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401(k) Testing, Including Safe Harbor and Roth

401(k) Testing, Including Safe Harbor and Roth. Bob Kaplan, CPC, QPA, APA, CFP. July 16, 2008 Session #58 Western Benefits Conference. AGENDA. Getting Started Defining Your HCE/NHCE Groups Current Year/Prior Year Issue Testing Options Correcting a Failed Test Questions.

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401(k) Testing, Including Safe Harbor and Roth

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  1. 401(k) Testing, Including Safe Harbor and Roth Bob Kaplan, CPC, QPA, APA, CFP July 16, 2008 Session #58 Western Benefits Conference

  2. AGENDA • Getting Started • Defining Your HCE/NHCE Groups • Current Year/Prior Year Issue • Testing Options • Correcting a Failed Test • Questions 2008 Western Benefits ConferenceING

  3. Getting Started • Do you have all employees • Controlled group members • Leased employees/Independent contractors identified • Did you pass coverage • If not – need to fix prior to ADP/ACP tests 2008 Western Benefits ConferenceING

  4. Getting Started • Disaggregated Testing • Eligibility less than 1 year • §401(k)(3)(F) lets you test all HCEs (regardless of hire date) along with NHCEs who have completed the statutory requirements (age 21 and 1 year of service) • Entry Date = 365 days?? 2008 Western Benefits ConferenceING

  5. Getting Started • Disaggregated Testing • Eligibility less than 1 year • §410(b)(4) allows you to separate all employees with less than the statutory eligibility from those who have completed statutory • Must use for all plan purposes • Statute references “plan’s entry date • Hot potato that IRS hasn’t absolutely resolved 2008 Western Benefits ConferenceING

  6. Getting Started • Excess deferrals - §402(g) • HCEs – include amounts in testing, even if corrected • NHCES – exclude amounts from testing • Gap period income included with correction • Roth – which dollars go back first • Document decides or employee decides • Do not include amounts over $15,500 for catch-up eligible participants • Or §415 or plan limit violations 2008 Western Benefits ConferenceING

  7. Getting Started • Do you have the correct compensation? • Remember new post-severance rules • Discussed at other sessions • If an employee has zero compensation • Self Employed • Participant who did not work during year • No official guidance, but IRS has said informally to exclude 2008 Western Benefits ConferenceING

  8. HCEs/NHCEs • Check your plan document • HCEs • 5% owners, or • Those who made more than the $ threshold in prior year (2008 = $105,000); compensation as defined in §415(c)(3) • Optional election to limit HCE group to 20% who made more than $ threshold • Could limit HCEs and help testing • Must sync up in all plans of sponsor 2008 Western Benefits ConferenceING

  9. Example – Assume 20 Employees Prior $HCE Top 20 • $225,000 Y Y • $225,000 Y Y • $175,000 Y Y • $150,000 Y Y • $130,000 Y N • $125,000 Y N • -20 <$60,000 N N 2008 Western Benefits ConferenceING

  10. HCE Determination • Stock Attribution (rules under §318) • Do you have % of ownership and family relationship? • Often missed during takeovers 2008 Western Benefits ConferenceING

  11. Current Year/Prior Year • Check Plan Document • Prior Year is default (under regs) • Prior Year – changes in group ignored except: • Amendment in Plan • Consolidation, merger spin-off • Change in permissive aggregation • Change in employee group of more than 10% - calculate the weighted average 2008 Western Benefits ConferenceING

  12. Current Year/Prior Year • Mix and match ADP/ACP • ADP = Prior • ACP = Current • Effective when Discretionary Match is used • Okay for most plans • But not in GUST prototypes (this will change whne you use EGTRRA prototypes) 2008 Western Benefits ConferenceING

  13. Current Year/Prior Year • Mix and Match ADP/ACP • Cannot use: • QMACs in ADP • Recharacterization • Shifting 2008 Western Benefits ConferenceING

  14. Current Year/Prior Year • Switching from Prior to Current • Allowed with no restrictions • Timing = this is a discretionary amendment so it must be done by the end of the year being tested 2008 Western Benefits ConferenceING

  15. Current Year/Prior Year • Switching testing method from Current Year to Prior Year • Allowed with restrictions • Entire life of plan on Current (if less than 5 years) • 5 consecutive years of Current (includes short plan years and safe harbor years) • Merger of two or more plans and change is during the §410(b)(6)(C) transition period • Discretionary amendment – by PYE 2008 Western Benefits ConferenceING

  16. Current Year/Prior Year • Prior Year use of QNECs • Must be made by end of current year • Example: • Testing 2008 Plan year (calendar year plan) • Prior year 2007 used for NHCEs • QNEC must be made by 12/31/08 • Problem = we don’t know we need a QNEC until early 2009!!!! 2008 Western Benefits ConferenceING

  17. Current Year/Prior year • Prior year testing in initial plan year? • Assume 3% 2008 Western Benefits ConferenceING

  18. Correcting a Failed Test • Flat $, Flat %, or Targeted QNEC • QMAC • Shifting • Recharacterization • Reclassified as Catch-up • Refunds • Can use a combination of methods 2008 Western Benefits ConferenceING

  19. Correcting a Failed Test • QNECs or QMACs • If you want to use a QNEC or QMAC of more than 5% in ADP or ACP test, you must: • Give it to all eligible participants • Give it to at least 50% of eligible participants, and • The contribution for any of those receiving the corrective contribution may not be more than double that of any other participant 2008 Western Benefits ConferenceING

  20. Correcting a Failed Test • Shifting • If you pass ADP by a lot and fail ACP – you can shift amounts not needed in ADP to ACP • Testing gimmick only – you do not actually move funds • You must pass ADP both before and after shift • You cannot shift ACP to ADP (unless ACP amounts subject to same withdrawal restrictions as 401(k) deferrals) 2008 Western Benefits ConferenceING

  21. Correcting a Failed Test Example of Shifting Before After ADP ACP ADP ACP HCE 5.40% 1.85% 4.40% 2.85% NHCE 3.90% .85% 2.90% 1.85% • ADP passes before and after • Shift of 1% helps ACP pasd 2008 Western Benefits ConferenceING

  22. Correcting a Failed Test • Recharacterization • Failed ADP amounts are changed to be voluntary after-tax $ • Must be a plan document provision • Must then run ACP test including these amounts • Does anyone do this??? 2008 Western Benefits ConferenceING

  23. Correcting a Failed Test • Reclassifying as Catch-up • If catch-up eligible participant has room; this is automatic. Does not have an option of refund Note: This is done at point in process when check would be written to participants – not before!!! 2008 Western Benefits ConferenceING

  24. Correcting a Failed Test • Refunds • If participant has both pre-tax and Roth in year? • What does document state? • Some give participants the choice; most define which is returned first 2008 Western Benefits ConferenceING

  25. Correcting a Failed Test • Gap Period Income • 2007 PY = Yes • 2008 PY = No • Remember this is only for ADP/ACP test • Still calculated for §402(g) and §415 corrections 2008 Western Benefits ConferenceING

  26. Correcting a Failed Test • Taxation of distributions • 2008 PY: All distributions and earnings taxable in year distributed (not contributed) • Form 1099R codes – discussed in earlier session 2008 Western Benefits ConferenceING

  27. Correcting a Failed Test • Timing for Eligible Automatic Contribution Arrangements (EACAs) • 6 months after Plan Year end 2008 Western Benefits ConferenceING

  28. Correcting a Failed Test • Tests not corrected by 12 months after the end of Plan Year are disqualified • Hello EPCRS 2008 Western Benefits ConferenceING

  29. Miscellaneous • Post-Severance Compensation • If terminated in December and paid (unused vacation) in February – do you test February deferrals in that year or in the prior year (when services were rendered) • No guidance 2008 Western Benefits ConferenceING

  30. Miscellaneous • Permissive 90 day withdrawals (EACA) • Do not include in testing • May want to hold up testing until the 90 day period has completely expired • For those who start deferring very late in the year 2008 Western Benefits ConferenceING

  31. Testing Plans with Safe Harbor Match • Matching contributions in excess of either ADP or ACP safe harbors must be tested • Matches with conditions • Discretionary in excess of 4% • Last day, 1000 hours • Applied to match on deferrals greater than 6% of pay 2008 Western Benefits ConferenceING

  32. SH Matches • What to Test?? • Include all matching contributions • Only those not considered safe harbor 2008 Western Benefits ConferenceING

  33. Had Enough for One Day? • Questions??? • Thank you for your attendance and participation 2008 Western Benefits ConferenceING

  34. Certain of the statements contained herein are statements of future expectations and other forward-looking statements. These expectations are based on management's current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates (viii) general competitive factors, (ix) changes in laws and regulations, (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward-looking information contained in this document. www.ing.com 2008 Western Benefits ConferenceING

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