Originally posted in the "Correction of Plan Defects" forum, but appropriate for this forum as well...

First, my apologies for interrupting the NCAA tournament.

A participant in a cash balance plan requested a lump sum rollover to an IRA. The plan custodian cut the check and it was accepted by her IRA provider. Shortly after the check was cashed, however, the participant informed her IRA provider that she had changed her mind and directed the provider to reverse the rollover. The IRA provider wrote a check back to the plan, which, unfortunately, the custodian accepted without mentioning any of this to the employer. The custodian then issued a Form 1099-R, showing that the participant had rolled over her entire account balance in 2008 (notwithstanding the fact that the plan again has possession of the funds).

Nothing in the plan document would have allowed the rollover back into the plan, because the plan does not have rollover accounts.

My thoughts/questions:

(1) One option would be to treat this as a cancelled rollover election, and to issue a corrected 1099-R showing that no amounts had been rolled over in 2008. This seems like an extremely aggressive (if not disingenuous) position, since the check was actually cashed and the amount actually went into the IRA. Does anyone disagree?

(2) A better option (in my mind), would be to acknowledge that a rollover did occur in 2008 and that the plan improperly accepted a return of the funds from the former participant. Presumably, this would be an operational error that needs to be corrected under EPCRS and the amount must somehow get back into an IRA for the former participant. But I'm not clear on how the corrective distribution should be structured... Can this amount properly be characterized as an eligible rollover distribution? Does the amount need to be credited with interest at the plan's stated rate from the date of improper acceptance to the date of distribution? How should these transactions be reflected on the Form 1099-R?

Any thoughts would be greatly appreciated.

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Hi gang:

I'm one of those faceless ex-employees that you all talk about and work hard to keep legal. The horror, the horror .....

I took a Buyout with my Company last September (08). Buyouts where offered to many before the layoffs became inevitable. I took the buyout with a good deal... Company/Cobra subsidized medical for one full (1) year. As I left the Companies HR folks told me that to qualify and get unemployment I was to tell the powers to be that I was "Mutually Agreed Separated". I got unemployment and the lower rate insurance through Cobra.

Now, I got a question. I'm still looking for work and am starting to worry about Health Insurance costs. If after a year I'm still jobless can I apply for some of that subsidized Cobra ARRA 2009 extension ? As I read it in the ARRA literature... The qualifying events for employees are : Voluntary or Involuntary termination of covered employee for reasons other than gross misconduct".....etc, etc I left in good terms.

I figure I was included in the Voluntary part. But can I still get an ARRA extension after the year is up ? Confusing for us mare mortals....

Thanks,

MSG

What laws would a retirement have to have had amended for by the middle of 2007?

Any aspects of the PPA (Pension Protection Act), for example?

Does anyone know of official sources that state one can use plan assets to pay plan maintenance fees, but not to pay audit CAP fees? I tried gpoaccess.gov, but it did not seem to have ERISA online. Does anyone know of any official source reproducing ERISA online?

A small company terminated its plan in early 2008 and distributed all benefits to the 3 owners, who were the only participants in the plan. None of these owners rolled the distributions over; thus they are taxable in 2008. However, one of the owners turned age 55 during 2008 (the others are over 59 1/2). Is this owner subject to the 10% excise tax, or is he considered "separated from service" for purposes of IRC 72(t)?

Any replies would be appreciated, thanks!

A calendar year 401(k) plan failed the ADP tests and refunds were made to the HCEs by 03/15. After 03/15 it was determined the census information was misreported, and the plan actually passes the ADP test based on the new accurate information.

Can we reverse the refund transactions and have the HCEs send back their refunds? What is the recommended course of action in this situation? Thanks very much!

I have a 401(k) Plan that 2008 was the initial year. It has only one participant, the business owner, who makes well over $230K and is over age 50. During the year the client deposited $57,000. Since the IRC 415 Max is $51K (with the Catchup), there is $6,000 that exceeds both the deduction limit and the maximum individual allocation. I have two concerns that I do not have complete confidence with my conclusions.

First, I understand that under this Plan the Maximum Allocation under 415 is the Maximum Deductible, not 25%. If this is correct, the excess $6,000 is subject to the 10% excise penalty tax on nondeductible amounts. Am I missing something?

Second, the Plan allows a 415 excess to be corrected via a refund of employee contributions. Does this avoid the 10% penalty tax, and would that create a problem with the application of Catchup?

I am almost 100% sure on the Maximum Deductible Amount being the $51K. While less sure, I also believe the 10% excise tax will apply in all cases. I don't think a refund of employee contribution avoids the penalty tax as the Pension Answer Book says "...an excise tax imposed on the employer equal to 10 percent of the portion of any contribution..". I assume that "any" means any. If so, refunding the $6,000 would not avoid the penalty since the tax applies whether the contribution is employer or employee.

Any insights will be appreciated.

First, my apologies for interrupting the NCAA tournament.

A participant in a cash balance plan requested a lump sum rollover to an IRA. The plan custodian cut the check and it was accepted by her IRA provider. Shortly after the check was cashed, however, the participant informed her IRA provider that she had changed her mind and directed the provider to reverse the rollover. The IRA provider wrote a check back to the plan, which, unfortunately, the custodian accepted without mentioning any of this to the employer. The custodian then issued a Form 1099-R, showing that the participant had rolled over her entire account balance in 2008 (notwithstanding the fact that the plan again has possession of the funds).

Nothing in the plan document would have allowed the rollover back into the plan, because the plan does not have rollover accounts.

My thoughts/questions:

(1) One option would be to treat this as a cancelled rollover election, and to issue a corrected 1099-R showing that no amounts had been rolled over in 2008. This seems like an extremely aggressive (if not disingenuous) position, since the check was actually cashed and the amount actually went into the IRA. Does anyone disagree?

(2) A better option (in my mind), would be to acknowledge that a rollover did occur in 2008 and that the plan improperly accepted a return of the funds from the former participant. Presumably, this would be an operational error that needs to be corrected under EPCRS and the amount must somehow get back into an IRA for the former participant. But I'm not clear on how the corrective distribution should be structured... Can this amount properly be characterized as an eligible rollover distribution? Does the amount need to be credited with interest at the plan's stated rate from the date of improper acceptance to the date of distribution? How should these transactions be reflected on the Form 1099-R?

Any thoughts would be greatly appreciated.

Has anyone run any PPA valuations for a DB/DC combination that is permissively aggregated for 401(a)(4) sponsored by an LLC where there are employees and the owners take no W-2 wages?

I have two such nightmares currently that I've been actively putting off. I have an excel spreadsheet that would help me do the LLC income split and include the employee cost divided between the two owners since my valuation software will not split out the income across two plans.

Any advice on how to handle the circular equation between contribution and compensation, and how to communicate most effectively with the client, would be appreciated.

Joseph

A client in an unusual situation wants to be certain of bankruptcy protection and wants the added protection of having a a determination letter. No body has the first document from the 80's. Will the IRS issue determination letter if you do not give them all of the documents for the Plan?

I received a K-1 for a stock I have in an IRA at Fidelity Investments. It is an LP which I do understand has tax possibilities in an IRA. My understanding was that if UBTI exceeds $1000, it is taxable. Is that correct? Probobly not the smartest thing I did buy in this in an IRA but did not expect the UBTI to exceed $1000 and my dsitributions for 2008 was 978.00. The K-1 form I was sent by the company shows Ordinary Business Income of 1009. Does this mean I must file a return with IRS and that I have exceeded the UBTI by $9.00?

A participant requested her distribution be split 50/50 between a rollover to her new 401k and a cash payment to her. Through nothing but sheer "OOPS" by the TPA when requesting the distribution, a check for 100% of her balance was issued payable to her new 401k plan but mailed to her home address so that she could submit it with her investment election form for the new plan. She took the check to the bank and they cashed it. The payor of the funds (Nationwide) will be issuing a corrected 1099-R showing a code of "1" and no tax withheld and the participant will be claiming the entire distribution on her income tax return. But, what is the penalty for not withholding? Who is responsible for paying it? (enough blame to go around on this one... TPA,participant, bank that cashed the check). How does it get paid? Is there a form that must be filed?

We will be purchasing annuities for just retirees in a DB plan. In adjusting the AFTAP, do we look at all retirees to determine if they were an HCE at retirement, or does the HCE/non-HCE status apply to active participants only and therefore there would be no adjustment to AFTAP as retirees and whether they were HCE/non-HCE not considered here?

Also, if there is an adjustment to AFTAP, we would assume the adjustment to assets is the purchase price. Is the adjustment to liabilities the purchase price or the funding liability released?

Here's one I haven't seen before.

Client installed a new 401(k)/PS plan for 2008. clearly indicated on plan "set-up" papers that they wanted to allow up to 100% deferrals, catch-up, and Roth.

However, document was completed by TPA, and signed by client, not allowing deferrals.

Client deferred anyway.

Can this be fixed by retroactive amendment under VCP? There's no specific fixmin Appendix B. However, plan loans or hardship withdrawals that were allowed where document does not allow them are eligible for correction, so it seems reasonable to attempt this. Anyone ever run into this? Success or failure with a fix? Other fixes? Perhaps consider an excess deferral?

Are annual royalties from a previously published book automatically excluded as earned income for SEP contribution purposes? Does it matter whether the person is currently an author by profession? Where would I find the references?

Thanks!!

What limited due diligence do you TPAs out there accept as sufficient to cause you to believe that the rollover $$ are coming from a qualified plan? A recent statement showing sufficient assets in the partcipant's account? A statement actually showing the distribution which is resulting in the rollover? A check which mentions the name of the plan? A signed statement by the Trustee of the plan from which the assets are coming?

Once the DOL has granted an exemption from the prohibited transaction provisions, how long after does the applicant have to complete the transaction? For example, let's say the DOL approves the proposed sale of property from the Plan to a participant for all cash. As a condition of the exemption, the applicant agrees that the purchase price will be updated to fair market value as of the date of the sale. Once the exemption has been granted, can the applicant in a sense sit on the exemption for some period of time (say, 2 years) before consumating the transaction -- provided of course that none of the facts described in the application have changed?

We have company that is reducing everyone's hours 20%. My understanding is that a reduction in pay such as this is not in and of itself a qualifying event for a (status) change of election. Rather, the change must be based on a change in eligibility for benefits (such as full time to part time) or a change in cost of benefits. It is unlikely that a company has written into their plan document that a pay cut constitutes a change in eligibility.

If true, then is this written in the tax code somewhere (the client wants to know) or is it by implication; the fact that a change must be based on eligibility or cost and nothing else is mentioned?

Perhaps is there something I'm missing and these employees can change their elections under circumstances I'm not aware of?

Thanks

Edit: I forgot to ask: What about contributions the company is making to these elections? Are there any circumstances such as this one under which the company can change these amounts?