austin3515

An accountant called to tell me not to process his clients RMD yet, because he thought there might be relief on the RMD rules for 2008 - Does anyone have any idea what he's read? It seems hard to believe that any relief would be in line for 2008, since so many RMD's have already been processed? Perhaps the relief will be to allow them to adjustment for investment losses?

No it won't. The only people not covered by the Plan will not have satisfied the plan's eligiblity requirements. Erego, no coverage issue.

1) We need to know the ownership split of the partnership 2) We need to know how (if at all) the S-Corp and the partnership work together, whether or not they are a service industry, etc. If a potential ASG exists, there are a lot more particulars, but what I've mentioned could help to quickly rule it out.

Allow me... Qualified Plans (i.e., non 403b) Small plans have been POTENTIALLY subject to the audit requirement for four or five years now. HOWEVER, the only time they will be subject to an audit is if they screw up. For example, the audit exemption is maintained by: 1) Providing participants additional disclosures in the Summ. Ann. Report (i.e., the summary of 5500 for the participants) regarding where the money is held. This is NOT required if the participant receives their statement directly from a regulated financial institution or insurance company etc (in other words, most plans are all set). This is really tarteted at "pooled" plans where the participant gets a piece of paper off a laser printer from a TPA as evidence of their accounts each year. 2) Having adequate fidelity bond protection IF more than 5% of plan assets are not in "regular" investments. So for example, if 10% of plan assets are invested in a racing horse, or a coin collection, Real Estate, private equities, mortages, etc. additional fidelity bond protection is required, potentially above and beyond the regular 10% fidelity bond. As you can see, maintaining the exemption is not particularly challenging, and I would therefore be surprised if any significant number of small plans have actually had to get an audit. With respect to 403(b)'s what she says is true (I'm not sure of the exact effective date)--this represents a DRAMATIC change in 403(b) plans. Compare this to the small plan audit waiver where the DOL really just wanted to deter "bad" fiduciaries from investing in garbage, and did not really want small plans to get audits.

Any number divided by itself is indeed 1, which in ADP test is 100% (that would have quite a dramatic effect in a small population!) But I thought it was more like any VALUE divided itself is 1, but zero is by definition the lack of any value at all... But admittedly I did not study match in grad school - truth be told I studied nothing at all in grad school (of course if I had gone to grad school I would have studied...).

Anyone whose a TPA knows you can't charge enough for loans - you will always lose money or barely break even on loans (particularly in the case of a client who is not diligent in administering the loan payroll deduction process, and particularly if participants are allowed more than one loan outstanding). I will say this though, we are relying a LOT more on the fund company's automated loan programs and a lot less on flipping through piles of amortization schedules, which has helped us keep our fees down.

I've never seen guaranteed payments not be included in earned income. I have seen CPA's forget to fill in the SE box by accident. Do with it what you will

Never run into this before, but my first reaction is that it seems strange that someone should incur the tax liability for a deceased indivudual's o/s loan balance simply because they were designated as beneficiary. Shouldn't the taxable income flow through to the estate or something? Can you assign someone your debt? It seems awfully strange if true.

Thanks for the link R Butler! I now understand the logic behind what I've always been doing. I have always thought it was strange that they didn't get a deduction for the employer contriubtion (i.e., because if it was a c-corp that bonused out all income, the c-corp owner would not pay FICA/SECA on those amounts). I still think its a silly conclusion, but at least now I understand the logic. It seems clear that the Q&A is either incorrect or very very misleading.

This was in the May 2008 IRS Q&A from the ABA: 12. § 401©(2) – Self Employed Individuals Earned Income Treas. Reg. § 1.415©-2(b) defines compensation for self-employed persons as earned income under § 401©(2) of the Code, plus amounts deferred at the election of the employee under § 401(k) of the Code. Earned income under § 401©(2) of the Code includes a reduction for 50% of SECA liability. When is SECA liability determined? Proposed Response: The SECA liability should be determined after the 401(k) contributions have been deducted from the person’s income. The 401(k) contributions are then added back to arrive at 415 compensation. IRS Response: The Service representative agrees with the proposed response. Is anyone calculating the 50% deduction for SE Taxes on comp NET of 401(k)?

There was a big thread on that exact topic a month or so ago - it was split down the middle re: whether or not that was acceptable. I personally wish the DOL/IRS would issue some guidance on that issue. I figured this "hardship" might be the path of least resistance.

Got a participant with a loan who cannot afford the payments anymore (got very sick, but is still working). She has a lot of medical expenses not covered by insurance AND she has a son who needs tuition money for school in the fall, so she really wants to get rid of her loan payments. Question: Can she request a hardship distribution for the above situations in the form of a loan offset? It seems strange given that the proceeds will be used to repay a loan, and not to fund the intended expenses, but I have always read that hardships can be in the form of loan offsets. Note that the participant could take a hardship in cash (because she is indeed eligible for the distribution) and then use the proceeds to separately repay the loan. I am aware of no requirement that a hardship distribution actually be used for its intended purpose. Once the hardship exists, the participant is eligible for the distribution. They could blow the money at the casino for all the Plan Sponsor knows. PS, the plan is in a 90 day black out right now so my idea in the previous paragraph would not work.

My answer was based on my reading of the EOB: Part 2 of the top-heavy exemption in the EOB states: to the extent there are matching contributions made to the plan, all of the matching contributions satisfy the ACP safe harbor prescribed by IRC §401(m)(11)... Since all of these contributions satisfy the ACP safe harbor, at least according to Sal, TH exemption would be in tact.

Small (but very important modification/expansion) is that the TH exemption is still maintained with discretionary and fixed matches above and beyond the basic SH match provided they satisfy the ACP safe harbors described by JFKBC (as he/she also pointed out). This infamous idea is referred to as the "triple stacked match" and is really quite cool IF no one defers. The problem with it is that sometimes employees change their minds and before you know it you could have a BIG MATCH if your not paying attention (i.e., if discovered early enough they can all be discontinued mid-year)!

Of course, a discretionary match cannot exceed 4% of pay. In order to do this 200% of 6% the match would need to be written into the document, which would eliminate the benefit of hindsight.

Mike Preston, reflagging per your request!

There was a big DOL official (Kristen Zarwinski??) right next to Scott, and she did not say a word re his answer. I too agree though that its primarily a DOL issue, regarding protection of assets, etc. But I still feel pretty good about the answer nonetheless. After-all, the Plan is adequately protected via the security agreement.

At the Northeast Benefits Conference I asked Scott Falwell (or something like that, he runs the EPCRS program), and asked "If a participant can no longer afford loan payments and forbids the employer in writing from continuing payroll deductions, may the employer stop the deductions?" His response was yest "but blah blah blah" (the blah blah blah being all of the obvious issues regarding taxes, max loan calc on future loans, etc.). It has since occured to me as well that the act of disccontinuing loan payments simply puts the loan into default as a violation of the terms of the promissory note. Just because you have an agreement doesn't mean both parties are necessarily required to follow its terms--however, the terms of the agreement have implications for the failure of either party to abide by the terms (in this case, it would be the Plan's eventual loan offset upon a distributable event--of course taxation occurs "immediately"). I think further that it would be an abuse of the employer's position to disregard the aforementioned request. So I think you could say I have turned a complete 180 on this one. Of course, I now have justification for what I wanted to do all along. So that's a good thing But I do like the requirement of a written letter from the participant forbidding future loan payments.

Except that ERISA trumps those laws. Another example of an incredible lack of guidance in a situation that arises quite frequently. Also, TAGData indicated in a Q&A on their site that QDRO and I are correct (though admittedly as someone who is not an employer, it is very easy for me to say this). LAstly, I should point out that if a participant is eligible for a hardship distribution, they can request this in the form of a loan offset, thus potentially solving the problem.

Though its difficult, imagine if your bank said, "oh forget it, I know you're down on your luck so just forget about the loan I gave you." I know it stinks, but what are you going to do? Who decides whose tale of woe is bad enough?

If its incorporated into the promissory note (which is at least where we have it in our loan paperwork), than it ceases to be voluntary when they sign the note. It's not an administrative convenience at that point--it's a contractual obligation.

I agree w/ QDRO 100%.

You're on my Outlook calendar...

The following also occured to me an hour ago. I was struggling with the justification for that first bolded sentence regarding disregarding the catch-ups for the 06 (a)(30) limit. BUT, we're essentially doing the same thing when someone does $20,500 of 401(k) (in 07) and also goes over 415 by the same $5,000 in a calendar year plan. I've never felt that was getting two catch-up limits. I realize now that the same logic applies (or at least it is being applied by the IRS in these regs). I sure do hope Mike Preston weighs in on this

To all those who participated in that ridiculously long exchange from a month or so ago, I hope this helps conclude it. I think there were a few who were in fact saying this, but I now know why, and I took a good deal of time to lay it all out. I hope it helps (it certainly helped me clear my head). I painstakingly read through EOB on this issue and here is what was missing, at least for me (from Example 5 of 414(v) regs) (the bolded entry is what inspired this post): (v) Even though Participant E's elective deferrals for the calendar year 2006 have exceeded the section 401(a)(30) limit, Participant E can continue to make elective deferrals during the last 2 months of the calendar year, since Participant E's catch-up contributions for the taxable year are not taken into account in applying the section 401(a)(30) limit for 2006. Thus, Participant E can make an additional contribution of $3,400 ($15,000 minus ($16,000 minus $4,400)) without exceeding the section 401(a)(30) for the calendar year and without regard to any additional catch-up contributions. In addition, Participant E may make additional catch-up contributions of $600 (the $5,000 applicable dollar catch-up limit for 2006, reduced by the $4,400 ($1,000 plus $3,400) of elective deferrals previously treated as catch-up contributions during the taxable year). The $600 of catch-up contributions will not be taken into account in the ADP test for the plan year ending October 31, 2007. SO: ADP test at 3/31/08 plan year is failed, resulting in $5,000 of refunds to be distributed. Participant is over age 50 so the amounts are reclassed as catch-ups. As long as the participant made at least $5,000 of 401(k) for 2008, those amounts are disregarded for calendar 2008's (a)(30) limit. SO the participant can make $15,500 of 401(k) for the remainder of 2008, calculated as follows: Line 1) (a)(30) limit for 2008: $15,500 Line 2a) 2008 Calendar Year To Date 401(k): $5,000 Line 2b) 2008 Calendar Year To Date 401(k) reclassified as catch-ups, and therefore disregarded with respect to the 2008 (a)(30) limit: $5,000 REMAINING contributions for 2008 = Line 1 minus (2a minus 2b), OR $15,500 minus ($5,000 minus $5,000) = $15,500. Therefore, for all of 2008, the participant can make the full $20,500 in 401(k). THE CATCH For the 3/31/09 plan year, the full $15,500 in 401(k) made from 4/1/08 to 12/31/08 is included in the test, in addition to any 401(k) made from 1/1/09 to 3/31/09 (which to be consistent we will assume is the same $5,000). So the full $20,500 is included in the test because the 2008 catch-up was consumed in the 3/31/07 ADP test. This of course means his ADP refunds will be higher in the following year because refunds are in descending order, starting with he who hath contributed the most. This is dead-on consustent with EOB, at the bottom of page 11.283 of the 2008 version if anyone wants to review. THE ONLY REMAINING QUESTION What if the participant made no 401(k) from 1/1/08 through 3/31/08? Are there any 401(k) contributions to be disregarded? The answer would appear to be no. Line 1) (a)(30) limit for 2008: $15,500 Line 2a) 2008 Calendar Year To Date 401(k): $0 Line 2b) 2008 Calendar Year To Date 401(k) reclassified as catch-ups, and therefore disregarded with respect to the 2008 (a)(30) limit: $0* *The intent of this adjustment is to disregard deferrals actually made. Note that for (a)(30): (taken from 1.414(v)-1©(3): with respect to elective deferrals in excess of an applicable limit that is tested on the basis of the taxable year or calendar year (e.g., the section 401(a)(30) limit on elective deferrals), the determination of whether such elective deferrals are treated as catch-up contributions is made at the time they are deferred. Since no deferrals were actually made, I have a hard time seeing a case for entering $5,000 here (which would effectively increase the (a)(30) limit for 2008). The purpose of the adjustment is to disregard deferrals actually made; since there are none, there is nothing to disregard. Therefore, if there were no actual deferrals made from 1/1/08 through 3/31/08, then participant has solely the $15,500 limit for 2008.