dcoderre

Does the answer change if a 401k Plan includes a merged MPP transfer balance? In other words, may a 401k plan distribute from the “MPP source” for CARES prior to age 59-1/2? The source includes normal MPP restrictions, but it seems like CARES Act allows because the plan is a 401k, not a MPP. Thank you for sharing your opinions.

The background in Sec 2.03 gives a bit of a hint as a policy matter to encourage auto-enrollment. The 3-month correction rule doesn't require a QNEC for missed deferrals. After three months, and before the end of SCP correction period for significant errors, the missed deferral QNEC is 25% assuming all the other requirements are met.

Rev Proc 2015-28 provides a "9-1/2 month rule" for Elective Deferral Failures associated with missed elective deferrals for eligible employees who are subject to automatic contribution features under a 401(k) or 403(b) -- including employees who made affirmative elections in lieu of automatic contributions but whose elections were not implemented correctly. Question: Does the affirmative election "in lieu of" automatic contributions include only a participant's initial affirmative election opting out of auto-enrollment, or would it include the initial election and any subsequent affirmative election a participant makes if that participant is in the class of participants covered by the automatic enrollment feature? Proposed Answer: It includes the initial affirmative election as well as any subsequent affirmative elections. This is true regardless of whether the plan contains an automatic escalation feature. (Assumes an EACA continues to cover participants who make an affirmative election -- i.e., annual notice continues to be provided to participants who make an affirmative election.) Rationale: Consistent with the objective of encouraging automatic contribution features, nothing in the new rule specifically limits application to a participant's initial affirmative election. Section 4 of Rev Proc 2015-28 adds new section .05(8) of Rev. Proc. 2013-12 Appendix A that says in part: "If the failure to implement an automatic contribution feature for an affected eligible employee or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature does not extend beyond the end of the 9-1/2 month period after the end of the plan year of the failure..." Further, a participant who makes an affirmative election is continued to be covered by an EACA (if the plan provides) so it does not make sense to limit the correction only to an initial election. Example: Calendar year plan with auto-enrollment at 3%. Participant becomes eligible at 1/1/2015 and immediately opts out by affirmative election. Participant subsequently elects to defer 5% as of 7/1/2015, but the election is not implemented. The Participant does not notify the Employer, and the Employer implements the correction no later than the first payroll made on or after 10/15/2016. The Employer gives appropriate 45-day notice after deferrals begin and makes up the match with earnings within the "SCP correction window" for significant operational failures. No QNEC is required for the missed deferrals because the correction is appropriate under the "9-1/2 month rule" of Rev. Proc. 2015-28. Agree? Disagree?

What about when the "shift" involves two tax years? If 2012 MLR is a refund of a 2011 pre-tax health insurance premium, then it seems to me the amount may be included in plan comp for both 2011 and 2012. Let's say plan comp is W-2 plus deferrals with no adjustment for fringe benefits. In 2011, the pre-tax premium is included in plan comp because we add back pre-tax Sec. 125. In 2012, it's in plan comp again because it's included in W-2 taxable wages. Agree? If plan comp were defined to exclude taxable fringe benefits, then I can see an argument to treat the rebate as a fringe benefit and thus exclude it from 2012 compensation. Other thoughts?

Here's my take on Kevin's example: 2/28/2010 PYE - $1600 of deferrals reclassified as 2010 catch-up (no other 2010 YTD deferrals at this point) July 2010 contributes $16,500 402g max, plus $3,900 remaining catch-up max, plus $1,600 which is in excess of 402g & max catch-up 2/28/2011 PYE - ADP test includes $16,500, plus $1,600 excess 402g (because he's an HCE) It would be interesting to know what the software would have included in the ADP if this person had been an NHCE for 2/28/2011. If my above analysis is correct, only $16,500 would have been included in the ADP test for an NHCE.

I suggest looking into the Delinquent Filer Voluntary Correction program described at http://www.dol.gov/ebsa/FAQs/faq_DFVC.html If the plan is small (threshold generally = 100 participants) then non-profits get a big break in cost for multiple years. Good luck!

It's true the 2-1/2 month rule for distribution of excess contributions for ADP failure no longer impacts withholding because PPA now requires the distribution to be taxed in the current year. In accordance with IRC 3405, distributions taxable in the current year are generally subject to 10% withholding if ineligible for rollover. The 2012 Form 1099-R instructions are silent about excess contribution & excess aggregate contribution withholding, but it's my understanding they are subject to withholding per IRC 3405. The 1099-R instructions do indicate correction of 415 excesses are subject to withholding; however, correction of 402g excess deferrals are not subject to withholding. See 2009 explanation from Relius at: http://www.relius.net/News/TechnicalUpdates.aspx?ID=434

For a 403b to be exempt from Title I of ERISA, it must either be a non-electing church plan, a governmental plan, or a plan with limited employer involvement. If the entity makes employer contributions, it fails the limited employer involvement test. Thus, if it's not a church or government sponsor, it most certainly should have filed 5500s. Some entities are both a 501©(3) and an instrumentality of a government (or a church organization), so you'll want to look into that possibility if you haven't already.

I agree. The distribution is not eligible for rollover, so the lump sum federal withholding rate is 10% unless the participant opts out. State withholding rules also apply, with some states allowing for opt out. I'd report the distribution on 1099-R with Code E to indicate it corrects an error, and hope the IRS is not aggressively using this code for targeted plan audits...

I agree. If the entire $7K was deferred in latter half of 2011, a $2K ADP failure nevertheless is applied to the 2012 catch-up for 6/30/2012 testing. Thus, for the remainder of the year 7/1/2012 - 12/31/2012, the participant could defer max of $17,000 (402g limit) plus the remaining catch-up of $3,500 for 2012 grand total of $20,500. When 6/30/2013 is tested, only the first $17K of this is included in the test (plus applicable 2013 amounts) and any ADP failure will be applied to the 2013 catch-up to the extent it is not already used. If the $7K was deferred ratably throughout the year for 6/30/2012 PYE, such that $3,500 was contributed 1/1/2012 - 6/30/2012, then participant still gets maximum use of the $17K 402(g) limit and $5,500 catch-up for 2012 as follows assuming a $2K ADP failure: $3,500 for first half of year of which $2k is 2012 catch-up, plus up to $15,500 for remaining 402(g) and up to $3,500 for remaining catch-up, for grand total of $22,500. Of this amount, the 6/30/2013 ADP test will include only $15,500 (plus applicable 2013 contribs), and any ADP failure is applied to 2013 catch-up even if the contributions were all made in 2012. HCEs can hinder or help their ADP results depending on how they bunch up or spread out contributions in a noncalendar plan, as well as potentially decreasing their ability to put in the full $22,500 as in the first part of this example.

If a plan is submitting Appendix F Schedule 2 within 1 year of RAP for EGTRRA VS nonamender, the fee is 50% of the normal fee based on the 5500 participant count. For 51 - 100 participants, 50% of the fee is $1,250. If only Schedule 1 applies for a more recent amendment such as PPA, the fee is only $375. If both of these schedules are submitted together within the same VCP application, what is the fee? Is it only $1250, or is it $1250 + $375 = $1625 if submitted by 4/30/2011 (1 year expiration of RAP)? Thanks in advance.

The IRS does not consider it part of 415 comp according to PLR 200135045.

A correction offered in the IRS "fix-it-guide" for an impermissible hardship is for the participant to repay the hardship amount plus earnings, consistent with SCP under Rev Proc 2008-50. For a hardship taken in 2010 and repaid in 2011, I am wondering how to tax report. The 2010 1099-R (already issued to participant) reflects the amount of the hardship withdrawal. Rev Rul 2002-84 (issue #3) leads me to conclude the amount is supposed to be taxed in 2010, and then the participant might be able to take a deduction for the repayment in 2011; the repayment would not create a tax basis in the 401k account. The participant is unhappy with this tax result. The participant wants to pay back the hardship in 2011, but wants the 2010 Form 1099-R amended to reflect a $0 distribution. The participant is under age 59-1/2, and does not want to pay the early withdrawal penalty nor 2010 income taxes on the withdrawal. The plan would like to correct under SCP assuming it is eligible, though I think if an early withdrawal penalty applies, the only way to request waiver of early withdrawal penalty would be under VCP. Can anyone point me to some guidance that would allow us to amend the 2010 Form 1099-R to $0 when the SCP repayment correction is done in a later tax year? Thank you in advance.

What a difference a day makes. Having term'd on 12/31/10, $70K (RMD) of her April 2010 rollover was ineligible for rollover, and then she took a $20K partial distribution in September which is on top of the RMD. So she has $90K taxable distribution in 2010. Had she termed 1/1/2011, she would have had only the $20K taxable distrib in 2010, as it appears she intended.

I have a similar situation with an active participant who took a partial rollover distribution during April 2010 when the RBD had not yet been established (due to active employment). But then on 12/31/2010 the participant terminated employment, so the RBD is now 4/1/2011. When you read through the code and regulations, especially Treas. Reg. §1.402©-2, Q&A-7, a strict interpretation of the rules requires that “any” distribution during the distribution calendar year must first meet the RMD requirements. Does this mean that we would need to code the 1099R to indicate that part of the rollover that occurred April 2010 was not actually eligible for rollover (about $70K of the $1M rollover) or can the participant merely take another $70K distribution from the plan prior to her RBD of 4/1/2011? She still has about $500K in the plan, more than enough to pay out the RMD. (As an aside, she also took a partial lump sum of about $20K in September 2010. So if the full rollover is okay, presumably the $20K is applied toward satisfying her minimum such that she need only take another $50K from the plan prior to 4/1/2011.) Thanks in advance for your thoughts.