Kevin C

I think the question is did CIGNA amended at the prototype level or did they send an amendment for each sponsor to adopt? The adoption deadline was the end of the 2003 year, I think. If CIGNA amended the prototype, they just need to get a copy of the amendment. Our prototype document provider's final 401(a)(9) reg amendment included a section for selecting options about how the rules would apply. It had to be adopted by each plan sponsor.

Take another look at participant category 4 on page 17 of the instructions. It says: "Deceased individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan."

The late penalties on 10 years worth of 5500's will be astronomical if you don't do the DFVC. I should find out in the next few weeks what the non-amender penalties will be for a plan caught in audit. We just picked up a client with a one person plan that wasn't amended since 1985. He got audited and the agent told him to find someone to update his plan document. He hired us to help him. The agent hasn't done one of these in a long time, so he wasn't sure what the penalties would be. He is checking with his supervisor to find out. Based on what other agents in his office told him, the penalties will be significantly more than the non-amender VCP filing fee.

Even if you conclude that it is not a settlor expense, it still has to be a reasonable expense of administering the plan before it can be paid from plan assets. The topic is legal fees that the plan would not have incurred if the plan had been administered properly. I don't see how those legal fees could be considered reasonable expenses of administering the plan. It might also be useful to look at the plan's language regarding indemnification of fiduciaries.

That's what I was thinking. But, I didn't read all of the Rev Proc with that in mind. I was looking through it for another issue and noticed that wording. If there isn't something else in the Rev Proc that would prevent you from doing the retroactive amendment, I think that correction would be a lot easier on everyone than trying to distribute the excess.

I wouldn't expect to see the deferral limit removed in the good faith EGTRRA amendment. We only had a few clients with deferral limits due to the old deduction limits. I incorporated the removal of the deferral limit into their GUST restatements. Before you turn to a correction method, I would make sure that they really did not amend. We have taken over plans where the client did not initially provide copies of all the executed amendments. They usually remember the amendments when we go over the inconsistent provisions in the current SPD versus the document they provided. If they did not amend, I'm not sure that distributing the excess is the only way to correct. I just noticed in Rev.Proc 2008-50, 6.05(3) that they address the correction of a failure to timely adopt an amendment required to implement optional law changes. Removal of the deferral limit would have been one way to comply with the catch-up universal availability requirement. You might be able to fix this with a VCP non-amender filing. It would be worth looking into.

George, Part IV is labeled "Transactions During Plan Year". The questions in item 4 are also prefaced by the phrase "During the plan year:" When you put that with the instructions, as Sieve pointed out, it looks pretty clear to me that the questions need to be answered yes if the transaction occurred at any time during the year.

That definition of compensation can be used for ADP testing IF it is consistent with the plan definition of compensation for testing and IF the definition satisfies 414(s). We don't have enough information to be able to tell if there is a problem or not. I agree with George that if it has not already been done, then the first step is a 414(s) test to see if the compensation definition passes.

If some or all of the plan investments are held in insurance products of the Big Time Insurer, there may or may not be reason for concern. You would need to get independent advice from someone who understands how those products work to tell for sure. We had a client years ago that had a GIC as part of the assets of their DB plan. The insurance company who issued the GIC filed for bankruptcy. Withdrawals from the GIC were temporarily suspended and the GIC went into a court ordered reorganization plan. When they were later allowed to remove funds from the GIC, it was worth a fraction of the former value. Over time, the value rose significantly and eventually the Trustees decided to cash out. The whole process took several years.

There is more to the wikipedia explanation. http://en.wikipedia.org/wiki/Indeterminate_form N/0 = infinity if N<>0. 0/0 is an indeterminate form. There is no way you can count someone with zero compensation in the ADP/ACP tests because you can not calculate their deferral rate.

I would expect the fiduciary who removed the assets to be on the hook. You have not answered whether the employee mentioned is the owner or not. Either way, the person who took the plan assets became a fiduciary when they became able to access the plan assets. The DOL may be able to help. Their website has lots of news releases where they announce recoveries of plan assets and criminal indictments for theft of plan assets. The 5500 needs to accurately list what happened. Don't forget the questions about prohibited transactions and losses due to theft or fraud. Even if they don't go to the DOL, I would think answering those questions accurately will just about guarantee an audit. Remember, the 5500 is signed under penalty of perjury. There was a recent article where a fiduciary's embezzlement affected plan assets and he lied about it on the Form 5500. I think the penalty for the false filing was $123,000.

I agree with fiona1. Besides, how would you calculate his deferral rate if he is included in the test? 0/0 is not 0.

IRS and DOL auditors have a significant amount of discretion in how they address problems they find, or think they find. We have had ones that insist there is a problem when there is not one. We've also had ones that were extremely reasonable when there was a legitimate issue. In a couple of cases, the correction method they suggested did not follow the letter of the rules. They were more concerned with making sure the NHCE participants were not harmed than they were about dotting the i's and crossing the t's. If I were in your situation and the plan was audited, I would take the same approach. We talked with a prospective client last month with a plan that had a $2,500 minimum loan amount. When I told him they can't do that, he laughed and said it used to be a $5,000 minimum. Hmm, I wonder why they didn't hire us?

Yes, but those new participants at the beginning of the year should already be included in the count. I'm used to valuation systems that determine terminated status based on the termination date. If someone drops off the payroll without getting a termination date in the system, they usually end up still being treated as active.

Since we are talking about a correction, I would look to Rev Proc 2006-27. Section 6.02 4(b) looks like it answers a couple of questions: (b) A corrective allocation to a participant's account because of a failure to make a required allocation in a prior limitation year will not be considered an annual addition with respect to the participant for the limitation year in which the correction is made, but will be considered an annual addition for the limitation year to which the corrective allocation relates. However, the normal rules of §404, regarding deductions, apply.

J Simmons, I'm not so sure about that. (b)(1) has three sub-parts and all three must be met. Would requiring that the loan be at least $10,000 really be only considering factors that would be considered in a normal commercial setting? I am looking at the minimum loan amount as one of the factors being used to decide if the requested loan will be granted. If it is ok, then what happens when the employer foolishly rehires the guy who terminated three years ago when he was 80% vested and he repays the $2,500 distribution he received to get his forfeitures restored? If the minimum loan amount is $1,000 and someone requests a $500 loan, the loan is denied. In that case, (b)(2) says the minimum loan amount doesn't cause us to fail to satisfy (b)(1). With a higher minimum loan amount, you don't get the exemption from (b)(1).

Sieve, I was asking how a $2,000 or higher minimum loan amount would comply with: (ii) In making such loans, consideration has been given only to those factors which would be considered in a normal commercial setting by an entity in the business of making similar types of loans. Such factors may include the applicant's creditworthiness and financial need; and (iii) An evaluation of all relevant facts and circumstances indicates that, in actual practice, loans are not unreasonably withheld from any applicant. I realize what (b)(2) says, but the loan program still has to comply with the requirements of (b)(1). If the loan program doesn't meet the reg requirements, aren't the loans that were made prohibited transactions? If the loans are PTs, what is there to correct for the people that did not get loans? If $2,000 is ok, then how about $3,000? $4,000? $10,000? Where do you draw the line?

I don't understand your statement here. Are you saying you know they did not amend to remove the limit? Or that you don't know if they amended or not?

Sieve, If the minimum loan amount is greater than $1,000, how does that comply with 2550.408b-1(b)(1)(ii) and (iii)? I don't see how you can with a minimum loan amount unless you qualify for the exemption in (2).

Before you go forward with the audit, you should try to verify the participant count at the beginning of the 2007 year. That is not necessarily the same count as it was at the end of the 2006 year. Most plans have a deemed distribution provision that applies to terminated participants with no vested benefits. If this one does, then anyone who terminated during 2006 with a zero balance is no longer a participant at the beginning of the 2007 year. You might get lucky and find out that the TPA's participant count is not accurate. There may also be terminated employees that did not have a termination date reported to the TPA You did not mention the Schedule H item 3 having an auditor's name listed. If it was blank, their 5500 software should have given them an error message when they printed the form.

Schedule H is for large plans. Schedule I is for small plans. They would not have done both for the same filing. When you get a copy of the 2007 5500, it would be helpful if you would also tell us how item 3 of the Schedule H was filled out. That item addresses the audit report.

Are you saying the plan limits deferrals for all employees to 15% of pay? That type of provision was fairly common pre-EGTRRA. I would have expected them to remove that kind of limit starting in 2002. Were any of these people with excess amounts age 50 by the end of the calendar year of deferral?

The participant count we need is the beginning of year count reported on line 6 of the 2007 5500. Did the TPA prepare a Schedule H or a Schedule I for the 2007 5500?

Isn't there also a requirement that the purchase price not be more than fair market value? The DOL's VFC program lists correction methods for 1) purchase of an asset from a person who is not a party in interest with respect to the plan at a price more than fair market value, and 2) sale of an asset to a person who is not a party in interest with respect to the plan at a price less than fair market value.

It sounds like you are talking about the plan's first Form 5500 filing. If this was the first filing for the plan, the 80-120 rule does not apply. You have to have filed a return in the prior year to use it. If this is your first filing, 100 participants as of the beginning of the plan year makes you a large plan filer. If this is the first 5500 filing, what is the initial plan year? If the initial plan year is a short plan year of 7 or fewer months, you can delay the audit until the second year. The audit for the second filing covers the entire time period.