fiona1

That is correct. I believe the plan uses similar language as DB LRM 44 where it just says that employee will receive distribution if the PV is not greater than $5,000. I've seen plans that say that these payments will be made by the first day of the plan year after termination - presumably to allow the plan sponsor some wiggle room.

Like most plan documents, the plan has a small payment provision in which a single sum payment is made to the participant if the PV of their benefit is under $5,000 at the time of their termination. The plan sponsor has apparently failed to pay out several terminated participants who fall under this category - some of whom have been terminated for well over 5 years. Has anyone heard of this coming up under an audit?

I don't know that there is right or wrong answer. This is how I would approach it though... An operational failure has occurred for not following the terms of the plan. EPCRS correction principles indicate to put the plan in the position it would have been had the failure not occurred. Appendix A of the EPCRS provides a correction method for "failure to timely pay the minimum distribution required under §401(a)(9)" in which the plan distributes "the required minimum distributions, plus an interest payment based on the plan's actuarial equivalence factors in effect on the date that the distribution should have been made". Applying the late §401(a)(9) correction method to your failure (given that it also involves the delayed payment of a required distribution) seems logical. However the EPCRS allows other corrections - as long as they meet the correction principles and are reasonable. The plan sponsor could determine that a 9/1 ASD with 2 month increase is how they will correct the failure if they believe it is reasonable.

A plan participant retired on his normal retirement date with a $650 monthly benefit. 3 years later it was discovered that the benefit was calculated incorrectly and the corrected monthly benefit amount should have been $700. There are obviously a number of different factors that could lead to this (incorrect compensation used, incorrect service calculations, etc). The plan sponsor wants to self-correct this failure and follow the EPCRS correction principles in which a full correction will be made, restoring the plan to the position it would have been in had the failure not occurred. However the plan sponsor is looking for guidance on exactly *how* to correct the failure. They are struggling with whether they just provide a lump sum (with interest) for the $50 per month that was missed over the last 3 years, and then correct the benefit going forward - or whether they actuarially adjust the benefit going forward to make up for the missed payments. They are also wondering if they should allow the participant to elect a new form of payment for the $50 (this doesn't seem necessary). I imagine there are many methods of correcting this failure. Does anyone know if there is any guidance or a preferred method?

Like AndyH said - no notice, no suspension. I don't think you can claim that these amounts "should not have been paid out" if the plan did not provide proper notice. If the notice WAS provided timely but someone forgot to shut off payments, then in that case I can see an argument to perhaps treat this as an overpayment. I believe the same theory applies to late retirement suspension. Some plans choose not to increase a benefit if an employee works past NRD. In order to do this, however, the plan must provide notice. If the notice is not provided when the employee reaches NRD, the plan must generally provide an increase for the time period in which the notice was not provided.

In this scenario there were no missed payments to the participant. The plan allows a terminated participant to defer their benefit past NRD. The participant died before benefits were required to begin. And thanks CuseFan for the answer. Makes complete sense and it is certainly in line with the correction principles of the EPCRS which includes restoring the plan to the position it would have been in had the failure not occurred.

DB plan where the only death benefit is the required QPSA, payable to a spouse. A participant terminated in the '80s with a $19 benefit. He died in 2006 and his required beginning date would have been 4/1/2008. The pre-retirement QPSA was never paid to the spouse, and she died in 2015. Does anyone know where the plan sponsor would go from here? I assume an "operational failure" has occurred (in terms of not paying the QPSA timely) but don't know that there is clear guidance in the EPCRS on how to handle this type of failure. I know it addresses what to do if a participant is not paid by their RBD, but what kind of options exist for this situation? Can they forfeit the benefit and move on? Do they have to pay this benefit to the participant or the spouse's estate?

Scenario: Plan Fails ADP on Total Group basis, but Passes ADP on a Permissive Disaggregated basis. Plan Passes Ratio Percentage K on a Total Group basis and on a Permissive Disaggregated basis. AND Plan Passes ACP on a Total Group basis, but Fails on an Permissive Disaggregated basis Plan Passes Ratio Percentage M on a Total Group basis, but Fails on a Permissive Disaggregated basis. Could this plan rely on the passing ADP and RPK that were prepared on a Permissive Disaggregated basis, while relying on the passing ACP and RPM that were prepared on a Total Group basis?

I think the thought process is that this really isn't an MRD piece. The full benefit was paid out at age 68, albeit with an incorrect actuarial equivalent rate. By using the incorrect rate, it resulted in an underpayment. Unfortunately it wasn't discovered until 3 years later. The EPCRS says that correction is determined by taking into account the terms of the plan at the time of the failure.

Plan participant terminated and retired at age 68. They took a full cash distribution and elected to have it rolled over to an IRA. 3 years later it was determined that an incorrect present value rate was used to calculate the single sum value. The participant is owed an additional $6,000 plus interest - in which the plan sponsor will be using IRS self correction program guidelines to distribute this corrective distribution. Considering that the participant is now 71, is there anything that would preclude them from rolling over this amount?

DB plan's normal retirement age is 65. It allows an early retirement, but only if a member has attained age 55 and has 10 years of benefit service. The employer is looking to freeze all benefits as of 6/30/17. They will continue to credit service in regards to vesting, but are they allowed to freeze benefit service as of this date for the purpose of early retirement eligibility? For instance - assume a member is age 57 and has 9 years of benefit service as of 6/30/17. He/she could have been planning on retiring at age 60 - but will no longer be able to retire early if benefit service is frozen. Is the plan sponsor allowed to do this or would this violate a protected benefit rule?

Thanks for the feedback. I guess I was going more towards the protected benefit issues, and the regulations which say: “if an employer establishes a pattern of repeated plan amendments providing for similar benefits in similar situations for substantially consecutive, limited periods of time, such benefits will be treated as provided under the terms of the plan, without regard to the limited periods of time, to the extent necessary to carry out the purposes of section 411(d)(6) and, where applicable, the definitely determinable requirement of section 401(a), including section 401(a)(25).” I know that Rev. Ruling 92-66 says that this is based on the "facts and circumstances", so it's hard to say how multiple window amendments for a specific employer would be viewed without knowing details. Since this lump sum de-risking has been popular for a few years now, I was just curious if anyone has dealt with situations in which an employer has wanted to offer it multiple times over a period of 2-3 years and whether anyone feels there is risk associated with that.

Is there any guidance (official or unofficial) in terms of how many lump sum window offerings a plan sponsor can offer (and in what amount of time) before the IRS would deem the cash option a permanent plan feature?

I was struggling with that as well. Found the following in the ERISA outline book: 2.b.2) No delay rights for later distributions. Once the participant reaches normal retirement age (or age 62, if later), the plan is permitted to require that distribution be taken. In that case, only the form of payment might be left to the participant's election. The plan may permit the participant to postpone distribution beyond normal retirement age (or age 62, if later), subject to the minimum distribution requirements of IRC §401(a)(9) (discussed in Section VII of this chapter). Where distribution can no longer be delayed, a written notice is still required, but the notice would explain only the payment options available to the participant, as discussed in 2.a. above, and the direct rollover option, as discussed in 2.c. below. So take actives out of the equation. Is the right to defer past NRA protected for inactive participants? Assume John terminates at age 40 and (at the time) has the opportunity to defer his benefit past NRA (with an actuarial increase). Can the plan be amended when John is 45 to force him to take his benefit at NRA?

DB plan currently defines NRA as age 65. A participant (either active or terminated) can defer their benefit past NRA. In such case, an active participant will receive a suspension of benefits notice, while a terminated participants benefit will be actuarially increased from his NRA to his annuity starting date. In addition, the plan allows an active participant the option of taking their benefit (at NRA) and continuing to work. I'm not sure if this would be allowable with the suspension of benefit rules - given that their benefits are supposed to be withheld. But nevertheless, it's allowed in the plan document. When an active participant receives their suspension notice (at NRA), they are typically advised by the employer to just take their benefit - but not everyone does. The plan is frozen and the employer would like to force all participants (both active and terminated) to take their benefit at NRA. Is the right to defer a benefit past NRA protected?

Yeti68 - I remember seeing a very similar question posed a few weeks ago: http://benefitslink.com/boards/index.php?/topic/55105-maximizing-employer-contributions-415-limit/ I believe the underlying argument (as I see it) is that there is no 415 failure. I don't believe the 414(v) catch-up regulations say that you can reclassify in the event of a 415 "failure" - but you can reclassify in the event of hitting the 415 limit. The correction for an actual 415 "failure" is outlined in the EPCRS and it says nothing about reclassifying as a means of correction. It says that you refund, forfeit, and/or reallocate excess annual additions. From the final catch-up regulations: Catch-up contributions are elective deferrals made by a catch-up eligible participant that exceed an otherwise applicable limit and that are treated as catch-up contributions under the plan… As discussed above, whether elective deferrals in excess of an applicable limit can be treated as catch-up contributions is determined based on the year (e.g., plan year, calendar year, or limitation year) with respect to which each applicable limit is applied. The final regulations retain the rule that the amount of elective deferrals in excess of an applicable limit is generally determined as of the end of a plan year by comparing the total elective deferrals for the plan year with the applicable limit for the plan year. For an applicable limit that is determined on the basis of a year other than a plan year (such as the calendar year limit on elective deferrals under section 401(a)(30)), the determination of whether elective deferrals are in excess of the applicable limit is made on the basis of such other year.

An employer sponsors a 403(b) and 401(a) for hospital employees, and a 401(k) for their "for-profit" division employees. All have 1/1 plan years. For the hospital employees, the 403(b) took the deferrals and the match was made to the 401(a). On 4/22/2013, the 403(b) plan was amended to begin accepting the match. It will no longer be made to the 401(a). So the hospital employee's matching contributions were made to the following plans for 2013: 1/1/2013 - 4/21/2013: 403(b) match made to the 401(a) plan 4/22/2013 - 12/31/2013: 403(b) match made to the 403(b) plan When it comes to testing the 2013 match for nondiscrimination (ACP), is it allowable to prepare a 12 month test, adding the contributions together? Or, does that constitute permissive aggregation - which is not allowed with a 401(a) and 403(b)? Would it be better to prepare separate 2013 ACP tests?

I tend to agree. I just wonder if there is an IRS agent would would be techincal about it and claim that the 2014 deferrals are not excess contribuitons for the 2013 plan year and were improperly refunded.

A HCE took a full distribution from the 401(k) plan on 11/20/2013 and continued to work. He rolled all of these funds to an IRA> He resumed making deferrals to the 401(k) in January of 2014. He is due a ADP refund from the failed 2013 test. Would it be okay to refund his 2014 deferrals to correct the failure? Or will the IRS deem a portion of his rollover ineligible, meaning that the refund amount should come from the IRA?

I assume you mean 415©(3) compensation - and as to whether those items are included in 415©(3) compensation may depend on the definition outlined in the plan document, which could be one of 4 different definitions. There is the 415 defintion, and then the 3 safe harbor defitiions (415 Simplified, W2, and 3401(a)). If they use the Simplified 415 definition, for example, then whether or not a component of pay is reported on the W2 doesn't really apply in terms of whether it's plan compensation or not. 414(s) compensation is another animal. Any of the four 415©(3) defintions will satisfy 414(s). But then there are other methods of complying with 414(s). There are certain safe harbor exclusions, the inclusion of elective contributions, exclusions applicable only to highly compensated employees, and alternative methods that require additional testing. I assume you're trying to determine the compensation to use for nondiscrimination testing, since you bring up 414(s). I would first determine if the plan document outlines what kind of compensation to use. Does it use one of the 415©(3) defintiions? If so, which of the 4 definitions? Does it provide for the exclusion of any of the items listed in §1.414(s)-1©(3)? 1.414(s)-1©(2)Compensation within the meaning of section 415©(3).— A definition of compensation that includes all compensation within the meaning of section 415©(3) and excludes all other compensation satisfies section 414(s). Sections 1.415©-2(b) and © provide rules for determining items of compensation included in and excluded from compensation within the meaning of section 415©(3). In addition, section 414(s) is satisfied by the safe harbor definitions provided in §1.415©-2(d)(2), (d)(3) and (d)(4) and any additional definitions of compensation prescribed by the Commissioner under the authority provided in §1.415©-2(d)(1) that are treated as satisfying section415©(3). (3)Safe harbor alternative definition.— Under the safe harbor alternative definition in this paragraph ©(3), compensation is compensation as defined in paragraph ©(2) of this section, reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits.

Thanks for all the replies. Let me throw out another one. Assume a Limitation year is 7/1 to 6/30 and a participant's tax year is 1/1 to 12/31. As of today, 11/19, a ptp has deferred $20,000 into their 401(k) from 1/1/2012 to 11/19/2012. Their employer also has a profit sharing plan (with the same LY) - and it's just realized that they have a 415 excess of $6,000 (during the LY of 7/1/2011 to 6/30/2012). Since the participant has already deferred $20,000 this tax year - they only have $2,500 additional to defer. Is it correct to say that of the $6,000 415 excess that $2,500 would be moved to "catch-up" (for 2012) and then $3,500 be refunded? Is it also then true that the participant couldn't defer for the remainder of 2012 since they have maxed out on both the $17,000 elective deferral limit and they have also maxed out on their catch-up limit?

The catch-up (calendar) limit used for an off -plan year is the year in which the plan year ends. But what if there are no deferrals in that year? 4/1/2011 to 3/31/2012 ADP test failed. John needs an ADP refund of $900. John deferred all of his money from 4/1/2011 to 12/31/2011. He has not deferred anything in 2012 yet. You can NOT take that $900 and consider it 2012 catch-up, correct? So do you have to look at 2011? If John did not max his catch-up for 2011, can you apply the $900 as catch-up for 2011? Or does it need to be refunded?

So an employer has sponsored a pre-approved plan for the last 20+ years, and have always relied on the opinion letter. Well on 1/1/2013 they are restating to an individually designed plan. Their EIN puts them in Cycle E - and the next Cycle E submission period is 2/1/2015 through 1/31/2016. I'm trying to determine if there is anything that would allow them to apply for a determination letter sooner. There are a couple things in Rev. Proc. 2007-44 that I think may apply, but I'm having difficulty understanding them. 1. First, section 14 describes some situations where an off-cycle filing will be treated with the same priority as an on-cycle filing. It says that "a new individually designed plan whose next regular on-cycle submission period ends at least 2 years after the end of the off-cycle submission period during which the plan sponsor submits its application". It says that a new plan is defined as a plan that would be a new plan "within its initial remedial amendment cycle under §1.401(b)-1(b)(1) of the regulations, as summarized in section 2.03 of this revenue procedure". I'm having a hard time following what this means. 2. 19.03 talks about a temporary eligibility for 6 year cycle. It says that if "the employer is a prior adopter of a pre-approved plan and after adoptiong this pre-approved plan the employer replaces the plan with an individually designed plan whose underlying plan document is not based on a pre-approved plan", then the employer is "entitled to remain in the six-year remedial amendment cycle only for the current remedial amendment cycle". What does that mean? I'm pretty certain that neither of these rules will allow the employer to apply for a determination letter prior to the Cycle E submission period - but hoping someone could explain the 2 rules above. Thanks for any help.

Thanks for the reply. So when you say: In the event there isn't any additional cash as he approaches his deferral election, then nothing would be deferred. - you agree that if the 5% election exceeds the cash available, then then entire paycheck would be deferred - but nothing further would need to be deducted from future paychecks, correct?

John gets paid $3,000 in gross wages on a bi-weekly basis. He has a 5% deferral election, in which case $150 is contributed to his 401(k) every pay period. John's employer has a restricted stock program. The stock will vest on 11/1, and the value will be reported on John's first paycheck on November - and then subsequently reported on the W-2 at the end of the year. The 401(k) plan uses W-2 as the definition of pay - in which case restricted stock is counted as plan compensation. And the plan does not exclude anything from the compensation used to calculate deferrals. Therefore, the 5% election for the first paycheck in November must be applied to the gross comp for that pay-period, which will include the value of the restricted stock. If the value of the stock is $15,000 - then you take 5% x $18,000 to come up with a 401(k) deduction $900. So John's paycheck is going to be a little less this pay period. But what if the value of the stock is $120,000? 5% of $123,000 is $6,150. What do you in that situation? Take out any other pre-tax deductions and then put the rest into the 401(k) plan? So John wouldn't get a paycheck for this pay period? Do you have to take out the rest on the next paycheck? or the paycheck after that? We'll assume the employer doesn't want to amend their plan to exclude this pay from the calculation of deferrals.