Dan

We have a large client (3500 participants and $65 mil in assets) who made late deposits in January 2006 for deferral and loan payments withheld in 2005. We filed Form 5330 on these late deposits and the earnings amount was $112. The earnings were put in at the time the late deposits were corrected. Their attorney advised them to file VFCP to ensure compliance. I think that's overkill. I would appreciate comments or anecdotes. Thanks.

Some might do a refund to the employer but we don't. A screw-up is not a mistake of fact. Forfeiting it the conservative way to go. But its not like the participant loses any money. The employer makes the participant whole outside the plan and uses those forfeited monies to fund the next deferral contribution. It really should not be that much of a problem.

The error was made by the trust company. They didn't check with us prior to making the distrbution. But they are supposed to have the same data as we do, but somehow distributed too much. They gave no reason, and how they did it does not concern me. We just need to fix it. And they need to not do this again. It would be nice if we could use the extra amount for taxes. But the distribution can't exceed maximum distributable amount, even when grossing up for taxes. EPCRS doesn't address this cirucmstance. It does talk about amending the plan to permit hardships if one is made by mistake, but I can't find any reference to a circumstance of overpayment. But I have been known to miss a detail here and there. Fortunately, there are many smart people who comment on this board!

One of our clients uses a trust company that offers IDA or SDBA or whatever you want to call them. After finally getting the statements for 2006, we determined that the trust company made an impermissable hardship distribution to a participant by distributing more than allowed. I can't find a correction for such an error. The amount in question is about $400. Can the participant pay back the excess amount or is there some other correction?

As to your question about catch-ups, you can use the catch-up provisions for these 2 HCE's if they deferred the highest dollar in the HCE group, given the leveling method of refunds. If their current deferral dollar amounts are not already the highest in the HCE group, then they probably can't use the catch-up. If they have the highest dollar amounts, then you can add a sufficient amount to utilize the catch-up in the 401(k) plan. As for the plan year, I don't recall hearing about any restrictions to the calendar year. As to the rest, look at the 409A regulations, starting with IRS Notice 2005-1. Hopefully they should have used a a competent attorney to set up the wrap plan. The 20% penalty could get really expensive if its fouled up. As I understand it, the IRS hopes these HCEs do foul up the plan. Few will cry that HCEs have to pay extra taxes.

The notice is required to be distributed so that participants have adequate time to make their elections. 30 days is deemed to be timely, but no specific length of time is required. I would argue that less than 30 days prior to the beginning of the plan year could be timely too. The plan sponsor would need to make sure that participants had enough time to consider and make elections prior to the first payroll of the year. Perhaps two or three weeks could be timely depending on workforce. Suppose the first payroll wouldn't occur until the middle of January and the participants had until a couple of days prior to that to make their election. I think two or three weeks prior to the first payroll would probably be alright. Especially as Bird said, since participant deferral elections have no bearing on their safe harbor contribution in this case.

My initial response is that this is always how I have done Top Heavy calculations. But I don't expect anyone to take my word alone, so I will offer the sources below. They are directly on point. From CCH: Pension - Treatise/Analytical Materials and Tools - 401(k) Answer Book, Franz, Richardson, McDonagh, and Collister - Chapter 14 Top-Heavy Rules - Top-Heavy Testing - Present Value of Accrued Benefits - TREATISE, 401(k)-ANSWER-BOOK, Q 14:20 How is the present value of accrued benefits determined in a defined contribution plan? How is the present value of accrued benefits determined in a defined contribution plan? The present value of accrued benefits as of the determination date for any individual is the participant's account balance as of that date. (Technically, the regulations provide that account balances are determined as of the most recent valuation date occurring within the 12-month period ending on the determination date. For most plans, however, the determination date, because it is the last day of a plan year, will be a valuation date.) Contributions made after the determination date but allocated as of that date are not taken into account unless either of these conditions exists: (bold emphasis mine) 1. The plan is a money purchase, target benefit, or other defined contribution plan subject to minimum funding requirements under Code Section 412; or 2. The plan is a 401(k) plan or other profit sharing or stock bonus plan, and a top-heavy determination is being made for the initial plan year. [Treas. Reg. §1.416-1, Q&A T-24] From The ERISA Outline Book for 2006. See page 1.785; under section 2.a.1, he says "Pension Plans use accrual method. If the plan is a pension plan (i.e., money purchase plan or target benefit plan), contributions due as of the determination date under the minimum funding standards are included, even if not actually made by that date." Under section 2.a.2 he says "Non-pension plans use cash method. If a plan is not a pension plan (i.e., profit sharing plan, 401(k) plan or stock bonus plan) only contributions actually made by the determination date are included. In other words, the value of the non-pension plan account is based on "cash method" of accounting." Sal also cites Treas. Reg §1.416-1, Q&A T-24. Kim Sheek, I never read the source you quote. As I recall, they always begin those sessions by saying the answers given are not official IRS guidance, but the opinion of the one giving the answer. If the Service genuinely has a different take, someone needs to revisit and revise Treas. Reg §1.416-1, Q&A T-24. GordyK, I intended to include a 412(i) reference. It was obvoiusly poorly done. Thanks for the correction.

Generally, the receivables are included only if a defined contribution plan has minimum funding standards. So receivables to a money purchase plan or a profit sharing plan where the contribution is required would be included. Receivables from discretionary contributions are not included in the Top Heavy test.

Our firm is a provides broad services to our clients, which includes plan administration and qp audits. We take the position that record keeping a plan doesn't necessarily disqualify the firm from doing the audit. In some cases we also provide investment advice, which does disqualify the firm from doing the qp audit. We do not custody any assets nor handle any funds. The custodian handles investments and reporting at the plan level. And they send trust statements to the client and us. We do the traditional TPA work. Not all of our peers agree with our position. We agree it is aggressive, but not unreasonable. And we have had the DOL audit plans that use us for record keeping and qp audits. This arrangement has never been a problem for them. We also recognize that this position isn't universally accepted. It may happen that further guidance may indeed make this position unacceptable. At that point, we will discontinue this practice.

Here is what I have been reading. It appears from this that the notices will have to change for the post-2007 plan years. PPA will trigger hundreds of guidance items, mostly from Treasury The Pension Protection Act of 2006 (PPA; P.L. 109-280) requires government agencies to issue guidance or perform some task in 407 instances, according to a word search of the PPA conducted by W. Thomas Reeder, benefits tax counsel with the Treasury Department. The agencies involved will be very busy in the next year, he told the 40th annual conference of the American Society of Pension Professionals and Actuaries (ASPPA), in Washington, D.C., on October 24, 2006. With more than 300 references made to the Secretary of the Treasury, Mr. Reeder's department faces the most work, followed by 44 references to the Secretary of Labor, 21 references to the Pension Benefit Guaranty Corporation, and various references to other agencies. According to Mr. Reeder, guidance will be issued in three phases. In the first phase, the Treasury Department hopes to publish guidance by the end of November 2006 on issues such as mortality tables, a unified definition of governmental plan, the annual 401(k) safe harbor notices, and the issues surrounding Subchapter S ESOPs under Code Sec. 409(p). Reeder indicated that the Safe Harbor 401(k) notice will no longer allow a cross-reference to the vesting and distribution rules contained in the plan's summary plan description (SPD). The vesting and distribution provisions will need to be set forth in the Safe Harbor notice. IRS Notice 2000-3 allowed for a cross-reference to SPD provisions governing the plan's withdrawal and vesting provisions. The final 401(k) regulations do not specifically authorize cross-reference to the SPD discussion of the plan's withdrawal and vesting conditions. However, in Notice 2005-95, the IRS stated that, for plan years beginning after 2007, a Safe Harbor 401(k) plan will not violate the notice requirement of Code Sec. 401(k)(12)(D) merely because the notice cross-references the plan's SPD, in accordance with Notice 2000-3. The IRS has now reversed course. Accordingly, sponsors of a Safe Harbor 401(k) plan will need to modify the Safe Harbor notice to incorporate disclosure of the distribution and vesting conditions.

Has the guidance on the new safe harbor notice requirements even been published yet?

You may need to add earnings if the the contribution isn't made timely. Could that be what the attorney meant? As for why PR match and true up, the example dbvall gives is a good one. And consider some employers like to manage their cash flow with some consistency.

Thanks for the responses. I don't believe the sister is going to receive the policy proceeds when payable. The participant is content with the purchase of the policy as an investment. The sister apparently needs cash and this is her biggest asset. But it is not liquid, so I guess they devised this option. I believe it is a whole life policy. I wonder about whose paying the on-going premiums on such a policy. That is another thing ususual about this proposal. Since the policy is owned by the sister who is not employed by the plan sponsor and the insured is her ex-husband, I can't see how any self-dealing is evident. But that is a good point to consider.

I got a strange request. The lone participant in a one participant plan asked the following question. Can the plan buy a life insurance policy currently owned by the participant's sister for $X. The insured is the sister's ex-husband. The policy is still in force. I don't know any other details about the policy, premium, cash value etc. Has anyone heard of such a thing? Can it be done? Is there any reason it would be a prohibited transaction? This one is another step in the "now I've heard everything" direction. Thanks for any help.

I would highly recommend that employer have enrollment forms on file where each participant declines to defer.

Based on what you state here, the answer appears to be yes. Since he owns 100% of the plan sponsor and his ownership of the acquired company exceeds 80%, a controlled group should exist.

Here is that the "FINAL-REG, PEN-REGS, §1.416-1. Questions and answers on top-heavy plans" says, T-24 Q. How is the present value of an accrued benefit determined in a defined contribution plan? A. The present value of accrued benefits as of the determination date for any individual is the sum of (a) the account balance as of the most recent valuation date occurring within a 12-month period ending on the determination date, and (b) an adjustment for contributions due as of the determination date. In the case of a plan not subject to the minimum funding requirements of section 412, the adjustment in (b) is generally the amount of any contributions actually made after the valuation date but on or before the determination date. However, in the first plan year of the plan, the adjustment in (b) should also reflect the amount of any contributions made after the determination date that are allocated as of a date in that first plan year. In the case of a plan that is subject to the minimum funding requirements, the account balance in (a) should include contributions that would be allocated as of a date not later than the determination date, even though those amounts are not yet required to be contributed. Thus, the account balance will include contributions waived in prior years as reflected in the adjusted account balance and contributions not paid that resulted in a funding deficiency. The adjusted account balance is described in Rev. Rul. 78-223, 1978-1 C.B. 125. Also, the adjustment in (b) should reflect the amount of any contribution actually made (or due to be made) after the valuation date but before the expiration of the extended payment period in section 412©(10). Hope that helps.

The 402(g) limit is a personal tax-year limit. So they could defer that amount. They will most likely be limited by the 5% first year, if prior-year ADP testing is elected. If NHCEs defer at sufficient rates, they could get to $15,000, but that could be tough.

Sure, so long as you pass all discrimination testing every year. Since there are no HCE's that should be a easy enough. If there ever are any HCE's participating in the plan, this arrangement would need to pass discrimination testing.

I didn't state the structure very well. They are separate employers of a holding company and sponsoring employers of the plan.

Working with a controlled group has not been too difficult before now. I have a multi-state company that has made a number of acquisitions over the years. All of the divisions participate in the same plan. They have a very complicated ownership structure that leads to four controlled groups. We have always tested these groups as four separate plans. It so happens that the smallest group will be top heavy as of 12/31/06. They asked if there is any way to avoid the top heavy minimum for this small group. Can I combine this small group with one of the larger groups for testing purposes? The research I have done talks about combining two plans, but I am uncertain if that applies to two divisions of the same plan. I appreciate any insight.

I ran across this today. The court decision addresses a nearly identical issue. http://www.plansponsor.com/pi_type10/?RECORD_ID=33952 The article offers a link to view the decision. It looks like individual participants whose elections aren't followed can legally be told "tough luck."

The actual date the participant is made whole shouldn't matter. If the correction was done the day he called, he would still have the same number of shares. The argument could be made that he would have transferred the funds to a stable value right before the recent downturn, but that is dubious at best. As for the length of time to do the correction, corrections do take time. That is a fact of life. Our lives anyway. It's hard to argue the participant has a suffered a significant financial loss due to a one month delay in making him whole. And it isn't appropriate to enrich the participant because an error was made and good faith efforts were employed to make him whole. To the participant who says it's not fair to correct this error today, I would say the timing of this thing is unfortunate, but all errors unfortunate. But in this case he could be given two investment results to choose from. He could choose from the default fund or his investment election, whichever was better during this period. I would like to have such a choice. Since the error was unintentional, making the participant's account as if it were done correctly in the first place should be sufficient. I think JanetM might be right in that the participant might be better off where he is. But math can be done to make that determination.

IMHO the former employee is better known by his plan title, that of 'participant.' So, the employer should treat this person the same as they would any current employee, at least as best they can. With that said, did the participant received any statements since the conversion? If so they could/should have noticed their balance was invested in the default and not according to their elections. Then the participant would bear some responsibility for not communicating the error sooner. In that case, I would be less inclined to recommend the employer make up all lost earnings. But being the conservative type, and given the limited facts, I would probably recommend the employer make up the lost earnings anyway. But they have a reason to say no. If there have been no statements, then I would stronly recommend the Employer make up all lost earnings. The participant reasonably expected the employer to comply with their request, so the burden shouldn't be on the participant to confirm a reasonable expectation. In this circumstance, the employer simply blew it and should make the participant whole. As an aside, given the recent market conditions, the actual lost earnings could be less now than if they made the correction in early May. It could even be that they were no lost earnings. It was the employer's obligation to make sure everything was done properly, and in this case they didn't do it. Dan

It sounds like everyone is right, but the communication is complicated. As Stephen said, if you are testing for the 2005 plan year, the HCE compensation threshold is based on 2004 earnings. So anyone who earned $90,000 or more in 2004 would be classified as an HCE for 2005. Likewise, for a 2006 plan year, the HCE compensation level is $95,000 earnings in 2005. Current year wages have no effect on the definition of HCE. The year immediately preceeding the one you are viewing is often called the look-back year. The compensation-component of the definition of a HCE being determined by earnings in the look-back year. This can be a confusing concept. When you see a HCE compensation amount associated to a year, like $95,000 for 2005, that means if you earn $95,000 in 2005, you will be a HCE for 2006. If the IRS didn't seem confident in their answer, sometimes they do not understand what we ask. Other times, they really don't know. I hope I didn't muddy the waters.....