Tom Poje

under 1.401(k)-2(a)(1)(iii) you have 2 options: (iii) Special rule for early participation. If a cash or deferred arrangement provides that employees are eligible to participate before they have completed the minimum age and service requirements of section 410(a)(1)(A), and if the plan applies section 410(b)(4)(B) in determining whether the cash or deferred arrangement meets the requirements of section 410(b)(1), then in determining whether the arrangement meets the requirements under paragraph (a)(1) of this section, either— (A) Pursuant to section 401(k)(3)(F), the ADP test is performed under the plan (determined without regard to disaggregation under § 1.410(b)-7©(3)), using the ADP for all eligible HCEs for the plan year and the ADP of eligible NHCEs for the applicable year, disregarding all NHCEs who have not met the minimum age and service requirements of section 410(a)(1)(A); or (B) Pursuant to § 1.401(k)-1(b)(4), the plan is disaggregated into separate plans and the ADP test is performed separately for all eligible employees who have completed the minimum age and service requirements of section 410(a)(1)(A) and for all eligible employees who have not completed the minimum age and service requirements of section 410(a)(1)(A). item A is a special rule that says "Ignore otherwise excludable rule for HCEs" minimum age and service requirements of section 410(a)(1)(A) (a) Participation (1) Minimum age and service conditions (A) General rule A trust shall not constitute a qualified trust under section 401 (a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates— (i) the date on which the employee attains the age of 21; or (ii) the date on which he completes 1 year of service. so, did the people in question ever complete 1 year of service? If they never worked 1000 hours (generally a year of service is considered to be 1000 hours in a 12 month period) then they remain otherwise excludable. I would have thought most software programs would handle that. once the person complete 1000 hours he has a year of service. even if he goes back to under 1000 hours, he still has that year of service so he is never otherwise excludable again. If you run your ADP test using the otherwise excludable option then you have to run coverage testing the same way.

then I misunderstood what the original post was saying. it would have been better to say the combined match formula for ACP is 100% up to 6%

tell your colleague to look at Code 401(m)(11)(B) there are three limitations on matching contributions (I) can't make in excess of 6% deferred (ii) rate of match doesn't increase as deferrals increase (iii)HCE can't receive at a higher rate than an NHCE

no no no. ouch, the scars still hurt from having had this beaten into me a number of times, I would point out the following. 1. your document says the plan is safe harbor. therefore, failure to fund the safe harbor is a failure to follow the terms of the document. so the plan is still safe harbor, not top heavy. failure to follow the terms of the document is a possible cause for plan disqualification, but that is the purpose of EPCRS. 2. 1.401(k)-3(h)(1) .......safe harbor contributions must be made within 12 months of the end of the plan year. [just like any other QNEC or QMAC.] so there isn't a Sept 15 deadline, there is a 12-31 deadline. now, at one of the ASPPA conferences the issue was raised about how this effects the 415 limit (annual additions) normally you have up to 30 days after the deadline, so 10/15 for a calendar year plan. if contributions are made real late (after 12/31 they are corrective contributions under EPCRS and count as an annual addition for the year they were required. but what of contributions made between 10/15 and 12/31? That's right. it makes no sense. you make them timely for purposes of satisfying the safe harbor, you actually avoided getting into EPCRS, why should the annual additions apply to the year made rather than the year required. even the IRS admits this may be issue. (On the other hand it doesn't sound like you will be running into a 415 issue either year, so it probably doesn't matter in this case.)

lets suppose the only people with 5 or more years were HCEs. you have a possible discrimination issue, so need to test that.

the fact no one was excluded from the match (for this particular yea) has no bearing. you simply can't have an allocation requirement for the discretionary match e.g. you have people in the plan, they know they aren't going to work 1000 hours, so based on the terms of the document they do not defer because they know they can't get a match. it blows the safe harbor requirement out of the water

I simply used the example of a QNEC to indicate that not only can you provide a contribution but you can also provide vesting as well. 1.401(a)(4)-11(g)(2) is the reg that says you can provide to an individual who did not benefit during the year. 1.401(a)(4)-11(g)(5) example 6 is the reg that says it would be inconsistent to provide a contribution to a terminated non vested individual. this has been understood to mean as long as you provided vesting as well as the contribution you are ok. consider a simple example. 1 HCE and 1 NHCE. the NHCE terminates with more than 500 hours but receives no contribution, and is 0% vested. If you can't provide vesting as well as a contribution it would be impossible to fix the problem, and that certainly isn't the intent of the regs. (all that being said, I wouldn't pick a person who quit in Jan with $100 in comp as opposed to someone who worked most of the year, if it boiled down to picking between 2 people. correcting a problem is one thing, abuse of a provision is another. of course, if a person worked less than 500 hours and terminated wouldn't be counted anyway, but I am using an extreme example)

1.401(a)(4)-11(g)(4) requires corrective amendments have substance. a non vested terminee provided a contribution that is 0% vested would not be considered to have substance. since a corrective amendment could be in the form of a QNEC there is nothing to stop you from making the corrective contribution 100% vested.

along similar lines, Q and A #37 and #39 from the 2012 ASPPA Conference Q: A safe harbor 401(k) plan covers only salaried employees of Company X. The plan passes the ratio test under IRC §410(b). The plan year ends December 31. In June, X decides it would like to open up the 401(k) plan to the hourly paid employees, effective on July 1. Would this amendment be a violation of IRC §401(k)(12)? Proposed Answer No. Although certain amendments to a safe harbor 401(k) plan are not permitted to be made effective on a date other than the first day of the plan year, this is not one of those types of amendments. The amendment solely applies to employees who are not otherwise covered by the plan. The safe harbor rules simply treats these individuals as newly eligible, and the safe harbor notice provided prior to the beginning of the plan year would not have had to be distributed to these employees before July 1. IRS Response: The IRS agrees with the proposed answer as long as there is no effect on the already-eligible employees. ............. Q: A safe harbor 401(k) plan fails the §410(b) coverage with respect to its profit sharing plan component. Within 9-1/2 months after the close of the plan year, the employer adopts a corrective amendment, pursuant to Treas. Reg. §1.401(a)(4)-11(g). Does this amendment cause the 401(k) component to lose its safe harbor for the plan year in which the corrective amendment is adopted? Proposed Answer: No. Regardless of the position taken by the IRS with respect to amendments made to a safe harbor 401(k) plan, an implied exception exists for any amendments that are necessary to correct a violation of the nondiscrimination testing rules, which is a fundamental requirement for a qualified plan. IRS Response :The IRS agrees with the proposed answer

not necessarily. you (and apparently whomever you discussed this) are forgetting (or not realizing an important piece) the avg ben % test includes all contributions (deferrals + match + profit sharing) whereas your rate group test only includes profit sharing. or for a real simple example, imagine a young owner child deferring 10,000. it will blow the avg ben pct test out of the water. but if that child receives little or no profit sharing, the rate group for the child would be above 70% I would add a lot of people forget about this possibility happening..

if it helps, see the example on 7.7 of the IRS controlled group guideline all you need do is change the percentages to match what you have. as noted above, undetermined if affiliated service group exists irs controlled group notes.pdf

ok, I see while typing this John has responded. perhaps this will simply add to the comments the gateway rules are found in 1.401(a)(4)-8 which is, quite conveniently entitled Cross testing the opening sentence This section provides rules for testing defined benefit plans on the basis of equivalent employer provided contributions and defined contributions plans on the basis of equivalent employer-provided benefits... so, lets suppose you have a plan in which everyone is in their own group. for a given year everyone receives 5%. you don't have to test on an accrual basis, you could test on an allocation basis (which would then NOT be cross testing, and so no gateway. one of the gateways is 'broadly available' rates, which basically says if each allocation group passes you have satisfied the gateway. so you could have a group of NHCEs and HCEs at 9% and another at 3%. personally I think their is a catch, missed by most (including many documents!) the LRMs (Language Required Modification (or whatever that stands for) had the following: LRM #94 (Note to reviewer: There are other gateways that may be used in order for a defined contribution plan to cross-test using equivalent benefits under 1.401(a)(4)-8(b). The plan may provide for a different gateway other than the minimum allocation gateway (for instance, the broadly available allocation rate requirement of Regulations section 1.401(a)(4)-8(b)(1)(iii) or the gradual age or service based allocation rate requirement of section 1.401(a)(4)-8(b)(1)(iv)); however, sample language for other gateways is not provided herein. If a sponsor wishes to use other gateways, it is important to ensure that the benefits provided under the plan remain definitely determinable. In order for plan benefits to remain definitely determinable, the plan document should specify which gateway is used. The plan document could allow adopting employers to elect between different gateways, but in order to provide definitely determinable benefits it is not sufficient for the plan document merely to specify that one of the gateway requirements will be satisfied.) (Note to reviewer: No section 401(a)(4) failsafe language is allowed. The plan must pass nondiscrimination testing based on Income Tax Regulations sections 1.401(a)(4)-1 through 1.401(a)(4)-13.) maybe they removed this requirement, or maybe it will show up in the next round of restatements, or whatever, but apparently documents 'should' specify what gateway will be used

1.401(k)-4© states the SIMPLE plan must be the exclusive plan for the plan year. this requirement is satisfied if there are no contributions made. on behalf of any SIMPLE plan participant..under any other qualified plan maintained by the employer

1.401(k)-1(b)(4)(iv)((B) restructuring prohibited - see also 1.401(a)(4)-9©(3)(ii). You can test otherwise excludable employees separately. though if Mr. Peabody and Sherman (I think they are still on speaking terms with Mr. Know it all) will permit you to use the Way-Back machine I think you can go back anytime before 1986 and use such a method but since the test was run in the 80's and you were using it to make the govt happy it was called the 80 appease test. oh, no, Mr Peabody!

well, 1.401(k)-4(g) says The plan year for a SIMPLE 401(k) plan must be the whole calendar year. Thus, in general, a SIMPLE 401(k) plan can be established only on January 1 and can be terminated only on December 31. I think there is a private letter ruling somewhere that says if you have a 2 year old goat to be sacrificed, and it is Friday the 13th, and there is a full moon then you can ignore the regulation. but really, just what the heck do the regs mean by "in general"

yes, that sounds correct go out a like a firework and celebrate. but not so close here, too dry, I don't need the fire

having sat in on a Dave presentation years ago I'd be curious just what other bells and whistled he will use to do the audience. Have a safe and enjoyable 4th!

yes, because when you are looking at the component plan you are treating everyone not in the component as 0 so HCE2 can't have a benefit greater than HCE1 for that component plan

I guess I am unable to convey the concept and need to leave that to someone else that can explain better. again if you had 2 separate plans (or 1 plan split into component plans) you count ALL bodies in the denominator whether you aggregate the plans or not. thus your denominator will always have all bodies counted, not just the plan (or component plan you are looking at) the numerator consists of just the plan (or plans) you are aggregating (or not aggregating)

think of it this way, instead of 1 plan being split into 2 component plans you have 2 plans the plans will be tested separately (permissive aggregation not used) one plan consists of all people tested on an allocation basis the other plan consists of all people tested on an accrual basis. for avg ben pct test, no matter whether you aggregate or not you would combine everything because there is one and only 1 test when looking at the individual plan all members of the other plan are includable and not benefitting. now you look at plan 1 and use whatever mean you can to pass testing now you look at plan 2 and use whatever means to pass testing. note: again, you can't avoid the gateway with the group tested on an allocation basis. ........ yes integration is considered a 'safe harbor' formula, assuming you are using the proper taxable wage base and proper excess %

the original preamble to the catch up regs had an example in which HCEs (since it was an example it could be keys) in which the document specified HCEs were limited to 0%. therefore that was a plan imposed limit and anything above would be treated as a catch up. but you can't simply treat any deferral as a catch up - there has to be a limit or failed test

you are forgetting the rule 'treat everyone not in the component plan as includable and not benefiting' so you have component plan accrual basis (assuming the NHCE in the rate group) 1/10 NHCE ratio 1/2 HCE ratio this is only 20% for the rate group test. you have 10 /12 for nhce concentration percent or 83.33 always round down, so 83% so a midpoint of 27.75% and at that point the big fog horn goes off in addition, even if the ratio % passes, you need to pass avg ben pct test as a whole, since your ratio % is going to be less than 70%.

cross testing implies you are taking a dc allocation and 'crossing' over and testing on an accrual basis (though I guess you could do the same with a db accrual and cross over and test on an allocation basis) so no a pro rate allocation does not automatically pass cross testing rules. e.g. if I give a young HCE 3% and an old NHCE 3% and cross test I would fail. but a pro rate allocation is considered a safe harbor allocation (not to be confused with safe harbor 401k) so no testing is needed, same with an integrated plan. but you could test if you want on an allocation basis and lo and behold you would pass (of course!!!!) conceivably, if the plan is integrated at 5.4% and you impute disparity you could actually fail testing on an allocation basis, but the regs say don't sweat it. if only 60% of the NHCE benefitted, yes arguably you would fail the rate group test, but then you would fail coverage as well so it is something of a moot point.

well, for where the retirement industry has been, I did a Karoke a few years ago. enough bullet points there to get things started for a discussion, perhaps. since your system won't let me attach a mid file I renamed it to .xls, so you would have to rename back to .mid but it's the best I can do to beat your system. (Statler Bros, Do You Remember These) I think I wrote this when e-file2 first came out and people were complaining how much easier the paper froms were, but I don't think many feel that way now. 10 year cliffs, class year plans, and the rule of 45, Five to fifteen year vesting really made those plans alive Laid off just before you’d vest, but that’s the way it goes- Ah, do you remember those? No EGTRRA, no USERRA and what the heck is GUST? No top heavy requirement was placed upon the Trust No self-direction, default funds and why disclose the fees Ah do you remember these Fifty-five hundred C or R, there’s No e-file 2 hand filled forms sent in by mail, that’s all that we need do And we filled out many forms, the Schedule Ts and Ps Ah do you remember these HCEs and the 1/3rd rule, the multiple use test PIA offset DB plans, they seemed like the best No Cash Balance, no DB-K, nothing like an E-Bar Can you remember back that far? No catch up limits, Roth deferrals, EPCRS Things were easier back then, but now we’ve got a mess Segment rates and funding yield curves have added to our woes Ah, if we could forget those SIMPLE plans, and SHNECS and SHMACs, New Comparability Way back when those things were not part of reality no nondiscrim, no 410-b, we didn’t dream of GATT, ah do you remember that? Combo plans had 415-e rules to think about the1.25 multiplier was often left in doubt and owners could not take a loan, even if they did say please ah, do you remember these? 30 thou was the limit; 25 percent of pay comp reduced by deferrals, for us that was ok for us old folks, those were the rules, they were our ABCs Do we, do we remember these? Yes, we do, Ahh how we remember these! doyourememberthese.xls

well, what do the regs say? There are 2 ways of passing coverage. 1. ratio % test - you fail at less than 70% 2. avg ben test - since this is an option, no reason you can't use it (unless you have people excluded by name or something that is basically the same as exclusion by name - you do not seem to fall into this category) of course if you have a document with fail safe language, then option 2 is out and you have to provide a QNEC to people to pass coverage. the main reason I hate fail safe language. ha. no true guidelines on how much to provide if you end up there. usually something to help you pass other testing, but you don't have anything else to pass. by the way, I have a similar plan, but some HCEs are deferring, so they have to provide a QNEC to a few people every year to pass coverage.