12AX7

BG, I know you're citing from EOB, but I can't find this in Rev. Proc. 2008-50. This is what I come up with from the Rev. Proc: (5) Failure to implement an employee election. (a) Missed opportunity for elective deferrals. For eligible employees who filed elections to make elective deferrals under the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the “missed deferral opportunity.” The missed deferral opportunity is equal to 50% of the employee’s “missed deferral.” The missed deferral is determined by multiplying the employee’s elected deferral percentage by the employee’s compensation. If the employee elected a dollar amount for an elective deferral, the missed deferral would be the specified dollar amount. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. I understand that HR perhaps did not receive the deferral election, but this is the closest I came up with.

Theere's some conflicting terms in the OP's question. It appears the plan is to be merged, not terminated. Depending of the type of SH in effect, termination may occur for certain reasons. Plan merger is another beast. Is the surviving plan a SH?

Jim, I'm inclined to think you're way if I could find it somewhere in the code, regs or elsewhere. The closest I can come is in Rev. Proc. 2008-50 regarding excess deferrals in a SEP or SIMPLE IRA Plan: (5) Treatment of Excess Amounts under a SEP or a SIMPLE IRA Plan. (a) Distribution of Excess Amounts. For purposes of section 6.10, an Excess Amount is an amount contributed on behalf of an employee that is in excess of an employee’s benefit under the plan, or an elective deferral in excess of the limitations of §§ 402(g) or 408(k)(6)(A)(iii). If an Excess Amount is attributable to elective deferrals, the Plan Sponsor may effect distribution of the Excess Amount, adjusted for earnings through the date of correction, to the affected participant. The amount distributed to the affected participant is includible in gross income in the year of distribution. The distribution is reported on Form 1099-R for the year of distribution with respect to each participant receiving the distribution. In addition, the Plan Sponsor must inform affected participants that the distribution of an Excess Amount is not eligible for favorable tax treatment accorded to distributions from a SEP or a SIMPLE IRA Plan (and, specifically, is not eligible for tax-free rollover). If the Excess Amount is attributable to employer contributions, the Plan Sponsor may effect distribution of the employer Excess Amount, adjusted for earnings through the date of correction, to the Plan Sponsor. The amount distributed to the Plan Sponsor is not includible in the gross income of the affected participant. The Plan Sponsor is not entitled to a deduction for such employer Excess Amount. The distribution is reported on Form 1099-R issued to the participant indicating the taxable amount as zero. Is is reasonable to treat excess amounts in a SIMPLE (k) the same way?

Anyone? Gary....help!

GMK - the match is discretionary, and the employer wants no allocations made for 2011. ETK - I'm more inclined to agree with you because that would be the conservative approach and no one could argue that a benefit was taken away.

ETK - your answer was what I was about to deliver to the client, had I not thought more about this (maybe too much more). I see your point, but can you argue that even though a participant has already met the requirements for a match, this is still a discretionary component of the plan. If the employer does not wish to allocate a match for the plan year, is there a match to technically reduce by the forfeiture? I'm more inclined to agree with you since these amounts were scheduled to become benefits for 2011, had the employer decided to make a match for the year. But, is there a way out of this and to use the forfeiture for expenses when no match is declared for the year?

401 (k) Plan currently uses forfeiture to reduce match contributions (discretionary match) in the plan year following the year when the forfeiture takes place. Forfeitures are not used to pay plan expenses. Can the plan be amended currently to use the forfeitures to pay plan expenses rather than allocate for the current plan year? There's about $2,500 in forfeiture that would have been available for 2011 (from 2010 distributions) and an additional $2,500 in forfeiture that occurred from 2011 distributions that would have been available in 2012. Is the use of this forfeiture considered a cut-back in benefit if used to pay plan expenses? The match is discretionary and employer does not wish to provide a match in 2011 and 2012. Thanks.

The catch-up would apply when some "limit" was reached during the plan year. When the contributions were made would determine the tax year it's applicable to. Is it conceivable that you could have up to $11,000 in catch-up contributions for a plan year (e.g. p/y/e 6/30/11)? Not according to what you are saying ETK. Can the determination be made at the end of the plan year 6/30/11 for the two tax years?

I would also say that a plan limit could cause a contribution to classified as a catch-up, but I would perhaps argue that a $0.0 or 0.0% HCE limit would not permit an HCE to defer only catch-up contributions. I think the HCE would need to have some ability to defer before a catch-up is permitted. Others will certainly argue differently on this approach. If I were to use this type of method, I would allow an HCE to defer a marginal amount or percentage by plan definition. Any amounts in excess of the plan limit would certainly then be classified as catch-up. I'm not addressing any other plan issues here such as TH, 415, etc.

I've taken over a SIMPLE (k) Plan and the deferrals for two participants have exceeded the maximum including catch-up contributions for the 2008, 2009 and 2010 plan years. When the excess deferrals get removed from the plan, are these amounts only subject to taxation in 2011 (if distributed this year)? In other words, is there any other penalty for late removal of the excess deferrals? Thanks.

I took away something good from this as well. Thanks !

My Volume Submitter Adoption Agreement does not permit the use of any period (other than annual) if the permitted disparity allocation election is made. I can't see how the rules of PD can be followed in this manner without a possible true up at the end of the plan year. Check your document language again. I'd be surprised if it were missing similar language to the one I have.

I agree that HCE status is for the entire plan year. Somehow, I don't think marriages get planned around HCE determinations so unfortunately, the plan will have to deal with the ineligible contributions.

If you file a Form 5500-EZ, this information is not in public records through brightscope of similar websites. Form 5500 and 5500-SF as you can see are public record and have always been. The internet just makes it easier to get access to this information.

I would suggest getting a copy of the current Plan Document. You are entitled to receive a copy of this document under ERISA law. Althought the SPD should reveal this type of information, I've seen many examples that are woefully inadequate in disclosing which participants are entitled to certain benefits. If you are unsure as to how the Plan Document language translates into benefits for certain groups of participants, then ask your employer, or perhaps they will allow you to speak with their plan consultant. We cannot interpret your plan or determine how it should operate within the contexts of your postings, but you have received answers to your questions. It is possible to exclude certain groups of participants from benefits in the plan and be "legal" within the guidelines of all the regulations. It may not seem fair, but it is entirely possible to operate a plan this way. I hope you find this information helpful. Feel free to ask us questions, and we will try to help you understand this concept in general terms.

My bad as I'm usually more detailed. The client wants to exclude bonuses, so it's not a SH definition under 414(s). I normally would know the answer as this applies for employer contributions, but with salary deferrals, would the employer have the right to take away future deferrals without a participant's change in election?

Traditional 401 (k) Plan. Is it possible to add a comp exclusion mid-year? The participants would have the ability to change their deferral elections, but the client doesn't want to bother with the process of collecting enrollment changes. Can this be done? Thanks.

What BG describes is covered in EPCRS.

It's amazing that the employee was not aware of the missing deductions. There should be some type of rule in EPCRS where if the employee does not discover or document that a deferral is missing after a number of years, the employer is not responsible for the total correction provided that this type of error is isolated. For example the employer would only have to correct X number of current and prior years. I would imagine the IRS would not want any part of this, but at some point the employee has to accept some responsibility for not taking an active interest in their plan participation. A controversial idea to say to the least.

If it's any consolation, you have an auto-extension for the 2009-10 SSA forms.

At that level, I can understand your concern.

Austin, why would you not be able to sign a Form 5558? Are you not an EA for this purpose?

Capt. Mike, if it's any consolation, you can establish a SEP plan up to the date of the employer's tax filing due date. The contributions would intially be pre-tax, but could be converted at a later time to Roth.

How about a non-related third party purchase of the home, and then your client purchases the land from that party? Substance over form perhaps?

When I run this scenario (assuming Sole Prop) with $24,000 pre-plan comp, I get a maximum PS contribution of $2,902.22, in addition to the $22,000 (k) cotribution. I'm not sure how these results were generated, but it's $902.22 above the $24,000 starting figure. I am using the Relius Proposal system and don't think these results are correct based on how I coded the system. A safer approach for me is to perhaps calculate the maximum PS contribution, then fill up the rest of the deduction with 401 (k), however technically the election for Sole Props are to be in effect by the end of the plan year, but you may say that 415 has reduced the dollar amount of the (k) election. With a C Corp, you should not have a problem with the $22,000 (k) contribution, plus a $6,000 PS contribuiton, assuming plan comp of $24,000.