NW529

We have a catch-up eligible employee who is participating in two "plans" adopted by unrelated employers. The employers are part of the same MEP, but tested separately. If the participant is due an ADP test refund in both plans, can we use up to $6,500 catch up to offset in each plan? I believe the regs allow catch up offset exceeding $6,500 across unrelated employers in SEPs, but we are wondering if the same rules apply to an MEP.

Thanks for the reference, @Bri! Mainly, I am wondering if it is permissible to allocate more than 5% to some NHCEs and 0% to the former employees? Based on 19-19, the only allocation restriction is that eligible employees (excluding former employees) receive a uniform allocation, which they do. My initial thought is that this allocation is allowed, but additional feedback is appreciated!

We have a failed 2015 ADP test that was not corrected timely. We are now correcting under ECPRS using the one-to-one correction method. Our intention is to allocate the QNEC to employees who were NHCEs in the year of the failure and are also NHCEs in year of the correction. If allocated this way, three NHCEs would receive a QNEC allocation of greater than 5%, while three would not receive a QNEC at all (they are no longer employed). Is this allocation permissible using the one-to-one correction? Any insight is appreciated! Thanks

A plan is effective for the first time on 8/1/2020. When determining Key status for Officers and greater than 1% owners for the initial plan year, what compensation is used? 1/1/2020 - 12/31/2020, or 8/1/2020 - 12/31/2020?

A plan is effective for the first time 1/1/2020 and is not Safe Harbor. The owner is over 50 and contributes $4,000. There are no other employees contributing and her ADP refund will be recharacterized as catch-up. For the 12/31/2020 Top Heavy test, is her balance excluded from the ratio because it is characterized as catch-up? Is the plan considered Not Top Heavy at 0% for 12/31/2020 (2020 and 2021 plan years)? Any guidance is appreciated! Thanks!

@BG5150 Thank you! We're also looking for some guidance on correcting a 415 failure for a prorated short year. The plan is terminating mid-December 2020. They have 100% of 90% match, but are not matching catch-up. They also made a 2020 Profit Share. Several employees have an excess 415. They are catch up eligible and contributed the catch-up. When following the correction steps, is the catch-up classified as "unmatched deferrals" and refunded first to cover the excess? Or, is the catch-up excluded and the regular deferrals are refunded and corresponding match forfeited?

A participant is catch-up eligible and 415 compensation is $16,500. The participant deferred $8,750 and received a match of $8,750. Does the 415 test pass because $1,000 is re-characterized as catch-up?

We have a client who would like to allocate a Top Heavy contribution to both Key and Non-Key employees. The language in the document regarding Top Heavy allocations is as follows: Each Non-Key Employee who is a Participant, or was eligible to be a participant in the plan year, and is employed by the Employer on the last day of the Plan Year will receive a top-heavy minimum allocation for that Plan Year, irrespective of whether he or she satisfies the Hours of Service condition under the Employer's Adoption Agreement... Based on this language, is it permissible to allocate to Key employees? Any feedback is appreciated! Thank you

A client is an adopting employer in an MEP. The employer is Top Heavy for 2020 and the keys are contributing. The employer is stating that they will be selling a business unit this year and terminating non-key and possibly key employees. How does this impact the 2020 Top Heavy minimum? Are those employees simply deemed as terminated prior to the end of the year and not allocated the Top Heavy minimum? Or, would the minimum be calculated on compensation until the sale for those employees? Any feedback is appreciated. Thank you.

Hi @C. B. Zeller, would it make a difference if it was 2 plans tested together? Even if it was 2 plans tested together, they are still considered "one employer" and you would still be reducing the number of employees eligible to receive the Safe Harbor contributions.

One plan covering both entities

A controlled group is made up of two entities and one of the entities would like to revoke Safe Harbor mid year. All the HCEs are in the entity that is revoking Safe Harbor. How would the 2020 Coverage Test be performed for the 401(m) portion? Are all the NHCEs considered as benefitting due to the Safe Harbor for the partial year? Any feedback is appreciated!

We have a company that is owned by several trusts at 20% ownership each. Each individual is the primary beneficiary of their respective trust, so they are considered 20% owners of the company. However, are the children of the beneficiary of the trust also attributed 20% ownership of the company? This scenario has come up due to key employee determination for Top Heavy. My initial instinct says yes, but I would appreciate any feedback and/or reg citations. Thank you!

An employer is Top Heavy in it's initial plan year. If the plan makes a discretionary match to NHCEs, is this employer contribution included in the Top heavy ratio for the first year? Or does it have to specifically be a non-elective contribution as specified in the plan document? Any feedback would be greatly appreciated. Thank you.

@Belgarath - Yes, the contributions in question are elective deferrals. @Tom Poje - The plan is not Top Heavy for 2019, so I think we are okay. Thank you both for your help!

A 401k plan is on a calendar year and ceases contributions in March. However, the effective date of the termination is in July. Which date is used to determine the prorated 415 limit? If the employer had already ceased contributions with the intention to terminate, but did not make the effective date until several months after, aren't they essentially increasing the contributions allowed by the prorated 415 limit? Any guidance is appreciated!

Hi Tom, Thank you for your response. I understand your logic, but I was reviewing the following from ASPPA regarding this topic. The example on the bottom seems to suggests that an EE with a DOH 9/1/2014 can be considered otherwise excludable until 1/1/2017. Is that the correct interpretation of the example? It seems to contradict the IRS memorandum you quoted above. Thanks in advance! Otherwise Excludable Employees and Entry Dates BY LYNN YOUNG MAY 17, 2016 In a recent Chief Counsel Advice Memorandum, the IRS responded to a request regarding the application of the “otherwise excludable employees” for purposes of coverage testing. Specifically the request was whether it was permissible to apply the maximum statutory requirements to determine the population of excludable employees if a plan had an earlier entry date. The example was for a calendar year plan that allowed for immediately eligibility for employee deferrals. If an employee, age 24, was hired in August 2015, they would be in the otherwise excludable group for 2015, but could they also be in the otherwise excludable group for 2016 since the earliest they would have to enter the plan is Jan. 1, 2017? In their analysis, the IRS cited Section 1.410(b)-7(C)(3) which describes otherwise excludable employees as “employees who satisfy age and service conditions under the plan that are lower than the greatest minimum age and service conditions permissible under section 410(a).” The use of the word “greatest” can be read to include the maximum waiting period of entry to the plan of the earlier of the first day of the plan year or 6 months after the date the employee has attained age 21 and completed 1 year of service in the determination of the otherwise excludable employee group. They also looked at the legislative history accompanying Section 410(b)(4)(C), which included the statement: “For purposes of the separate testing of excludable employees, employees who have not attained the statutorily permitted entry dates may be considered excludable employees.” This further supports the application of the maximum waiting period in the determination. However, when you review how separate testing under 410(b)(4)(B) works, Example 4 in 1.410(b)-6(b)(4) does not explicitly provide the waiting period be tacked on to the age 21 and 1 year of service requirement to determine the otherwise excludable group, and therefore does not support the application of the waiting period on top of the age 21 and 1 year of service requirement. While the IRS agreed it was acceptable to apply the maximum age and service requirements, including the maximum waiting period, it was not the only acceptable application. The IRS cited two other acceptable positions: (1) an employee is an otherwise excludable employee only until the date they meet the age 21 and 1 year of service requirement (there is no waiting period tacked onto that); and (2) an employee is an otherwise excludable employee only until the plan’s entry date after they meet the age 21 and 1 year of service requirement. For example, assume we have a calendar year plan with eligibility requirements of 3 months with an entry date of the first of the month following completion of the requirements. If an employee, age 24, is hired on Sept. 1, 2014, they would enter the plan on Dec. 12, 2014 and would be an otherwise excludable employee for 2014. However, for 2015 it would depend on our application of the entry dates as to whether they would be considered an otherwise excludable employee for 2016. If we use the statutory requirements of age 21 and 1 year of service, with the maximum waiting period they would be excludable until Jan. 1, 2017. If we use either of the alternative options of not imposing a waiting period, or use the plan’s monthly entry dates, they would not be excludable for 2016. Depending on the demographics of our group, a different application of the determination of the otherwise excludable employees could impact our nondiscrimination testing.

Hi Mike, These are the other 2 options for classifying otherwise excludable EEs: Option 2: The group includes participating employees only until the plan’s entry date after they attain age 21 and complete one year of service – in other words, they are treated as otherwise excludable until the date they would have entered the plan, using the plan’s entry dates, if the plan required age 21 and one year of service to participate. Option 3: The group includes participating employees until the actual date on which they attain age 21 and complete one year of service – in other words, no waiting period is tacked onto the maximum age and service conditions. EDIT - The EE is a HCE.

A plan is on a calendar year. EE is eligible to participate on their date of hire, and the entry date is the first day of the month coinciding with or next following the date they satisfy the eligibility requirements. EE was hired on 11/25/2015 and is >21 years old. There is no termination date. Until what date are they still considered otherwise excludable based on: Option 1: The group includes participating employees who have not satisfied the IRC Section 410(a)(4) entry date period applicable to them – in other words, they are treated as otherwise excludable employees until the earlier of the first day of the next plan year after attaining age 21 and completing one year of service or 6 months after satisfying such requirements. This is the maximum waiting period under the Code. Any comments or thoughts would be much appreciated! Thanks!