Tom Poje

ooops. something is a miss. you can't "if cross testing doesn't work a safe harbor allocation may be used" because you have to follow the terms of the document. now hopefully most cross tested plans are by class, and so you could allocate the same % to everyone, and in that sense of the word, you have a safe-harbor formula. now: coverage is different that nondiscrim testing. you indicated you fail, that the ratio is less than 70%. If plan has fail safe language, you would have no choice but to bring people in by whatever the document says. if there is no fail safe language, then you still might pass coverage by using the average benefit test. since you failed ratio percentage test (and if there are no deferral/matches you probably wont pass unless imputing disparity helps.) if you still fail coverage, you will have to use corrective amendment to bring people in (or increase contribution to some of the rank and file) but correctives have to be in place withing 9 1/2 months of plan year end. perhaps to answer your question: before even worrying about your formula(safe harbor or otherwise), you have to pass coverage.

jquazza: Tom doesn't even know what a cba is. apparently its union. (guess I have been living in confederate country too long????)

agree with your comments in regard to the ADP test. I thought the comment was referring to the coverage test in which the ees would be treated as 0 or not benefiting. maybe my confusion.

generally yes. in addition you are not allowed (at least in the case of profit sharing piece) to exclude terminees with < 500 hours from another company since they are not 'participants'

I suppose the document could say you combine since you can add just about anything to a document (with approval of course), but that would be unusual. You could test separately, combine 2 of 3 or all three. But what you do for ADP test you must do for coverage as well. since you indicated plan 3 was higher paid management, I dont see how that one would pass coverage by itself (just guessing on the number of bodies), so I would assume you would aggregate at least a couple of the plans. You must use least stringent eligibility, etc.

most likely not. reg 1.401(k)-1(b)(5)(v) basically says QNECs used in the ADP / ACP test treated as elective contributions. since you can't 'integrate' a deferral, similar rules would apply. This is no different than SHNECs. You can't integrate (nor impute disparity in nondiscrim testing) I suppose (and I'll go out on a limb on this one) if these contributions weren't used in the ADP test you might be able to use them. but why would you have a required QNEC and not be used in the ADP test???? In addition, I think it would require a strangely worded document. I have never seen such an animal, and you must of course follow the terms of the document, not "I would like to do it this way' The only documents I have ever seen have separate formulas for QNECs and other nonelective contributions.

see 1.415-5(a)(2) the limit is effective as of 1/1 of each calendar year and applies with respect to limitation years ending in that calendar year. therefore, the limit in question is 41,000. This is the one item that uses end of plan year, everything else is begining of plan year.

I really don't know for sure. The example in the Outline Book of one that fails is a 5 year cliff and a 6 year graded. In that case you have a schedule (top -heavy) that is better than a non top heavy. That obviously fails. I could argue that in your example you have a schedule that is better than a top heavy schedule (not equivalent to it) and therefore would fail. the regs do describe a facts and circumstances - I guess if there are only NHCEs in the 3 year cliff and a majority of HCEs in the other plan I would have 'misgivings'. Again, I am certainly no expert in this area.

The term ‘top-heavy plan’ shall not include a plan which consists solely of – (i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), [ADP safe harbor] and (ii) matching contributions with respect to which the requirements of section 401(m)(11) [ACP safe harbor] are met. A discretionary matchas you described meets the requirements of (ii) Note:The proposed regs (if passed as is) would clarify that you can NOT have allocation conditions on the discretionary match to be safe harbor. you also can not envoke the otherwise excludable rule for purposes of allocation and get the free top heavy ride. all this assumes there are no other contributions

well, lets take the example to an extreme, and consider the 'good old days' plan 1 is 10 year cliff. Plan 2 is 99% vested for years 1 - 9 and in year 10 you become 100% vested. now, would you say that is non discriminatory because after 10 years everyone is 100% vested. I realize that is an extreme example, but I dont see how it is different than what you have. buried in ERISA Outline book (9.157, 2003 edition) is some discussion but not quite what you are asking - at least I think - in that it seems to me you would have to test each 'svc year'. however, what is interesting (and I never would have thought about it) is that a 5 year cliff and 7 year graded are deemed equal, as are the top heavy schedules. e.g. you could use one schedule for hourly and another for salaried.

I think you would still have to test. suppose your boss set up two plans, one for himself (Plan B) and one for everyone else - so you are in plan A. After 1 year would you consider it to be a discrimination issue that he is 33% vested and you are 0% but you both performed the same service?

yes, you have to test after tax contributions. yes, you have to use current year testing. you are free to include the basic match in the test if you so choose

and deferrals don't count toward the deduction limit

well, you raise an interesting question. my guess is that there are a number of documents out there (with determination letters) that probably don't meet the 'requirements' that the IRS wishes. These documents were written when safe harbors were first available. Without mentioning names I knwo of one that has changed (at least in my opinion) quite dramatically. The proposed regs are pretty clear in regards to short plan years ...if employer incurs substantial hardship....employer makes the contribution for the short year, employees are provided notice of the change and plan passes the ADP test.... If there is no money then I am not sure what the IRS could do. In a DB plan sometimes the Key ees will waive part of their benefit, but DC is different since you have actual account balances.

well, then I believe you have VCP or hope the plan never gets audited.

response was 'there are no published guidelines. take your chance if it was a SHNEC, simply provide a late notice. Match would be different' I suspect for the match, that would imply providing a QNEC for all ees who didnt defer 'because they didnt know about it' The proposed regs (the final 401k regs are to be released soon, I suspect they wont change much) are clear: A plan can not revert to testing.... so it is operational. so, I would say you have to make the safe harbor, provide the notice late and you are lucky because it is the SHNEC rather than the SHMAC, and they will probably let you off. again, the answer was 'take your chance' and Q and As are informal opinions by IRS agent, but since they had a chance to discuss beforehand, probably fairly reliable. SHNECs will probably get off the hook because they dont really effect a persons deferral rate.

I'd hold that Q-A 7 of notice 2000-3 implies NO. in this Q-A it is discussed if e-mail could be used, conclusion was that they are still looking into it, but as long as 'each employee "instead of receiving a notice on a written document", that employee receive notice through electronic media, bleh, bleh, bleh...' but then maybe I am reading more into the statement about 'receiving' rather than simply 'posting' a notice somewhere.

probably yes, without seeing actual numbers I wouldn't say for sure. suppose the 4 ees of X are HCE via comp only. also suppose there are lots of ees in Z, some of which are also HCE. If I recall correctly, I look at total ees when determining HCEs and if I use top paid group election it is possible that some of the company X employees are now NHCEs rather than HCEs. but you are correct, if they are all HCEs the thing wont fly unless Z also particiaptes

the answer to this depends on how many ees there are in total and how many are HCE. in a controlled group, all ees are treated as employed by one employer. so for coverage you would have X NHCEs / (X + Z) NHCEs / X HCEs / (X + Z) HCEs where Z employees include only those ees who met the eligibility of X plan. if you can pass coverage you are ok just covering X employees

Andy: you get into some interesting possibilities when it involves a DB plan. as to your comment, 'the NCT is passed', well, maybe. Recall, with DB you have to pass normal accrual and most valuable accrual. It is entirely possible that you could fail the most valuable test. ......... For some clarification. the rule with safe harbor and ignoring 'top heavy only' people would apply if the top heavy was the only benefit a ee was eligible for. In the example given, 1 nhce had 698 hours and didn't receive a benefit. therefore for coverage you had 1/2 NHCE benefiting, or plan failure. As Blinky indicated, the plan could have a lesser hours requirement for top heavy. If true, then the ee should have received a top heavy to start with, and therefore both NHCEs would benefit, so coverage would be at 100%. However, at that point, since the only benefit the ee was eligible for was top heavy, you would now have to run nondiscrim as you would probably fail coverage treating the ee as not benefiting. In the particular example cited, it was indicated ee would eventually receive the greater of the formula or the top heavy minimum. Since it was indicated that ee received nothing to start with, I concluded the hours to receive top heavy was 1000 and so I didn't see how the ee get a top heavy. Oddly enough it would appear the ee could receive the benefit through the formula (via corrective amendment or safe harbor language) rather than top heavy. At this point, both NHCEs benefit, and since it doesn't involve an ee who received top heavy only, then the plan would be considered safe harbor. Or at least that is how I would understand things.

back up one sec. for a top heavy plan to be considered safe harbor, you must pass 410(b) treating those ees who receive top heavy as not benefiting [this is solely for safe harbor, not for coverage, see 1.401(a)(4)-2(b)(4)(vi)(D)(3) - the DB rules reference this section] what you have if some ees receive a top heavy is a plan with two classes - those through the formula(same benefit for all ees) and those with top heavy only. thus, a plan that would have to be tested for non discrim. now, if you pass 410(b) by treating the top heavy people as not benefiting, that implies at least 70% of the NHCEs have the same benefit as the HCEs, so by 'default' the plan would pass nondiscrim rate group testing anyway [or at least looking at it in a rather simple way, that should be true] so I guess the govt lets you off the hook because testing becomes a foregone conclusion. In the case of a DB, not even sure how an ee with less than 1000 hours would get a top heavy.

when determining the top heavy minimum, what comp limit is used for 2001? In 2001 the comp limit was 170,000, but EGTRRA allowed you to retroactively use 200,000. Does the answer depend on whether you actually retroactively amended the comp limit for those prior years?

good luck. I don't think there is an easy answer unless something was specific in the document, which in this case, obviously there isn't. If ee bought 10% ownership at anytime during the year would you treat him as an HCE? yes, the regs are clear on that. on the other hand, 1.410(b)-6(d)(2)(i) says (briefly) an ee who performs service as a union member part of the year and as a nonunion member part of the year is treated as such for those hours he performs such service. I guess I might lean toward that (e.g. allocate attorney for 1/2 year based on that 1/2 year comp and partner 1/2 year). (Solomon 'cut the baby in half and give half to each person claiming to be the mother) Interestingly enough, recall, at least for coverage you could test each quarter, so if you tested each quarter then he would be an attorney the first two quarters and a partner the last two. but then, maybe I am just rambling...

watch out for the following. I actually had this happen in one plan. A doctor was hired after 7/1. His comp was $$$$$$ in the initial year of employment. Because of the one year wait he was ineleigible, but when ranked by comp he was one of the HCEs . therefore the plan had one less HCE for testing purposes the following year.

congratulations. makes you proud of your accomplishment, doesn't it? Its no free ride.