10/18/2016. Cutting things short. S. Derrin Watson FIS

Transcription

1 Cutting things short S. Derrin Watson FIS 1

2 Establishment of new plan or contribution source New document example: Employer wants to set up plan with calendar plan year Employer sets the effective date as October 1 Creates 3-month initial plan year New contribution source example: Employer established a calendar year profit sharing plan in 2005 In 2016 decides to add 401(k) feature, effective August 1 Since deferral contributions are separate from PS for coverage and nondiscrimination, first 401(k) plan year runs August 1, 2016 to December 31, 2016 Example Change of plan year Employer has plan year ending June 30 Wants to switch to calendar year for 2016 Creates short plan year between the two Year 1: July 1, 2015 to June 30, 2016 Year 2: July 1, 2016 to December 31, 2016 Year 3: January 1, 2017 to December 31,

3 Plan termination Simple example: Employer has calendar year 401(k) plan Amends plan effective April 30, 2016 to Freeze participant eligibility and contributions Terminate plan Commence distribution of assets For most qualification purposes, final plan year ends April 30, 2016 But, for some purposes (5500 filing) plan year continues unchanged until all assets distributed Multiple employer Employer cosponsors calendar year multiple employer plan Ceases sponsorship March 31, 2016 As to that employer, effectively the same as termination But not distributable event after PPA document You always have a choice; no need for short year You can have a 12-month initial plan year Or adopt retroactive start date But not for deferrals You don t have to change plan year ends You can wait until the plan year end to terminate 3

4 Issues impacted by plan year length Service for Eligibility Vesting Benefit accrual Compensation for 415 and related issues Nondiscrimination testing Allocation Employment at plan year end Deadline for some safe harbor contributions Some distributions Valuation dates Limits for 415 Compensation (401(a)(17)) Testing periods for Coverage Nondiscrimination ADP/ACP Safe harbor rules 415 Top-heavy Reporting and disclosure Form 5500 Amendment deadlines Fundamental rule Follow your document if it gives you specific instructions If document ambiguous or silent, follow the law But if your document explicitly tells you to take a certain action (such as prorating hours of service for benefit accrual purposes), do it If the document is less than clear, when you amend plan to change plan year, consider adding language describing the approach you will take 4

5 Plan year effect on eligibility Entry date First day of plan year must always be an entry date Eligibility computation period (ECP) May be unaffected by plan year change if you don t use shifting ECP (change to plan year after first year) ECP is ALWAYS 12 months long So change in ECP creates two overlapping ECPs Much like what happens when you have shifting ECP ERISA mandates this treatment Case study: Eligibility Plan year ends August 31 Eligibility provisions 1 YOS, Shifting ECP Dual entry dates: September 1; March 1 Plan moves to calendar plan year eff. Jan. 1, 2016 Short year September 1, 2015 to December 31, 2015 a) What are the entry dates for 2016 and 2016? b) Hugh was hired 5/1/2014. What are his first four ECPs? 5

6 Vesting Vesting computation periods work on same principle as eligibility computation periods Main difference: Don t have to start with hire date Could use any 12-month period Has to be the same for everyone In regs, this is permissive (a safe harbor) Perhaps you could prorate the 1,000 HOS requirement for a short period, instead Benefit accrual computation Applies to defined benefit plans Participant accrues full or partial benefit in any accrual computation period in which participant has 1,000 HOS DOL regs say if you change computation period, prorate 1,000 HOS requirement Example: Plan year ends March 31 Plan switches to calendar plan year Creates 9-month plan year For short year, participant accrues benefit with 750 hours 6

7 Defined contribution allocation requirements Many plans require employment on last day of plan year to receive DC allocation That day shifts when plan year shifts Many plans require 1,000 HOS during plan year to receive allocation In regs, this can be part of 401(a)(4) safe harbor Regs do not discuss short plan years Theoretically, you could keep 1,000 HOS clause But probably you d want to prorate it Integrated plan How do you handle permitted disparity with a plan year less than 12 months? If plan allocates based on plan year compensation (or plan year compensation while a participant) Prorate integration level (taxable wage base) for short plan year based on number of months Not for mid-year entry 7

8 Case study: Integrated plan MPP plan provides contribution of 8% of total comp plus 5.7% of excess comp Excess comp = Total plan year comp taxable wage base ($118,500) Plan amendment switches from June 30 to calendar year, creating 6-month short year July 1, 2016 to December 31, 2016 How does the plan compute excess comp for the short plan year? Compensation limit 401(a)(17) ($265,000) 401(a)(17) limit applies to 415 compensation Allocation compensation Nondiscriminatory compensation Deduction compensation For short plan year, prorate limit (based on months) No proration needed for: Midyear entry Payroll period determination of deferrals and match Avoiding this issue is most frequent reason for retroactive effective date 8

9 Case study: Compensation limit Mark (age 52) enters plan 7/1/2016 PS allocation based on comp while participant Compensation = $50,000/month ($600,000/year) a) Is Mark s allocation comp for 2016: $132.5k, $265k, or $300k? b) What would his allocation comp be if the plan had a 7/1/2016 effective date and December 31, 2016 plan year end? Mark elects to defer $3,500/month (7% of actual comp) When he reaches November, his participating comp has already exceeded $265,000 limit c) Can Mark defer in December? Plan matches 100% of deferrals up to 6% of comp, computed on payroll basis d) Compute the maximum match if the plan year is 12 months. 6 months? e) What is his match for July (the month he enters?) limit Prorated for Change of limitation year Midyear termination Otherwise, limitation year is always 12 months So no need to prorate for first plan year 9

10 Top heavy issues Determination date is last day of prior plan year So plan year change modifies determination date Exception: for first plan year, determination date is last day of first plan year Determination date used to figure: Account balance for top heavy test Including distribution lookbacks Identity of key employees Owner status Officer status Compensation Exclusions For top heavy, a year is usually a year Use the 12 months (not plan year) prior to determination date to compute: Compensation for key employee test Officer and owner status 1 year period for distribution lookbacks Exclusion of employees who had no service Use the 5 years (not plan years) prior to determination date to compute distribution lookbacks for in-service distributions 10

11 But plan year does matter for top heavy Sets determination date Sets top heavy period If plan tests as top heavy on a determination date, it is top heavy for the following plan year Sets top heavy contribution Based on compensation during plan year Based on highest key employee allocation during plan year Years of service for top heavy benefit Apparently short years are prorated for changes in benefit accrual period Used in determining safe harbor exemption Plan year starts Top heavy example Determination date Lookback year starts Lookback year ends 7/1/2013 6/30/2013 7/1/2012 6/30/2013 7/1/2014 6/30/2014 7/1/2013 6/30/2014 1/1/ /31/2014 1/1/ /31/2014 Plan switches from June 30 plan year to calendar plan year (stub period in 2014) 11

12 HCE determination Two ways to be an HCE: Ownership Compensation I am a 5% owner if I owner (or was deemed to own) more than 5% on any day during: The current plan year (which could be a short year) Or the prior 12 months (which could span plan years) I am an HCE for a given plan year if my compensation exceeded the HCE threshold in the prior 12 months Plan can use top 20% rule, also looking at prior 12 months Plan can use calendar year compensation election (which makes changes in plan year irrelevant for determining HCEs by compensation) ADP/ACP test: Change no big deal Besides HCE issues and compensation issues, ADP/ACP tests not affected by change in plan year Must satisfy test each plan year If plan uses prior year testing, NHCE ADP based on prior plan year (regardless of length) and HCE ADP based on current plan year (regardless of length) 12