|News from NIPA.org, July 13, 2011|
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The Latest Q&As for TPAs
Is compensation for matching contribution purposes limited to $245,000 (IRC Section 401(a)(17) maximum) or is total compensation matched?
Yes, compensation for matching purposes is limited to the 401(a)(17) limit of $245,000. See §1.403(b)-5(A)(1)(II).
We have a married participant that is now deceased. He elected his children as beneficiaries on the designation form; however his spouse did not sign a consent agreeing to the beneficiary designation and waiving her right to the benefit.The spouse is not arguing that the benefit should be distributed as listed on the designation. Can she sign a consent now waiving her right to the benefit?
She can sign a qualified disclaimer, which will make the children the beneficiaries. The disclaimer must be signed by the spouse not later than September 30 of the calendar year following the calendar year of the participant's death.
§1.401(a)(9)-4, A-4(a) provides that "if a person disclaims entitlement to the employee's benefit, pursuant to a disclaimer that satisfies section 2518 by that September 30 thereby allowing other beneficiaries to receive the benefit in lieu of that person, the disclaiming person is not taken into account in determining the employee's designated beneficiary."
Take-over plan is a 3% safe harbor plan. Per the adoption agreement, the employer will make the safe harbor contributions for each participant who is eligible to make deferrals.
For this plan, there are four partners who all received K1 well over $245,000. Also note that all four partners were eligible to defer.
Last plan year, the previous TPA stated that two of the partners did not have to receive the 3% safe harbor while the other two partners can receive the 3% safe harbor. In other words, it would be up to the individual partners to decide whether or not they want to receive a 3% safe harbor. Is this allowed?
No. If the partner can decide each year whether or not a safe harbor contribution will be made for that partner, the contribution is an elective deferral, not an employer non-elective contribution. Section 1.401(k)-1(a)(6)(i) provides that "In the case of a partnership, a cash or deferred arrangement includes any arrangement that directly or indirectly permits individual partners to vary the amount of contributions made on their behalf."
There is an exception for matching contributions under 1.401(k)-1(a)(6)(ii). This also would be a plan document violation, based on the information provided.
Can a plan document state (explicitly) that participants can continue to defer after a hardship distribution?
The short answer is, a plan document cannot state that participants can continue to defer after a hardship distribution.
A plan document is permitted to use the safe harbor for determining whether there is an immediate and heavy financial need, but use facts and circumstances to determine whether a hardship distribution is necessary to satisfy the immediate and heavy financial need.
For purposes of the facts and circumstances determination, section 1.401(k)-1(d)(3)(iv)(C) provides that "...an immediate and heavy financial need generally may be treated as not capable of being relieved from other resources that are reasonably available to the employee, if the employer relies upon the employee’s representation...that the need cannot reasonably be relieved...by cessation of elective contributions or employee contributions under the plan."
Under this provision, a plan is not required to suspend deferrals for six months following a hardship distribution. However, if suspending deferrals for six months will relieve the hardship, the deferrals must be suspended. In other words, a plan document can require the six month suspension, but a plan document cannot exclude a six month suspension as a means to satisfy the need.
Sponsor has a 401(k) plan (not safe harbor) and everyone over 21&1 is eligible. Employee A does not defer. Employee B does.
Are A and/or B excluded for the concentration test if they both terminate with less than 500 hours? (Assume all of the other conditions to be excluded are met.) Or must they be included since they "benefited" in the 401(k)?
They must be included since they benefited in the 401(k) (sorry). See §§ 1.410(b)-3 (a)(2)(i) and 1.410(b)-6(f)(1)(i).
I have a top heavy 401k plan where the key employees are excluded from contributing since the employer doesn't make an employer contribution. If the employer were to allow for voluntary after tax contributions, would the contributions made by the key employees trigger the requirement that an employer contribution be made to satisfy top heavy?
Yes. § 1.416-1, T-28A provides that "the accrued benefits attributable to employee contributions are considered to be part of the accrued benefits without regard to whether such contributions are mandatory or voluntary."
The goal with this new comp allocation is (generally speaking) to maximize the owner at the $49K limit and minimize all other participants. The plan is top heavy. The 414(s) Compensation test fails when excluding bonuses and commissions (spread is about 7% between HCEs and NHCEs). The plan satisfies the 5% gateway minimum based on 415 compensation — the plan is top heavy and therefore the non-keys needed to be brought up from 3% to the gateway minimum. When calculating the allocation rates using the plan's definition of compensation, every participant is getting a different rate (when compared to the allocation rates calculated using the 415 compensation and 5% gateway minimum).
1. Based on LRM #94 and the limits on the number of NHCE allocation rates, since the plan is using a prototype document, are the NHCE allocation rates based on the plan's definition of compensation or 415 compensation?
The plan's definition.
2. Assuming the number of NHCE allocation rates is limited based on #1 above, and since the NHCEs must get 5% of 415 compensation to pass the gateway minimum, it appears that the plan's definition of compensation may be moot and therefore if we are "forced" to use the 415 compensation based on the facts presented and to pass compliance testing, does the plan's definition of compensation need to be amended?
The plan's definition of comp is used to determine the allocation rate. Because the top heavy and gateway allocations are based on 415 compensation, it appears each NHCE's allocation is at a different rate (using the plan's definition of compensation). This is not a 414(s) issue; it is a plan document issue. It results in more NHCE allocation rates than is permissible under LRM #94, which means that there are more NHCE allocation rates than is permissible under the plan document.
The solution is to allocate contributions such that each NHCE gets at least the gateway minimum based on 415 compensation and the number of NHCE allocation rates does not exceed the maximum allowed under the plan document, based on the document's definition of compensation.
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