masteff

Perhaps someone w/ some experience getting the IRS to waive penalties would post some suggestions on how to try accomplishing that.

Keep in mind that normally you can't jump straight from problem to lawsuit. What efforts, if any, have been made to get the plan to correct the "mistaken" tax reporting? I presume that since the IRS has gone to the participant, then you are referring to a mistake on reporting of a distribution or excercise (and not a mistake on the plan's tax reporting on form 5500). You don't detail the nature of the mistake (overstated, understated, not reported but s/h/b, etc), so it's hard to speculate what types of cure might be available. As in any matter like this, you need to get a copy of the plan document and the SPD (do esops have SPDs?) and review the rules for making claims. Failure to follow the specified claims procedure can result in dismissal of lawsuits. Oh, and consult an atty.

I remember from college business law that there's a statutory pecking order (versus judge determined). But it's been awhile and I'm sure it got modified by the recent changes in law. Need to be sure the business lists it as an outstanding payable. I assume a plan fiduciary would be responsible for that but if I had a lot owed me as a participant, I might want to see it in writing or file a claim myself as an interested party (not sure how that would really work legally, just thinking out loud).

Correct, Notice 2001-56 confirms exactly that. And to clarify, it's not the hardship safe harbor (ie the prescribed list of hardship reasons) but rather matching contribution safe harbor plans that had to reduce to 6 months to maintain compliance. (The IRS has too many different meanings to safe harbor, if you ask me.)

Or, on that line of thinking, could not be suspended until after a small lapse in time (such as after the next regular contribution, which occurred on 5/25). Then run the 6-month suspension to conform to the plan.

1) The assumption is that it was a valid hardship reason and was properly documented. 2) Does the plan allow for in-service w/drwl of PS and if so, would this qualify for the amount taken from the PS source (i.e., could the participant have taken the PS money disregarding the hardship)? 3) Please clarify, did the w/drwl come only from PS or did it come first from deferrals and then from PS? If it came only from PS and the participant has sufficient deferrals, then simply reclassify the withdrawal (ie move identical amount/shares from deferral source to PS source, thus correcting the source the withdrawal came from). If it came from both deferrals and PS, first see #2 above and then, yes, the money needs to go back into the plan. 4) Yes, deferrals should be returned. But only to extent of normal timing. So if it normally takes 1-2 pay periods before deferral changes are applied in payroll, then apply same timing here. Since it's in the same year, if it's possible to run a negative deferral adjustment thru the payroll system for the amount of the deferrals being returned, then I'd suggest that as it puts the employee's taxable wages back to the right amount. Also, check whether the employee received any matching contributions which will need to be taken back.

You have to specify the term of the refinancing to determine whether it counts as two simultaneous loans or not. The following excerpt is from the Q&A-20 of the final regs: "For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction." So if the refinancing extends the loan past the original 5 year allowable term, then it counts as two loans on the transaction date (and thus violating a plan provision limiting to one loan).

Nope, not the only one... at previous job, we had four 401(k) plans with over $1billion in assets. While we didn't advertise it and even went so far as to actively discourage defaulting, my management explicity determined that if we had such a request in writing, we would have to honor it. And those plans went thru both IRS and DOL audits w/in the last 3 years.

I like the retro effective date suggestion. Or thinking out loud, another option would be a 9 month exception for those in employment on 7/1, which puts the '06 employees in immediately but makes the '07 employee wait another 6 months. Upside is it lets you stay w/ 7/1 date but downside is it lets the '07 employee in 3 months sooner.

Nothing in the regulations mandates that payments be by payroll nor that said payments cannot be stopped. Q&A-4 of the regs says a deemed distribution occurs when the loan fails to meet the requirements of Q&A-3, whether at the time of the loan or after. I would point you to the Example in Q&A-10 of 1.72(p)-1... Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a three-month cure period. (ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)©, the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003. This does not say that the loan was defaulted because the employee violated a deduction agreement, it was defaulted due to non-payment which made it no longer a qualified loan.

Be careful about your state's payroll laws. Some states require that if EE puts in writing to stop a deduction such as this, then you have to stop it regardless (it's not truly mandatory like withholding or a garnishment). Then the loan simply defaults per normal procedure (end of quarter after quarter of last payment). If in doubt about payroll laws, check w/ local counsel.

First, the plan would have to be amended and would have to allow for distributions at termination (and not just year end). The notice, under "Qualified HSA Distributions" says: "Although the unused amounts can be distributed to an HSA before the end of the plan year, because the health FSA coverage continues until the end of the plan year, an individual covered by the health FSA is not an eligible individual immediately after the qualified HSA distribution, and thus any such qualified HSA distribution is included in income and subject to an additional 10 percent tax. Similarly, an individual without HDHP coverage after a distribution is not an eligible individual after the distribution and thus the qualified HSA distribution is included in income and subject to an additional 10 percent tax." Applying sentence one, since your EE is terminating, then no continued coverage after the mid-year distribution (as long as not elected in COBRA) so appears to be no problem. Applying sentence two, your employee would be subject to tax and penalty unless she has HDHP coverage after the distribution (such as by COBRA or thru another employer's plan). Furthermore, she has to remain an "eligible individual" for 12 months or the rollover will be taxable: "If an individual ceases to be an eligible individual during the testing period, the amount of the qualified HSA distribution is included in the gross income of the individual and subject to an additional 10 percent tax." And lastly, the notice says: "Thus, an individual who was not covered by a health FSA or HRA on September 21, 2006 may not elect a qualified HSA distribution."

Do you mean a) employee after tax contributions that were matched or b) employer contributions that were matching on ee's after tax contribs?

rmse46 -- 1) for support, as mjb said, see IRS publication 560. 2) no, the extra amount for catch-up only applies to elective deferrals and does not apply to an SEP (which are technically employer contributions).

1) I doubt an account number is needed. It's only if the receiving trustee requires an account number that it would matter. Most qualified plan rollover request forms don't require one; all that's truly needed to make a direct rollover distribution is the name of the receiving plan/trustee and how the check should be payable. 2) What does the plan say? Our plans said you had to properly complete our prescribed form. Otherwise, you're on the right track of making sure the DRO has all the info that would be covered by the request form (not the least of which being the AP's signature). (Unless Belgrath's link contains info that would sway this answer one way or the other, I only skimmed it.)

Actually limit would apply to 401(k) and SIMPLE but not to SEP. (Bird's post (#10) in this thread illustrates: http://benefitslink.com/boards/index.php?showtopic=35164 ). And no, in a situation like this where the employers are different (hospital versus herself), the cash balance plan has no impact on doing an SEP.

The prohibited transaction of selling it to herself at $10 is of much greater concern. She really needs to go back to the ERISA atty to figure out how she can fix this mess. You might look at the instructions to Form 5330 on which the excise tax for a prohibited transaction is reported. http://www.irs.gov/pub/irs-pdf/i5330.pdf

A quick (but certainly incomplete) list for networking comes to mind: insurance brokers (especially those dealing in group health and life), law firms (especially w/ ERISA specialty), and accountants. Also, does your area have a local benefits group (our's meets for monthly luncheon and presentation) (maybe call the benefit departments in a few of larger employers in area and ask if they belong to one)? Maybe think about Rotary and other groups that are frequented by local businesspersons.

Question for anyone who cares to comment: Is the QDRO's deadline for payment ("payable on or before a specific date in 2001") binding upon the plan sponsor? I've never seen a deadline so don't know how it applies.

Our outside counsel took the position that the participant had to be sufficiently incapcitated before the POA could take action on the part's behalf. Generally we required a note from the attending physician to that effect. Whereas your client has had contact w/ the part and the part seems capable of taking action for him/herself, I'd say 'sorry'. To me the logic is the POA is in place in case of worse case scenario (ie part can't act for him/herself) and not before.

For those of us whose computer monitors face our office doors, avatars can optionally be turned off under My Controls, Board Settings.

We had a whole period of time where letters didn't go out because the TPA's programming was slightly messed up and we certainly never concluded notification was "required" (denoting to me that IRS or DOL or plan language mandated it). I do agree w/ Janet's CYA comment. Also important is that a letter can help keep participation numbers up. To fix our mess, we recompleted the TPA's questionaires for the suspension service. They offered three flavors at end of suspension: restart at prior %, restart at a set % (such as fully matched %), or leave at zero and require EE to take action. In all cases, had the option to send a letter. We left participants at zero w/ a letter going out about a week prior to end of suspension.

Our outside counsel said same thing when we had problems after some large bonuses to HCE's... limit is applied on an annual basis, not on a pay period basis. So if %'s are within annual limit then no further action required.

Still trying to figure out where these fit... when employees receive a reimbursment, is it taxable income to them?

Only if it's an easy fix, as I'm sure EPCRS would allow prospective correction under VCP in this scenario.