Tom Poje

The IRS audit guidelines for 403b plans are as follows: (ok, so I 'bolded' some stuff)based on these I'd say 403b deferrals are ignored. VI. NONDISCRIMINATION AND COVERAGE A. Technical Overview (1) General (a) TRA '86 imposed nondiscrimination and coverage rules on 403(b) plans under § 403(b)(12). These rules generally must be satisfied for plan years beginning after December 31, 1988. (b) These rules do not apply to churches, including qualified church-controlled organizations, as defined by § 3121(w)(3). © For tax years prior to August 5, 1997, governmental 403(b) plans are deemed to satisfy nondiscrimination (except for § 401(a)(17)) and coverage requirements with respect to non-salary reduction contributions. After that date, these requirements (except § 401(a)(17)) do not apply to governmental 403(b) plans. A governmental plan (within the meaning of § 414(d)) is one maintained by a State or local government or political subdivision, agency or instrumentality thereof. (d) Notice 89-23 1 Currently there are no nondiscrimination regulations under § 403(b)(12). 2 Pending the issuance of regulations or other guidance, Notice 89-23, 1989-1 C.B. 654 (extended by Notice 96-64, 1996-2 C.B. 229), provides guidance for complying with the nondiscrimination rules. a Notice 89-23 deems a 403(b) plan to satisfy nondiscrimination if the employer operates the plan in accordance with a good faith, reasonable interpretation of § 403(b)(12). One means of satisfying this test is through the safe harbors set forth in Notice 89-23. b Under the notice, salary reduction and non-salary reduction contributions are tested separately for nondiscrimination. Only non-salary reduction contributions (both matching and non-elective) are subject to the coverage requirements of § 410(b). See subparagraph (3) below. 3 Under § 414(u), a 403(b) plan is not treated as failing nondiscrimination or coverage requirements by reason of the making of employer or employee contributions(or the right to make such contributions) made pursuant to veterans' re-employment rights under USERRA. (2) Salary Reduction Contributions (a) Salary reduction contributions are tested separately from non-salary reduction contributions for nondiscrimination. See § 403(b)(12)(A)(ii). 1 The nondiscrimination requirement for salary reduction contributions is satisfied only if the plan in operation allows each employee to elect to defer more than $200 annually. Unlike a qualified CODA, nondiscrimination with respect to salary reduction contributions is not satisfied through compliance with the ADP test. 2 The test for salary reduction contributions focuses on eligibility and generally requires universal eligibility. However, there is no requirement that the opportunity to make salary reduction contributions be available; but once that opportunity is available to any employee, it must be available to all nonexcludable employees to satisfy nondiscrimination. 3 Until future guidance is issued, both public education institutions and 501©(3) organizations MUST currently operate their 403(b) plans in accordance with a good faith/reasonable interpretation of the nondiscrimination requirement for salary reduction contributions. No plan provisions are currently required, but faulty plan language may indicate an operational violation. (b) Excludable employees may be disregarded in applying the nondiscrimination test for salary reduction contributions. These include: 1 nonresident aliens with no U.S. source income, 2 employees who normally work less than 20 hours per week, 3 collectively-bargained employees, 4 students performing certain services, 5 employees whose maximum salary reduction contributions under the plan would be no greater than $200, 6 participants in an eligible § 457 plan, a qualified CODA, or other salary reduction 403(b) plan, and 7 certain ministers described in § 414(e)(5)©. Unlike a qualified plan, a 403(b) plan is not permitted to have any minimum age and service exclusion for salary reduction contributions. © Like elective deferrals under § 402(g), salary reduction contributions for nondiscrimination testing consist of employer contributions made pursuant to a salary reduction agreement. (d) Under Notice 89-23, "employer" means the common law employer (and not the controlled group) for purposes of testing salary reduction contributions for nondiscrimination. A good faith, reasonable interpretation as to the identity of the employer is sufficient for this purpose. 1 Salary reduction contributions made pursuant to a one-time irrevocable election at initial eligibility to participate in the salary reduction agreement, or pursuant to certain other one-time irrevocable elections to be specified in regulations, and pre-tax contributions made as a condition of employment are treated and tested as non-salary reduction contributions. See text V.A for a discussion of a similar definition for elective deferrals under § 402(g). EXAMPLE 28: Employer is a large public university located in City Y. Employer maintains an annuity plan ("Plan") intended to be a 403(b) plan. Both non-elective, non-matching contributions and salary reduction contributions are provided under the Plan. Under the Plan, only senior administrative staff and faculty are eligible to elect to defer a portion of their salary pursuant to salary reduction agreements with Employer. Employer also maintains a defined benefit plan for remaining employees. Employer maintains no other plans of deferred compensation. The salary reduction contributions are discriminatory. The Plan does not satisfy the requirements of § 403(b). EXAMPLE 29: Same as Example 28, except that all full-time employees are eligible to participate in the Plan. There are 40 part-time clerical employees who are not students and who normally work 29 hours per week (or 1,508 hours per year). Since the part-time employees in this example are not excludable, the salary reduction contributions are discriminatory. The Plan is not a 403(b) plan. EXAMPLE 30: Employer is a small private school which maintains an annuity plan intended to be a 403(b) plan. All eligible employees may elect to defer at least four (4) percent of compensation. An eligible employee, A, has compensation of $25,000 for 1998 and elects prior to 1998 to defer 1.5 percent of compensation. The plan administrator declines to process the election and informs A that the minimum deferral is four percent of compensation. The salary reduction contributions are discriminatory, and the Plan fails to satisfy 403(b). EXAMPLE 31: Employer is a private hospital maintaining an annuity plan ("Plan") intended to be a 403(b) plan. The Plan provides only a salary reduction arrangement. Under the Plan, all medical doctors and senior administrative staff are eligible to participate in the Plan immediately upon hire. Remaining employees, including nurses and other support staff, are eligible only after two years of service and attainment of age 21. Employer maintains no other plans of deferred compensation. The salary reduction contributions are discriminatory, and the Plan loses its status as a 403(b). (d) Examples 28 through 31 illustrate that salary reduction contributions are tested separately from other contributions for nondiscrimination and that these contributions must be offered universally to non-excludable employees. The effect of violating nondiscrimination is the loss of § 403(b) status. Contributions to the Plans are therefore subject to income tax, employment tax and withholding. (3) Non-Salary Reduction Contributions (a) salary reduction contributions are all contributions that are not salary reduction contributions. salary reduction contributions are basically all non-elective and matching contributions. 1 Salary reduction contributions are tested separately from salary reduction contributions for nondiscrimination. 2 Non-elective (non-matching) contributions, and matching and after-tax employee contributions, are also tested separately for nondiscrimination. Section 403(b)(12)(A)(i) requires compliance with §§401(a)(4) (nondiscrimination), (5) (permitted disparity), (17) (the $160,000 ceiling on compensation, as indexed for 1998), and (26) (minimum participation), 401(m) (matching and after-tax employee contributions) and 410(b) (minimum coverage) for salary reduction contributions. (b) Salary reduction contributions of 403(b) plans maintained by public education institutions, or governmental entities which qualify as 501©(3) organizations, are not subject to the nondiscrimination or coverage requirements (other than § 401(a)(17)) beginning in tax years on or after August 5, 1997 (prior to that date, governmental plans are deemed to satisfy these requirements, except § 401(a)(17)). © For 501©(3) organizations, under Notice 89-23, nondiscrimination requirements for salary reduction contributions are deemed satisfied if the employer operates the plan in accordance with a good faith reasonable interpretation of the above Code sections. The safe harbors in the notice are one means of satisfying the good faith/reasonable interpretation test. (d) Excludable employees are those employees who have not satisfied any permissible age and service requirements of the plan, in addition to those listed above in section VI(A)(2)(b). (e) Employer is generally defined for purposes of nondiscrimination with respect to salary reduction contributions under §§ 414(b) (controlled groups), © (groups under common control), (m) (affiliated service groups) and (o) (other organizations or arrangements described by regulations). Until further guidance is issued, a good faith, reasonable interpretation applies in defining the employer for this purpose. See Notice 89-23 for more detail. (4) Highly Compensated Employee For years beginning after December 31, 1996, the definition of an HCE means any employee who: (a) was a five percent owner at any time during the year or the preceding year, or (b) for the preceding year has compensation from the employer in excess of $80,000 (as indexed for COLAs), and if the employer so elects for the preceding year, was in the top paid group of employees for such preceding year. B. Examination Steps (1) Ask the employer for the number of HCEs and NHCEs, which of these participate or are eligible to participate in the 403(b) plan or other plans of the employer, and annual compensation and contributions records. (2) Using employment records, check to see who can make salary reduction contributions and when they can be made. Check to see whether salary reduction contributions are in fact available to all nonexcludable employees. Because the definition of salary reduction contribution and elective deferral are similar, refer to the Examination Steps in Section (V)(A) concerning whether contributions are elective or non-elective. Nondiscrimination requirements may be violated if the employer fails to properly characterize the contributions. (3) Ask the employer which employees were excluded from participation and the basis on which they were excluded. (4) Find out whether the employer aggregates plans to pass coverage under §§ 403(b)(12) and 410(b). Ask which test the employer uses to pass coverage, ratio percentage or average benefits. (5) Consider whether employer contributions satisfy the safe harbors. If not, see if there is another basis on which employer contributions satisfy good faith/reasonable interpretation. (6) See whether matching contributions satisfy the ACP test.

you raise an interesting question - most of the time you read that QNECs and QMACs that are used in nondiscrimination testing are not available for hardships. and you are talking about a contribution that is being used to satisfy the ACP safe harbor. if you dig into your all that material you printed and saved regarding safe harbor 401(k)s I am sure you will find your copy of Notice 98-52. under Section IV (Definitions) you will see ...excuse me while I blow the dust away, I can't read the it...oh, its item H Safe Harbor Matching Contributions...(1) are nonforfeitable within the meaning of section 1.401(k)... well, the discretionary match could be subject to forfeitability, so I'd say that unless your document states otherwise, there isn't a restriction on the discretionary match. see also 1.401(k)-6 definition of QMAC which also require 100% vesting. or, put another way, I'd hold that the unavailability of hardship applies only to those safe harbors that are 100% vested. or a discretionary match, while it satisfies the ACP safe harbor is not a QMAC.

My knowledge is better on "Don't Rely-on-Us" anyway, the system should be using whatever you have coded for NRA in Plan Specs. if you are getting everyone to show at age 65 it sounds like a coding problem. (I even tried changing the retirement date on a dummy plan I have and age 60 shows up as testing age (or it could be 59 depepnding on if you code age nearest or age last) The only other ting I can think of is that you have the definition for retirement date as something other than 'date of event' or '1st of the month following' (this would apply to any definition - not just 59 and a half) I could see this creating nonuniform ages, and therefore the system using age 65. e.g. if it is coded plan val date nearest, some people would be age 59 and others 60. this is nonuniform and so I will go out on a limb and guess the system would use age 65.

I'm not so sure that NHCE #2 has to receive the same rate as NHCE #1. LRM simply says if you only have 2 NHCEs, then the max number of groups you can have is 1. thus the plan meets that qualification. LRM also specifies that the grouping must be reasonable (I'm pretty sure have only 1 group would be reasonable.)(I only point this part out simply because I imagine that some people will miss this point and simply assign people to groups in whatever order and then depend on Mr. Preston to back them up and say prove to me the grouping isn't reasonable) now, while true each person in the group must receive the same amount/percentage, you have one person in the group who has failed the hours/last day provision - therefore, the person isn't eligibile for the group alloaction.( I can only assume this person must have had less than 500 hours.) the only reason this person received anything in the first place is not because of the grouping, but because of the safe harbor, and that is simply increased to the gateway minimum under a different portion of the document, not the allocation grouping. if I recall, years ago at an ASPPA conference (on a different issue) someone asked about a prototype that had immediate eligibility if hired by such and such a date, and a 1 year wait for all new employees. I don't remember the exact details, but the plan appeared to fail 'coverage' (I'm not sure why the otherwise excludable wasn't use) However,the conclusion of the IRS went along the lines something like "well, its a prototype, and they always pass coverage and nondiscrim, so you must be ok"

then my mis-read. I thought it was indicated there were 4 nhces

I'd agree with Blinky on this one. since SHNECs can perform triple duty, it wouldn't appear to be a problem if the HCEs 3% was a nonelective and the NHCEs was a 3% SHNEC. As far as I know, there is no rule like QNECs in which you have to run a nondiscrim test with and without QNECs. Such a contribution would of course take the plan out of the top heavy free scenario, but since most if not all employees would receive the 3% SHNEC anyway it probably doesn't matter

it is not a matter of "sources could be disaggregated" 1.410(b)-7© requires mandatory disaggregation, and quite clearly states the sources are treated as 'separate' plans. while 1.410(b)-6(b)(1) certainly says that you use the minimum age and service, however the paragraph before that 1.410(b)-6(a)(2) clearly states that this rule is applied 'soley' in reference to that 'plan' However, the concluding statement adds 'In determining if a plan satisfies the average benefit percentage test ...then all plans in the tesing group are treated as a single plan'. so, if, when referring to coverage, you are talking about the avg benefits % test, then it is true you would look at the min age and svc conditions. if you are talking about the ratio % test, then you look at the 'plan' or 'source' conditions.

its in the LRM pertaining to the prototypes. I'll post it again

as a general rule you take the ending balance as of the prior year and divide by the appropriate factor from the uniform table: age factor 70 27.4 71 26.5 72 25.6 73 24.7 74 23.8 75 22.9 76 22.0 77 21.2 78 20.3 79 19.5 80 18.7 81 17.9 of course, nothing is ever that simple. sometimes there are possible adjustments that would have to be made to the account balance - though I dont think that often. if the 70 year old had a young (more than 10 years difference) wife then its possible that using the joint table might be desired....oh, oops, not politically correct, I suppose the 70 year old lady could have a 50 year old muscle bound macho husband....

If it was a prototype then you could only have 2 groups for the NHCEs, but otherwise the formula does work (ignoring the possible reprucussions when the youngest NHCE tells the other NHCEs he received 49% of pay!!) suppose the plan had simply given all NHCEs 5%. it would have failed testing and could have put in a corrective amendment producing the same results.

no elapsed time required. you could, for instance (depending on the document) put an hours qualifier on it such as "600 hours in a 6 month period or 1000 hours in a 12 month period"

but you do not have only 11% nonelective. the 4% QNEC is still a 'non elective', but as the wise fish said, you still have 2 tests to run - one with and one without, though of course the test including all nonelectives would pass

I asked King Sal about your comments (- or maybe its Emperor Tripodi - I get the titles confused) - and he responded in the following manner (I happen to have a running gag with him about some of the typos I have come across over the last few years, so I have a foot (or at least a toe) in the door) ........... Not sure where the confusion is. Here is how I would distill it. (1) First identify the "plan" that is subject to coverage/nondiscrimination testing. In this case, the plan is the total of nonelective contributions, whether by PS allocation, gateway, TH, or SH 401k. (2) Then determine how the "plan" in (1) is tested. If the plan is not subject to disaggregation, or permissive aggregation with another plan, then you test it accordingly. If the plan is subject to disaggregation (e.g., otherwise excludable employees - see last sentence of 4.a.6)a) on p. 9.41), then you test each disaggregated group separeately. If the plan, or a disaggregated portion of the plan, is permissively aggregated with anothe rplan that consists of employer nonelective contributions, then those aggregated plans are tested together.

I'd say I would need a lot more convincing based on my 'limited' knowledge

yeh, but you don't have a boss like I do that insists you can do such things.

this could be corrected under the self correction program (VCP only) see page 29 of rev proc 2006-27 (its a loan in excess of 72(p)(2)(A))

despite the fact it changes how the nondiscrim testing? e.g. the IRS has said you can't change ADP testing (e.g. from prior to current year after the fact, etc)

Cash Balance has NRA = 60 401k plan has NRA =65 so, can the 401k NRA be amended after plan year end to NRA age 60?

my copy of the regs (1.401(k)-1(b)(5) and 1.401(k)-2(a)(6)(ii)) says to pass 401(a)(4) nondscrim a plan must be able to pass i) including the QNEC (rarely a problem since they usually only go to NHCEs) ii) excluding the QNECs I think that is one reason why the IRS personal says they can't satisfy the gateway - you have to run the test excluding QNECs so I am not sure I would agree QNEC are in the same 'general nonelective contribution pot' always. sometimes yes, sometimes no, depending on whether you are (i) or (ii). it is interesting that no such rule applies to the SHNEC. see 1.401(k)-3(h)(ii)...'these contributions are not subject to the limitations of 1.401(k)-2(a)(6)(ii)... (thank heavens you don't have 2 tests for coverage!)

ah, young grasshopper under 1.401(a)(4)-(8)(b)(1)(B) it is clear these are the hoops you pass through to be able to nondiscrim test a DC plan on an accrual basis. there is no gateway if you were to test on an allocation basis. note also, the rules apply to nondiscrim testing. thus they do not apply to coverage testing, thus you could run the avg ben % test on a 'cross tested' basis for coverage without having to provide the gateway.

I don't think, that's been my problem all along. however, at the Q and A a year ago, the IRS personal said the QNEC (unless it is the safe harbor 401(k) version) can not be used to satisfy the gateway. it simply can not be used to perform 'extra duty'. only a SHNEC can do that.

correct, because instead of the allocation gateway you have provided the smoothly increasing gateway.

yes, well put. Kim can give the talks and I can 'retire', though I did hear a rumor that Elvis ASPPA-resley may try his hand at some type of presentation this fall.

if you are not aware of it, one of the best features of this website is the free daily newsletters, http://benefitslink.com/newsletter/ when, for instance, the final regs for some section are released you receive the notification and a link so you can print out the stuff. I print the stuff off, because, while I can always look in the regs, I've found it hard at times to find the preamble. And I've found the preambles to be so valuable - in this particular case I think they addressed your question more so than the regs (in fact I only copied the one paragraph, if you read further they address when the deferral election must be made, etc )

about as close to any comments you might find can be found in the preamble to the final 401(k) regulations. (always print them preambles when available, you can never find them when you need them later! "One commentator asked for clarification of the interaction between these timing rules and the rule under the regulations that treats a self-employed individual’s earned income as being currently available on the last day of the individual’s taxable year and whether this last day rule precludes a partner from making elective contributions during the year through a reduction in the partner’s draw. The restriction on the timing of contributions is not intended to prevent a partner from deferring amounts that are paid to the partner throughout the year on account of services performed by the partner during the year, and the final regulations have been modified to clarify this point. However, self-employed individuals who take advantage of this opportunity to defer amounts during the year must make sure that the amount contributed during the year will not exceed the limits (such as the limits of section 415) that will apply to the individual, based on the individual’s actual earned income for the relevant period."