fiona1

Does anyone know how many 1099-R's are issued if an excess deferral refund is distributed after 4/15? Using the example below from the ERISA Outline book, the excess ($325) is taxable in both 2012 and 2013. The earnings ($45) are taxable in 2013. I'm wondering if there would be one 1099 for 325 with a distribution code of P, and another 1099 for 370 with a distribution code of 8. Or, would there just be one 1099 and if so, for how much? Example. JoAnne has excess deferrals for 2012 in the amount of $325. The plan does not distribute the excess amount by April 15, 2013. JoAnne receives a distribution of $370 on June 1, 2013, which represents the amount of the excess deferrals ($325) plus allocable income ($45). The following tax consequences apply to JoAnne. (1) For 2012 (i.e., the deferral year), JoAnne must include $325 in gross income, which represents the amount of her elective deferrals for that year that exceeded the income exclusion limit under IRC §402(g)(1). (2) For 2013 (i.e., the distribution year), JoAnne must include $370 in gross income, which is the total distribution made to her, even though $325 of that amount was also included in her 2012 income.

Thanks for the info. So it is always a DB/DC situation? Could you have 1 DC plan offset another one? In other words - could you have a Money Purchase plan and a 401(k) plan - where the account balance of the 401(k) may offset an allocation in a MP plan?

So I'm filling out a Form 5307 - determination letter for a proto document. I'm not sure what question 3n is asking when it says: Is this plan an offset arrangment with any other plans? Of course the 5307 instructions don't help. Anyone know how I would go about figuring out how to answer this question?

First you'll want to determine what contributions make up the 415 excess. Are you dealing with deferrals? match? employer money? All of the above? Per the EPCRS - Employer money (including match) needs to be forfeited. The employee is not entitled to the employer portion of the correction. So the employee needs to send this money back to the plan. The EPCRS does provide a deminimus amount of $100. Now if you have elective deferrals, roth deferrals, or employee contributions (after-tax voluntary) that makes up the correction - which would normally have been refunded to the employee - then you have to consider the taxation impact. 415 refunds are not eligible to be rolled over. So when this employee took their funds - you'll need to determine if they were rolled over or not. If yes, then you'll need to contact the employee and inform them that a portion of their rollover was ineliglbe to be rolled over. They will need to contact the financial institution - and that FI will either need to refund that money, or treat it as a contribution - depending on what kind of vehicle it was rolled over to.

Here are my thoughts... 1. First, I have a different interpretation of the 1-1 method. To me, the 1-1 QNEC is strictly for refunds that have not been made timely. Therefore, you can issue the $96 in additional refunds - and then the plan sponsor can fund a corrective QNEC equal to $96 (plus earnings). By using the 1-1, the plan sponsor can elect to have the QNEC allocated to only those NHC's who are still active - a huge advantage of the 1-1. 2. In regards to Q2 - the plan document does not come into play at all here. You are using the EPCRS to correct an operational failure - and you follow the correction principles outlined. The QNEC provisions and allocation requirements in the plan are irrelevant here. 3. In regards to Q3 - the corrective QNEC is treated as an annual addition for the year to which the QNEC relates. This goes for both the QNEC method in Appendix A and the 1-1 in Appendix B. But you have to determine what testing method was used on the 2009 test. If the current year method was used, then the QNEC will go to those NHC's on the 2009 test and it's treated as a 2009 annual addition. However, if the 2009 test used the prior year testing method, then the QNEC will go to those NHC's on the 2008 test and it's treated as a 2008 annual addition. I know that Sal discusses the 415 limit related to these corrections in the ERISA Outline book (chapter 15). 4. When I work with this correction, I don't even bother with the QNEC method in Appendix A if some of the refunds have been made timely. I just issue the additional refunds and then have the plan sponsor fund a QNEC equal to the additional refunds only - not the full refunds. Sometimes the QNECs are so small, however, that it just seems pointless. In your situation, for example, - what if you have 500 active/eligible NHCs. Is it really necessary to allocate a $96 QNEC to 500 people? There was an EPCRS forum in August of last year and this question was presented. Here was the answer: When using the one-to-one correction method can you have situations where the methodology results in the employee's getting de minimis amounts and so really practically you might want to come up with a somewhat different approach to allocate the QNC that's used to correct the ADP test using the one-to-one correction method? The answer is probably you could. You may want to consider the exceptions to full correction provided in Section 6.02 of the revenue procedure, and that includes a provision relating to the delivery of small benefits. That provision might support the rationale you might use in coming up with an approach that the revenue procedure might otherwise consider to be less than full correction.

It's an operational failure. The plan sponsor can most likely use the Self Correction Program to correct the failure. The EPCRS outlines 2 corrections methods. There is the QNEC method in Appendix A and the One-to-One method in Appendix B. I would suggest reading through these correction methods in the EPCRS (Revenue Procedure 2008-50). Both corrections involve the plan sponsor funding a QNEC to the NHCE's. Will it have any impact on the 2010 test? No.

Unfortunately they are not catch-up eligible. In Section 6 of the EPCRS (2008-50) there is information regarding small benefits ($75 or less) and small overpayments ($100 or less) that don't need to be made. Sal says that the $100 de minimus applies to 415 refunds. However this section in the EPCRS states that even though you don't have to issue the refund, the amount is not eligible for favorable tax treatment. So if this member were to rollover all of this money, they can't rollover 8 cents of it?

The plan matches 50% up to 6% of pay. This member made $8,300 and 6% is $498.00. They deferred $8,041.08 and got a match of $259 - making their annual additions $8300.08. According to the EPCRS, you're supposed to refund unmatched deferrals first. I didn't think you could forfeit the match before refunding any unmatched deferrals. You're saying it's okay to just forfeit 8 cents of their match? The plan sponsor matched correctly.

Is it necessary to issue a check to a plan member if they went over the 415 limit by 8 cents?

A participant exceeds the 415 limit by $88.00. According to 6.02(5)(e) of the EPCRS..."if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $100 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including earnings, is not eligible for favorable tax treatement." I know that this section applies to 415 corrections - so the $88.00 does not need to be refunded to the participant. But I'm a little confused on the last part regarding favorable tax treatment. Does this mean that the participant cannot roll this $88.00 over? When this participant eventually takes a distribution from the plan - does this $88.00 (plus earnings) have to be treated differently? It almost seems easier to just pay this money out rather than fool around with earmarking it as "not eligible for favorable tax treatment". Thoughts?

Yes - the rule applies to NHCE's. The Final 401k/m regs limit the amount of a QNEC that can be included on the ADP/ACP test for NHCE's if the contributions are disproportionate. HCEs are not limited. For a Davis Bacon plan, the disproportionate QNEC is the greater of: - 10% of compensation or - two times the representative contribution rate

Yes it is. I found a few blurbs via google that said PPA required the plan administrator to notify participants of a bankruptcy. They said the DOL is to prescribe the rules and the fine can be up to $100/day/ptp. Just can't find anything in the Act.

DB plan has been frozen since 2002 - and the plan sponsor is now filing for bankruptcy. Does anyone know if the employer is required to give any sort of Notice to plan participants?

Section 902(e) of PPA amended Code section 401(k)(8)(A) to add "through the end of such year". So this section of the Code now reads: the amount of excess contributions for such plan year (and any income allocable to such contributions through the end of such year) is distributed. The same change was made to 401(m). So to me (for ADP/ACP refunds anyway), GAP is not an option. The refund only includes earnings up to the end of the plan year.

I was under the impression that GAP wasn't an option. PPA said that ADP/ACP refunds should not include GAP. The plan can't be written to allow them. The same applies to Excess Deferrals - with the PPA technical correction. Again, this is just my understanding. I agree that the valuation doesn't change anything...

Hello. The related match must be forfeited. This type of match is commonly referred to as related, associated, or an orphan match. Any way you look at it - it has to be forfeited because the HCE is receiving a higher rate of match after you account for the ADP refund. The same situation can occur if a plan participant has rec'd an excess deferral refund for going over the $16,500 402(g) limit. If there is a match associated with an excess deferral refund - it must be forfeited as well.

It's not an "option" to include someone on the ACP test. If a participant is eligible for the M portion of the plan, then they're included on the ACP. If they're not eligible for the M portion, then they are not included on the ACP. Yes, you can carve out the "otherwise excludable" employees - but that's only after you've determined who is and isn't included on the ACP. Keep in mind that Employee after-tax contributions (voluntary or required) are tested in the M portion of the plan. A participant may not be eligible for an employer match- but if they are eligible to make voluntary after-tax contributions - they must be included on the ACP.

I looked at the definition of "eligible employee" for the ACP test in §1.401(m)-5. It says that if an employee must perform additional service - then the employee would not be eligible for the ACP if they didn't meet the service requirement(s). But in this example - the lack of a match is not due to service. So I agree that John would be included on the ACP test. Thanks for everyone's help....

The plan has immediate entry for both deferrals and match. John is going to be considered "not benefiting" for the M coverage test. But overall, the plan passes coverage on both the K and M portions of the plan. Some plans will have a year-end requirement for the match. If a participant terminates and is not eligible for the match, they are not included on the ACP test - as they were not eligible for the 401(m) portion of the plan. John didn't receive a match because he didn't meet a plan requirement. The requirement being - deferring 3% of pay.

401(k) plan provides a match - but in order to receive a match a participant must defer a minimum of 3% of pay. So if John defers 2.5% he'll receive no match at all. If Barry defers 3.5%, he'll receive a match of 50%. So my question - is John going to be on the ACP test? I know that in order to be on the ACP you must be eligible for the 401(m) provision of the plan. I can see it both ways. John was eligible for the 401(m) provision because he didn't defer 3%. On the other hand, he had the ability to defer 3% - so maybe he should be on the test. Any thoughts?

This specific question was posed on an IRS EPCRS phone forum on August 24, 2010 - given by Avaneesh Bhagat, an EPCRS coordinator. Here is the answer - exactly what Kevin stated above: When using the one-to-one correction method can you have situations where the methodology results in the employee's getting de minimis amounts and so really practically you might want to come up with a somewhat different approach to allocate the QNC that's used to correct the ADP test using the one-to-one method? The answer is probably you could. You may want to consider the exceptions to full correction provided in Section 6.02 of the revenue procedure, and that includes a provision relating to the delivery of small benefits. That provision might support the rationale you might use in coming up with an approach that the revenue procedure might otherwise consider to be less than full correction. See page 17 of this transcript: http://www.irs.gov/pub/irs-tege/epcrs_phon..._transcript.pdf

I am completing Form 5300 for a plan that spun-off on 1-1-2008. On line 4d it says to put the plan's original effective date. I assume this would be the effective date of the original plan - and that I shouldn't put 1-1-08 - Correct? I also have to indicate on line 3b if the plan has received a determination letter. The spun-off plan obviously has not - but the other plan has. I assume I should indicate yes and notate the date of the determination letter of the original plan? Of course I can't find any guidance on how to complete 5300's on spin-off plans. Any thoughts?

Plan Sponsor is in Cycle C - as they have an individually designed plan. They filed Form 5300 by the 1/31/2009 deadline. They have not received a Determination Letter yet. They just recently amended their plan for some minor revisions. According to Rev. Proc. 2010-6, if they haven't rec'd a DL yet, they "must" send the discretionary amendment to the IRS and it may be included as part of the determination. Here is the wording: In addition, the applicant must send the Service any amendments that are adopted and/or proposed after the date of the determination letter application and before the Service issues the determination letter. The applicant must submit a cover letter that references the date that the pending application was submitted, the identity of the employer and the plan, and any other helpful identifying information. The amendments must be attached to the letter. Send the cover letter and the attachments to: Internal Revenue Service, TE/GE Correspondence Unit, P.O. Box 2508, Room 4024, Cincinnati, Ohio 45201. Although all such amendments must be provided to the Service, it is possible that the determination letter may not provide reliance for all of these amendments. See, Rev. Proc. 2007-44 for the scope of the Service’s review with respect to a particular determination letter application. Has anyone had experience with this? Is it common for a plan sponsor to send amendments to the IRS in this manner? Are there any repercussions of not sending the amendment - since it says the applicant "must" send them to the Service? I would have assumed the plan sponsor would just wait until their next cycle is due to include any new discretionary amendments.

Does the QNEC for the lost opportunity count towards the 402(g) limit? For example - assume John is eligible for the plan on 1-1 and elects to defer 8%. The plan sponsor forgets to process the election until March 1st - and it's not noticed until November of that year. Well in the meantime, John has deferred 16,500 from 3-1 to 11-1. Can he receive a corrective QNEC for the lost opportunity from 1-1 to 3-1?

Thanks much...