Tom Poje

This one goes back a little ways, but you might look at Q & A 38-Q & A 41 (Q and A for Plan Defects) Correctiing improper return of Excess Contributions

fidu: I know nothing of VEBAs, but there is a VEBA board as well, so you might try posting there as well!

Mike: at least if you watch the Red Wings you don't have to stay up until 1:45 in the morning! I guess they are showing there is hope for 'old-timers' like me. have a great day!

Mike: my comments were that 1) you have to include the SHNEC in a(4) testing. I was making no comment in regards to it (not) performing triple duty. simply to say that it is still a nonelective contribution and therefore included in that type of testing. 2) My comments were in regards to if you did not seperately test the 'plans' (meet statutory and doesn't meet) ............. I guess a reminder, if seperately tested, then coverage must also be done seperately.

you did not indicate if you are testing 'otherwise excludables' seperately or not. The 'explanation of provisions' in the Federal Register says: ..'for example, these regulations do not change the general rule prohibiting aggregation of a 401(k) plan or a 401(m) plan with a plan providing nonelective contributions.' A safe harbor is still a nonelective contribution, so I see no way out of excluding that from (a)(4). furthermore, the Register goes on to say 'if a plan benefits employees [someone who receives a SHNEC benefits] who have NOT met the minimum age and service requirements of section 410(a)(1), the plan MAY be treated as two seperate plans, one for those 'otherwise excludable employees...' from that statement, I think you are stuck with 30 employees, unless you actually seperately test. I guess that makes sense.suppose you had two 'profit sharing plans'. one with immediate eligibility that provides the SHNEC and the other plan a one year wait that provides discretionary. how would you test? you have to use the eligiblity with the least stringent requirements.

in other words, the following happens: the IRS looks at the w-2 on the 1040 and sees too much in deferral. the individual will be taxed in 2001. that is kind of hard to hide from the IRS, whether the individual claimed it or not. you give him a distribution in 2002. he will be taxed again on the money when he files his 2002 taxes! 2 times on the same amount! gotta love it!

I would have to see an example first. we run must of our plans on an annual basis, one eligibility transaction dated 12/31 and haven't had a problem with entry dates showing up as 1/1 or 7/1 depending on the employees date of hire. of course there are always exceptions to every situation, but I would want more details first.

yes it is related. net effect might be something like this: E BAr EBAR w disparity NHCE 2.00 2.65 HCE 2.20 2.57 in other words, plan might not pass without disparity, but it would pass with disparity.

1. yes. NHCEs receive 4%, hces can receive 12% for the gateway. you can now proceed to the nondiscrim test. note: you might not want to impute disparity. you have the following: NHCE 3% SHNEC plus (1%discretionary which you can impute disparity on) vs HCE 3% SHNEC plus (9% discretionary which you can imput disparity) a 43 year old at 1% = EBAR of .625 in 2001. maximum disparity is lesser of .65 or 2*.625. so as a rough guideline, NHCEs less than age 43 are helped by imputing disparity under this scenario. 2. same as above, NHCEs at 5%, therefore HCEs can max out at wahtever will pass testing. you can now imput on 2% for the NHCEs, so that helps even more. I estimate the NHCE can be age 51 or younger, so imputing should help most of the NHCEs. vesting would not make a difference, unless you actually declared a 5% safe harbor, in which case you could not impute on 5%.

interesting. notice 98-52 VIII D clearly states that safe harbors may NOT be used as QMACs or QNECs. (That is why I call them SHNECs) the example given is a 7% SHNEC. 3% must be used to satisfy ADP test. the remaining 4% could be treated as a QNEC in the ACP test. remember, the SHNEC satisfies ADP, there is nothing in the regs that says a SHNEC is used to satisfy ACP. notice 2000-3 Q-10 simply says if you apply section 410(B) separately to that portion of the plan that benefits only employees who satisfy age /svc lower than the minimum permitted under 410(a), the plan is treated as separate plans for section 401(k) AND the ADP safe harbor need not be satisfied with respect to both plans...Accordingly, the plan is not required to provide SHMACs or SHNECs to those participants who have not attained age 21/1 year of service. based on that, it does not look like you have to provide the SHNEC to the less than 1 year group. In other words, you have '2' plans. Those with more than 1 year you are providing the SHNEC. those with less than one year you are not. the profit sharing eligibility only refers to the profit sharing piece. At least, I can see reading it that way. note, you HAVE to test coverage separately seperately as well. That shouldn't be a problem, but one never knows. Recall that under the regs, all HCEs can be treated as having met the 1 year wait, even if they haven't. but that only applies to the ADP test, and not coverage. the regs are strange! Also, in the case of QNECs the plan has to satisfy 401(a)(4) when QNECs are combined with nonelectives, but also has to pass when QNECs are not combined. My logic says SHNECs should be treated the same way, though I must admit I don't know for sure on that.

the rule is as follows: the longest exclusion you can have for anyone is one year. (In the case of profit sharing it can be two years, but then you have to 100% vest) anyway, once an ee has completed 12 months, you have to bring him in either 1. first day of plan year or 2. 6 months after meeting the 12 month wait. most plans accomplish this by having 2 entry dates, 1/1 and 7/1 in the case of calendar year. In your example, the plan has only one entry date 1/1. but it gets around the problem by saying those hired in the first half of the year enter retroactively, and those hired 2nd half enter following. Technically, you could have eligibility first day of plan year or 6 months after meeting eligibility of 1 year. wouldn't that be fun. 183 entry dates!!!!!! Awhile ago I read something that the original intention would have been max exclusion using 2 entry dates, rather than 18 months...in other words not 6 months after meeting the 12 month wait, but 6 months after the first day of the plan year. ........... What is even more fun is if your plan has a one year break in svc rule and someone gets rehired. technically, the regs say you have to retroactively let the person in after he works one year. that is next to impossible in a 401(k). example: ee gets rehired 5/1/2001. he completes 1 year on 5/1/2002. now you have to retroactively let him in back to 2001!!!!! Oh boy. your ADP test for 2001 is shot. if you made a profit sharing contribution you may have to redo that as well!!!!.

technically, there is no problem with the eligibility (retroactive entry if hired in first 6 months) as you described, but it does lead to some obvious problems. lets take a look at an example: calendar year plan ee hired 3/1/2001 so in 1 year it is 3/1/2002, ee now has retrocative entry date to 1/1/2002. you suggested letting him defer from 1/1/2002. but what if he had quit on 2/1/2002? then you have let him defer when he wasn't eligible. can't do that, can you? on the other hand, if you didn't let him defer, now he has 2 months of money he couldn't defer on, and you can't retroactively defer. generally, for testing purposes you have to use comp from entry date, which would result in a lower ADP %. can't win can you? I don't recomend retro entry dates when a deferral feature is involved.

through the formula you would use $180,000, but that is only through the formula, no adjustments were ever released. as I recall, non conforming states would operate under the old limits (e.g. 10,500 for deferral even though through the formula the limit would have been 11,000 anyway.) Based on that I guess I would be uncomfortable using 180,000 rather than 170,000.

see 1.72(p)-1 Q-12 A deemed distribution is not an actual distribution..... thus, it is a distribution for tax purposes, but the obligation to repay the loan still exists, so it does not matter whether the plan allows for post-tax contributions. In fact, technically you need to continue to accrue interest on the loan. If the participant wants a new loan, the defaulted amount plus interest counts against the maximum he can borrow - it is still an outstanding loan. Thus, when he repays the loan it will be for an amount = deemed distribution plus interest. his basis will be only for the deemed distribution amount, not the total paid back on the loan.

for a full explanation, see Q & A #121, under the Q & A Section, Correcting Plan Defects Basically, remove excess amount (plus earnings) and hold in suspense, reduce this years match

The last notes I had on it (from the ASPA conference inOct) was that "The Conference Agreement expects the IRS to waive excise taxes on a loan made prior to the effective date that, had the new law been in effect for the term of the loan, would have been an exempt loan." (I guess you could apply for a waiver and see what happens)

that I wouldn't know. If everything ends up in Puerto Rico, I would expect the info not to be on FreeErisa, but I couldn't tell you for sure.

congratulations. especially since you studied during busiest season of the business as well!

if the plan is not a 401(k) plan, the answer is easy - assuming the key ee received nothing, no top heavy is required. if the plan is a 401k plan and any key ee deferred, then (personal opinion since there doesn't appear to be any guidelines) I would say you need to provide a minimum. you could argue that no one was employed on the last day of the year so no top heavy is needed, but one could easily argue you have a 'short' plan year and everyone was employed on the last day of the short year.

According to the Coverage and nondiscrimination answer book the Puertp Rico Code requires form 5500 and Puerto Rico Form Hacienda 480.70 be submitted to Hacienda annually by 15 th day of the fourth month following close of plan year. hence I would also conclude an EIN would be required.

no problem, I understand. I have a problem with group 2 if the allocation is indeed 3.86 % base plus 5.7% integrated. usually the excess % can not be greater than the base percent. now, that being said, it could very well be the document says allocate 5.7% on the excess and allocate the remainder on the base. in Relius you have in plan specs: Employer contribution rate % 3.8 % contrib in excess SS comp [normally left blank unless money purchase] % alloc in excess SS Comp 5.7% apply permitted disparity rules to excess Normally Yes this will make sure the excess % does not exceed the base. again, without seeing how the document is worded I can't say 100% on the coding, just what I would expect. hope that helps. as a warning, if the plan was safe harbor using the 3%, Relius would impute on that piece, because their is no separate 'source' for the safe harbor at this time.

not wrong, unusual, something I wouldn't have expected. I haven't seen a class formula like that, but I guess anything is possible. usually class plans are allocated comp to comp among the classes. I was also confused on the description itself. you mentioned the Corbel seminar and safe harbor, but then I notice you said the plan was not safe harbor, so I will operate on that assumption. so you are saying the following: class 1 ee makes 200000, integration level=84900 so he gets 5.7% on 115100 = 6560.70 23000 - 6560.7 = 16439.30 or 8.21965 base % he is ok for profit sharing 23000 / 200000 = 11.5% class 2 is also intergated. the gateway requires a 3.83% (1/3 of the HCEs rate) thus, if anyone had comp above the integration level they would get 3.83 base plus 3.83 integrated. They can't get 5.7% unless you increase the base % (or you have some unusual document language) since there is no safe harbor, you can impute on the entire profit sharing contribution. top heavy is no problem since everyone received above 3% (unless you have an hours requiremnent and you have an active participant with less than the hours required) if the plan was 3% safe harbor, then an ee who receives 3.86% would have an e-bar consisting of the 3% (no disparity) plus .86% which could have disparity. lets go one step further. lets say that the ee only received 3% safe harbor. then you could not impute disparity on him. the HCE who receives 9% could impute on 6%. But that would make no sense to do that. you are increasing the E Bar for the HCE and not for the NHCE. is that a little clearer?

your description is confusing. you said the plan is integrated at 100%. If it is integrated, then it sounds like you do not have a 'class' plan, or cross tested plan, and therefore, everyone receives the same base % and the rest is integrated. If the plan is not really integrated then if the HCE gets 11.7%, then nhce must get 3.86%. this will satisfy top heavy since it is above 3%. you can only impute disparity on the .86%. remember, the 3.86 is mearly the gateway. you still have to pass testing!

my guesses both 2000-16 and 2001-17 said that ADP failures are corrected by QNECs (not bottom-up) regardless of document language. my guess is that won't change even with a new rev proc, especially since the new 415 limit makes a sham out of bottom-up QNECs. now, (at least according to the Plan Correction Answer Book) under the old VCR program, a bottom-up QNEC was permitted. And if your document said you could allocate bottom-up QNECs, you may have a leg to stand on in arguing for the bottom-up QNEC. If not acceptable under a future audit, the book says at least you made a good effort to correct the problem, and maybe (ugh) sanction will be lower. Is the amount so bad that the one-to-one method of correction is extremely high?

according to the 'explanation of provisions' in the Federal Register in regards to minimum gateways, etc, '...if one group receives an allocation rate of 10% and another receives an allocation rate of 3% [ok, in your case substitute 0%], AND if the group of employees that receive the 10% alloaction rate satisfies section 410(B) (without regard to the average benefits percentage test) then the 10% rate and the 3% rate can be aggregated and treated as a single allocation rate for purposes of determining whether the plan has broadly allocation rates. [hence, no gateway needed] In addition, the final regs provide that...differences in allocation rates resulting from any method of permitted disparity...are disregarded.