Tom Poje

shame on you. the I in IRS stands for "illogical" - you should know that by now. I suspect because of the way the regs are written, you have to have to write your own special language that says something like "oh, by the way if you have someone who terminates with 1000 hours in a DB/DC combo, even though he is not eligible for a dc top heavy give it to him in the DC anyway" of course, anytime someone writes their own language all bets are off. (or put another way, in a volume submitter document I bet the hands are tied) a few years ago at the ASPPA Conference on my top heavy talk I shared the following I tripped across in a takeover document for "special language" 1a. Plan to which Top-Heavy allocations are made: i. [ ] This Plan ii. [ ] Pursuant to the terms of another plan iii. [ X ] Partially in this Plan 1b. If H.1a.iii is selected, describe how the Top Heavy minimum accruals will be made: 2% top heavy minimum to XXX, Inc. Cash Balance Plan and 3% top heavy minimum to this plan. I'm not sure how that would pass because 2% Cash Balance + 3% profit sharing does not equal 5% top heavy you would have to convert the 2% to a DC equivalent to verify that would work.

in addition to blowing "top heavy free"

probably the same employees who "don't need to be covered" under Obamacare because they will never work "that many hours", but then the company wants to use them to support the DB/DC plan. we want our cake and eat it too.

years ago the IRS issued a memorandum on using (in the IRS terms) such a "scheme" especially if these folks never vest. I'd say you have a reason for concern if all NHCEs 'benefit' it might pass a smell test, though the fact, if indeed you are talking about 0 hours to receive but 1000 hours to vest sounds like these folks never truly benefit. short term employees.pdf

the long winded answer for purposes of coverage, the fact the plan is a new comp plan has nothing to do with the question. as you indicated you have NHCE benefiting 1 / 2 = 50% HCE benefiting 2 / 2 = 100% so ratio% is 50% and as you said, since this is less than 70% this fails ratio % the plan does not contain failsafe language, so you are able to proceed to the other option to pass coverage. part 1 avg ben % test - you indicated it passes part 2 - nondiscrim classification test 1.410(b)-4(b) Reasonable classification - based on all facts and circumstances of those who benefit under the plan... an enumeration by name (or other criteria having the same effect) is not considered reasonable. If (this was not indicated) the plan has each person in their own group then that could be considered the same as enumeration by name. however, the regs do indicate it based on all facts - and in this case, the reason the person didn't benefit was due to last day requirement not because of the groups., so probably are ok. (e.g. if the people weren't in individual groups you would have had the same results) 1.410)b)-4©(2) safe harbor - only if the plan's ratio % is greater than or equal to the employer's safe harbor %. The plan's safe harbor % (based on the NHCE concentration % is 50%, so since the ratio% is equal to that it would appear you are ok.

does the document mention a possibility of a true up, and when you say 'document' are you talking about an adoption agreement or basic plan document?

The definition of active participant hasn't changed from prior years. the instructions indicate: For pension benefit plans, "participant" for this line means any individual who is included in one of the categories below. 1.Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a "cash-out" distribution or deemed distribution of their entire nonforfeitable accrued benefit. note: my special thanks to FT William, they already have the 2014 up and running, it was easy to copy the instructions and post here.

cough * hack * blowing off the dust from my old notes*hack*wheeze** can't hardly see.... dang it how did I end up saving so much stuff...(or even why). (wowzers, I just noticed your post says 1999 posts, so your next one will be 2000) 1999 ASPPA Conference 46. A participant took a 401k hardship distribution pursuant to the hardship safe harbor rules, but was allowed to continue making 401k deferral contributions in violation of the 12-month suspension rule. What are the possible methods of correcting this error under APRSC? Start a full 12-month suspension when the error is discovered? Distribute impermissible deferrals and earnings? Return deferrals and suspend for balance of original 12-month period? IRS response; Starting a new 12-month period doesn't meet the rules. Deferrals (and match, if applicable) should be forfeited and the balance of the 12-month suspension should be applied. Of course, the employee should be made whole outside of the plan (i.e., no distribution from the plan to the employee). ................. We have submitted a VCP to the IRS on this very issue. Initially, we proposed to take out the contributions that should not have been made plus earnings and this was approved. In attempting to implement this, however, we found that most of the affected participants did not have sufficient amounts in the money types in question (because of subsequent loans and/or withdrawals) to make this an unworkable solution. We went back to the IRS and they proposed a prospective suspension. The problem was that a number of years had elapsed between the time the amounts were improperly contributed, the first compliance statement was issued and then the second VCP request was submitted and resolved and a final compliance statement issued, that the participants who were impacted complained that the prospective suspension would be coming when they earned a much higher rate of pay. The bottom line is, if you are consider the refund method, take a look to see if there would be sufficient money in the participants' accounts to effect the refund. If not, then use the prospective suspension. 8/10/2007 Benefits Link posting (Note: wouldn’t try it other than under VCP) ................... EPCRS Phone Forum notes (file date 10/18/2012 on my computer)ELECTIVE DEFERRALS NOT SUSPENDED FOLLOWING FINANCIAL HARDSHIP WITHDRAWALS • Failure: Elective deferrals weren’t suspended following financial hardship withdrawals as required by the plan terms. Pursuant to Treas. Reg. §1.401(k)- 1(d)(3)(iv)(E)(2) a plan (or other legally enforceable agreement) must prohibit an employee from deferring or making employee contributions for at least 6 months after receipt of a hardship distribution. • Correction: Current taxable distribution of the 6 months' worth of "improper" deferrals, adjusted for earnings. Where appropriate, the employee must also forfeit any matching contributions associated with such deferrals. • Example: Misaki is a participant in the Carco, Inc. 401(k) plan. In 2010 Misaki elected to defer 5% of her compensation. Her 2010 plan compensation was $50,000, paid in equal bi-weekly installments. On June 15, 2010 Misaki took a hardship distribution from the plan. Carco failed to suspend Misaki’s elective deferrals for a six month period following such hardship withdrawal. Such suspension should have occurred during the six month period between July 1, 2010 and December 31, 2010. Instead, Misaki was permitted to defer $1,250 during this period. Carco files a VCP application in 2012 for its failure to have suspended deferrals. Carco must distribute $1,250 plus earnings to Misaki to correct the failure. ................. EPCRS Phone forum (file dated 9/13/2010 on the computer) Failure to suspend deferrals contd.. • Option 1- Can plan return the improper elective deferrals (adjusted for earnings) to employee? Yes. This would put the participant in the same position he or she would have been in had failure not occurred. • Option 2- Can plan suspend elective deferrals for a six month period going forward? Possibly. However,this may not put the participant in the same position. E.g. Matching contribution levels for the six monthperiod going forward could be different than whatthey were during suspension period. Participant may quit employment before expiration of 6 month period. Option 3- Take no action. Revise administrative procedures going forward? No. The failure will not have been corrected. ................. IRS EPCRS slide show date 10/31/2014 VCP – Failure to suspend deferrals following 401(k) hardship withdrawals Question: A 401(k) plan that follows the safe harbor rules on hardship withdrawals correctly allows a participant to receive a hardship withdrawal but fails to suspend the participant’s deferrals for a period of six months following the withdrawal. What is the preferred correction? Answer: The preferred correction is to distribute the ineligible elective deferrals to the employee, and where appropriate, forfeit any matching contributions associated with those deferrals, adjusted for earnings. ........... IRS Phone forum 7/25/2013 Option 1- Can plan return the improper elective deferrals (adjusted for earnings) to employee? Yes. This would put the participant in the same position he or she would have been in had failure not occurred. •Option 2- Can plan suspend elective deferrals for a six month period going forward? Possibly. However, this may not put the participant in the same position. •Matching contribution levels for the six month period going forward could be different than what they were during suspension period. •Participant may quit employment before expiration of 6 month period.

I'm not aware of anything in particular. if you rely on document language here is a sample from FT William (If it wasn't possible then I guess all of their plans for the past many years would be bad and the IRS would have said so) if item g is selected, it says each person in own group, and the contribution to that group has no relation to any other group. so you could give one person 8% another 6% another 5% etc. if item f is selected then you fill in the actual group names as the sample indicates. the biggest caveat being that it is supposed to be clear which group an employee is in. e.g senior engineering vs junior engineering when doing the allocation you can't simply say last year Bob was in Senior engineering, but this year he is Junior engineering and, oh by the way the senior group gets 8% every year and the junior group gets 6% that just plain smells bad. f. [ ] New Comparability - Defined Groups. See D.21. g. [ X ] New Comparability - One Group per Participant. In an amount designated by the Company to be allocated to each group. For purposes of this D.18g, there shall be one group created for each Participant eligible to receive allocations of Profit Sharing Contributions. The contribution shall be allocated to each group in a manner determined by the Company. The amount allocated to one group need not bear any relationship to amounts allocated to any other group. The Company shall notify the Plan Administrator and/or the Trustee in writing of the amount of contributions allocated to each group. 21. Profit Sharing - New Comparability New Comparability - Defined Groups. If D.18f is selected, the Company's Profit Sharing Contribution shall be allocated to eligible Participants who have met the requirements of B.17 through B.20 and D.12 through D.15 in an amount designated by the Company to be allocated to each group described in D.21. The contribution for a group shall then be further allocated to the members of such group who are eligible to receive allocations of Profit Sharing Contributions in the method as specified in D.21 for such group. The amount allocated to one group need not bear any relationship to amounts allocated to any other group. In the event that an eligible Participant is included in more than one group, the Participant's share of the contribution allocated to each group will be based upon either the amount of service or the Compensation for the part of the year the Participant was in the group. The groups and allocations shall be determined as follows: a. Group One: Executives/Owners An amount equal to: i. [ X ] A percentage of Compensation ii. [ ] A fixed dollar amount iii. [ ] the greater i. or ii. b. Group Two: Senior Management An amount equal to: i. [ X ] A percentage of Compensation ii. [ ] A fixed dollar amount iii. [ ] the greater i. or ii. c. Group Three: Senior Engineering An amount equal to: i. [ X ] A percentage of Compensation ii. [ ] A fixed dollar amount iii. [ ] the greater i. or ii. d. Group Four: Junior Engineering An amount equal to: i. [ X ] A percentage of Compensation ii. [ ] A fixed dollar amount iii. [ ] the greater i. or ii. e. Group Five: Customer Service/Support Staff An amount equal to: i. [ X ] A percentage of Compensation ii. [ ] A fixed dollar amount iii. [ ] the greater i. or ii. NOTE: D.21 applies if "New Comparability - Defined Groups" (D.18f) is selected. NOTE: Groups must be clearly defined in a manner that will not violate the definite predetermined allocation formula requirement of Treas. Reg. section 1.401-1(b)(1)(ii) and is objectively determined with no Company discretion.

the famous "I was always told" syndrome even when the plan has everyone in their own group the reason why you might 'group' them is note comparing that might go on. so hard working Chippy sees he has received a 5% contribution. he tells his somewhat lazy co-worker (the guy who comes in 15 minutes late to work half the time and leaves 15 minutes early to make up for it), only to find out the co-worker received 7%..... so to prevent problems within the rank and file it is generally recommended to put people in groups (at least at the allocation level) for purposes of coverage the 'reasonable classification test' fails if you have "an enumeration of employees by name or specific criteria that has substantially the same effect as if by name" so, for example, 40% NHCE don't receive the nonelective. you fail ratio % and you can't rely on the avg ben test (for coverage) I think some people are of the opinion "even though the plan says each in his own class" I really did it by group so I am ok, but sorry, the document still has things, for all intents and purposes, by name. now, how often will that actually happen to fail coverage? unknown.

I guess that's appropriate for us in the business. how many clients wait til the last moment and give us upset stomachs.

well, the example from the instructions only uses code B. Examples. Participant A received a nonqualified distribution of $5,000 from the participant's designated Roth account. Immediately before the distribution, the participant's account balance was $10,000, consisting of $9,400 of designated Roth contributions and $600 of earnings. The taxable amount of the $5,000 distribution is $300 ($600/$10,000 x $5,000). The nontaxable portion of the distribution is $4,700 ($9,400/$10,000 x $5,000). The issuer would report on Form 1099-R: Box 1, $5,000 as the gross distribution; Box 2a, $300 as the taxable amount; Box 4, $60 ($300 x 20%) as the withholding on the earnings portion of the distribution; Box 5, $4,700 as the designated Roth contribution basis (nontaxable amount); Box 7, Code B; and The first year of the 5-taxable-year period in box 11.

If the corrections under EPCRS are any guideline, it never gets to that point - you are supposed to reduce the balance by what should have been paid. this sounds like a death benefit, which means there shouldn't be anything left after 5 years, so if the balance is reduced by what was missed there shouldn't be anything left. .06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with Earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)-5, Q&A-3, reduced by the amount of the total missed minimum distributions for prior years

well, the 1099R instructions says you can use code 7 with B more importantly is the new box 11, which will indicate that the 5 year period was not met. Box 11. 1st Year of Desig. Roth Contrib. Enter the first year of the 5-taxable-year period. This is the year in which the designated Roth account was first established by the recipient.

pretend there are no taxes to worry about. the 415 limit is the lesser of 100% of comp or $52,000 (as indexed) person defers 100% of comp. how much of the required safe harbor can they receive?

Using EPCRS as a guideline - it indicates you are supposed to adjust the account balance by reducing what should have been paid, so I don't think you ever get to the point you are talking about. I assume you are talking about a death benefit, which the rules usually say it is 5 years and done, and I think the reg cite you are noting is simply saying, if by chance you have anything left after 5 years, stop calculating and get the whole thing paid out. Appendix A .06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with Earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)-5, Q&A-3, reduced by the amount of the total missed minimum distributions for prior years.

yes, I believe you follow the terms of the document. so basically you have the same dates as you would have had, except the plan year end changed. the one rule some people miss is the vesting which is always over a 12 month period, so in this case 2 months of hours overlap and get counted twice.

I guess you are not testing otherwise excludables separately, which of course would make life easier because then I think the question would go away. (assuming no HCEs in that group) I would lean toward the following approach. The 'plan' actually consists of 3 'plans' for the 401k plan I would use total comp (comp from DOP in the 401k portion of the plan) 401m - your question implies there is none. nonelective - use comp from date of participation.

interesting, the instructions are different than the form that was released earlier. on the form Question 7 dealt with ESOPs - that is not on the instructions on the form question 9 pertaining to amount of contribution is not on the instructions. guess we have to wait and see - the instructions are a draft dated 12/18 so maybe they changed the form of course, all this is somewhat moot as the SUP is for 2015, so it will be another year before we have to worry about it

you have 4% termination The ERISA Outline Book chap 4 section vii part B1b1 comments on the Matz vs..... 10 to 20% probably no partial, but check facts and circumstances 20 to 40% most likely partial, but check facts and circumstances 40% or more - most likely (though it is possible it is not. I actually had a plan that was around 30% as I recall, and the IRS asked why it shouldn't be a partial, and I said the company was a computer industry (e.g. high tech employees) and the agent agreed that industry had high turnover so no problem. under 10% - assume no partial termination again the IRS has never officially adopted a benchmark. But in your case, I don't see it even getting to facts and circumstances.

if it helps, here are some IRS notes, in particular see page 73 regarding rate group testing. as the notes say: Once the rate groups are determined, each rate group must satisfy coverage (in other words, you now go back to the coverage rules) To determine whether the rate group satisfies 410(b), the rate group must take into account all nonexcludable employees regardless of whether they benefit under the plan. under coverage, the 1.410(b)-6 lists the possible 'excludable employees' in particular (f) (i) employee does not benefit (ii) employee is eligible to participate [thus someone who is excludable by class and has met age 21/1 year svc would not meet this criteria because they were never able to participate] (iii) fails min hrs or last day (iv) fails to benefit [because of hrs/ last day] (v) terminates with less than 501 hours coverage and nondiscrim - govt.pdf

to make clear, since the plan could be a 401k with a match coverage: 401k - includable, not benefiting NOT on ADP test as that includes only those eligible to defer 401m - includable, not benefiting NOT on ACP test (this is no different than if you had a last day or hours requirement 401(a)(4) [nonelective] - includable not benefiting nondiscrim - show up with a big fat 0 if they terminate with less than 500 hours they still are includable and not benefiting. the rule of excluding non benefitting terminees with less than 500 hours only applies to 'participants'. these people never get to that stage.

just curious, are there other nonelective contributions (e.g. profit sharing) being made? let's look at it from another point of view let's say you had an owner defer the max. the NHCE makes 10,000 and for the sake of the argument 40,000 in bonus. now, do you think the IRS wants to give a free ride on the ADP test as well as top heavy? (so the amount of bonus shouldn't matter, and the fact the HCE doesn't receive the safe harbor shouldn't matter either) at leas5t in my opinion, but I haven't seen the issue addressed before.

see page 2 Roth 401k of the following article http://www.strategicpensionservice.com/images/March_April_2013.pdf (or at least that would be how I understand the rules as well)

so it really boils down to whether they mind getting a refund (most likely) every year. probably some of the after tax will remain in the plan and could then be moved. they have already paid taxes on the $ so there are no tax consequences. if the plan was safe harbor they lose the top heavy free, but maybe that doesn't matter. the example I've used is let's suppose the plan has a basic match, and everyone defers 5% or more, so there is 4% for match (which could be used in testing) so the max additional match for the HCE is 2%. someone making 260,000 could put away 5200 in after tax - and that is with ideal conditions of all NHCEs deferring (or at least that is the way I understand how it would work - not the "You can sock away an extra $20,000 in after tax and convert to a Roth"