wsp

Participant has 2 loans outstanding. Plan only allows for 2 loans at any one time. Loan 1 has 1 year remaining Loan 2 has 18 year remaining on loan whose purpose was to buy property and build a home. Participant is at final stages of refinancing the original bank loan from a building loan to a home loan. However, builder is now requiring payment of amount owed to him by end of month and refinancing won't be completed in time. If participant fails to pay the builder then she'll get a credit ding which will cause her refinancing to fall apart (evidently her low rate is contingent on no late payments on her credit report). Participant inquired about refinancing loan #2 to add the 6k that she still owes. Account balance is sufficient to add the additional 6k. Can I refinance the 401k loan over the remaining loan period to pay this obligation on the original home?

Ok, I'll make a stab at this. If nothing else it will bump it to the top where I'm sure someone will not agree. The loan is a prohibited transaction. The broker provides a service to the plan and thus is a disqualified person. Fact that he doesn't receive compensation doesn't mean anything. If the plan lends money to a disqualified person the correction includes termination of the loan. Repayment has to be immediate and also includes extra payments if an independent commercial lender decides that the loan wasn't made at fair market interest rate. And repayment can't be the signing over of the property to the plan it has to be in the form of cash to avoid another prohibited transaction. If the plan were to accept the property in lieu of the cash it would then be the sale of property by a disqualified person to the plan. This is true even if the value of the property exceeds the note because you would need to sell the property in order to generate the value. I don't think it makes a difference if there are sufficient non-loan assets to pay out all non-owners. If the value of the property were to drop would the non-owners be shielded 100% from the losses? Don't think so. Besides it's the plan that is issuing the loan and not the individual participants. And to add to that if the loan wasn't to a party-in-interest then I would still think this would be an issue for the plan sponsor as I think you would be hard pressed to prove that 82% being invested in a single piece of real property is a diversified and responsible investment made by the trustee on behalf of the participants.

Plan year end is 6/30. Child enters kindergarten in September and daycare is no longer needed...would that be a change in status that would allow the deduction to be stopped or would that be argued as a forseen event and the participant should never have started and thus forfeits the contributions?

Client was hit with random IRS audit for 2003 plan year. Plan year ends 6/30. Turns out that 3 employees were missed on the contribution allocation. My recommended correction (vested portion of contribution plus income) was accepted by IRS and money will be contributed to plan. My only question is...is it a deductible expense for 2007 py or do they miss out on the deduction altogether. If it's deductible...for what year?

Wouldn't you also want to know if there are any related parties involved with the employees of the bank and the plan sponsor?

Would the use of a new comp profit sharing formula come reasonably close to being a solution?

What's the profit sharing formula? is the owner hitting the max?

I, too, fail to see the connection between the two but on a side note: As soon as you figure out a way to keep non-licensed drivers off the roads could you let me know. I vaguely remember reading that someone estimated that 10-15% of the drivers on the road in Washington at any point in time are there without a license or auto insurance coverage. I think it would be fair to assume that percentage to be somewhat similar in most states.

I won't gloat either, but have to admit I did make a wager against a Yankee fan involving team jersey's and photos. This is one bet that I'd better not lose! and yes, a west coast Sox fan does exist!

That doesn't relieve the distress just puts it off for 16 months; likely shorter if it got that far. Either way the participant is better served if they were given the number for a legitimate credit counseling service then a loan default. Question though...does the plan's obligation to collect on the debt end with the default?

Thanks Tom, now I have no excuse.

count all prior service: Nine month of service with semi-annual entry gets the 9/06 hires in the plan on 7/1/2007. Same eligibility gets the 4/07 hire in on 7/08 (assuming not a 4/1 hire). Almost the 21 and 1 but because of the hire dates it basically serves the same purpose.

We are not talking about any loan default. We are talking about a loan default that the plan sponsor is a party to. That's the difference and the reason that you can't allow it to happen. Treas. Reg §1.72(p))-1, Q&A-3(b) is the source of the whole issue. It says that the loan must be evidenced by a legally enforceable agreement. In this case the legally enforceable agreement says that the loan will be paid via payroll deduction if employed. By signing the document the participant is agreeing to have the loan payment taken via payroll deduction for the loan period. Not that the payments will be made via payroll deduction. The participant does not have the authority to stop the loan payments, since loan payments as a payroll deduction are based on an agreement with the employer. The employer would have to agree to stop the loan payments. Further, if the employer fails to enforce the loan document or fails to enforce the loan policy then the plan has got a sham loan program. ERISA Regulation Section 2550.408b-1(a)(3) deals with that with the following: "The existence of a participant loan or participant loan program will be determined upon consideration of all relevant facts and circumstances. Thus, for example, the mere presence of a loan document appearing to satisfy the requirements of section 408(b)(1) will not be dispositive of whether a participant loan exists where the subsequent administration of the loan indicates that the parties to the loan agreement did not intend the loan to be repaid". And yes, by allowing it to happen you have turned your program into a sham program because it's only a matter of time before it happens again and again. Then sooner or later you'll have a participant take a loan with no intention of making a single payment. At that point you may as well fold up the tent on your loan program; and depending on who is taking the "loan" it could be your entire plan. As for the impermissible distribution issue, simply look to 401(k)(2) and (10). Since the participant is still employed and the repayment of a loan is not a reason to allow a hardship, unless the participant is of age or the source of the money allows for inservice distributions, I would say that by not taking the loan payment as the document requires them to do the employer has voluntarily issued a distribution from the plan that is not allowed. Certainly that same employer wouldn't grant a regular distribution under these circumstances so why would this be any different? Of course it's all moot if the plans sponsor/employer doesn't want to be involved in the process and the loan documents do not state how the loan is to be repaid. Because then the loan isn't being granted on a condition of repayment via payroll deduction but instead on a condition of repayment via check. At that point there is nothing to prevent the employee from failing to write the check and suffering the consequences. But that's not the premise that the OP posted.

If plan sponsor (employer) allows the stoppage of the loan payments they would, in effect, be allowing an impermissable in-service distribution. And, if you allowed it for one you'd have to allow it for all. The loan policy would have to be changed to allow for elective default. End result would be prohibited transaction issues and more likely due to the impermissable in-service distribution issues a plan disqualification issue. Don't allow it.

Instructions for Schedule R to support Below Grounds response: Line 2. Enter the EIN(s) of any payor(s) (other than the plan sponsor or plan administrator on line 2b or 3b of the Form 5500) who paid benefits reportable on Form 1099-R on behalf of the plan to participants or beneficiaries during the plan year. This is the EIN that appears on the Forms 1099-R that are issued to report the payments. Include the EIN of the trust if different than that of the sponsor or plan administrator. If more than two payors made such payments during the year, enter the EINs of the two payors who paid the greatest dollar amounts during the year. For purposes of this line 2, take into account all payments made during the plan year, in cash or in kind, that are reportable on Form 1099-R, regardless of when the payments began, but take into account payments from an insurance company under an annuity only in the year the contract was purchased. Clear enough for most plans, question I have is regarding the payments made by insurance companies...Do we use their EIN or the EIN of the trust? Had always thought it to be the former but now am not so sure.

Over time I've found that in most cases a plan is better off using current year and simply refunding the amount. Too many times I've passed on an ADP limit to the sponsor only to find out at the end of the year that one of the HCE's stopped a deferral, hired two of his children, or gotten married to his secretary. Funny how it's MY fault that money was left on the table.....communication is great but if it's not both ways and the plan sponsor isn't aware of the impact of various personnel issues on the test then it's not really worth the hassle. I'll take current year and early year end data transfer any day of the week.

Guess this is a moral dilemma as much as a legal one... participant is in ill health. relative claims to have POA to handle participants financial affairs and asks about withdrawing funds to pay for care. client has been in contact with participant since intial inquiry and participant was unaware that the request was made. participant was somewhat disturbed to hear that 401k was intending to be tapped as his goal was to recover and spend his own money. Must the plan honor the POA if participant gave verbal disapproval? Intent of request by individual with POA was to distribute balance in two pieces..cash to pay for short term care and rollover of remaining balance to IRA in participant's name with beneficiary being same beneficiary as with the plan (not the person who has POA). So I don't question the motives....just not sure what to do since we know it's not the participants desire. What do we do? Recommend to participant that the POA to be amended to not include the plan? Honor the POA? Stick head in sand and sing "Ob la di" until the participant passes away and issue is resolved? Seems to me that none of those are truly beneficial to anyone.

I'm guessing that Masteff never read any wild west dime store novels... btw thanks for the tip. Just turned them off. I like them but I cringe every time I see Austin's posts.

Your word choice is rather strange. Why does the gay man (or woman) "hook up" while you "choose to live" with a female partner? Aren't they exactly the same thing? Shacking up is shacking up... At any rate, the courts have decided and many states are now changing the laws to comply/agree with them that states don't have to allow gays to marry but you do have to provide them with the same opportunity for benefits. It's not a condemnation or condoning of any lifestyle, simply a way of complying with the law. If you want your company to provide your "opposite sex domestic partner" with health insurance then you need to marry her. Something that your state doesn't allow the same sex couples to do. Might want to think about that the next time the gay marriage agenda comes up on the ballot. Make those darn "same sex domestic partners" suffer along with the rest of us married folks!

Wouldn't this approach work only if accounts are pooled or there is a forfeiture/suspense account?

$3,000 wasted and a spouse in prison would cause me to divorce said spouse which certainly is a change in status. Down the road when spouse becomes "reformed" then a remarriage might be in order.

I used Word Merge to create statements for awhile, but I ran into problems with formatting when upgrading to Word 2002. Same spreadsheet would create two different formatting outputs when using Word 2000 versus Word 2002. That and the fact that in about 3 hours you can create a quality workbook that will contain all of the data, run all of your discrim tests, and give you output for plans with under 20 participants, I'm not sure you would ever need to use Word. Stick to EXCEL and spend a few extra hours on the visual look of the output and don't worry about Word.

I think that was meant to be... "Include the total cash contributions received and/or (for accrual basis plans) due to be received." (edited...sorry WDIK, didn't want to be ticky tacky but think the extra words made it hard to follow) Since you said it's cash basis then you'd ignore the 2005 contribution. Make sure though that your 5500 accounting method is consistant with prior years. I've had plans that filed the 5500 on an accrual basis but wanted the rest of plan reporting/participant reporting to be cash basis. If your 2004 5500 filing was cash based then make your 2005 cash based as well.

pax, the fact that you would so quickly toss aside the family history that you and your parents shared lo these many years is truly awful and shocking. What's more disturbing is that you beat me to the punch with the adoption scheme. I'll have to try harder next time. Perhaps I can find one of flamaster's overfunded 412(i) clients....wait, best not to give away my plans.

Client is a partnership. Only two partners made over 150k. 3 more made 140k. If two of those three are considered officers then plan is not top heavy. If all three are considered officers then plan is top heavy. None of the three have any more or less real authority than the others. Partners regularly meet to discuss budgeting issues, hiring and firing decisions and such. However, majority owner makes final decision. So the word discussion is really that...a discussion. None of other partners have more than 1% stake in company. Does such an arrangement and ownership structure preclude any of the others from being named as key employee so long as those three other partners don't earn over 150k? Since officer status is based upon facts and circumstances, it seems to me that majority owner can claim the minority partners have no authority and thus shouldn't be included and it would only come to light in an audit situation and even then only if documentation doesn't support his position.