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News from, August 10, 2011
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The Latest Q&As for TPAs

Q: We have a plan that would like to change from the prior year testing method to the current year testing method. They would like this change to be effective in 2011. The plan typically fails the ADP/ACP test every year.    Are there any issues with changing from the prior year to current year testing method midyear?  

A: No. The amendment must be adopted before the last day of the plan year and will apply as of the first day of the plan year.  Notice 2005-95 provides that a discretionary amendment must be adopted by the end of the plan year in which the plan amendment is effective.   

Q: The provider is making the client sign a representation letter that basically states this will not result in a reduction in benefits or any violation of the Internal Revenue Code section 411(d)(6) and that the amendment does not violate the anti-abuse provision discussed in IRS Notice 98-1.

A: This is unnecessary, but if it makes the provider happy, there's no reason not to sign. As a technical matter, if the provider has any potential liability under ERISA with regard to the amendment, making the client sign a representation letter does not relieve the provider of such liability. If the provider does not have potential liability under ERISA, the letter is irrelevant.

The amendment will not result in a reduction in benefits or any violation of the Internal Revenue Code section 411(d)(6), and the amendment does not violate the anti-abuse provision discussed in IRS Notice 98-1. Note that the current anti-abuse provision referred to is under §1.401(k)-2(a)(6)(vi) of the final regulations, published on 12-29-04, last updated on 2-23-2009.

Q: A plan uses the prior year testing method and excludes bonuses and overtime from the plan's definition of compensation which is eligible for deferrals.

In the prior year, the plan passed 414s compensation testing and performed the ADP test on "Plan Compensation" which excluded both overtime and bonuses. For the current year, the plan again passes 414s test but has better testing results when "415 Compensation" is used for testing (i.e., including bonus and overtime). Is this okay?  In short, the compensation used in the prior year NHCE ADP% excluded bonus and overtime (and passed 414s) but the current year ADP for the HCEs includes bonus and overtime (also 414s compliant). The next year's percentage will be based on the NHCE ADP of this year including bonus and overtime. As long as the compensation in both years meets 414s requirements, can either definition of compensation be used (i.e., included bonus and overtime in one year but not the next)?

A: No. You must use the same definition of compensation for HCEs and NHCEs for the ADP testing purposes. You cannot use two different definitions under the same test, regardless of whether they both satisfy 414(s) (§1.414(s)-1(b)(2)(i)).

Q: The first plan year for a new defined benefit plan is 7/1/10 - 6/30/11. This plan is adopted 6/8/2011. The only participant is the owner. He turned 70 1/2 on 12/11/99. When is this participant required to take his first minimum required distribution from the defined benefit plan?

A: Assuming this participant has a vested accrued benefit on or before 12/31/11, distributions must begin not later than April 1, 2012 (§1.401(a)(9)-6, A-5(a)).

Q: A former participant in a 401(k) plan wants to rollover his vested interest to his son's college tuition fund (529 Plan). Can the 401(k) distribution be rolled over to a 529 Plan?

A: No; a 401(k) plan distribution cannot be rolled over to a 529 plan (IRC 402(c)(8)(B)).

Q: I have a client who has a defined contribution plan (profit sharing) with a minimum required deferral amount. The client insists that previously the law allowed them to only include the years the employees made the contributions for the purpose of calculating years of service for a matching formula. The plan has a formula that gives additional matching for those employees who have been there longer. In other words, if you deferred in 2004, 2005, did not defer in 2006, deferred in 2007, and deferred in 2008, you would have 4 years of participation counted. Is this permissible?

A: No. Regulation section 1.401(k)-1(e)(6)(e) provides that no other benefit (other than matching contributions and certain other specified benefits) may be conditioned, directly or indirectly, upon the employee’s making or not making elective contributions.

Under section 1.401(a)(4)-4, rate of match is an "other rights and features," separate and distinct from the match itself. The matching contribution is tested for nondiscrimination under section 1.401(m)-2. Other rights and features are tested for nondiscrimination under section 1.401(a)(4)-4.

The formula your client wants to use therefore violates section 1.401(k)-1(e)(6)(e) with regard to the rate of match, since a participant's rate of match would be determined by the number of years in which the participant defers.

Q: A client has a Plan Year of January 1 - December 31, 2011; their fiscal year ending June 30, 2012. The employer funding will be deducted in the fiscal year ending June 30, 2012. This is a safe harbor 401(k) plan.

What is the funding deadline - do they have until the corporate tax return is due for the fiscal year ending June 30, 2012 to actually make the deposit?

A: The contributions must be made by 12/31/12 for plan qualification purposes. The final 401(k) regulations (§1.401(k)-3(h)(1)) requires that elective deferrals and QNEC (including safe harbor contribution) must be deposited to the plan not later than 12 months after the plan year end.

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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