Top 20% election

[pmacduff]

I need help!!

I have a plan where the top 20% election is written into the Plan Doc. Based on the 2009 data, there would be 44 people in the top paid group for 2010.

At the end of 2010 when the 401k discrimination tests are run there are only 38 HCEs in the test. The test passes. I thought that it was ok to leave the test as is...the client's attorney (not an ERISA attorney) is saying that we need to add in another 6 people from the NHCE group to have 44 in the upper group because the top paid election is in the Plan Doc.

I thought the top paid group election was utilized in order to "reduce" the number of HCEs that have to be considered for the 401k testing which would therefore "help" the test when necessary.

If I had 50 people in the HCE category at the end of 2010, I could consider only the top 44 in my HCE group for the 2010 test.

Am I ok with only 38 HCE in my 2010 ADP/ACP testing?

Thank you in advance.

[Lou S.]

It depends on why the 6 employees are "missing". I've seen it before where some employees who were in the top paid group terminated before the end of the prior plan year and had no comp in the testing year. In that case your test may actually be correct as is.

[pmacduff]

The 44 comes from the prior (2009) count of 219 times 20% = 43.8 rounded up to 44 people to count in the top paid group election for 2010.

Now - when the actual ADP/ACP testing is run at the end of 2010 there are 38 highly compensation employees by definition.

Since the top paid election is written into the Plan Doc - do I HAVE to move 6 NHCE employees to the HCE group to test for 2010? Those NHCE employees are not HCE by any definition.

I'm trying to convey to the attorney that the top paid election is utilized if necessary, but you don't have to move up 6 NHCE employees to equal 44 if your test is already otherwise passing.

[Lou S.]

No if the employees are not HCEs because they are not 5%+ owners and do not earn over the dollar limit they are NOT HCEs. It does not matter if you are using the TPG or not.

We have some plans that use the TPG that sometimes have more than 20% over the dollar limit and other years where they have fewer than 20% over the dollar limit. typically when the work force is on commision and income varies with the economy a lot.

The TPG will only throw out some HCEs from the test, it will never bring in additional ees to the test. That is TPG election <= non-TPG election.

[pmacduff]

Yes - I agree with everything you said. Now I have to get the client's attorney to understand. The Plan is under IRS audit for the 2010 plan year. One of the things the auditor is asking the client to respond to is the fact that the Plan Doc states that the top paid election will be used. I advised the client that there were 44 to be considered in the TPG for 2010 based on the 2009 information, but that the TPG election isn't needed in 2010 because when we got to the end of the plan year there were only 38 HCEs. The client was including that in the response to the IRS audit followup.

The attorney is telling the client that because the top paid election is in the Plan Doc, it applies. I cannot seem to get him to realize that we can't add 6 people to the HCE group from the NHCE group to get to the 44 count. I read over the IRS notice relating to the TPG election and there isn't anything specific I can send the attorney to make my point!

I did send him some information from Sal's book and one example that states you don't add people back in, hopefully that will work. The sad part is that the IRS auditor will understand and be fine with the client's repsonse. The attorney is the one who is creating an issue.

Thanks again

[Mike Preston]

Maybe the attorney is saying that the plan is drafted so badly as to make those who the code and regs would consider NHCE's as being part of the group that is tested against to see whether the ADP test is passed or failed.

I would think this should be a document failure correctable under EPCRS rather than something which causes somebody who is not an HCE to be considered an HCE under the plan. In fact, if the lawyer insists on treating somebody who would otherwise be an NHCE under the code and regs as an HCE for any purpose under the plan I would run for the hills. The potential for abuse is frightening.

So, I would ask him to read 414(q). It is short and sweet and demands you to define, as of the first day of the year, everybody who is an HCE for the year in question, other than those who become 5% owners during the year.

Your description is a little bit off to me as to what you are doing. Under the code and regs you not only identify the number of HCE's, but you actually identify them as of the first day of the year (other than the 5% issue previously mentioned) BY NAME. You don't take the number of HCE's and apply that number to the census for the current year. We stopped doing anything with the current census (other than for 5% owners) after 1996!

How old is this lawyer?

[Bird]

It's hard to believe your document isn't clear on this. Note the word "and" below. You must have something similar; maybe it's in the basic plan document. Is the attorney billing by the hour for you to explain this to him?

"Highly Compensated Employee" means, effective for Plan Years beginning after December 31, 1996, any Employee who during the Plan Year performs services for the Employer and who:

(a) was a More Than 5% Owner at any time during the Plan Year or the preceding Plan Year; or

(b) during the preceding Plan Year (the Adoption Agreement may provide that the foregoing determination may be made with respect to the calendar year beginning with or within the preceding Plan Year)

received Testing Compensation in excess of the Code section 414(q)(1) amount ($80,000 as adjusted)

and

unless otherwise provided in the Adoption Agreement was a member of the top paid group of Employees within the meaning of Code section 414(q)(3).

[Peter Gulia]

Possibly to help pmacduff but also for a little learning among us, I'm interested in seeing what commenters think about two other ways that might resolve the situation.

First, in my experience, even some duller lawyers can welcome an opportunity to spot mistaken advice and correct it. The weaker the lawyer's relationship with his or her client, the more it helps if the other practitioner helps the lawyer outside of the client's view, and allows the lawyer to control his or her presentation of the revised advice. (A decent lawyer will at least thank you, and a good lawyer will tell your client that it was you who saved them from the lawyer's mistake.)

Second, a service provider's agreement often provides that the service provider is relieved from liability to the extent that the liability is caused or worsened by following the plan administrator's instruction. I've even seen such a provision state expressly that the service provider is relieved from liability even if the service provider actually knows that the plan administrator's instruction is wrong.

For example, pmacduff might ask the plan's administrator to confirm in writing its instruction on exactly which participants to include in or omit from the group of highly-compensated employees for the coverage and non-discrimination test services that pmacduff performs.

Many TPAs have told me that a contract provision about relief from liability for following instructions might work in a court of law, but won't work in the court of business reputation. They tell me that an employer/administrator expects its TPA to speak up and 'tell the emperor that he has no clothes on'. Is that your experience? If so, do you think that your client's expectation is fair or unfair? And do you worry that too often meeting such an expectation might make the service provider the plan's de facto administrator and so a fiduciary to the plan?

[pmacduff]

This attorney's issue is that the Plan Doc states that the Plan will use the top paid group election. He didn't like the fact that the client was responding to the auditor by saying that the TPG election was not needed in 2010 because there were only 38 HCEs by definition and those 38 were all included in the EOY 2010 testing; which passed.

This attorney is retiring as of 12/31/2012 but finishing up the audit work with the client.

The Plan Doc is a well known vendor's non-standardized 401(k).

[Bird]

By now, you should have 100% confidence that you are right and the attorney is wrong. Just be firm and keep repeating "that's not how it's done."

(FWIW, if it helps, I would use the phrase "not applicable" rather than "not needed" when you're talking about the TPG election.)

[pmacduff]

Good thought Bird on the verbage...I was trying to find a better way to say it and I like the "not applicable" as opposed to the "not needed" for the Plan year.

After reading through what I sent to him from Sal's book (including the example), the attorney "agreed with" my analysis and understood my position. Whew!

Thanks for all the input. I hope everyone has a safe, happy & healthy New Year!!!!

[Mike Preston]

Possibly to help pmacduff but also for a little learning among us, I'm interested in seeing what commenters think about two other ways that might resolve the situation.

First, in my experience, even some duller lawyers can welcome an opportunity to spot mistaken advice and correct it. The weaker the lawyer's relationship with his or her client, the more it helps if the other practitioner helps the lawyer outside of the client's view, and allows the lawyer to control his or her presentation of the revised advice. (A decent lawyer will at least thank you, and a good lawyer will tell your client that it was you who saved them from the lawyer's mistake.)

Second, a service provider's agreement often provides that the service provider is relieved from liability to the extent that the liability is caused or worsened by following the plan administrator's instruction. I've even seen such a provision state expressly that the service provider is relieved from liability even if the service provider actually knows that the plan administrator's instruction is wrong.

For example, pmacduff might ask the plan's administrator to confirm in writing its instruction on exactly which participants to include in or omit from the group of highly-compensated employees for the coverage and non-discrimination test services that pmacduff performs.

Many TPAs have told me that a contract provision about relief from liability for following instructions might work in a court of law, but won't work in the court of business reputation. They tell me that an employer/administrator expects its TPA to speak up and 'tell the emperor that he has no clothes on'. Is that your experience? If so, do you think that your client's expectation is fair or unfair? And do you worry that too often meeting such an expectation might make the service provider the plan's de facto administrator and so a fiduciary to the plan?

Peter,

It is fair.

And I don't worry about it making me a de facto administrator (fiduciary) to the plan.

I have always cited Shofer v. Hack:

http://www.leagle.com/xmlResult.aspx?xmldoc=1991416324Md92_1408.xml&docbase=CSLWAR2-1986-2006

If, based on those facts, the court comes to the conclusion that:

"For purposes of this appeal the respondents are not fiduciaries under the ... plan."

then I find it hard to believe that we can be construed as ERISA Plan Administrators unless our contracts make it clear that we are accepting that role.