Tag Archive for: 401k

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Five percent Owner and Stock Options to Consider

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Stock Options and Determining a “Five-Percent Owner”

“One of my clients in a 401(k) plan has been given stock options, which have not been exercised.  When determining a five percent owner for plan purposes, does ownership of stock options count?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • The answer to your question is clearly addressed in Internal Revenue Code Sections (IRC) §§416 and 318 and underlying regulations.
  • Under IRC §416(i)(1)(B)(I), the term “five-percent owner” means the following:
  • If the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than five-percent of the outstanding stock of the corporation or stock possessing more than five-percent of the total combined voting power of all stock of the corporation, or
  • If the employer is not a corporation, any person who owns more than five-percent of the capital or profits interest in the employer.
  • A person might be a more than five-percent owner through the “constructive ownership” rules of IRC § 318. IRC §318(a)(4) states:  If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

 

Conclusion

When determining ownership for plan purposes, if any participant has an option to acquire stock, such stock shall be considered as owned by such person.

 

 

© Copyright 2024 Retirement Learning Center, all rights reserved
retirement plan
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Time to Deal with Mergers

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Time for Managing a Plan Merger

“My client is working through a business acquisition, which will involve merging two 401(k) plans.  He is concerned about how quickly they will be able to merge the plans.  Are there guidelines on compliance testing for the plans during the merger process?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • A special “transition rule” under Internal Revenue Code Section (IRC §) 410(b)(6)(C) applies for meeting employee coverage requirements in situations where an acquisition involves the merging of two plans. Under these rules, the plan will continue to be considered in compliance with minimum coverage requirements during a “transition period.”
  • The transition period is the period that begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction.  For example, for an acquisition that takes place on September 1, 2017, the transition period that would apply for a calendar year plan would last until December 31, 2018.
  • The transition rule is only available if 1) both plans satisfy the coverage rules immediately before the acquisition; and 2) there are no significant changes in either the terms of the plan or the coverage of the plans following the transaction.

Conclusion

The merging of two employer plans is a complicated and time consuming process. Fortunately, from an employee coverage perspective, there are transitional rules that give the employer some relief.

 

 

 

© Copyright 2024 Retirement Learning Center, all rights reserved
money
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What is the Definition of Compensation for HCEs

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What is the definition of compensation for determining HCEs?

“What definition of compensation is used to determine who is considered an HCE for nondiscrimination testing in a 401(k) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

A plan must use an Internal Revenue Code Section (IRC §) 415 definition of compensation when determining which employees are HCEs under IRC §414(q).

  • More specifically, according to  Temporary Treasury Regulation 1.414(q)-1T, Q&A 13, the term “compensation” for HCE determination means compensation within the meaning of IRC §415(c)(3) without regard to §§125, 402(a)(8), and 402(h)(1)(B) and, in the case of employer contributions made pursuant to a salary reduction agreement, without regard to § 403(b). Thus, compensation for this purpose includes elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement or tax-sheltered annuity.

 

  • Only compensation an employee received during the “applicable period” is considered in determining HCE status.  HCE status based on compensation (not on ownership) is determined using compensation earned during the preceding year or 12-month period, referred to as the “look-back year.” If the year for which HCE status is being determined is not a calendar year, the sponsor may make a calendar year election so that HCE status is determined based on compensation earned during the calendar year beginning with or within the look-back year.

 

  • A compensation threshold applies for determining HCE status. This amount is subject to indexing.  When the amount is indexed, the new dollar amount applies to the year in which the compensation is earned, not the year in which HCE status is determined.  For example, when determining HCE status for 2017 based on compensation, plans must use the indexed amount for 2016, which was $120,000.  When determining HCE status for 2018 based on compensation, plans must use the indexed amount for 2017, which is $120,000.

Conclusion

Plans must follow a specific definition of compensation as defined in the IRC and supporting Treasury regulations when determining whether an employee is or is not an HCE.

 

© Copyright 2024 Retirement Learning Center, all rights reserved
retirement pension
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Participant in SIMPLE IRA and 401(k) with Separate Employers

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Deferral limit involving SIMPLE IRA and 401(k) plans

“I have a client—over age 50—who participates in a savings incentive match plan for employees (SIMPLE) IRA plan with one of his employers and a 401(k) plan with a separate employer. How much can my client defer into the SIMPLE IRA plan and 401(k) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • To determine the answer to your question your client must look at his overall Internal Revenue Code Section (IRC §) 402(g) employee salary deferral limit and the rule that limits employee salary deferrals to the SIMPLE IRA plan under IRC § 408(p)(2)(A)(ii).
  • For each tax year IRC §402(g) limits an individual’s overall employee salary deferrals combined across all eligible plans (e.g., deferrals made to a SIMPLE IRA plan and 401(k) plan) to a set amount. For 2016 and 2017, a person’s 402(g) limit is 100 percent of compensation up to a maximum of $18,000 if he or she is under age 50, and is $24,000 if he or she is age 50 or greater and making catch-up contributions.
  • The maximum amount that a SIMPLE IRA plan participant may defer into the SIMPLE IRA plan is limited to 100 percent of compensation up to a maximum of $12,500 for 2016 and 2017 or, if he or she is age 50 and over, to $15,500 (which includes catch-up contributions of $3,000).
  • Therefore, your client, being over age 50, could choose to make employee salary deferral contributions to the SIMPLE IRA plan in any amount as long as he does not exceed 100 percent of compensation up to $15,500. He could defer the balance of his 402(g) limit up to 100 percent of compensation up to $24,000 to the 401(k) plan IRS Publication 560 and IRS Notice 98-4, Q&A C-3.

 

EXAMPLE

Seth, age 53, participates in a SIMPLE IRA plan with Employer A and a 401(k) plan with Employer B.  Based on his compensation he decides to defer $15,500 to his SIMPLE IRA plan ($3,000 of which is considered a catch-up contribution).  In order to stay within his 402(g) annual limit across all eligible plans in which he participates, Seth may only defer up to $8,500 to his 401(k) plan.  Note that Seth’s overall 402(g) limit of $24,000 could be allocated as he wishes between the two plans, as long as his deferrals do not exceed $15,500 to the SIMPLE IRA plan.

 

Conclusion

An individual who participates in a SIMPLE IRA plan and a 401(k) plan of a different employer must look at his or her overall 402(g) employee salary deferral limit and the rule that limits employee salary deferrals to the SIMPLE IRA plan in order to determine the amount that can be deferred into each plan.

© Copyright 2024 Retirement Learning Center, all rights reserved
pension benefits
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401(k) and Nonqualified Deferred Compensation plans

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“My client has a 401(k) excess contribution as a result of a failed actual deferral percentage (ADP) test.  However, he was told he could roll over the excess contribution to another of his employer’s plans.  How could that be; I thought excess contributions were ineligible for rollover?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • You are correct; 401(k) excess contributions are not eligible to be rolled over to an “eligible retirement plan” pursuant to Internal Revenue Code Section (IRC §) 402(c)(8)(b). The term eligible retirement plan is defined as an individual retirement account under IRC §408(a); an individual retirement annuity under IRC § 408(b); a qualified trust; a qualified annuity plan under IRC § 403(a); a governmental plan under IRC §457(b); and an IRC §403(b) plan.
  • However, it is possible that, in addition to the 401(k) plan, your client’s employer maintains a plan that is not an eligible retirement plan, such as a nonqualified deferred compensation plan (NQDC) under IRC §409A.
  • An NQDC plan is an agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee or independent contractor compensation in the future for service presently performed. NQDC plans allow employees to defer compensation until retirement or some other predetermined date. A thorough discussion of NQDC plans is beyond the scope of this writing.
  • NQDC plans are an attractive benefit for highly paid employees because they are free from the contribution limits, participation requirements and nondiscrimination restrictions that apply to qualified plans. Because NQDC plans are not subject to the limitations of qualified retirement plans, they can allow some executives and high-level managers to defer a much larger portion of their compensation than permitted under qualified plans.
  • If permitted under the terms of the plan document, participants may have the option to contribute to the NQDC their excess contributions that occurred in their 401(k) plans. These NQDC plans may be referred to as “401(k) excess plans” or “401(k) wrap plans.” The contribution to the NQDC plan is not a rollover, but is considered an additional type of permissible deferral under the NQDC plan.
  • A best practice would be to get a copy of the NQDC plan document and check to see if there is language in the plan that addresses the ability of participants to defer excess contributions. The consultants at the Learning Center review NQDC plans documents, as well as other types of plan documents, daily.

 

Conclusion

While 401(k) participants may not roll over excess contributions to another eligible retirement plan, it may be possible for them to defer their excesses into a NQDC or 401(k) wrap plan, if one exists. Check the NQCD plan document for accommodating language.

 

 

© 2017 Retirement Learning Center, LLC

© Copyright 2024 Retirement Learning Center, all rights reserved