A question revisited in the context of WRERA.

Plan uses 5 year rule (only) for RMDs to nonspouse beneficiaries.

Q&A 17©(2) of IRS Notice 2007-7 provides that the nonspouse beneficiary may determine the RMD "under" the plan using the LE rule if distribution is made before the end of the year following the year of participant's death. Kinda sounded like the plan had to use the LE rule if the nonspouse beneficiary applied for distribution in year 1 following the death, but not in year 0 or years 2-4. If so, notwithstanding the plan terms providing for the 5 year rule, the plan would have to implement procedures to calculate a RMD in year 1 (only) under the LE rule and offer a direct rollover only for the balance of the distribution in excess of RMD.

IRS 2-13-07 employee plan news special edition explains this stating that the nonspouse beneficiary may "treat" the plan as using the LE rule for determining the amount eligible for rollover and the IRA RMD. Kinda sounded like the plan did not have to apply the LE rule, but nonspouse beneficiary would. The example did not help clarify this by noting "the amount eligible for rollover" must be reduced by the RMD calculated using the LE rule. A tad bit awkward, since a nonspouse beneficiary can only do a direct rollover. Thus, the plan would be offering a direct rollover for an amount the nonspouse beneficiary is not eligible to rollover, and the beneficiary would have to either elect a direct rollover for only the eligible portion of the distribution or take the correct RMD from the IRA after rollover of the entire amount. This requires a pretty savvy beneficiary.

I guess you could boil this down to whether in year 1 the RMD had to be paid by the plan or taken from the IRA (if the nonspouse beneficiary applied for distribution). A number of commentators seemed to lean towards payment of the RMD from the plan. But that was troubling, because the 401(a)(9) regs allow a plan to use only the 5-year rule, and the special LE rule would apply to the plan only if the nonspouse beneficiary actually elected a distribution in year 1 (not the easiest thing to explain to a plan administrator). I can't remember seeing any straight forward guidance on this from the IRS. The one paragraph in the new 402(f) notice is not very useful, noting only that the nonspouse beneficiary will have to receive RMDs from an inherited IRA.

Somehow, I (and a number of my employee benefit friends) generally managed to dance around this issue. In a number of cases, the plans simply did not offer the rollover. In other cases, the nonspouse beneficiaries elected direct payments with the amount eligible for rollover then not at issue. Other cases involved some pretty intensive communication and hand holding or the plan used the LE rule.

Now WRERA makes nonspouse direct rollovers mandatory and requires 20% withholding for direct payments. As a result, it seems that all plans will have to directly answer the basic issue of whether the RMD required by the special rule has to be paid by the plan or taken from the IRA, if for no other reason so as to get the withholding right. If the RMD is to be paid from the plan, in year 1, the 20% mandatory withholding applies only to amount of the direct payment in excess of the RMD. Conversely, if the RMD is to be taken from the IRA, the 20% mandatory withholding applies to the entire direct payment.

Comments (other than are you are insane).

We administer a 401(k) Plan that permits both participant loans and Roth 401(k) deferrals. The current loan policy does not allow for loans to be taken from the Roth money source.

I'm wondering, though, in this plan's case is the Roth 401(k) deferral account still taken into consideration when calculating the maximum available loan or is it excluded since we are excluding the Roth 401(k) deferral money type from loans? Or do we simply define this in our loan policy and apply it uniformly to all participants? The plan document does not say one way or the other.

For example, let's say a participant has a $10,000 account balance consisting of $6,000 is Roth 401(k) deferrals and $4,000 in pre-tax 401(k) deferrals. Is the maximum loan amount $2,000 or is it $4,000? Or what about if the account balance is $10,000 consisting of $6,000 in pre-tax deferrals and $4,000 in Roth 401(k) deferrals, is the maximum loan amount $5,000 or $3,000?

Any input would be greatly appreciated.

Thanks!

What is the deadline to amend a defined contribution plan for the PPA Technical corrections aspects of WRERA (elimination of gap period income for excess deferrals; mandatory non-spouse Inherited IRA Rollovers; and remove QDIA requirement for EACA's)?

Is it 12/31/2009 (amendment deadline for PPA) or 12/31/2011 (WRERA Amendment deadline)?

I am hearing conflicting reports.

Has anyone seen, drafted, been involved with or otherwise dealt with drafting model Section 436 language?

If the beneficiary wishes to keep her deceased husband's account in the plan, does this become a distributable event if the account is transferred to her name/ss#? She is not a participant in the plan. 1099R issued? Thanks.

I'm filing a final 5500 after a PBGC takeover due to duress of the sponsor. How is this reported on the 5500 Schedule H? I get that I need to mark 4k as "yes" but where do I show the asset distribution? Transfer of Assets from this plan? Then do I show PGBC as recipient plan? And I assume that the plan is also considered terminated since the employer is no longer the sponsor.

Thanks!

A doctor with employees is terminating his 401(k) plan effective 11/6/09 - plan is calendar year. He is a sole proprietor. No one has made deferrals during the year. He will be required to contribute the SH 3% through 11/6/09 for his eligible employees.

He has taken some money during the year but of course his taxes will not be prepared until into 2010 and he would like the plan paid out before the end of the year. Does he owe anything for himself? When is a sole proprietor's earned income really earned - end of the year?

Any thoughts would be appreciated. Thanks.

Are Roth conversions done prior / before age 59 1/2 subject to the 10% IRS penalty on the taxes paid on the conversion amount . ?

Plan is on Corbel prototype document. Plan had no age/service requirement for eligibility, but is amended to add age 21/1 year of service. There was no special provision in the adoption agreement to grandfather employees.

If a participant is under 21, does the amendment remove the employees eligibility until age 21 or is his initial entry preserved?

If participant was part-time never working 1000 hours, does the amendment remove eligibility for the employee?

I'm looking for a good write-up on what the paid prepare penalties rules means for the TPA, particularly when we encounter clients who are looking to bury things in the sand (for example, business owner strapped for cash takes a loan, but misses a payment). Once upon a time, it's been said that as TPA we are not the Pension Police. Is that basically what this new rules says? We are the pension police? In other words, not even a CYA letter will help?

well, as part of my otherwise drab presentation, this was one the songs from the ASPPA Conference.

This group wrote a song about a defined benefit plan (there have always been rumors they used drugs)

and they were foolish enough to name themselves after those types of plans.

D Beatles

(Tune is Let it Be)

My 401(k) it is in trouble

And I just turned age 50

How can I save up quickly?

A D-B.

And in my hour of darkness

The solution’s right in front of me

Yes there’s an easy answer

A D-B.

A D-B, a D-B, a D-B, a D-B

A great big tax deduction

A D-B.

And when the broken hearted people

Living in the world agree

Yes there will be an answer

A D-B.

For though the company defaulted

Still there is P-B-G-C

Yes there will be an answer

A D-B

A D-B, a D-B, a D-B, a D-B

A great big tax deduction

A D-B.

And when the night is cloudy

There is still a benefit for me

Yes there will be an answer

A D-B.

I’ll wake up to the sound of money

Monthly checks are mailed to me

Yes there’s an easy answer

Annuity

A D-B, a D-B, a D-B, a D-B

A great big tax deduction

A D-B.

Does anyone have any suggestions or ideas on how to calculate the late contribution interest for quarterly contributions when using an end of year valuation under PPA? I've seen the suggestion to "do something reasonable" but are there any suggestions on what is actually considered reasonable? Is it actually reasonable to only apply the 5% increase to the fourth installment as the preamble to the proposed 430 regulations seems to say below?

". . .The proposed regulations would provide that, if the employer fails to pay the full amount of a required installment, then the rate of interest used to adjust the amount of the contribution with respect to the underpayment of the required installment for the period of time that begins on the due date for the required installment and that ends on the date of payment is equal to the effective interest rate for the plan for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1) plus 5 percentage points. This increased interest rate applies only to installments that are due after the valuation date for the plan year because section 430(j)(3) refers to interest being charged on late quarterly contributions.. . ."

Based on this statement in the preamble, does the situation below seem "reasonable"?

2008 calendar year plan

12/31/2008 valuation date

Subject to quarterly contribution requirement

No PFB or COB

Quarterly contribution amount is $27,642 due 4/15/08, 7/15/08, 10/15/08 and 1/15/09

MRC as of valuation date of $122,853

Effective Interest Rate is 6.80%

Plan Sponsor made an early contribution to the plan of $80,000 on 10/3/2008 and a final contribution of $42,631 on 2/26/2009.

First project the three quarterly installments and the early contribution to the valuation date using the effective interest rate to determine the amount of required installment not made as of the date of valuation

$27,642*1.068^(260/365)=$28,968.21

$27,642*1.068^(169/365)=$28,496.95

$27,642*1.068^(77/365)=$28,028.30

Total:$85,493.46

$80,000*1.068^(89/365)=$81,293.66

Amount of quarterly contribution requirement for installments due prior to the valuation date that have not been made is $4,199.80. Since this amount is attributable to installments due prior to the valuation date, according the the preamble to the proposed regs, it is not discounted at the increased rate of interest. In this case, the $4,199.80 of unpaid quarterly is not actually useful going forward, but would have been had contributions exceeded required installments up to this point as the additional amounts would be applied toward the next quarterly.

The final installment due on 1/15/2009 was not made until 2/26/2009. Therefore $27,642 of the $42,631 final contribution is discounted at 11.80% from 2/26/09 to 1/15/09 and 6.80% from 1/15/09 to 12/31/2008, while the remaining $14,989 is discounted for the entire period at 6.80%.

$27,642*1.118^(-42/365)*1.068^(-15/365)=$27,215.80

$14,989*1.068^(-57/365)=$14,835.80

MRC as of 12/31/2008 is $122,853, and discounted value of contributions made is $81,293.66+27,215.80+14,835.80=$123,345.26. Therefore, minimum funding has been exceeded by $492 as of the valuation date.

BTW, I learned the hard way that accidentally hitting escape after writing a long equation filled post can sometimes erase an hours worth of work and the undo button won't bring it back.

I remember reading something about this and now I cannot locate the cite to double check. A plan amended their benefit formula from 2% per year to 6%, effective for the 2008 year. I seem to recall that when something like this happens, you cannot use the extra 50% of the funding target for the maximum contribution for the year following the change, i.e., 2009 - is this accurate? Are there any other considerations due to the new rules when the formula is increased? All help is greatly appreciated.

Do we agree that the funding-based restrictions on lump sums do not apply in the instance of a plan termination, per the final regulations that came out in October?

Dog

In 2008, a 403(b) plan was terminated and all participants received a distribution. Can a former participant who now has a paid up annuity roll that to a 401(k)? In other words, is their paid up annuity still considered a 403(b) and eligible for rollover?

A participant wants a distribution of 1/3 of what his RMD would be for 2009 and not have any federal withholding. Under the new 'rules' for 2009 is this allowed? Or would it really be considered a normal in-service withdrawal because he did not take the entire RMD amount?

Is a sole proprietor's 401(k) plan benefits protected from the IRS and State tax liens? Can a distribution be forced?

It is my understanding that, pursuant to Notice 2009-82, a participant who received a "purported" 2009 RMD in 2009 may do an indirect rollover to an IRA or eligible employer plan of all or any portion of such distribution by the later of November 30, 2009 or the date 60 days following receipt of the distribution.

Assuming my understanding is correct, may such a rollover be made back into the plan from whence the distribution was made?

Do terminations for cause, such as failing drug tests or violating attendance policies with tardiness, add to layoffs when evaluating the number of terminations against the 20% limit for partial plan termination?

In section 404(b)(2)(A) it states, For purposes of this section, any plan providing for deferred benefits (other than compensation) shall be treated as a plan deferring the receipt of compensation. In the case of such a plan, the determination of when an amount is includible in gross income shall be made without regard to any provisions of this chapter excluding such benefits from gross income.

In section 404(b)(2)(B) it states, Subparagraph (A) shall not apply to any benefit provided through a welfare benefit fund (as defined in section 419(e)).

Don Levit