ERISAAPPLE

Good analysis Mr. Bagwell. I keep going back to the IRS ASPPA Q&A (mentioned in the EOB) where the IRS said no top-heavy contribution is required for HCEs who are not key employees and who do not receive a SH contribution. Based on that Q&A, if the plan is SH plan for the entire year, but with zero contributions for the HCEs, the SH top-heavy exemption applies. The analysis seems to be that a plan can be safe harbor even if HCEs don't receive the SH contribution. It doesn't make sense to me that if the plan gives the non-key HCEs zero in contributions, no top heavy contribution is required, but if plan gives the non-key HCEs more than zero, and also gives the NHCEs a SH contribution for the whole year, then the non-key HCEs (and all NHCEs) must be given the top heavy contribution. Nonetheless, under Revenue Ruling 2004-13, I can see an argument that the "more than zero" contribution for the HCEs was not in fact a SH contribution (due to the mid-year suspension), and thus for the year the plan's contributions do not consist solely of SH contributions. I think that unless we get guidance otherwise, that is the more cautious position to take.

Of course we have to follow the regs, but what do the regs say? The regulations merely say you can reduce or suspend safe harbor contributions. The regulations also say you are not required to give safe harbor contributions to HCEs. You can have a safe harbor plan without giving HCEs any safe harbor contributions. I don't see any thing that says giving HCEs a portion of the safe harbor causes the plan to lose safe harbor status.

Even if it is a typo, I'm not sure an exception is needed. 1.401(k)-3(g) allows the sponsor to reduce safe harbor contributions. It doesn't say the reduction must apply to all participants. This gets back to my original thought. If the sponsor can give the non-key HCEs no safe harbor, why can't it give them a partial safe harbor for the year and then suspend the SH contributions for the non-key participants mid-year? It doesn't make sense that the sponsor can give them nothing, but if it gives them something, the top heavy kicks in. The other side of the argument though is if the sponsor starts with what is intended to be a SH contribution and then stops, what it gave them was not safe harbor and thus the top heavy kicks in, because the plan for that year did not consist solely of safe harbor contributions.

I agree with you that the plan loses top heavy exemption unless it is a safe harbor for the entire plan year. I don't agree that the reduction or suspension puts the plan under the rules of 1.401(k)-3(f). Rather, I think it falls under 1.401(k)-3(g).

Thank you for the response. In order to suspend, the plan must already state that the plan provides the safe harbor. To suspend, the plan must be amended to eliminate the safe harbor and apply the ADP/ACP (among other things).

I am brooding over the interaction between the exemption from top heavy for safe harbor plans and a mid-year suspension of safe harbor contributions. I am thinking about three issues. For all three issues below, assume the plan would be top heavy but for the safe harbor exemption. Issue 1. The first is an old issue, but in re-reading Revenue Ruling 2004-13, I am having doubts now about Situation 4 in that ruling. Under Situation 4, the sponsor has a safe harbor match, but employees who at hire are eligible to make elective contributions have a 1 year of service requirement for the safe harbor match. The IRS responds as follows: In Situation 4, under the plan, newly hired nonhighly compensated employees who make elective contributions will not be eligible to receive any matching contributions until they have completed 1 year of service. Since this will result in a greater rate of matching contributions for highly compensated employees than for nonhighly compensated employees, the matching contributions do not satisfy the requirements of § 401(k)(12) (or § 401(m)(11)). Further, since all eligible nonhighly compensated employees under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the requirements of § 401(k)(12). However, certain plans that provide for early participation may satisfy the requirements of § 401(k)(12) with respect to the portion of the plan that covers employees who have completed the minimum age and service requirements of § 410(a)(1), while satisfying the ADP test of § 401(k)(3)(A)(ii) for the eligible employees who have not completed the minimum age and service requirements. Unless a plan (within the meaning of § 414(l)) meets the requirements of § 416(g)(4)(H), no portion of the plan will satisfy § 416(g)(4)(H). (See Notice 2000-3, 2000-1 C.B. 413, Q&A-10.) I added the bold. Is this saying everyone in the plan has to receive the top heavy contribution (minus any match), or just the otherwise excludible employees? I thought for both 414(l) and top heavy purposes, the otherwise excludible employees were treated as one plan with the other participants. But I also thought you only had to give the top heavy in this situation to otherwise excludible employees. This is what has created my doubt. Issue 2. What happens if the employer only makes safe harbor contributions during a year, but in the middle of that year suspends the SH contribution? Up until the date of the suspension, the only contributions that were made were safe harbor contributions. After the suspension, the plan is required to fall back on the ADP/ACP test. Is it reasonable to take the position that the plan only received SH contributions for the year, and thus under 2004-13 the plan is still exempt from top heavy? I think the answer is no. I think once the plan is amended mid-year to suspend the SH contribution, the contributions that were previously made are no longer considered SH contributions for purposes of the safe harbor exemption from top heavy status. I could see, however, that one could argue that during the year the plan only received safe harbor contributions, and nothing else, and thus under 2004-13 the safe harbor exemption still applies. I could also see an argument that the top heavy contribution is only required for compensation paid for the portion of the year the plan is no longer safe harbor. Nonetheless, I think the best answer is that once the plan is amended mid-year to suspend the safe harbor, the plan is top heavy for the entire year. Issue 3. We know that a plan that does not give the SH contribution to HCEs nonetheless qualifies as a SH plan (provided all other requirements are met). In an ASPPA Q&A, the IRS said the HCEs who do not receive the safe harbor and who are not key employees are not eligible for the top heavy contribution. What if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs? Would the analysis here be different from the analysis in Issue 2? I think the answer here is yes, meaning the plan remains a safe harbor plan for purposes of the top heavy exemption even if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs. If the plan can give the HCEs nothing for the entire year and still be safe harbor, it should be able to give the HCEs a safe harbor contribution for part of the year and still be safe harbor.

Can the sponsor adopt an 11(g) amendment?

How do you advise clients to design their CB formula when they don't know their earnings until after year end? I am looking particularly at clients that are not corporations, such as partnerships and LLCs taxed as partnerships. It is a problem because they need to adopt their plan or amend their formula by the end of the year, but they don't really know their earnings until after year end.

Just cite ERISA Section 412, 29 USC Section 1112. Have them tell you where the exemption is. You won't find a statutory provision that says PBGC-covered plans are subject to ERISA 412 even though they are covered by the PBGC. There might be a PBGC opinion letter that addresses it tangentially, but it is doubtful you would find one that addresses it directly.

What does the plan say? If it allows participants to submit a new form once a quarter, why can't the form say stop for two months (or however long she wants) and then start again when the two months (or however long she wants) has ended?

If it is a promise to establish a plan in the future, I don't see a qualification issue. Once they establish the plan, they will have to meet all the tests/requirements.

I would plan for the cash flow requirement. The client can do that without an economic benefit to the employee. Otherwise, what happens in year 5 if the company doesn't have the $25,000? That will be a mess and a really disgruntled employee on top. One alternative is to tie the profit sharing requirement to some performance measure that is reasonably likely to ensure the company will have the cash flow needed to make the contribution.

I actually follow what you are saying Tom. I can't say I can fully comprehend, but I follow it. I am starting to scare myself with the boredom.

If anyone is willing share, what types of clients do you find to be "ideal" target clients who could benefit from a cross-tested or new comparability plan? I will be glad to share my thoughts. I look for smaller businesses that have a lot of income with demographics that are favorable for the testing and with owners who want to sock away some money, take advantage of the tax deduction, and mitigate the costs of benefits to their staff.

chc93, if the plan provides for such a forfeiture, and the plan has an IRS letter, go for it.

There is no such thing as a forfeiture back to the company.

I have always liked Millenium Trust. This is just my personal opinion, and should not be considered advice or a recommendation, and certainly not for a fee. You, the plan, the plan's fiduciaries, plan's agents, and plan participants, and anyone else who may be interested or even if they are not interested may not rely on my opinion and should seek advice from a competent professional. The communication of my opinion does not create an attorney/client relationship, etc., etc.

This is interesting. The EOB suggests that if the distribution does not meet the rules for a rollover, the IRS would treat the entire payment as a taxable distribution and then the amount that goes into the IRA would be an IRA contribution, not a rollover. That makes sense. Also, 1.401(a)(31)-1 Q&A 9 makes it clear that participants have to be allowed to take cash. I think the IRS was saying a plan cannot force participants to take all cash, but the regs can clearly be read also to say the plan cannot force participants to take it all as a rollover. Can clients still submit their plans with a Form 5307? I have lost track of the determination letter process. I am using the FTW volume submittor.

No the plan can't do that, or no there is nothing that prohibits such a plan provision?

Can a plan allow for in-service distributions, but limit the distribution to a rollover to an IRA? I realize this doesn't make sense, because once the money is in the IRA the participant can just take a distribution. Also, they are not looking to avoid the 20% withholding. The client wants to allow in-service distributions, but does not want to allow participants take their cash and go on vacation or whatever. My question then is whether there are any rules that would prohibit a plan provisions that would allow participants who are employed to request and receive a rollover distribution, but the employed participant cannot take that distribution as a taxable, cash distribution. They also do not want to have any in-plan IRAs.

Barbara, you might want to reconsider whether your 501(c)(3) clients sponsor non-ERISA plans. If they are not governmental entities, such as state universities, they are most likely covered by ERISA.

Churches have to elect into ERISA. If they don't, their plans are not covered by ERISA. Unlike the safe harbor for plans in which have no employer involvement, the types of contributions (employer or employee only) does not matter.

Is a church subject to 457(f)?

As long as the plan meets 410(b)(4), the plan can exclude employees who work fewer than 20 hours per week (or less hours provided under the plan).

Thank you Bird. That is how I read it. I also think that any contributions made in a later calendar year that is allocated within the plan year (in my example, on or before 09/30/2017) must be included. If somehow an employer could make a contribution on 12/31/2018 that gets allocated as of 09/30/2017, that allocation would be included in the 12/31/2018 RMD. That's just how I read the language the regs.