I am 64 and planning to invest money in an IRA this year. My question is about the tax benefits or penalties that might ensue. I believe that with the Roth IRA in order for me to avoid penalties I must leave the money in for 5 years. Could someone elaborate on this, because I think it refers only to the money earned, not the capital. What about the traditional IRAs? Since I am 64, if I invest this year, can I take money out without incurring a penalty at any time? Thank you for answering these questions.

We administer a 401(k) plan that excludes certain HCE's from participation. The plan has S/R and P/S only.

We just received the 2007 data and found one of the excluded HCE's made salary deferrals. Our document indicates that salary deferrals and earnings be distributed to the ineligible participant.

I have read all the discussions about this.

Rev Proc 2006-27 provides correction by amendment and DL. However, it appears to only permit this if the employee has not met age/service requirements or met age/service and entered before the entry date. It does not appear to apply to an excluded class, particularly if that excluded class is comprised of HCEs. In fact, it starts out by saying "The operational failure of including an otherwise eligible employee in the plan who doesnt meet age/service or enters early"

This seems to not apply to excluded employees as they are not otherwise eligible.

Given this we are inclined to follow the terms of the document and distribute the salary deferrals and earnings. Should these salary deferrals be included in the ADP test?

My understanding is that starting in 2008, a participant may rollover (and simultaneously convert) funds, other than a Designated Roth Account, from a qualified employer plan to a Roth IRA. This is addressed in Pub 590 in a rather blasé fashion, imo. I have also read the instructions for 2008 Forms 1099-R and 5498 but cannot find specific instructions on how these rollover-conversions are to be reported. Maybe I'm overcomplicating it, but that's a hazard of this job...

Does anyone know if there will be a special distribution code for Form 1099-R (other than G)? When the funds are deposited, the 5498 instructions indicate to report them as rollovers, not conversions. It seems I'm missing something. How will the IRS know the funds are taxable?

I know we have lots of time for this, but I'm putting together a chart for internal use and need to address this.

Any insight or direction is appreciated.

Thank you!

Hoping I can get some thoughts on the following situation...

Two 401(k) plans (we'll call them Plan A and B) are aggregated for both coverage and ADP/ACP for 1/1/06 to 12/31/06. However in 2007, they are being tested separatley. Both plans use the prior year testing method.

Let's assume the NHCE average on the 2006 aggregated test was 4.50%. What prior year percent would you use on the separate tests for Plan A and Plan B in 2007?

The regs define this as a plan coverage change and says to determine the prior year subgroups and defines that as:

(B) Prior year subgroup. --The term prior year subgroup means all NHCEs for the prior plan year who, in the prior year, were eligible employees under a specific plan maintained by the employer that included a qualified cash or deferred arrangement and who would have been eligible employees in the prior year under the plan being tested if the plan coverage change had first been effective as of the first day of the prior plan year instead of first being effective during the plan year. The determination of whether an NHCE is a member of a prior year subgroup is made without regard to whether the NHCE terminated employment during the prior year.

© Weighted average of the ADPs for the prior year subgroups. --The term weighted average of the ADPs for the prior year subgroups means the sum, for all prior year subgroups, of the adjusted ADPs for the plan year. The term adjusted ADP with respect to a prior year subgroup means the ADP for the prior plan year of the specific plan under which the members of the prior year subgroup were eligible employees on the first day of the prior plan year, multiplied by a fraction, the numerator of which is the number of NHCEs in the prior year subgroup and denominator of which is the total number of NHCEs in all prior year subgroups.

I can see this going one of two ways:

1. The plans were aggregated in 2006. If plans are aggregated together, they are treated as a single plan for nondiscrimination testing. Therefore there is only 1 prior year subgroup. The NHCE average used on both Plan A and Plan B's tests for 2007 would be 4.50%. If 2 plans are tested separately in Year 1 but aggregated in Year 2, then in that case you have 2 prior year subgroups.

2. If the plan coverage change had been first effective on the first day of the prior plan year (2006), the testing would have been disaggregated and you would have had two subgroups. Therefore you determine individual NHCE averages for each plan in 2006 to use on the 2007 test.

Any thoughts?

I have an S-Corp ESOP that has plummeted into failure with the 409(p) testing calculations. The plan with four Disqualified Persons who have in excess of 10% ownership within the plan. The primary owner's wife also participates in the plan which combined gives them about a 19% ownership. In addition the primary owner holds outside of the plan 49% of the outstanding shares.

With the final regs, I know that I cannot target an individual to sell his shares to the remaining participants, however, I have discussed with other practitioners shuffling shares within the entire account. This ESOP has a good amount of Other Investment funds available which would allow sale/purchase prorata. Can I sell prorata then prohibit the Disqualified Persons from participating in the repurchase?

I can't fix the 49% outside of the plan, but any suggestions or other correction techniques would be greatly appreciated.

Thanks.

This post was submitted to the 401k plans and retirement plans boards with no response, thus the reason for the post on the spirited DB plans board.

An employer sponsors a defined contribution plan.

It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature.

For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004.

The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions.

The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years.

It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed.

Any other views?

If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

2 companies are not controlled group nor are they asgroup.

If someone has ownership in each,what prevents him from having 2 db plans,both with max benefits?

H and W are in debt up to their eyeballs. They are divorcing. H has two 401K accounts, wife has one. They want to QDRO 100% of each account to the other, and then agree to use the $$ (less withholdings) to pay off debts (mainly the house which is mortgaged to the hilt). Will the IRS look behind a marital settlement agreement to each award the other all of the retirement assets? The purpose here would be to avoid the 10% penalty on withdrawing all accounts.

An employer sponsors a defined contribution plan.

It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature.

For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004.

The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions.

The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years.

It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed.

Any other views?

If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

We have a plan that charges distribution fees directly to the participant.

They are failing ADP this year and require refunds to correct.

Has there been any guidance on whether it is allowable to charge a distribution fee on a corrective distribution?

If allowable, would you "gross-up" the refund amount by the distribution fee so the HCE is getting the full refund, or net the distribution fee against the total refund amount?

Thanks.

An employer sponsors a defined contribution plan.

It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature.

For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004.

The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions.

The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years.

It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed.

Any other views?

If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

Did any guidance change the GAP period income issue for excess deferrals?

Under Final 1.402(g)-1 regulations for 1.402(g)-1 paragraph (e)(5)(i) and it states as follows:

(5) Income allocable to excess deferrals

(i) General rule. – The income allocable to excess deferrals for a taxable year that begins on or after January 1, 2007 is equal to the sum of the allocable gain or loss for the taxable year of the individual and, to the extent the excess deferrals are or will be credited with gain or loss for the period after the close of the taxable year and prior to the distribution (the gap period)

if the total account were to be distributed, the allocable gain or loss during the period. The income allocable to excess deferrals for a taxable year that begins before 2007 is determined using the 1.402(g)-1(e)(5) (as it appeared in the April 1, 2006 edition of 26 CFR Part 1)

- So it looks to me like gap period income will apply for excess deferrals beginning with 2007 tax years, but PPA said something related - that must have only applied to ADP/ACP refunds, not for excess (over the 402(g) limit) refunds?

2007 was and 2008 will be bad financial years for my client. They are filing a 2007 funding waiver for the 3 out of 4 quarterly contributions they did not make and since the envelope still has room, we're including a 2008 application as well (we know it's premature).

Question:

In the 5 year projection of the company financials, Rev. Proc. 2004-15 asks not only for a projection of the minimum required contributions but also for a projection of income and expenses. Should I read "expenses" as "GAAP expense"?

Since we made changes to the OPEB and Pension Plan, the client is in a OPEB and Pension "Income" position, as opposed to annual expense accruals.

Yes, this will be pointed out in the cover letter but it seems self defeating, especially if the reviewer don't follow what has occurred.

Thanks all.

My last post got no responses, so maybe this topic will prove more interesting.

In 2002 we merged a plan for an acquisition into our "core" plan. Because there were numerous employee terminations, and we were more aggressive in making distributions, we paid out quite a few people. And we reported them appropriately on the SSA--either as Adds or as Deletes.

The Problem: it is clear to me that people we reported as deletes on the 2002 SSA accompanying the final 5500 never reached the Social Security Administration. They are on the 2002 SSA as Deletes, but every week a few call me looking for "the benefits that Social Security told them they had".

Showing them as Deletes on the successor plan isn't going to help. Other ideas?

Two employers are in one plan. Mid-year there were ownership changes and these companies are no longer considered as being a controlled group. Do I test separately based on the status at year end or do I test them together and switch with the following plan year? It will make quite a difference in the ADP refunds. I sure do appreciate any help.

Jimmy

Folks:

I am doing a series of articles on www.benefitblog.com that discusses what you can do to assist your clients in the upcoming premium increases similar to the 2001-02 plan year.

Check out benefitbog.com and feel free to subscribe. I am working with NAHU to put together a webinar regarding this topic. If you are interested in participating let Farren Ross know at fross@nahu.org

Ric Joyner, CEBS, GBA, CFCI

rj@eflexgroup.com

It has always been my understanding that IRAs set up under SEPs or SARSEPs were not subject to any rules protecting surviving spouses (411(a)(11) does not apply because a qualified plan is not involved, but there is a parallel provision in ERISA Section 205). However, that question has now been posed directly to me, and I am now wondering whether my assumption was correct. Specifically, a SEP is an ERISA plan; however, it is a conduit to an IRA, which is not an ERISA plan. Can someone point out to me some defintive guidance on this subject?

The advantage of a SIMPLE is to avoid ADP/ACP testing.

If a 401k plan starts a year as a SIMPLE may it be amendment mid-way through the year to remove the SIMPLE aspect, and ADP/ACP testing thus applies to the entire year? Can this be done without stripping the contributions made for the SIMPLE portion of the year of their tax deductibility?

Of course, the required SIMPLE contributions would have to be continued to the point in the year that the amendment takes effect (after the required 204h notice period).

I have a client with a Cash Balance hybrid plan with an unusual definition of Normal Retirement Age; The earlier of age 65 and five years of service.

We filed for a determination letter on termination and this is the sticking point with the Service. They've cited Laurent v. PricewaterhouseCoopers in saying the definition violates ERISA, we've cited Fry v. Exelon, the 1.401(A)(4)-12 regs and 411(a)(8) saying that it doesn't.

There's no question that going forward, the new 1.401(a)-1(b)(1)(i) regs would prohibit the use of this definition. However, the plan was frozen years ago, and future accruals are not at issue.

I've talked to others in the field who were surprised we've been experiencing this much pushback and thought that the Service had settled on a position that these Normal Retirement Age definitions were permissible, but have been unable to identify any specific instances.

Has anybody else dealt with this issue? Has seen a favorable resolution?

I am looking for a copy of the proposed 2008 Form 5500. Is this something that has been published. I would like to know what will be required reporting for a DB plan and how the Sch B differs due to PPA.