From the no good deed goes unpunished file.......

Employer faithfully deposited 401(k) contributions during the year. However, due to a payroll glitch, everyones W-2's reflect a slighlty larger 401(k) amount than what was actually the correct (and deposited) amount for 2006. W-2's were sent out with the wrong amounts.

There are quite a few people in this plan so, rather than fix and re-issue the W-2's, the employer decided to make an additional contribution to the plan for the difference between what the W-2 shows and what was actually deposited (Again, the actual amounts deposited as 2006 401(k) contributions were correct, it was the W-2 that was incorrect). This was done recently, well after 12/31.

The proper thing to do would have been to correct the W-2s, but that apparantly is not going to happen. If the employer does not take the amount of this additional deposit as an employer contribution deduction, does that help the situation somewhat? Also, would you consider this extra deposit as a "late contribution"? Really, its not late because it shouldn't have went into the plan in the first place.

This is messed up. Any comments or suggestions are appreciated.

Have a Plan we inherited that has a 50% match on the first 3% of deferral, 75% match on the next 3% of deferral (4-6), and a 100% match on the next 3% (7-9). I know the plan not only has to pass acp testing but also 401(a)(4) for a right or feature.

Appears to me that each level of match has to pass 401(b) with respect to availability. All participants can defer at least 9% of their pay per the plan document (no cap). Of course it appears the HCEs are the majority deferring the full 9%.

Is the 410(b) based on availability (which all participants have available) or is it based on the actual rate of deferral - in other words look at hces deferring at least 7-9% compared to nhces deferring at 7-9%.

First time I have had this and prior administrator did not address.

Thanks in advance

With regard to 5-percent owners 401(a)(9) has gone through some gyrations. Prior to TRA 86 only 5% owners were required to take distributions from qualified plans at 70 ½. TRA 86 changed this to everyone. SBJPA changed it back to only 5% owners. However, the pre- TRA ’86 rules and the proposed regs had specific rules with regard to what happens if you first became a 5% owner in a year after you reach age 70 ½. (You have to begin taking distributions).

SBJPA and the Final 401(a)(9) regs are silent on this and actually appear to say that the determination date for 5% owners is the plan year ending in the calendar year in which someone turns age 70 ½. It would appear from the language of the Code and the regs that if you become a 5% or more owner after this year you would not be a 5% owner and would not have to begin taking distributions.

The Section of the Code that provides the exception to the rule allowing distributions to be deffered to actual retirement applies only to “an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 701/2,”

The regs provide:

(c) For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70\1/2\.

Therefore it appears that if someone becomes a 5% owner after age the plan year ending in the calendar year in which they are 70 ½ they would not be a 5% owner under the current Code language. I wouldn't have thought that this was the rule, but looking back at the pre-TRA '86 Code provision and proposed regs--where this was specifically addressed--and looking at the current Code language and regs the conclusion appears to be that 5% owners is a one time determination and what happens after that date with regard to corporate ownership is irrelevant. Has anyone looked at this?

An advisor for a prospect of ours is debating that once an employee is eligible to defer into a 401(k) plan, they are always eligible to defer unless the plan is frozen/terminated, or the employee quits. The plan in question is considering excluding all HCEs from future participation in the plan: no more deferrals, no contributions, no forfeiture allocations. They are also considering excluding a fair number NHCEs to get their participant count under 100 (the plan has well under 100 with balances overall, but more than 120 eligible).

1. Assuming the amendment is not considered discriminatory, is their a problem with amending the plan to exclude certain employees from being eligible to make deferrals into the plan?

2. The document we propose is a normal nonstandardized prototype, or we could go the volume submitter route if that's really necessary. If #1 is ok, do you think such an amendment/restatement would damage the reliance on the D-Letter or advisory letter?

Employees have deferral elections in place for bonuses, and the deferral elections were made prior to year in which bonus was earned. Employee must be employed on bonus payment date to receive bonus (so substantial risk of forfeiture). Bonuses paid at the end of March following the year in which earned. Emloyer's payroll system has a glitch, and no deferrals are deducted from the bonus payments. Employees get checks and cash them. Employer discovers error.

One position is that the bonus amounts are not, and were not, deferred and so are not subject to 409A, and so no violation of 409A. However, another position is that the deferral elections were improperly "revoked" because they were not irrevocable, and thus a violation of the initial deferral rules occurred and so the "not deferred" amounts are subject to the 409A penalty. Yet another position would be that the amounts WERE deferred but then the payment of those amounts was accelerated, again in violation of 409A.

Thoughts?

I am having trouble justifying a "correction" by asking the employees to return the amounts that should have been deferred (and I find no direct authority that this is a transaction that can be rescinded), since they now are in actual receipt of those dollars, but am wondering if anyone has tried that strategy. Thank you for what I know will be some interesting responses.

A 401(k) plan mistakenly excluded an eligible employee from making deferrals. I believe I understand the Rev. Proc. 2006-27 correction to be a QNEC of 50% of the missed deferral (ADP for employee's group * employee's comp for PY), adjusted for earnings.

However, the employee excluded is over 50. Rev. Proc. 2006-27 does not seem to address correction as to the catch-up. Employee asserts he would have done catch-up, had he been allowed to make deferrals. What is the appropriate correction with respect to the catch-up?

Thanks in advance for any suggestions.

It is my understand that the conversion calculation includes all IRAs. You can't carve out a specific IRA as a non-deductible IRA and convert only it.

What does all IRAs mean?

I am guessing that SIMPLES and SEPs are excluded when calculating the percent of the conversion that is taxable?

Thanks

My knowledege was very limited when fees were brought up during the time I opened my account as I failed to do research. Can someone please help and explain whether a 5.25% front-end sales charge is good or bad? I opened up my ROTH IRA account at Washington-Mutual.

Just wanted to start a little open discussion. The company I work for is about to initiate a 401k, and the investment managers we're choosing to go with said two things that I didn't agree with. Now, bear in mind, I don't have industry experience dealing with these two questions, but I have certainly been reading everything I can get my hands on. So I was hoping some of you might be able to lend your expertise.

The two things I didn't agree with:

1. Investment Policy Statements aren't needed, and they add more liability to the business owner than they prevent.

2. "We're looking at offering your guys 25 investment alternatives, which would cover every asset class."

Now, although they aren't required under fiduciary law, I thought IPS's certainly streamlined the investment management process.

I also thought that after reading several behavioral finance studies people are coming to the conclusion that once you offer MORE than 9 or 10 investment options, participants start to become paralyzed by analysis and start leaning towards more conservative investments, because they aren't sure what they should choose.

Now for someone who really wants this 401k to take off and have a lot of guys participate, what do you guys think about these statements with your experiences?

Thanks so much.

I have contributed to my employer's 403b (TSA) plan for several years, and recently, the company moved to a 401k. What are the implications of rolling over the TSAs to the 401k plan. Are there penalties??

If a DB Plan Sponsor wants to give 4 NHCEs non-reduced benefits without making NRA, naming them by amendment, is this allowable? This just doesn't seem right but seems that I have seen amendments like these. Citations? Thank you.

I have two related companies (ASGs) where one is passing the coverage test but the other is not (both are top heavy).

The Company A plan provides for 401k, matching and cross-tested PS contributions. For the PS portion, 3 HCE’s received a $27k (or 12.272727%) contribution and 8 HCEs & 8 NHCEs receive a 4.50% contribution, to be eligible for a contribution participants must be employed on the last day and worked at least 1,000 hours.

Company A passes coverage and the cross-testing with no problem and would prefer not to increase their contribution above the 4.50% level.

The plan for Company B has a cross-tested PS contribution only with 1 HCE receiving a 20% contribution and 1 NHCE who did not receive a contribution because she terminated before 12/31/06. Company B fails the coverage test.

Can Company B adopt a corrective amendment to provide for a 5% contribution to the terminated participant which would then allow Co. B to pass the coverage test and satisfy the minimum gateway requirement and not impact contribution percentage that must be given to the Co. A participants (i.e. min. gateway)?

Do the new requirements regarding Plan provisions apply to all eligible Participants or only those people who have an account and are receiving some sort of statement?

Are VEBA's typically set up to fund specific benefits, making it difficult/impossible to alter and use funds to fund a "new" benefit?

As an example, a current VEBA is set up to fund Group LTD premiums - could funds later be used to fund Exec. Life premiums as well?

In negotiations w/ union. They want us to modify our self-insured plan to provide the same coinsurance amount for medical/surgical and mental health benefits but want us to continue to keep the visit limitation (e.g., 30 visits) for only mental health benefits.

I generally understand the MHPA to prohibit dollar or lifetime maximums for mental health than medical/surgical benefits, but I think the MHPA says that the plan can still have coinsurance, co-pays, limits on the number of visits, etc. on mental benefits are ok - if it does not result in a combined limit that would act as an annual limit. For instance, I looked at the DOL's website and there is an example where when you combine a dollar limit with a limit on the number of visits - that this constitutes a combined limit that is akin to an annual limit (not allowed by the MHPA if the same limits are not placed on medical/surgical) - e.g., 50 visits allowed per year and $40 paid per visit would be an annual limit of $2,000 on mental health benefits that does not apply to medical/surgical benefits.

Does the coinsurance suggested by the union work the same way (e.g., the 20% coinsurance x 30 visits could be an annual limit too?).

Or am I thinking wayyyy to much about all of this?

If:

1) an S-Corp is planning to deduct a large DB contribution for 2006, and

2) they file for an extension for their S-Corp return to September 15, 2007, and

2) they plan to contribute on or before September 14, 2007 and then file the S-Corp return,

then, are the individual S-Corp shareholders required to extend their individual 2006 tax returns (1040) in order to justify that DB plan deduction against the S-Corp income for 2006 for their tax purposes?

I wouldn't think so, but I am not a CPA.

The client's CPA asked this question.

The EGRRA amendment allows a traditional IRA rollover into the plan. I have researched everything I could find & it looks like we are just supposed to treat this IRA rollover like any other unrelated rollover from a qualified plan. Other than requiring the participant to certify there are only pre-tax contributions and earnings in this rollover, is there anything else to watch out for? This really looks too easy to be true. What's the catch?

what is the correction method for failure to take deferrals from an automatic enrollment 401(k) plan? my thinking is it has to be the same as the correction for failure to allow an employee the opportunity to defer.

I understand that nongovernmental 457(b) plans are not eligible rollover plans. But, is there a way to transfer funds from one nongovernmental 457(b) plan to another nongovernmental 457(b) plan without triggering income tax inclusion?

Can QJSA and installment options be eliminated as optional forms of benefit from a 403(b) plan?