FundeK

The adoption agreement will reference the basic plan document which defines the period of service. The Corbel document I just looked at defined the period of service to be a 12 month period starting on the date of hire. What does yours state?

Can anyone else comment on what type of documentation you require to allow a rollover (either retirement plan or IRA) into your qualified plan, or the qualified plan you administer? Does anyone accept a certification from the participant claiming the funds are qualified? If so, do you only require the certification, or do you require additional documentation as well. What are the risks of allowing "ineligible" funds into the plan? EPCRS allows you to distribution the "tainted" money correct?

I would have to respectfully disagree. The issue is that the participant did not commence payments, therefore, under IRS regulations, the loan must be considered a taxable distribution. The treatment of a loan as a deemed distribution is solely for tax purposes, and the loan obligation is not satisfied until the participant repays the loan or the loan is offset, which can only occur if there is a distributable event. The outstanding deemed loan continues to accrue interest, and is taken into account for purposes of applying 72(p)(2)(A) loan limits (See Treas Reg 72(2)-1, Q19) 2004 ERISA Outline Book, Chapter 15: Tables, Checklists, and Quick Reference Guides -Section VI (Plan disqualification and IRS resolution options): Part B.¶1 (EPCRS: general information) Failures involving participant loans. Section 6.07 of the EPCRS Procedure provides that, as part of VCP, a plan may correct failures relating to participant loans from a qualified plan or section 403(b) plan. If the loan is to be treated as a deemed distribution, pursuant to IRC §72(p), the distribution may be reported on Form 1099-R for the year of correction with respect to the affected participant.

I am sorry, but I am confused by the question. The loan should be deemed now and issue a 1099-R for 2004. The payments that have been made should be reclassified as after-tax because they are now payments made to a deemed loan. Just because the "deeming of the loan" was not processed on the recordkeeping system doesn't mean the loan didn't fall into a "deemed status". The participant took the loan, signed the agreement to repay, and never paid. They have some liability here. Did they think they hit the jackpot, got money out of the plan, and would never have to repay it?

TAX COURT REFUSES TO ACCEPT EXCUSES FOR NOT REPAYING PARTICIPANT LOAN [Leonard v. Comm'r, T.C. Summary Opinion 2004-11 (2004)] For a copy: http://www.ustaxcourt.gov/InOpHistoric/Leonard.SUM.WPD.pdf The participant in this case received a loan from a qualified plan in June 2000. Due to a transfer that same month to a different operating division of his employer, no loan payments were ever taken out of his paychecks. Because no payments had been made by the end of the year, the loan was declared to be in default and a Form 1099-R was issued, reporting the entire amount of the loan as a taxable distribution. (As a general rule, a participant loan from a qualified plan will be treated as a taxable distribution unless the loan complies with the requirements of Code Section 72(p). Among other things, the loan must be repaid within five years unless used to purchase a principal residence, and substantially equal payments must be made at least quarterly.) When the participant failed to include the amount of the loan in his taxable income for the year, the IRS issued a notice of deficiency and assessed additional taxes against the participant, including a 10% early distribution penalty under Code Section 72(t). The participant argued in tax court that he had not received a "deemed distribution" because he had not received the quarterly plan account statements that were mailed to him after his transfer, a letter that requested him to remit the delinquent loan payments, or the Form 1099-R that was later issued to him. (For a time, the participant's address was not correctly recorded in the plan's records.) But the tax court held that none of this mattered. The participant had not made any loan payments from the time he received the loan through the end of the year, more than two quarters later. As a result, the quarterly repayment requirement had been violated, and the loan therefore constituted a deemed distribution. Furthermore, on the facts of the case, there was no exception that would prevent the application of the 10% early distribution penalty.

I guess by election, I was referring to the form they return to the TPA firm indicating the factor they will be using to determine the RMD amount. Perhaps I didn't do a very good job asking the question either. Let me try again with another scenario. Say you have a married participant who has designated his spouse as his beneficiary and is using the joint life expectancy factor. He has been receiving payments for 3 years and now would like to change his beneficiary to someone other than his spouse (with her permission) and would like to start using the single life factor to calculate his RMD amount. Is this okay? Is there any reason it isn't?

The loan needs to be deemed and a 1099-R mailed to the participant. Any payments the participant makes on the deemed loan are after tax and will create basis.

1st question: When notifying a participant of his need to take a Required Minimum (RMD), are you required to send them a tax notice? For example, if you notify the participant in October that an RMD is needed by 12/31 and you give him an election form, are you required to also provide a tax notice? Since the RMD is inelgible for rollover, I wasn't sure if the tax notice requirement applied. 2nd question: Can a participant who is married and elected to use a single life factor, chose to use a joint life expectancy factor after a few annual payments have been made? If so, can the participant just elect a change, or must he have had a maritial status change? Thanks

You do not have to withhold 20% from any source of money being taken for hardship withdrawal since none of it is eligible for rollover.

Probably, I think I am little slow today. For some reason, I took the to mean that he wanted to add funds to the current loan balance.

If you do not extend the terms of the original loan, you do not have to consider the replaced loan (old loan) and the replacement loan (new loan) to be outstanding at the same time. So, based on a $50,000 account balance, and a $10,000 outstanding loan balance, you could take an additional $15,000 to bring your total outstanding balance to $25,000 which is 50% of your vested account balance. If you extend the payoff date of the original loan beyond 5 years, you would have a different calculation to do.

What is the vested percent of the account balance? So, you want to take out an additional sum of money, add it to your current loan balance, and keep the original payoff date?

I think we are all in denial that it will actually happen. Who would want to accept these rollovers?? The fees to be charged must not exceed the earnings on the account. The funds have to be invested in something conservative to keep the principal intact. What kind of fee will you be able to collect on a $1,000 - $5,000 balance sitting in a money market fund?

FYI - We told the participant she had to contact her spouse and get him to sign the waiver.

One of the basic requirements for a plan to be qualified is that is must be in writing. So, yes, you must have a plan document.

Thanks for the info...Not the response I wanted, but I guess I will have to take it

Is there a place you can search to find lawsuits by plan participants against a fiduciary or plan sponsor that have been settled? In particular, a participant who claims his distribution was delayed causing him a loss due to market fluctuation?

Anyone???

Scenario: Participant terminated employment March 2004 and stop making loan payments. Participant was rehired in May 2004 and did not have payroll deductions for loan start again. The loan policy states that the loan will be offset at termination within a reasonable period of time after termination. Reasonable period of time is interpreted as being "90 days from date of termination" at which point the TPA firms processes the offset and sends a 1099-R to the participant. It is now the end of July and payments still have not resumed. The end of the cure period was 6/30/04, so the participant must be taxed. Questions: Should this loan be considered a deemed distribution, or a loan offset? I was always of the opinion that there had to be a current distributable event for the loan to be offset. This participant is an active employee now. OR, can you offset the loan and say the participant had a loan offset during the "termination period", but that the 1099-R was just issued? Any comments are appreciated.

Check out Q39 of this link http://w3.abanet.org/jceb/2004/qa04irs.pdf

MWeddell - Have you ever had an IRS auditor question this? I was really confused by some of the auditors request because they were DOL regulations he was questioning and he is an IRS auditor! Would a DOL auditor even bother asking you to prove how you determined a reasonable rate of interest?

Prime plus one is definately the most common one I have seen. We recently had an IRS auditor inform us that prime plus one "did not appear" to be a reasonable rate of interest, so apparantely they have issues with it. As you stated, the interest rate must a rate that a commercial lender would charge on a similar loan. The only loans issued that are secured by a participant retirement plan balance (similar loan) are issued from a retirement plan. If the majority of retirement plans use prime + 1% how can that not be a reasonable rate of interest? We responded to the auditor that at the TPA firms who recordkeeps the plan, 90% of the plans use prime plus one. Since there are no specific guidelines for determining a reasonable rate of interest, a Plan Sponsor must make the determination based on all relevant facts. Using a benchmark survey, if it contains this information would be helpful. Basically it is up to the Plan Sponsor to determine how they will define a reasonable rate of interest, and stick to it. I would recommend putting this policy in writing in case the big bad auditors come knocking on your door.

This was QDROPhile's statement in the prior post. So, if your document states "the assets transferred or contributed as Rollover Contributions shall be made in cash or such other form as is acceptable to the Trustee or the Custodian, if applicable" you would accept a loan rollover if directed by the Plan Sponsor because it does not specifically preclude the loan rollover?

I actually found that information too, but I don't think it applies in this situation. The person on military leave is not the participant, but the participant's spouse. The participant is trying to sign the QJSA waiver on behalf of their spouse.

Does a qualified plan have to specifically allow for loan rollovers? Is it acceptable if the plan is written to allow "rollovers from other qualified retirement plans" without a specific reference to loans? For some reason I have it stuck in my head that the plan had to specifically allow for it, but I can't find a reference for it. Thanks