Tom Poje

my gut feeling would be yes, since you have to follow the terms of the document. I have one that says you hold the amounts in suspense and allocate the following year, which could certainly jumble things up. or if plan allows catch up contributions I think you have issues as well. (I think its called pension simplification)

1. wife is an hce by attribution, so you would only discriminate against an HCE anyway 2. see 1.410(b)-3(a)(2)© a dc plan can apply the first sentence of (a)(2)(ii)(A) of this section which says if an en ee is treated as benefiting under a db plan, plan provisions that implement section 415 are disregarded

generally you would have to specify integration as part of the allocation formula. of course, there are scenarios where it doesn't matter. Remember, you have to follow the terms of the document. you have to have a definitely determinable formula suppose you had 2 classes of people, each class is allocated comp to comp classes are: HCEs and NHCEs and the HCEs all make over 200,000. you allocate 6% to the nhces by selecting the right dollar amount provided to the HCEs you could end up with a net effect of allocating 6% + 5.7> TWB If you were to test on an allocation basis it would pass testing. since you are not cross testing, no gateway is necessary, though it really wouldn't matter since all the NHCEs received enough anyway. On the other hand, why have a plan that is set up as a class plan and then run a formula like this? I suppose initially the plan might have worked as a class plan, but due to turnover of young employees it no longer works. I bet if you look at most cross tested examples they look great - but no one asks "What if the youngets employee quits?" and at that point, a many of those examples fall apart.

assuming the match meets all other requirements, e.g. no eligibility restrictions, 100% vested, not discretionary, subject to the distribution restrictions, then yes, you would satisfy ACP safe harbor. If there were no other contributions, the plan is not considered to be top heavy. if there are forfeitures or profit sharing contributions, then yes, if plan is top heavy the match could be applied toward top heavy

actually, I wouldn't take that position, but so much is being bandied about I have gotten sidetracked. my apologies! you are correct the one rule only applies to people who have received a top-heavy only. (e.g. treat the top heavy as 0 and see if you can pass coverage) so to recap: the issue in this case is not coverage, plan passes that at 100% thus failsafe language doesn't comp into play, that is only for passing coverage. now, in this plan, there have been different rates of allocation, and one must prove the plan passes 401(a)(4) testing. If the plan is tested on an accrual basis, one must make sure the NHCEs receive a gateway minimum. A really good document will allow that, I know Corbel document now have that language, it is fairly new, you may have to put that in if that is your document. I think they have snap on language or something like that. Even the gateway may be insufficient to pass testing, all one can do is run the numbers and see what happens. I smell a corrective amendment, but I am down wind from the Maxwell House factory, so maybe that is what I smell. I am near the Jacksonville River, maybe I will look and see if any of Blinky's relatives are swimming about.

if the document has fail safe language, it would indicate how to handle the situation. however, fail safe language has the disadvantage of eliminating the avg ben test. thus, in your case if only 1 of 2 nhces benefit at the same rate as the hces you would still fail ratio % test. (There are some poorly worded documents that have fail safe language that says you can use the avg ben test, but they are incorrect) The advantage to fail safe language is that no amendment is required. If you have no fail safe language, then you simply allocate an additional contribution to an individual(s) using a corrective emenment..1.401(a)(4)-11(g) it must be meaningful, so it might have to include vesting.

under the proposed regs, if you impose any conditions on the match you no longer have a safe harbor formula. obviously, those are not in effect at this time, so that doesn't really answer your question, but be aware it probably will in the future.

and be careful when you run your test. If you test on an accrual basis, you would be cross testing, and this might require providing the gateway. wouldn't want you to forget that a be like a fish out of water....er....

lets try to get the terminolgy straight. cross-test - concentrate on the second word 'test'. thus, the term cross test only refers to testing, it really has nothing to do with the formula. you are 'crossing over' into another world. thus, if allocations in a dc plan are converted to an equivalent accrual, you have crossed over. likewise, if accruals in a db plan are converted to an equivalent allocation rate, you have crossed over. Lets say you have a ps plan that allocates 10% to 1 HCE. 6 NHCE receive 10% and 4 NHCE receive 3% top heavy only. for coverage purposes, how many received a non-elective? ALL. On the 5500 sched T you indicate all benefit. However, at this point, some employees have received one rate and others another rate. therefore you need to test to make sure you haven't favored the HCEs. Ignoring the average benefits test completely, how many NHCE received the same allocation rate as the HCE? 6 out of 10 or 60%. Plan fails ratio % test. so now you cross test to see if converting the contributions into accruals will give you 70% of the NHCE greater than the HCE. if one of the NHCE who received top heavy only is 16 years younger than the HCE you have the following(assuming 8.5% interest rate): 3% * (1.085^16) = 11.066% since this is greater than 10% you are on your way. This is rather a simplified way of looking at, I am ignoring imputing disparity, only trying to pass ratio % test, and also assumed the 6 NHCE who received 10% are not older than the HCEs.

I thought they passed coverage. All receive SHNEC, so all received a nonelective. However you now have some receiving 3% only and others receiving additional non elective. that fails 401(a)(4) Nondiscrim testing must be performed. and depending on how much the HCEs received you might have to increase the contribution to the NHCE to satisfy gateway minimum. oh wait, if document doesn't contain language for it then you also need an amendment.

This is a debatable issue. 2003 edition of the ERISA Outline Book discusses both sides of the issue, simply concluding that it is an unclear issue. In a somewhat similar related issue: A few weeks ago I was working on adding some stuff to the Coverage/Nondiscrim Answer book and had Amy (coeditor of the book) pose the following to Sal Q and As Ran the ADP test with the following results: ADP % ACP% HCE 4.11 2.06 NHCE 2.17 .70 So plan passes ADP and fails ACP. Because plan passes ADP no limit has been reached, so catch-up contributions are not permitted. But now suppose .33 of NHCE deferrals are shifted to the ACP test. ADP % ACP% HCE 4.11 2.06 NHCE 1.84 1.03 Now plan passes ACP but fails ADP. Since plan fails, is it now permissible to treat some the deferrals of the HCEs as catch-up contributions? My response: It is unclear but it does appear to be an acceptable correction method. The regulations simply indicate that any amount of elective deferrals may be included in the ACP test as long as the ADP test is satisfied both before and after the shift of deferrals is determined. In this case, the ADP test fails after shifting, but a legitimate correction is to then treat a portion of the deferrals by the HCEs as catch up contributions. The regulation seem to indicate that all testing (emphasis on ‘all’) before it is determined how much of the deferrals are available to be treated as catch up contributions. Sal's response The way the regulations are written, I would have to agree with the other person. Originally, I was of the view that when you shifted the deferrals to the ACP test, you couldn't cause a failure on the ADP side. But I became convinced that, so long as you end up passing the ADP test (i.e., through correction), that the shifting is still okay. Assuming that's true, then the catch-up recharacterization on the refund being generated on the ADP side necessarily follows. Supporting this view is that the 401(k) regulations simply require the ADP test to be run without taking into account the elective deferrals that have been included in the ACP test. It doesn't require that the plan must be able to pass the ADP test without need for corrective action. Thus, if corrective action is needed, and the action taken is to refund excess contributions, then you can use the catch-up rules to recharacterize the refund as catch-up contributions. This, of course, assumes that the plan includes catch-up provisions and that they were in the plan for a sufficient portion of the plan year to satisfy the effective availability requirement (i.e., the catch-up rules are not added after the close of the plan year for the sole purpose of recharacterizing refunds). ......... Scares me to death I start thinking like Sal! Again, I would emphasize this is an unclear issue. You are only hearing opinions voiced by fools like me!

I would agree, if plan does not match bonuses you could fail 414s. And if you fail 414s, I would assume you have to run the ADP test using total comp, and also use current year testing since that is also a requirement of safe harbor plans. And the contribution still has to be 100% vested and no restrictions, etc.

SHNECs, like QNECs are still treated as nonelectives for purposes of coverage.

I guess you could always plug it in the normal census field, run deferrals, print your ADP test and then reverse the transaction????

Actually, I have it wrong. My apologies. Brian is correct. If it is solely enhance match AND as long as it doesn't go above 6% of compensation you satisfy ACP safe harbor. eg you could do 300% up to 6% and be okay.

actually the enhanced match can be whatever, but you have to be careful on your ACP testing. you have a choice to run ACP based on all match or just on match that exceeds 4% (since you could have had a basic match at 4% you are allowed to treat that portion as a safe harbor. so in your case, it sounds like you run an ACP test on either 5% or 1%

well, guess I am not sure what a document means by 'allocation on a cross tested method' an allocation is based on a formula, in your case it sounds like people are in classes and it is probably comp to comp. I guess the document could be using the term 'allocation on a cross tested method' but I don't know if that term makes any sense. now, to prove a plan is nondiscriminatory, one does (a)(4) testing, which can be on an allocation basis or on a benefits basis. if tested on a benefits basis then you are cross testing because you are converting the allocation to a benefit. I suppose a document could require you to test on a benefits basis, why I don't know, I suppose it would be no different than some type of fail safe language. That would be ugly if the document forced you to do that.

a couple of questions: 1.was the loan part of the general investment of the plan, or was the loan an individual investment of the employee. 2. once the person quit, was there not a distributable event under the terms of the plan?

Julie: My apologies! I assume too much at times. When you test on an allocation basis all you do is simply take contribution / compensation thus if everyone receives the same percentage of pay, everyone will have the same, for lack of better term, E-BAR. That is not really a correct term, because it is not an Equivalent Benefit Accrual Rate, it is the actual Allocation Rate someone has accrued when you test contributions on an allocation basis. The only way a plan couldd fail under those conditions would be a plan that has a last day provision or hours requirement and enough people fail to receive a contribution. If a plan is integrated up to the maximum (5.7%) then if you were to actually test on an allocation basis AND impute disparity everyone would still end up with the same Allocation Rate. In fact, if your software does nondiscrim testing on an allocation basis, I suggest try testing a fully integrated plan (e.g. 5.7% and 100% TWB) and see the results. One, it is a quick an easy check to make sure the software allocated the contribution properly. Two, I always hope it will be one of those things in which one looks at the results and says 'no wonder this formula is considered to be safe harbor. when you test it everyone is equal.

correct, you would still have to test at least the ee post tax contributions I believe if you want you can include the match, but it is not required.

well, technically you have a safe harbor formula, just for the heck of it, imagine what would happen if you tested it on an allocation basis. what would your results be?

I would say yes, since both itemsadded are new to the plan.

there is no safe harbor for employee contributions. That being the case, it sounds like you would be adding the 401(k) feature. notice 98-52 V-C-2(b) basically says in the case of a new plan you can provide notice as late as the effective date of the amendment. This is really no different than having a new hire. If the plan had immediately eligibility, how could you give that employee 30 days notice? It would be impossible.

Andy- If I go, do I get an automatic extension on filing my 5500s?

guess I would start with the assumption of 5% to the rank and file. see what is left over for the ownerafter taking off 1/2 FICA, see if there is enough $ to supposrt at least 15% contribution and still pass testing