FundeK

Can anyone comment on the following scenario? Participant terminated employment 12/03 with an outstanding loan. For some reason, the loan was never offset. Can the plan now accept a total repayment of this loan? I understand the loan was in default when one payment was missed, and that the loan should have been offset following a "reasonable period of time" as stated in the loan policy. But, this was not done. Since a loan offset is an eligible rollover distribution, why couldn't you accept total repayment and keep the funds in a pre-tax status? Any cites would be greatly appreciated. Thanks

Treas. Reg. 1.72(p)-1 Q/A 10 (Please see bolded info and example) Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution? A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)© and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)© will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due. (b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure. © Example. The following example illustrates the rules in paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section: Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a threemonth cure period. (ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)©, the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003.

I'm inclined to think you have to add interest through the end of the cure period.

If the 401(k) plan allows rollovers from an IRA, she could roll the funds over. Of course, after-tax money from an IRA can not be rolled into a qualified plan. All of the funds must be pre-tax.

Yes! I know you don't want to hear this, but...at my previous place of employment (recordkeeper), we got in major trouble for forfeiture issues. (can't remember what type of audit, but it was discovered at audit) We spent countless MONTHS (YEARS!!) cleaning up many plans! We actually had to go back 5-6 years and do reallocations. Here is how it went.... Reallocate 1998 forfeitures (with earnings funded by ER or recordkeeper), process residual distributions. Forfeitures from these residual distributions had to be allocated to the correct "bucket" for the year in which they should have been forfeitures had they been allocated correctly. (Of course, it was great fun tracking down the census data for those years.) Move on and reallocate 1999, same follow up as 1998....And you can guess the rest. I am not sure how correct the following practice was, but I will throw it out there for you to decide.... We did adopt the practice of "carrying forward" amounts that would have resulted in participants receiving less than $1.00 per allocation. For example, you have $10,000 in 1999 forfeitures that should have been allocated, and you have 10,000 participants. Since the average amount a participant would receive is less than $1.00 we carried the balance forward and added it to the forfeitures from 2000. It was time consuming, labor intensive, and generally STUNK, but it was the right thing to do..... Have you thought about submitting it to the IRS anonymously for an opinion?

Based on your response, and without seeing the document, it seems that the 2002 forfeitures should have been used by the end of 2003 and 2003 have to be used by the end of 2004. Now, a few more questions. What was the 2002 forfeiture balance? Very small hopefully? Are we talking about profit sharing or match forfeitures? Both? Any chance that you have a profit sharing contribution that hasn't been made for 2003?

I would agree that you should always follow the terms of the plan, but I also believe that it is prudent to have extensive documenation to show you are following the terms of the plan; thus requiring a "paper trail" If the plan requires reallocating forfeitures, and you know a terminated participant (who I am assuming is 0% vested) was entitled to the forfeitures, I believe you should process the reallocation and then process a residual to forfeit the amount necessary. If you do not go through the steps of reallocating and forfeiting, it could appear (to someone just looking at the plan) that you missed eligible participants and did not perform the allocation correctly. Therefore, I would recommend having a "paper trail"

I would allocate the forfeitures to the participants and then process residual distributions (whether it be to send a check to the participants, or to forfeit the funds back into the forfeiture account to be reallocated with the 2004 $). This is how I have always approached the situation and I think it leaves the cleanest paper trail should a friendly auditor stop by.

If you classified $2000 of deferrals as catch up for the 3/31/03 plan year end, that applies to the 2003 catch up limit. If the participant deferred $14,000 from 1/1/03 to 12/31/03 and you classify $2000 of that as catch up, then you only look at the remaining $12,000 to determine if she exceeded a limit. Now you are doing the testing for the plan year end 3/31/04. Anything you reclassify for this testing period will be applied toward the 2004 catch up limit. Anyone want to cofirm this?

mbozek and jevd - I understand that it isn't practical, but can it be done?

Sure, why not. Really? Why not? I would have to say that my experience is that most plans allow rollovers into multiple IRAs. I personally haven't seen the money segregated based on tax status, but I don't see why that would be difficult. It may cost the participant (or plan, depending on who pays) an additional amount if more than one check is required.

I thought EGTRRA now allows the rollover of after tax?

I think I found my answer. A Safe Harbor 401(k) with a match MUST use a 6 month suspension, nothing longer. BUT, a plan using the safe harbor definition to determine hardship availability can use 6 months or 12 months. Can someone please just agree with me?!

Can a plan that uses the safe harbor defininition of hardships have a suspension period longer than 6 months?

Sorry to bring up the issue again..... Do you think you could use a deminimus in this situation? What if the payment submited is $.50 over the loan repayment, could you apply this to interest? This sometimes happens when the plan sponsor creates their own amort schedule and comes up with their own payment amount. Of course when the loan is issued from the recordkeeper, it may be off slightly.

With the passing of EGTRRA, it is now allowable to rollover pre-tax money from an IRA to a QP. It is also allowable to rollover pre-tax and after-tax from one QP to another QP. Can a participant rollover after-tax funds from a QP to a "Condiut" IRA, and then from the "Conduit" IRA to another QP (assuming the QP accepts after tax)? Or, does the after-tax loose it's rollover ability once it hits the IRA?

Does your document indicate that if the forfeitures are not used to reduce, then they will be allocated to the participants? At my previous place of employment we had to do massive clean up of forfeiture accounts. If you can give me more specific language in the document, I can tell you what we did.

Can anyone tell me if the prior year's ASPA Annual conference questions to the IRS/DOL are available for public viewing. I don't want to submit my question if it has been addressed in the past. Thanks

Assuming a calendar year plan. I would give two years of service 2002 - Worked 1000 hrs = 1 YOS 2003 - Worked entire year = 1 YOS 2004 - Terminated prior to year end, NO YOS

Help!! Don't you still have to have a code in box 7?

This is exactly why there shouldn't be loans from a RETIREMENT plan.... Any chance that you have an in-service option in this plan? Could you possibly offset the loan via in-service distribution?

What is the current actuarial value that should be entered in box 8? Also, don't you still have to put something in box 7?

If a plan is subject to the J&S provisions and requires spousal consent, that consent must be witnessed by a notary or plan representative. Does it matter if the participant signs the form after the spouse and notary? I have always had an issue with this because I thought the participant had to make an election and the spouse then had to agree to that election and signed the form showing this agreement. But, now I am questioning this.

pmacduff - The plan is purchasing the annuity for the participant which is why I am confused. The plan will not hold the annuity contract so I think it needs to be reported that the funds left the plan. However, I don't know what to code the 1099-R, if one is needed.

I am a bit confused. I thought you had to report all distributions from a qualified retirement plan. So, how is a distribution of funds from the plan, which is used to purchase a annuity contract reported if it isn't on a 1099-R? Is it on the Form 5500 or something?