Tom Poje

I'm not disagreeing or agreeing with your comments, it is just from what I have read no one knows for sure. T-30 of 416 simply says "For purposes of this question and answer, distributions means all distributions made by the plan." according to that there are no exceptions. or as someone once said to me just what part of 'all' don't you understand? My present mental state would have a hard time not including match amounts that were returned to the (key) employee. It would be like saying, it is a good thing you failed the test, otherwise you would be top heavy. In addition, you got a distribution out of the plan for nothing, whereas normally you would have to wait until retirement. This should happen more often. such a deal!

A participant had deferrals deducted from the paycheck for around 2 years. Unlike all other particpants, this money never made it to the IRA, no one knows for sure what happened, possibly the $ ended back into the company itself. Granted it is not a qualified plan, what is the correction? Do you simply deposit the amount that was deducted (it is known from the W-2s), plus the match and put it in a SIMPLE IRA. How would you calculate earnings? Penalty for failure to timely deposit the deferred amounts? thanks!

no one knows 100% for sure how to handle corrective distributions. The ERISA Outline book (and I think this is what I learned years ago) is if the amount is treated as ana nnual addition, then include it in the top heavy test. Therefore, corrective distributions for failed tests would be included. Excess deferrals (amounts over the 11,000 limit) that are returned would not be included. with the advent of EGTRRA I am not sure if the above argument is entirely valid. Consider the rules on catch up contributions. They are included in determining whether the plan is top heavy. One reason for exercising a catch-up is a failed test. If you do, then you include the amount in the test. On the other hand, if you return the $ then you .....(from EGTRRA) "In the case of in-service distribution made for a reason other than separation from service, death, or disability you keep track of the amounts for 5 years rather 1 year" since the distribution is not for separation of service, etc, then it looks like you should track for 5 years. But what about excess deferrals? The same logic could be applied. so, I guess I would lean toward including the amounts because of the combination of the catch-up rules and EGTRRA. Hopefully those amounts would not be critical in determining top-heavy or not. but heck, we are still not clear on if a safe harbor 401(k) plan is exempt from the top heavy rules if it merely offers a profit sharing feature. Maybe the IRS will answer all these questions at once.

I didn't see an indication what mortality table/interest rate was used, and I don't have any tables sitting in front of me to check the actuarial factors/normalization factors. however you have the following: HCE age 44 NHC age 33 this is an 11 year difference 1.085^11 = 2.453167 allocation to NHCE = 9.06% 9.06% * 2.453167= 22.22569 and you indicated the rate to the HCE was 22.22.- so I would expect those two ees to have the same E-Bar This implies that the NHCEs age 33 and 32 are in the rate group, so passes nondiscrimclassification test. since the two ees have the same e-bar - your mortality results in 15.51. one ee is age 38 or 5 year difference. 1.085^5=1.5036 15.51 / 1.5036 = 10.31 which is the e-bar you indicated. without going firther, I would say your numbers look fine, plan will pass avg ben % test.

the particular example in the rev procedure simply says reduce the account balance by the excess (adjusted for earnings) I interpret earnings to be positive or negative - it does not say adjusted for gains only in the example. the correction is an attempt to put things as if the error had not occurred. suppose it was a new ee and they had match of 10,000. failure to limit comp gave them a match of 11,000. the plan had a 10% loss, or 1100. If I placed the full extra 1000 in match in suspense without earnings, the individual would have a balance of 11,000 - 1100(loss) - 1000 (not eligible for) = 8900. If the mistake had not occurred, and the ee had only received 10,000 in match with a 10% loss, the balance would be 9000. My understanding, or somewhere I read you can ignore losses - don't ask me where, it was somewhere. but that over penalizes the participant, and that hardly seems right .

If you distributed too much money, you are suppose to request the $ back. According to the most recent Rev Proc. if it is less than $100, you don't have to worry about it. Depending on all the options available under the ADP test I guess I would try to find one that best suits your needs... e.g. shifting, if there was an HCE with less than 1 year of service treat them in the otherwise excludable group, use comp less deferrals for testing purposes (if document allows it), use current year or prior year, etc.

enclosed is a census verification that includes column for both deferral and match. assuming the tables are the same in this report as in the census request, you can copy the match field from this report to the census request.

first, yes, I mispoke my first statement. certainly the HCE could receive more than an NHCE and the plan fail testing. my apologies. never type in a hurry. what I was really addressing was your statement 'someone who is not benefitting is not a part of the 401a4 test, rather than showing as a 0' someone who is otherwise eligible but not benefitting shows as a 0 for the 401a4 test. such ees are the main reason a plan can fail avg. ben % test. The only exception would be if the person was not eligible for the plan (e.g. failed age and service). but that was not being addressed in this question.

If that was true, then the 401(a)(4) test would consist of only those benefitting, therefore the % would always be 100%, therefore the plan would always pass. see 1.401(a)(4)-2©(2)(vi)(3) "...thus, for example,the ratio percentage of the rate group is determined by taking into account all nonexcludable employees regardless of whether they benefit under the plan" as for an employee treated as benefitting with a 0 accrual, in both the DB world and DC world easily possible due to 415 limits or plan limits, floor offsets, etc. see 1.410(B)-3 for the examples

although, actually Judy is on to something. since the NHCE is not deferring, they could go with the 4% match. Then the HCE only needs 21,000 in profit sharing. which is 10.5% of pay. 1/3 of that is only 3.5% if the plan can pass cross testing then the owner gets but real cheap. Of course, that only works if the ee doesn't defer, and since you have to anounce beforehand, the guy might start deferring.

I have run them as follows: acct 1 - cash acct 2 - stock acct 3 - loan acct 4 - unreleased shares I create a dummy ee to hold the shares, and track the loan as 'negative'. only the dummy has account 3 and 4 so for a new plan, I have, for example, 1 million in shares and a negative million in loan, so total balance = 0. I then run a negative contribution = # of shares released to the dummy ee, and a positve # of shares to all other employees. These two transactions net out. If need be, I do this in two steps. Step 1 principal only. check for the 1/3 rule with HCEs. I have a customized allocation report separating the HCEs from the NHCEs. That is a real simplified explanation, obviously there is more to it than that. I run a positive contribution to the loan account.

your question can be summed up in an example from ASPA. The safe harbor can count toward the 5%. However, the HCE received 29,000 in nonelective contributuions which is 14.5% of pay. therefore the minimum is the lesser of 5% or 4.83%. from the ASPA Webcast Q & A q. There was a question earlier concerning giving a participant an extra 2% in a safe harbor plan...the participant would receive the 3% safe harbor contribution, but why would they necessarily have to receive the 2% if the plan required last day employment for the profit sharing? a. If an employee is benefitting, they are entitled to the 5% gateway allocation. ......... and a reminder. this is only the gateway. you still must pass nondiscrimination testing.

I would vote 'yes'. (But remember, I am from Florida, so if you hold the ballot up to the light you might see a hanging chad that indicates I voted 'no'.) You didn't indicate exactly what date the 'new ownership' took place. Since we are only in the first part of August, I will assume the individual was an owner before July 1, and therefore any 5% owner is treated as an HCE.

interesting problem! if rank and file total comp = 100,000 gross profits = 130,000 making it simple, formula 4% contribution to rank and file = 4,000 if I first reduce this by forfeitures, then to calculate the ideal salary I would have: gross profits - less contribution = 130,000 FICA=7004 comp = 118265 contribution = 4731 on the other hand, lets say I don't reduce contribution by any forfeitures. then I have gross profits - rank and file contrib = 126,000 FICA = 6951 initial salary 114,470, contribution 4579 but the contribution has to be reduced by 4000 in forfeiture. but this will increase the compensation, so I have to increase the comp by 4000 / 1.04 = 3846 increase in salary and 4% of 3846 = 154 (increase in contribution) or end result of FICA = 6951 comp = 118316 contribution = 4733 - 4000 = 733 total =126,000 plus the 4000 contrib to rank and file = 130000. and obviously, if you were 'splitting' the forfeitures between rank and file and the sole proprietor, you would end up somewhere imbetween that. In this example the numbers are fairly close. I suppose if the comp is going to be way above the comp limit for the year it would make life easier. But you indicated the plan is integrated as well. Fun! You got me curious just what type of gross comp and formula you really have.

Tara: You might try asking this on the SEP, SARSER and SIMPLE board rather than the 401(k) board. From my experience, Gary Lesser knows everything about SEPs!

Jim, I do not know of an article, but if post-tax contributions are allowed, then deferrals may be re-characterized as after tax contributions. Therefore, if the plan fails the ADP test, the problem deferrals 'cease' to exist. and now the ADP test passes. A big advantage. However, this is offset by the following- since they are post tax contributions, they must be used in the ACP test. generally, that means you are only moving the problem from one test to another. In addition, if post-tax contributions are allowed, then you can no longer exclude anyone from the ACP test. E.g. if plan has a last day rule, then ees who termianted are not included in the ACP test. That eliminates a bunch of zeroes. Now however, you have to include these people because thay could have made an after tax contribution. Ugh, now you have a greater chance of failing the test. In addition, since you have recharacterized the deferrals as after tax contributions, I believe you have to go back and issue a new W-2 to the individual. All this sounds like to many disadvantages, rather than advantages.

I suppose you could write the document to do whatever you want, but if that was how it was worded I would like to see how they pass BRF.

I received the following from the client: "I am forwarding you copies of the amendment for the XXXX and YYYY Plan. They signed it and have executed the individual classes of partners." It was not indicated whether the partners were shot or hung, but I guess the law requires you to follow the document, doesn't it?

And now the latest from the ASPA conference out west: IRS is now backing off on the idea you do not need a determination letter. And for voulme submitter, prototypes, etc.. you have to be word for word to rely on the opinion letter. And this goes beyond just the 'self correction' reason for having a determination letter. The determination letter offers protection in case of bankruptcy. ASPA indicated they will try to get an article addressing this issue on their website in a few days.

I think when I had a similar problem once. If I recall, I showed a loan pmt for the full amount (you could create a dummy account) and then show a distribution from that account. Net effect was to zero out the silly thing. If it makes you feel better, I had no luck following the help screen either.

Tara: see the thread 'RevProc 2002-47 in word format' this rev proc is the latest and greatest word on self-correction. There is a document file on this thread. page 70 of the document gives the govt's guidance of calculating earnings. granted that all the examples involve 'gains' rather than 'losses', I don't see how you can use another method not sanctioned under the self correction program

no - in component testing you do not split the contribution, you split the people . a person can only be in one plan. It would sort of like you having a controlled group with 2 companies, and not aggregating for testing purposes. for example, test 1 hce with 2 NHCE using allocation method and test 1 hce with 3 nhce using accrual method. test 1 NHCE ratio = 2/5 = 40% hCE ratio = 1/2 = 50% ratio % = 80% Plan passes ratio % test. test 2 would have an even higher rati % now, since each component plan passes 410(B) you can try your cross testing. component testing is especially useful when you have one young ee whose EBAR goes through the roof when using accrual method.

I would disagree. 1.416-1 Q & A m-10 clearly states that a participant in a top-heavy defined contribution plan MUST be provided the minimum if he/she is employed on the last day of the year. end discussion. consider a 401k plan with immediate eligibility, and a defined benefit plan with a 1 year wait. That right, you would have a bunch of people due a top heavy, but are not even eligible for the defined benefit. now what are you going to do? one of the plans needs to be amended to handle the situation you described. remember, a plan can have less restrictive requirements...e.g. the top heavy minimum could be given to those with less than 1000 hours in the DB plan...

In fact, according to the notes only Wisconsin, North Carolina and Arkansas are nonconforming. And Arkansas doesn't convene until 2003...fun stuff. They would have to retroactively conform to EGTRRA. now that is really screwy.

I guess one needs to be careful about the terms being bandied about in this question - and maybe I didn't read the question closely enough. I don't handle the plan submissions in our office, so I have a poor excuse. However, for the self correction programs an individually designed plan needs the determination letter, a prototype can rely on the opinion letter, a regional prototype on the notification letter. I think all the plans we use are individually designed, so I immediately think of determination letter without regard to the type of plan.