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So, the participant failed to make the agreed upon plan loan payments within the allowable cure period and on 3/31 this resulted in a loan default triggering a taxable deemed distribution on that date (or offset if separated from service)? If so, then in my opinion the 10-percent additional tax on early distributions applies unless it meets another exception under 72(t) (separation of service after attainment of age 55, etc.). The exception for age 59-1/2 are distributions which are made on or after the date on which the employee attains age 59-1/2. If I understand correctly, the deemed distribution occurred on 3/31 which was over three months before turning 59-1/2. The timing of the issuance of the Form 1099-R is not relevant.

I agree giving him a full allocation is the safer route.

This is not true. It's going to have to be all 'eligible' comp. The plan gets the define its Compensation for different plan purposes; and you must follow those plan terms when you're allocating contributions. How you test the plan when you exclude portions of Compensation that are not 'statutorily excludable' is another story. But, you must follow plan terms with respect to how the Contributions are calculated. Good Luck!

It's a matter of following what the plan document says. You've said that the plan allocates based on full year compensation, not just compensation for the portion of the plan year during which the individual was eligible. However, you'll need to track through the plan's definitions to see whether "compensation" includes pay from any employer in the controlled group or from only participating employers (or in your case, participating divisions).

I hate to complicate the matter, but I think the answer is "it depends." An ERISA expense account held within the plan can only be used for the reasonable plan expenses for that plan. However, a few years ago, the DOL issued some guidance that indicated it was OK to hold an ERISA budget account OUTSIDE of the plan assets. That is, in essence, that the service provider is providing a credit to the plan sponsor for it's use to offset plan expenses out of the service providers own pocket (with funds derived from the fees it charges, or revenue sharing it receives for that plan). Now, I disagree with the DOL on this one - because frankly, if the money the service provider is using to pay plan expenses came to the service provider either "directly or indirectly" from/through the placement of plan assets, then I think those funds are/should be plan assets as well. But I digress - because the DOL said the opposite. To that extent, if the ERISA bucket is NOT a plan asset, then I suppose, theoretically, they can be used by the plan sponsor for a different plan's expenses. The service provider I work for does have ERISA accounts that are NOT plan assets - but we do, by contract, restrict their use only to paying expenses of the plan that generated those funds - but....

If the plan was audit size, you could use the rule for plan years less than 7 months and file a combined audit for the last full year and the one day plan year with the final filing.