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2 basic errors..correction options


Draper55

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medium size 401(k)(preapproved document..no fdl) had two operational errors in 2014:

1.)allowed one person(nhce) to defer before eligible...appears that the rev proc

allows an amendment to bring the person in for the applicable time period..would

it be reasonable to also return the deferral with earnings and 1099R the person.in this case is the person in the 2014 adp test or not and would the 1099r be 2014 or 2015?

2.)active nhce rolled over his deferral account(self directed brokerage account).. . what would be a reasonable attempt to get this money back into the plan ..give the ee 60 days and then issue a 1099r for a taxable premature distribution if not returned? Seems to me there has to be some penalty to the employee ..i.e., cannot just..notify the ee and then do nothing if no response..

any comments are appreciated...

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#1 - I think amendment is still the correction method though the last procedure "may" have added distribution as an option, you'd need to check the rev proc. If refund is allowable I assume it would not be subject to 10% penalty and would be taxable in year received.

#2 - I assume he does not qualify for in-service distribution? Can plan be retro-amended to make this in-service OK? If yes that might be easiest, though it does open a potential in-service can of worms. As for recovery, that would be best option though I'm not sure what the procedure is if ee does not comply with request. If their is pre-59.5 401(k) money leaving w/o distributable event that is not eligible for rollover and causes potential plan qualification problems as well.

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Would you care to explain how it was possible for a participant to take an impermissible in-service distribution, pesumably with a diret rollover, no less? That might have a bearing on threats or consequences to the participant. It also has implications with repsect to breach of fiduciary duty with respect to some named fiduciaries.

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Would you care to explain how it was possible for a participant to take an impermissible in-service distribution, pesumably with a diret rollover, no less? That might have a bearing on threats or consequences to the participant. It also has implications with repsect to breach of fiduciary duty with respect to some named fiduciaries.

it's mostly likely that the brokerage firm just doesn't know what they're doing.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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If that is it, the post is only about some symptoms and remediation of the very serious real problem is required.

It is likely the SDB was not setup properly to require a trustee signature to release funds but rather only the participant. Or the Brokerage firm just allowed the participant to do it without trustee approval. Either way, I would agree that a review of plan's administrative procedures is in order so there is no future repeat of this incident.

Surprised it happened with an NHCE, it is usually some owner who goes off on his own and does it on the "advice" of his investment guru.

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I am assuming the incident happened due to an employee acting on their own and

and employee at the brokerage firm just robotically processing the rollover request. I had this happen several years ago with several hces on an account..plan administrator had to fire the brokerage firm due to the impermissible distributions...Whatever the cause here I am going to tell the sponsor/administrator they need

to get the money rolled back into the plan as clearly there can be no premature inservice distributions of k money.

thanks much for your imput...

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Firing the brokerage firm is appropriate, and some discipline is mandatory. The fiduciaries also have to document that they did everthing reasonably necessary to prevent the problem, including contractual assurances from the brokerage firm at the time of inception of the custodial account that the beneficial owner could not order distributions. That means not using they typical form documents for the account. The typical la-ti-da approach to brokerage accounts is a breach of fiduciary duty. But who cares in an environment of no enforcement?

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