Happy 4/8/16

I am doing my daughter's taxes. She has $1,899.08 as Gross Distribution per her 1099-SA and $1,100.08 for Total Contributions per her 5498-SA. On the tax software I am using it asks to enter the qualified medical expenses paid with the funds received in your distribution. Her medical expenses were $2,100 and when I put that in her refund went up $400.00. Does that seem right?

We have a 401(k) client that is in the process of converting the participant-directed individual brokerage accounts held by a large wirehouse firm to a retirement plan recordkeeper/investment provider. The trustee provided a letter authorizing the liquidation of all of the assets in the accounts but the firm is insisting that the participants call to authorize the liquidation of their investments. According to the brokerage firm, it is a FINRA rule. However, the trustee made the decision to liquidate and transfer the plan assets another provider and provided the required black out notice and it should not be up to the participant to initiate the trades of the stocks/bonds held in the accounts. Has anyone encountered anything like this in their experience?

A participant goes from full time to part time due to the company reduction in hours. He needs to take a loan to pay bills. He is not at the point of hardship and does not have any distributable event. The problem will be his pay will not cover his loan repayment. The loan repayments are payroll deduction or a check for pre-payment only. Does the fiduciary refuse the loan on this basis or do they have to approve it? If the pay does not cover the loan repayment, will the company just not take anything and default at the end of the cure period? Could this really be considered an unqualified in-service distribution?

An active employee had their loan balance deemed because it was not paid off within 5 years. However, the employee continued to pay off the loan after it was deemed.

How is this reported on the 5500?

Does it get reported under deemed and or corrective distributions?

Owner, sole proprietor files Sch C

In a dc plan, employee cost is reported on Sch C and reduces Net Sch C that goes to SE Tax calculation.

Net Sch C is adjusted by 1/2 of SE tax.

Then, for example, if the result of above is 100,000 for the owner the result could be 80,000 "compensation" and 20,000 contribution making the formula 25% of pay

I think this is accurate and basic for all of us

If the plan is a db, similar situation, where does the cushion amount go? It could make a big difference in what is "compensation" to the owner.

I hope the question makes sense.

just a portion of the notes found at

https://www.irs.gov/Retirement-Plans/Discriminatory-Plan-Designs-Using-Short-Service

Plans may discriminate even though they allocate a larger percentage of compensation to NHCEs. With this design, NHCEs, on average, may seem to receive a misleadingly large accrual or allocation level. For example, an NHCE participant with $200 of annual compensation may receive a profit sharing allocation of $200 (a benefit equal to 100% of compensation), while an HCE with compensation of $200,000 may receive a benefit of only 25% of compensation or $50,000.

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they dont satisfy Treas. Reg. Section 1.401(a)(4)-1©(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

...........

In other words, yes you can get the plan to pass mathematically but that it is quite possible the formula won't pass a reasonable interpretation of the intent of the regs.

Am I able to have my sick leave/vacation lump sum payout directed toward a 403(b) account?

For persons retired and receiving benefits who are over age 70-1/2 at the time benefits are distributed and who elect to rollover the non-employee contribution of their lump sum, is the terminating plan sponsor required to calculate an RMD that cannot be rolled over? If so, do monthly benefit payments made in the year count toward the RMD? If so, would that include both the employer and employee portion? If there are employee contributions being paid in cash that cannot be rolled over, do they count against the RMD?

We are TPA for a client that has a number of commission only employees. They allow deferrals from all W-2 compensation, but exclude commissions from the match calculation due to budget constraints.

Apparently various state wage and hour laws require them to pay a minimum base hourly wage that is later offset by commissions earned.

Should that nominal base hourly wage be included in the match calculation even though it is deducted from the commissions paid?

We have a plan where the profit sharing formula puts each employee in his our rate group.

Due to the age of the owner, she is younger than her only other employee. trying to pass all testing required, a New Comparability allocation will be difficult.

I have suggested to allocate using integration. Is this allowed? And if so, since integration is a safe harbor allocation method there is no additional testing required. Is that correct?

Now that we can make changes mid year to safe harbor plans can we increase the eligibility requirements?

Plan currently has a 6 month wait for all contributions (including sh match). The client would like to increase it to 12 months.

from ASPPA (under prohibited mid year changes) - "a mid year change to reduce the number, or otherwise narrow the group of employees eligible receive the safe harbor contribution"

from Sungard (under prohibited mid year changes) - " a mid year change to reduce the number, or otherwise narrow the group of employees eligible to receive the safe harbor contribution. However this does not limit the ability of the employer to amend a plan mid year to change eligibility requirements for employees who have not yet become eligible to receive the safe harbor contribution.

Sungard is stating that you can increase the eligibility requirements mid year but i haven't seen this anywhere else so i wanted to make sure that it is in fact permitted.

If sole prop total profit is right at 10K.

Can client make a non deductible contribution of 10K to my Roth 401K?

And still allowed to put 10K in the defined benefit as well?

The Internal Revenue Service announced a new correction program under which a preapproved documents sponsor may cleanse many users failures to adopt the document.

https://www.irs.gov/Retirement-Plans/New-Program-Allows-Providers-of-Pre-Approved-Plan-to-Correct-Missed-Deadlines

If a document sponsor has only 20 plans to cleanse, the minimum fee of $10,000 averages to $500 per plan, which is the VCP fee for a super-micro plan.

But if a recordkeeper has 10,000 plans to cleanse, the maximum fee of $50,000 averages to $5 per plan.

What do BenefitsLink mavens think about this?

Hi. We offer certain voluntary benefits to employees (whole life, critical illness, etc.). We have been told by the broker that the insurer has extra funds in the premiums (commissions) that will go to the broker. The broker is telling us that it plans to send these commissions to us (the employer); and that the employer can use these funds. This concerns me. Can anyone point me in the direction of a statute on this? I want to be sure that the employer can receive these funds. And if so, what are the permissible uses for these funds?

Thanks.

The sponsor of an individually designed Cycle E plan restates the plan using a volume submitter plan document. Based on section 17.04(2) of Revenue Procedure 2007-44, was the deadline to adopt the volume submitter document 1/31/2016 or 4/30/2016?

Section 17.04(2) of Revenue Procedure 2007-44 states:

.04 An employer is an intended adopter if:

(1) the employer currently maintains a qualified individually designed plan and

(2) such employer and a sponsor or practitioner who maintains an existing pre-approved plan or an interim pre-approved plan execute Form 8905, Certification of Intent to Adopt a Pre-approved Plan, before the end of the employer's five-year remedial amendment cycle as determined under Part III of this revenue procedure. However, if the employer's five-year remedial amendment cycle ends during or after the announced adoption period described in section 16.03 and 16.04 associated with the applicable six-year cycle, rather than execute Form 8905, the employer should instead adopt the newly approved version of a pre-approved plan (and will be treated as a new adopter under section 17.03).

The current adoption period for pre-approved defined contribution plans is 5/1/2014-4/30/2016. If a Cycle E IDP is restated on a volume submitter document, is the deadline to do so the same deadline as executing the Form 8905 for Cycle E plans (1/31/2016)? Or is the deadline the same deadline as executing the pre-approved plan document (4/30/2016)?

I have a service spanning rules question.

Plan's eligibility requirement is 6 consecutive months of service, quarterly entry dates.

Employee A is hired on 12/31/14, gets paid, and terminates the same day. The employee is then rehired on 7/6/15. I claim that we have to look at the service spanning rules and determine when the employee is eligible for the plan. Under the service spanning rules, since the time the passed from her termination date to her rehire date is less than 1 year, she is credited with the time while not employed and as such earns 7 plus months of service at her rehire. Does anyone agree?

If the employee is eligible, I say her entry date is her rehire date. Do you agree?

An Executive has reached his retirement age but he and his employer want him to continue employment or consult to the employer. The employee wants to receive both the SERP payment and continue to receive compensation for continuing to work and the employer is agreeable to that. One thing the employee wants is to continue 401k contributions. Is there any problem with the employer paying the 1st annual SERP payment and continuing to employ the executive?

The question is how does the 5-year delay rule for subsequent deferral elections (under Reg. Section 1.409A-2(b)(ii)) apply to a form of payment change where the plan pays on the earlier of a fixed date designated by the employee and separation from service.

Fact pattern: Plan pays upon the earlier of a specified distribution date designated by Employee and Employee's separation from service and offers payment in either a lump sum or fixed installments. Employee timely makes an initial election to be paid in a lump sum and designates January 1, 2020 as his specified distribution date. Employee files a subsequent deferral election by December 31, 2018 changing his elected form of payment from a lump sum to fixed installments and moves his designated distribution date to January 1, 2025. If Employee incurs a separation from service in, for example, 2023, must his benefit be paid in a lump sum pursuant to his initial election or installments pursuant to his subsequent deferral election?

Example 15 makes clear that with respect to a payment deferral he still gets paid on separation from service.

Any citations, guidance or authority on point would be helpful.

Suppose a corporation has a 401k, but never makes any contributions to it - this is an additional twist on a question from last week. Plan established only to allow a participant loan for owner, from funds rolled in from another plan. Employees eligible, but never notified. NOT a safe harbor plan.

Please ignore the qualification implications of the above for purposes of this question.

Client in a subsequent year establishes a SEP. Let us assume for the moment that is a prototype SEP, and not an IRS model SEP.

Client makes a contribution to the SEP for a given year. Under the terms of the SEP, he is the only one eligible (3 year eligibility) - BUT, since the plans are aggregated for TH purposes, doesn't this trigger a contribution requirement in the 401k plan? Or am I dreaming?

P.S. - poll question - I've never actually heard of this being a problem raised on audit - anyone ever encountered a situation in real life like this? If you start a new 401(k) plan for an employer who freezes a SEP after the prior year, do you always get all the SEP contribution/account balance data for all prior years when determining TH status for the new 401k?