Randy Watson

So there's nothing in the Code or ERISA that prohibits this?

Could a plan, such as a defined benefit plan or a defined contribution plan other than a participant directed account plan, permit a participant to take an in-service distribution of their entire account balance, including the participant's outstanding loan balance (which is treated as an investment)? The participant would continue to pay that loan off through payroll deductions. Assume all loan limitations were satisfied at the time the loan was made.

Would use of a separate trust agreement jeopardize prototype status?

Based on Rev. Rul. 2008-40 and 2011-1, you can avoid income tax on transfers from a U.S. qualified plan to a Puerto Rico qualified plan as long as that transfer takes place by the end of 2011. The articles I've seen on this issue dealing with these Rev. Rulings also indicate that you can avoid qualification issues if you make a transfer within this window. My question is whether there are any qualification issues if you simply continue to cover a Puerto Rico employee under the U.S. plan without making such a transfer.

Well, does it?

Relatively small employer sponsored a DB plan for a short period of time. The company had financial issues and decided to terminate the plan. Distributions were processed. No determination letter was sought on the termination. After termination it was discovered that the plan was a PBGC plan and should have gone through a standard termination. Of course premiums were never paid as the employer did not know it was a PBGC plan. Now what? What would happen if the DOL discovered this? What are the chances they discover it?

Are you saying that a plan cannot condition payment of benefits to a beneficiary on being required to repay the funds if the beneficiay is determined later not to be the rightful payee under law? There is plenty of case law that has allowed plans to recover benefits paid to the wrong party under the doctrine of unjust enrichment since ERISA is a law of equity. Is this any different from requiring competing beneficiaries who agree to share the distribution to waive their claims to additional benefits under any future action? If the person receiving the benefits is not legally entitled to payment what new condition is added by making payment subject to indemnification since the party receiving the benefits is not the beneficiary designated under the plan? Just out of curiosity, if it turns out this person is not the rightful beneficiary, would recovery of the benefit become a matter of state law since the person really didn't have rights under ERISA?

An individual claiming to be a deceased participant's beneficiary is making a claim for a death benefit under a plan. For reasons I'd rather not get into, there is some question whether this individual is the rightful beneficiary. With that said, there is some evidence that they have a valid claim...enough where I think the plan administrator's decision to pay the benefit would be considered to be reasonable if this ever made its way to court. Could the plan administrator require the beneficiary to execute an indemnification agreement where the individual agrees to reimburse the plan for the amount paid if another individual makes a claim for the same benefit and it is conclusively determined that the second claimant was the rightful beneficiary? We're talking about a relatively small payout, so interpleader is not a cost effective solution.

I spoke with the IRS on this issue. For pre-2009 years, there is no 403(b) failure for not making employer contributions, even if there was a plan document that required the contribuitons. This is strictly an ERISA violation and therefore it is not eligble for correction under 2008-50. The only way to get the IRS blessing is to show that the failure to make the contributions resulted in failed 401(m) discrimination test and the correction is necessary to pass the test. As Kevin C noted, you would have a 403(b) violation for failing to follow the terms of the plan for 2009 and subsequent years due to the Final Regulations. You can submit under VCP for those years.

Well, that's actually another problem. There was no "plan document" when these "failures" occured.

Sponsor improperly excluded eligible employees from participating in a 403(b) that also provides for nonelective contributions. From what I can see the Universal Availability rule applies to salary deferrals only. I'm unable to find eligibility rules under 403(b) for employer contributions. I understand that once you make employer contributions you become subject to ERISA (with a few exceptions) and would have to follow the age 21 and 1 year of service eligibility rule for employer contributions. I can correct the failure under VCP with regard to salary deferrals. The sponsor would also like to correct the failure to make employer contributions. My problem is that I'm not seeing a 403(b) violation with regard to those employer contributions as there is no eligibility requirement (that I can find) under 403(b) for employer contributions. With no 403(b) violation I don't see how I can correct this specific issue under VCP. Can anyone see a correctable violation of 403(b) here?

You need to give more detail on the type of plan. ESOPs hold S corp stock all the time. For what it is worth only an ESOP is the pass through income exempt from the Unrelated Business Income Tax. So even if the another plan can hold S Corp stock you have an UBTI issue. That is why S corp ESOPs are so popular. If the ESOP owns 100% of the S corp stock no one pays income tax on the business income. I should add there are very complex rules regarding S Corp ESOPs. So before anyone goes off and thinks of setting one up you should talk to an ESOP expert. ESOP Guy, thanks for your answer. I have another question. The ESOP exception for s-corp stock under Section 4975(f)(6)(B)(ii) appears to work one way (i.e., sale from shareholder-employee to ESOP). Is there another exception out there for the reverse (i.e., ESOP to shareholder-employee)?

Yes, that would be ideal. I just think it's odd to have a 403(b) calculate ADP when that test doesn't even apply. The sponsor would have to go and engage a TPA to calculate ADP for numerous years when they could easily use a 3% deferral like you would in a safe harbor plan.

Sieve, why can't I find any commentary confirming there's a PT in the case of a plan purchasing the employer's s-corp stock? I'm not doubting you, I'm just surprised I can't find anything in RIA or BNA etc... Any thoughts?

You need to give more detail on the type of plan. ESOPs hold S corp stock all the time. For what it is worth only an ESOP is the pass through income exempt from the Unrelated Business Income Tax. So even if the another plan can hold S Corp stock you have an UBTI issue. That is why S corp ESOPs are so popular. If the ESOP owns 100% of the S corp stock no one pays income tax on the business income. I should add there are very complex rules regarding S Corp ESOPs. So before anyone goes off and thinks of setting one up you should talk to an ESOP expert. Not talking about an ESOP. The plan would purchase S-corp stock from the company. I think it's a PT because 4975(f)(6) appears to carve S-corp stock out of the PT exemption for qualifying securities.

In general, if you exclude an employee from participating in a 401(k), you can correct that operational failure under Rev. Proc. 2008-50 by making a QNEC equal to 50% of the "missed deferral". In a 401(k) plan, the missed deferral is the ADP for the employee's group. Since an ADP test is not performed in a 403(b), are there any alternatives to the ADP as the "missed deferral"? Can we go with the 3% that would be used in safe harbor plan?

I believe that the sale of employer s-corp stock to the employer's plan would be a PT by virtue to 4975(f)(6). Can someone confirm this? Thanks.

Good answer.

Why not?

Plan excluded a certain class employees that were actually eligible to participate. This has been going on for the last 8 years. The plan has filed 5500s for all years, so the statute of limitations on the IRS side of things has been tolling. We could correct just for open plan years. But what about DOL audits? Couldn't the DOL come in and audit years beyond the last 3 and require corrective action and impose sanctions?

I have a qualification failure (failure to adopt discretionary amendment) that qualifies for an Appendix F streamlined submission. Please correct me if I'm wrong, but it appears that I submit Appendix F, the user fee and any other enclosures I identify in the Appendix. That means no plan document is necessary, no complete description of the failure, no Appendix C checklist etc... I think I'm reading it correctly, and it makes sense to only include what I identified above since this is supposed to be "streamlined". Please let me know what you all think. Thank you!

If you receive an administrative scrutiny ruling on QSLOB status I assume you can rely on that ruling until there are material changes in the controlled group or the plans of the group. I also assume that if you can satisfy one of the safe harbors and don't need an administrative scrutiny determination that you can only rely on QSLOB status for each year you satisfy the safe harbor. Can anyone confirm that? I'm not finding anything on this. Thanks.

An employer established an individually designed plan in late 2009 and made a 5300 submission. The employer is now in financial ruins and is winding down the business and terminating the plan. A favorable letter has not yet been received. Is there any way to convert that 5300 submission to a 5310? Will we have to pay any fees for doing so? Any input is appreciated. Thanks.

So we are terminating a PBGC plan and it's taking longer than we anticipated. The PBGC will grant extensions on the final distribution date when there are "compelling reasons" why the distribution deadline cannot be met. I don't want to say the "wrong" thing in my letter to the PBGC. Would the PBGC consider the following reasons to be compelling: delayed receipt of election forms, dealing with missing participants, and plan amendment, drawn out annuity search?

How common is it for governments to submit their plans for a favorable letter? Do they generally choose not to submit?