2muchstress

Just an obvious word of caution: If the plan is top heavy or becomes top heavy, the employer will be required to contribute the th min to all participants - including those who are eligible for 401(k) deferrals but have not yet become eligible for profit sharing. I have had to explain this to many employers whose plans had dual eligibility and became top heavy. It is not a fun experience to try to convince them they have to fund 3% of full year comp for everybody even if they are not eligible for profit sharing.

Our document will say that the administrator may rely on the written representation of the participant, bla bla bla, in order to determine if a financial hardship is met. I agree with MWeddell. You don't want to get in the habit of approving hardships without documentation, but I wouldn't sweat this one too much.

Assuming that they are no longer employed, then I could distribute the entire balance. However, if they are employed, they are not required to receive the RMD, but they are require to complete an election to defer the RMD. Typically, I would send out paperwork notifying them of the RMD amount, plus an election form to defer the RMD until after they separate from service. I was just curious if anybody knew of a deminimus rule so I wouldn't have to spend any time on it.

Same scenario, different twist. I have a terminating plan with a lost participant - balance over 5k. The participant's balance is in a self-directed brokerage account. The broker will not re-title the account without the signature of the participant. Is it possible to treat this distribution as a rollover, even thought the account will still be registered in the plan name?

Is there a de minimus rule for RMD's like there is for corrective distributions? I am processing several RMD's where the balance is under $100 and the RMD is just a couple of dollars, or pennies in some cases. It doesn't seem to make much sense to spend the effort on these.

What exactly was the error? Did the partcipant not provide sufficient data to evidence a hardship? Or does the plan not allow hardships? Depending on the error, the correction may be different. Does the plan allow for in-service distributions? If the participant does not repay the money, and the plan does not allow for in-service distributions, then there may be other operational failures.

How is the document written? I would imagine that the document provides for a discretionary match, and the employer is trying to use his own definition of discretionary. I have had several employers misinterpret the word discretionary and it is almost humorous to see what they can come up with.

Brian, I think your assumption may be wrong. It is possible to add a safe harbor 401(k) feature to an existing PSP that does not already have a CODA feature in place. The addition of the SH 401(k) is treated similar to a SH 401(k) with a short plan year. I believe that the 401(k) feature must be in place for at least 90 days. IRS Notice 2000-3 also indicates that it is possible to add the 3% SH nonelective to an existing 401(k) plan at any time before the END of the plan year provided that the following the provisions apply: 1) The plan must use current year ADP testing method. 2) That the employees be provided with notice that the plan MIGHT be amended to add a SH feature before the plan year, and 3) That a second notice be distributed to all employees that the plan is amending to add a safe harbor nonelective contribution 30 days prior to the end of the plan year. IRS Notice 98-5 was more restrictive, but they changed their opinions and issued notice 2000-3.

What I have done in the past is make the check payable to the participant, but then mail it to the company. That way the company can have the participant come in and sign the check over. Probably still not technically correct, but it skirts around the antialienation issue.

WSP - that seems correct to me. However, I believe the key here is that the document must state that for 2002, that plan will use the prior year testing method to pass ADP. Because it is the first year of the 401k plan, and there was no prior NHCE ADP for 2001, then you can assume a prior year ADP of 3% for NHCE's which will effectively limit (or allow) and ADP for HCE's of 5% for 2002. Again, the key is that you must use prior year testing.

Wow, I would take the rest of the day off. Because the participant is truly unlocatable by the plan, the balance could possibly be forfeited. However, the balance would also have to be reinstated if the participant ever shows up. Just a possibility.

My understanding from the ASPA webcast presented by Cheryl Morgan a few months ago is that if a participant takes more than 2 loans in 12 months, then the third loan is treated and taxed as a distribution. I would definately say that I don't believe you should allow for loan 3.

The expense of legal counsel is well worth it, especially if the doctor is to receive $80,000 in retirement for the year.

I would agree with Mbozek that these restrictions don't make much practical sense. However, since the document would need to be amended to accept the provisions of EGTRRA, if you didn't amend your document, you would have to operate under Pre-EGTRRA rules.

Without reading the link provided by Katherine, it is my understanding that a benefit would not accrue until the last day of the year, due to the last day requirement. This is the way I have always practiced, and have yet to run into problems because of it.

Thanks! That was the answer I was hoping for.

Tom, In the first post, you said that the IRS opined that "A. Yes, however, if no profit sharing contribution is made such that the only current contributions are elcetive deferrals and safe harbor match, then the plan is not top heavy." Would you rely on this answer by the IRS for use in your practice? Also, I have a safe harbor 401(k) plan for a small start up company that allows for discretionary profit sharing. They will definately not fund anything for at least a few years but as the company becomes more profitable, they hope to fund in the future. Can I, or would you, rely on that statement to mean the plan will not be top-heavy until they actually fund a discretionary profit sharing contribution? Thanks.

I agree. As much as I disagree with the logic, I agree with the conclusion.

Here's what the ASPA ASAP said with respect to a failed ADP: Actual Deferral Percentage (ADP) Limit: The ADP limit is imposed on §401(k) plans, with similar provisions applying to SARSEPs under §408(k)(6)(A)(iii). The Actual Deferral Ratio (ADR) for a participant is calculated without regard to the amount treated as catch-up under either the Statutory Limits or the Employer-Provided Limit. If a plan fails the ADP test, the amount to be refunded to catch-up eligible participants is first offset by the amount of the dollar catch-up limit. The catch-up amount due to the ADP limit is calculated after the ADP test has been performed; all amounts eligible for disbursement under §401(k)(8) or §408(k)(6)© must be re-categorized as catch-up contributions, up to the dollar catch-up limit. For example, suppose that ABC Company's 401(k) Plan has adopted the catch-up provisions for its plan year ending February 29, 2004. It is determined that the plan is failing the ADP test. An HCE who will be turning age 50 on August 31, 2004 would normally receive a refund under §401(k)(8) in the amount of $3,200; however, because she is a catch-up eligible participant as of January 1, 2004, her distribution of excess contributions equals $200 (the amount in excess of the $3,000 catch-up limit for 2004).

I agree that the testing needs to be done first. The only cite I can reference at this point is the 11/19/01 ASPA ASAP. This was before ASPA sent the ASAPs as an attachment to an email so I cannot attach the file. However, it can be found on their website.

Seems a little extreme. This is probably something that the auditor can include in a footnote. I don't think it is any reason to hold up the 5500. What if the test fails? Are they going to wait until they see the correction before they finish the audit?

Why would they want to start a new plan immediately after terminating the old one. Termination fees and start up fees would be expensive. Couldn't they just amend their existing plan to accomplish what they are trying to do.

I think "forfeit" may have been the wrong term to use. It is possible that your balance was used to pay the fees of the plan. That is money that you were entitled to and would have been non-forfeitable. But again, they may have told you that it was "forfeited" and meant something different. However, the DOL has taken the position (informally) that a participant's account cannot be reduced to pay the fees associated with the distribution. Since it was only $5 dollars, the hassle to recover the money would be much greater than the benefit you would receive.

If a plan has greater than 100 participants but less than 120, they are allowed to file as a small plan (no audit) only if they filed as a small plan in the previous year. If they filed as a large plan in the previous year, even if they had less than 120 participants, they are still required to file as a large plan. Using this same logic, if a plan goes over 120 and files as a large plan (as it must), and then drops below 120 but still above 100, they would have to file as a large plan because that is how they filed in the previous year. Basically, if you ever go over 120, you will have to go under 100 to avoid it in the future.

As for the lost participants. Document your efforts to try to locate them. Call family members, use the internet, even run a credit check. If all of these options fail, and you have it documented, then distribute the money with 100% being withheld for federal taxes. Then it becomes the IRS's problem and not yours. Some people disagree with this approach, but I have heard many big name ERISA attorneys argue in favor of it. The key is that you actually spend the time and effort trying to locate these people before you do any thing else. It is possible to forfeit these people as well, but you still have to try to locate them. If they come out of the woodwork after you have forfeited them, then you still have to fork over the cash to pay them out. This brings up a fiduciary issue of potential lost earnings and personally, I would try to avoid it. I don't believe there is anything written that says you would have to pay the lost earnings, but I think the participant might have a valid argument that they would be owed to him.