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News from, March 21, 2012
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The Latest Q&As for TPAs

Q: Last year, the prior TPA on a takeover case first reduced an HCEs deferral by $5,500 before calculating a QNEC (he  was well below $16,500). Is this an acceptable way to pass ADP? 

A: Nope. The amount of a participant's deferral that becomes catch-up is the amount of the deferral that exceeds a statutory, regulatory or plan imposed limit. Assuming the only limit that applies to the situation at-hand is based on the ADP test results (taking into account any QNECs or QMACs), the amount of the catch-up is the amount of the HCE's deferral that would otherwise be distributed to correct the ADP test failure.  A plan cannot designate a deferral amount as catch up and exclude that amount from the ADP test.  

The preamble to the final (2003) regulations provides that "The ADP limit is the highest dollar amount of elective deferrals that any highly compensated employee (HCE) is reason of the ADP test. The ADP limit is determined after taking into account all elective deferrals (other than elective deferrals that are catch-up contributions because of an employer-provided limit or statutory limit) and qualified non-elective contributions or qualified matching contributions for the plan year...".

A small employer that sponsors a defined benefit plan midyear sold off their company’s assets in February of 2011. All rank and file employees became employees of the purchaser at that time. In years past they were covered by the PBGC.  Now the only the husband and wife are the employee.  They are both 50% owners.  They also sponsor a defined contribution plan.

Q: When does their plan cease being subject to the PBGC?

A: The first day of the plan year beginning after the plan year in which the employees' benefits are distributed from the plan. If all benefits (except the owners') were distributed in 2011, the plan is not covered by PBGC in 2012. 

Q: Assuming their plan is no longer subject to the PBGC, when would the DC IRC 404 deduction limit shift from 25% to 6%; "midyear”, beginning of year, end of year?

A: The DC IRC 404 deduction limit would shift from 25% to 6% on 1/1/12; effective for the 2012 plan year. A participant is defined in section 4006.6. Under § 4006.6, an individual is considered to be a participant in a plan on any date if the plan has benefit liabilities with respect to the individual on that date.  A plan’s participant count for PBGC premium purposes is generally determined as of the last day of the prior plan year. A terminated participant who has been paid out prior to the date used to determine the participant count (12/31/11) would not be included because the individual is not a participant.   (§§4006.5(c) and 4006.6(b)(2)(ii), PBGC Opinion 90-6).

Q: A client company is a professional group and now has less than 25 vested participants which is not subject for the PBGC premium filing. Can I file the cessation of covered status as the final filing?

A: No. Once the plan has 25 active participants, the plan cannot go back to being exempt. Act Sec. 4021(b)(13).

Q: An S-Corp has a 401(k) plan.  The document has no exclusions to compensation.  The owners W-2 is increased by Deferred Compensation box 12b Code Y.  However, they are not paid this, it is just for tax purposes.

Should this be counted as compensation for ADP/ACP testing?

A: Yes (include). Section 1.415(c)-2(c)(1) provides that "The term compensation does not include...Contributions...made by the employer to a plan of deferred the extent that the contributions are not included in the gross income of the employee for the taxable year in which contributed". That can be restated (removing the "nots") as "The term compensation includes contributions made by the employer to a plan of deferred compensation to the extent that the contributions are included in the gross income of the employee for the taxable year in which contributed."

Q: There is one surgery center with 5 owners at 20% ownership each.  Each owner then has his own medical practice that he owns at 100%.  It has been determined that the surgery center is a FSO and each practice is an A-org to that FSO.  We have combined all companies for testing purposes and they pass. It is also determined that each of the owners' own companies can be considered a FSO and the main surgery center A-org to each of those FSOs. This means there are 5 ASGs under this scenario.  

Do we need two do a test between each FSO and the surgery center as the A-org and pass each one? Or does the testing we preformed with the surgery center as the FSO and every entity as A-orgs included in that test suffice?

A: The regulations do not quite address this. However, there is nothing in the regulations (or elsewhere) that suggests you have to do a second set of tests between each FSO and the surgery center. Once we have determined that there is a single ASG encompassing all of the entities, we are not required to determine of there are separate ASGs within the single ASG.

Q: In processing a takeover 401k plan, it was discovered that the owners of the takeover 401k plan (Company A) are owners of another company (Company B). The ownership is 50/50 for both A and B companies. After researching, it was brought to our attention that these plans are in fact a control group. The plan designs are not similar. Company A has Safe Harbor match, Company B does NOT have Safe Harbor. There are also difference in legibility requirements, vesting schedules and entry dates. Furthermore, we are currently a TPA to Company B. We had no information that there was another company and/or control group/affiliated company. Therefore, we tested plan B (Company B) by itself; individually. In summary, the plans were not tested together as a control group.

As we are now taking over the other plan, we need to know how to handle this issue. Is there a correction? What is the process?

If two plans that are a control group were never tested together, is there a correction? If so, what is the process for a correction in testing for prior years?

A: First you need to test the plans separately, on a controlled group basis.  Each plan must pass coverage testing under section 410(b), treating the employees of the other company as non-excludable and not benefiting.  If each plan passes 410(b) on that basis, the plans do not need to be aggregated for nondiscrimination testing. In that case, there is no correction to make.  If the plans do not pass 410(b) as described above, the correction generally would be to retroactively amend the plan that is not passing on its own, adding a sufficient number of the other company's NHCEs to pass coverage. Additional contributions would also have to be made for these NHCEs. Check the plan document first, though, for any provisions for correcting a coverage failure.

The retirement plan has previously elected the top paid group election. There are no owners or key employees in the retirement plan. The plan has immediate entry into all components (employee deferral, matching and profit sharing) so all employees are also participants in the plan. The union employees account for 16% of the total work force. The retirement plan covers the union employees. Half of the work force was reduced either by termination or retirement during 2010 creating some lingering issues.

Q: Since the union employees represent less than 90% of the total workforce and are covered under the retirement plan, do I include the union employees when calculating the 20% top paid group?

A: Yes, include.

Q: Determining the first two HCEs by highest compensation presented no problems. The third highest paid employee retired during 2010. Do I just drop down to the employee with the next highest compensation?

A: Former employees excluded in determining top-paid group. In addition, former employees are not counted as employees for purposes of determining the number of employees in the top-paid group.

Q: If I do just drop down to the employee with the next highest compensation, that employee is also in the union. Am I required to prepare a separate ADP test for just union participants and a separate ADP test for just non-union participants? Or, are the union participants totally excluded from ADP testing?

A: You need to run two separate ADP tests.

Q: If I am required to include the union employees when calculating the 20% highest paid group, the calculation results in the same number of HCEs as would be determined if just compensation above 110,000 were utilized. Would this require the plan to amendment away from the top paid group? I would prefer to not have to amend away from the top paid group as this would present a host of other problems.

A: If the plan is using the top paid group election, it must be stated in the plan document.  If the top paid group election has been used in prior years and you don' want to continue to use it, the plan document must be amended.  If you have the same HCEs whether or not you use the top paid group election, I see no reason to amend.

TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and

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