fiona1

It is absolutely permitted. The $15,500 deferred in 12/07 is applied to the 2007 402(g) limit and the $15,500 deferred in 11/08 is applied to the 2008 402(g) limit. The 402(g) limit simply prescribes a limit on the amount of deferrlas that can be excluded from gross income for a calendar year. Where you might run into trouble is nondiscrimination and 415 limits. Assuming the limitation year is the same as the plan year, this participant already has $31,000 in annual additions. If they received any match or employer money - they may be over the 415 limit. The ADP test will include $31,000 in deferrals, which will result in high deferral rate. Some of those deferrals may need to be refunded if the ADP test fails. (This assuming the plan is even subject to ADP/ACP).

You shouldn't have a 415 issue. From the ERISA Outline Book: The one-to-one contribution is treated as an annual addition for §415 purposes for the year of the failure (or for the prior year, in the case of corrective contributions made to a plan that used the prior year testing method for the year of the failure), not for the current year in which the corrective contribution is made. See section 2.01(1)(b)(iv)(B)(1) (last sentence) of Appendix B of the EPCRS Procedure. Thus, the amount of the one-to-one contribution being allocated to an employee must not cause the employee's total annual additions for the year to which the allocation relates to exceed the §415 limit in effect for that year (taking into account that employee's section 415 compensation for that year).

You bet. It's in Chapter 5, Section II, Part C.1.d. The section is titled "Timing of QNECs"

Again, the One-to-One should not be a consideration. The One-to-One involves refunds being made IN ADDITION to a QNEC of the same amount. Since you're still within the 12 month correction period - you can still just issue refunds to correct the test. Why would you choose the One-to-One and issue refunds AND do a QNEC? It makes no sense at all. The One-to-One is only when you are past the 12 month correction period, which you are not. As for what you proposed, I agree with Blinky that you can probably fund the QNEC to the ptps who have no compensation and just correct the 415 failures. Here is an exerpt from the ERISA Outline Book in which a similar thought is made: 1.d.5)Administrative considerations. Given the treatment of QNECs under §415, as expressed in IRS Notice 98-1, an employer that uses the QNEC approach to correct violations of the application nondiscrimination tests might want to routinely extend its tax return each year to give itself the longest period of time possible under the section 415 crediting deadline to treat the QNECs as prior-year annual additions. If IRC §415 has been violated for a prior year because of the crediting deadline rule, the employer should use the corrective mechanisms under its plan to cure the §415 violation, as outlined in Parts D and E of this Section II. The IRS' correction procedures under the Employee Plans Compliance Resolution System (EPCRS) are available to protect the plan's qualification when proper corrective action is taken.

Pretty straightforward question - but I'm struggling with how testing would be handled. Company A owns Company B, C and D. They are all part of a controlled group (obviously) and each maintain their own 401(k) plan. They all operate on 1/1 plan years. In 2007, B and D are tested on their own. They were each able to pass coverage separatley - and therefore performed ADP/ACP separatley. A and C were a different story in 2007. In order to pass coverage, they were permissivley aggregated. As such, they were combined for ADP/ACP testing as well. On June 1 of 2008, Company A sells B, C and D. They were sold to an investment group and all 3 companies will continue to operate separate plans. In other words, neither B, C or D will merge into any other plans - nor will they merge their own. So, how would you handle testing these 4 plans for 2008. Keep in mind that A and C had to be aggregated to pass coverage in 2007. For coverage, I think these plans would be able to rely on the transition rule. Assuming B and D could pass coverage on their own as of 6/1/08, they would be deemed to meet coverage per the transition rule until the end of 2009. A and C would be aggregated and tested for coverage on 6/1/08. Again, assuming they pass coverage - both plans would be able to use the transition rule until the end of 2009. As for ADP/ACP, B and D would just be tested on their own for 1/1/08 to 12/31/08. But what about B and D? Would you test ADP/ACP combined from 1/1/08 to 6/1/08 due to the fact the plans are aggregated for coverage for that time period? And then test them separatley from 6/1/08 to 12/31/08? Any testing experts out there willing to chime in? I think we should have our own testing forum!

I don't think the One-to-One should be a consideration. They're still within the 12 months prescribed correction period. They have until 12/31/08 to correct the failed ADP/ACP test. The One-to-One involves both refunds being made in addition to a QNEC of the same amount. They're still able to just issue refunds and not do a QNEC at all. Sounds like the plan sponsor wants to avoid refunds all together and fund a QNEC in lieu of refunds. Has the client considered just issuing the refunds?

In February of this year we issued an ADP refund to a participant. Gross was $4,600 and earnings made it $5,100. She cashed the check. But we just found out the ADP test was incorrect, so it was reprocessed. The correct ADP refund amount is $4,400 and earnings make it $5,350. I've done some research, and it looks like this is referred to as an operational failure. I read that I should use the EPCRS to correct this. The EPCRS (Rev Proc 2008-50) has a "Return of Overpayment" section that says the participant should return the difference to the plan. It goes on to say that this money should be put in an unallocated account and used to offset future employer contributions. How would you handle this situation? Just have the particpant send back the gross difference plus earnings? ($4,600 - $4,400)? Send back the difference between the totals after earnings ($5,350 - $5,100)? And does it really need to go into an unallocated account to offset future employer contributions like the EPCRS says?

The question has to do with a distribution that occurred within 2 1/2 months - and I think it's a great question. I think the OP knows that the excise tax is based on the gross only. Assume this is for a 1/1 plan year - which means the 2 1/2 month deadline is 3/15. There are 5 HCE's all due a $1,000 refund - for a total of $5,000 (gross). One of the HCE's has taken a distribution and rolled his money out of the plan into an IRA and another financial institution. This occurred on 3/1. Is the excise tax based on $5,000 or $4,000? I can see the argument that because the $1,000 left the plan prior to 3/15 then the excise tax is only based on $4,000. Does anyone agree? Disagree?

Sorry. I'm not following. Are you saying that I can calculate earnings on 415 refunds anyway I like because the EPCRS doesn't specifically address my circumstance? With my circumstance being the calculation of earnings on 415 refunds? I'm just really confused on whether GAP needs to be included on 415 refunds. The regs are silent. The EPCRS is silent. The plan document is silent. You have Sal's book that says ""The longer the delay in making the distribution (415 refund), the more earnings will have to be distributed as well." - which leads you to believe that GAP should be included. I'm just confused...

My vote would be that the excise tax would be based on $4000. I think that as long as that $1000 left the plan within the 2 1/2 months, then it is considered a correction. Regardless of whether it was rolled over or not. I can tell you that this is how we operate at my company. Of course, that doesn't mean it's right. I wish there was some more guidance on this...

I did. And there is 2 problems with that. 1. This is a 2007 limitation year. EPCRS isn't used to correct 415 failures until 1/1/08. Prior to 1/1/08 you have to use the plan document. The plan says to issue refunds to correct a 415 failure - but doesn't say how to calculate earnings. 2. The EPCRS doesn't say how to calculate earnings either. It just says that one of the methods to correct a 415 failure is to issue refunds. It doesn't say whether to use GAP or not.

I know that when the Final 401(k) regulations came out a few years ago, they said that GAP earnings needed to be included in ADP/ACP and Excess Deferral refunds. But what about refunding excess annual additions in excess of the 415 limit? Can those continue to be only plan year earnings? For example, say you have a 1/1/07 to 12/31/07 limitation year and John has $2000 in excess annual additions. There is no "deadline" for issuing the 415 refund - so say that it's just being done now. Would the earnings on this $2000 only include plan year earnings (earnings up to 12/31/07)? Or would they include GAP earnings (earnings up to the date of distribution). I don't think the 415 regulations really say anything about how earnings should be calculated for 415 refunds. Heck, the new 415 regulations don't even say anything about 415 refunds because they should now be handled in the EPCRS. There is a note in the ERISA Outline Book under the 415 refund section that says "The longer the delay in making the distribution (415 refund), the more earnings will have to be distributed as well." The only way earnings could increase is if GAP was included. If GAP was not included, then the earnings would be the same regardless of when they were distributed. Thoughts?

Probably not.

1/1 plan anniversary. ADP test for 1/1/06 to 12/31/06 failed. A correction needed to be made by 12/31/07. There were 3 HCE's who were due a refund of $1500 each. They all terminated employment on 11/8/07 and rolled their money out of the plan into another financial institution. The rollover occcurred in November of 2007. Now, I know that the $4,500 was not eligible to be rolled over. However, the plan sponsor did not notify the former employee's to tell him this. So here are my questions.... What should the plan sponsor do at this point? Is this considered an operational failure? Do they need to self-correct using the EPCRS? Or, because the money left the plan prior to 12/31/07, is that considered a correction within the 12 month correction period? Or does their lack of informing the former employee's come into play? The plan sponsor really doesn't want to use the One-to-One method and have to fund a $4,500 QNEC. Thoughts?

The excise tax is due on the last day of the 15th month following the close of the plan year - so 3/31/09 in your situation. Your fiscal year end has no impact on this deadline - and the fact that you extended your 5500 to 10/15 has no impact on this deadline either.

A plan participant has exceeded the 415 limit for the Limitation year of 1/1/07 to 12/31/07. Now, the plan document says that the correction method is to refund the elective deferrals (with attributable earnings). However, it doesn't specify how those earnings should be calculated. Now, I know that the Final 415 regulations say that a plan sponsor should use EPCRS to correct a 415 failure, but I believe that is effective for 1/1/08 Limitation Years. So for this situation, the plan sponsor is still using the direction from the plan. I looked at the old 415 regulations - in §1.415-6(b)(6) - and all it says is that the 415 refund should include "gains attributable to those elective deferrals and employee contributions". Again, no specific instructions on how to calculate the earnings. So I went to Sal to see what information was in the ERISA Outline Book. In his section on returning excess annual additions (in the 415 chapter), he just says "gains credited on the excess amount should be distributed along with the excess amount". Not much help. So one of my co-workers said that Appendix B of the EPCRS has 4 different safe harbor methods of calculating earnings - and that the plan sponsor can use any one of those methods in calculating the earnings on the excess annual addition refund. However, it specifically says in this section that "This section 3 does not apply to corrective distributions or corrective reductions in account balances." So I guess my question is this - how is it determined how earnings should be calculated on an excess annual addition refund? Does the plan need to be more specific? Has the IRS issued any guidance - seeing as how there is nothing specific in the 415 regulations?

Here is how we handle this situation... First, say that the plan recordkeeper is A and the financial institution that Joe rolled him money to is B. When A processes the distribution from the plan and rolls it over, they issue a 1099. In this example, we'll say the amount of the rollover is $45,000. The distribution code on the 1099 is G for rollover. When it's realized that Joe is due an excess contribution refund, then that means $1,000 of the $45,000 distribution was not eligible to be rolled over. The recordkeeper (A) will notify Joe that he needs to have B return $1000 back to him. Also, A will adjust the original 1099 - showing the distribution of $44,000 instead of $45,000. They will then create a new 1099 in the amount of $1000 - with a distribution code of P or D. The financial institution (B) would then just return the $1,000 to Joe and they will not need to issue a 1099 for that. Like I said, that's what we do (as A).

Has anyone heard of an option that starting in 2010, plan participants would be able to convert all or part of their 401(k) balances into the Roth portion of their plans. I've been told it will be most beneficial for participants, who have saved enough money to cover the additional taxes that will be generated by this transfer. But I don't remember seeing anything about this.

I know several employers who sponsor a 401(k) plan in addition to an ESOP. If an ESOP contribution puts a member over the 415 limit, then the plan language usually directed the 401(k) plan to refund elective deferrals back to the member. I suppose this is in the member's best interest so they can get the full benefit of the employer contribution (the ESOP). Anyway, this practice happens year after year and the correction was always handled by doing what the plan said. Nevertheless, the Final 415 regulations now instruct plan sponsors to use EPCRS to correct 415 failures. Plan sponsors can still use the refund method to correct the failure and return deferrals from the 401(k) plan - but is there a concern if they do this year after year? I know that the EPCRS says that when you self correct a failure then you should put procedures in place so it doesn't happen again. Thoughts?

Employer has a 401(k) and DB plan - both 1/1 plan years. They freeze the DB plan effective 6/30/08 and agree to increase the match on deferrals to the 401(k) plan effective 7/1/08. Does this create any testing or nondiscrimination issues? Does it create the need for a current availability test? For example - assume the match on 1/1/08 was 50% up to 7% of pay. And on 7/1/08 it's increased to 55% up to 7% of pay. If someone contributed $15,500 during the first 6 months of the year - then they will not benefit from the match increase. But if someone contributes $1250 per month, then they will be able to receive the bump in match from 7/1/08 to 12/31/08. Any thoughts?

1. The following was written in the additional course materials for the SunGard 401(k) Plan Workshop, 4/06, page K-37: “Note: A participant with zero compensation for the plan year is not an eligible employee and is excluded from the ADP test.” © Copyright 2006 SunGard 2. From our good friend Blinky: Jim Holland at the IRS has stated many times, and that same sentiment has been reiterated many times as well on these message boards, "no compensation, not in the test."

I disagree. I would not include them on the ADP test. In order to be on the ADP test you have to be eligible TO DEFER. How can you defer on zero compensation?

That's interesting. I find it odd that a plan sponsor would have to pay the tax for each year the refunds are late. There is nothing in Rev Proc 2006-27 about whether the excise tax is applicable or not. However, this is addressed in the ERISA Outline Book - Chapter 15, Section VI. (ii) Excise tax on excess amounts being distributed. Note that excess amounts which are distributed under this correction method are subject to the excise tax under IRC §4979, which is payable by the employer. The excise tax applies to corrective distributions under the ADP test or ACP test that are made more than 2½ months after the close of the plan year for which the failure occurs. The IRS does not normally waive these excise taxes merely because the employer is using the relief programs under EPCRS. However, as part of a VCP filing, a plan sponsor may request a waiver of the IRC §4979 and provide an explanation supporting the request. See section 6.09(4) of the EPCRS Procedure.

Another quick question for Laura (or anyone) - does the current company have rules about notice to employees and how early that has to go out?

Unless the failure is deemed to be insignificant - then the 2 year deadline would not apply.