I am representing a client going through Audit CAP. Of course, the 800-pound gorilla in the room is the Maximum Payment Amount and how to calculate it. The IRS agent is asking us to prepare a position paper which sets out a recommendation of the audit CAP sanction amount, which would be a starting point in the negotiation.

Two things:

(1) Does anyone have access to a simple tool to calculate the Maximum Payment Amount that they could with post or provide the web address for?

(2) Can anyone provide a CAP position paper (feel free to redact whatever information or details you consider necessary)?

Either or both of these would be MOST helpful.

If running ADP and ACP test after the 12 month period - testing is being done now for the 2014 plan year, can the disaggregation method for otherwise excludable employees still be used?

Thanks!

A plan failed the ACP Test for the plan year ending 12/31/2014. There was a ACP refund due to to be given to HCE Randy. The refund amount of 117.18 (110.98 plus 6.20 earnings). The prior admin (we recently took over this plan) "corrected" by sending the 117.18 to the forfeiture account. I am not sure when in 2015 this was done, but let's say it was done after March 15th (if it matters)

This amount should have been sent to HCE Randy. What is the correction from here?

Can we simply move the amount out of forfeiture and back into his plan and then process the distribution to the participant? Or, Do we need to do a QNEC or One to One?

our office set up an account improperly and its been charged a flat annual custodial fee. we want to reimburse the client for the overcharges. can we do so and can they put the money into the plan? alternatively can we just put the money back in the plan?

RE: Rev Proc 2015-28 section .02

Plan sponsor uses an automatic enrollment feature. Plan has 5 participants who should have been enrolled at eligibility but were not. Three months later plan sponsor finds they were not enrolled and subsequently enrolls them.

Plan sponsor does not provide notice to employees as noted in section .02(1)(b). Does failure to provide the notice automatically require the sponsor to use the 50% correction method for the missed enrollment periods?

Thank you

I'm violating my "don't try to make sense out of it" policy here, because I'm just curious if anyone knows.

Safe harbor plan with basic matching formula. Suppose they want to do a mid-year amendment to exclude some compensation. Assuming all proper notice, etc. is observed, this is possible. Yet, according to IRS Notice 2016-16, an amendment to the definition of compensation if it would INCREASE the match is generally impermissible, unless it is effective for the entire plan year.

Curious as to the reasoning, if anyone knows.

4. A mid-year change (i) to modify (or add) a formula used to determine matching contributions (or the definition of compensation used to determine matching contributions) if the change increases the amount of matching contributions, or (ii) to permit discretionary matching contributions. However, this prohibition does not apply if, at least 3 months prior to the end of the plan year, the change is adopted and the updated safe harbor notice and election opportunity are provided, and if the change is made retroactively effective for the entire plan year (which may require a plan that provides for periodic matching contributions as described in §§ 1.401(k)-3©(4) and (5)(ii) and/or 1.401(m)-3(d)(4) to be amended to provide for matching contributions based on the entire plan year).2
2

We have a client who owns an annuity as part of his investment choices. It is held by a Life Insurance Company but all the paperwork, including investment statements and Schedule A information for the company references 'variable annuity.'

Prior TPA reported the annuity as a welfare benefit - code 4B on the Form 5500 and had completed a full Form 5500,Schedule A and Schedule I.

I am not sure that I agree that this is a life insurance policy. Are annuity contracts considered life insurance for Form 5500 reporting purposes? I consider this fund another investment vehicle, like a mutual fund would be.

Can anyone provide some words of wisdom that can help me determine if a full Form 5500 is overkill and all that is really needed for this client is a Form 5500-SF?

Got a heated debate on this one.

19, YOS (1000) Semi Entry, 6/30 PYE

Employee hired 8/11/14

Terms 4/22/15

Worked 1000 hours between 8/11/14 and 4/22/15

Rehired 8/15/16

What is employees participation (entry) Date?

I say 1/1/17 because employee was not an employee on 1/1/16 or 7/1/16.

I am being told the employee is eligible 8/15/16 because employee satisfied eligibility requirements and crossed over 1/1/16's entry date and was therefore potentially eligible then.

Going to need solid backup for either answer. Boss is involved.

Thanks!

A participant is no longer living in the U.S. wants to take a distribution (The participant is living in Mexico).

The plan has spousal waiver and consent requirements.

Does a participant need to have the notary public done by a U.S. Consulate if done outside the U.S.?

I am looking for information that either expressly allows or prohibits the carryover of HRA funds into a limited purpose FSA. (An employer group is adopting a HDHP, along with an HSA and a limited purpose FSA). All the guidance we are uncovering relates to HSA conversions. -- If the HRA is amended to allow for qualified distributions to the newly established limited purpose FSA, is this permissible? Our two member team here is divided and we could use some ideas/pointers. Team "yes" is thinking that because a LPFSA can be funded both by employer and employee contributions, this would be allowed. Team "no" is erring on the side of caution -- until we find something saying it can be done, it cannot be done.

We have a participant who has only been contributing to his Roth 401k account for 2 years. He does have a bona fide hardship (medical expenses substantiated with receipts).

He has $1950 in contributions and $50 in earnings. Even if he is limited to his $1950 - is he taxed on this distribution since it's only been in 2 years, as opposed to 5 years?

I read something about allocating a portion of the ROTH distribution to earnings, and that amount would be taxable, even if earnings are not actually distributed.. I am a little confused on what, if any, is taxable.

Just wondering if anyone has ever encountered a situation where the one-to-one QNEC correction was so excessive that the IRS has agreed to reduce the required amount under VCP.

Let's suppose (for sake of argument) that a failed corrective distribution requires a one-to-one QNEC of $10 million dollars (and that would be less than the required $20 million QNEC to actually correct the ADP test.

[[i used these extremes to avoid the conversations on ALL options of late corrections of ADP tests and focus squarely on VCP submissions for one-to-one]]

My question is simply whether anyone has had experience with having the one-to-one reduced to a lower percentage (let's say 0.50 to 1) utilizing the argument of the excessive level of funding for a one-to-one?

I ask while imagining the answer is no, but wanted to ask in the event someone may have been successful in getting this amount lowered in certain instances.

Thanks :-)

Money purchase plan Trustees want to convert to a profit sharing plan. No other significant changes. Really want to do it so they don't have to credit participant accounts if there's a delinquent employer. Also may want to allow for hardship distributions.

Anyway, I know that a 204(h) notice must be timely distributed and that the MPPP assets have to keep their MPPP character (so there has to be separate accounting).

But the biggest question I have is, does the "new" plan have to file for a determination letter, especially considering the new determination letter rules?

Thoughts? Thanks.

From EPCRS:

© If the employee should have been eligible for but did not receive an allocation of employer matching contributions under a non-safe harbor plan because he or she was not given the opportunity to make elective deferrals, the employer must make a corrective employer nonelective contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under section .05(2)(b). The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee.

The question is, this is not a QNEC (they would have said QNEC if it was required). But it says "Employer nonelective contribution." That seems problematic because perhaps the plan does not even have a profit sharing provision. Perhaps there is a profit sharing provision, but the vesting schedule is 2/20 on that source, while the match is 100% vested.

Have these questions ever been addressed?

Missed deferral opportunity QNEC is made for a participant whose deferral election was not implemented. Can the QNEC be included in the ADP Test in the year of correction?

We have a client who is a non-profit organization. They want to do a profit share allocation based on the following:

1% for less than 1 year of service

3% for 1 to 4 years of service

5% for 5 or more service of service.

Is this possible? Would they have to go with an individually designed document? Or would a non-standardized document work?

Is this considered a points method allocation? I have never seen one done before.

Any thought, opinions, comments are welcomed!

Thank you!

I'm thinking about how to avoid top heavy status for the first year a contribution is made, and I think the following works in this one odd situation. Thoughts?

Suppose in 2016, you have an employer who wants to establish and start contributing to a plan for 2017.

Why can't the employer establish the plan as a PS only for 2016, effective 1/1/2016, with 401(k) deferrals/other contributions to be effective for 2017, and then just contribute zero for 2016?

So, the rules for the "first year" apply to 2016, but in reality they are immaterial, as no contribution is made or allocated or accrued.

When doing 2017 testing, the determination date is 12/31/2016, and the account balances are all a big fat zero, so the plan isn't top heavy for 2017. No top heavy contributions required until 2018.

Any holes in this thought process?

It is my understanding that the 5 year loan term begins when the funds are withdrawn from the participant's account (essentially the date of the check) rather than the date of receipt of funds by the participant. Do you agree?

What if an amortization schedule is prepared with a 5 year loan term based on a date later than the date the funds are removed from the participant's account such as 30 days later from the date the loan is processed? This would cause the loan to exceed the 5 year max loan term at its inception. Would the entire loan be considered a deemed loan?

In an earlier benefitslink thread dated back to 2003, IRS seemed to take the position that curing a missed payment after the 5 year loan term but within the cure period provided by the plan and within the normal limitations of 72(p)-1, Q&A-10 would not violate the requirements of 72(p)(2(B). Payments made within the cure period are deemed to relate back and considered made on the date the installment payment was due. However, something posted by QDROPHIL seemed to contradict this opinion and reverts back to the cure period not applying to the last payment.

Thoughts on these two issues?

Any official cites or reference to material on this topic would be very helpful. Thank you!

An employer has maintained multiple 401(k) plans for various nursing homes over the years. It was decided to merge all of these plans into a multiple employer plan with an effective date of 1-1-16.

The TPA of the employer, hoping to make the 2015 audit of 5 of the plans that are merging the final audit of the plan (in a sense trying to avoid a one day audit for 2016), has indicated that the assets "merged" on 1-1-16. At 12/31/15, the assets were still invested in the various mutual funds maintained by the old plans, as they were to transfer in-kind on 1-1-16.

The TPA, in filling out the 2015 Form 5500, is maintaining that this is the final return for the old plans, and is trying to show, on Schedule H, the assets as of 12/31/15, with a liability "due to new plan" in the same amount, thus zeroing out the assets as of the end of the plan year. Their software is rejecting this treatment. Both the TPA and plan auditor is maintaining that the 2015 Form 5500 filing and certified audit are to be considered "final".

I have seen this happen in the past, but it was many years ago. What are folks opinion of the above scenario? Thanks for any replies.

Participant A took a hardship and Employer did not stop deferrals as required.

I know that the deferrals need to be returned to the participant, but are the deferrals included in the ADP Test?