PLAN MAN

Concerning part 2 of your post: I think the IRS agent is trying to say that the plan cannot be written to only include certain employees, but it must be written to EXCLUDE employees with certain job titles or job categories. Remember, a qualified plan is set up to benefit the employees and can only exclude certain employees as allowed under the statutes or if the plan passes the 410(b) coverage requirements. The following is taken from the IRS Employee Plans Determinations Quality Assurance Bulletin 2006-3 and might explain the reasonable classification issue: "Section 410(b) of the Code provides certain minimum coverage requirements that were introduced in ERISA. Under section 410(b), a plan could satisfy these requirements by benefiting such employees that qualify under a classification set up by the employer that did not discriminate in favor of employees who are officers, shareholders, or highly compensated. Although the Tax Reform Act of 1986 (TRA 86) made significant changes in the coverage requirements of section 410(b) of the Code, it retained the concept of nondiscriminatory classifications. Section 410(b) now provides, in general, that a trust will not be qualified unless the plan of which it is a part benefits a minimum percentage of nonhighly compensated employees. One prong of the average benefit percentage test described in section 410(b)(2) of the Code, provides that if a plan benefits a reasonable classification of employees set up by the employer that is not found to be discriminatory in favor of highly compensated employees, then the plan has, in part, satisfied section 410(b)."

mjb is correct. If the employee is age 21 or older, has earned a year of service & passed an entry date, and is only be kept out of participating in the plan because he is a union employee - then as soon as he is no longer a union employee he is eligible to participate in the plan immediately. This is not a question of prior service. The employee is an active employee and is earning service with the employer. Once his status changes he is eligible for the plan - on May 1, 2006.

That is some creative thinking there. I applaud you in trying to suggest a solution. Unfortunately, you must be able to support your position with tax law or IRS regulations and guidance. And, most importantly, the plan document must support your approach. I don't think there is any way to support your suggestions.

I don't think that is correct. Section 508 of the PPA says that a plan shall furnish a benefit statement at least one each calendar quarter to a participant or beneficiary who has the right to direct the investment of assets in his or her account under the plan. I think that provision means you must provide a benefit statement for the calendar quarter ending December 31, 2007. What do others think?

The forfeitures should be used for the year in which they occur or, the following plan year if the document allows. The employer cannot choose to leave the forfeitures in the suspense/forfeiture account to pay future years' expenses. You say the plan doc provides that forfeitures first are used to pay plan expenses and then any remaining forfeitures are applied to reduce the employer contribution. This can be applied several ways. I'd operate so that the forfeitures are identifed by plan year and those for any plan year are applied to the expenses accrued for that year, then used to offset the employer contribution for that year. If the employer contribution is discretionary and the employer chooses not to make a contribution for any year, I'd apply the remaining forfeitures as the only contribution for that year. The goal is to use the forfeitures and not let them accumulate in the suspense account.

How does it work for plans that do not start/end on a calendar quarter such as this plan? Would the first statement be required for the calendar quarter ending December 31, 2007? Field Assistance Bulletin No. 2006-03 "With regard to individual account plans that permit participants and beneficiaries to direct the investment of assets in their account, section 105(a)(1)(A)(i) requires that a pension benefit statement be furnished at least once each calendar quarter. If a plan operated on a fiscal year basis, with the first plan year (after December 31, 2006) beginning on July 1, 2007, the first pension benefit statement required to comply with the new requirements would be required to be furnished for the quarter ending September 30, 2007."

I agree, Rev. Proc. 2006-27 is there so plans can fix many types of errors, including not operating the plan in compliance with the plan terms. An attorney should not be encouraging them to ignore the plan document. I would think the IRS would levy some kind of fine for this type of failure, even if it benefits the nonhighly compensated employees. Note on J. Bringhurst's comment, if the employer does not take into account bonuses, commissions and overtime when operating the plan, that definiiton of compensation must be tested to be sure it is not discriminatory. If more than a de minimis amount of the percentage of highly compensated employees' compensation versus total compensation is greater than that for nonhighly compensated employees (compensation ratio test) the compensation used is considered discriminatory. And that could be a qualification issue.

The Code requires level amortization of the loan and payments at least quarterly. See Code section 72(p)(2)©. "© Requirement of level amortization Except as provided in regulations, this paragraph shall not apply to any loan unless substantially level amortization of such loan (with payments not less frequently than quarterly) is required over the term of the loan." If your loan progam allows, a participant can make multiple payments in January, but he must continue making payments at least quarterly throughout the year. I'd suggest a thorough reading of the loan program to see what provisions the plan requires.

If the union portion of the plan covers only NHCEs, then that portion of the plan is deemed to satisfy the ADP test and you would not be required to run the test.

I agree with J4FKBC. The employee's required beginning date is based on the date he retires from the employer. If the employee-employer relationship is ended, then he is considered retired and must begin his required minimum distributions. The rule for a non-5% owner is the required beginning date is the later of the date the employee turns 70-1/2 or retires. I don't know where you got the idea of a year later to make the determination. If the empoyer does not end the relationship with the employee, then the employee would not be considered retired. Do you know if any other benefits continued for the employee after Nov. 8, 2006? If so, you could determine the employee is not retired if he is considered active for those benefits. Also, if the employee returns to work before April 1, 2007, he would no longer be considered retired and you may be able to consider a later retirement date for the RMD. With regards to your other question, you must look at the retirement date to determine the required beginning date. I'd advise you to track retirement in December closely, because someone may want to take their 1st distribution by Dec. 31 and not wait until April 1 of the following year when they will have to take two distributions in one year.

Give the IRS a break! I don't see it as a typo at all. What the IRS is saying is the employee was in a class of employees eligible to participate in the plan (i.e., not a union employee or a nonresident employee, etc.) and the employee was allowed to participate in the plan earlier than the age/service/entry date provisions allow. So the employee is an otherwise eligible employee (except for age/service entry date). I think the correct method might be different if the employee was in an ineligible classification.

Yes, a profit sharing plan can have a definite contribution formula, such as an amount equal to 4% of such Active Participant’s Compensation. A discretionary formula is the most common, but not the only type allowed. The plan must designate the type of retirement plan it is, it should say either a profit sharing plan or a money purchase plan. If the name of the plan does not make it clear, I would look at the SPD and the plan document itself for an indication. A money purchase plan may not include a 401(k) feature unless it was around on June 27, 1974 and is considered a pre-ERISA money purchase plan. A 401(k) feature is usually part of the profit sharing plan. Also, a money purchase plan is required to provide a QJSA, and a profit sharing plan is not.

We can all agree that good guidance is not available on this issue. I don't think the IRS anticipated this scenario. That being said, I think you must work within the IRS rules and regulations to fix the problem. As much as jpod and mjb would like to include the employee in the correction, I don't see any justification in the code or regs for that action. As I see it, the employer failed to deduct salary deferral amounts from the participant's paychecks and the employer should deposit the missed elective deferral amounts to the plan. Yes, the employee should have notified the employer sooner, but the employer is the one responsible for administering the plan. The employer should have established internal controls and audit procedures to ensure that any errors are discovered as quickly as possible. The failure is the employer's, they set up the plan and they must be sure to operate it correctly. My opinion is to recommend the company make up the $40/per pay period plus match and earnings - and do it as quickly as possible. I hope someone can find guidance or a reference to show another way to fix this type of error. Here's a thought: do you think there is any benefit in putting a disclaimer statement on the enrollment form advising the participant they have a duty to review their pay records to cofirm the employer is processing the salary deferrals correctly and a failure to notify the employer of any discrepancy may result in a reduction in the amount of their deferrals?

I think BobK is correct. A 401(k) plan may be amended to eliminate or modify hardship distributions without having to protect the accrued benefits. It is okay for the plan to remove the hardship option altogether. Refer to Treasury Reg. section 1.411(d)-4, Q&A 2(b)(2)(x), which is still valid. Section 411(d)4 was repealed, but it is not the same as the regulation, [411(d)(4) Repealed. Pub. L. 99–514, title XI, § 1113(b), Oct. 22, 1986, 100 Stat. 2447]

I'd say the first thing to do is read the plan document. Do you find any provision in there that would allow an employee to waive receiving the profit sharing contribution?

RCK, does the plan document have a provision that permits the refund of the deferrals? How do you handle taxes? How do you report the refund? Does the situation ever crossover into the participant's next tax year? I'd like to hear more on your process as we discuss options with our clients. Thanks.

I thought it was time to reopen this discussion. Under the group annuity contract, the insurance company admits they are an ERISA fiduciary with this language: "ERISA requires (insurance company) to act solely in the interest of plans and participants in administering plan assets. ERISA's fiduciary responsibility provisions may not apply to administration of general account assets by (insurance company)." The question I still have is does this mean the insurance company is accepting the role of Investment Manager for the assets invested in the separate accounts? We can agree that the funds invested in the separate accounts are plan assets and the insurance company is a fiduciary by offering the investments. However, must there be a formal appointment by the Employer and acceptance by the Insurance Company for the insurance company to be identified as an Investment Manager?

Huh!? W-2 is just a form which among other items shows a) Income subject to Federal taxes [box 1], b) income subject to SS tax [box 3] and, c) income subject Medicare taxes [box 5] => using 2005 Form W-2. As far as I know, income subject to Federal taxes shown in box 1 is what is commonly referred to as W-2 wages and that's what shows up line 7 of Form 1040. So which item on (Form) W-2 is Section 3401(a) income? flosfur, your question does not address my response. There is a distinction between income subject to income tax withholding (3401(a) wages) and income included for income tax reporting (W-2 wages). All amounts included in 3401(a) wages would also be included in W-2 wages. However, certain income is exempt from income tax withholding and would not be included in 3401(a) wages, but would be included in W-2 wages (such as group term life insurance provided by the employer).

The PPA provisions are safe harbor provisions, but are not the only option available to incorporate automatic enrollment in a plan. I would follow the language in the plan document. If the proper notice is given to participants, I don't see why the anual increase could not apply.

AndyH is correct. A simplified explanation of the difference is 3401(a) wages are shown on your paycheck each pay period. This is the amount subject to tax withholding. W-2 wages are calculated for the year and include the additional amounts, if any, that do not have income tax withheld. If you ever have a difference between the total amount on your last paycheck for the year and your W-2, you'll see the difference.

I agree. Make-up deferrals should come from current pay. Otherwise, you have after-tax money in the plan and this would make distributions more difficult.

Let's hope sharrel mistyped the question and the plan has a 7 year graded vesting schedule and not a 7 year vesting cliff. Otherwise, there may be bigger problems here.

I aslo agree with Tom Poje. The plan document must have additional language that permits an employee who works 1,000 hours in 12 consecutive months to be eligibe for the plan. The plan cannot exclude employees who meet the statutory requirement.

I'm looking for help. Our investment services department wants to put together 404© notices for some clients. To meet the requirements to provide a general description of the investment objectives and risk and return characteristics of the investments they are going to lists the risks from the fund prospecus. Is this enough or should they be describing the risks as high, low moderate, etc.?

We have an employer who failed to list a part-time employee on the census form and only listed her when she became a full-time employee. In completing the 2001 plan valuation, we have determined this employee was eligible to participate in the plan in the 2000 plan year. We immediately instructed the employer to correct this defect of excluding an eligible employee under the EPCRS Self-Correction, by depositing to this employee's account a make-up contribution for 2000 plus earnings based on her 2000 compensation. The employer made the contribution in a timely manner in 2002. The questions: Because this is a money purchase plan, does the discovery of this excluded eligible employee cause the employer to now have a funding deficiency for the 2000 plan year because the required contribution (i.e., the newly discovered employee's) was not made by the funding deadline for 2000? If yes, does the fact that the employer corrected the failure under EPCRS override, waive or eliminate the funding deficiency caused by the discovery of the excluded eligible employee? Does the excise tax imposed by Code section 4971 still apply and the employer is required to file a Form 5330? If yes, does the employer file a 2000 Form 5530 to report the funding deficiency?