TBob

I am a little confused by your post, Appleby. In the context of Lynn's question we are talking about a participant that rolled over the RMD amount and the penalties that could apply. I am not sure how the 10% early distribution penalty would come into play here since the participant is definitely over age 59 1/2. Am I missing or misunderstanding something? There are only two penalties that I can think of that one might we worried about here. 50% penalty for not satisfying the RMD requirement - In this case the RMD requirement is satisfied because the first payments out of the plan are treated as satisfying the RMD requirement in a year in which there is a RMD required. Even if the entire amount is rolled over, the RMD requirement has been met by the plan. Treas Reg 1.402©-2, Q&A 7. The only problem is that a portion of the amount distributed is ineligible for rollover. I agree that there should be 2 1099R's from the plan. One for the RMD amount and the other for the remaining rollover amount. Which brings into play the second penalty...6% penalty on an excess contribution to an IRA. To avoid the penalty the ineligible rollover plus earnings must be removed from the IRA before 4/15. The earnings must be included here or they will be subject to the penalty.

Lynn - If the ineligible rollover is removed from the IRA before 4/15/04 then there are no penalties. If there are earnings distributed with the excess they are taxable but no penalty. Also, the participant should note that since the RMD was not eligible for rollover (as they initially thought) it is a taxable distribution from the qualified plan in the year it was distributed from the plan which in your case was 2003. The 1099R's from the plan should reflect this but it probably is not a bad idea to remind the participant because they may not have claimed it as income if they have completed their 2003 filing already. As far as getting the IRA custodian to cooperate...I can't really say. We usually send a letter to the participant with a copy to the IRA custodian explaining things. That is usually where it ends. I would think that IRA custodians would encounter this situation often enough to be aware that it could happen and should not have any problem with the correction. It is really on the participant's shoulders to make sure the IRA custodian complys with his request to remove the excess rollover. My 2 cents worth...

I assume that if he can grow a third eye, a hand and some fingers would be no problem.

This may be out of the realm of the expertise on this board but if the partners are splitting income and expenses equally between the two...would not partner #2 be stuck with half of the expense of the employer contribution to the plan. I think that the cross tested scenario or the "elect out" idea mentioned above work fine but there may be reasons outside of the plan that may not work for Partner 2.

jfp - I guess I agree with you that one can make the leap to apply the same principal the IRS spells out for overpayments to impermissible distributions. Thank you for setting me straight on the 1099R vs 1099Misc issue as well. mbozek - The employee would return the funds for several reasons...First and foremost, to keep the money tax deferred for retirement which we all know is the most important thing to all plan participants (ha ha). The participant will have to pay taxes on the distribution in 2003 but will get a corresponding deduction in 2004 (assuming they repay in 04). I assume that the participant did not want the unanticipated tax impact of the distribution when they thought they were taking a loan. If the participant is unable or unwilling to repay the distribution, it does not make sense to me for the employer (or anyone else for that matter) to make the plan whole in this case. Since the money came out of the participants account, any repayment would go back to the participants account. The participant should not receive a windfall because of the situation. The sections of the Rev Proc pointed out by jfp talk about having the employer or someone else pony up the difference when the overpayment resulted in a shortage to other participants in the plan. That's my 2 cents worth...

Following the correction principal of putting the plan (participant) back in the same position it would have been in had the error not occurred, the participant should repay the money. In one of my past lives in dealing with impermissible distributions that were not repaid by the end of the tax year, we tax reported them on a 1099Misc if they were over $600.00. The theory behind this was that the distribution was not a proper distribution from a qualified plan and therefore should not be reported on a 1099R. The participant must include the distribution as income for the year distributed. For what it's worth, I have yet to get anyone on these message boards to agree (or vehemently disagree) with the 1099Misc idea. If the participant does pay back the distribution in a subsequent year, they claim a deduction in they year they repay it using the "Claim of Right" doctrine. I can't remember where the IRS documented the "claim of right" theory but no tax preparer ever appreciates it when you suggest this method. Every one I have ever encountered wants the 1099Misc amended, destroyed, revoked or something of the like. Those of you that disagree with this, please post because I am curious how others handle this as well.

Advisable or not...Not going to touch that one! I would never say it's a bad idea but then most of the clients I deal with have gotten used to shreading useless privacy notices. Whether they are required or not is another story. Prior to going to work for a TPA I worked for a bank like Doombuggy did. We sent out Privacy notices to our bank customers but I seem to recall something in GLB that basically said that the privacy rules in GLB did not apply to Trusts, qualified plans, and such because these accounts were already protected by fiduciary rules. Sorry, I can't quote the section of GLB. It was a while ago that I sat on that committee at the bank. We don't send any privacy notices out to our TPA clients.

Appleby...Would it help if we created another forum on the message board for addicts like yourself to talk (post) about your problems? We all need support some times!

You all thought this one was finished....not! So, you take a look at the 700.00 monthly payments and by your reasonable actuarial assumption it will take more than 10 years to deplete the account balance. Therefore, it is not eligible for rollover the 20% mandatory does not apply. I agree with this. What happens a few years down the road when, based on the participants investment elections, the account has lost a significant portion to the market. Now your reasonable actuarial assumption falls short of 10 years. Do the payments then become eligible for rollover? If so, do you have any liability for not withholding the mandatory 20% on the earlier distributions? Is the determination of the eligible rollover status only made when the distributions begin or do you look at this each year? Maybe I'm thinking too much but wanted to play the devil's advocate. This happened with one of our retirement plans that had employer stock as an investment option (not Enron but similar) where the stock tanked. The payments that were scheduled for more than 10 years ended in less than 2. I am curious how others would have handled the withholding.

Thanks all for the help. My understanding was that the QNEC would satisfy the gateway but Tom cleanly chopped the legs out from under me by pointing out the obvious flaw in my logic (though not so ovbious to me - obviously) that the plan would have to satisfy the testing with and without the QNEC. Blinky needs to go to work for the IRS as a consultant when they are drafting notices, regs, rulings and such. At least then they will be interesting to read! I think the whole key in the door thing should be written verbatim into the Regs!

I know that if a NHCE receives an allocation of SHNEC, QNEC, or Top Heavy Mandatory, they will also need to receive the gateway minimum. I can find pleanty of posts that discuss that in detail. Does the QNEC in turn satisfy the gateway? Let's assume that a plan fails the ADP test for 2003. In order to pass the test, the employer needs to contribute a 5% of comp QNEC to each eligible NHCE. Does this 5% also automatically satisfy the gateway as well or is there some obscure cite that says you can't get the double benefit out of the QNEC? For simplicity sake, let's assume that all of the employees have met the statutory entry requirements and are all eligible for all contributions...that way we won't get off on an "otherwise excludible" tangent (as fun as that would be...). Thanks in advance!

...and what ever happened to Dredorick Tatum?

I think in the spirit of the countless awards shows (Grammy's, Oscar's, Golden Globes, et al ...When will they have an awards show for the best awards show?) this post must be categorized to properly give credit where credit is due. My personal nominations... Most Ironic - Pensions In Paradise Most Obscure - Blinky...(this one's a lock!) Most Accurate - thisissocomplicated Best Accronym - WDIK Best Reference to Fictional Character - Belgarath (most probably never read it!) Best Depiction of the Pension Industry - 2muchstress Worst Depiction of the Pension Industry - Happy Actuary Best Special Effects - Tie (Blinky, Doombuggy, ERISAatty) A word from our sponsor - DietPepsi The Lifetime Achievement Award - Dave Baker Special mention goes out to all those that had the confidence to use their real names (although somewhat boring!). Also a great personal thanks to everyone that has ever posted to these message boards.

Since we are talking about this in 2004 for the 2002 plan year, the contribution is non-deductible and subject to the excise tax. Correct?

What do you mean when you say that you over contributed? What limit did you exceed or test did you fail? There are prescribed correction methods for these failures, etc. but more information would be helpful.

Blinky...I am struggling with the same question. True down doesn't work for me either! As the one testing the plan, all I can say is that the employer has some problems with their payroll system. My guess is that since this HCE received more than 200,000 in comp, that the employer did not stop the match when they were supposed to. I think I have some consulting work to do! Let's assume that HCE was making 30,000 per month. He decides to defer only 1,000 each month to hit 12,000 by the end of the year. Since 1000/30000 is only 3.33% deferral and you are matching on compensation for the pay period, he would receive a match of 3.165% each month or 949.50 for a total by the end of the year of $11,394. The employer needs to cut him off at 8,000 for the match or the HCE will get a match that is calculated on >200,000 comp for the year. Correct? I don't think that matching on a payroll by payroll basis is meant to be a loop hole to get past the comp limit.

A Safe Harbor 401(k) plan utilizes the Basic Safe Harbor Matching Contribution of 100% on the first 3% of deferrals plus 50% on the next two with no other employer contributions being made to the plan. The document (PPD Prototype) says "compensation for this purpose is compensation for each payroll period." I have always taken this to mean that you do not true up the match contribution at the end of the year based on total deferrals and total compensation. This would not bother me so much if it was not a safe harbor contribution. Some participants are getting more (or less) than a 4% match when they defer a total for the year of more than 5%. What about the guy with 200,000 in comp that defers up to the 12,000 limit and ends up with more than 8,000 in match.

This situation just doesn't smell right to me but I can't put my finger on it. Father owns 100% of two corporations. Business B derives all of its income from Business A. Father transfers ownership of Business B to his two children (X age 10 and Y age 5). Business B pays each of the children a heafty salary. Business B sets up a separate 401(k) Plan for X and Y. Their salary is enough to allow them to defer the maximum plus to receive a safe harbor non-elective contribution a sizeable profit sharing contribution (integrated). Business B has no employees other than X and Y. It's obvious, based on their ages, that X and Y perform no services to Business B for which they are paid. Father now derives all of his income from Business A which has several other employees and its own 401(k) Plan. I am sure that I am leaving out some vital information but it seems clear to me that Father is paying X & Y through Business B solely to put more into a qualified plan. What's wrong with this picture or am I just being paranoid?

Dave - I think that this works in your situation as long as the plan has the 401(k) provision. I have had plan sponsors who have traditionally hit the 40,000 limit in a straight profit sharing plan who then want to make a catch-up contribution. I have told them that they have to add the 401(k) feature and allow all of the employees the ability to defer in order to allow for the catch-up. I did not think of setting a plan limit of 0% which would effectively only allow ppts what are over 50 to defer just the catch up amount. Has the IRS had any issue with doing this?

Assuming that the participant actually notices that the distribution was not directly rolled over and asks you to reissue the check as a direct rollover, I think you are obligated to do it. I am not sure what the clients last payroll has to do with it. In my experience, we always kept withholding for the qualified plans separate from the employer's wage withholding. I assume that you are saying that there is no more withholding that is going to be done this year which you could deduct your previous overpayment from. Anyway, you can probably stop payment on the participant's check (again assuming they have not cashed it) and reissue as a direct rollover. You will have to ask the IRS for the erroneous withholding back. If memory serves me, I think you use Form 843 for this purpose and may need to look at Form 941C as well. The IRS has never been as quick at sending money back as they are at collecting it so you may need to consider putting the W/H into the plan to make it whole until the IRS sends you your refund.

If you send the ineligible contributions back to the employer, would that not be considered a "reversion of plan assets"?

I agree that you should not try the mistake of fact route here. That term gets thrown around alot in the industry but my understanding is that the IRS gives it a very narrow definition. If you correct this under EPCRS and distribute the ineligible deferrals with earnings, how do you tax report the distribution? Should it go on a 1099R? What Distribution Code? In the past we reported this on a 1099Misc. Is this correct?

PATA - Don't give up too soon. For some of us the job comes first and reading and sometines answering posts on the message boards is just some kind of sick hobby (although a great way to learn in this business!). To answer your question, the deferral contribution should be deposited to the trust "as soon as administratively possible". With a sole prop. the compensation for plan purposes is "earned income" which usually is determined after the close of the year. So, once the earned income is determined, the clock starts on the DOL's timing standards. It is important to note that the election to defer has to happen before the income becomes "currently available" which for Sole Prop's and Partners happens on the last day of the tax year. So, make sure the election to defer is done before the end of the year. Then make the deposit as soon as you can after earned income is determined. There is a nice discussion of this in Chapter 11, Part C(1)(f) of the 2003 version of the Erisa Outline. Pay particular attention to C(1)(f)(4).

More information for inquiring minds... The contribution was sent via regular mail so there is no paper trail to prove that the contribution was submitted except for the carbon copy of the check in the clients checkbook. The client send the contribution to TPA because old habits die hard. Prior to 2003 they were on a balance forward platform and converted at year end. In the old world, they had to send the $$ to TPA so they could direct the funds to individual participants accounts at the custodian and include a directive for the purchase of mutual funds with the deposit. Now they send directly to the custodian with a copy to TPA. I agree with you Mr. Preston, that the client did not "do their part" by not following up on the outstanding check. This is a small plan and client has a pretty small operation. The accountant did balance the check book but obviously did not question the outstanding check for the entire year! Finally, I guess that I don't see the point in using the DOL program since we are not going to get the excise tax waived anyway. The late contribution had to be submitted within 180 days in order to be eligible for the exemption if I read things correctly. The contribution was not huge so the excise tax is not as onerous as filing the correction with the DOL. I saw a thread in another board that said that the DOL has sent out a letter when an excise tax was paid for late contribs but no submission under their correction program was sent. Anyone else have this happen?

While a client was balancing their checkbook and reviewing their uncashed checks from 2003, they noticed that the check that they issued for the deposit of the January 2003 deferrals has never been cashed. They routinely issue their deposits to their 401(k) plan within several days of their payroll and send them via USPS to TPA. TPA records them and sends them on to a large institutional custodian. The client did their part but neither the TPA or the custodian have any record of the check. The check was/is lost in the mail. If we set aside the question "Why are they just noticing this now?" are the contributions really late by DOL's standards? Do we need to use the DOL's correction program? Who would be liable to make up the lost earnings? Client? TPA?