan be considered a plan that provides uniform and reasonable allocations to all? If so, an HCE can receive lesser contributions in a safe harbor DC plan and it would still be considered a safe harbor plan.

Suppose you have a new non-safe harbor DB that is offset by a new profit sharing plan. The DB will provide 5% of pay per year of partic for shareholders and 2% of pay per year of partic for non-shareholders. All benefits are offset by the act equiv of profit sharing balances. The employer will make contributions of at least 7.5% in the profit sharing plan. However, they wish to provide no profit sharing contributions to the two shareholder employees in the profit sharing plan. The plan easily passes the general test and they will have no problems with 404(a). 1.401(a)(26)-5(2)(iii)(A)(2) states that an employee whose benefits are offset is deemed as benefiting but only if he/she benefit in the other plan on a uniform and reasonable basis. Does this mean that we simply do not count the two shareholder employees for 401(a)(26) purposes because their benefits (in the DB) are not being offset? Or does this mean that we cannot count any participants because two HCE's did not receive the same contribution as every other eligible participant in the profit sharing plan? Thanks much!

Can a non-key HCE be prospectively excluded from a top heavy db plan when he has already accrued benefits under the plan? I dont think so. I think it is a different story if he was excluded from participation right from the effective date (i.e. he never accrued a benefit under the plan). Then as long as the plan passes 401(a)(4) they are OK. Anyone disagree with this? Thanks

Have an existing 401(k) plan and wish to convert it to a Safe Harbor 401(k). If the employer wishes to make the basic match safe harbor (100% match up to 3% of pay plus 50% up to 5% of pay), do existing match accounts need to be 100% vested? Clearly, future match contributions must be 100% vested, but what about existing match contribution accounts? Thanks much

I agree. The same five or fewer owners who do have 51% identicle ownership between A and D do not together have at least 80% ownership in each company A and D. Companies B and C do not have more than 50% identicle ownership.

Have a small profit sharing plan (10 participants) that requires employees to be employed on the anniversary date of the plan to receive a contribution. One of the participants terminated employment prior to year end with 750 hours and therefore did not receive a contribution. However, this participant did receive contributions for the past three years (i.e. he has an account balance). We are using the accrued to date method when testing for 401(a)(4). Is it correct that he should have an accrual rate even though he did not benefit this year? Thanks.

Administer a small cross-tested 401(k) plan that has depended on QNECs to pass ADP test in prior years. Next year they will not need QNECs to pass ADP test. However, the employees now count on getting a 3% of pay 100% vested contribution on top of the 5% Nonelective contribution subject to a vesting schedule. Question: can they make a QNEC anyway even if they already pass the ADP test? Does the QNEC simply become an additional Nonelective contribution that just happens to be 100% vested? If so, I would think we could use the QNEC in the a4 test and not have to pass a4 without it. We suggested the employer simplify matters and just make an 8% of pay Nonelective contribution but they just cant face the wrath of the employees who have gotten used to the 100% vested contributions.

We administer a (non-PBGC) 20 participant DB that provides a lump sum and installment payments from the plan as optional forms of Benefit. Our concern is that the plan will terminate soon, optional forms of benefit cannot be eliminated per 411(d)(6), an therefore we cannot eliminate installment payments from the plan. What happens if a participant has 20 years to NRA and chooses the installments? Does that mean the plan must be maintained for 20 years after termination? Has anyone run into this? Thanks.

I found a prior post that directly answers my questions.

We administer a cross-tested 401(k) plan that will fail the ADP test. The employer may want to provide a 2% QNEC to all NHCE's to pass the ADP test. Can the QNEC be considered in meeting the 5% minimum gateway? Is the QNEC considered for purposes of passing the rate group portion of the 401(a)(4) test? Thanks.

Have a small DB plan that provides the deminimus benefit. The plan is co-sponsored by two sole proprietors (each participants in the plan and no other employees). One sole proprietor has yet to make a profit. Can we provide him with the deminimus benefit even though he has only had negative earnings so far?

I've written the PBGC before too. The problem is that it usually takes them about 6 months to respond. That would usually not be a problem but in this case a buyer is considering purchasing the stock of the company that sponsors the plan. The buyer wants to seal the deal by December 15. Even though they cannot find anything on point, the buyers attorney somehow thinks we have a PBGC plan even though only greater than 20% owners remain as participants.

How about this to add even more assurance to Blinkys position: What if the current owners establish a new corporation and have that corporation become a successor plan sponsor? Then surely the plan should not be a PBGC plan as it will only cover greater than 20% shareholders of a non-related plan sponsor. In this case we would change the current plan year (and limitation year) from 9/30 to 12/31. Then, presumably when this plan terminates in the next plan year, there should not be any controlled group questions. For what its worth, I did find an opinion letter (90-6 dated October 31, 1990) on a similar question. The letter indicates that while the plan was not established exclusively for substantial owners, it is presently so maintained and therefore exempt from coverage. DK

We adminster a small DB plan. 3 owners and 10 non-owner common law employees. Last year all 10 non-owner employees terminated employment. A partial plan termination occured so we made all employees 100% vested and distributed their benefits. All that remians are greater than 20% shareholders of the corporation. The company will not ever have employees again. This company was recently approched by a potential buyer who wants to make a stock purchase. My understanding is the plan is no longer covered by PBGC since only greater than 20% shareholders remain as participants. Is anyone aware of a cite that proves this? Or disproves this? This is important because the plan is underfunded and shareholders are willing to waive a portion of their benefits. However, if the plan is still a PBGC plan, they cannot waive benefits and the potential buyer will run away as they feel the underfunded plan will be their liability. Thanks.

We administer a 12 participant DB that has benefit liabilities that exceed assets by about $600K. The plan is covered by PBGC. The owners (stockholders) would be happy to waive a portion of their benefits to terminate as a standard termination. The majority owners are brothers. One has 50% of the stock, the other has 30% and his daughter owns 20%. Clearly the one who owns 50% can waive his benefits, but it is less clear as to whether the 30% and 20% family members can waive their benefits. Although the constructive ownership rules of code section 318 appear to aggregate family members, resulting in two 50% owners, PBGC reg 4041.21(b)(2) references the constructive distribution rules of IRC sections 414(b) and © when defining a majority owner. 414(b) and © deal with controlled groups, which we do not have here. Anyone have any thoughts as to whether the family members can waive their benefits? Thanks.

I would like to thank everyone for jumping in on this. It has been extremely helpful.

Tom Agree with everything you said, but are you sure compensation cannot be counted for deduction purposes for an employee who is excluded from participation? Although I do not have it in front of me, seems like we researched this some years ago and found that for 404 purposes only, an eligible employee (whether or not excluded) is considered to have benefited from the plan. Years ago, we purposely designed plans to benefit key employees who did not wish to participate. We established a seperate class and gave them $100 per year just so we could count their comp. However, I believe we found that we need not provide any allocation to consider their comp for deduction purposes.

MGB I can see how you would have thought my original question was in regard to calculating a distribution, which will eventually happen when he winds up the plan. Perhaps I should have described it better. We are a small TPA firm and do not have an in-house actuary. In this case, we mentioned that the annual deductible contribution would be approximately $140,000. When we sent the valuation to our actuary, he indicated the employer would be restricted to a monthly benefit of only $3,333 per month under the new plan, and the resulting annual contribution would be approximately $70,000. He based his explanation on the fact that benefits must be accrued over 10 years in the new plan and that we could not consider any of his participation under the prior plan. It is true that we always accept full responsibility for the plan. In this case the actuary believes the plan would eventually be over-funded because the participant could only be paid a monthly benefit of $3,333 per month.

MGB, As an actuary, do you agree that prior years of participation are counted under the new plan in this case?

That's funny. Seems I cannot conclusively prove to him that we count prior years of participation and he cannot conclusively prove to me that we cannot. What a conundrum hah? Problem is he signs the schedule B.

Thanks for the reply Flosfur. reg section 1.415-8 on combining and aggregating plans indicates that for purposes of applying the limitations of section 410(b), all qualified defined benefit plans (without regard to whether a plan has been terminated) ever maintained by the employer will be treated as one defined benefit plan. We interpret that to include all of 415(b) including subparagraph 5 which explains the application of the 1/10th reduction for the dollar limit. Our actuary disagrees and believes the 1/10th reduction only considers years of participation under the current plan. He could be correct but has not been able to provide us with anything that would indicate we cannot consider participation under the prior plan.

My question has to do with the treatment of the 415 dollar limit when a prior DB existed. Supose a one participant DB was established with a NRA of 65. Also, the only participant was 55 when the plan started, always had more than $200k in salary and accrued the maximum benefit under the plan. He participated 5 years and then terminated the plan at age 60 and distributed benefits. Suppose he then immediately adopted a new DB with a NRA of 65 and wanted to have the maximum benefits. Does he get penalized on the 415 dollar limit simply because he had a prior plan? We are told that we must subtract the prior plan accrued benefit from the 415 dollar limit and then accrue the benefits over 10 years in the new plan without any consideration of participation in the prior plan. If this is the case, here are his maximum benefits under the new plan: 415 dollar limit: $13,333 Less prior plan benefit: -$6,666 Adjusted limit: $6,667 x 5/10 Max proj benefit $3,333 In this case he will have participated 10 years under two plans but will only be able to receive $10,000......a 25% penalty so to speak. I've looked under 415(b) and the regs and cant seem to find anything on point. Anyone have any experience with this? Thanks much.