M R Bernardin

QDROphile, there are ways to do this in a prototype. I do it all the time.

I read the regulations to state that contributions in excess of the 402(g) limit would be treated as catch-ups as soon as they were contributed rather than at the end of the year. So, for a pye 1/31/02, an eligible employee could front/backload $12,000, and $1,000 would be treated as a catch-up for the pye 1/31/02. Am I missing something?

I disagree. The DOL regulations provide that a change in plan year cannot adversely affect someone's vesting status. There is specific guidance in the regulations about the rules for double crediting during the transition period which, if followed, should ensure you have not harmed someone through the plan year change. I believe there is more than a hint in the regulations that the period of overlap is prospective, not retroactive. In your example, vesting would be 10/1/2000 to 9/30/2001 and 1/1/2001 to 12/31/2001.

R Butler, I don't think you are getting accurate advice. In order for your clients to use a certification to get the extended amendment period, you as the prototype sponsor (and not the prototype mass submitter) would have to have submitted your name to the IRS by 12/31/00 as an adopter of that prototype. Since you didn't, your clients have only until 2/28/02 unless they sign someone else's certification. One way to check whether your clients will have the extended period is to see if your name appears on the IRS' website as an entity that submitted prior to 12/31/00. That is the list the IRS is going to use in determining whether someone amended timely.

Okay, you've almost got me convinced. But if you are correct, then would you also agree that you can set up a 401(k) plan, with immediate entry for deferrals and match and a two-year of service requirement for a 3% safe harbor contribution, subject those with less than two years of service to a separate ADP and ACP test, and get a pass on the ADP test for those with two or more years of service?

Take a look at Code Section 410(B)(4)(B), which says "If employees not meeting the minimum age or service requirements of subsection (a)(1) (without regard to subparagraph (B) thereof) . . . (emphasis mine). Subparagraph B is Code Section 410(a)(1)(B), which contains the two-year rule.

If you look at the statute, you will see that the ability to exclude employees who have not satisfied minimum participation under 410(a) does not include the ability to exclude employees who have completed more than 1 YOS, even if the plan's eligibility rules require 2 YOS.

I'm not sure what in the 1099-R instructions is leading you to believe you issue two 1099's in this situation. A 1099 is issued only when a distribution is made from the plan. The instructions state that if an excess deferral is returned prior to the 4/15 deadline, then the earnings are taxable in the year distributed and the deferral is taxable in the year deferred. The instructions further state that "if the excess and the earnings are taxable in two different years, you must issue two Forms 1099-R to designate the year each is taxable." Thus, if the excess was refunded by the 4/15 deadline, two 1099's would be issued. In this situation, however, the 4/15 deadline was missed, so whenever the excess is distributed, from a 1099 reporting perspective, only one 1099 will be issued because both the distribution and the earnings will be taxable in the year distributed. The deferrals are taxable in the year made as well, but not because they were distributed from the plan but rather because they were not distributed by the 4/15 deadline. The reporting of the excess deferral as taxable income for the year of the deferral is, IMHO, accomplished by the participant including the excess on her 1040, not by the issuance of another 1099.

It is my understanding that the means of including this excess deferral in income for the year of the deferral is a W-2 item, not a 1099 item. The employer should issue a revised W-2 or perhaps the employee simply increases the taxable income reported for the year based on the W-2 that was issued. Of course, an amended 1040 would be required. Only one 1099 would be issued, showing the amount distributed, which is taxable in the year distributed as are any earnings. Keep in mind that if there is no distributable event allowing distribution of the excess at this point, EPCRS may need to be used to get the excess out of the plan.

Perhaps you are thinking about the rule that a qualified trust must be a valid trust under state law, and that most if not all states require a trust corpus in order for it to be valid. This mix led many to believe that in order to establish a qualified trust for a plan year, there had to be at least a nominal deposit by the end of the first plan year. The IRS announced at some point that a trust will be considered a qualified trust for a year if it is a valid trust under state law other than a state law requirement that the trust have a corpus. So, no deposit need be made until the 404(a) deadline.

What does the document say exactly? I'm curious because the language you are citing sounds quite a bit like what you would find in Code Section 414(l), which is the Code Section that discusses what you have to do when you merge two plans. Essentially, 414(l) requires that the amounts being transferred be equal to the amounts participants would have received if the plan making the transfer had been terminated. I take this to mean not that participants are entitled to 100% vesting, but just that what gets transferred to the surviving plan be equal to what they would have gotten had their current plan been terminated, i.e., that both vested and nonvested balances get transferred. If your plan document truly requires 100% vesting due to this merger, then the answer to your question must lie in the plan document and/or the plan administrator's interpretation of who would be entitled to full vesting in this situation, because the Code would not require full vesting.

If this were a profit sharing contribution, I would say the employer could get to the 15% limit, because if an employee hits his or her 415 limit, you would just reallocate the money to other employees who hadn't reached the limit, and 401(a)(4) allows you to treat all employees as receiving the same percentage if the reason the percentages are different is because of the 415 limits. I'm not aware of a similar rule for matching contributions. You could declare an extra match of $25,000, to be allocated based on participant deferrals, and to the extent the allocation would cause a participant to exceed his or her 415 limit, those participants would be capped at the 415 limits and the excess would go to other participants, who would get an even greater match. However, it appears you would potentially have a situation where different participants are receiving different rates of match. I'm not sure about that, because it seems in theory everyone had the right to the same rate of match, so maybe that's not a problem. It needs to be considered.

Look at TR 1.401(a)-13(e), which contains an additional exception for "certain arrangements," which may permit you to do what the participant is asking here. You would, of course, want to be comfortable that your plan document would not prohibit following the regulations.

What you are describing is a normal arrangement for a plan that treats loans as a general plan investment. I do not believe it is necessary from a fiduciary perspective to have the borrower invest an equal amount in the bond fund; all that is necessary is that the responsible fiduciary determine that the loan is a prudent plan investment. Of course, there are lots of reasons why earmarked loans are less risky and a better idea. In converting these loans from general asset to earmarked, consider the following: (1) since participants apparently have the authority to direct their plan accounts, should they be notified and given an opportunity to affirmatively choose to have a portion of their plan accounts prospectively invested in their loans, (2) the participants invested in the bond fund will be receiving cash in exchange for their interest in the loan notes, so it will be necessary to assign a value to the loans, and this will be complicated if any of the loans are past due, (3) should participants be given an opportunity to pay off their loans before this "conversion" since the return on this money will be changed, and (4) do the loan documents (application, promissory note, etc.) have any language in them that would prevent you from converting to earmarked loans, such as language regarding how loan payments will be applied?

Here is something to think about. You are not supposed to contribute anything that puts someone over the 415 limit, unless the excess is due to a "reasonable error" in estimating compensation, etc. You are well past plan year-end, so it is hard to see how this is due to an error in estimating compensation. Unless there has been such an error, the regulations don't allow you to correct an excess through distribution of deferrals, etc. So, what should have happened is reducing the amounts contributed.