Tom Poje

Given the nature of the beast, it is very rare that each HCE will pass the ratio percentage test on his/her own. (Though with the 5% minimum gateway it might be a little ore common) gosh, just for kicks(I know you don't have to), try running a safe harbor integrated plan using accrual rates for testing purposes. you will probably fail - that is why it is important to be aware of the avg ben % test. plus, when you use the term rate group test, I have no idea exactly which test you are referring to. did you mean the ratio % test on each individual or did you mean the nondiscrimination classification test in which the ratio % test has to be greater than the midpoint?

Joe: we actually work on one plan that has about 10 groups. each doctor wanted his own thing. as far as testing goes and which contributions to use, you have to be careful about which test you are talking about. It is a yes and no answer. the average benefits % test includes everything. the rate group test would only consist of the nonelective contributions - e.g. the safe harbor and profit sharing (including forfeitures). you are allowed to impute disparity on the profit sharing and forfeitures, but not the safe harbor.

I think this one goes back at least 5 years. I don't recall the major problem that might exist, possibly it was a BRF issue, whether it was effectively available to all rather than just HCEs, but I dont recall. If you type in unused vacation time on the search you will come up with a number of possible discussions This is from 401(k) Q & A Question 25: Is it true that the IRS is allowing participants to defer accrued but unused vacation time into 401(k) plans, tax-free? Answer: Basically yes, but any plan sponsors considering such a feature should exercise caution. In IRS Technical Advice Memorandum 9635002 (Nov. 9, 1995), the employer maintained a use-it-or-lose-it vacation policy (i.e., employees forfeited any accrued but unused vacation time at the end of a calendar year). The employer proposed a procedure to the IRS whereby employees with more than two weeks of unused vacation could elect to have the dollar value of any excess vacation time contributed to the employer's 401(k) plan. The IRS ruled that such a procedure would not trigger a taxable event to employees at the time of contribution, although their elections did not constitute cash or deferred arrangements under the 401(k) plan (because they had no opportunity to receive the unused vacation time in cash). Instead, the IRS characterized the contribution as a nonelective employer contribution. The IRS also confirmed that such contributions were not constructively received by employees or subject to FICA taxes at the time of contribution. While the outcome of the IRS ruling has excited some participants and service providers, the IRS did not address potentially troublesome nondiscrimination implications. For example, it is likely that highly compensated employees would use a vacation time contribution procedure more than nonhighly compensated employees (note that any contributions would be treated as employer contributions on behalf of individual participants). Thus, a plan sponsor contemplating vacation time contributions to a 401(k) plan should ensure that its service providers have thoroughly analyzed applicable nondiscrimination tests, including those under Code Section 401(a)(4).

You can define your groups in any manner you want, but just because you provide the gateway, it means nothing. In other words, before you even get to the land of cross testing, you have to 'buy a ticket' to get in past the entrance (or gateway). It will cost you - in most cases, 5%. Ok, now you have entered the park, now start running your cross testing.

fax it to him

an even smaller note to Merlin's note: SBJPA's change is entirely optional, and not required. you can still perform 2 tests if you want.

The idea for this came about a few years ago. Someone in the office was running about saying, "The plan needs an EIN, an EIN" (back when we were making sure all plans had a trust EIN) Old Macdonald Old Macdonald had a plan He needs an E-I-N And in this plan he has match E-I E-I-N There’s a deferral here a deferral there Here a match, there a match Everywhere a match match Old Macdonald had a plan E-I E-I-N Old Macdonald ran a scam I-O I-O-U And in this scam he stole the dough I-O I-O-U Steal a few bucks here steal a few bucks there Here a buck, there a buck Everywhere a buck buck Old Macdonald ran a scam I-O I-O-U Old MacDonald is in jail D-O D-O-L He hasn’t got a chance of bail D-O D-O-L Steal a few bucks here serve a little time there Here a year there a year The judge gave him about 20 years Old MacDonald is in jail D-O D-O-L Old MacDonald’s on parole And living in RIO He has a big fat Swiss Account RIO – R-I-O With a pretty girl here and a pretty girl there Here a grand there a grand He’s got about 500 grand Old MacDonald’s on parole And living in RIO Old MacDonald should be alarmed E-I E-I-O His former help will do him harm E-I E-I-O There’ a gunshot here and a gunshot there Here a shot there a shot Everywhere a gunshot Old MacDonald bought the farm E-I E-I-O ooooooooooooooo. my humor is dry.

I didn't attend the session where this was addressed, but an interesting issue was raised at the conference about how many unknown controlled groups might exist. the example given involved a child under age 21. If the parents have separated and both own businesses then a controlled group exists. In fact, technically, it doesn't matter even if there was no marriage. yeh right. how are you going to ask for that on your data request... do you have any kids that no one is suppossed to know about whose other parent might also own a business? I think my biggest highlight is to actually meet with some people who respond to this website- even if it is only for a few minutes. It is always great to connect a face with a name . I missed our fearless leader's talk, as I was off moderating another session. I got a little carried away and actually had fun giving my talk. I don't know if that's permissable or not. even interrupted the talk with a pension song - I'll get the words posted under the humor forum.

Moe- say hello to Curly for me. Loved you in 3 stooges! all kidding aside, I don't think anyone has ever addressed your point on Benefits Link, though it is found in the regs 1.401(k)-1(g)(4) eligible employee(i) The term ELIGIBLE employee means an employee who is directly or indirectly eligible to make a cash or deferred election under the plan for all or any portion of the year. this leads to 1.401(k)-1(B)(2) actual deferral percentage test (A) the actual deferral percentage for the group of ELIGIBLE highly compensated employees is not more than the group of all other eligible employees..... a similar point can be found in 1.401(m) for match. 1.401(m)-1(f)(4).In fact, if the match has an hours condition or last day provision, then there may be less bodies, because there are less ELIGIBLE bodies. However, for purposes of coverage, the bodies count if they are terminees with more than 500 hours. Good bet though. no one has previously posted the reg cites that I know of!

maybe. if you have immediate eligibility to defer you have everyone in the plan. But you could limit the 3% safe harbor to only those who have completed a year of service. If there were no other contributions - hence - 'solely', then plan is deemed to be not top heavy. however, if you made additional contributions, all of a sudden the plan is top heavy - and you have to provide a 3% to all active less than 1 year people for top heavy - and it could be subject to vesting.

this sounds correct, but is no different than any other cross tested class plan. remember in 2002 you would have to provide a 5% minimum gateway to all nhces. A 35 year old owner plan does not lend itself well to cross testing, unlesss the NHCEs are that much younger. Ignoring imputing disparity, you have: if NHCE = 25 yeard old... 1.085^10 = 2.26 (10 year difference in age) this means the owner could get a contribution 2.26 times that of the 25 year old. so if you gave a 5% contribution, the owner could get 11.3%. but that would only get the rate group to pass if you had one other nhce. you still have to pass the avg ben % test. and if one NHCE quits.... It just doesn't sound like an ideal choice of plans with such young ages and small population. it may work one year and then BOOM

and the employer can make a discretionary profit sharing as well. actually, the employer can make a larger discretionary match as well, but you would have to run an ACP test on amounts greater than 4% of compensation. however, if there are additional contributions other than safe harbor, then you lose the free ride on top heavy begining in 2002. whether this means you lose the free ride on top heavy forever or just the current year is open to debate.

true, but I think(???????) you could have non maximum integration in one and non maximum intergartion in another as long as the total integration wasn't greater than the maximum. But why would anyone design 2 plans that way?

Hi! If it is not showing 'Create DCM installation disk' you are either seriously missing something from the system or you are not licensed

I'm not disagreeing with the proposed regs, merely pointing out what they seem to say. suppose you have the following: comp def 45 year old 170,000 3% $5100 55 year old 100,000 4% $4000 nhce rate = 1.5% so plan must average 3% so 55 year old (old rules) would be at 3% and refund $1000 but the refund goes to the 45 year old. proposed regs say that the ADP limit is the highest $ amount after application of the test. Now, you now darn well someone is going to argue hold on. in effect, for the current year the plan has a limit of 3% to pass testing. therefore cap the 55 year old at 3% and treat the remainder as catch up. If last year's ADP for the NHCE was 1.5% and you use prior testing, then you are penalizing the 45 year old. He deferred what he should have to pass testing. it is just interesting what can happen when you look at what might happen.

hopefully this will be discussed further at the ASPA conference and we can get a better idea. The ADP failure is an interesting one. The proposed regs say the ADP limit is set after figuring corrections. This is different than saying plan fails, I will treat some of the deferrals as catch up and then retest. for example, suppose i have 2 hces, one age 55 and the other age 45. plan fails, I have to refund $, and the only refund is due the 45 year old. so the catch up option doesn't help under the proposed regs. But suppose I had treated part of the age 55's deferral as a catch up initially. Now plan passes (or fails by a smaller amount), so no refund required (or certainly a smaller refund would be necessary) This does not appear to be permitted.

ok. you are an employee. under safe harbor there is no hours requirement, no last day requirement. your prior plan may have had these restrictions. which would you want? this sounds like a no brainer from the employee point of view..

Going to ASPA next week. Anybody else? Our 'fearless leader' Dave Baker is giving a talk Wednesday!

I vote no, thumbs down. The proposed regs that just came out say "a participant is a catch up eligible participant....if the participant is otherwise eligible to make elective deferrals under the plan." Thus, I would argue the participant is not otherwise eligible to defer, since his right has been suspended, not because he hit a limit. the participant certainly doesn't fall under the ADP limit. IT is not an employer provided limit (e.g. can only defer up to 10%) so that leaves you with arguing statutory limit. My understanding these limits would only include the 402(g) limit ($11,000) or annual addition limit, not that a participant is limited to 0 since he had a hardship. There is nothing in the proposed regs addressing hardships.

fun stuff. a couple of posts back I used an example from the ERISA Outline Book, for an individual with comp of 100,000 and he received a 2.8% contribution (plus 2.8% integration above the wage base) plus a 3% SHNEC. The concept of the example was correct (you get to impute on the 2.8% plus the 2.8% above the integration level and then add the SHNEC) however, upon further review, my example contains an error. I looked it up in the book and it used 2.8% of 100,000 and 5.7% above the wage base (5.7% * 23,800) to arrive at the results. (It was a cross tested formula) In my haste to post an answer, I put down 2.8% plus 2.8% integrated. My apologies for any confusion!

real quick. Plan passes ADP by 2 points Plan passes ACP by 2 points Govt says do not Pass go, do not collect 200. Only one plan can pass 2 points, the other must pass 1.25 test (or the multiple use, which is an average of the two) hurray, in 2002 that has been eliminated.

It 'can' be right. It all depends. In the case of accruals I would suspect it to be the same most of the time. here is why: obviously a highly paid 'apprentice' like you would be different, but a lowly paid jester like myself would fall into the following category.... all kidding aside, a brilliant individual is not afraid to ask a seemingly 'obvious' question. you would be surprised how many people don't know why you arrive at the results you are getting. the most permitted disparity will increase an individual SSRA 67 is .65, SSRA 66 is .70 and SSRA 65 is .75. So, if your profit sharing piece is .7 or more before adjsuting for disparity, then it doesn't matter whether you add the SHNEC before or after. for your employee who got SHNEC only, his profit sharing piece was 0, so it makes a difference whether you added the SHNEC before or after. your other individual was already above .70 so it didn't matter! and you have to be pretty old to end up with an EBAR less than .70. consider what would happen if you tested on an alloaction basis. The permitted disparity is 5.7%. Ouch! that means to get the full effect of disparity you have to give 5.7% profit sharing - and that doesn't include the SHNEC. hope that helps.

and that would be 2002. how about in 2006 when the catch up is $5000. what a country!

Merlin (I assume the magician): I hope you will bear with me if I use an example using dc numbers. ee receives 3% SHNEC and a 2.8% profit sharing as well. Impute disparity on the profit sharing 2* 2.8 = 5.6%, plus the 3% SHNEC for an adjusted allocation rate of 8.6% an ee with comp of 100,000 who received a 2.8% base plus 2.8% integrated as well as the SHNEC would be: ...an adjusted allocation rate of 6.72. this is added to the 3% unadjusted allocation rate attributable to the SHNEC. the Adjusted allocation rate (after imputing permitted disparity) = 9.72% ...or if cross tested, then..."for each employee, permitted disparity may be adjusted only on the separate EBAR attributable to the additional nonelective contribution. The adjusted EBAR would then be added to the EBAR attributable to the SHNEC for the total EBAR used in the test." This is from The ERISA Outline Book 11.359. 2001 edition. maybe put another way... old rules said you had the lesser of the A rate or B rate. now you have the (lesser of the A rate or B rate) plus the SHNEC

you are allowed to include the safe harbor, if testing on an allocation basis I would say you are at 3%. I would assume if you used the gateway then you would have 3% safe harbor + 2%(ps contrib) + 2%(impute disparity)