In a defined benefit plan is it okay to have the participant pay the distribution fee out of his/her accrued benefit? For example, if the lump sum was $1,000 and the distribution fee is $100, can the participant only be paid $900? My feeling is that this is not okay since you are now paying the participant less than their accrued benefit.

Does anyone have any thoughts on how to handle uncashed checks from a dependent day care flexible spending account? Specifically, I am wondering whether those funds escheat to the state, and if so, which state's law will apply (the state where the account is located, the state of the payee, the state of incorporation of the payor, the principal place of business of the payor all seem like possibilities).

Facts: Plan's actuary mistakenly changed the formula in a DB plan from a 'step formula' to a richer 'integrated formula' in 1996. Plan continued calculating and paying benefits under old 'step formula' until it discovered the problem in 2002. It then applied for EPCRS correction; the IRS granted it. So in 2003, the sponsoring ER attempted to 'revise' the documents retroactively.

Some EEs, who acknowledged they did not know of much less rely on the error until 2002, filed suit for the richer benefits.

The 4th Circuit held that the ER had not put on any evidence of the EEs' intentions at the time of the scrivener's error, and therefore mutual mistake (a contract law doctrine) would not apply. For a unilateral mistake, there had to be some fraud by the other party. The mistake was not mutual; the EEs did not make the same mistake. The mistake was unilateral by the ER, but there was no fraud by the EEs.

The 4th Circuit rejected the ER's claim that the IRS approval per EPCRS ought to allow the ER to reform the plan documents:

the IRS determination that inclusion of the Integrated Formula in the 1996 plan was a scrivener's error, thus justifying an equitable reformation of that provision. Put simply, however, the IRS determination is neither helpful nor controlling in this appeal. A primary purpose of the IRS program—and the only purpose of the IRS ruling on the 1996 plan—is to authorize an ERISA plan to amend its provisions without losing the tax exemption provided for by 26 U.S.C. § 501(a). Notably, such IRS proceedings are ex parte, predicated only on the submissions of the ERISA plan seeking relief. The IRS determination thus only resolves issues between the IRS and the ERISA plan—it is not a formal adjudication, and it does not impact on the relationship between an ERISA plan and its beneficiaries. Even though the IRS may decide whether to tax an ERISA plan, it is not entitled to alter the contractual rights of a plan beneficiary. Although we accord great deference to the IRS with respect to tax policy and regulation, the judiciary retains its dominion in ERISA civil actions.

The appeals court gave great importance to what the documents actually provided (error or not) because of the congressional intent behind ERISA that each EE "may, on examining the plan documents, determine exactly what his rights and obligations are under the plan."

So it appears that a scrivener's error correction, even if allowed by the IRS, will not save the day for an ER facing claims from EEs. An ER wanting to put the matter to rest completely might want to consider a declaratory judgment action, which would require notice to all the affected EEs. Alternatively, giving the benefits as erroneously promised will solve the matter as well (with an EPCRS filing because the greater benefits were not provided when specified under the plan).

Cross v Bragg, 4th Cir Docket ## 07-1699, 07-1755 and 08-1190, 7/24/2009.

For a governmental 457 plan, is the employer likely to find a plan administrator willing to do the hardship/unforseeable emergency determination?

This employer a) doesn't like privacy issues which often turn up due to information contained in the requests for hardship distributions, and b) would prefer to have a third party making decisions to avoid any perceived favoritism or differences in treatment.

I’m posting this to get some input on behalf of a client.

He has a defined benefit plan which was opened in 2001. This is a small plan (5 participants) and the client is a dentist. The plan was opened and administered by the same actuaries company. He is now terminating the plan and received the paperwork to begin the process. Notice was already given to the participants (15 days before the proposed termination date), amendments were signed, etc.

Here is the question:

With his termination papers he was given an option to terminate with or without an IRS letter of determination. While the paperwork stated that the optional determination letter process is expensive and lengthy, it suggested that he would have to accept some significant responsibility if he elects to avoid the letter process and then gets audited. He discussed this with them, and they basically told him that they discuss the determination letter option as a matter formality, but (off the record) they don’t really advise it due to the additional costs and the fact that the determination letter is basically an audit, so if he gets audited later he would be in the same position as if he elects for the determination letter now. But he may avoid the random audit, if he forgoes the letter, and save some money.

He asked for my opinion and I suggested that he pays the additional fee (roughly $2,500) to have the determination letter since the cost would be tax deductible and he has nearly $900k in the plan, most of which will be going to him and his wife.

He sent in the termination paperwork to the actuary, and was shortly contacted by them to see why he would like to pursue the letter. He explained his concerns and was told that it’s a waste of money and that 99% of theirs client opt not to get the letter. He asked them if there is anything wrong with the plan, they replied that to the best of their knowledge everything is perfect and was signed off by the actuary.

He just called me again asking for guidance on whether to pursue the letter or not. This latest follow-up by them is actually making me more concerned about having him to waive the letter and basically assume future responsibly if it gets audited and some problems with the plan are found.

It seems to me that if there are problems found with the plan during the determination letter process, the actuary would be held responsible, but I don’t have experience with this regards.

Any input would be greatly appreciated, particularly with regards to whether a letter of determination is advisable for him to obtain and with who is responsible should issues arise during the determination letter process vs. forgoing the letter.

Thanks for your time,

J

.

Our Special Tax Notice needs to be updated for the Roth IRA rollover language. Is there a new "model' notice available anywhere that has this language? Thanks and welcome to Monday!

Employer has learned of loss of major contract and is facing severe cash crunch. It currently matches 401(k) deferrals 100% up to first 3% of compensation. Employer needs to eliminate matching contribution effective October 1st. Even though there are only 3 months left, the employer needs to conserve this cash rather than simply start with the 2010 Plan Year.

The 401(k) plan document provides as follows:

"The Employer may make discretionary Matching Contributions. The percentage of Elective Deferral Contributions matched, if any, shall be a percentage as determined by the Employer. Elective Deferral Contributions that are over a percentage of Compensation won't be matched. The percentage shall be determined by the Employer. Matching Contributions are calculated based on Elective Deferral Contributions and Compensation for the payroll period. Matching Contributions are made for all persons who were Active Participants at any time during that payroll period. Any percentage determined by the Employer shall apply to all eligible persons for the entire Plan Year."

I am wondering about the effect and intent of the last sentence. The provisions seem to make very clear that the match is discretionary and thus the employer could set any percentage or no percentage at all for the match at the outset of the Plan Year. However, does the last sentence work to make that discretionary match a fixed match for the entire Plan Year once the match percentage is set / used for the initial payroll period?

I have reviewed several prior posts on this board and other discussions regarding the elimination of discretionary matching contributions mid-year and have not found a discussion of a provision exactly like this one. Those discussions have also frankly left me confused about just how much discretion employers have in reducing clearly discretionary matches given my understanding that plans eliminating or reducing matching contributions must pass current availability testing since participants entering the plan after a match is reduced or eliminated will be entitled to a different rate of matching contributions than participants in the plan the entire year. In addition, my understanding is that such reductions in matching contributions create non-uniform formulas for the plan year and thus will need to pass the general nondiscrimination test in addition to ADP / ACP testing.

We are not worried so much about the plan being able to pass these tests if required under our facts--there are not likely to be many new entrants to the plan nor would I think discrimination in favor of HCEs under our facts would likely be a problem. The phrasing of the plan provisions, however, suggests that the rate of the match must be the same for the entire Plan Year regardless of whether testing concerns are an issue. Thus, it seems to me any elimination of matching contributions for the remainder of 2009 would violate that last sentence and that any amendment of the Plan now to delete that last sentence effective prior to 2010 would be problematic.

I would appreciate any thoughts or guidance.

2 clients received "Application for Extension of Time to File an Employee Plan Return - Approved" from IRS in Ogden UT.

I've never seeen this before. Is this new this year?

Suppose you have a small DB that is less than 80% funded. Can the 100% owner's spouse be paid a lump sum as ordered by a QDRO?

Hello all, I want to open an Roth IRA for my spouse however she is not working as of now due to medical illness. She has Leukemia so I have many questions regarding my situation. I am 37 and she is 36 I just opened the roth for myself this year, I am getting started way late with retirement savings so I need to try to catch up. Would it be in my interest right now to open a spousal IRA given her medical condition?

Thanks all for your help

One of our young employees lost her life suddenly this week and left a 28-year-old spouse. He's entitled to a very tiny (<$10) monthly lifetime survivor pension that starts on October 1. Or he can choose (or perhaps it's mandatory - still being studied) a rather small lump sum settlement.

If he gets the lump sum, will he be able to roll it over into his IRA?

I apologize if this has been posted but I haven't been able to find consistent information regarding all of my questions. I have a Plan with both a traditional and roth 401k feature. Participant Age 50 wants to move money into a Roth account (either 401k or IRA).

1) Can someone move money from Traditional 401k to Roth 401k in the same Plan?

2a) Can someone under age 59.5 (assuming the Doc allows for 59.5 withdrawal) transfer money to a Roth IRA?

2b) Is there any way to make an amendment to allow for the above?

Thank you, in advance, for your assistance.

We have a plan that uses an enhanced match of 100% of deferrals up to 4% of pay. In addition, they contribute a discretionary match of 100% of deferrals up to 3% of pay. In this particular case do we have to perform the ACP test or does it automatically satisfy the ACP safe harbor since the discretionary match is less than 4% of pay?

Any input (including reg cites) would be greatly appreciated. Thanks!

I'd like to get a feel for what other Relius users do in this instance:

I have a large (1000+ lives) plan. There are employees that terminate with no compensation in the current plan year. As an example - the client terms the employee as of 04/02/2009 but the employee has 0 hours and $0 comp in 2009. Employee was a participant in 2008; therefore Relius shows them in the 2009 ADP/ACP tests with $0 compensation.

If there weren't many I could just code them with 12/31/2008 term dates and they wouldn't show in '09 testing. But there are a lot of them and I'm wondering if there isn't another better (easier!) way that would maintain the accurate term date per the client's records.

Thoughts?

My company is in the process of switching to an HSA-type medical insurance plan. My understanding is that an HSA can pay for eligible medical expenses including Vision and Dental. If this is correct, why would I also need a Limited FSA to cover Vision and Dental?

Am I correct that ALL HSA's cover Vision and Dental? My employer also provides Dental Insurance and Vision Insurance...does that impact the ability to reimburse those costs via the HSA?

Loan payments continued for several months after the loan was repaid.

Is the correction as simple as writing a check from the plan to repay the borrower for the overpayment?

Hello. I have a question I'm hoping for some advice... After I was laid off last year, I withdrew my 401(k) and had it deposited into an IRA account. That all went smoothly. However, this fall, I was contacted by the former 401(k) custodian, indicating that they discovered an incorrect divided had been included in that account and therefore an overpayment had been made. They requested the excess payment be returned in order to avoid tax consequences for the incorrect distribution.

I delivered that correspondence to the IRA custodian. The IRA custodian sent me TWO checks--payable to me--one for the exact amount of the overpayment, and a second check for the earnings attributable to that overpayment.

I questioned why the checks were made payable to me instead of the new custodian, and spoke with the 401k custodian--who advised that some brokerages do it that way and it was not a problem--and she instructed me to deposit the checks and write them a check out of my own personal account--and the IRA custodian, who confirmed that she had followed company procedure and had coded this all as a "withdrawal of excess contribution." Anyway, so far so good.

Upon receipt of my check (as instructed), the 401k custodian advised that she had misunderstood my question, and that they were unable to accept any of the earnings from that initial incorrect dividend. She is having a check cut, payable to me, refunding the amount of the check that represented the earnings from the incorrect dividend. She stated that it was improper for the 401k custodian to have withdrawn those funds and this will result in a tax consequence to me.

401k custodian insists that she did nothing wrong or improper and tells me I should just deposit the "earnings" in my bank account and pay the associated taxes and any penalties.

I'm caught in the middle. Who is right? In my mind, the ITA custodian/fiduciary withdrew my money improperly, and now I have a tax hit, which I did not want or anticipate. But, perhaps if the earnings were based on money that was not supposed to be in the account in the first place, that is just the way it works and there is nothing to be done.

Is there a way to correct/undo all of this, or is this just how it works. Thanks for your thoughts and advice.

When you need a tax attorney that can argue anything without blushing, here might just be the guy.

Halby v CIR

I am preparing a 1099-R for 2008, which was inadvertently overlooked.

Questions:

1. Can we simply "type" the form on the form I printed from the IRS website and submit it, or is there a special type of paper I should use which can only be ordered from the IRS? As you can tell, this is my first venture into reporting land in awhile.

2. Should we simply file it as if it were not late and wait for any repercussions from the IRS, or is there a "late" procedure I need to be following?

Thank you, and Happy Rosh Hashanah to Jewish users.