david shipp

I'm guessing that the ees are NHCEs since 15% of $80,000 is $12,000 which would have brought 402(g) into play. Leaving the money in the plan does leave the possibility that the operational failure is discovered on audit. The hope in that case would be that since we are dealing with NHCEs, we acknowledge the problem and redoubled efforts to avoid the problem in the future, the issue wouldn't blossom into a problem. Again, this assumes discovery on audit. (The dreaded "audit lottery"!)

I believe Kathleen is right that none of the standard refund mechanisms is available to cover the return of contributions that exceed a plan imposed limit. In this case, it appears that all affected ees are nonhighly compensated based on the fact that they contributed in excess of 15% of comp. I would either return the "excess" plus earnings, taxable in year of return, under the APRSC (if you can meet the conditions for eligibility) or simply hold on to the excess and document that you will "sin no more." I realize that the APRSC guidelines indicate that it is preferable to keep assets in the plan, but since we are talking about NHCE deferrals, I don't see how throwing addtional employer money at the plan can resolve the defect.

The first step is to determine if there is a problem. There is no requirement that the fourth company maintain a retirement plan (presumably the other plan(s) are not using a standardized prototype.) The issue is, rather, does the inclusion of the new company affect the demographics of the controlled group in such a way that the existing plan(s) no longer meet 410(B). Assuming the plan(s) still meet coverage, taking the new company into account, all is well. Note that there a number of coverage testing alternatives.

What position do service providers take when the plan sponsor says "even though we are past the grace period for nonpayment, reamortize the payment amount so that it is paid off within the original 5 yr. period from this point forward." Is the answer different if the service provider is responsible for 1099Rs on benefit payments?

It is important to note that the collateral issue for plan loans is a DOL requirement. ERISA 408(B)(1) requires that a participant loan be adequately secured (among other things) in order to avoid being a prohibited transaction. Under the DOL regs., a loan is adequately secured if it is collateralized by no more than 50% of the account balance determined immediately after the origination of the loan. As a result, subsequent decreases in account value will not affect the adequacy of the security for the initial loan, but can affect the availability of subsequent loans. If 50% of the account balance is used for collateral, the remaining 50% is available for hardship withdrawal or any other distribution permitted by the plan. See 17 BNA 1718, in which DOL's Deborah Hobbs is quoted as saying "Under the terms of the regulation, no more than 50% of the participant's vested accrued benefit may be considered as security for the loan, . . . but nothing in the regulation would preclude the remainder of the present value . . . from being available for a hardship distribution." Note, however, that some plans routinely take a 100% collateral interest in a participant's account balance even though the loan is limited to 50%. In that case, it might be difficult to argue that the "excess" account balance is available for distribution since it is part of the collateral pledged for the loan. Such loan procedures might be modified to reduce the collateral interest to 50%.

The IRS has indicated at seminars (i.e informally) that severance pay as you describe it was "earned" in prior years and thus cannot be taken into account as includible compensation for the current year.