Should This Plan Be Filed?

[Scott]

I just don't do much work with prototype plans, so any help here would be greatly appreciated.

A client has adopted a non-standardized prototype 401(k) plan that has received a favorable opinion letter. My client elected "W-2 wages" as the definition of compensation, but also elected the following adjustments to the definition: (i) include amounts that are not includible in gross wages under Code Sections 125, 132(f)(4), 402(e)(3), etc., (ii) exclude reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation and welfare benefits, and (iii) exclude bonuses.

I've reviewed the regulations and it appears that adjustments (i) and (ii) preserve safe harbor status, but by excluding bonuses, this definition is not a safe harbor.

Annc. 2001-77 states that, unless otherwise provided, an employer cannot rely on a favorable opinion letter with respect to, among other things, Section 414(s). It also states that if an employer elects a safe harbor allocation formula and a safe harbor compensation definition, it can rely on an opinion letter with respect to 401(a)(4), 401(k) and 401(m). Because the client has not adopted a safe harbor definition of compensation, it apparently cannot rely on the opinion letter for those purposes. Does it therefore make sense to file for a determination letter, or is it not a big deal?

One other question: Annc. 2001-77 states that if the employer maintains or has ever maintained another plan covering some of the same participants, it cannot rely on the opinion letter with respect to Code Sections 415 or 416. My client has a defined benefit plan as well. Same question: Does it make sense to file the 401(k) plan?

Thanks!

[Blinky the 3-eyed Fish]

So you didn't make changes to the prototype's standard language, correct? If not, then the question is do you want the IRS to rule on operational issues affected by the non-safe harbor definition of compensation. The ruling would be good for only 1 year, but would confirm your methodology.