Tom Poje

I can answer an ESOP question! actually, I am looking at 1997 ASPA Conference notes (Session 14) "Another, less controversial, issue occurs when there are multiple sellers who all make the Section 1042 election. In this case, the statute is clear that none of the sellers can receive allocations"

I did not say they were paying off the loan according to any schedule. You are allowed to pay off the loan faster if you so desire. A larger payoff results in a larger release of shares. Yes, you are correct, if they made 'equal' payments every year that would work. This is not the case this time. so now what?

let's say I have a 1 person ESOP. I make $10,000. so 25% is 2,500. Lets say this releases (through the formula in the document) 1000 shares. I now have to allocate the 1000 shares. I am the only one in the plan, so I receive 1000 shares. I can do so at either: original share price or current share price. If my original share price is 3.00 then I have received 1000 shares valued at $3000 which is over my 415 limit. That is the way leveraged ESOPs work. Then you turn around and say the stock is now worth 5.00, and you get a fantastic gain. Or, look at from another point of view. I allocate the 2500 to the cash account. Fine and dandy, thats 25% of pay. I now go and buy shares at $3. I get 833.33 shares. But I released 1000 from suspense, so I have 166.67 shares that are unallocated. They are not in 'suspense' because they have been released through the plan formula. I have no choice. It's bizarre, evn though my cash contribution was 25% of pay, the shares released constitute a contribution > 25% of pay. a clear 415 violation (if allocated?)

Dang it. I forgot. If you are using prior year testing, you have to make sure your prior year testing numbers also used 'statutory exclusions'. in other words, since you asked, you probably need to go back and run last years test to determine the NHCE average under 'statutory exclusions'. then compare to this years HCE avg.

the only ignorance is in not asking. Statutory exclusions allows you to exclude employees if the plan has more generous entry requirements than allowed by law. In other words consider a plan that has immediate eligibility. The law requires employees to enter after age 21 and 1 year of service. (Actually you have to enter 6 months after meeting the requirements) Therefore the system will look at Date of birth, see when you turn 21, add 6 months and exclude you if you fail at plan year end or your date of termination. The same goes for Date of Hire. (Note, it is 6 months after meeting eligibility or 1st entry date of the plan if earlier) If you have someone who was always parttime, (Never 1000 hours), they should be excluded as well, though I don't think the system checks for that) Note in 1998, if an HCE falls in this group of 'excludables', you would need to actually run a test including just those employees. This is a great feature since 1st year employees rarely defer.

here is the deal. numbers,numbers,numbers. (rounded for convienience) contribution was 84,000. (25% of pay = 65,500) interest = 18,500 so principal was 65,500. loan balance was 234,000. so, less principal, now = 168500 using principal only method to release shares I have: numerator = 65,500 denominator = 65,500 + 168,500, which results in 28% of shares to be released. there are 198,770 shares, so this means 55,638 shares get released. original share price (since smaller) was 1.25, so 55,638 shares * 1.25 = 69,548. But this is greater than the 25% of pay which is only 65,500! So now I have an extra 4000 or so above the 415 limit that I can't allocate. no hces (owners)receive, since they put the shares in (leveraged esop) and take the deduction, so 1/3 rule doesn't come into play. so, now what? count the 'extra' contribution as loan payoff for next year, and release fewer shares?

company puts in 25% of pay. shares to be released is principal/(principal + future principal) I am using original share price for allocation purposes because it is smaller. This would result in 26% contribution being allocated to participants. Ah, a clear violation of 415 limit. Which of the following is permissable: 1. Release the shares anyway, but don't allocate them. Hold in 'suspense', but not same 'suspense' as unreleased shares.This would seem to me to imply a penalty for overcontribution. 2. Only release enough shares to cover the 415 limit, and consider the remaining contribution as loan payment for next year. Plan is 6/30 Year end, and last loan payment was made 6/22, so it is within a week of year end.

Perhaps the conflicting information lies in the fact that hardships from deferrals are no longer subject to the mandatory 20% withholding. Someone you talked to has things jumbled.

QNECs can count both as top-heavy and be used in the ADP test. However, since plan is standardized, I think you are out of luck. Standardized require that QNECs go to all participants, including HCEs. That is a stupid rule , but you have to follow the document. but, again, what does the document say? if it says QNECs must go to all participants, am I allowed to allocate different rates to different employees? In other words, suppose you also had a 5% profit sharing contribution. Can I treat 3.5% as QNEC for NHCE and 0% for HCEs? That would pass the ADP test. now I test 401(a)(4) just like a cross tested plan. 5% for the HCE and 1.5% for the NHCEs. (I can't include amounts used in the ADP test) I'm not sure if you can do that, but it might be possible. I have to ask some other gurus if that is possible. sorry, I just don't know yet.

it is 415 comp comp, which is comp for the whole year, not just date of participation. This means an ee might be better off with a top heavy minimum at 3% rather than the contribution based on comp from date of participation. I would hope most software would be able to handle this as well - provided of course, you have comp entered properly.

I don't know about reg cite examples, but there are a few examples. (You do not do 401(a)(4) testing, its 410(B), though the process is close to rate groups, its just not on an individual HCE test.) The concept, or whole idea involved is similar to the idea of forfeiting match $ attributed to corrective distributions involving return of deferrals. For example, suppose my match for one group was greater than the match for another, and this group consisted of HCEs only. That would fail the 'rate of matching' contributions test. Yes, I know, how do you pass ACP test and yet fail the rate test, but it is possible. Remember, not all HCEs might have deferred, but they are still in the higher rate band. anyway, examples: see ERISA Outline Book by Sal Tripodi 1998 edition is p. 11.191 Nonuniform match formula (under the section on 401(k) and 401(m) testing. or, of all places, try The 403(B) answer Book by Panel publishers. Q 12-17 (second edition) I believe I posted a similar example awhile back as well under this section.

Just took a look at it. There is a fix on the bulletin board. I just pulled off the latest fix from the bulletin board, and it appears to have fixed the problem with: NHCE concentration %. this was incorrect. terminees who had less than 500 hours were properly excluded from 401(a)(4), included in the avg ben % test if plan was 401(k), but were not excluded from the NHCE concentration %. They are now excluded from the NHCE concentration %. At least in my test plan! So go for it.

(My apologies, I misread the original message as to say the HCE was the only one in the plan vs. the only one who deferred- not a great candidate for a 401(k) is it?) Guess I need more details before offering a solution. Since so few people, I would assume plan is top heavy. especially if plan existed when Dad retired, I still think you have his account balance to consider. (It has been less than 5 years) Anyway, if plan is top heavy, and is not standardized, then you could probably give a top heavy/QNEC to the NHCEs. Or maybe I should say, you would probably want to do that anyway. For your information, when QUANTECH calculates amount of QNEC, it first determines the amount of % needed to pass the test. (e.g. if HCE was 5% and NCE was 2%, system would say 'raise all employees 1%) It would then multiply compensation by 1% and say "will pass with a QNEC of $xxx." If there are some employees not eligible to receive a QNEC, the system makes an adjustment, taking that into consideration. and just in case, what Quantech calls a QNEC is QNEC ADP and what Quantech calls QMAC is QNEC ACP. (grrrrrr, don't get me started) Anyway, I got sidetracked. An odd thought hit me, I am going to sak some others on this one. Suppose in 1997 I gave a top heavy. Plan fails ADP in 1998. Since we are in 1999, I can't give a QNEC on prior data. Can I recharactrerize the 1997 top heavy as a QNEC? well, as I said, maybe I need a few more pieces of info before I can offer any other help.

Good question! 1. Per document, plan is to match 50% of deferrals, so by all means, match anything deferred. 2. Now run your test, you said it fails. 3. If plan fails ACP test, calculate corrective distributions on the match portion. be careful if ee is not 100% vested. there are 2 possible method of refunds at this point! I would always do this step first. 4. Calculate corrective distributions on the deferrals. 5. any match attributable to the deferral MUST be forfeited (not distributed) that is why you fix the match first. This is because rate of match must be the same for all employees. e.g. suppose ee deferred 2000$. he got 1000$ in match. if you refund 1000$ in deferral, he has now received a 100% match. by the way, such an employee is entitled to receive a portion of the forfeited match. [if match was limited to, say, 5% of deferral, you might not have forfeitable match $] Have you exhausted all other means? Statutory exclusions, using last year test results, etc?

which means: code this employee as owning the stock. technically, by family attribution, the person does. since he is the only employee, plan passes the ADP test, though depending on the software, it might say 'fail' simply because a plan with only HCEs is an oddity. some programs are don't have a default "If only HCEs then print "Plan passes ADP test" by the way, the 5500 should show the employee as an HCE as well. Again, plan passes 410(B) if only HCEs in the plan, and again, depending on the software, if there is a 410(B) report, it might not say plan passes.

for a good 'reading' of 'active', see the ERISA Outline book by Sal Tripodi definitions in Chapter 1 Active Participant for IRA purposes -always based on calendar year basis you are active 'only in year you actually receive a contribution...' thus in a profit sharing plan (no 401k) if no contributions are made, then you are not active. to quote Sal "the employer must actually contribute to the plan on behalf of the employee for the employee to be treated as an active employee" so if you don't defer, the employer doesn't contribute for you. ah, so 'active' for IRA purposes is different than for 410(B) it gets real fun. money purchase and deferrals count in the same plan year (assuming calendar year) while profit sharing since made after the end of the year count in the year MADE. I believe forf, since considered made at end of year would be considered in the plan year (not in the year you actually ran the valuation) I think the logic is correct, if you allow someone to elect in and out every year, you have created a CODA, which is probably not what you want.

One sample is in the ASPA study guide for C-1 (1998) though it might be in earlier editions as well

allowable to elect out (though I believe the option has to be in the document.) it is irrevocable- it is a one-time elction. for 410(B) ee is treated as: includable and benefitting for 401(k) (as if he deferred 0) includable and benefitting for match (if deferral =0, match = 0) (if there is an hours requirement or last day for match and he fails, then he might be includable and not benefitting or excludable) for 401(a) he is includable and not benefitting. If he is an HCE this can only help.

assuming this is what the question asked: I have an ee who has been a participant in the plan. This year he did not work 500 hours, so fails to get a contribution. he is treated as Includable and not benefiting for 410(B). if plan passes 410(B) you are finished. if plan fails 410(B), but is top heavy, then ee can be treated as includable AND benefiting, but then you need to follow general nondiscrimination guidelines. (e.g. you now have 2 formulas - x% for most employees and 3% for top heavy people) by the way. terminees with less than 500 hours is an option. if you want to you could include them. if one of them was an hce, it might help. you can only exclude terminees

actually the true benefit was what the key ee contributed, followed by a distribution. ...top heavy % = contributions + forfeitures allocated to a key employee. to correct a failed test, you have a distribution, not a 'negative' contribution. (if key ee is also sharing in the contribution to satisfy top heavy, it becomes a moot point, as his contribution will increase)

Nondiscrimination Module The NHCE concentration % may be incorrect. Terminees with less than 500 hours are being included in the concentration test, but not in the ratio percentage test. example: 3 nhces, 1 hce. one NHCE terminated with less than 500 hrs, one nhce terminated > 500 hrs. terminees do not receive allocation. while cross testing I get a ratio % of 1/2 divided by 1/1 but my concentration % is showing as 3/4 = 75%. It should be 2/3 = 66%, or at least that is my understanding of the regs. This may cause a plan to say it passes, when in reality it fails. This is the rate group report on an HCE. .............. create new plan from existing plan (including employees) have a profit sharing plan. created a money purchase plan, and copied existing employees. Status code and status date do not get copied, so have to re-key terminees status code and date! also, participants who I deleted from the prior year magically reappeared! so I had to delete them from the money purchase. ......... census request I am sometimes 'rented' out, so to speak, to do Quantech training. No, I am not working for Quantech, this started as part of something I do for the Southern Users Group. Anyway, I was discussing the top-paid group calculation for HCEs. One of the items involved is hours - the system checks to make sure ees worked an average of 17 1/2 hours a week. (e.g. an ee who quits 1/5 with 20 hours is considered in the top paid group count because he averaged over 17 /12 hours a week. [assuming he is over age 21, and has worked at least 6 months in prior year]) One of the trainees pointed out that the census request asks for the following codes: 0 = <500 hrs 1=>500 but < 1000 hrs 2= >= 1000 hrs I hadn't thought about it before, be he is correct, if all you go by is a simple code like that rather than actually hours, your top paid group count will be incorrect. Most of the time this won't make a difference, but be careful because it might! see the trainer gets trained! this is not a bug, but something to watch out for. The other problems have been reported to Quantech, but I figure this is a good spot to make other people aware of 'possible' bugs. I call them possible bugs, because there is always a chance I coded something wrong, although in the examples cited this seems doubtful.

I don't do daily vals, so I will avoid that part of the question. regarding fake soc. sec numbers: supposedly no one in the country has a soc sec # starting with 9. therefore, I recomend using fake numbers such as 998- (where 98 indicates the current year) 12- (where this value indicates the month the dummy ee was created) xxxx (whatever other number convention you decide) this should prevent the rare chance of duplicating a number

SBJPA test no longer requires testing those ees who are statutory excluded, as this group contains no HCEs. That was one of the real nice things about the deal. If you are an HCE with less than 21 or 1 yr svc you are included with those ees >21 and 1 yr svc. While it doesn't happen often, that will be an even better deal come 1999 than what we have now

e.g. Group A shall include all doctors who have at least 10 years of service with the Employer. Group B shall include all doctors who have less than 10 years of service Group C shall include all other employees and as kboyce says, keep things discretionary. at the ASPA conference, someone suggested having a group 'terminees > 500 hrs' they don't have to get anything, but you have them there as a further option.

my apologies for not responding sooner. I wanted to find the code section 402©(4)© refers "To any hardship distribution described in section 401(k)(2)(B)(i)(IV)" as no longer being an eligible rollover distribution. Thus, it appears, only deferral hardship distribution are not subject to the 20% withholding.