Tom Poje

In the case of a SHNEC I do not think the issue is as bad as in the case of providing some type of safe harbor match. It is in the employer's own interest to have something on record if someone chooses not to defer, otherwise an employee could go to the DOL and claim they never knew about getting a match -we all know they 'would have deferred' if they had known about it.

In case you are a 'fool' and don't subscribe to such things: This is quite good, its the first explanation I've seen for a failure involving a safe harbor match. subscription is free http://www.irs.gov/retirement/content/0,,id=154836,00.html Fall 2008 edition IRS Retirement News for Retirement Plans Fixing Common Plan Mistakes: Failure to Provide a Safe Harbor 401(k) Plan Notice Each issue of the RNE looks at a common error that occurs in retirement plans and provides information on fixing the problem and lessening the probability of its recurrence. Background: A safe harbor 401(k) plan requires the employer to provide: • timely notice to eligible employees informing them of their rights and obligations under the plan and • certain minimum benefits to eligible employees either in the form of matching or nonelective contributions. The employer should provide the rights and obligations notice within a reasonable period before the beginning of each plan year (or in the year an employee becomes eligible, within a reasonable period before the employee becomes eligible). In general, the law considers notices timely if the employer gives them to employees at least 30 days (and no more than 90 days) before the beginning of each plan year. The notice must include, at a minimum, details on: • whether the employer will make matching or nonelective contributions, • other contributions under the terms of the plan, • the plan to which the safe harbor contributions are made, if more than one plan, • the type and amount of compensation that may be deferred under the plan, • how to make cash or deferred elections, • the specific time periods available under the plan to make cash or deferred elections, • withdrawal and vesting provisions for plan contributions, and • how to easily obtain additional information about the plan (including a copy of the summary plan description). The Problem: Rainbow Company established a safe harbor 401(k) plan in 2005. The plan provides for matching contributions in an amount equal to: 100% of elective contributions up to 3% of the employee’s compensation plus 50% of elective contributions greater than 3%, but not more than 5% of the employee’s compensation. Eligible employees received timely notices in 2004, 2005, and 2006. However, in 2007 Rainbow failed to provide safe harbor notice to its employees. In addition, Rainbow did not furnish notices to employees who became eligible to participate in the plan in 2008. Rainbow discovered the problem when it conducted an internal review of its plan operations at the end of 2008. Violet first became eligible to participate in the plan on January 1, 2008. She did not receive notice and Rainbow did not inform her of her right to make elective contributions to the plan. She earned $20,000 in compensation in 2008. Indigo has been a participant in the plan since 2005. She has made elective contributions of 2% of compensation each year, after receiving notices in 2004, 2005, and 2006. While she did not receive a notice in 2007, the human resource department (HR) informed her that the employer’s matching contribution formula will remain the same for 2008 and that she should inform HR if she wanted to make any changes to her elective contributions for 2008. Finding the Mistake: In order to find the mistake, review: • The deferral decisions among eligible employees. If many eligible employees are either not making elective contributions or deferring at low rates, it is possible that they did not have timely access to the information contained in the notice. • The plan’s procedures for issuing notices. • The plan’s records showing that the employer followed the plan’s procedures relating to the distribution of notices. Fixing the Mistake: Rainbow must evaluate the impact of its failure to provide notice to its eligible employees. The solution might be different for each affected employee. As illustrated in this problem, the failure to provide notice could require correction for the exclusion of an eligible employee or a simple revision to an administrative procedure. Exclusion of an eligible employee. Violet belongs in this category. Due to its failure to provide notice, Rainbow did not inform Violet of her ability to make an elective contribution when she was eligible. To correct the failure, Rainbow must make a corrective contribution for Violet to replace her missed deferral opportunity and the missed matching contributions that occurred because Rainbow improperly excluded her from the plan. The corrective contributions are determined as follows: (a) Missed deferral opportunity: If an employee is not provided with the opportunity to elect and make elective deferrals to a safe harbor §401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of §401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee. Violet’s missed deferral is 3% of her compensation of $20,000, or $600. Violet’s missed deferral opportunity is 50% of her missed deferral of $600, or $300. Rainbow needs to make a corrective contribution to replace Violet’s missed opportunity to make elective contributions of $300 (adjusted for earnings). (b) Missed matching contribution: If Violet made an elective deferral of $600, she would have received an employer matching contribution of $600. Rainbow needs to make a corrective contribution to replace the missed matching contribution of $600 (adjusted for earnings). Fixing an administrative problem. Indigo belongs in this category. The failure to provide notice did not prevent her from making an informed timely election to change (or maintain) her elective contribution to the plan. No corrective contribution for Indigo is required. The plan needs to reform its procedures to ensure that she receives timely notices in the future.

you could have an enhanced match, for example of 100% up to 8% deferred. that will satisfy ADP safe harbor. it will not satisfy ACP safe harbor. per the regs, your acp test would either be all match, or you could exclude 4% of match (or 3.5% if you have a QACA)

that depends on whether you want to ACP test the discretionary match or not. you can only match up to 6% deferred and 4% comp and still be safe harbor. in other words, the perfect discretionary match is a 66.6% match up to 6% deferred which then equals 4% of comp

well, of course first you would have to follow the terms of the document, and hopefully you have a document that says for purposes of 414(s) comp use any definition that satisfies 414(s). now for 414(s) you can use comp from date of entry. but you have 2 different dates of entry, so now what? I'd go out on a limb and make the follwoing 2 possible guesses: 1.401(a)(4)-9(a) says 2 or more plans that are permissively aggregated as a single plan under 1.410(b)-7(d) [aggregation for ratio % and nondiscrim classification] must also be aggregated for a(4) testing. since I must use the least stringent eligibility requirements when testing for coverage in aggregated plans, I'd lean toward using whatever comp is available in the least stringent entry date, in this case 2/1. the other possible alternative would be to calculate the % under one plan (using comp and contrib) from 2/1 and add that to the % based on contrib and comp from the other plan (e.g. from 7/1). this would certainly be the way you would perform the test under 1.410(b)-5(d)(5)(ii) [calculating the avg ben % for plans with different plan years] - e.g. calculate the % seperately for each plan and then aggregate them.

I think under 'Employer' you could simply add another payroll schedule and then use that for one plan and then use the other pay schedule for the other plan.

and the latest news is (so we may know the answer to some of our questions real soon!): Final Auto-Enrollment Regulations Are In Clearance Process, IRS Official Says Final regulations concerning auto-enrollment are in the clearance process and are “pretty much done,” an Internal Revenue Service official said Nov. 17 at an employee benefits conference sponsored by BNA. The regulations are a high priority and should be out by the end of the year, Martin L. Pippins, manager of Employee Plans, Technical Guidance and Quality Assurance at IRS's Tax Exempt and Government Entities Division, said at the conference. At the same time the auto-enrollment regulations are released, IRS will issue an updated sample notice to participants, like the one issued in November 2007 (221 PBD, 11/16/07; 34 BPR 2703, 22/30/07), which covers qualified automatic contribution arrangement (QACAs) and eligible automatic contribution arrangement (EACAs), Pippins said. The model notice is intended to be an example, and plan sponsors can deviate somewhat from the language and still be fine, he said. Pippins said IRS received many comments on the proposed regulations on auto-enrollment (REG-133300-07). One of the big sources of concern was whether an EACA could or should be adopted in the middle of a plan year, he said, noting the final regulations will address this issue.

the notice and plan are completely seperate. the plan only must be in place before the end of the plan year (unless you are talking about a plan that issued a 'maybe' notice, in which the plan has to be amended 30 days prior to the end of the year (but then it is for that year, not the follwoing year, so that makes sense) the preamble to the final 401k regs specifically states "These final regulations specify that a section 401(k) safe harbor plan must generally be adopted before the beginning of the plan year..." note it is does not say "At the same time the notice is issued" or "30 days prior to tye beginning of the year"

I did manage to modify the nondiscrim report 401(a)(4) to indicate how many NHCEs and HCEs were entered under the nonexcludable/not benefiting field, so I have at least a start toward a better report if you are doing component plan testing.

maybe, maybe not. A safe harbor contribution can be based on compensation from date of entry, while top heavy is always based on compensation for the whole year, regardless of date of entry.

in the 'old days' the 415 regs contained language in regards to refunding deferrals to correct 415 problems. As such, many plans contained such language as well. when the new 415 regs came out any such language was removed, so its no longer in there. (Therefore, I don't think it is part of document language anymore, though I could be wrong) Now the language is in EPCRS, so I think technically any such corrections fall under EPCRS (even though you aren't really doing anything different.)

I think most of us are waiting for the final regs on the issue. The IRS has promised they are coming soon, but maybe not soon enough since the Dec 1 deadline is fast approaching. sorry, can't be more help.

since Andy is an actuary, maybe he thinks he trick the IRS and get a better deal using the female table?

the other 'advantage' so to speak, is that, in economic times like these, the employer is not forced to make the contribution. they simply fail their test and take their refund.

oh, so now you are going to tell me the other terms are Qua - Dee - Eye - A (canadian Qua - Dee - Eye - Eh) and Qua - Nec for the record I asked the actuary in the office and he said "How do you want it to be pronounced?" huh, go and figure.

see EPCRS Appendix A .05(5)(g) plan may disgregard ee who were improperly excluded. since a QNEC is made, then nothing should effect the participant's payroll. Contributions (including make up contributions) I think are only deductible in the year they are made (or if made by tax deadline to the prior year)

legally or otherwise? the particpant is the one who must pay the tax. its all in their name. can they recoup that by complaining to management, etc? that is different matter.

talk is cheap. at this time there has been no relief provided. with only a month and a half to go (with Thanksgiving and Christmas squeezed in there) it is doubtful any such relief is forthcoming. I vaguely recall the topic being raised at the ASPPA conference and the answer being there was really little that could be done at this late date.

30 - 90 days before plan year BEGINs you issue a notice saying "we might give a 3% SHNEC next plan year" if indeed the SHNEC will be made you issue a notice at least 30 days before plan year END saying you will make the SHNEC. at that time you also amend the plan to be safe harbor for that year (and future years if you decide to go permament) if you decided not to go safe harbor you would probably do the same thing again, issuing a new 'maybe' notice.

the deferral limit is always calendar year. (That way, the govt can tell how much someone deferred if they worked for more than one company. One simply adds up the W-2s deferral amounts.) all other limits are beginning of year values, except the 415 limit which is the end of the year. Thus, you could take a calendar year plan 2008, shorten it by one day, and have it end 12/30/2008. your next plan year begins 12/31/2008 and ends 12/30/2009. You get to use $49,000 for the 415 limit. back in 1993 the comp limit was 235,840. then they cut things back to 150,000 in 1994. so my understanding is that a number of plan went short plan year in 1993, so they could get an extra year of using 235,840 (comp is a beginning of year value)

the only issue I can think of off the top of my head is eligibility, since the first computation period is 1000 hours from date of hire to anniversary date. thus its possible you might miss someone who is eligible. most of what i do is on an annual basis, and its extremely rare that I have to ask for hours for a particular period just to make sure of things. if the plan has less than a year of service for eligibility, then hours rarely matter. If it is self directed accounts then allocation of gains isn't going to matter as in the case of a pooled account, so their is no weighting of deferrals to worry about. so I don't think you will have much of a problem. (good to meet you at the conference!)

at the ASPPA coference, a similar question was asked about a plan modifying its 401k to be a QACA as of 1/1. would it be ok to provide the notice as of 1/1 and take out deferrals starting starting 2/1 (30 days after the notice) the IRS says NO you violate the 12 month rule, that you have to give 30 days notice before the plan year. unfortunately, they offerred no solution if you were late implementing something, simply that you couldn't plan on doing something like this. since you have a document in place which says it will be safe harbor, since the time fram for the first year is indeed 3 months which satisfies the condition for the safe harbor, then I think you have an operational failure - namely, failure to implement elections of employees to have deferrals taken from paychecks. EPCRS tells how to correct that. (along with making whatever safeharbor contributions are required) I believe the IRS at the conference said something like "Don't set something up if you aren't really ready to implement it" my opinion and interpretation of the IRS comments as well.

most (if not all) documents will have the option to add the gateway language to the plan. in fact, in LRM 94 there is a note to the reviewer. (While LRM 94 pertains to prototypes, I do not see why the note itself would not apply to all plans...that is, that a document can't simply say it will satisfy one of the gateways, but it must be specific as to which gateway it will satisfy, if such language is to be included. maybe my opinion only,but what the heck) we put the 5% minimum allocation gateway language in all our plans that would allocate by class. If I understand the rules correctly, since this is a 'descretionary amendment- [not required] it has to be in place before plan year end. otherwise you correct by a corrective amendment via -11g. (Note to reviewer: There are other gateways that may be used in order for a defined contribution plan to cross-test using equivalent benefits under 1.401(a)(4)-8(b). The plan may provide for a different gateway other than the minimum allocation gateway (for instance, the broadly available allocation rate requirement of Regulations section 1.401(a)(4)-8(b)(1)(iii) or the gradual age or service based allocation rate requirement of section 1.401(a)(4)-8(b)(1)(iv)); however, sample language for other gateways is not provided herein. If a sponsor wishes to use other gateways, it is important to ensure that the benefits provided under the plan remain definitely determinable. In order for plan benefits to remain definitely determinable, the plan document should specify which gateway is used. The plan document could allow adopting employers to elect between different gateways, but in order to provide definitely determinable benefits it is not sufficient for the plan document merely to specify that one of the gateway requirements will be satisfied.)

my understanding of the rules would say you have to test either all match, or just match that exceeds 4% of pay since the match exceeds 6% of what was deffered

I wouldn't think you could do this in one document. the regs would seem to say if you are eligible to defer you must get the safe harbor. it seems like it would be 'cheating' to exclude that group of employees from that plan and put them in their own deferral only plan, but as long as you don't have to aggregate, that might be possible.