Outline of concerns regarding the qualification status of my 401k plan

[Guest Miller426]

A. Treasury Regulation 1.401-1(a)(2) A qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer...(ii) In the case of a profit-sharing plan, to enable employees or their beneficiaries to participate in the profits of the employer's trade or business, or in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under section 404(a)(3)(B), pursuant to a definite formula for allocating the contributions and for distributing the funds accumulated under the plan (see paragraph (b)(1)(ii) of this section)

#1 Issue with respect to the safe harbor match -

#1.1 Information provided concerning validity of payroll based safe harbor match:

paragraph 3.02 of the Basic Plan Document, “the matching contribution amount may be determined by the employer at any time during the Plan Year so long as the amount of the matching contributions is determined in a uniform and nondiscriminatory manner”. In summary, our 401k plan is fulfilling its safe harbor match obligation (4%) by submitting matching contributions at the same time it submits elective deferrals.

#1.2 Issue:

No participant can calculate his or her match with certainty. They will only know it after it has been it has been determined and deposited. The match provisions of this paragraph also contradict the safe harbor notice which provides for 100% of elective deferrals up to 4% of compensation annually.

#2 Issue with respect to deferral suspension on account of participant loans -

#2.1 Information provided concerning suspension of deferrals on account of participant loans:

No documentation has yet been provided that states the plan has ever restricted elective deferrals on account of a participant loan. A statement was first made that federal regulations prohibit deferrals while making loans payments, which was subsequently reduced to a statement that there were agreements in the prior plans that created this restriction.

#2.2 Issue:

If such a plan provision existed it was not disclosed in the SPD, loan policy, or loan application and it still has not been shown to be a plan provision at any time via a reference to a plan document or an actual copy of the plan document. A participant would have determined their deferrals to continue based on the documentation provided to the participant. I would venture to say most participants would have taken at face value an assertion that there are federal regulations which prohibit concurrent deferrals and loan repayments. I doubt many participants would know they were denied benefits to which they were otherwise entitled if in fact the plan provision to restrict deferrals never existed or were denied benefits if the provision existed while the plan was a safe harbor plan.

B. Treasury Regulation 1.401(k)-3©(5)(ii) Periodic matching contributions. The safe harbor matching contribution requirement of this paragraph © will not fail to be satisfied merely because the plan provides that safe harbor matching contributions will be made separately with respect to each payroll period (or with respect to all payroll periods ending with or within each month or quarter of a plan year) taken into account under the plan for the plan year, provided that safe harbor matching contributions with respect to any elective contributions made during a plan year quarter are contributed to the plan by the last day of the immediately following plan year quarter.

#3 Issue with respect to safe harbor match -

#3.1 Information provided concerning validity of payroll based safe harbor match:

paragraph 3.02 of the Basic Plan Document, “the matching contribution amount may be determined by the employer at any time during the Plan Year so long as the amount of the matching contributions is determined in a uniform and nondiscriminatory manner”. In summary, our 401k plan is fulfilling its safe harbor match obligation (4%) by submitting matching contributions at the same time it submits elective deferrals.

#3.2 Issue:

The paragraph provided states the contribution amount may be determined by the employer at any time. It does not say the contribution amount will be determined on a payroll basis.

C. Treasury Regulation 1.401(k)-3©(6) Permissible restrictions on elective contributions by NHCEs —(i) General rule. The safe harbor matching contribution requirement of this paragraph © is not satisfied if elective contributions by NHCEs are restricted, unless the restrictions are permitted by this paragraph ©(6).

(ii) Restrictions on election periods. A plan may limit the frequency and duration of periods in which eligible employees may make or change cash or deferred elections under a plan. However, an employee must have a reasonable opportunity (including a reasonable period after receipt of the notice described in paragraph (d) of this section) to make or change a cash or deferred election for the plan year. For purposes of this paragraph ©(6)(ii), a 30-day period is deemed to be a reasonable period to make or change a cash or deferred election.

(iii) Restrictions on amount of elective contributions. A plan is permitted to limit the amount of elective contributions that may be made by an eligible employee under a plan, provided that each NHCE who is an eligible employee is permitted (unless the employee is restricted under paragraph ©(6)(v) of this section) to make elective contributions in an amount that is at least sufficient to receive the maximum amount of matching contributions available under the plan for the plan year, and the employee is permitted to elect any lesser amount of elective contributions. However, a plan may require eligible employees to make cash or deferred elections in whole percentages of compensation or whole dollar amounts.

(iv) Restrictions on types of compensation that may be deferred. A plan may limit the types of compensation that may be deferred by an eligible employee under a plan, provided that each eligible NHCE is permitted to make elective contributions under a definition of compensation that would be a reasonable definition of compensation within the meaning of §1.414(s)–1(d)(2). Thus, the definition of compensation from which elective contributions may be made is not required to satisfy the nondiscrimination requirement of §1.414(s)–1(d)(3).

(v) Restrictions due to limitations under the Internal Revenue Code. A plan may limit the amount of elective contributions made by an eligible employee under a plan—

(A) Because of the limitations of section 402(g) or 415; or

(B) Because, on account of a hardship distribution, an employee's ability to make elective contributions has been suspended for 6 months in accordance with §1.401(k)–1(d)(3)(iv)(E).

#4 Issue with respect to deferral suspension on account of participant loans -

#4.1 Information provided concerning suspension of deferrals on account of participant loans:

No documentation has yet been provided that states the plan has ever restricted elective deferrals on account of a participant loan. A statement was first made that federal regulations prohibit deferrals while making loans payments, which was subsequently reduced to a statement that there were agreements in the prior plans that created this restriction.

#4.2 Issue:

If such a restriction existed in the plan at any time it was a safe harbor plan it was not a permissible restriction at least with respect to non-highly compensated employees. I do not know if the existence of a restriction is sufficient error that needs to be corrected or if a correction is only necessary if at least one non-highly compensated employee was affected.

D. EPCRS correction method for the exclusion of eligible employees can be found in Rev. Proc. 2006-27. They provide for a QNEC contribution equal to 50% of the missed deferrals and 100% of the missed match, adjusted for earnings.

#5 Issue with correction method

#5.1 Information provided concerning correction:

It was verbally communicated that a contribution equal to 50% of the missed deferral would be added to the next contribution file as well as a contribution equal to 100% of the missed match. It was communicated that the deferral portion would be added to the deferral made for the next period and the match portion would be added to the match made for the next period.

#5.2 Issue:

The corrective contributions are not being processed as QNECs and no adjustments for earnings are included. This may not be a problem if the other recent participant affected and I are the only participants affected, but the EPCRS correction may need to be used if there are other participants affected as identified in issue #4.

[J Simmons]

You certainly have a number of concerns/issues.

[Guest Miller426]

Yes. If any are not legitimate in anyone's opinion I would rather know that sooner than later. I am genuinely concerned that the plan has qualification issues. I am trying my best to make sure the plan assets are protected. If there is something I do not understand I would appreciate being informed. I am just trying to do the right thing here.

[Guest Miller426]

In an effort to better communicate with my employer I have prepared the following questions. Comments welcome. The sooner the better.

Are operations under all plan documents, past and present, relevant to the qualification status of the plan? If not, why? If so, is there any issue with a plan fiduciary believing them to be irrelevant?

When did the plan first become a safe harbor plan?

Did the plan ever have a provision in the plan document to restrict deferrals on account of a loan? If so, when did it become effective and when was it amended to be removed from the plan? If not, were there any participants whose deferrals were suspended on account of a loan?

If the plan did have a definite written provision to restrict deferrals on account of loans, was this communicated to participants? If ever it

was not, does this represent a qualification or fidicuiary issue? If so, how should it be corrected to protect plan assets and/or plan fiduciaries?

If the plan did have a definite written provision to restrict deferrals on account of loans, were there any participants with suspended deferrals on account of a loan when the restriction was removed from the plan? If so, were they notified that they were eligible to resume deferrals or were their deferrals automatically resumed?

Were there any deferrals by non-highly compensated employees that were restricted on account of a loan while the plan was a safe harbor plan? If so, is the EPCRS correction method for exclusion of eligible employees being used to correct their accounts? Does the VCP option under EPCRS need to be used if any of these participants were affected in plan years prior to 2007, assuming corrections for participants affected in 2007 will be completed by 12/31/2009?

When did the plan first provide for a payroll based safe harbor match? Did the language of the plan specifically state that the safe harbor match will be determined on a payroll basis?

In any years the plan was a safe harbor plan that had a safe harbor match based on annual compensation, was a true-up match made after the end of the plan year or determined to not be needed? If not needed, what was the basis of that determination?

Was a safe harbor notice ever provided to participants with incorrect information? If so, does the safe harbor notice control? If the safe harbor notice does not control, how is the incorrect notice remedied?

Do the answers to any of these questions result in qualification issues as they relate to treasury or ERISA regulations including, but not limited to, Treasury Regulations 1.401-1(a)(2), 1.401(k)-3©(5)(ii) and 1.401(k)-3©(6); and 29USC1104. If there are issues are they capable of being corrected under EPCRS and/or VFCP?

[Mike Preston]

Strangely enough, and I don't mean to minimize your efforts, you aren't really entitled to an answer to these questions. As a participant, you are entitled to ask questions about your accounts and your benefits and about the plan's documents and disclosure items. But you aren't entitled to information regarding other participant's benefits or accounts, I don't think.

I understand that you are just trying to help, but I doubt your employer will see it that way.

They might, especially if they perceive that you might take your concerns to a governmental agency if they don't bring you in to the situation. But I still doubt it.

Keep us informed as to what your employer decides to do, as I, for one, am interested in the outcome.

[Guest Miller426]

I'm not asking for names, I am just trying to help them determine where the issues may lie. Are you saying they aren't allowed to tell me or any participant if there have been failures or what is or has been done to correct them? I have no interest in knowing actual participants or actual amounts if there is money involved. I am just interested in knowing if they exist and the correction methodology that will be used. Some of my questions don't involve questions about other participants. If you could let me know which questions specifically they are not allowed to answer I will remove them. It seems to me I should be given enough information for me to reasonably conclude that my assets are in a qualified plan. I have no intention of reporting this to a governmental agency. As I told my employer I want to resolve these matters through the internal process. I have come to this site to educate myself. Thank you for letting me know some of my questions may be out of bounds. Please continue to educate me so that I don't make any mistakes that would possibly create another qualification issue.

[Bird]

As Mike notes, you're not entitled to some of, if not a lot of, these questions. If it makes you feel any better, I would not worry at all about the IRS disqualifying the plan. I would just zero in on how you were disadvantaged, if at all, by the improper implementation of a deferral restriction after taking a loan, and the annual vs. payroll match issue, and be content to fix it going forward and maybe for the recent past. FWIW. And do keep us posted.