LCARUSI

All your questions are addressed in IRS Notice 98-1.

Laura - I posted a new thread on this bulletin board - "Discussion with Author of 98-52...". I believe it answers your question. Len Carusi

I spoke to Roger Kuehnle. I posed this question: Can a Sponsor abandon safe harbor status in the middle of a plan year due to financial hardship or other substantial reason? The short answer is no. By issuing the notice to participants, the Sponsor is making a commitment for the full year - similar to the commitment made under a money purchase pension plan. Any attempt to manipulate results by having a short plan years and/or changing plan years (or even terminating the Plan in mid year) would be subject to the general anti-abuse language contained in section E of the notice. If a SPonsor has a significant reason to abandon safe harbor status, they would be advised to seek specific advance approval from the IRS, e.g. VCR.

Big John - You should take a look at IRS Notice 98-1, section VII. It discusses rules for switching from current year to prior year method. It is definitely NOT as simple as amending the Plan from year to year. If you did this, you would be in violation of section VII and also section VIII. Section VIII (of 98-1) is the anti-abuse provision.

PWBAer - Can you provide a cite on the IRS ruling? Thanks

Question Posted by DESTRUO: Does anyone feel uncomfortable about allowing Canadian employees who work in Canada to contribute "after tax" monies into a profit-sharing/401(k) program? I am not as concerned about the "exclusive benefit rule" as I am about 415 and compensation that can be taken into account. Dealing with a Controlled Group with operations in Canada. Would appreciate any feedback. Thanks, Oscar

It sounds to me like you want to wire funds from the Plan to the Trustee so the Trustee can then remit the funds back to the Plan for matching contributions. Why do that? (even if it is legal and I'm not sure that it is) You have a forfeiture account with $5,000. Those funds are already in the Plan. If your next required matching contribution (for example) is $1,000, the company would not remit those funds to the Plan. Instead, you would use $1,000 of the $5,000 forfeiture account. After this transaction, you would have $4,000 remaining in the forfeiture account to offset future matching contributions. (This was a "generic" discussion of procedures for reallocating forfeitures. You must read the Plan document to be sure you adhere to its rules regarding timing and reallocation method of forfeitures.) [Note: This message was edited by LCARUSI] [This message has been edited by LCARUSI (edited 11-12-98).]

I think you need: 1) a resolution authorizing the transfer 2) language in both plans providing for transfers when an employee changes status (union/nonunion) 3) 5310-A (I don't see you as falling into any of the exceptions for filing the form.) You need 1 and 3 for each transfer. Why not leave the participants' balances in the union plans? In the future, as participants switch bewteen plans,you let them maintain balances in both plans - probably easier than always doing these transfers.

This thread has gotten huge - and contains numerous "subthreads". It seems that anyone who has a question or issue relating to Safe Harbor 401(k) Plans posts it here. Please don't do that. Instead, start a new thread with your issue. I will wait a few days to close Mac Lewis's thread to allow time for posting specific responses to items already posted there. Thank you.

Steve - I was writing my repsonse to your first posting while you were writing your second one in which you describe your client's specific plan to implement the new vesting schedule. What your client is doin is fine. There is no cutback issue here.

The definition of an Eligible Retirement Plan (to receive a rollover) includes "a qualified trust". 402©(8)(B),1.402©-2, Q&A-2. Does this mean a DB Plan can accept a rollover? If it does, how does one account for the value of the rollover?

It seems pretty clear that they are both eligible. What is your concern?

You have to give anyone with more than 3 years of service the choice to remain under the old vesting schedule - with respect to prior AND future contributions. They will all elect that - so you are now only cocerned with people with less than 3 years. For that group (less tha 3 years), I think you can put them all on the new schedule, but anyone who is 100% vested (2+ years) must remain 100% vested with respect to their account balances as of the date of the amendment. To summarize: 3+ years ==> stay on old schedule with respect to prior and future contribs 2-3 years ==> 100% vested on current account balance, new vesting schedule with respect to future contribs 0-2 years ==> new vesting schedule with respect to prior and current account balances By the way, I think it would be incredibly foolish from a PR point of view to tell current employees (0-3 years of service) that you are upping the vesting from 2 to 5 years. This change should only apply to new employees.

Does anyone have a draft of a notice they can share with our readers?

I don't think we overlooked the possibility of a sale of substantially all the assets.... The discussion is based on the Company's position and assertion that Adam1 is subject to the same desk rule. If he isn't, there's no problem. He takes a distribution and rolls it into an IRA - end of story. [This message has been edited by LCARUSI (edited 11-10-98).]

Mary Ellen - Two thoughts on this: 1) Impose a 24 month holdback on a PROSPECTIVE basis. I believe this avoids the anti-cutback problem. If you start it on 1/1/99, there would be a holdback of January contributions for a withdrawal in February; there would be a holdback of January and February contributions for a withdrawal in March etc. By 1/1/2001, you have a full twenty four month holdback and there is no need for any match suspension penalty in the plan. You then go safe harbor as of 1/1/2001. 2) Ask the IRS for guidance. Not many 401(k)Plans allow after-tax contributions. Not a lot of thought, therefore, was given to the complications associated with after-tax contributions. Maybe they would allow you to waive the suspension in the two year period that you are establishing the 24 month holdback enabling you to go safe harbor immediately?

2.5% If X is the first plan year, you are allowed to use 3% for the prior year X-1 because you don't have actual data for year X-1. When you test for year X+1, you have data for the prior year X and you should use it. Another way to look at it is this: if you use 3% in the second year of testing, presumably you could use the same logic to use 3% every year forever - not what the IRS intended.

Assuming your longer service employees tend to be more highly compensated employees, it will be harder for the Plan to pass the ACP test with the tiered match you describe. And even if you do pass the ACP test, yes you must also subject each level of matching contributions to a benefits, rights & features test. Basically, you have to show the participant group eligible to receive each level of match satisfies 410(B).

It's a defunct form. It's been gone so long, I don't even remember what form replaced it. Maybe the 5500? I recently assisted a client with an IRS audit for 1994. They requested an EBS-1 as part of standard computer-generated form letter. We indicated "not applicable" on the response and that was the end of it. I don't know the form's last year. Maybe someone else does.

Hi EREAD... No, in the second situation (the one I posted), the agency which is owned entirely by the Trustee receives the commissions. Are you and Derek saying you have a problem with that?

It would have been nice if they offered you the opportunity for a direct transfer from Plan A to Plan B before they changed service providers for Plan A and, therfore, before you took the "hit" on load fees on the investment changes in Plan A. But now you have already absorbed the hit. It seems to me you have two choices: stay in plan A or direct transfer to plan B. You want a third choice; withdraw your account and establish an IRA. You should check the Plan document. Maybe you can take an in-service withdrawal for part of your account (e.g. matching contributions or profit sharing funds) and get those funds into an IRA. But you won't be able to get the 401(k) part of your account out of the Plan (Plan A or Plan b) until you have a distributable event (for 401(k) purposes). And yes, a direct transfer is different from a direct rollover. The direct transfer is not a distribution - it is a transfer of assets and liabilities from one plan to another at the sponsor level. [This message has been edited by LCARUSI (edited 11-09-98).]

I'm not sure I understand your question. But I think you're asking how the aquisition of the "small Company" affects 401(k)/(m) testing of the "big company" for 1998 and 1999. 401(k)/(m) testing is based on the deferral rates or contribution rates of ELIGIBLE employees. Since "small company" employees are not eligible to participate in the plan in 1998 or 1999, they are not included in the testing. However, you should note that "small company" employees ,might be included in the determination of HCE/NHCE status. You should check the regs (414(q)I believe) to see when and how "Small Company" employees enter into the determination.

M-7 seems pretty clear that 1)a forfeiture reallocation counts as part of the top heavy contribution. "The sum of contributions and forfeitures allocated to the accounts of non-key..." 2) therefore, your required contribution is 1%

I think it's okay - it might not be advisable but it's okay. I base my opinion on a similar situation I am familiar with. An individual owns an insurance agency. He is the trustee of the Company's 401(k) Plan and the Company receives commissions related to the 401(k) Plan. It's not exactly the same situation as Cristie's but it is close. (Their outside Counsel who presumably blessed this relationship a while ago is a respected ERISA expert.)

NDT123 - I don't believe your suggestion to suspend the participant's right to make after-tax contributions will satisfy the IRS requirement to "impose a substantial limitation on the right of participants to withdraw their own contributions". See rev-ruling 74-55 and 74-56. Kazimer - Why don't you impose a24 month holdback on the withdrawal of after-tax contributions. Then, no penalty would be necessary.