ASPPA Q&A Question 2014 - Anyone hear the discussion?

[austin3515]

This was my question But the lame IRS answer was "to be discussed from the podium." Does anyone recall what was said? It's question 12 on the 2014 ASPPA Q&A. ASPPA's proposed response was basically an argument agains the IRS's interpretation on the matter.

Plan A is a calendar year 401(k) Plan that provides the basic safe harbor match. The Plan holds

“regular” matching contributions from prior plan years that are subject to a vesting schedule. The

Plan is top-heavy and at least one key employee receives total allocations of more than 3% of 415

Compensation.

For the 2015 plan year, only deferrals and safe harbor matching contributions are to be made.

There are $3,500 forfeitures of regular matching contributions waiting to be used. They cannot be

used to reduce the safe harbor match under IRS policy. If the forfeitures are allocated, the plan

will fail to be exempt form the top heavy rules, and a top-heavy minimum will be required. The

top-heavy minimum (after using the safe harbor match to offset the top-heavy minimum, as is

permitted) is about $90,000. The safe harbor match is only $45,000.

Is the plan forced to reallocate the $3,500, giving rise to an additional contribution obligation of

$90,000?

[ETA Consulting LLC]

It's always a plan design issue. Keep in mind that you may use the $3500 forfeiture to allocate a safe harbor match under 401(m)(11); you know the one that does not have to be 100% vested. This will ensure that all contributions continue to fall under the ADP [401(k)(12)] and ACP [401(m)(11)] safe harbors.

Good Luck!

[austin3515]

I am aware that would be the obvious choice. The point of the question was to highlight a very very real phenomenon that is going to catch a lot of "bundled" plan sponsors off guard. I'm telling you it is going to happen, and it's all because of an overzealous indirect interpretation of a rule. That;s what I was trying to highlight. So I'm curious to know what the IRS said in response.

[ETA Consulting LLC]

I understand your point and agree, but for potentially different reasons. Everything catches bundled plan providers off guard. Most clients I acquire are from a service failure of a bundled provider. When designing a plan, you have to understand how it is going to operate and the design the plan to avoid these pitfalls. "IF" you know the Top-Heavy exemption is important, then you know the alternatives to include in the plan design in order to prevent a $100,000 surprise to your client.

Not being argumentative, but if you see the potential of the plan 'blowing up', then you add your value by eliminating that potential.

Good Luck!

[austin3515]

I understand your point and agree, but for potentially different reasons.

Sounds like the exact same reason. This was a public service question for all those bundled providers whose ignorance will cause potentially irreparable harm.

If I could them as a client, rest assured I will take care of it for them. I would just hate to win the business only after this monster rears its ugly head...

[John Feldt ERPA CPC QPA]

Perhaps the plan document could be written to say that if the plan intends to utilize the safe harbor top-heavy exemption, that any allocation of forfeitures would be applied as an ACP-free discretionary match following all the rules that apply for an ACP-free discretionary match. And the basic plan document could say that this allocation could be applied regardless of whether or not the adoption agreement itself even provides for such a match.

[austin3515]

Now that would have been a very very very smart thing for Corbel to do. I don't think they did that, but I am going to email them with that suggestion...

Very very cool observation.

[John Feldt ERPA CPC QPA]

I think their sister document, PPD, has language like that. Hmm, I wonder where they got the idea. I talked to Robert and he is aware of this.

[austin3515]

Good thing I gave you credit, cuz I just emailed him