Ramification of -11g amendment

[jquazza]

I picked up a new comp plan. Previous TPA calculated PS contribution which ends up failing the general test. I understand I can still fix it with an amendment. My question relates to any penalties or excise tax associated with it.

I seem to remember that if we the sponsor makes the additional contribution by 10/15 and wants to take the deduction for the previous year, it will be associated with a 10% excise tax.

What if the sponsors takes the deduction in 2015. Is it just a 415 issue and as long as I don't have one, there's no penalties?

[rcline46]

Before assuming the test fails, request the test from the prior TPA for your records, and see why it just might have passed.

[jquazza]

I am not assuming anything. it seems they were careless and in the report they sent the client, you clearly see an HCE with an EBAR higher than anyone else.

[Mike Preston]

I seem to remember that if we the sponsor makes the additional contribution by 10/15 and wants to take the deduction for the previous year, it will be associated with a 10% excise tax.

Where does this stuff come from?

[Mike Preston]

I am not assuming anything. it seems they were careless and in the report they sent the client, you clearly see an HCE with an EBAR higher than anyone else.

Grouping?? Restructuring where they got lazy and only printed it one way? (the wrong way) I'm never convinced a test fails unless I can put the data in my own system to confirm. Have you done that?

[shERPA]

I seem to remember that if we the sponsor makes the additional contribution by 10/15 and wants to take the deduction for the previous year, it will be associated with a 10% excise tax.

Where does this stuff come from?

That's creative, to say the least.

[jquazza]

Mike, I'm probably getting confused. I had dealt with a similar case a long time ago. I think it was subject to the minimum funding rules and that's why we had the excise tax.

Anyway, that test is failing and there's no way around that. There's an HCE with an EBAR more than twice of any NHCEs (using DOE comp). The report from the previous TPA doesn't show any analysis that says the plan passed. ABT passes but that's not enough.

So, I need an 11g amendment by 10/15 to increase one NHCE's contribution.

If funded by 10/15, i can count it as 2014 contribution. Can I deduct it in 2015 anyway with no excise tax?

If funded after 10/15 and before 12/31. Count the contribution in my 2014 general test, but in 2015 415 and that's it? No excise tax either?

[Mike Preston]

You may not need an amendment. Depends on document language. If funded on or before due date of tax return plus 30 days (so 10/15 is correct *IF* on extension to 9/15) it counts for 415 purposes in the prior year. If funded after 10/15 and before 11/14 then it counts for 415 purposes in the prior year if on extension to 10/15. Counting the contribution for 415 purposes in the current year is rarely a problem unless the recipient terminated employment very early in the current year.

How many people in the plan? Share the data (no names or SSN's please) if you feel like it. Until I see the data I'm never convinced that a plan fails.

There would only be an excise tax if the contribution for 2015 ends up being non-deductible in some way. Almost unheard of (theoretically possible but highly, and I mean *HIGHLY*, unlikely).

[jquazza]

Here's the original test. For NHCE2 I used DOE comp hence the higher contribution rate.original failing test NO NAMES.pdf

[Mike Preston]

Yes, that test says it fails. I thought you said you had a report that didn't indicate whether the test passed or failed?

I didn't ask for the test, I asked for the data. If you don't know the difference, somebody else should be asking for you.

DATA

Date of Birth

Date of Participation

Current year salary

Current year allocation amounts (broken down by source: discretionary ER contributions, deferrals, QNEC's, safe-harbor, safe-harbor-match, etc.)

If you want to do a thorough job (people rarely do), the data necessary to do an accrued-to-date analysis:

End of year account balances by source (i.e,. 12/31/2014 account balances, inclusive of 2014 contributions)

Number of years where participant received ER allocations (usually all years of participation)

As much compensation history as you can get (at least 3 years)

[Tom Poje]

based on the limited data, there is another possibility - and I've seen it arise often enough.

3 HCEs are shown on the minimum gateway test at 5.26%.

If it is one of those HCEs that is causing the test to fail (e.g. they are the owners kid and they are 21 and the NHCEs are age 30 then the plan would have a chance of passing using component plan testing.

e.g. pretend you have 2 plans, one plan has the young HCE and one NHC. test this on an allocation basis. (all other employees included at 0

and the other plan consists of all other employees. tested on an accrual basis. treat the 2 people as 0

[Mike Preston]

Let's be more specific, Tom. Run 1 test with HCE5 and nHCE1 set to zero. Cross-test that plan. It should pass. That plan satisfies coverage at (2/3) / (4/6) = 100%. Run a second test with everybody other than HCE5 and nHCE1 set to zero. Test that plan on the basis of contributions. It should pass. That plan satisfies coverage at (1/3) / (1/6) = 200%.

I'm not saying that the plan will definitely pass using the above technique because in the absence of seeing the data there is just no way to be sure.