Rob P

A client has decided to terminate one of their two pension plans. They are not merging assets (403b and a 401a). An active employee who is over age 70.5 has been deferring receipt of their RMD. That employee has elected to rollover their benefit from the terminated plan into the continuing plan. We are processing as a rollover and will be issuing a 1099. Question: Is an RMD required to be distributed from the terminating plan prior to the rollover? If the participant were to rollover to an IRA I would say the RMD is required, but I cannot find if there are any exceptions since it’s the same sponsor. Any input is appreciated.

In late 2014 a 401(k) plan incorrectly allowed a new hire to immediately start deferring to the plan. Unfortunately the plan has a 1-YOS eligibility requirement. The sponsor's new payroll company made the mistake (not knowingly done by sponsor). The employee is not a 5% owner and did not earn enough to be deemed an HCE for 2015. However, based on their current rate of pay they will be an HCE for 2016 (will most likely earn more than $120K in ’15). Would a corrective amendment under SCP be allowable since the only affected employee may become an HCE? I believe an amendment under SCP is only allowable if it affects “mainly” NHCEs. The participant was definitely an NHCE for '14 and '15. Any thoughts are appreciated.

Thanks for clarifying. Hopefully this thread will be helpful to others. Sometimes when I try to over simplify I may not be as clear as I should. I generally get accused of being too detailed and wording. Truly appreciate the help and comments from you and John.

Sorry if I was not clear. Mike, there is there is no doubt in my mind that you know this stuff better than I do, and I am happy that you took the time to help out. In your example, you are correct and the rate group would fail. How it was explained to me was as follows: Example 1 (no ABT, reach rate group must pass by 70%): Partner/Staff Plan: 3 HCEs and 7 NHCEs Associate Plan: 2 HCEs and 3 NHCEs 410(b) ratio test would be [(7/10)/(3/5)]=117% and [(3/10)/(2/5)]=75%, as such each pass coverage. No requirement to do an ABT. So if I assume each HCE is in there own rate group in the GT an example of one rate group with the highest EBAR would be [(2/10)/(1/5)]=100% , in this rate group I would need at least 2 NHCEs with an EBAR equal to or greater than the HCE to pass at 70%. Example 2 (use ABT, so I may use mid-point instead of 70%): Partner/Staff Plan: 3 HCEs and 7 NHCEs Associate Plan: 2 HCEs and 3 NHCEs My ratio tests are greater than the SH%, and assume I pass the ABT. The concentration is 10/15 = 66%. SH%=45.5% and NSH%=35.50%. Therefore, the mid-point is 40.5%. Using an example of the rate group for the HCE with the highest EBAR, I would need to have only 1 NHCE equal to or greater than the HCE to pass this rate group [(1/10)/(1/5)]=50%. Comments: On a side note, my original question was if I needed to aggregate the Associate Plan into the denominator; which was confirmed that you do. The ADP test comment was something that this attorney said to me so I thought I would just reiterate; if you aggregate for coverage (ABT) you need to aggregate for ADP. Also, thank you for confirming your understanding of the TH minimum requirements. Thanks for your comments.

Hi John, Thank you for responding. Apparently this was much more of an issue than I originally thought. I guess that’s why very few people felt comfortable responding. In the interim, I contacted a prominent ERISA attorney (a regular ASPPA speaker) and he was kind enough to go over the issues with me. This is what I found out: 1) If each plan satisfies the 410(b) ratio percentage test separately, then each plan needs to have a separate ADP test. Also, the Partner/Staff plan would be General tested (GT) and only count the employer contributions of the Partner/Staff plan in the numerators but include the Associate plan in the denominators. The kicker is that each rate group would need to pass at 70%, not the mid-point. 2) If we wanted to use the mid-point in the GT we would need to pass an Average Benefits test (ABT). Since the ABT is an aggregated test, that would also require us to pass one aggregated ADP test. However, if we pass the ABT, in the GT each rate group would only need to pass by the mid-point. As above, in the GT we would only count the employer contributions of the Partner/Staff plan in the numerators but include the Associate plan in the denominator. I guess the bottom line is that regardless of how it's tested, the denominators in each rate group would include all plans of the employer. His conclusion was that it did not matter if we aggregate for ABT (and a single ADP test). Since there is no key employee in the Associate plan, there would be no top heavy contribution requirement to that plan. If I have misspoken I hope someone will correct me. Thanks again.

I know this has been discussed a few times, but I am hoping to just get a simply clarification. The situation is that we have a law firm that sponsors two plans. One plan includes only partners and staff. The second plan includes only associates. The partner/staff plan allows for both 401(k) deferrals and ER ps contributions (new comp allocation). The associate plan only allows 401(k) deferrals. The plans each satisfy the 410(b) ratio test on their own. Since aggregation is not required the associates have not been getting the top-heavy minimum. It is my understanding that we must include both plans in the average benefits test, and if passed we get to use the mid-point for rate group testing. Questions: When the general test is performed must both plans be included in determining whether each rate group passes? More specifically, do associates get included in the denominator for each rate group? I understand the numerator only includes those participants actually receiving a ps contribution. I just want to make sure that I am not including the associates improperly in any tests that would deem this aggregation in some way and therefore require the associates to get a TH minimum. In this case, the inclusion of associates would greatly benefit the GT. Any input is appreciated.

We need to file a new DB Cash Balance Plan for an IRS Determination Letter (with no Demos) using Form 5300. The plan is under 100 participants with at least 1 NHCE. Is this plan exempt from the $2,500 user fee? I just re-read IRS Notice 2011-86 and it looks like it is exempt from the fee, but in the back of my mind I am thinking the exemptions ended with the EGTRRA remedial amendment period last year. However, I see the exemption option is still on the new Form 8717 (rev. 2-2013). Thanks.

Thanks. I am sure it would not be a high priority if I started to lobby my local congressman to get the law changed. Still is very frustrating, but I can always dream.

I hate to say it but I am glad someone else is in this boat too. If it was just limited to us, I think it would have been a more difficult fight. I was confident we would prevail, but I figured it would still be painful. Note that I followed Andy’s advice and contacted ASPPA yesterday. I spoke with someone on their government affairs staff. They are going to look into the problem, but we were the first they’d heard of this. Personally, I think the whole extension process is asinine anyway. If this is supposedly an automatic approval process, just do away with the whole thing and make all 5500 due 9½ months after the close of the PY.

The clients are receiving the generic extension confirmation letters from the IRS as if nothing is wrong, so there is no reply area. Only the standard customer service telephone numbers and website reference are on the correspondence. I tried calling several different IRS numbers but they are all closed. I am assuming we can get this straighten out but it is not something I really wanted to deal with on October 14th. I am an ASPPA member and may contact them for advice. Thanks

We filed about 15 extensions back in August for our clients with 1/31/2013 plan year ends. The extensions were correctly filed showing the plan year as 1/31/2013 with the requested extension to 11/15/2013. We just heard from three of these clients who received extension confirmations (one just got it in the mail today). The confirmation is only granting the extension to 10/15/2013 and they are incorrectly showing the plan year end as 12/31/2012. Has anyone else been having this problem? Does anyone know of an IRS office that is actually open that we can call? Any input is appreciated.

Thanks. I have used that approach for a few small plans in the past, but technically you cannot file a final 5500 showing a liability (or payable). Plus, in this case the auditor will not signoff, which means we need to prepare a 2013 5500. At this point I am inclined to file a 2013 marked off as final and show zero participants at both the beginning and end of years.

A large calendar year DB plan (150 participants) terminated and the sponsor purchased annuities covering 100% of the plan’s benefits in December 2012. After the purchase of annuities the plan’s trust balance was $0.00. Of course, a week later a $200 dividend posted to the trust and was not dealt with until June 2013 when it was used to pay plan fees (balance in trust as of 12/31/2012 was $200). We have no problem with preparing a 2013 5500, but I am not sure how we should be reporting the participant counts. I would think that technically the plan had no participants or benefit liabilities since the annuities were purchased. Question – is it reasonable or even allowable to file a Form 5500 with a 0 participant count as of 12/31/2012 and still have assets in the plan? Going with the same thought, could we than file a final 5500-SF for 2013 showing zero participant counts as of 01/01/2013? Any thoughts or suggestions are appreciated.

Sorry, no insult intended. I guess it’s true when they say you’re as old as you feel. And after doing 8 hours of yard work yesterday, I feel elderly myself.

Thanks everyone for the comments, they are truly appreciated. Just as a follow-up on withholding. I agree that RMDs are not subject to the 20% withholding, but it is my understanding that distributions not eligible for rollover are subject to 10% withholding, unless the participant specifies not to withhold in writing. We usually give our participant’s a W4-P for good measure.

Good point. It's very nice elderly participant. I am looking for the least complicated approach for them.

This is great stuff and exactly what I was looking for. It is definitely an offset distribution since the participant is actually retiring and leaving the firm. The deemed distribution caveat is interesting because I would have thought it does not matter since the IRS is picking up the taxes anyway. Thanks!!

Hopefully and easy one, but I have never heard of this. We have a non-owner active participant who is age 74 with an outstanding loan balance in a 401(k) plan. The participant is terminating and wants to rollover their account to an IRA. They are aware that their 2013 RMD must be processed from their account prior to the rollover. Question: Can we offset the actual RMD amount by the loan that will default? It seems logically that you could since the tax consequences net to the same place, but we all know that logic doesn’t always rule. Example: 2013 RMD is $6000 and participant has a $5000 loan balance that will default upon their termination in 2013. As such, I would give them a $1000 distribution and 1099 them for the entire $6000 with a tax code 7. Then allow her to rollover the remaining account to an IRA. Thanks.

So we must use independent test ages? I will definitely have the employer amend the DC to 65 but I am stuck with two different testing ages for now? That may hurt a little.

Do we have a problem or am I just over thinking this? We are aggregating a PS and an offset DB for testing purposes under 401(a)(4). The PS normal retirement age defined in the document is 55 and the DB normal retirement age is 65. The plan covers the same participants. For testing purposes I am assuming this is one plan with a non-uniform normal retirement age. As such, under 1.401(a)(4)-12 I am assuming that I must use a Testing Age of 65. Is this correct? What worries me is that I have the same participants with multiple retirement ages and that doesn’t seem to be specifically addressed.Assuming (1) above is correct and I must test at 65. Are there any special adjustments that I am supposed to make to the PS contributions to test at 65? I would assume that it is simply the EBAR calculation at 65 using interest to 65 and an age 65 APR.Note that I have seen prior threads but all seem to deal with a DB NRA less then the DC NRA which would create different normalizing issues. Any input is appreciated.

It was my understanding that the annuity values should be included in the calculations; as such we requested a market value statement for each policy that the plan owns. One of the insurance carriers who issued a policy is telling the client that we don’t need the MV information (others did give us a MV calculation without a problem). The plan owns several policies. SoCalActuary, in my research I did an BNA article that mentions if an insurance product does not have a surrender option and the participant’s right to receive the benefit is irrevocable, then the liability of that benefit does not need to be reflected in the FT and TNC calculations. However, I could not find anything in the actual regulations or any additional articles to clarify. In this case since the plan owns the policies I was not sure if this applied anyway. So to conclude, the benefit liabilities should stay in the calculations and the value of the annuities should be included in the assets. However, the annuity values can be something reasonable which essentially offsets the benefit liabilities associated to that policy. I appreciate the input; extremely helpful. Thanks!! David – explaining the issues to the client regarding post NRA adjustments (or lack thereof in most cases) has been a problem too. Definitely another project.

We’ve gotten involved with a small db plan that allows active participants who have reached normal retirement to start receiving benefits. The plan also does not have a lump sum option. Once an active participant reaches NRA and goes into pay-status, the trustees purchase an annuity (based on the participant’s AB and payment option) which is owned by the plan’s trust and monthly payments are made to the trust. On a monthly basis, the trust will then distribute a check to the participant. Note that because of post-NRA adjustments to the participant's AB (increase in salary/service), the annuity contracts do not match the actual payments distributed to the participants. Question: Should the market value of that annuity contract be included in the funding calculations, or can the value of the contract (and liabilities associated that that portion of the AB) be eliminated from the funding calculations? Also, what about the AFTAP? Any opinions or a regulation site would be appreciated.

I know the topic of amending a SH 401(k) plan during a plan year has been covered pretty well. However, I have a tangent that was touched on but I don’t think ever answered. My question is if a plan sponsor issues a SH contingent (e.g., “wait and see” or “maybe”) notice and then decides not to give the SH contribution can that plan be amended? Is a plan considered SH for the full year even if it does not give the SH contribution (and just subject to ADP testing)? In this case we are talking about the plan’s non-safe harbor nonelective allocation formula; client wants to amend from an integrated to a new comp. The plan does have a 1000 hour and EOY requirement (on the non-SH feature).

Dell – If you file without an audit attached, the filing is technically incomplete and still subject to late penalties. I agree that you would still need to file an amended return with the audit, but the amended return does not automatically alleviate the late filing penalty. The DOL can hit the client with a $50K penalty for not timely filing the audit. Although I haven’t seen it, I think the DOL could also hit the client for perjury since they knowingly signed and filed an incomplete return. In my case, the auditor sent the report at 7PM on 10/15 and the return was filed on time so we didn’t have a problem after all. If the audit wasn’t ready, I would have probably recommended the DFVCP option to the client. As long as you file under DFVCP before you receive a DOL letter, it is my understanding that the DOL cannot hit you with any late filing penalties. Better to pay a $900 then risk $50,000. Thanks for the response.

We've been with Relius (and Corbel) for about 25 years and have never had a major problem like this. Even though their products and support have definitely slipped over the last few years, we’re still very happy with them. However, if they don’t do the right thing here, we will be definitely shopping for a new vendor. From the above threads I would assume that FT Williams is going to be a popular booth at ASPPA. Has anyone heard from Relius since 8:30 this morning? We still have about half-dozen plans that were published yesterday but never signed. I have a couple of irate clients looking for answers.