Is anyone doing end of year valuations anymore?

Recently an overpayment was made to a former participant of one of the plans we administer. We contacted the former participant and were lucky enough to get in touch with the IRA institution in which she rolled the funds into. They are helping us get the overpayment back, but they are going to issue a 1099 with a code 8, which appears to make that distribution taxable for the former participant. In addition, that money was invested and lost about 20% of its value in the month it was invested. Here are some quick details:

Distribution made: $25,500

Correct amount: $23,500

Amount that we are getting back: $1,600 <-- Amount to be reported by the IRA company as income for 2008; to be given back to the plan.

As of now they plan on adding $1,600 to her income by issuing the 1099, code 8, even though the money is going back to the plan of which she is a former participant of.

Does anyone have any suggestions of how the IRA company should be handling this so she doesn't have this overpayment distribution made into a taxable event? 1099 code suggestions? When we issue the 1099 on our end, should it be for 23,500, or 23,900 (to include the amount that was not returned to due decrease in the investment)?

Any advice is welcome. Thanks!!

I have a 401K that I plan to rollover to an IRA. The statement lists the funds in the 401k in various categories. I have talked to the plan administrators a number of times and can't get a good handle on what the categories mean.

They are as follows, using, as an example, $1000 for the total plan balance

(A) Nontaxable Contributions Post-1986 = $19 (Pre-1987 not listed, assume=0)

(B) Before Tax Contributions & Earnings = $718

© After Tax Contributions & Earnings = $60

(D) Company Contributions & Earnings, Non-contributory = $6

(E) Company Contributions & Earnings, Company Match Pre 2007 = $215

What happens when I rollover to an IRA? I have been told that:

$981 (=$1000-$19) would roll over and I will receive a check for $19.

(1) If I roll to a traditional, I assume I would file a form 8606. Would the

nondeductible amount be C or C-A or $0?

Can item A be rolled over to a Roth IRA?

Can part or all of item C be rolled over to a Roth IRA?

I have a Roth already, can I put any Roth rollovers into it or is there an advantage to not commingle?

Are there better options or am I completely bonkers on all this?

TIA

Pete

We are arguing with cpa.

he says if contribution to p/s plan(calendar year plan 2007)went in on 10/18/08

it should still go on the sked I for the 2007 filing since it's receivable.

I say that's absolutely incorrect.

to further complicate matters;we were told monies were put in by 10/15 and filed sked I with contribution included;I claim we need to do amended return for 2007 with zero contribution!

and also we say accountant needs to do amended corp return.

any thoughts?

ty

It appears that the only election required to use the alternate funding target (e.g., 430 assumptions) to determine unfunded vested benefits is to check a box on the PBGC electronic filing. Is anybody requesting the employer to make a separate written election? I wonder since the election is irrevocable for 5 years how much slainin' practitioners are doing.

I recently received a copy of the audio portion of last month's ALI-ABA program in Washington DC on Pension, Profit-Sharing, Welfare and Other Compensation Plans. A portion of that program includes a discussion between Pamela Baker, Sonnenschein, and Bill Schmidt from the IRS regarding lingering 409A questions. One question included a fact pattern / set-up along the lines of the following:

A lot of agreements say something like this: "If you are terminated after age 60, we will provide coverage under our medical plan until age 65 (or for five years after separation from service or some other period that is clearly beyond the maximum COBRA period) and if we cannot do that--if that kind of coverage is not available under the medical plan for whatever reason--then we will provide you the cost of paying for that kind of benefit on your own."

Ms. Baker asked if something like this could be done in a compliant way with 409A. Both she and Mr. Schmidt seemed to agree that it was not. Ms Baker's analysis and chief concern seemed to focus on the fact that the benefit provided was potentially being converted from an in-kind benefit to a cash payment in this case and so ran afoul of the 409A reimbursement rules. Analysis seems to be something like this:

1. The extended coverage goes beyond the COBRA period so not exempt from 409A altogether.

2. If the arrangement cannot fit within the exception, then we should seek to comply with the reimbursement rule.

3. Here though the reimbursement rules would not seem to permit this because one of the conditions of the reimbursement rules is that you cannot convert the benefit to cash and that seems to be exactly what you are doing here.

The discussion went on to note that the outcome could possibly vary depending on whether the health plan is self-insured or fully insured where it may be exempt from tax, etc.

Maybe I am misinterpreting the question / fact pattern here and would appreciate hearing others' thoughts on this, particularly if you heard the discussion live. I agree that there would be a clear problem if, at the end of the COBRA period or other point when coverage under the existing plan ends, the company simply paid the former employee a cash amount without any restrictions and truly "cashed out" the benefit. Shmidt's analysis, however, seems to say that the 409A problem would exist not just if the amount was cashed out but even if the amounts were provided in true reimbursement fashion where the company only reimbursed amounts the participant had paid for comparable coverage under some other policy or plan and was structured as a reimbursement of premiums previously paid.

If that is the case, I guess I have a hard time understanding exactly what the reimbursement rules were intended to do. Couldn't you argue that really the benefit being provided under the Plan was a cash benefit (in the form of the cost of coverage under the plan) rather than in-kind benefits such that continuing to pay cash for same level of coverage under some other policy or plan did not represent a change? As the discussion touched upon, it seems to me true reimbursements should not be viewed as cashouts or cash payments but simply another way to continue the benefit promised--i.e., continuation of health coverage. In this case though, some of those benefits would come from the existing plan and some outside that plan. In the end though the employer is simply doing the same thing for the duration of the coverage--paying the cost of continued health coverage for the terminated employee.

Based on my understanding of the discussion, that does not appear to be acceptable interpretation though. Ms. Baker suggested that one alternative might be to promise the former employee a fixed amount (e.g., up to $1,000 per month) toward medical coverage and if we can do that under the existing plan we will but if not the participant can apply the amount under some other plan. That way, the benefit is always presumably a fixed cash benefit and it doesn't change forms, etc. Again, I don't see how that really differs much from the interpretation above--other than fixing the amount and I'm not sure that is appropriate because it seems continued coverage under the existing plan could / would likely result in increased costs if it went on for any time.

Anybody have other thoughts or interpretations on this or suggestions of better ways to structure benefit continuation provisions?

If a plan has only a 401(k) arrangement and a safe harbor match, we know that the elective deferral is not counted for determining whether a person is vested for purposes of the rule of parity under 410(a)(5)(D). But what about the safe harbor match? Is that considered an elective deferral for this purpose or does the safe harbor match mean that the participant is vested and thus the rule of parity cannot apply for eligibilty purposes?

I'm feeling particularly irate this morning with regard to stupid IRS agents. While I do not yet have full details:

Profit sharing plan (NOT a 401(k) plan, nor even a document with a 401(k) option) was terminated as of 12-31-06. We (or more accurately, the client) applied for, and received, a favorable determination letter for the termination.

Client subsequently received a letter from a Revenue Agent, who shall for the present remain nameless. In this letter, the agent presents a list of "failures that were presented and the correction that was completed during the examination of the plan." The agent also says that the Area Coordinator has proposed a sanction of $7,000.00.

The "failures" are:

1. Not timely amended for automatic rollover requirements under IRC 401(a)(31). Naturally, it was timely amended, and this amendment was provided as part of the termination.

2. Not timely amended for final 401(k) regulations. Interesting, since it isn't a 401(k) plan anyway!! I'm surprised they don't want a PFEA amendment as well!

3. Not timely amended for 401(a)(9). It was.

So now the client is understandably in a tizzy, and we have to waste our time educating one or more morons at the IRS. We've been having a lot of trouble on plan terminations with people who don't know what they are doing, and WE have to waste our time instructing them - are we alone, or are others having similar problems?

GRRR!

I do graciously give thanks to God for all those who have provided so much useful information. It does make a difference to me, I can never stop learning, and that knowledge does help. And a special thanks for all the extra wit and humor along the way. I know I am truly blessed and so thankful for all those I can consider friends. May your Thanksgiving holidays be truly blessed.

A potential client wants to setup their prevailing wage plan so that the prevailing wage contribution offsets the safe harbor match and the profit sharing contributions. The profit sharing formula would be new comparability.

Our volume submitter document can handle this setup, but I have a question about how the offsets affects the rate-group test.

The prevailing wage contribution is a nonelective contribution, so typically I would include it in the rate-group test.

But if the prevailing wage contribution offsets the safe harbor match, should I include the portion of the prevailing wage that offset the safe harbor match in the rate-group test?

The entire prevailing wage contribution would still be a nonelective contribution and deposited in the prevailing wage source, not the safe harbor match source.

Thank you in advance for your help.

A one participant plan invested in loans.

That is, they did what appears to be a private promissory note and loan that was secured by real estate.

The appeal is interest rates on the loans of above 10%.

Does anyone detect any problem with such arrangement?

The loans are to non parties in interest.

Thanks.

I understand that FSA plans are "use it or lose it" with regard to balances and that employers cannot refund balances to the employee, but I have also heard that in certain circumstances employees can get money back from their FSA if it is a result of administration error. Any insight on this topic?

2 owner only plan with AFTAP greater than 90% is terminating and would like to "equalize" distributions amongst the 2 owners. Their respective 415 limits would appear to be sufficient to allow this.

Plan Doc: Just states that if insufficient assets then benefits cannot discriminate under IRC 401(a)(4), also has the top 25 HCE restriction language.

Treas Reg. 1.401(a)(4)-5(b)(2) states only the plan cannot discriminate in favor of HCEs upon plan term.

Rev. Ruling 80-229 has allocation of assets approach (using ERISA 4044 allocation priority) but seems to be primarily concerned with discrmination between HCEs and NHCEs (we have no NHCEs).

Any opinions on whether a 2 owner only plan (never has had any NHCEs) can "equalize" distributions if they are within 415 limits ? Does the one with the higher PVAB have an impermissible forfeiture if she takes less than a pro-rata funded share of her benefit ? Grey area ? not Grey area ? Thoughts.....

a current self directed 403(b) plan, which offers 3% qnec across the board as well as employee deferrals, is being told by their provider to shut down the 403(b) and to move to a 401(k). Alternatively, they are saying if they want to stay 403(b) that they will have to close out the current 403(b) that is not pooled and open a pooled 403(b) account and that they have until June to update for new 403(b) regs. Some supervisors are worried about the employees understanding this.

Any thoughts would be appreciated.

I've been asked to do a DB illustration for a new LLC, formed in 2008 and taxed as an S Corporation. The LLC is owned 100% by Mr. W. The accountant wants a small W-2 for Mr. W, and a large ($200k+) pension deduction. Mr. W will be the sole employee/participant, and he's 68 years old.

Complications arise because Mr. W and his wife formerly owned a law firm. Each owned 50% of that entity, but they sold out to other (unrelated) owners several years ago. The law firm used to maintain a DB plan, and Mr. W and his wife each received lump sum distributions of about $600k when the plan terminated several years ago. The lump sums that they received were nowhere near the 415 lump sum limits at that time, although it should be noted that the plan had been very underfunded and the lump sums that they received were only about 1/2 of their accrued benefits.

The law firm is still in existence, owned by unrelated parties, and there is no desire on anyone's part that it should become a co-sponsor of the LLC's new plan.

How should the 415 limits be calculated for the new plan?

1. Take into account salary history, years of service, and years of participation at both the LLC and the law firm (since they had common ownership), and offset by the actuarial equivalent of the prior lump sum payouts?

2. Ignore the prior service and comp, and the prior payouts, and treat the LLC as a brand new employer?

3. Other?

Option 1 makes some logical sense, since Mr. W owns 100% of the LLC and (by attribution) used to own 100% of the law firm. It would seem that aggregation might not only be permitted, but required, since Mr. W received a benefit from the old DB plan.

My concern is that it's going to result in a very large initial 415 limit because (a) the lump sum payout was relatively low, (b) Mr. W had 10+ years of participation in the law firm's DB plan, and © Mr. W had very high salaries at the law firm. This would open the way for Mr. W to take a very low (or zero) salary from the LLC, while making a huge pension contribution. Seems pretty aggressive to me, especially since the law firm is not going to co-sponsor the new plan.

What d'ya think?

TIA.

Hello. We have discovered that a client with a 401k plan has deposited a corrective contribution into the wrong participant's account. We are aware that Section 10.01© of the plan document allows the Employer to withdraw mistake-in-fact contributions within a year after the incorrect deposit. Unfortunately, a little over a year has passed since the incorrect deposit was made. We are trying to determine if the plan document addresses this issue. We have asked the document provider for comment, but no word as of yet. I would think that the participant who received the incorrect deposit is not entitled to the principal, but is entitled to any investment gain. If there is investment loss (highly likely), the principal amount deposited would absorb its share of the loss. But the question is, what happens to the adjusted (in the event of investment loss) principal? According to the plan document, the Employer can't take it back. What are your thoughts in dealing with this issue? The participant in question is requesting a distribution. Thanks in advance for your help.

A former employee left the firm to take another job. He left no resignation letter just said he had another job.

The company esop sent his his put option papers and He now says he retired from the company. He was in the plan for 6-years, was fully vested and had reached retirement age when he left. When does the ESOP have to begin making payments? The company would like to wait 5 years.

We are starting to sell financial planning services to our 401k participants for a monthly charge. I'm trying to figure out if it would be a good and safe idea to deduct from participant accounts.

Any thoughts would be helpful.

With market tanking, is there anything on the horizon that may provide relief to an underfunded DB plan?

Thanks

I was curious about how many governmental plans (especially those for local muncipalites, etc. where the current document is a series of ordinances) are actually applying for IRS determination letters. If so, under Cycle C or are you delaying to Cycle E? And is anyone converting to an actual plan document?