davef

There have been previous threads talking about what to do when an employee has been permitted to make elective deferrals before meeting the eligibility requirements. The concensus of practitioners seems to say that you distribute the deferrals plus earnings back to the employee. Up until recently, you didn't need to worry about losses. If there are investment losses on the amounts improperly deferred, should you adjust the distribution to take into account losses? Same question regarding excess 415 contributions. The regs (1.415-6(B)(6)(iv)) only mention distributing excess deferrals and gains. Should deferrals that are distributed in order to satisfy 415© be adjusted for losses? We are getting conflicting opinions from document and software providers. Any input would be helpful.

Sorry for any confusion. I was just trying to explain how the tax-exempt status of credit unions is derived. It differs depending on whether the CU has a federal or state charter. To my knowledge, all CUs are considered tax-exempt and are eligible to sponsor 457 plans. I would imagine that many of the California CUs you mentioned have a federal charter (For example, if the CU's name is "[name]Federal Credit Union" it has a federal charer.) That said, there has been a recent trend where some CUs have converted to mutual savings banks. If this happens, they are no longer tax-exempt, and no longer eligible to sponsor 457 plans.

Federally chartered credit unions are organized under the Federal Credit Union Act and are considered instrumentalities of the United States. As such, they are tax-exempt entities under Code Sec. 501©(1). State chartered credit unions are tax-exempt under Code Sec. 501©(14). The issue you raise applies more to federal CUs than state CUs. It is my understanding that federal CUs are considered as tax-exempt entities (rather than governmental employers) for purposes of maintaining 457 plans and 401(k) plans. There is not much guidance on this point, but you may want to take a look at PLR 9550030 or PLR 9749014 or Rev. Rul. 89-49. Hope this helps.

When I referred to the 10% withholding rule, I meant the rule that applies to the percent that needs to be withheld on distributions that aren't subject to 20% mandatory withholding (such as an ADP refund). I wasn't referring to the early distribution penalty. Sorry if I wasn't clear. But I agree with your point that the early distribution tax does not apply.

If an ADP/ACP failure is corrected after March 15, there is a requirement to withhold taxes on the distributions. Since these amounts are not eligible for rollover treatment, they are subject to the 10% withholding rules. What are TPAs, etc. doing with respect to these rules? For example, are participants actually being given the election (via Form W-4P) to have withholding apply before the refund is made. Is withholding being done automatically, without an election by the participant? Is withholding being done regardless of the size of the refund? There is a $200 de minimis exception under the direct rollover withholding rules, but there does not appear to be a similar provision under the 10% withholding rules. Any input would be helpful.

I was at a meeting last year which featured some of the Covington people and they gave out their phone numbers, which are below. Hopefully, one of these persons can help you out or at least point you in the right direction. Bruce Settel (I think he may be in charge of the whole operation) is at 513/263-3610 Judy Bailey is at 513/263-3579 (don't know what her title is) Bob Bell is at 513/263-3567 (he is in charge of quality assurance -- no oxymoron comments please)

Take a look at Rev. Rul. 85-6. It deals with terminating DB plans with subsidized early retirement provisions and related 411(d)(6) issues.

I would argue that this is not really a forfeiture because the participant was never entitled to the money to begin with. These are not the same a nonvested account balances. Any amounts that were previously "allocated" to someone who quits before completing 1,000 hours would be used to reduce future employer contributions for the year. I don't believe that plan provisions on the timing of forfeitures or how forfeitures are used would be relevant in this instance.

I've seen plans that do this and it turns into a communications issue at the end of the year, especially if these amounts show up on quarterly statements. It's important to clearly mention on the statements that the allocations are conditioned upon completing 1000 hours. It seems to me that you run into less problems if the money is deposited and invested by the employer during the year, but not actually allocated until year-end. For example, if an employee quits without completing 1000 hours and requests a distribution, someone needs to know to back out the "allocations" before making the payment. If allocations are not made until the end of the year, you don't have this problem.

For starters, I would look at the LLC operating agreement. It will usually specify the interest percentage that each member has.

For some other insights on this issue, you may want to take a look at Derrin Watson's "Whose the Employer Q&A" column on BenefitsLink (start with Q&As 4, 24 and 42).

I'm not sure there is a real easy way to quickly find the rate. But they are published in the Internal Revenue Bulletin quarterly (www.irs.ustreas.gov/ind_info/bullet.html). The most recent listing was in Rev. Rul. 2000-42, which is in IRB 2000-39. That Rev. Rul. also lists the underpayment rates for prior calendar quarters. FYI, the rate was 8% for the 1stQ of 2000 and 9% for the last 3Qs. Hope this helps.

I've always been of the understanding that no discrimination testing (401(a)(4), 410(B), 414(s), ADP/ACP) is required for plans with only HCEs. 415 would always be a concern, as well as top-heavy testing.

I have some articles I can fax to you if give me your number.

It's my understanding that the only in-service distributions permitted under a MP plan would be for after-tax employee contributions. Also, if the person is working past NRD, I believe that employer contributions can be withdrawn.

Couldn't this problem be avoided if the employer waited until the end of the year to make its profit sharing contribution? If the profit sharing contribution is not discretionary, perhaps it should be. You indicated that the document is silent on the 412/415 issue. Doesn't it cover what happens if there is a 415 violation and two DC plans are maintained. There is normally some language that coordinates which plan's contribution gets cut back. That said, in my opinion the rules under 415 will override any minimum funding requirements under 412, since meeting 415 is a qualification requirement, whereas 412 isn't. Failure to satisfy the minimum funding requirements results in an excise tax, but not possible disqualification. Where the 415 limit results in the reduction of the amount to be allocated under a money purchase plan, I would argue that the 415 limit IS the minimum funding limit. If the contribution formulas under both plans are that generous, it sounds like the employer may continually run into this problem. I would not recommend that the employer regularly violate 415 and then correct by putting amounts in suspense (pursuant to Reg. 1.415-6 methods) since those correction procedures are supposed to be used only when excess annual additions are the result of the allocation of forfeitures, reasonable errors in estimating compensation, etc. It doesn't sound like the 415 violations would be caused by those reasons.

IRC401, I recently encountered the same issue, and advised the employer to allow the person to defer a portion of the backpay award on the grounds that, had it been paid originally, the employee could have deferred at that time. I don't know if that is the correct approach, but it seems to make some sense. (I could also argue that the deferral should not be allowed, since the person is no longer an active employee.) In this case, we limited the person to $10,500, although perhaps one could take an agressive position and allow the person to defer more if the backpay award spanned multiple years. You also run into ADP testing issues -- do you re-run prior years tests or count the deferral in the current year? Also, there may be payroll issues on how the backpay award is paid to the person, net of the deferral. Finally, the employer needs to know that this is not a black and white issue and that there could be risks attached to this approach.

For what it's worth, there was an article by the Groom Group on electronic signatures in the Benefits Buzz on 7/20. It raised more issues than it answered, but at least someone has looked at it.

Has anyone given any thoughts or seen any articles on how the new law allowing electronic signatures will apply to various employee/spouse signature requirements under retirement plans?

FYI, the IRS addressed this issue in Q&As that it answered at the 1999 ASPA meeting. Here is their answer under Q&A 42: "Refunding from the plan is NOT an acceptable APRSC solution, although it might work under VCR. The money should probably be forfeited and used in whatever way other forfeitures are used, with the employee being made whole outside the plan. However, we strongly argue that the 'mistake of fact' argument does not apply to these contributions!" Food for thought.

In the book "Saving Your Qualified Plan" (published by CCH), there is a list of previously approved VCR requests on a variety of compliance issues. Regarding the failure to cease deferrals after a hardship withdrawal, the IRS approved the immediate suspension of deferrals for 12 months for active employees; nothing was done for terminated employees, since their deferrals had already ceased. In other words, nothing was done to go back and refund deferrals that should not have been made -- the correction was prospective.

In a recent letter ruling (9850011) dealing with the tax treatment of health benefits to domestic partners, the IRS cited the "Defense of Marriage Act" as authority for defining a spouse as "a person of the opposite sex who is a husband or a wife." This is contrary to the historical position that marital status is determined by state law. In that ruling, the IRS stated that "an employee's same-sex domestic partner does not qualify as the 'spouse' of the employee for purposes of the Code." I realize that PLRs can't be cited as precedent, but it looks like the IRS has found a way to not recognize domestic partners as spouses, regardless of state law.

My only concern would be the length of time between the freeze and the unfreeze. The longer, the better. Otherwise it looks like the employer is just trying to get around the minimum funding rules for a few years. Could the employer accomplish the same thing by converting the plan to a discretionary PS plan? Or is there a desire for a higher deductible limit?

If a former employee receives a back pay award under ADEA, can that person defer a portion of the award into the former employer's 401(k) plan? (Apparently, the person talked to someone at the IRS who said that the deferral could be made as long as the award related to lost wages.) The document defines "compensation" as that which is paid to an employee. Do we treat this person as if they were an employee, since they would have been able to defer if not for the fact they were terminated in violation of ADEA?

I would think that satisfying any nondiscrimination rules would take priority over the minimum funding requirements. In order to satisfy 401(a)(4), you need to pass 401(m). Per IRC 412, the minimum funding rules only apply if the plan is qualified. So, IMO the minimum funding rules would apply only after making any ADP/ACP adjustments. You could have similar issues in a MP thrift plan that has an employer match.