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RCK

W-2 Retirement Plan Box

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Our interpretation of the instructions of last year's W-2 forms has come under fire from participants, and having reviewed the 2001 forms and instructions, I expect that to happen again next January/February.

Our main defined benefit plan specifies participation at the entry date following attainment of age 21, and one year of Eligibility Service (where one year of eligibility service is an employment anniversary with 1000 hours of service). It excludes union employees,but not temporary or seasonal employees.

Up through 1999, our interpretation had been that if they did not work enough hours to meet the eligibility criteria, then the Pension Box would not be checked.

All the guidance that we have found says that someone who has met the age and service requirements and an entry date, but who has not met the hours requirement should be coded as a Pension Plan (or Retirement Plan for 2001) participant. Tax Management for example says" Even a participant who accrues no benefit because he or she has not completed the required number of hourswill be considered an active participant."

We have a group of employees who work for us and other similar employers on a "substitute" basis. They might only work one day in a given year, or many more days, but probably not 1000 hours.

They claim that even if they receive 8 or 10 W-2's for a given year, we are the only ones that are checking the Pension Plan box on the form.

Continuing to check the Pension Plan box will interfere with our ability to hire and retain these people.

Anyone with comments/clarifications?

RCK

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I don't understand how the "substitute" employees entered the plan if they "probably" didn't work 1,000 hours per year. And if they didn't enter the plan, they are not active participants.

By the way, a lot of trouble can come with "probably".

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We do count hours. And 99% of these people do not work 1000 hours in any given year. The "probably" was a global comment, not a participant specific comment.

All the guidance defines active participant. So it says that an employee is considered an active participant unless they are excluded by the eligibility provisions. Examples of eligibility provisions are age, years of service, and classification of employment.

It seems to me that you are applying the common sense approach, which does not seem to apply in this situation.

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I was always told that the key to that box on the W-2 was for the Individual & tax preparer & IRS to determine that individual's eligibility for a deductible IRA contribution as the law has limited the deductible IRA amounts for individuals based upon their participation in a Qualified Plan as well as AGI and other factors. If these individuals are NOT receiving ANY allocation in the plan, it is my understanding that the box not be checked. You may want to check with an accountant or tax specialist for the definitive answer.

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RCK, I am not sure I understand exactly what you are saying. Aren't these employees ineligible to enter the plan because they don't work enough hours?

I have attached the following from the pension answer book:

An active participant in a defined benefit plan (see Q 2:3) is an individual who participates or meets the eligibility requirements for participation at any time during the plan year ending with or within the individual’s taxable year. Thus, an individual is an active participant if the individual is eligible but declines to participate or fails to complete the minimum period of service or to make an employee contribution necessary to accrue a benefit. However, an individual who elects pursuant to the plan not to participate will be considered to be ineligible for participation for the period to which the election applies; but, in the case of a defined benefit plan, such an election is effective no earlier than the first plan year commencing after the date of the election. An individual is not an active participant if the employer has frozen benefit accruals (unless prefreeze benefit accruals increase as compensation increases). An individual who accrues no additional benefits in a plan year ending with or within the individual’s taxable year by reason of attaining a specified age is not an active participant by reason of participation in the plan. [Treas Reg § 1.219-2(B); Prop Reg § 1.219-2(f)(1); Wartes, 65 TCM 2058 (1993); Ann 91-11, 1991-4 IRB 80; Notice 88-131, 1988-2 CB 546; Notice 87-16, 1987-1 CB 446; Ltr Rul 8948008]

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pmacduff,

Received an allocation or made a contribution is indeed the DC version of the rules. But this is a defined benefit issue.

And the opinion came from our esteemed ERISA counsel, who can be counted on to give us a strict if somewhat conservative interpretation of any rules.

RCK

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RCK - Sorry about that...I didn't read your original post carefully! And, as well all know, strict and conservative is usually your only "saving grace" when an issue arises with IRS or DOL, etc.

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I'm confused. If they never worked 1000 hours in an eligibility ocmputation period, they did not complete a year of service, so are excluded pursuant to your original statement. I agree that if they did satisfy eligibility but then failed to accrue a benefit due to hours, they should be coded as an active participant, but that does not sound like the case here. It almost sounds like you are saying they completed a year of eligibility service when they did not.

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Well, once again I agree 100% with Medusa.

Note the Tax Management article cited references "even a participant who accrues .....".

The people you've described are not participants, so that statement is irrelevant.

Based upon the presented data, these people should not have the box checked.

If these people once work the necessary hours, they remain active participants even if they never do so again. That's what the article says, and it is a true statement.

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I can't quote the entire Tax Management reference here, and in the broader contex of the entire section, I still think that the employee does not actually have to enter the plan to get the Pension Plan box checked.

The most 'on-point' reference that I have is from BNA's Payroll Guide, where it says "Under a defined benefit plan, any individual who is not excluded from participating under the eligibility provisions of the plan is considered an active participant. The individual is considered active even if mandatory contributions have not been made,the minimum service for benefit accrual for the year has not been met, or no benefits have vested."

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RCK, but they ARE excluded from the plan because they have not met the eligibility requirements. You have the right information. It's just it is being interpreted incorrectly.

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But he is excluded from participation on the basis of a minimum service requirement that has not been met.

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I think I'm in agreement that the employees in question should not be participants, but I'm not so sure about the documentation. Except for a few minor wording changes, the instructions for the 2001 W2 are very similar to that for the 2000 W2 (at least with respect to this check box). There is a reference to IRS Notice 98-49. http://www.benefitslink.com/IRS/notice98-49.shtml

Read Q&A C3. It cross-references Notice 87-14. Sorry, I could not find a copy; I'll continue to look.

In addition, there is a reference in the instructions to IRS Publication 590. http://ftp.fedworld.gov/pub/irs-pdf/p590.pdf

Note that this publication is focused on IRAs, and includes comments on who can make a deductible contribution to an IRA. Relevant comments begin at the bottom of page 8. From page 9:

"If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you:

• Declined to participate in the plan,

• Did not make a required contribution, or

• Did not perform the minimum service required to accrue a benefit for the year."

I do not know how to justify that last bullet, except that perhaps it means you are already a participant but worked less than the required hours (probably 1000) this year.

I am also unsure about the comment above "the plan year that ends within your tax year". For example, if I am a participant on 10/1/99 (beginning of plan year) and terminate employment on 12/31/99, I am a participant in the "plan year that ends within my 2000 tax year", but I never participated during my 2000 tax year.

Have I missed something?

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RCK, pax has provided you with some valuable information and/or cover for whatever you decide to do with this.

I'll bow out of this discussion, with the opinion that if somebody ain't a participant, he/she ain't an active participant for purposes of Form W-2/IRA limits, with the correct exceptions of (thanks to pax' info):

1. Failure to participate due to failure to make mandatory employee contributions (now an archaic issue)

2. Failure to participate due to some phony (for this purpose) waiver.

But, just one opinion, in closing. The box shouldn't be checked for the always under 1,000 hour crowd based upon the info you've provided.

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Thanks to everyone, but pax in particular, for their comments. The third bullet as outlined by pax is indeed the sticking point, as is the "plan year ending in the tax year" point.

We produce 80,000+ W-2's per year, and have employees in 35 corporate qualified plans and probably nearly 100 multiemployer plans, each with different eligibility criteria. Keeping it all straight is a nightmare.

I'm not yet sure what we will be doing for calendar 2001.

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