PLAN MAN

Please help set me straight. I totally confused myself with a QACA that excludes bonuses and car allowances for all contributions, including elective deferrals and the QACA basic matching contributions. I know that compensation eligible for the deferrals must be safe harbor compensation defined in section 414(s) and 1.414(s)-1. I'm confused if the plan may use this definition of compensation and pass the 414(s) nondiscrimination test each year to determine this definition of compensation satisfies section 414(s) (under 1.414(s)-1(d)(1) or if the plan by design cannot exclude these types of compensation and can only modify the compensation under the rules in section 1.414(s)-1©. Please confirm if the plan design to exclude these types of compensation is permitted under a QACA and performing the 414(s) test is the acceptable method to determine the definition of compensation is nondiscriminatory.

Here is the response on this issue from Janice M. Wegesin at form 5500 help.com: "The auditor is wrong. (I love saying that! :-)) While I understand the auditors have this stupid practice on the statement of changes page of reducing the participant contribution number by the value of the corrective distribution (which includes earnings so you and I know that's crazy, plus the money did go in the plan) - the Form 5500 requires that corrective distributions be reported on the line you mention. Because the auditor insists on his presentation style, then he has to create a Note in the financial statements that is Reconciliation to Form 5500 - and reconcile the contribution and distribution numbers to the Schedule H. That's what's missing here. Can you tell this is one of those items that makes me crazy?!! Thanks, Janice"

The auditor is insisting we report the corrective distributions (for the 2014 plan year, corrected on 3/1/2015) on the Schedule H in the same manner they are treating these distributions in their financial statement. Specifically, the auditor wants us to - 1. Report these corrective distributions as a payable at 12/31/14 for excess contributions paid in the following year. We are to list them on line 1j(b), Other liabilities. 2. Reduce the Participant contributions reported on line 2a(1)(B) by the amount of these corrective distributions because their best practice is to reduce employee contributions because these were not eligible contributions. The audior says these contributions are required to be remitted back to participants and therefore were not actual contributions in 2014. 3. Not report the corrective distributions on line 2f, on either the 2014 or 2015 Schedule H, because the participant contributions are being reduced by this amount. The auditor will add a footnote to the financial statement describing this activity. I know the Generally Accepted Accounting Principles (GAAP) the auditor uses for the financial statement wants the corrective distributions handled this way, but I never heard of the Schedule H being completed in this manner. Has anyone come across this situation this year? If you have, how did you handle it with the auditor and the client?

What happens to the matching contributions if the 402(g) excess is requested after 4/15 of the following year? My understanding is if the excess amount involves two or more unrelated plans, then the distribution cannot occur until the participant has a distributable event. The plan document states that related matching contributions shall be treated as a forfeiture. If the 402(g) excess is not distributed does the participant keep the matching contributions in their account? If the plan knows about the participant's 402(g) excess, but does not make a distribution, must the plan still forfeit the related match at the time the 402(g) excess is identified? Or is the related match forfeited at the time of the distribution? Any ideas on the best practice for this plan administration issue? Thanks.

Just came across this today- if I am understanding QDROphile's comments correctly, a well drafted plan would designate the appropriate deferrals as catch-up even though the deferrals in that plan did not exceed the 402(g) limit. So that leads to the question: QDROphile, do you know of a "well drafted" prototype plan document? Can you suggest any specific language that may be added to the adoption agreement for a plan to allow it to operate in this manner? Thank you.

Dave, Please accept my heartfelt sympathies for you and your family and my great appreciation for all you do.

Were the students considered employees when they were in the "work-study" program? How were they treated for payroll taxes, etc. in the "work-study" program? How are you treating them upon hire for other employee benefits (medical, dental, etc.)?

If the participant is rehired, then it seems he has not retired.

Yes, I have a response. Proceed carefully because returning an excess employer contribution to the employer is generally not allowed. If the contribution was made after the end of the plan year, it should be applied as a contribution for the plan year in which the contribution was made to the plan. Check the plan document, if it is a prototype plan, the language usually requires the IRS to determine the contribution is not deductible before any funds can be returned to the employer. The contribution stays in the plan and is applied to future years' contributions. The employer must have a legal basis for requesting a return of contribution. You are correct on the other point, because the employer contributed more than they can deduct for the particular year, that must be reported to the IRS and a penalty paid.

Very good point, Kevin C. If you look further down in the article, I think the IRS makes a recovery from the statement you quoted. Under "Avoid the Mistake" the third bullet point says - For those plans that use forfeitures to reduce plan expenses or employer contributions, there should be plan language and administrative procedures to ensure that current year forfeitures will be used up promptly in the year in which they occurred or in appropriate situations no later than the immediately succeeding plan year.

The IRS just published an article on the timing and use of forfeitures in the new issue of Retirement News for Employers (Spring 2010). This supports what I have been saying all along....a plan cannot accumulate forfeitures in a suspense account for very long, the forfeitures must be used for the year generated or, if making frequent employer contributions, as soon as possible after the forfeitures have been determined. Does anyone disagree with the IRS' position? IRS forfeiture account

If we are voting, I'd say no. 12/28/2009 is not the same as 1/1/2010. More importantly, how as the plan sponsor been operating? When limits increased, when did they apply the increase?

Disagree with Tom, Agree with Bird Language from one of our plan documents: In the event a participant elects to receive payment by distribution of a nontransferable annuity payment, then payment will automatically be made in the form of a qualified joint and survivor annuity unless the participant elects not to receive payment in such annuity form and the participant's spouse, if applicable, consents to such election.

That would be at the employee's election, not the employer's decision. If the plan says employees can elect to defer a portion of their compensation, and the plan includes bonuses in the definition of compensation, then the employer should take salary deferrals from the bonuses.

I think you should check the plan document to see if there is any provision for allowing this. Bonuses are considered compensation and if the plan does not specifically address this, I think you must include bonuses in the regular deferral elections.