QDROphile

No. Yes, unless there is some legal compulsion that is brought to bear. The custodial agreement may have some interesting provisions that could lead to the IRA custodian taking certain actions without participant direction.

What was the intended action after the first faliure to make sure the second did not occur? Some failures lend themselves to prevention by correction or installation of procedures. Some falures are simply human error, and you can't prevent recurrance. Some human error can be minimized in the future by education or admonition. I would not worry too much about these circumstances, because it seems almost like an enrollment oversight -- human error that cannot be absolutely prevented. The plan people have some explaining to do and some promises to make. Perhaps a specific item needs to be added to an administrative checklist in connection with determining contributions/allocations.

You might be able to make something of the document you have with some ancillary documentation, such as records of corporate actions. The plan document that you cobble together could fail be a prototype but that is still a lot better than no document in the post-EGTRAA era. You might benefit from legal help in that endeavor. Are you saying that Morgan Stanley cannot find documentation of its product, or cannot find the documents that were actually adopted by the client? Certain amendments to prototype documents can be automatic and would not require specific plan sponsor action.

If the document was compliant on 1/15/2011 and the stupid 401(a)(9) amendment (if any) was adopted by 12/31/2011, what amendments would be needed to make the document compliant on 2/3/2012? It does not look like the plan will pass another year end before distribution of the newly discovered assets, so you don't have another Form 5500. You should think about whether or not there is an operational failure because of the misplaced assets and maybe a fiduciary breach. One might be affected by how the assets were invested while not in the plan.

I agree with your description if by "self correction" you mean both VCP and SCP.

Perhaps there is a misunderstanding about what is considered wrong. I don't think anyone has argued about correcting a 415 excess under EPCRS. In at least one post I mistakenly used "VCP" when I should have used "EPCRS." It is wrong to think that EPCRS under 2008-50 is available to cover corrections year after year. The IRS posted its power point slides and its program on EPCRS correction in which it confirms that the correction is a one-time opportunity and the problem has to be fixed to prevent subsequent excesses. Outside of EPCRS you cannot correct an excess by distribution or otherwise. Do you dispute that? With respect to reductions of contribution amounts before actual contribution (the method required by the regulations), it is impractical to try to reduce elective deferrals unless you know very early in the year that there will be a section 415 excess and who will be affected.

"jpod, I agree with your answer after talking this around a little bit. However, if it were still 2011 and the deferrals had been discovered, I think then they could have been returned and run through payroll, subjecting them to Federal and State taxation. Sound right? Thanks! (and yes, it was in writing.)" No.

Give the employee a raise effective 2011 equal to the amount of the deferral. The FICA wages will need to be increased and additional FICA taxes paid for 2011.

Ask the question another way, and ask yourself. If I am responding to an IRS auditor who wants to know why someone was allowed to change election mid-year, what would I want to have in my file?

I was incorrect to state that VCP is all that is available. I should have identified EPCRS in all instances. An important point under EPCRS is that you cannot use it year after year for section 415 problems. The plan is required to fix systemic problems as a condition of correcting under EPCRS.

The section 415 regulations require the plan to have terms that prevent a 415 excess. If the the plan has a 415 excess (money in the plan), it has violated plan terms. The old 415 regulations that allow a plan to correct the excess in certain cases by certain means (distribution, suspense accounts) are no longer available. That leaves VCP as the only way to correct. The IRS reviewers are going overboard in their checklist approach to plan tems. Some of them will not allow any correction language in the plan unless it specifically references EPCRS by number. They even reject correction "in accordance with applicable IRS procedures." That is merely the determination letter position, but it reflects the IRS thinking. The reviewers are so simplistic that they reject plan terms that provide for adjustment to contribution or allocation amounts before the actual delivery of trhe contribution. They back off when it is shown the "correction" is outside the plan before the funds are delivered.

One reason for the change is tha the old regulations were being applied inappropriately. They did not provide for the employer to dump all contributions in the plan and then sort it out later, but that is the way too many people understood them (or applied them, no matter what the understanding). An employer can do that once under VCP, but then has to clean up its act.

The problem is not with the correction and I did not say the correction under VCP could not involve priority to deferrals. The problem is with the plan terms. Detailed plan terms concerning priority of reductions have to provide for the reductions to be effected before amounts are deposited to the plan. The old regulations allowed adjustments after deposit. That does not work any more. It is very difficult to reduce elective deferrals before deposit accurately unless all the other contributions are known (except the match that goes with the deferrals unless the match is discretionary). Discretionary contributions are usually not determined until after the end of the year. All deferral amounts are determined and deposited by then. Plan terms are supposed to work to prevent violation. The same terms do not necessarily work very well to inform correction of a violation.

Let me venture a response to my question. If the plan has a detailed priority for reduction of allocations to avoid an excess contributions, the VCP people might allow a correction that respected those reductions because if the plan terms had been followed, the participant would have been in that position. One issue with that thought is that if elective contributions have a priority for being reduced, as a practical matter that will not work unless the plan knows some time in advance what all the other contributions will be for the year. Elective contributions are already deposited by year-end and cannot be reduced after the deposit. The best practical candidate for reduction is the discretionary employer contribution that is determined after the end of the year. But that is not the most desirable reduction for the participant.

ESOP Guy: Please explain. I do not see how plan terms could have any effect on dealing with an excess. Having an excess means that plan terms to avoid the excess have been disregared.

Lou S: Exactly.

How do you correct the excess under the terms of the plan when the plan is required to provide that there will be no excess?

Is the excess based on the taxable compensation treated as a separate contract?

It is more difficult to control the message when it is not scripted. Not that anyone is inclined to lie, but the best presentation, without distraction, is helpful in such situation when credibility and nuance can be very important.

The language you quote will not help you. You have a problem that relates primarily to timing of deferral elections, not establishment of the plan. I don't think you can say that a plan has not been established if deferral elections were submitted with the intent that they be given effect. You do not have license to reset the plan and change any deferral elections for 2012. You might consider what you can accomplish with a correction under 2008-113.

Can we possibly say enough bad things about ADP with respect to anything that touches in any way on retirement plan issues? Unfortunately, the IRS has been unhelpful in addressing the surprisingly common misdirection on this issue. As far as I know, the closest to a direct statement is in the peamble to the section 415 regulations.

If the transaction was a stock purchase, nothing changes about the plan sponsor, the plan or the employees except that the plan sponsor has a new owner. I don't recall that the owner of a plan sponsor has any effect on discrimination rules unless the owner is a government or a church. There is a choice under section 410 about operating the plan independently in the year of merger (and the year following) or treating the plan as a member of the buyer's controlled group. Within the plan itself, the stock purchase should be irrelevant.

Sorry, I do not see a response about taxation of a distribution to a beneficiary of an alternate payee unless you are saying the general rule applies that a beneficiary is treated as the taxpayer with respect to a benefit of the person who designated the beneficiary. Perhaps the question should have started a new thread. Under a QDRO, an alternate payee gets an interest under the plan. Think defined contribution plan to make things simple. IRC section 402(e) says that when the interest is distributed, if the alternate payee is a spouse or former spouse of the participant, the alternate payee is treated as the taxpayer and the rates and rules for qualified plans apply (e.g. 20% withholding if distribution is not directly rolled over). The corollary is that if the alternate payee is not the spouse or former spouse of the participant (e.g. a child of the participant), the participant is treated as the taxpayer (recipient of the income for income tax purposes) and the regular witholding rules apply (not 20%). If the alternate payee is the spouse or former spouse of the participant, and then designates a beneficiary for the alternate payee's interest (as allowed by the plan) and dies, the distribution to the beneficiary is not a distribution to a spouse or former spouse of the participant. Does 402(e) say that the participant includes the income? Seems to be nonsense, but that is what 402(e) seems to say, on its face. Does some other rule apply?

mbozek: Switching to a side track, if an alternate payee designates a beneficiary and then dies, is the distribution still covered by section 402(e)? It seems unfair to the participant to have the tax consequences change, but the language does not fit so well any more.

1. If she is awarded an amount and it is set aside for her, why do you care when it is paid? 2. A plan can provide that an alternate payee (the former spouse) cannot be paid her share until the participant is paid. An exception applies to most 401(k) plans -- the alternate payee must be eligible for payment when the participant attains age 50 even if the participant is still working or has not chosen to be paid. 3. The terms of the order can be more restrictive about payment than the plan would be.