Pending Guidance

[Guest Napili]

I understand that the IRS will be issuing pending guidance regarding 401k and 401m testing and the definition of HCEs. Does anyone know the status if this and any idea what the guidance will be? What changes are they making?

[Mike Preston]

I have heard that they are scheduled to be released before 4/30/2003. Of course, the 1987 401k regs were originally scheduled to be released in 1984. So look for them some time before 2006. Until they actually go out the door, delay is possible.

Please, please, please let them clarify that it is acceptable to amend the Top-Paid Group election until the due date of the IRS Form 5500 for the year, with extensions.

[MGB]

Although no one knows how they will accomplish it (or under what authority), they have repeatedly said they will outlaw bottom-up QNECs. Wickersham and others continually call what they are targeting as "abusive", although they may cause problems for reasonable, unabusive practices, too.

The only way I can think of that they could structure a rule to accomplish this is to require QNECs be given to all NHCEs or some significant proportion and/or not allow too large of differences between the percentages given to the different individuals. A different approach may be to say X% QNEC can be given to any small number of employees, but anything in excess of X% must be given to a minimum number of employees.

Beyond that, the regulation is supposed to just be pulling together all historical guidance on 401(k) into one place (this is really supposed to be omnibus in the biggest sense) without actually changing it.

At one point, it was scheduled to be released by the end of last summer (and probably even earlier than that).

[Guest qwert]

That's curious about bottom-up QNECs. I put such an arrangement into an M&P plan document that was approved. (I think the check-box might have even said "Bottom Up QNEC".) And it didn't just fly by the reviewer either, as he brought it up with his manager who focused on it. I can't think of any statutory basis for outlawing them as ADP is a mechanical test, but that's not to say IRS won't dream one up. Well, a lot of old-timers at IRS don't like elective tax deferrals (401k, 125) and view their job as reigning them in (e.g., the outlandish 125 regs).

[Kirk Maldonado]

The IRS and Treasury didn't have any trouble with bottoms-up QNECS. The issue came up in the legislative history when Congress raised the Section 415 percentage limit from 25% to 100%.

[MGB]

That language was requested by Treasury. They have been focusing on this long before the change in law. The change in law would exasperate the problem that they saw, so they wanted the legislative history to give them some ammunition to do something about it.