rocknrolls2

Let's say an employer maintains a 401(k) plan for its employees. A participant retires and then starts receiving minmum distribution payments in connection with his/her attainment of age 70 1/2. The checks are payable to the individual who is the participant and bear the correct social security number. Unfortunately, the participant moved without informing his//her employer of the change of address. Therefore, the checks are still delivered to the same home address in the name of the participant at the same social security number. However, in the meantime, an individual with the same first and last name as the participant has begun cashing the checks although s/he has also been reporting the distributions on his/her tax return. The error has since been discovered and the individual who had cashed the checks is now willing to pay the amount back to the plan. My question would be what should be done by the plan other than through the SCP program of simplying issuing the checks to the intended participant? I see no qualification issue on the part of the plan since it paid the checks to the correct SSN and to what it thought was the correct address. Similarly the participant should not be subject to the excise tax because the circumstances should make him/her eligible to satisfy the reasonable error test resulting in waiver of the tax. Does anyone see anytihing else here that I have not specifically mentioned?

Does the new NYS mandate for insured health plan coverage apply to dental insurance issued in New York State?

Thanks. Now I have learned of a twist in the facts. The employee was hired and was expected to work less than 1,000 hours in any employment year. Under the qualified plans, if the employee actually works at least 1,000 hours in any employment year, then s/he is entitled to become eligible to participate in the plans. In this case, the individual had a few months of service before being called up to the military. Thus, the safest approach would be to project his actual service before going on military leave to an employment year to see if he ever would have satisfied the 1,000 hour rule. Do you agree? If he never would have satisfied the requirement based on his pre-military actual hours as projected, we do not even get to the issue of being able to make up contributions to the 401(k) plan. Agree?

Company X sponsors a 401(k) plan for its employees. Employee M was hired in 2004 and did not elect to contribute to the 401(k) plan. A few months later, M is called into military service. In July, 2009, M returns from active military service. Is M entitled to contribute make-up deferrals even though s/he had elected not to contribute to the plan prior to going on leave?

Employer X maintains a 401(k) plan for its employees. Due to the fact that payroll is decentralized, when there was a change at one of the locations, HQ put the employees onto a new payroll system resulting in deferrals being taken from their compensation but not deposited into the plan. After a few participant complaints, the problem was discovered and the amounts were credited to the affected participants' accounts and credited with earnings at a stable value fund rate (which was higher than the VFC online calculator rate). In preparing a VFC application for this, I read the rules for the class exemption and learned that to get out of the notice requirement, the employer could credit the amount of the 4975 excise tax otherwise due to the affected participants' accounts. Another part of the class exemption states that in lieu of calculating the excise tax, the plan could use the online calculator amount of interest and contribute that. It seems to me that the employees who are impacted by this would be getting double credit for interest, first to make the necessary correction and then to comply with the exception to the notice requirement under the class exemption. Am I missing something or is this what is intended? Thanks.

Employee participates in Company's cafeteria plan and elects family medical and dental coverage. Employee's spouse is convicted of an offense under state law and imprisoned for up to 5 years. While spouse is incarcerated, medical expenses will be covered by the state. In addition, Company's medical plan provides that it will not reimburse medical expenses incurred while an individual was covered under another governmental plan or program. Can the Employee validly drop the spouse's medical and dental coverage due to a change in status event or is the Employee required to continue covering the spouse until the next open enrollment period?

Thank you for your response. I interpreted your response to reach the same conclusion with the prospective unavailability of matching contributions prior to age 59 1/2. I was not proposing to eliminate the age 59 1/2 distribution option but rather the pre-age 59 1/2 distribution option for matching contributions. For the post 59 1/2 distribution option, the proposal was merely to eliminate the 6-month suspension period.

Company X sponsors a 401(k) plan for its employees. Currently, the plan provides that participants may obtain an inservice distribution of matching contributions prior to age 59 1/2 if such contributions have been held in the plan at least 24 months or the employee has participated in the plan for at least 60 months. The distribution of the matching contribution results in a 6-month suspension of matching contributions. The same provisions apply to withdrawals of matching contributions after age 59 1/2. Company X would like to amend its 401(k) plan as follows: (1) with respect to pre-age 59 1/2 inservice distributions, by removing matching contributions as an eligible source for distribution; and (2) to remove the suspension period for post 59 1/2 in-service distributions. With respect to (1), is such an amendment a cutback prohibited by Code Section 411(d)(6)? If so, is a viable alternative to simply amend the plan to state that matching contributions after a certain date will not be available for pre-59 1/2 in-service distributions? I looked at the IRS regs and thought there was more flexibility as applied to in-service distributions than appears to be the case.

In general, the assets of a defined contribution plan have to be allocated among all plan participants and there should be no unallocated amounts. When the 415 regulations specifically provided for the correction method, a suspense account containing forfeited or reduced employer contributions was permitted to last beyond the end of the plan year but had to be fully allocated in the following plan year. In fact, no employer contributions were permitted to the extent there was a balance in the suspense account. In your situation, you should use some sort of self-correction. However, this will depend on how much is involved and the number of affected plan years. If there is a good bit of money involved over several plan years, then technically there should be a Voluntary Correction Program filing with the IRS. What is done depends on what the plan provides on the application of forfeited balances. The easiest situation is if the plan states that forfeitures are to be allocated among the plan's participants. If that is done, then all participants entitled to the allocation should have an additional amount allocated to their accounts in each year. However, if the plan provides that forfeitures are to be used to reduce employer contributions, there could be a problem because less should have been contributed during the relevant time frame. Did any participants who had a partially vested account balance terminate employment, receive a distribution and were then rehired within five years? If so, they have a right to repay the vested portion of the amount distributed to them and the plan has to restore the forfeited balance. If this has happened, the plan may need to be amended to provide that forfeitures may be used to restore forfeited account balances for participants who timely repay. Another option is to use some of the forfeited amount to pay plan administrative expenses (make sure that the plan either permits such an application or that the plan is amended prior to the application of the forfeitures for such purposes).

Company X buys the assets of the Z division of Company Y. Company Y maintains a profit sharing plan for its employees. Assume that Company X is willing to accept a spinoff of the portion of the assets of the Company Y profit sharing plan attributable to the Z division employees. Company Y proposes to transfer only the vested portion of the affected participants' acccount balances. Does this result in a violation of a qualification requirement?

Thanks for your help.

J4FKBC, As you will note in my post, compensation for allocating contributions is "a list of certain items that are eligible to be counted as benefitable compensation and the remainder of such items are not counted." Since this definition does not satisfy the W-2 definition, therein lies the problem.

Company X maintains a 401(k) plan for its employees. In an effort to revitalize interest among its employees, X is considering the adoption of a design-based safe harbor 401(k) plan. Based on the way it compensates its employees, it has generally used a list of certain items that are eligible to be counted as benefitable compensation and the remainder of such items are not counted. In testing compliance with 415 and certain other requirements, including ADP/ACP testing, X uses the W-2 earnings definition. In order to be able to use a safe harbor approach, the plan must amend the definition of benefitable compensation to meet one of the 415 alternatives or to subject such definition. As a result of the test, the inclusion percentage for HCEs is between 1 and 2 percentage points higher than the percentage calculated for the NHCEs. From your experience is this a more than de minimis difference sufficient to cause the plan to fail the 414(s) nondiscrimination test and therefore preclude the use of a safe harbor design? Thanks.

I have the following questions concerning the application of the COBRA premium subsidy: (1) Company maintains a medical plan for its employees. Bill works for Company and participates in its medical plan. Bill's wife Karen works for Another Company and participates in its medical plan. In March, 2009, Bill is involuntarily terminated from Company. At all times, Bill was eligible to be covered as a dependent under Karen's medical plan but had not done so prior to losing his job. Under these circumstances, does Company have to provide Bill with COBRA? Does Company have to provide Bill with the COBRA premium subsidy? Based on my reading of the legislative language and the Conference Committee report, in my view, the answer should be that Bill should be offered COBRA but that the COBRA subsidy would not be available to him because he is eligible to participate as a dependent in Karen's medical plan. Prior to ARRA COBRA permits employers to cut off COBRA if an individual becomes enrolled in another group health plan after electing COBRA. My reading of the COBRA premium subsidy rules is that the COBRA subsidy does not even have to be offered if one is eligible to participate in another group health plan on or before the qualifying event. Therefore, the answer to the first question should be yes and the second question should be answered no. Anyone disagree? (2) Company maintains a medical plan for its employees. Bill works for Company and participates in its medical plan. Assume that Company also maintains a severance plan for certain involuntarily terminated employees which, prior to ARRA, provided for a COBRA subsidy for 6 months equal to the employer's portion of the cost of coverage while the employee was active. As a result of ARRA, Company decides to restructure the severance plan to provide for a COBRA subsidy determined under the ARRA provisions. However, if an employee files a waiver, the employee will become entitled to the preior COBRA subsidy but only if s/he signs a separation agreement which has become final. Assume that Bill's adjusted gross income, after taking the severance pay into account will cause his adjusted gross income for the year to exceed $290,000. Bill therefore decides to waive the ARRA subsidy and negotiates a separation agreement with Company providing for the higher COBRA subsidy for up to the first 6 months following his termination of employment. Is the COBRA subsidy provided to Bill taxable? Based on my reading of the legislative language and Committee report, the answer should be no because the income limitation applies solely to subsidized COBRA provided "under this section" and does not extend to any COBRA subsidy negotiated as part of a severance agreement after the subsidy is waived. Anyone have any different views on this?

JanetM, The rollovers are voluntary and the plan permits partial distributions. U would not like to permit trust to trust transfers because its plan would need to retain the distribution options under the prior plan.

Company M maintains a 401(k) plan that contains a number of features, including after-tax contributions and Roth 401(k) contributions. Company T participates in Company M's 401(k) plan. M has reached agreement with Company U to sell the stock of Company T. U will establish a new 401(k) plan but it will not have after-tax contributions or Roth 401(k) contributions. U will enable Company T employees to roll over their account balances in Company M's 401(k) plan other than after-tax contributions, Roth 401(k) contributions and that portion of outstanding plan loans containing after-tax contributions and/or Roth 401(k) contributions. Can M divide the loan into two: one portion including the portion of the loan attributable to contributions other than after-tax contributions and Roth 401(k) contributions and the other loan being the portion of the loan attributable to after-tax contributions and Roth 401(k) contributions? Why or why not?

In order to answer this, I would need to know in what year the rolled over amount was distributed. Most likely, the answer will be that the IRA rollover was valid and that the distribution from the IRA should be taxed in the year received. The amounts contributed to 401(k) Plan 2 would probably be deemed to include the excess deferrals and the excess catch-up contributions and would have to be distributed as adjusted for gains and losses, if any. These latter amounts would be taxable in 2009, the year of distribution.

Participant A is 49 years old in 2008 and makes an excess deferral to Plan X. A reports the excess deferral to the sponsor of Plan X in early 2009, the year in which he will attain age 50. Can the employer simply recharacterize this amount as a catch-up contribution or must it refund the amount as an excess deferral?

I was aware that the plan document had to provide which testing method it was using. My question was if the employer decides that it is eligible to switch to the other method and desires to do so, when must the amendment making the switch be adopted.

Is there any piece of guidance issued by the IRS that you can cite for this? If you are correct, this would mean that it would be too late for us to apply the prior year method to test for the 2008 plan year.

Calendar year 401(k) has been using the current year testing method for all years since prior year testing authorized by the tax law. For 2008, employer determines that, due to the volatility in the equity markets, many NHCEs stopped contributing to the plan altogether. If the 2008 ADP/ACP tests show a failure, but the plan would pass based on a prior year testing methodology, what is the deadline for the plan to be amended to adopt the change in methodology?

Even if the participant was granted sole custody at the time the divorce was entered and the change in custody to the other spouse occurred a number of years after the divorce decree issued?

A participant in a cafeteria plan enrolls in the dependent care FSA to provide after-school supervision to her child who is under age 13. During the year, the judge awards custody of the child to the ex-spouse, who lives in a different state (shich is not contiguous to the participant's state). Is this a change in status sufficient to support the participant's desire to prospectively revoke deductions for the remainder of the year?

A participant in a 401(k) plan requests and obtains a hardship withdrawal to purchase his/her principal residence. Because the contract of sale included a condition that the home pass an engineering inspection, which it failed, the participant was able to cancel the contract. Now, the hardship no longer exists. Assuming that the withdrawal and the disappearance of the hardship occur in the same plan year, should the plan simply reverse the withdrawal to avoid reporting the distribution?

Company A bought Company G. Each has a 401(k) plan and G's plan is merging into A's plan. Under A's plan, employer matching contributions are available for withdrawal by employees prior to age 59 1/2 only to the extent that such contributions were either in the plan for at least 24 months or the employee had participated in the plan for at least 60 months. If such an employee obtains a withdrawal, his/her employer matching contributions are suspended for 6 months after the withdrawal. Prior to attaining age 59 1/2, an employee in Company G's plan may not obtain any in-service withdrawals of employer matching contributions. On or after attaining age 59 1/2, an employee in Company A's plan may obtain an in-service withdrawal of employer matching contributions under the same conditions as applied prior to attaining age 59 1/2, including being subject to a 6-month suspension period following the withdrawal. Under G's plan, an employee who has attained age 59 1/2 may obtain an in-service withdrawal of employer matching contributions without restriction and without being subject to a suspension period. I know that the anti-cutback rules generally apply to optional forms of distribution under merged plans. However, I am also aware that the employer has the right to eliminate optional forms of distribution by amendment if the participant has a right to elect an otherwise available single sum distribution. As applied to in-service withdrawals, that refers to an optional form of distribution in an amount elected by an actively employed participants subject to the satisfaction of certain plan designated conditions. Thus, it would appear that A cannot amend out the G withdrawal availability conditions. Applying these rules, are the following options available to A: (1) Amend the plan to provide that participants with employer match transferred from G's plan are subject to the same distribution restrictions that applied under G's plan; (2) Amend the plan to retain the post-59 1/2 withdrawal availability provisions regarding the G plan matching contributions while subjecting the pre-59 1/2 withdrawals of G plan matching contributions to the more generous A plan availability conditions.