Tom Poje

some argue that the 6 month suspension refers to 'safe harbor guidelines' for hardships. in otherwords, you could say no suspension. Now, if you don't suspend deferrals, then how do you prove the hardship really exists? Oh I need the money for this and by the way, I can afford to continue to defer, someohow or other. arguablly then you didn't need the hardship or you took too much in hardship because you have leftover $ to continue to defer. sort of like, under EPCRS the correction is this. if you follow those guidelines you are generally 'safe'. but if you turn around and say, well, I have a failed adp test, I'm going to correct this way instead of a one-to-one correction. If you get audited you probably won't have a leg to stand on. Prototype plans are required to supend for 6 months.

without getting into 'numbers', because my desk is full enough of stuff without stopping to look at things (sorry) you generally get a 'sizable difference' between the cash balance and the DC equivalent beacsue of the interest rate difference. you are providing a contribution credit at 5% interest for 40 years. so if you provided a contribution at 8.5% interest for 40 years just what would that contribution be for the two numbers to be equal. that is a real rough way of looking at it (because the APRs factor in as well)

the regs only say each HCE must pass (Its not like a matching contribution in which each match rate must pass)

I'm probably oversimplifying things but when testing the cash balance portion we would take the 28% or 7.5% cash balance contribution and project out at the int credit rate of 5% for gateway determination the benefit would be converted to a dc equivalent alloaction % and added to the dc alloaction % to determine the required gateway for the NHCEs we use the avg of the dc converted values and apply that toward the gateway.

suppose your firm always makes a 5% to the rank and file and maxes out the owner. even though its discretionary, its done every year that way. now this particular year you fail. that's sort of discretionary, but almost fixed in its intent, and perhaps that is the logic behind it. I'd be only guessing.

I have my leanings towards that answer, but (assuming the IRS understood the question - but the way it was worded seemed clear, but then sometimes questions posted here are misunderstood) they seemed to indicate otherwise. Plan allocates max to owner Plan provides the gateway as required by regulations. It tests It fails It now either corrects by giving more or bringing someone else in. plus its an answer by IRS personel and doesn't necessarily represent an official position of the IRS. not sure if I would be that bold with a discretionary contribution.

I'd agree, if you have fail safe language you are stuck on who you bring in for coverage. but once that is done you probably fail nondiscrim and then have to correct by bringing in the othe NHCE. At the 2010 ASPPA Conference the following was asked:(Remembering of course such answers might not reflectan actual position of the IRS) A company sponsors a discretionary profit sharing plan that has tiered allocations and utilizes cross testing to show nondiscrimination in amounts. Owners are allocated a contribution equal to their 415 limit. All other participants are allocated a contribution equal to 5% of compensation, which satisfies the gateway minimum. The Plan fails nondiscrimination testing. The plan could have passed by providing a 6% contribution to all eligible participants, instead of a 5% contribution. Is the plan sponsor obligated to correct the failed testing by contributing more to the current participants, or is it permissible to put in a corrective amendment and permit entry and provide a 5% contribution to an individual who was previously ineligible (assuming that would permit the plan to pass nondiscrimination testing Either proposed correction is possible, but both probably require an amendment to the plan that satisfies Treas. Reg. § 1.401(a)(4)-11(g), in both form and timeliness. In form, such an amendment generally either confers additional benefits to existing participants or existing benefits to additional participants. In either case, the amendment must be both “definitely determinable” and nondiscriminatory. of course with a young HCE its possible that you are better off with component plan testing (assuming the young HCE is only receiving the same as another NHCE.

but is that referring to an individual with a total distribution but the plan is still on-going or a plan that had total distributions? (otherwise what is the one paragraph even in the regs?) I'm not perhaps disagreeing with you, perhaps the paragraph is poorly worded using the terms 'deemed' and 'otherwise have been required'

there is a strange rule under 1.401(k)-2(b)(v) .......in the event of a complete termination of the plan...ih the entire balance of the HCE is distributed prior to when the plan makes a distribution of excess contribution...the distribution is deemed to have been a corrective distribution...to the extent that a corrective distribution would otherwise have been required.

in the most recent LRM dated 2011 for plan documents (LRM=Listing of required modifications FOR DOCUMENTS) the whole LRM can be found at http://www.irs.gov/retirement/article/0,,id=97182,00.html in 3 different spots there are notes about forfeitures/QNECs, (so again, this does not appear to be the opinion of one individual or unofficial stance0 [Note to reviewer: The blank space in the preceding paragraph should refer to the Plan's forfeiture provisions applicable to employer contributions other than Elective Deferrals and Qualified Nonelective Contributions. In the alternative, a sponsor may provide for specific forfeiture language applicable only to Matching Contributions. Note that forfeitures cannot be used as Qualified Nonelective Contributions, Qualified Matching Contributions or Elective Deferrals.] [Note to reviewer: Forfeitures cannot be used as Qualified Nonelective Contributions, Qualified Matching Contributions or Elective Deferrals. For Plan Years beginning after 2005, matching formulas, other than those above, such as flat-dollar or ones that target matches at lower paid Non-highly Compensated Employees, must satisfy additional requirements specified in Regulations § 1.401(m)-2(a)(5).] Forfeitures of nonvested ACP Test Safe Harbor Matching Contributions will be used to reduce the Employer's contribution of such ACP Test Safe Harbor Matching Contributions. [Note to Reviewer: Other language specifying the use of such forfeitures may also be acceptable. However, forfeitures may not be used as ADP Test Safe Harbor Contributions, and if used as anything other than ACP Test Safe Harbor Contributions, the Plan will not be exempt from Code § 416.]

this is somewhat old, but probably still valid that maybe will answer one of your questions, see especially item 2 of the author's comment at the end http://benefitslink.com/modperl/qa.cgi?db=...ects&id=119

if catch ups are matched then there is no rate of match issue. (If using Relius I believe there is a check box for matching catch ups.) even if catch up are not matched, I'd be willing to bet that if you treated 10 cents less in deferral as catch up the message would go away (assuming you are under the deferral plan limit.)

I'll assume you mean the ACP test fails and the people are not vested???? technically there is no di minimums amount, but if a tree falls in the forest and no one is around does it make a noise? in other words, who is going to notice. a female once told me I misunderstood the expression, its more correct to say if a man walks in a forest all by himself, is he still wrong. if the testing is that close, I'd be surprised if tesing using a definition of comp - deferral or, now that the ADP test passes, possibly shifting deferrals to the ACP test might be enough to pass ACP. (e.g. suppose I shift 50 cents from one NHCE to the ACP test and his ADP % stays the same, but the ACP % increases by .01%.

by disaggregation do you mean testing otherwise excludables separately? if so, yes but for the current year HCEs you have to rerun last years test to get the correct split to compare. it is doubtful this would have any effect on coverage. the same would hold true if you are talking about permissive aggregation of plans, though you have to test coverage as disaggregation as well and that might be a problem.

it doesn't matter when a person enters the plan, if the plan year is a full 12 months the comp is pro-rata-ta-tat (I guess aside from special language that might be in the doc.) if Austin truly has a document that says you pro-rata the wage base for a new entrantthen you could have a doctor who has been then for years who gets 245000 * 5.7 + (245000-106800)*5.7 where the new doctor enters midyear and gets 245000 * 5.7 + (245000- 53400)*5.7

lets suppose the person was hired 8/1/2010. a doctor. a lawyer. whatever. made 400,000 in 2010. so he enters 7/1/2011. still makes boooooka booka bucks in 2011. so are you saying his contribution would be x% * 245,000 + 5.7% * (245,000 - 1/2 TWB) I think there are some problems with that. ........... as to the other question, I'm not sure how you handle things when a self-employed enters mid year. I've never heard that issue addressed before.

assuming it is an NHCE, and the person is at least age 21, I guess for cross-testing purpose you could assume a worse case scenario..e.g. the person was born 1920 which would produce an extremely small e-bar, so no help to the testing at all. (or if the plan barely passed with him in it, treat him as a 0 e-bar) and go from there.

why not update your spreadsheet? It's not that hard. Section B of form Schedule SE gives a clear walk through

this is a debatable issue. Q and As do not necessarily reflect an actual position of a particular govt entity, they may indeed only reflect an opinion of one or more of its members. but the issue has been raised before with the following comments. At the 2000 Annual American Society of Pension Professionals & Actuaries (ASPPA) Conference, this was asked as Question 5 for the Department of Labor (DOL) (not the IRS Q and A): A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct? Answer: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance—even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department of Labor stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process. At the 2009 American Bar Association (ABA) Conference Q and A session, this was answered in the following manner: Question 14: An employer has about 200 employees, and 160 of them are eligible for one of the employer’s two retirement plans. Except for a provision on which employees are eligible, the two retirement plans have identical provisions. Further, each plan provides that a participant directs investment among mutual funds of the same network. Each plan uses the same prototype document, and the two adoption agreements are identical except for the eligibility provision. The different eligibility provisions do not relate to different business lines or locations. Further, nothing in the terms of the eligibility provisions suggests any business purpose at all. Rather, all of the documents and other facts seem to suggest that the employer designed the two eligibility provisions so that each plan will have fewer than 100 participants. Under both plans, the employer is the administrator and the only named fiduciary. Proposed Answer 14: A fiduciary may not rely on a plan’s documents if doing so is inconsistent with ERISA. See ERISA § 404(a)(1)(D). In deciding whether ERISA requires a fiduciary not to rely on a plan’s documents, an administrator must act according to ERISA’s standard of care. ERISA § 404(a)(1)(B). If a person acting “with the care, skill, prudence, and diligence” that ERISA requires would believe that the two plans really are one plan, the administrator must engage an independent qualified public accountant. DoL Answer 14: Under Title I of ERISA, employers have substantial discretion in designing the benefit plans they will offer to their employees, including decisions on whether to offer the benefits as a single plan or as separate plans. Whether an employer has established one or more than one ERISA plan depends on the facts and circumstances. In the staff’s view, in the absence of contrary annual reporting rule or requirement and assuming the structure of the arrangements is otherwise lawful (e.g., under the Internal Revenue Code), it would be reasonable for a fiduciary to look to the instruments governing the arrangement or arrangements to determine whether the benefits are being provided under separate plans and to treat the arrangement or arrangements for annual reporting purposes as separate plans to the extent the instruments establish them as separate plans and they are operated consistent with the terms of such instruments. It should be noted that splitting the plan into two would raise certain issues, such as, what happens when a partially vested employee terminates? Do his forfeitures remain in just the plan he is in or do they get allocated across the board to all employees? If allocated to all employees, it does not sound like two plans. If allocated just to one plan, and suppose that plan only had HCEs—then you have a discrimination issue.

just to make sure there is generally one and only 1 Avg Ben Pct Test using everyone whether yo aggregate or don't aggregate any or all plans of the employer. there could be 2 avg ben pct test if you choose to test otherwise excludable employees separately. whichever method you choose for coverage ('all employees' or 1. stautory include and 2 otherwise excludable) must be used for nondiscrim. now, when you run nondiscrim you can aggregate or disaggregate the plans. at least that is how I understand the rules. The ERSIA Outline Book chapter 8 part C3 describes the avg ben pct test as "This is a special aggregation rule and is required, regardless of whether the plans are otherwise permissively aggregated for coverage testing...

my understanding is you have run your avg ben pct test for coverage (and passed). if disagregated the 'ratio test' is based on the people in B treated as includable and not benefiting, but you are not trying to pass the 70% but the safe harbor % because you are using the avg ben test rules. for nondiscrim, the avg ben pct test is exactly the same so nothing more need to be done in that area. now, if plans are disaggregated, you would look at A only, but the people from B are included as 0 .......................... or you could aggreagte them and then anyone who received a nonelective gets the gateway. (But then that changes you coverage test because you have to follow the same rules - if you aggregate for coverage you aggregate for nondiscrim and vice versa) but just because you test everyone for the avg ben pct test does not mean you are aggregating the plans, it just means the regs say for that test and that test alone you test all together. or you could aggregate the plans, but then test the otherwise excludables separately. assuming there are no HCEs in that group there is no nondoscrim test so no gateway would be necessary for that group. of course all that is assuming I am inderstanding the facts correctly (and the regs as well)

that is how I would interpret it. the regs don't say "have the same plan year end"

perhaps the easiest way to see things is as follows: 1.410(b)-5 (the avg ben percentage test rules) (d)(5)(ii) explains the rules to determine the avg ben pct for plan with different plan years 1.410(b)-7 (disaggregating and aggregating plans) (d)(5) 2 or more plan may not be aggregated unless they have the same plan years. in other words you have to aggregate all for the avg ben pct test (even if you have different plan years) but once that is done you can't aggregate even if you want to aggregate if you have different plan years. ....... by the way, if the plan has failsafe language, then you never get to the avg ben pct test for purposes of coverage.

Question 44 at the 2009 ASPPA Conference: Based on the facts below, does the profit sharing allocation have to meet the gateway requirements of the final comparability regulations? A profit sharing contribution is allocated to a select group of employees using an integrated points allocation formula that requires a general nondiscrimination test under IRC §401(a)(4). The rates used in the rate group test were calculated using contribution rates, and the ratio percentages of all rate groups met the nondiscriminatory classification percentage. The average benefit percentage test did not pass using contribution rates, but did pass when tested using equivalent benefit accrual rates. Do the gateway requirements apply to this allocation because the average benefit percentage test was done based on equivalent benefit accrual rates? IRS Response: No. There is no gateway requirement for a general tested plan under Treas. Reg. §1.410(b)-5(d)(5), unless cross-testing is used to determine the rate group testing. The gateway rules are in §1.401(a)(4)-8(b)(1)(I). In other words, the gateway is required when you get to nondiscrimination testing not coverage.

again, you might be stuck by the terms of the document the old Corbel language (this was back when the limit was only 30,000 or 25% of comp, but it was simply the first thing I opened on the computer) If the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts would cause the "annual additions" for the "limitation year" to exceed the maximum "annual additions," the amount contributed or allocated will be reduced so that the "annual additions" for the "limitation year" will equal the maximum "annual additions," and any amount in excess of the maximum "annual additions," which would have been allocated to such Participant may be allocated to other Participants. with language like that I would say NO you can't do what you want to do - its pretty specific how to handle. but absence language like that it makes no sense to me the IRS would even provide a couple of examples in which excess deferrals are returned. or put another way, you have an clear example in EPCRS. self correcting does not guarantee the IRS will accept it if the plan was audited, but if you followed the guidelines, its my understanding they are less likely to frown upon it.