Tom Poje

example 3 under the old regs used a % shift (but maybe only gray hairs like me remember that, certainly not a youngster like you) and in fact, the current regs simply say something like "those elective contributions not used in the ADP test..." thus you could shift different amount for different people. no one said logic applies to any of these regs, but i would hold that if a person deferred 5% but terminated and therefore was not in the ACP test, you could not shift their deferrals. I think as long as your testing methods are the same (e.g. you don't have something like ADP prior year and ACP current year you would be able to shift.)

JSimmons: yes, an employer imposed limit must be desribed in the plan. the preamble to the catch-up rules says: As noted in the preamble to the proposed regulations, the condition that an employer-provided limit be contained in the terms of the plan is intended to correspond with the requirements of §1.401-1 that a qualified plan be a definite written program and provide for a definite predetermined formula for allocating contributions made to the plan. Accordingly, if a limit is otherwise permissible under a section 401(k) plan, the limit will also satisfy the requirement in section 414(v)(5) that the limit be contained in the terms of the plan. (and the catch-up regs say "An employer-provided limit is ANY limit on the elective deferrals an employee is permitted to be made..") .......... interestingly enough, at least to me, or at least I hadn't thought about it, and have never seen it done, but a plan could say an individual is not eligible to defer if they have a loan. This is found under the definition of conditions on eligibility in the 401k regs ...an employee who would be eligible to make elective contributions but for a suspension due to a distribution, loan...

Austin - you know, you really should have put in your 'two cents' worth instead of just a penny!

While I appreciate Austin's comments, I know there are times when I am not 100% correct - nor Sal. Here was the difference between the proposed regs and final regs (or at least the best I could find) and oddly enough, pertaining to the top heavy rules! Thus, by implication, a plan that was top-heavy, could impose a limit on the key employees, and because of the catch-up rules, the key employees could at least get something without blowing the plan out of the water! Proposed regs iv) Application for top-heavy. Catch-up contributions with respect to the current plan year are not taken into account for purposes of section 416. Thus, if the only contributions made for a plan year for key employees are catch-up contributions, the applicable percentage under section 416©(2) is 0%, and no top-heavy minimum contribution under section 416 is required for the year. However, catch-up contributions for prior years are taken into account for purposes of section 416. Thus, catch-up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416(g). Final Regs (3) Contributions not taken into account for other nondiscrimination purposes--(i) Application for top-heavy. Catch-up contributions with respect to the current plan year are not taken into account for purposes of section 416. However, catch-up contributions for prior years are taken into account for purposes of section 416. Thus, catch-up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416(g). as to why some examples 'disappear', I was told by someone it was more a matter of space - but I have no idea if that is true or not. There is nothing in the preamble that I found that says "In the proposed regs we indicated you could have a cap of 0%, but after consideration and comments that is not possible.."

so in regards to the plan, I guess to be on the 'safe' side, they could put a cap of 1 cent on deferral? Then it would be ok to treat 4999.99 as catch-up? actually, under EPCRS if an individual exceeds the 415, the first return is deferrals (assuming no related match) thus you could give an individual who deferred 5,000, a 46,000 profit sharing contribution. he now has exceeded the 415 limit, and the 5000 in deferral could be treated as catch up. as to hardships, that is not one of the 'limits' eligible for catch-ups, and I certainly don't think it is in the intent of the regulations why deferrals should cease when one has taken a hardship to allow deferrals to continue in any way shape or form. I think one of the arguments for a cap of 0 comes from the preamble. the preamble to the regs says "Thus, for example, a plan could provide for an employer-provided limit that applies to HCEs, even though no employer-provided limit applies to NHCEs. However, as under the proposed regulations, these final regulations retain the rule that an applicable employer plan is not permitted to provide lower employer-provided limits for catch-up eligible participants. Furthermore, a plan fails to provide an effective opportunity to make catch-up contributions if it has an applicable limit (e.g., an employer-provided limit) and does not permit all catch-up eligible participants to make elective deferrals in excess of that limit. " so under the universal avilability rule you have to provide a catch up eligible person the chance to defer above that plan provided limit.

The ERISA Outline Book (at least the 2006 edition) suggests it is possible to have a 0% limit. by the way, there are other instances in which an individual can not make deferrals but is still treated as an eligible employee. by definition, an eligible employee (1.401(k)-6) is someone who is directly or indirectly eligible to make a deferred election....an employee does not fail to be treated as an eligible employee merely because the employee may receive no annual additions because of 415. (or due to suspension because of hardships)

yes, this was one of the gifts of PPA. makes life a lot easier. in addition, no GAP earnings.

more info from that desk drawer that collects 'odd' information that comes up from time to time Publication: The Tax Adviser Date: Wednesday, June 1 1994 SPD Trumps Plan Document The Fourth Circuit recently reiterated its view that representations in a summary plan description (SPD) control over inconsistent provisions in an official plan document (Aiken v. Policy Management Systems Corp., 4th Cir., 1993). Plan sponsors should be concerned about this case because it reflects the views of at least five other circuits, and because the court maintained its position even though the plan, as with most plans, contained language stating that the plan document would control. In Aiken, an employee accused of sexual harassment was offered the choice of resigning or being fired. The employee opted for resignation "under protest." The employee claimed that he resigned in part because he believed he would be immediately eligible for his retirement benefits. He based his claim for benefits on the SPD, which on its face indicated that he was entitled to a lump-sum distribution of his vested benefits. The employer, Policy Management Systems (PMSC), denied his claim because the terms of the plan itself did not provide for such a distribution. On cross-motions for summary judgment, the district court concluded that the terms of the plan controlled over those of the SPD and dismissed the employee's claim. It alternatively found that even if the SPD controlled, the employee was not entitled to recover; he had failed to demonstrate reliance on the SPD or any resulting prejudice. In effect, the court of appeals overruled the district court on both issues, ruling that the case was not ripe for summary judgment. The specific provision in the SPD on which the employee based his claim stated, "...if a participant terminates employment after completing 20 years of service but before attaining age 60, the participant is entitled to distribution of the vested interest in the Plan." At the time of his resignation, the employee was not yet 60 years of age and had served with PMSC for more than 20 years. Reversing the district court, the Fourth Circuit stated that "under controlling precedent in this Circuit, representations in a SPD control over inconsistent provisions in an official plan document." The court cited its decision in Pierce v. Security Trust Life Insurance Co., 979 F2d 23 (4th Cir. 1992), in which it recognized that the SPD is "the statutorily established means of informing participants of the terms of the plan and its benefits," and the "employee's primary source of information regarding employment benefits." In that case, the court found that the logical import of the status of the SPD was that "if there was a conflict between the complexities of the plan's language and the simple language of the SPD, the latter would control." The court then went on to list the following cases and circuits in accord with this view: Heidgerd v. Olin Corp., 906 F2d 903 (2d Cir. 1990); Hansen v. Continental Insurance Co., 940 F2d 971 (5th

At the 2002 ASPPA conference, the IRS answered that question as follows: Q 3. Are corrective distributions (ADP/ACP) considered in-service distributions and added back for 5 years for purposes of determining top-heavy status? Answer: Yes. A reminder that: This material does not represent the official position of the Internal Revenue Service, the Treasury Department, or any other government agency; nor has it been reviewed or approved by the Service or Treasury. (If theor comments were never reliable then why bother with the Q and A's, so it gives at least a basis for taking a position. - there were no other comments on this one (e.g. that ASPPA individuals disagreed or nything similar) my logic would say to include it. It would seem somewhat strange to treat people differently: e.g if you had 1 HCE who was under age 50 and another over age 50 who was allowed to keep the $ in the plan due to catch up.

ah, thats a little more detailed info of whats going on. a couple of points, based on what you said, but always need to verify: plan is top heavy must also be a 401k and at least 1 key employee must have deferred (otherwise there should be no top heavy due) plan might pass on an allocation basis if you impute disparity oh wait, its Friday the 13th. nothing will work no matter what.

something is not being fully explained - or its Friday and my brain has already left for the day which wouldn't surprise me. a standardized plan is guaranteed to pass coverage - terminees with more than 500 hours are required to receive a contribution. In other words, if the only contribution made was 3% top heavy and those terminees didn't receive it, then why not simply allocate 3% profit sharing - this would also satisfy top-heavy as well.

what does the document say? I thought it had to specify one of 2 possible formulas 1. X = P (AB+(R * D)) – (R * D) 2. X = P (AB+D) – D X = remaining vested balance P = current vested percentage AB = account balance after the distribution D = amount of distribution R =Ratio of the account balance at the relevant time divided by the account balance immediately after the distribution. The relevant time is that point in time the vested percentage cannot increase. I believe Relius uses method 2. as an additional comment, I have seen some documents that say if you get paid a partial distribution, you also partially forfeit

There is a provision in the regs that says you can test all DBs on an accrual basis and all DC on an allocation basis, but since it sounds like the DC plan 'is cross tested', that probably wouldn't work. therefore you will most likely test everything together on an accrual basis. by the way, you can't simply say "they received a 10% cash balance credit, the gateway is satisfied" Becasue the cash balance uses a different interest rate, you have to convert the credit into an equivalent DC contribution rate.

There is nothing to prevent you from having an effective date of 1/1 - in fact if you plan on making an additional profit sharing contribution, that is probably what you want. the 401(k) portion of the plan would start 3/1. remember, you can also use the 3% prior year assumption for NHCEs the first year and then amend to be a safe harbor the following year.

you have the option of not providing the safe harbor to otherwise excludable employees (though that would also cost you the 'top-heavy free' exemption as well). my understanding is that you can not change conditions mid-year.

read the name then the number

what might speed your process would be to set up a DER to pull names and comp. delete last names of anyone with 0 comp and then import. This would put all the people you need to delete in one block at the start, you can then highlight all at once and the delete somewhat rapid fire.

the other unusual circumstance that could cause the plan to fail would be to have young non-key HCEs who receive a top-heavy minimum rather than the contribution through the age-weighted formula.

the rules require that no HCE may receive at a higher rate than an NHCE. suppose an HCE deferred the max the first month so he received the 6%. now you cut back to 5%. its a no go. when viewed over the whole year, the rate of match would be different.

see page 10 of Publication 525. do a search and just type in Publication 525 in Google.

think of it this way: the participant is filing his 1040 tax return. he includes the W-2, it says deferrals = 20,000 and the IRS knows the person is not catch up eligible, so the IRS knows the person has 4,500 in excess deferrals. end discussion. the person couldn't defer it so its taxed in the year it was made, not distributed. (this is somewhat different than for failing the ADP test, in which the reason for receiving a distribution is different. plus the IRS doesn't receive a "W-2" for the return of failed tests, etc.) I do not see anything to indicate any change under WRERA, except for the elimination of GAP income) If the person does not 'claim' that 4,500 as income for 2008, the IRS is going to (or at least should if they catch it) write back and tell him to correct the form. it is taxable as income in the year it pertains to, not distributed. (by the way, as a result, if the amount is not distributed by April 15, then the person will get taxed a second time when the distribution is actually made!) gains are taxed in the year actually received (or losses, which would be indicated under 'other income' on the tax form.)

yes, if catch ups are not matched you forfeit the match its 1.414(v)-1(d)(2)(iii)

EPCRS is pretty specific, or so I thought. section 6.06(2) first return unmatched deferrals. then return deferrals that were matched and forfeit that corresponding match

based on your comments you have a plan that satisfies ADP safe harbor, but the match is not safe harbor. therefore the regular rules apply for failed testing - the excess aggregate contribution is distributed. (I will assume it is vested)

Sieve: the comments (making sense or not) were not mine, I was just posting the message.