lkpittman

I recently attended a seminar where the presenting atty stated that where an MPPP plan is merging with a PSP prior to end of remedial amendment period, "the employer could update the MPPP for GUST prior to the merger, OR it could update the resulting plan (PSP) and have that restatement cover both the PSP and the prior MPPP. If the employer intends for the PSP restatement to cover both plans, the employer should make certain the restated document identifies that the restatement is for both the PSP and the MPPP. The corporate minutes also should confirm that the restatement will cover both plans." Does this conflict with your conclusion?

Disclosure of the coverage data and demonstration of compliance with minimum coverage and nondiscrimination is still required for terminating plans (see Announcement 2001-77, Section I, part E, paragraph 4). I wasn't aware that the Forms have been modified already--but I would assume that if Schedule Q says it's not required, the Form 5310 has also been revised to add the coverage and nondiscrimination disclosure items.

We have such a client--the realty company has adopted the 401(k) Plan and its employees participate (there are only a handful of secretarial staff, etc.). The individual realtors adopt the plan separately. We've got a multiple employer plan with unrelated employers.

An employee was allowed to defer in 2000, but employer discovered later that she was not eligible. I understand that correction of this insignificant operational defect should be distribution of the deferral, plus applicable earnings. What about losses? The deferral amount was only $276, so if losses are taken into account, the amount to be distributed won't be much. Also, does the employer issue a 1099-R for 2001, or is the $ taxable in 2000, and, if so, how reported? I'm sure this has been covered before, but my search isn't turning up anything on point. Thanks for any help.

MJ Hartman is correct--no controlled group in this case. We have several clients that maintain multiple employer plans--no controlled group or affiliated service group situation--but usually there is a business reason for "sharing" the plan.

Thanks--I'll have a look. Also--the new final regs are here. I haven't had a look yet, but they should shed some light on the matter.:confused:

I think you can exclude the participants who are not yet eligible for the PS portion from the 401(a)(4) testing. However, in 2002, I think you will have to provide them with an allocation because they will be "in the plan" (participating in salary deferrals) or you would fail the minimum allocation gateway (just like you would have to provide them with a top heavy 3% minimum if the plan was top heavy). Likewise, I think you'll have to include them in the 401(a)(4) testing if they receive a 3% non-elective ADP safe harbor contribution. I am interested in any other comments you receive!

I think I already know the answer to this one, but I'll give it a whirl to see if there are any comments . . . We have a couple of employers that employ only physicians that have annual compensation in excess of the $100,000. These plans used to pass nondiscrimination/coverage "automatically" because they were considered employers that employed no NHCEs. However, under the newer HCE definition, we end up with NHCEs in some case in some years. For example, let's say a physician is hired towards the end of the year and his compensation for that first "short" year is $60,000. Let's say he becomes eligible the following year--even though he's making $200,000 or more on an annual basis, he's technically an NHCE for that first year of participation. This is really screwing us up for such a plan that previously excluded non-shareholder physicians. Any comments regarding the automatic passing of 401(a)(4) and 410(B) where "no NHCEs" are employed? Does that even work anymore?

Yes, Tom. In fact, they do participate in salary deferrals, but are excluded from participation in the employer discretionary portion of the plan. We are not looking forward to explaining this to the employer!

Yuck!!!! We've got a potentially ugly situation. We have a cross-tested plan that also has an excluded class of employees. The excluded class includes NHCEs. Obviously, the plan has passed 401(a)(4) previously with these NHCEs not benefitting, but in 2002, I don't see any way to keep these previously excluded ees out! Any comments?

We have a Profit-Sharing sponsor who decided to "terminate" the plan on his own and allow participants to receive distributions/rollovers without providing a written 402(f) notice to participants. He claims that everyone rolled their money over--it remains to be seen whether he did these as "direct rollovers" or made out checks to participants. In any event, I'm assuming this is not a qualification error as defined in Rev. Proc. 2001-17 and is simply an error subject to the penalty described in 6652(i) ($100 for each failure). Can someone confirm that this is not a qualification failure?

I think the best way to handle it would be to follow the correction method in Appendix B of Rev Proc 2001-17 for "Exclusion of Eligible Employee" and correct as you would for an elective deferral failure (failure to allow ees to make elective deferrals for a portion of the plan year). Er would need to contribute enough on the ee's behalf so that the deferral amount equals the ADP for the ee group (adjusted as set forth in the Rev Rul.

Good question, Felicia. I assume you're talking about a loan that has been treated as a deemed distribution under the new final regs that is still carried on the books of the trust and still accrues interest. Note that Q&A 19 of the regs provides that "a loan that is deemed to be distributed under 72(p) ceass to be an oustanding loan for purposes of section 72 . . ." However, I think you've still got a valid "loan" on the books for other purposes that is due and payable from the participant until repayment, "actual distribution" or offset and the terms of the note/loan document should apply. Also, see Q & A 16, where the IRS states that the deemed distribution does not "correct" a loan which is also a "prohibited transaction" which would mean that the participant would still be required to repay the loan under the PH correction rules, even after a deemed distribution under 72(p) because the loan was in default. Frankly, I don't know why anyone would want to repay the loan after a deemed distribution (they've already experienced a taxable event and offset later won't cause another taxable event), but I guess it could happen.

401(k) elig/participation is immediate; the 1 or 2 year wait and vesting is for the psp and matching components, as indicated in my prior post. Any comments on allowing the participant to make the decision?

We have an employer with a 401(k) PSP who wants to allow employees to make a one-time election of chosing between 1 yr eligibility w/vesting schedule for match and profit-sharing or 2 yr eligibility w/immediate vesting. This smells bad to me, but I can't pinpoint why. Has anyone heard of allowing the employee to elect eligibilty/participation/vesting provisions? I'd love some comments. Please tell me it can't be done (and why . . . ).

Wait a minute--how are W-2s involved? Don't you mean 1099-R? And no revision should be necessary, as the excess amount should be reported on 2001 1099-R as a 2000 transaction (i.e., taxable in 2000). Earnings are a separate 1099-R as a 2001 transaction. Am I missing something?

Hi Ervin--I would love to hear some answers to your question, because we have a similar situation. HCEs (about 100 of them) need to have a small amount returned (about $500) each. Employer really doesn't want to go to all the trouble of doing the safe harbor calculation of the "earnings" for each one; in addition, they know that there really are no earnings--just losses for the period. So, instead of doing the calculations and reducing the amounts to be returned, the employer is happy to just return the excess distribution amount and wants to know if this would be acceptable. I know that VCP correction for excess deferrals provides that earnings must be calculated and returned, but losses don't have to, but this isn't the same situation. Anyone have any thoughts on this?

This client only employs physicians who would, on an annual basis always make more than $80,000--so we thought we had an employer that employed only HCEs, exempting them from 410(B) and nondiscrimination testing; however, for the first year that these physicians are hired, if they are hired during the later part of the year, and do not make $80,000, they are considered NHCEs for the following year. IRS says you do not prorate comp for the first year. So, we have to do 410(B) testing and cover these "NHCEs" . . . . even though it would seem that this plan only benefits HCEs.

Thanks, Bob R., that's some reassurance I was looking for!

I think you guys are missing my point. They are employees and may participate in this plan--period. They are also directors. Do you see any problem with an eligibility classification for the plan that provides that only director employees are eligible to participate (410(B) tests out okay). GBurns, according to your reply, you don't see a problem--this classification would be "reasonable" under 410(B)?

Thanks for your input, Paul, but these Directors are, in fact, employees. The Group Health Insurance Standard Provisions Model Act 27 provides that a director may be an employee, if he or she is actively engaged in the conduct of the employer's business. The issue we are concerned with is 410(B). Any comments?

Hi Pax--I also posted this message under Cafeteria Plans--it is a 125 plan (the board members are not HCEs under the 125 rules, either), HOWEVER, we are interested in whether this "classification" might be reasonable under the 410(B) rules (410(B) also applies to 125 plans)--i.e., exclusion of employees other than board members. Let's say it's a qualified plan--would you see any problem with it? Feel free to respond under the Caf Plan heading, too. Thanks!

If a plan is set up to cover only members of the board of directors and directors are NOT HCEs under 414(q) (plan tests out okay under 410(B)) would there be any reason why this classification might be considered unreasonable?

Client would like to set up a cafeteria plan that benefits only the members of the Board of Directors. Directors are NOT HCEs (under 414(q) or under 125 rules), and 410(B) tests out okay. Any comments on whether this would be okay? Reasonable classification or not (and why?). Thanks.

Since there is nothing "on point" in the guidance--our attorney is going the aggressive route (don't they always?). I think we'll actually be okay--we're not actually reducing her benefit--it will be accounted for in the plan; she simply already received part of her accrued benefit and any additional payouts to her of her benefit will reflect the amount she has already received. Thanks for your input.