Tom Poje

very good, you got it Andy, the determination letter is important to have for some of the self correction programs. rev proc 2002-47 section 4.04 "VCO and the provisions of SCP relating to significant Operational Failures (see section 9) are available for a Qualified Plan only if the plan is the subject of a favorable letter."

my understanding, is that if the formula says the match is discretionary, then that is it, you can not also impose a different cap each year. On the other hand, it is supposedly possible to put in a corporate resolution capping the match, but it would have to be done before plan year end to avoid cutback rules.

If you had bought $1000.00 worth of Nortel stock one year ago, it would now be worth $49.00. With Enron, you would have $16.50 of the original $1,000.00. With WorldCom, you would have less than $5.00 left. If you had bought $1,000.00 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10 cent deposit, you would have $214.00. Based on the above, my current investment advice is to drink lots of Bud and recycle.

Actually, I would say I don't know for sure. Is it effectively available as well? I remember reading about match contributions, something like 100% of the first 6% then 50% on the next 6%. Currently available to all, but only the HCEs could afford to defer more than 6%, so effectively, no it wasn't really available. Could you prove something like that? probably not. If you go back to the illustration, if the plan set up the investments and set the limit ay 50,000, the conclusion is that it is wrong. And lets further pretend there is only one great kahoona with a balance of over 100,000. He simply says, ok, instead of setting the number of investments and which investments, you can do whatever you want. That is a good work around the problem, and it looks like, as Thorton indicated, if reasonable fees are charged, etc, will work. If the plan had 100 people and each had their own investments I had to track I am not sure I would want to process it, but that is me. I am too lazy.

I'm still not sure. The ERISA Outline Book uses the following illustration (9.129, 2001 edition) "...suppose a plan provides a menu of eight investment options. ..the eighth option is a separate brokerage account. The brokerage account option requires $50,000 minimum accounty balance, whereas all account balances may be invested in any of the other seven options. The brokerage account option option is a separate right or feature that must be tested for availability because it is available to a different group of participants than the other seven investment options. When testing availability, participants whose account balances are currently less than $50,000 are treated as NOT having this right or feature available to them."

I believe the broker is correct. When testing current availability, there is no testing exception for minimum dollar requirements (loans and the minimum 5000 cash out are exceptions)

The ERISA Outline Book says the following in regards to failing to give timely notice: "The notice is a condition to relying on the ADP safe harbor. Thus, if notice is not given on a timely basis for a plan year, the plan is NOT a safe harbor 401(k) plan, EVEN IF the safe harbor contribution is provided for that plan year" ....it is anticipated the IRS would excuse de minimis failures, such as failure to give notice to a small percentage of employees, as long as notice was given ... as soon as [possible] after the error was discivered... The IRS has informally indicated it MAY permit correction of the untimely notice through...APRSC and VCR program... (page 11.339 of the 2001 edition, emphasis (Capital letters) is mine. I would hold that if the safe harbor was the 3% Nonelective you would have an easier time pleading your case, than if the safe harbor was a Match. The nonelective has no real bearing on whether one defers. Plus, the notice only has to say the nonelective might be provided. But that is my opinion!

Blinky: My understanding if the plan was safe harbor, then technically you are on current year method. lets suppose plan was safe harbor in 2000. current method because of safe harbor. in 2001, notice was not given timely. I don't see how you can 'switch' back to using the prior year method - unless you haven't restated your document yet and listed what methods were previously used.

I would go back to actuarysmith's advice. check the document. All the documents I have seen base vesting on the plan year. (Except of course in the case of elapsed time) Thus, based on the original post, vesting should not be a problem. Eligibility is a different issue. The first 'year' is based on anniversary from date of hire(see DOL reg 2530.202-2(a) according to the ERISA Outline Book), after that the eligibility usually switches to plan year. It can get real interesting in the case of a plan with 2 year eligibility. A full time ee hired 12/10/2000 completes 1 year on 12/10/2001. Also completes 1 year fron 1/1/2001 - 12/31/2001!!!!!!!!Thus they enter on 1/1/2002 Hint: Don't switch to plan year method for purposes of eligibility when using 2 year wait.

years ago (1998) the issue of 'discretionary match' was discussed on PIX (Pension Information eXchange). I saved the notes on this one, and the basic comments were as follows: Standard document that allows a discretionary match reads as follows: On behalf of each participant who is eligible to share in matching contributions, a discretionary matching contribution equal to a uniform percentage of compensation shall be made... the client has decided how much $ they want to put in, then allocating it as a % of deferral and limited to a % of comp. It is my understanding that this is a problem. Do you agree? all comments to the question were YES, It is a problem. The reason, of course, is that all the document said was a uniform percentage of compensation. There was no mention of a cap. Therefore, placing a cap resulted in a failure to follow the terms of the document. As to whether a corporate resolution can be made Again the answer was YES, but must be made before the end of the year, otherwise you could end up with a cutback

I believe the procedure would be the same as you would handle an ineligible employee return incorrect deferrals (+ earnings) forfeit match (+ earnings) see Q & A 122 on the correcting plan defect Q & A section. Obviously, you would also have to rerun your ADP test

much less the plan permit it, does the law permit it? I thought to waive out of a plan is a one-time irrevocable decision. If the person has already been in the plan, I don't think it can be done. consider a profit sharing only plan - you have in effect, created a CODA where one does not exist. The plan could always be amended to exclude the person, but that is something slightly different. For nondiscrimination purposes, employees who waive out would be treated as includable and not benefiting. In the case of an hce this would only help coverage testing You implied things were done after the end of the plan year - that sounds like a no-no if the person has already accrued the benfit. Can the person receive cash? Well, of course an owner can take any bonus he wants. he is the owner. But that is different from a contribution. Based on the info provided, something smells. Maybe, just maybe, if it was the first year of the plan you could argue the individual waived out.

sort of, if that makes any sense, and depending on how things are worded in the document. under the 'explanation of provision' to the proposed regs on catch-ups is the following A. Explanation for Catch-Up Contributions Under these proposed regulations a participant is a catch up eligible particiapnt, and thus is permitted to make catch-up contributions, if the participant is otherwise eligible to make elective contributions under the plan and is age 50 or older. (Federal Register vol 66, no 205/tuesday Oct 23, 2001) Now, if the ee was capped at 0% for deferrals, is he eligible for catch up since he reached a limit? I would say no, because such an ee was not otherwise eligible to defer. In your case, you are saying the ee is not capped at 0, but rather deferred 1000 and because of 415 violation, the 1000 is treated as catch-up. My comment on that is simply, if the document says correction of annual addition is to reduce the profit sharing and hold in suspense, then I think you have no catch-up. My logic being, ee is treated as having 1000 deferral and 39000 profit sharing. If your document says that step 1 is to return deferrals first, then I would say that amount could be treated as a catch-up. Interesting, which come first, the chicken or the egg.? My understanding of catch-ups was that 1. a violation occurred. (Failed test, deferral limit hit, etc.) 2. Deferral Money should be distributed - at least in all cases I have seen it involved a possible distribution of deferrals. 3. Treat the deferral money as a catch-up instead. in the case of 415 you have 1. a violation occurred 2. Money should be distributed. (Depending on the document it might be deferral, but it might not be.) 3. ?????????? As I said, maybe I am too conservative. I would hold, depending on the terms of the document, you might never have an annual addition violation, because the 415 violation is never 'reached' because of the deferrals, because the cap on the profit sharing contribution is reached first. Generally, deferrals are made first during the year then the profit sharing is made. I suppose the timing of contributions might even make a difference. First the 40,000 went in, then the ee deferred 1000 and hit the limit, but that would be an unusual order in most cases. Fortunately, most documents allow for return of deferrals as step 1.

I have a problem with your statement "employees defer 0% and then make a catch-up contribution" I don't think someone really 'makes' a catch-up contribution. It is just that the deferral is treated as such due to a limit being hit. In the example being discussed, it sounds more like ee defers $1000 and receives a $40,000 profit sharing contribution. EE has gone over the annual addition limit. Hopefully the document allows for the return of deferrals in case of an annual addition violation. Otherwise, I think you would have to limit the profit sharing contribution. Maybe I am too conservative on that approach. (And if there is a match involved, then you have another possible issue to consider)

This is a little old, but it is probably still applicable: (It is from the Q & A board on this website) Correcting Plan Defects Q&A -------------------------------------------------------------------------------- by Attorneys C. Frederick Reish, Bruce L. Ashton, Nicholas J. White and Nicholas J. Waddles of Reish Luftman McDaniel & Reicher, a Professional Corporation. Mr. Reish and Mr. Ashton are the co-authors of the Plan Correction Answer Book (click for details), from Panel Publishers. -------------------------------------------------------------------------------- Failure to Follow the Plan's Terms Regarding Hardship Distributions (Posted August 16, 1999) Question 110: A reader asks the following question: "In the first year of a 401(k) plan, an employer allowed two participants to receive hardship distributions without completing any required paperwork. The employer also allowed the participants to continue to make deferral contributions to the plan. Can this situation be corrected? What would be the method of correction?" Answer: In answering this question, we have made the following assumptions: (1) the plan document permits hardship distributions; (2) the distributions were made on account of bona fide hardships; (3) the terms of the plan require that hardship requests be made in writing; and (4) the plan's terms provide for suspension of elective deferrals for at least twelve (12) months after the distribution. The failure to comply with the required hardship "paperwork" and suspension of deferrals is a failure to operate the plan in accordance with its written terms, and as such, is an operational failure as described in Section 5.01(2) of Rev. Proc. 98-22. If the IRS were to audit the plan and discover this error, it could seek to disqualify the plan on the basis that the failures violate the definite written program requirements of Code section 401(a) and Regulations section 1.401-1(a). The correction is to (1) complete the relevant paperwork, dated currently but with a retroactive effective date to the date of the hardship distribution (this would include obtaining any applicable spousal consents in accordance with Code sections 401(a)(11) and 417), and (2) return to the participants the deferrals they made during the 12-month period following the hardship distributions, plus any related earnings. It has been our experience that this method of correction is acceptable to the IRS, because it meets the requirements in Section 6.02(1) of Rev. Proc. 98-22 that "[t]he correction method should restore the plan to the position it would have been in had the Qualification Failure not occurred. . . ." As an operational failure, correction prior to an IRS audit can be made under either APRSC or the VCR Program. Under Parts IV and V of Rev. Proc. 98-22, operational failures can be voluntarily corrected without IRS involvement under APRSC, or with IRS involvement under VCR. Assuming the plan meets the eligibility requirements of APRSC (see Q&A #90 for a discussion of those requirements) and that the correction can be substantially completed prior to the end of the second plan year following the plan year in which the defects occurred, then the failures should be corrected under APRSC to save the time and avoid the filing fee required to resolve the failures under the VCR Program. If the failures are corrected outside the two-year time period, then APRSC can be used only if the failure is "insignificant" under all the facts and circumstances of the case. If the failure is "insignificant," it can be corrected under APRSC even if the plan comes under audit prior to the time correction is made. -------------------------------------------------------------------------------- Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. The laws, regulations and court decisions in this area change frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the laws, regulations or court decisions that occur after the date on which that Q&A is posted. -------------------------------------------------------------------------------- Copyright 1998-2002 Reish Luftman McDaniel & Reicher, a Professional Corporation

Here is a one page plan spec report that contains the basic info. It will give the following info Dates Alloaction Provisions Retirement Provisions Eligibility Hours to Recieve contribution Compensation Vesting Forfeitures Top Heavy The plan name is actually buried under Alpha fields 11 and 12 because I can't stand to repeat the company name as part of the plan name. We use Alpha field 1 to indicate definition of compensation ...e.g. exclude bounes, date of Participation, etc.

There is an example given under Q & A 77/ Q & A Columns/ Correcting plan defects It goes back a few years, but what the heck. SVP Correction for Failure to Make Required Minimum Distributions (Posted May 11, 1998) Question 77: We are continuing our series of questions which look at using the Standardized VCR Program ("SVP") corrections for defects under the Administrative Policy Regarding Self-Correction ("APRSC"). In Revenue Procedure 98-22, the IRS says that SVP corrections are deemed to be reasonable and appropriate methods of correcting under all the remedial programs; therefore, plan sponsors who correct using the SVP methods have "reliance" under APRSC that the correction will be acceptable to the IRS. In this Q&A, we address the following question: "What is the form of correction mandated under SVP for failure to make minimum distributions under Code section 401(a)(9)?" Answer: Appendix A to Revenue Procedure 98-22 lists the operational failures and acceptable methods of correction under SVP. One of the specified defects is the failure to pay minimum required distributions under Code section 401(a)(9) on a timely basis. (Even though amended in 1996 in the Small Business Job Protection Act, section 401(a)(9) still requires that qualified plans make distributions after age 70-1/2 to "5% owners" and to non-5% owners when they terminate service after reaching age 70-1/2.) The form of correction under SVP differs depending on the type of plan. For defined contribution plans, the correction is to distribute the missed required minimum distributions. How do you know what to distribute? The amount for each year is determined by dividing the "adjusted account balance" as of the valuation date for each distribution by the "applicable divisor" (which is the remaining years of projected life expectancy of the participant and any designated beneficiary). The adjusted account balance is determined by reducing the actual account balance at each valuation date by the missed distributions from prior years. This sounds more complicated than it is. Let's use an example to illustrate the methodology. Assume the participant has an account balance of $50,000, that there are no forfeitures or contributions added to the account, that the earnings rate on the account is 10%, and that the life expectancy of the participant and the designated beneficiary is 20. The normal minimum distribution in the first year would be $2,500 ($50,000 divided by 20), and for each subsequent year would be the remaining account balance divided by the remaining life expectancy. In the second year, the distribution would be about $2,763 ($50,000 less $2,500 plus $5,000 of earnings divided by 19 years), and so on. The SVP correction method effectively assumes that the required distributions were made each year in order to determine the next year's required distribution, and then the missed payments are added together and distributed at one time to complete the correction. For defined benefit pension plans, the correction method under SVP is to distribute the required minimum distributions plus "an interest payment representing the loss of use" of the funds. There is no guidance on how to determine the interest rate, but a rate approximating the plan's rate of return on its assets would be acceptable to the IRS. In our next Q&A, we will discuss other issues related to correction of a failure to distribute required minimums, including the resolution of excise taxes due under Code section 4974.

I see that the latest rev proc 2002-47 now has $50 as the minimum refund required!

you might want to read the Q & As 133, 134, and 135 under Correcting Plan Defects. These address the issue of using incorrect compensation.

Never have done accrued to date, and had to dig back through some old notes to find the following (just so I don't say something wrong): talk #26 1998 ASPA conference "Accrued to date method is very useful when a PS plan is being converted to a cross tested plan, or any other situation where the disparity between the HCE and NHCE contribution rates is significantly narrower than it will be in a cross-tested plan." so, for your q 1, you can include all years. if plan wasn't funded (assuming there are no forfeitures) then you would not be able to count those years. example given: 'plan effective 1/1/92 cross tested first performed for 1998. Last day of measurement period is 12/31/98. first day of measurement period can be any of 1/1/98, 1/1/97, etc." (Begininning of measurement period can be modified to not include all prior years under fresh start rules - but then you can only include earnings based on the contributions from the fresh start date -have fun calculating that number!!!!-ok, those are my hand scrawled comments in the margin) "you can not use current compensation in your calculation"

While true, by not giving the notice the plan is not safe harbor - however, if the plan formula requires it, you are stuck with the 3% safe harbor contribution.(e.g. fully vested, allocation to everyone) The worst of both worlds. you still have to test and you don't get the rewards of safe harbor.

well now, that is an interesting question. In a round about way there appears to be a de minimus amount. under the APRSC program...see Rev Proc 2001-17 sec 6 .02 (5)(B) Delivery of very small benefits "If the total corrective distribution due to a participant or beneficiary is $20 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of distribution"

LWilson (and others): for clarification: Term < 500 hours does not fall under the 'otherwise excludabled' group. The 'otherwise excludables' are those people who would not have entered the plan IF the plan had imposed a 1 year/age 21 requirement. and remember, just because an ee terms and has less than 500 hours, he still might be eligible for a contribution. in the case of a safe harbor, he has to be. and since he receives a contribution, he is not excludable from the testing.

If you have a copy, the ASPA yearbook will list members by state

I would exclude him. this is no different than under the old rules if an ee was gone 10 years and then took a distribution you don't all of a sudden start including the amount for another 5 years.