Tom Poje

running a 12/31/2006 plan year end. currently vesting is 3 yr 20% at the end of the year lady has 2 yrs of svc. so 0% vested. the census data indicates she quit January 2, 2007. but now, for plan years beginning 1/1/07 plan has to be on a 2/20% schedule. top that!

just to make sure on the facts, because the answer could be different. suppose I have 2 companies, A and B. they are a controlled group. I can say "All employees are eligible to particiapte" but if by 'all employees' I mean of company A, then I could easily fail the ratio % test. also, remember, you are only talking about the ratio % test for the 401(k) portion only. I had to explain that to someone years ago, just beacuse everyone can defer and hence benefit, does not mean "The plan passes the ratio % test" the correct answer is that the plan passes the ratio % test for the 401(k) portion. the nonelective portion (and the 401(m) is a totaly separate test.

First lets make sure on terms being used. excess contributions = failed adp test excess deferralls = deferred above the deferral limit (15,500 for 2007) now, while an excess deferral could cause an ADP failure, it is still an excess deferral and must be treated as such for all purposes. this makes a difference in regards to taxes. it also makes a difference in regards to adp testing. you first treat excess deferrals (up to the prescribed limit) as catch up. then run your ADP test. you do not run the ADP test first. it makes a big difference. ...... now, as to where in the regs how to handle. hopefully you at least know to look in the 401k regs, but then where. 1.401(k)-1 certain cash or deferred arrangements 1.401(k)-2 ADP test 1.401(k)-3 safe harbor 1.401(k)-4 SIMPLE 1.401(k)-5 mergers,etc [reserved] so this section doesn't really exist yet 1.401(k)-6 definitions. ok, hopefully looking at that you can say "I will look in 1.401(k)-2" very good, 5 points! this section is divided up into (a) ADP test (b) correction of excess contributions © additional rules for prior year testing well. per discussion above, we aren't talking about excess contributions, and we never mentioned prior year testing, so now we are down to section (a) (1) in general (2) Determination of ADP (3) Determination of ADR (4) Elective Contributions taken into the ADP test (5) Elective contributions not taken into the ADP test (6) QNECs (7) examples well, hopefully by this time you can see you would either want (4) or (5) - do you count excess deferrals or not. and if you look at (4)(iii) it will provide the answer that excess deferrals of HCEs are used in the testing (unless of course they were catch-ups, but that is a different section. hopefully the description above will make it easier or give you an idea how to try to look through the regs to find the answer you are looking for. you might not be able to find the answer, but at least it gives you an idea how things are laid out.

my understanding is that you have to use a uniform ret age for testing, hence age 62 in your example. Outside of your example I would add some precautionary notes if the NRA in the DB was less than the DC. At the 2005 ASPPA Q and A (#22) the question was as follows NRA age in the ps is 65 and in the DB it is 62, which means my latest uniform age is 65, which equals the testing age. [so the opening statement aggrees with the idea that the unform age is the latest of all NRA in the combo plans] the question then went into what 'happens if the DB plan opts to recognize the 415 limit for testing'. Is the max accued benefit the same at 65 as it was for 62 or do you have to normalize it? sorry, I only have the handout and not the answer, which was discussed from the podium. in addition, when testing for meaningful benefit, you still use the DBs NRA not the latest uniform age. and in addition, its buried somewhere in some chicken scrawled notes I have somewhere, if the DB was cash balance then you ahve to be careful about what interest rates you use. I think it might have been one interest rate through the DB retirement age, and then another to the latest uniform age. or maybe that was for determining the gateway minimum provided. I don't remember.

I'd normally agree, but since EPCRS says this is an operational failure (after all, the document says you can't accept excess deferrals) then I would say you go by the self correction method listed. otherwise, why would they even have it in there as a possibility/suggestion?

assuming the document calls for it, the answer is yes. Appendix A .04 under EPCRS permits this. note ee gets taxed in 2006 and 2007 as well. double taxation. If excess deferrals are a result of more than 1 plan or employer, then it is possible neither plan has a violation, and therefore no language to permit such a distribution, in which case ee is only taxed in 2006, and then again at distribution time.

if I understand your data correctly, the ee is eligible for a catch up, which is 5000 in 2006. therefore, 5000 would not be included in testing. this would mean 18,282.25 would be used to determine his ADP %. (I am assuming by 2006 testing you mean the plan is a calendar year)

now comes the fun part: allocating the QNEC. there are actually 4 possibilities that are permitted just to confuse you entirely Eligible NHCEs in year of failure Eligible NHCEs in year of failure and are also NHCEs in year of correction Eligible NHCEs in year of failure and are still employees on a date during the year of correction Eligible NHCEs in year of failure and are also NHCEs in year of correction and are still employees on date during the year of correction

if you are willing to plug in the CPI-U values every year, this spreadsheet should do the calculation. ok, maybe the rounding is off $1 and I am too lazy to fix that.

when in doubt, look at the regs. actually, we all they can be confusing at times, and simply reading them may not be easy. perhaps this will help: you know you are talking about a 401(k) issue so you know you will look under 1.401(k). these regs are subdivided as follows: 1.401(k)-1 Certain cash or deferred arrangements 1.401(k)-2 ADP test 1.401(k)-3 Safe harbor requirements 1.401(k)-4 SIMPLE 401(k) plan requirements 1.401(k)-5 Special rules for mergers, acquisitions so, you know you are asking about safe harbor, so that narrows where to look. now. 1.401(k)-3 is subdivided as follows 1.401(k)-3(a) ADP test safe harbor 1.401(k)-3(b) Safe harbor nonelective contribution requirement 1.401(k)-3© Safe harbor matching contribution requirement 1.401(k)-3(d) Notice requirement 1.401(k)-3(e) Plan Year requirement 1.401(k)-3(f) Plan amendments adopting safe harbor nonelective contributions 1.401(k)-3(g) permissible reduction/suspension of safe harbor match 1.401(k)-3(h) additional rules of course each of those gets subdivided even further, but if you make yourself a simple chart with the major headings, it might nake finding things easier. if you weave your way through those, the only place that mentions a 'contingent notice' (wait and see) is 1.401(k)-3(f)(2) which pertains to nonelective contributions only.

so many questions1 ok, if the plan in question failed 2 years ago, then that is the scenario in which you would have to make a 1-1 correction. I am assuming you are only talking about last year plan failure. Unless I am missing something in the discussion, it makes no sense to 'return deferrals and make them employer contributions' lets suppose the plan provides a 100% match for each $ deferred, and the correction was to return $100 in deferral. in that case $100 in match should be forfeited as it 'relates' to the deferral. however, if the match was 100% but capped at 5% of deferrals, and the refund of $100 deferrals was on deferrals greater than 5% then there would be no related match forfeiture. something is missing from the facts, because a corrective distribution was made, and now all of a sudden it is being asked to be returned and given to others, but no reason is given why. .............. as for BXO question on match distribution/forfeiture. suppose an ee has $1000 in match balance. ACP test failed. ee is 50% vested, and $200 needs to be returned. there are 2 possibilities. distribute $100 and forfeit $100 because he is 50% vested. the other possibility I've seen written up is to distrubute the $200. this leaves the ee with a balance of $800. he is 50% vested, but his vested balance is not $400, but rather $300 because he has received an additional $100 already. This turns out to be a good deal provided he keeps works and becomes 100% vested.

more info is needed. if its an ADP test failure only, corrective distribution is returned to the owners if its an ACP test failure only, corrective distribution is returned to the owners (in the odd case of them being 0 vested, then the distribution would be forfeited.if partially vested then it depends on how you want to handle things) if it is an adp failure only AND there is 'related' match, then the match is the only thing that is forfeited. if it is an ADP and ACP failure then figure the distributions first, then worry about related match that might need to be forfeited.

Mike: "I'm fairly certain I have a citation from Sal that specifically says a zero limitation for HCE's is, at the least, inadvisable. If I get time (please, stop the cacophonous laughter), I'll search for it." no need to search for it, I don't think you will find it. On page 11.272 (section XI part B.3.b.2)f (2006 edition) its even a particular paragraph Could a 401(k) plan impose a zero percent deferral limit? Yes...blah blah blah and then the last sentence in bold Applying zero limit to a specific group. A zero limit also could apply to a specific group of participants (e.g., only to HCEs or only to key employees) unless he has changed his mind in the 2007 edition, it doesn't sound like he is saying it is 'inadvisable'. the only place where he implies it is inadvisable is that he says this reduces the deferral rate available to someone substantially. (If you carry the argument further, then cap the HCEs a 1 cent. that should satisfy you.)

Fact: preamble 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 non HCEs." so one can't disagree with that. preamble then goes on to say: " However, the final regulations retain the rule that an applicable employer plan is not permitted to provide LOWER employer provided limits for catch up participants." emphasis mine. earlier in the preamble the example is used of a plan that limits HCEs to 1% deferral the first few months and then increasing it to 15% later in the year, thus creating an artificial 'catch-up" early on. the IRS has cleary said NO, you look at catch up at the end of the year, that catch ups aren't 'created' early on in that way. (By the way, no mention is made that doing this would violate any BRF - you could do this, but in determining what amounts are treated as deferrals and waht amounts are catch-ups you still have to follow the guidelines listed under, for lack of a better term - what happens if the employer imposed limit is changed during the year.) what has been left out from the quote from the preamble listed above was the first sentence -(which results in the whole thing (at least to me) to be taken out of context. Lets include that first sentence. "A plan will NOT FAIL the universal ability requirement solely because an employer-provided limit does not apply to ALL employees or different employer-provided limits apply to different groups, as long as each limit satisfies the nondiscriminatory availability requirements of 1.401(a)(4)-4 for BRF. Thus, for example, a plan could provide for an employer-provoded limit that applies to HCEs, even though no employer-provided limit applies to NHCEs... hmmm. lets see. first sentence says you could provide different limits as long as you satisfy BRF. next sentence says you could limit HCEs only. apparently the govt doesn't think that is a BRF. what you can't do (next sentence) "..not permitted to provide lower employer provided limit for catch-up eligible participants" so that would seem to say you can't write your document to say "deferral limit is 15% for employees aunder age 50 and 5% for employees over age 49.

actally, what does the document say? you have to follow the terms of the document. if there is no safe harbor language - then what happens? I don't think the IRS has addressed that issue of issuing a notice but having no 'plan' behind it. if the document contains safe harbor language then yes you have the obligation - regardless of whether a notice was issued or not. the IRS has made that clear - in that particular case the IRS has said it is probably a moot point in the case of a SHNEC - though you still have a failure to follow the terms of the document and issue a notice.

its not just Uncle Sal nor the IRS at Q and A sessions. the preamble to the 401k regs states (emphasis mine, as well as any abbreviations) A PLAN that uses the safe harbor method MUST specify whether the safe harbor contribution will be the SHNEC or the SHMAC and is NOT permitted to provide that ADP testing will be used if the requirements for the safe harbor are not satisfied. The safe harbors are intended to provide ees with a minimum threshold in benefits in exchange for easier compliance for the plan sponsor. It would be inconsistent with this approach to providing benefits to allow an employer to deliver smaller benefits to NHCEs and revert to testing. note, it is the PLAN that decides, not the notice or lack of notice. even in the case of a 'maybe SHNEC' the regs are clear that the PLAN must be amended within 30 days of plan year end.

'ab'use at your own risk. I of course offer no guarantees on any reports, this one seems to be working well for the way I have been running things. for vesting % to print requires the plan user alphanumeric fields to be filled in {UDFDATA.ALPHA030} through {UDFDATA.ALPHA036} e.g. 0 years would be 0% for {UDFDATA.ALPHA030} 1 year would be 20% for {UDFDATA.ALPHA031} etc. this assumes one does not have 2 different vesting schedules for match and profit sharing. if {UDFDATA.ALPHA037} is no then the message about integration will not print. This will print the diversification notice, plus This certificate prints a variety of different possibilities, depending on if participant has a balance in that source - so the look might vary even in the same plan (D = deferral, M= Match, L= Loan, P = Profit Sharing, R = Rollover, A = AFter tax) DM DML DMP DMA DMPA DMPL DMPR DMR well, last I checked it did a good job of filtering things out, and usually not printing a source that was 0. (unless the ee didn't defer). well, I didn't include transfers on some of them, so if an after tax is transferred in that won't print. but what the heck, it is a use at your own risk, so what do you expect. at least it fits on one page (I think)

it remians to be seen how all this will work out. return of deferrals was permitted under the old 415 regs. that is no longer true. now it is only possible under EPCRS. what that means for documents with language you mentioned is beyond me. I 'defer' to the document experts.

if I understand things correctly, marking up the form never accomplished anything. (especially if you are electronically filing since it is the bar codes that are scanned) the notes from the 5500 preparers book says if you are filing a final return and the form is not released by the due date of the final filing, use the most current year form that is available. if there are any changes to the questions on the new form, the EBSA may request further info. so, maybe something else is incorrect on the form?

so I guess it goes something like: Who won the MVP at the all star Futures game this Sunday? Yes.

lets suppose the person in question was simply an HCE and not even related or anything. if he met the eligibility requirements, but was excluded from the plan how would you treat him? hopefully as a 0 for the avg ben % test. [you'd do the same with an NHCE that was excluded, it is just that excluding an HCE helps testing] so I don't see how the situation changes (possibly if he was a 'short service' employee I could see the IRS gripe - they already said you shouldn't be giving NHCEs like that something to pass testing, so I'd hold the reverse is true about not giving a short term HCE anyting just to pass testing could fall into the same boat) what reasons were given for not inclding this individual in the testing?

very strange but true, and I only know this because the Dodgers have a minor league team (AA) here in Jacksonville. Currently on the roster they have a guy from China whose name is Hu. He is a very good fielding shortstop, batting over .320 this year so a good chance he will make it to the big leagues soon. Yesterday the Dodgers signed a guy out of college whose last name is Watt. If he is any good, then someday at a Dodger's game it is possible that you will hear Hu's on first and Watt's on second. good grief, shades of the old Abbot and Costello routine.

This was in the NY Times 'Puns and Anagram' Crossword Puzzle this week: 5 letter word "Government provision that might raise pension questions" (I find it fascinating that whoever composed the puzzle even came up with something like this)

the reg cite dealing with sole proprietors and partners is [1.401(k)-1(a)(6), 1.401(k)-2(a)(4)(ii)] there is a file attached of just the 401k regs in a topic called "ADP refunds...." - you could scroll through section, it is dated May 3. assuming the print out is the same as the copy I have: page 12 of the preamble talks about deferring before even knowing how much earned income is available. p63 and p 98 are the reg cites. the most important point is that the ELECTION to defer is made by plan year end. The actual $ can be deposited after that date- see comment on page 98 (A)(2) - the elective contribution is actually paid to the trust no later than the 12 month period follwoing the year to which the contribution relates. (this comment refers to what deferrals are used on the ADP test, but it shows the realization that deferrals might not come into the trust immediately)

no enhanced match was provided, and neither of your formulas match deferrals in excess of 6%, so no problem there. your rate of match does not increase as one defers more, so no problem there. your discretinary is capped at 4% of comp so no problem there.this requirement only applies to discretionary. sounds like you are ok.