J Simmons

Thank you, Bird and Larry. I appreciate your input.

There are documents setting up the new account. The EE did not understand the difference between a 401k PSP FBO account and an IRA. The documents were for an IRA. Once set up, the EE contacted the ER's CPA and gave the CPA the account number for the new account (the inadvertent IRA), without providing the CPA any paperwork re the account--just the name of the brokerage house and the number of the new account (the inadvertent IRA). From that, and knowing the EE's name, the CPA prepared a transfer authorization that listed the title on the new account as "XYZ Corp 401k PSP FBO Jane Doe". This transfer authorization, as so filled out, was then presented to the lay trustees, who signed it. Then it was sent to the old brokerage that forwarded the funds to the new brokerage, with the title and account designation. The new brokerage deposited the received funds into that new account, i.e. into the inadvertent IRA. The EE, the ER and the lay trustees are all in agreement and willing to sign whatever to effect that change in designation on the account. No. No f5500 has yet been due as this new account was set up and the transfer occurred in early 2009 (calendar plan year). No. ***** Thanks, Larry. Do you think with these added facts that VCP is necessary, or self-correction via changing the designation on the new account?

kimb, Did the IRS employee put this response in writing, sign it and send it to you?

401k PSP gives EEs self direction opportunity, including choice of brokerage house where a plan account will hold an EE's benefits. EE has a plan account at one brokerage house, wants to transfer to having at another one. EE calls and sets up the account, distinctly recalling that he told the new brokerage house rep that it was a 401k FBO account that was what was needed. New brokerage house sends out confirmation of establishment and number for new account, but as an IRA. Lay trustees don't realize the difference, and sign a transfer form for old brokerage to transfer the assets to new brokerage house, giving the number of the new account (i.e., the IRA number), but specifying in the transfer form that the new account is a 401k Trust FBO account for this EE. The money transfers. When the ER next makes a company contribution, the share allocable to the EE is sent to new brokerage house, which refuses the contribution saying it exceeds the annual amount that can be added to an IRA. That's when EE, ER and lay trustees realize that something has gone wrong. Can this isolated, one time problem with one EE be corrected by self correction or does this require VCP submission? Does anyone know off the top?

Has anyone made an EGTRRA DL application, just provided the GUST II restatment documents (and opinion or advisory letter) and subsequent amendments and/or restatements and had the IRS reviewers request older documents for the plan?

401k plan has hardship withdrawals per the regulatory safe harbors. EE presents a signed contract to purchase a house from her recently divorced ex-husband, which called for ex-husband to carry the contract for the entire purchase price. EE asked for a hardship withdrawal to make the "down payment" so she could buy the house. The request was rejected. EE and ex-husband agree to tear up that contract and sign a new one for the same purchase price, but with a down payment and ex-husband just carrying the balance. EE submits the new contract, asking for a hardship withdrawal of the amount stated in the new contract for a down payment. Is there a qualifying hardship? Or, since she had an enforceable right under the first contract to acquire the house with no down payment, is the tearing up of that contract and signing of a new one a bootstrap effort that the plan administrator should reject?

I don't know that you can 'correct' it in the sense that the EPCRS specifies corrections for 401(a) plan problems. That is, there is not a comparable for cafeteria plan problems to the EPCRS for qualified retirement plan problems. This failure could jeopardize the tax free status for the plan year of all benefits under the cafeteria plan. However, if you thought that taking some remedial action is better than just hoping the problem is not picked up on audit, then you might consider some of the same fix-it principles from the EPCRS. The first of which is to take steps that will put the employees in the same (or closest possible) situation that they would have been but for the error. You could perhaps hold out of their pay for December the amount that would have been over the 4-5 months since it was stopped in August, and get their insurance coverage reinstated. Both will face problems. There might not be enough December pay to go to make up for that much in insurance premiums. Also, you'd want to make sure the insurance company is on board with reinstating the insurance coverage retroactively. Not much of an upside to the insurance company to do so, but a big downside if there have been significant medical expenses incurred or medical conditions arise.

If I was one of the four individuals named as 'trustees' of the plan in its document, but the investment company is the trustee not only per its separate trust agreement but in practice, then I'd want the plan document amended to remove me as a 'trustee'. I see no advantage (only potential liability) to being a 'trustee in name only'. Also, the plan document and the separate trust agreement should be amended to the extent to be consistent one with the other, including the plan document's reference to whom is the trustee.

Off the top, I think you have to ACP test the match because depending on the elective deferrals (no need to ADP since safe harbored by the 3%-of-pay contribution), the match could be skewed in favor of the HCEs--and then there is, as you say, the benefit accrual requirements that could do or add to the same skewing.

Thanks, Mike. It might be Treas Reg § 1.410(b)-6(d)(2) rather than IRC § 414(s) that excludes the union earnings if CBA employees are excluded: Since you cannot count the union hours, it seems logical you could not count the compensation for those hours either.

Resurrecting a thread from the first year of BenefitsLink... Does anyone have any further insight on this situation? Is there any way to include in the ER's plan just the owner/CBA EEs and exclude all the non-owner/CBA EEs? I doubt it but running into this situation for the first time, I am hoping there is some obscure rule that allows such a too-good-to-be-true scenario.

Well, I'd expect many micro employers--tired of paying for document amendments and restatements, Forms 5500, etc. and having to fix operational errors when discovered--to dump their plans. For them it is, as you point out, not a cost of doing business. Micro employers can get employees without having a plan. So for these employers, a plan is, also as you say, entirely about the shelter. When Congress/IRS pops a few more gaping holes in the roof of that shelter, time to move on.

Or another writing signed by the vendor and employee indicating that the 403b contract would only be dealt with in a way consistent with the ER's 1.1.09 403b plan and/or take instructions regarding the 403b contract from the plan administrator

Not having seen all the provisions in the documents, this appears to be talking about the time between a distribution triggering event occurring and when, administratively, the payout will occur. This seems to be going to the precursor issue of whether in-service requests are allowed, i.e. a request alone is a distribution triggering event. So it would look to me like the AA wins out over the 403b contract if the vendor and EE at some point agreed to subordinate the 403b contract to the ER's 1.1.09 403b plan.

It depends on what the 403b contract between the vendor and EE provides, and whether the vendor and EE agreed to subjugate that 403b contract to the ER's 1.1.09 403b plan. 'have to amend'? If the vendor and EE agreed to subjugate the 403b contract to the ER's 1.1.09 403b plan, the vendor and EE essentially amended out of the 403b contract provisions, like in-service withdrawals, that are not consistent with the ER's 1.1.09 403b plan. The ER may, but would not have to, amend its 1.1.09 403b plan to allow in-service withdrawals. I think the rationale is generally that all tax-qualified retirement savings are ineligible for in-service distributions before retirement age. To make sure they are there and available in retirement, when the EE is no longer working (presumably). An exception was given to profit sharing contributions, since they are a sharing of the ER's profits as much as retirement savings.

Hi, Tom, Sad to see the pix of you in the pilgrim outfit gone for another year. Earlier this year, I became involved in an audit by the IRS of a plan that had language like the corbel prototype (not its VS) but after 1 year, the ER stopped giving the annual SH notice or making the SH contribution. Several years passed, and the IRS audited claiming that the SH contribution + imputed earnings must be contributed to the plan, since the plan document calls for that. Looking over the half dozen ensuing years, the ADP and ACP tests were not run (and failures not corrected). We've run those tests, and only a couple fail, and by very close margins--a very small corrective contribution would do the trick. With the auditor, I raised the example from the IRS website that you included a link to. Basically, the auditor and his manager have dissed that example. The audit process is coming to a head and I should know more about how it shakes out very soon.

I think you are correct that the return of the "SH" match in that circumstance is not an allowable correction.

How do you do that, Larry? By passing the ADP and ACP tests?

Hey, Larry, The ADP and ACP tests would apply to the plan year, because all the conditions for the plan year to be safe harbored have not been satisfied. I.e., no safe harbor notice for the plan year. If the plan's safe harbor language provides that the ER will make a contribution (3%-of-pay or the match) and does not specify that it is dependent on the safe harbor notice having been timely given, it is arguable that the plan language obligates the ER to make that contribution even for a year that the safe harbor notice was not given and thus the ADP and ACP tests apply. Depending on how the safe harbor provisions in the plan read, the contribution might or might not be required for a year that the notice is not given. ERISA requires that the plan be applied as written. But if the provision reads in a way that the contribution is not required for a plan year for which the notice is not given, then I do not think it has to be made.

But the IRS national office gave out opinion letters on 3/31/2008 to EGTRRA prototype 401k plans that included language that the plan is only safe harbored, and thus the 3% of pay or match contribution is only required to be made for a year as to which the yearly safe harbor notice was provided. I agree that to be safe harbored out of the ADP and/or ACP testing for a year, both (a) the plan documents must provide for such, and (b) a timely notice was given. You can't get to a safe harbor year just by giving a notice (#b) for a plan without the necessary (#a) language. The language described in the paragraph above satisfies the (#a) requirement. The question really is what happens in a plan year for which the plan's governing documents have (#a) language, but for which no notice (#b) is given? Obviously, the plan cannot avail itself of the safe harbor from ADP and ACP testing. Those tests will apply. For such a year, does the plan have to make a contribution per its 'safe harbor' terms? If the (#a) language in the plan document says such will be made, with no contingency depending on whether the notice (#b) is given, then yes, under ERISA the contribution must be made. That's because that's what the plan says. However, if the plan says that the plan will only be safe harbored and the necessary contribution be made for a year as to which the notice (#b) is timely given, then that contingency is not satisfied if the notice (#b) is not given and the ERISA rule that the plan document be followed is not violated because no safe harbor contribution is made. I think this approach is entirely consistent with the preamble quoted and ASPPA Q&A. I think that those provisions are aimed at explaining that you cannot have the language (#a), timely give a notice (#b), and then choose not to make the contribution and instead do ADP/ACP testing. This reading appears to be the only reconciliation of such provisions with the fact that the National Office keeps issuing opinion letters for prototypes with language in the plan's governing documents as described in the first paragraph of this post.

In my experience, I had two ERs/clients bag their x-tested plans when the minimum gateway requirement was added and they could no longer just cross-test off of the TH minimum.

Welcome to the outed world. Didn't quite see your post as very argumentative, though--just a point of view.

When you get to the first listing of types of entity, instead of picking "Trust", pick "Other". The Other list includes "Employer Plan (401K, Money Purchase Pension Plan, etc.)". That's the one to pick.

If you look at it from the business owner's perspective, if I don't have a plan and make any contributions to it, I can do IRAs and with the rest of what I might have contributed to a plan, I get to keep all of it after I've paid the income tax. That is, in the absence of a plan, the money (what remains after tax) is all the owner's anyway. Looking at it from the employee retirement plan perspective, why should any employee be treated any differently than any other? Cross-testing has actually been a good balance struck between these two perspectives. For the owner to get, say, 20% of pay accruals on a tax advantaged basis, he must fund in 5% of pay for the other employees. You take that away, and I would suspect as pmacduff observed, many micro employers will stop their plans altogether, and simply keep what's leftover after income taxation of the amount that otherwise would have been contributed. That will further burden and strain the Social Security system.

Never participate in backdating. Under certain circumstances, actions can be considered to have a retroactive effective date, but when dating a signature it should always be the date that the document was in fact signed. For example, many executives and companies that participated in the backdating of stock options have, in recent years, been caught and prosecuted.