We were engaged to do a first year audit of a profit sharing plan during which we discovered several operational defects. The discretionary profit sharing contribution was not allocated according to the terms of the plan for the years ended 10/31/98, 97 and 96. In addition, when they calculated the discretionary match contribution of 50 % up to the first 8% of compensation they used gross compensation rather than compensation net of 401(k) and Section 135 Plan contributions as required by the Plan document.

There are about 130 plan participants and all were affected by the incorrect allocation of the profit sharing contribution with the exception of the highly compensated employees who elected not to participate in the profit sharing plan. The amount of the profit sharing contributions were $50,000, 40,000 and $9,000 for 10/31/98, 97, and 96 respectively. The total plan assets are approximately $1,8 million.

The match contribution effected about 30 people out of 130 for 98, 97, and 96. The total amount of excess contributions on non-highly compensated employees is about $3,000 for each year. No non-highly compensated employees received excess matching contributions as they had refunds made to them in order to pass the ADP/ACP test each year. The error occurred in 1995 as well but records cannot be located for that year.

ISSUES:

1)What is the likelyhood that the IRS would consider the 96 profit sharing plan contribution insignificant and therefore eligible to correct under APRSC (eventhough the two year correction period has passed)? If allowed, would they accept reallocation as a method of correction eventhough SVP requires additional contributions?

2) Should this be corrected under APRSC or submitted to VCR to receive IRS approval of the correction?

3) Regarding the matching contribution the client does not want to make the corrections as we have only estimated the differences. In order to be exact we would need to look at all of the deferral election changes in effect during each year to ensure that the proper match has been made. In addition, if we refund these excess matching amounts the ACP test will fail as the test originally failed each year but refunds were made the HCE's to pass. With the 96 year affected we could not longer make refunds to the HCEs and then would be required to make QNEC's to pass the ACP test for each year.

If the excess matching contributions are considered insignificant and it is administratively unreasonable to correct the defect, and the error is in the favor of non-HCE employees would they still require us to fix this? We would like to amend the plan prospectively to adjust for this error. It doesn't seem worth it to pay $8,000 to submit the plan under Walk-in Cap to be able to amend the plan retroactively. Any thoughts on this.

Any help you could provide in this area would be greatly appreciated. We are trying to help our client correct the issues so that we can issue an unqualified audit opinion in the near future.

Thanks for your time!

Karen

I have had an inquiry from a client on the Florida Stamp Tax as it applies to participant loans from defined contribution plans. I know that it has been an issue for awhile, but I thought that it had gone away. Is anybody had an experience with it and whether Florida is enforcing it.

If an employee deferred more than $10,000 for their taxable year, do you include the excess amount when you are computing non-discrimination testing? For example: An employee deferred $11,500 in 1998 (plan year is calendar year). When the ADP test is computed, or when you calculate the 415 limit for each employee, do you include the extra $1,500? Thanks!

We have just initiated an automatic enrollment program in our 401(k) plan. Of our first affected group, 9% opted out, 19% elected in before the end of the period, and the balance 72% became auto enrolled. Does anyone else have any experience with auto enrollments?

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Employer A with a June 30 plan and tax year end merges on August 1 with Employer B who has a calendar year plan and tax year to form Employer C who has a caledar tax year. Both plans are profit sharing plans and the plans are merged into a calendar year plan. No contribution has yet been made for the June 30 tax year for Employer A but Employer C want to maximize contributions for both the 6/30 year of Employer A as well as for the calendar year of employer B and "new" employer C?

1) Can Employer C make the maximum 6/30 contribution for employer A to the merged plan because of IRC 381©(11)? How do you allocate this so that only the employees of former employer A receive the contribution? Would it be better to keep both plans up, change the Plan Year for Plan A, and then merge them on January 1?

2) How do you determine the Section 404 maximum amount which can be contributed for the 12/31 year assuming the plans are merged shortly after the employers merge?

[This message has been edited by KJohnson (edited 07-16-99).]

I am trying to locate a survey or study results describing what the typical company does for employee vehicles in a sales culture.

I would be happy to share our company's program in exchange for information.

Thanks,

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Todd Leach

I was told that they could effective 1/1/99. However, I haven't seen any information on this subject.

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Has anyone ever created a performance action plan for an employee? What kind of statements need to be on there and what is the usual timeline?

Plan A has a 12/31 plan year end. Plan B has a 9/30 plan year end.

Plan A is merging into Plan B, effective 10/1/99.

What are your thoughts with respect to the ADP/ACP testing for both Plans A and B - i.e., for what periods should the comp and contribs be tested for each?

We will be asking the client to consult with counsel, but I am personally curious as to what "the industry" thinks. Thanks for any ideas.

I have a client with a 457 plan and a cafeteria plan. They have two separate plan documents but it has recently come to my attention that they have one election form that includes both cafeteria benefits and a 457 deferral option. I have also been informed that a 457 plan cannot be combined with a cafeteria plan. When is a 457 plan combined with a cafeteria plan? Is the above scenario an impermissible combination? What is the evil that is being prevented?

I have a client who would like to set up a pre-tax premium plan and also make a $5 reimbursement toward prescription drug co-pays. I'm assuming that the prescription drug benefit is a self-insured medical reimbursement plan under 105 and not a flexible spending account because it is paid by the employer. My question is, Can I put both benefits in one document by adding prescription drug reimbursements as a benefit in my standard pre-tax premium plan?

Does anyone know what information an employer,who sponsors a cross tested plan,is required to provide a terminated participant who wants to check the accuracy of his allocation? For example, is the employer required, upon request,to provide 401(a)(4) non-discrimination test results? If not, what information can be requested that would help a terminated participant see if the calculation is in the ballpark?

Is anyone aware of some good case law that addresses the issue of fiduciary duty and outside directors? Thanks. Ed

What type of documentation is required for submitting expenses paid for Elastic Hosery/support stockings?

I don't seem to find anything defined in my Employee Benefits handbook.

Thank You

Would I be correct in assuming that since Section 137 benefits may be included in a cafeteria plan that such expenses may be reimbursed through an FSA?

The trustees must determine that the loan extension is primarily for the benefit of participants under ERISA Section 408(B)(3) and solely in the interest of participants under ERISA Section 404(a)(1). In addition, if the primary benefit test under IRC Section 4975(d)(3) is not met, the IRS may impose an excise tax.

How does the extension benefit the ESOP participants? Or is the extension primarily for the benefit of the company and shareholders other than the ESOP? What percentage of the company does the ESOP own? It is clear that the extension will result in slower release of shares for allocation to participants' accounts. Is there a problem in amortizing the loan (under its current terms) by reason of the limits under IRC Sections 404(a) and 415? Is the reason for the extension to limit the employer's obligation to make ESOP contributions?

For your information, the IRS has an official position that it will not issue private letter rulings regarding compliance with the primary benefit rule of IRC Section 4975(d)(3) in connection with the refinancing and/or extension of an ESOP loan. In addition, the DOL has recently expressed concerns about the actions of fiduciaries in approving extensions of ESOP loans. The two agencies have been discussing how they can reconcile their respective positions under IRC Section 4975(d)(3) and ERISA Section 408(B)(3).

[This message has been edited by RLL (edited 07-15-99).]

If a plan is amended, SPDs incorporating the changes must be distributed essentially five years after the last SPD (even if a summary of material modifications is provided in the interim). Given the timing of TRA '86 amendments, this means that many retirement plans (including plans that did nothing more than add an entry date, for example) would be required to distribute new SPDs before GUST changes are made. This seems ridiculous. Is anyone aware of a DOL enforcement position on this issue? Or have you taken a position on this?

(ERISA Sec. 104(B) and DOL Reg. Sec. 2520.104b-2(B).)

Can anyone refer me to a good site that summarizes record retention requirements for 403(B) and retirement paperwork? If not, could anyone provide comments as to your company's guidelines. We are trying to build a general policy and need help!

Can anyone refer me to a good site that summarizes record retention requirements for employee insurance paperwork? If not, could anyone provide comments as to your company's guidelines. We are trying to build a general policy and procedure and need help!

Are voluntary pre-tax contributions allowed in 401(a) plans? If so, are there any restrictions?