FundeK

When paying out non-spousal beneficiaries, is a code of "4" always used on the 1099-R? (401(k)/profit sharing plan) I know that when a lump sum payment is issued, code "4" is used, but I am unsure how to code the 1099-R when the non-spousal elects the life expectancy option. I would assume it should be the same code, but you know what assuming gets you. It seems odd that you could have a 35 year old beneficiary receiving payments for 35+ years coded as a death distribution.

Can anyone tell me what a RMD formula might look like for a participant with a TEFRA 242(b) election? Could the participant choose whatever formulat they wanted at the time of the election? For example, 2004 distribution amount is based on 1/2 of the balance as of 12/31/02. Could that be possible?

Anyone? Anyone? Does my question make any sense?

I take that statement to mean that the provision for catch-up has to be in the plan document for it to apply, not that all plans have to allow for it.

Let's say the plan allows for installment payments as well as in-service distributions. Is there any reason an active employee couldn't set up installment payments via in-service withdrawal? It seem okay to me, but I haven't really seen it done before.

I believe the ERISA Outline book says that 30 days is reasonable. Even though the cure period doesn't apply, we typically allow about that much time for repayment. I would reccommend having an internal policy (perferrably in writing) and applying it consistently.

A deemed distribution is treated as a distribution for tax purposes only. It is not treated as an actual distribution.

A basic requirement of any loan program or loan policy is that it must contain provisions detailing what constitutes a defaulted loan and what procedures will be taken upon the loan default. Failure to follow the terms of the loan policy is an operation failure, which could lead to plan disqualification.

I have done numerous searches for "overpayment" in different forums and keep coming across three court cases: Primary CareNet of Texas v. Scott, SA-99-CA-0427 OG (W.D. Tex. 2001) and AmSouth Bank v. Carr, 2001 U.S. Dist. LEXIS 6436 (S.D. Ala. 2001) and Great West-Life. I am not an attorney, nor do I play one on T.V. so I will not pretend to know what I am doing and apoligize now for my silly questions. Can someone help me decipher all of the abbreviations? (I did figure out Ala is Alabama and W.D. is Western District) What are the other numbers and letters? Also, what courts are these cases presented in? Is there anywhere on the internet the I can go to look at these cases? I have done numerous Google searches and have had no luck (as all of you attorneys probably already knew!) Does anyone have a link to a summary of these cases? Thanks!

I am sorry, I am miscommunicating. I meant that the loan payments are applied to the loan to maintain it's pre-tax status. The participant is actually using after tax funds, but the loan payments do not create basis. If the loan payments were applied to a deemed loan, they would create basis.

Yes, that is what I am asking. No Way! I was just wondering if the participant could request this, and what ramifications it would have. It just doesn't seem right to me.

Personally, I think the loan regs are very clear and don't have much wiggle room. They certainly don't allow for "correction due to administrative error". I believe that if the Plan Sponsor is adamant not have the participant face the taxation, they (Plan Sponsor) should pay the taxes and have the loan deemed. However, I was asked to define the risks in accepting a pre tax payment on a loan that is in a deemed status.

Scenario: Participant's loan fell behind in payments, and is past the cure period. Loan has not been "deemed" on the recordkeeping system. The participant would like to payoff the loan, without paying it back as an after tax payment. The employer does not want the participant to face the tax consequences, so asks that the pre tax loan payment be accepted. In most cases like this that I encounter, the employer made an error and stopped the payments too early, or stopped payments in the middle of the loan. What is the risk in accepting a loan payoff (pre-tax) for a loan that should have been deemed? I realize that it is an operational failure, but what position do you think the IRS/DOL would take? They do want participant's balances to remain pre-tax don't they? Especially if it is the fault of the employer? Thanks

Are you talking about a fee to process the distribution, or a fee for the participant to receive a package of information detailing how to get a distribution?

They get to drive me crazy!!! I don't know why, but in the past two weeks I have had at least 3 participants wanting to have their loans deemed in 2004 when they won't even be out of the cure period until 2005. I am trying to compose a list of risks to the Plan/Plan Sponsor (fiduciary liability, qualfication issues), and a list of items that will impact the participant (taxation, penalty, inability to take another loan) to make sure they are fully aware of all of the consequences prior to the loan being deemed. Anyone already have list they would like to send me?

If the participant is terminated he will be unable to get a hardship which is an in-service withdrawal. Also, I am assuming that if you are asking about a hardship, the participant is not at least 59 1/2. An, if he isn't, taking a hardship and incurring the taxation and penalties may not be such a great idea. If the participant truly has tuition bills, etc. that qualify for a hardship, then he could submit them for a withdrawal. The money he would have used for the tuition, etc. will now be diverted to his downpayment on the franchise, and the hardship will be used to pay the tuition.

If the Plan Sponsor knows that the hardship will not be used for one of the safe harbor reasons, I do not think it should be issued. If the Plan Sponsor had no idea, and the participant submitted paperwork showing their home being foreclosed on, or tuition bills, then they could issue the hardship. What the participant does with it after that is their own business. Having prior knowledge that the money will not be used as it is intended would lead me (personally) not to issue the hardship distribution.

Can anyone comment on allowing a participant to choose to have their loan deemed? Or, allowing them to choose the tax year it is deemed? I know there are alot of issues around this, I am trying to compose a comprehensive list. 1. Not following the terms of the loan policy (which most likely will require payroll deduction) 2. Could be viewed as an in-service by the IRS? 3. Deemed loan is still an outstanding loan, and Plan Sponsor has the duty to try to collect on the loan (any cites for this would be helpful) Also, if you could point me toward an prior posts on this topic. I have tried the search feature and come up empty handed. Thanks!

Is there anything that requires a SEP IRA to be in existense for at least two years before you can roll it into a 401(k) plan? Thanks

Are there any updates on this issue? I really want to search for SEP but I can't!!!

We require it as well.

From the IRS & ABA Section of Taxation May Meeting 2004 §411(a)(11) – Participant Consent (Under $5,000 Force-Out) A terminated participant in a §401(k) plan has a total account balance of $5,500, of which $2,500 is an outstanding loan. If the loan is deemed distributed prior to the date on which his benefit would be payable, is the participant’s account balance considered to be $5,500 or $3,000 for purposes for the $5,000 cash-out rule. Proposed response: The participant’s account balance is $5,500 for this purpose because it includes his entire vested account balance. IRS response: The IRS disagrees with the proposed answer. On the particular date, the participant’s benefit is $5,500, but if there was an offset for the loan, the remaining vested benefit could be cashed out. So if the loan offset occurs before the time for the cash out distribution, the participant can be cashed out.

Could you use it to pay a fee? Perhaps the recordkeeper forgot about a small <$10.00 fee they need to charge?

Isn't maternity leave considered a leave of absence? If so, and your plan allows a participant to suspend during a leave of absence, then this participant should be able to suspend. Of course, she will be required to make up the missed payments when she returns. Also, the leave must be without pay. So, if she is receiving pay while out (that is at least the loan payment amount) she has to continue payments. Does that help?

The loan policy indicates that the loan will be offset "within a reasonable period of time following the termination of employment". Although the cure period does not really apply here because it is a terminated participant, we usually use the same time frame to determine what is a reasonable period of time. So, if the participant terminated in Dec 2003 and missed his first payment in Jan 2004, his "cure period" would end on June 2004. If you consider the loan to be taxable on July 1, 2004, he would have had 60 days to rollover funds to maintain the tax deferred status. So, he should have completed the rollover by the end of August. Of course, a 1099-R was never issued to him so he did not know he had a taxable event. The participant could potentially request a waiver of the 60 day rule from the IRS to allow the rollover. It appears to me that the IRS waives the 60 quite often, and would most likely waive it in this circumstance as well. Since a loan offset is eligible for rollover (allowing part to maintain tax deferred status), why couldn't you allow him to pay off the loan and thus maintain the tax deferred status? Another question: What if we consider 1 year to be a reasonable period of time? Then he is still within the window and could pay off the loan.