Our client's auditor noted a 'significant deficiency in internal controls' relating to how interest on participant loans was being recorded on their Control Letter in the Auditor Report. Besides identifying and fixing the problem and documenting what they will be doing for internal controls, what else should the client be doing? Is there anything they're required to do because of this being noted in the report?

Here's the situation - Two brothers each own 50% of Company B, their parents own 90% of Company A. Both companies are currently participating in a PEO safe harbor match 401(k) profit sharing plan. Company B wants to exit the PEO plan and transfer the assets directly to their own safe harbor match 401(k) profit sharing plan. This transferee plan would be set up exactly like the PEO plan.

Questions:

1. The ownership by the brothers was shifted to a Trust sometime during this plan year (percentages remained the same). Based on the attribution rules, I don't think this transaction would meet the criteria for change in ownership under 410(b)(6)©, correct?

2. Company B wants to do the transfer/setup before the end of this plan year. How does this affect the ability to set up the transferee plan as safe harbor, and the safe harbor in the PEO plan?

I'm not finding much guidance on the safe harbor issues, so any advise would be greatly appreciated!

its a long story but the plan sponsor decided they didn;t want the plan in the first year and their lawyer determined that they can terminate the plan after making contributions to the nonhighly compensated employees. he also says to treat the plan as a nonqualified plan. i am not sure what is legal basis for this is but i don't really care. what i want to know is what we do regarding the form 5500 sf. i think we have to file a normal 5500 sf but does anyone know if any of the codes are different or if there is anything special that has to be done>? i see there is a code 1c for cash balance but also a code 3c for plans not intended to be qualified. do we use both 1c and 3c or just 3c.

I'm auditing a plan where there were contributions that were received by the investment account during the last few days of the year but not actually allocated to the participant's accounts until the beginning of the following year. So there is a difference between the trust statement's contributions received and the recordkeeper's contribution amount. Would you report this last deferral as a receivable to the plan, even though the money was already received by the investment account?

If an employee enrolls in employer plan and then decides to enroll on an exchange plan effective January 1^st, would this be considered a status change to terminate the employer plan? (Assume Plan Year runs July - June)

In an S-corporation ESOP where distributions are only in cash, plan sponsor wants to change distribution method. Currently, plan provides for annual installments (with minimum payment of $2,500) and lump sum distribution of amounts of $5,000 or less. Plan sponsor wants to change distribution method this year (for participants that terminated this year but who will not get a distribution until next year) -- the new method will be 5 equal annual installments (but no minimum amount requirement so distributed equally over 5 years) and lump sum distributions for amounts of $2,000 or less.

Will Reg. 1.411(d)-4 Q&A-2(d)(1) (see below) permit this change to be made this year or must the change be prospective only?

(i) Single sum or installment optional forms of benefit. The employer eliminates, or retains the discretion to eliminate, with respect to all participants, a single sum optional form or installment optional form with respect to benefits that are subject to section 409(h)(1)(B), provided such elimination or retention of discretion is consistent with the distribution and payment requirements otherwise applicable to such plans (e.g., those required by section 409).

Say I have a Nonqualified Deferred Compensation ("NQDC") Plan that allows only for lump sums or installments over 10 years. I would like to add by amendment, effective 1/1/2014, that allows participants to also chose 5 year installments.

Can I allow an employee to make a subsequent election whereby he changes a 2008 election (deferring 2008 compensation) from a lump sum to the new 5 year installment option?

Of course, I would apply the subsequent election rule -- the election isn't effective for 12 months and delays the initial payment by 5 years. But can I allow him to change to an option that wasn't around when the money was originally deferred?

Barbara owns 100% of Corporation X and 50% of Corporation Y. An unrelated person owns the remainder of Corporation Y. Is X and Y a controlled group?

I'm having trouble with an old IRS Notice (88-56) which provides an example on the "qualified election period". The qualified election period noted in the IRS Notice does not look like it is correct per the requirements of Code section 401(a)(28)(B)(iv). Can anyone shed any light on this IRS Notice Q&A-12 -- see references to both the Code and the IRS Notice below.

(iv) Qualified election period.— For purposes of this subparagraph, the term "qualified election period" means the 6-plan-year period beginning with the later of—

(I) the 1st plan year in which the individual first became a qualified participant, or

(II) the 1st plan year beginning after December 31, 1986.

For purposes of the preceding sentence, an employer may elect to treat an individual first becoming a qualified participant in the 1st plan year beginning in 1987 as having become a participant in the 1st plan year beginning in 1988.

IRS Notice 88-56 Q&A-12 provides as follows:

Q-12: When is a participant eligible to make diversification elections with respect to his ESOP account?

A-12: Pursuant to section 401(a)(28)(B), a qualified participant must be able to elect to diversify the appropriate portion of his ESOP account balance (as determined under Q&A-9 of this notice) within 90 days after the close of each plan year during the participant's "qualified election period." A "qualified participant" (as defined in section 401(a)(28)(B)(iii)) means any employee who has completed at least ten years of participation under the plan and has attained 55 years of age.

Generally, a participant's qualified election period consists of the 5 plan year period beginning with the plan year after the plan year in which the participant first becomes a qualified participant.

 However, the qualified election period of any employee who became a qualified participant before January 1, 1987, shall not begin before the first plan year beginning after December 31, 1986 and shall continue thereafter for a complete 5 plan year period.

For example, a participant in an ESOP (which uses a calendar plan year) who becomes a qualified participant during 1987 will first be eligible to make a diversification election within the first 90 days of 1989 (within 90 days following the close of the first plan year beginning after 12/31/87). The qualified participant's qualified election period begins in the 1988 plan year and ends with the 1992 plan year. The qualified participant's last diversification election will be within the first 90 days of 1993.

Similarly, for example, in the case of an employee who first became a qualified participant in 1986 or any prior year, the participant's qualified election period would begin with the 1987 plan year and close with the 1991 plan year. The qualified participant must first be given a diversification election within the first 90 days of 1988.

Notwithstanding the foregoing, in the case of an employee who became a qualified participant before January 1, 1987, a plan will not fail to meet the requirements of section 401(a)(28)(B) if such qualified participant is eligible to make the first diversification election no later than September 6, 1988. In addition, for purposes of this paragraph, an employee who became a qualified participant in 1987 and who was treated under the plan, prior to April 9, 1988 as eligible to make the first diversification election on or before June 8, 1988 may be treated as an employee who became a qualified participant before January 1, 1987.

_

We have a client where the CPA has converted all the earned income reported on the Schedule C to capital gains and he therefore has no earned income. Does this prevent him from receiving a year of participation for 415 purposes?

I am looking at a 2012 SB created based upon software-generated results. It is clear that MAP-21 rates were used, but the effective rate of interest is lower than the lowest of the MAP-21 segment rates. Can anyone explain how this can be possible? Is there any allowance to use MAP-21 rates for funding, but to base the effective interest rate on non-MAP-21 rates?

Any thoughts would be appreciated!

1. Client has high income and wants to fund a Roth IRA each year by making a nondeductible Traditional IRA contribution and immediately converting it to Roth. However, client has pre-tax dollars in a Traditional IRA, and the presence of these pre-tax dollars prevents client from converting a nondeductible Traditional IRA contribution tax-free. Assume client does not have a qualified retirement plan account through a current job that could accept a rollover of these pre-tax IRA dollars. Client is not self-employed. However, is it permissible for client to establish a solo 401(k) just for the purpose of accepting a rollover of the pre-tax IRA dollars, so that annual nondeductible Traditional IRA contributions can be converted tax-free?

2. Same situation as #1 except client has an LLC for a small amount of teaching work that yields $1,000 or less of income per year. Seems more likely that this client can set up a solo 401(k), but client is not likely to make any ongoing contributions from this small amount of income, so the purpose of the solo 401(k) is still just for the purpose of accepting a rollover of the pre-tax IRA dollars, so that annual nondeductible contributions can be converted tax-free. So is a solo 401(k) permissible in this case?

Thank you very much for any thoughts you can provide!

I found the below discussion (link at the end of my post) very helpful for my question; however, I would like to ask a question regarding what resolution would exist in the following scenario:

Company A buys 100% of company B in a stock sale. Company A maintains a non safe harbor 401k plan. Company B maintains a safe harbor plan. The sponsor intends to keep both plans separate. However, based on preliminary testing, I cannot pass coverage when combined and I don't think I can pass ABT either. For example:

Plan A (non safe harbor plan) -

NHCE - 150 (all eligible)

HCE - 10 (all eligible)

Plan B (safe harbor plan) -

NHCE - 3 (all eligible)

HCE - 7 (all eligible)

Coverage testing for plan B is 4.76% ((3/153)/(7/17))

Coverage testing for plan A is 166.67% ((150/153)/10/17))

I must be doing something wrong. I cannot combine a safe harbor and non safe harbor for a combined ADP/ACP test. Given the above participation in each plan, the sponsor cannot maintain these two plans separately, correct? Any thoughts?

Thank you

http://benefitslink.com/boards/index.php?/topic/34884-safe-harbor-and-controlled-group/?hl=%2Bcontrolled+%2Bgroup+%2Bsafe+%2Bharbor#entry182873

Employer pays 75% of NHCE employee premiums, NHCEs pay their 25% pre-tax via premium-only cafeteria plan.

All HCEs get no employer subsidy but pay 100% of premiums pre-tax via POP.

Since NHCEs are getting the better deal will this structure automatically pass the POP safe harbor testing rule?

Thanks

A 401k plan for a 1-man company holds a life insurance policy for the owner/sole participant. We have been showing the value of the policy in the plan's assets as the accumulated amount of premiums that have been paid (all paid by the plan) rather than the policy's actual cash value, as the total premiums have always been less. The owner has now informed us that there will no longer be any premiums due, so it would appear that we would just show it having the same value every year from now on - is this the best way to account for the policy? Thanks for any help offered.

Has anyone considered the issue of what to do with refunds from a 403(b) plan? The situation is that a vendor (TIAA-CREF) is recalculating its fees retroactively, and is paying the employer (a governmental entity) the excess of the fee originally paid over the fee calculated based on the new rate structure. The employer is trying to determine whether the refund can be used to pay administrative expenses of the plan (in this case, expenses of the bid process for selecting vendors), or must be allocated to employees.

The plan is a deferral-only plan. The plan document provides that deferrals are to be invested in annuities/custodial accounts as soon as administratively practicable. There is no provision for the payment of administrative expenses. And there is no provision for the receipt of any amount other than deferrals.

In theory, it seems to me that the employer should never be given the refund in the first place, because the amount is in effect a distribution from an annuity that is supposed to be owned by the employee. However, crediting employee accounts is not one of the options offered by TIAA-CREF.

However, given that the refunds are going to be made, what does the employer do now? Can it argue that using the money for the bid process is using it for the benefit of employees (because the bid process is basically about getting the best investment options for employees)? Or must it contribute the refund to the accounts of those employees in the TIAA-CREF products?

5500-SF was filed for 2011, extension exists for 2012 calendar plan year - owner the only participant at beginning and end of 2012 - can a paper 5500-EZ now be filed for 2012? Will EBSA send a form

letter asking for the 2012 SF return? Assets over $ 250,000.

I have a client and they failed the ADP test for 12/31/2012. When the TPA calcuated the refunds, they noted one HCE terminated in 2012 and rolled his account balance to an IRA.

In addition to the refunds, there were match funds attributable to the refund that needed to be forfeited

1. Doesn't the IRA need to return the match attributable to the refund to the plan? Otherwise he recevied a higher match than the NHCEs

2. Doesn't someone need to tell the IRA custodian to much was rolled into the IRA. The refund portion is not eligible for rollover, and needs to be distributed to the participant?

TPA has done nothing for 8 months. The client pays for TPA work but it seems this TPA could not be bothered to correct an issue that occured on their watch.

Thanks

Requested a Certificate of Coverage from Health Insurance Carrier. Was told that I cannot get one until coverage has been terminated. I do not want to terminate coverage but would like a certificate of coverage. Can I get one?

I'm having a disagreement with a colleague about a proposed 409A design and wanted some feedback from the forums.

Background

A private equity firm has proposed a "phantom carry" plan for its non-partner employees. The firm creates funds which invest in companies over the course of, for example, 15 years. Periodically, the fund will pay earnings of those companies out to investors. The payment of these earnings is "carry."

Proposed Plan Design

An employee is granted a phantom ownership interest in a specified fund managed by the partnership. As with phantom stock, this is not an actual ownership interest and does not dilute the ownership interests of actual owners. Rather, each time the fund pays carry to its investors, the firm pays an amount to the employee equal to what the carry payment would have been for that employee had their ownership interest been real. The firm would pay cash in the next semi-monthly payroll cycle, and there would be no further deferral. The employee's entitlement extends for the life of the fund; potentially beyond termination of employment.

Is there Deferred Compensation?

As a threshold question, we must ask if there was any deferred comp. When are the amounts earned. If the employee is entitled to nothing until the payment of carry, then there would be no deferred comp as amounts are paid out immediately thereafter. However, if we say that it's the grant of the phantom carry rights that creates the entitlement, then subsequent payment of benefits for years down the road would certainly be deferred compensation subject to 409A. I think we're OK on our end saying it's the latter, but wanted to float this in case anybody felt strongly that there was no deferred comp.

Is the Payment Scheme 409A-compliant?

Alternate Arguments:

No, it is not compliant. In this case, the payment of carry out of the fund triggers payment of NQDC to the participant. Such an event is not a permissible distribution event under 409A.

Yes, it is compliant. Each semi-monthly payroll cycle is a stated date, which is a permissible distribution event under 409A. On most of these dates, there is a zero balance in the account, thus no distribution. Following each payment of carry, the NQDC account has a balance which survives only until the next scheduled distribution date (the semi-monthly payroll).

Any thoughts/feedback?

Thanks.