Richard Anderson

Concerning whether the correction can exclude the keys: One of the general guidelines for correction (self correction or otherwise) is that the plan must be put in the same position as if the failure had not occurred. That would require that the keys receive the top heavy contribution. When submitting thru EPCRS you could propose that only non-keys receive the contribution as the correction.

Why can't the other $900 collateral be from the deferral account? He borrows the full $1,000 from the match account, and secures it with 50% of the deferral account.

A participant has $2,000 in deferral account and $1,000 in matching account. He is 20% vested in match. If the plan's loan policy allows the participant to choose from what source the loan will come from, can the participant have a $1,000 loan come from the match source only? If the participant terminates and defaults on the loan, the plan can forclose on the deferral account to restore the unvested portion of the match account that was loaned to the participant.

Where can I find a list of factors that a plan sponsor should consider when choosing a TPA or recordkeeper? It seems a lot of plan sponsors think that only one factor, cost, is relevant.

The 1999 Form 5500 for a calendar year plan is due Oct 16; the extension is automatic.

The loan immediately becomes a prohibited transaction once the S election is made. The loan should be paid off before the S election in order to prevent a prohibited transaction.

Yes an audit is required for 1999. Is 1999 the first year that the beginning participant count was over 120? The 80-120 rule is that if the count is 80-120, then you may treat the plan the same as the prior year. Meaning, if the plan was treated as a small plan in the prior year and the plan has 120 or less in the current year, then it may be treated as a small plan. I don't why you would want to, but if the plan in the prior year was a large plan, but this year the count is 90, the 80-120 rule allows you to treat the plan as a large plan, if you want to. You elect, because the count is between 80 and 120, to treat the plan the same as the prior year.

Thanks for the responses. MWeddell, you state that the answer should change if the document states that the loan comes from earnings first. Could you explain. I don't see that changing the analysis. The earnings are still in the plan, only now invested in the loan note.

A participant has a deferral account balance of $6,000; $4,500 in deferral and $1,500 in earnings. He takes out a loan for $2,000. Some time after the loan, he is eligible for a hardship distribution. Assuming that the account balance has not changed, how much can he take as a hardship distribution? The account now has $4,000 in other investments and the $2,000 loan balance. Can he take the full $4,000? The $6,000 account balance less the $1,500 earnings, that must stay in the plan, equals $4,500. Or, is he limited to $2,500? The $4,000 in other investments less the $1,500 in earnings. I believe that he can take all $4,000 of the other investments. The $1,500 in deferral earnings that must stay in the plan is still there, invested in the loan note.

Thanks IRC401; you are correct. 401(k)(4)(A) does not allow any other contribtion to be conditioned on the participant electing to defer or electing not to defer. After reading 401(k)(4)(A), it seems clear that a contribution allocated only to those that are not deferring would disqualify the CODA.

A participant has a deferral account balance of $6,000; $4,500 in deferral and $1,500 in earnings. He takes out a loan for $2,000. Some time after the loan he is eligible for a hardship distribution. Assuming the account balance has not changed, how much can he take as distribution? The account now has $4,000 other investments and $2,000 loan balance. Can he take the full $4,000? $6,000 account balance less the $1,500 earnings is $4,500. Or, is he limited to $2,500? $4,000 in other investments less the $1,500 in earnings.

The plan must accept repayments from after tax funds without regard to whether after tax contributions are allowed in the plan. The repayment is not considered an after-tax contribution, but is a repayment of a prior distribution. The participant then has basis in the pre-tax account. If the plan allows after tax contributions, the repayment should still go to the pre-tax account that the forfeiture originated from. Otherwise, if the repayment is allocated to a pre-tax account, it would be 100% vested. The restoration payment made by the plan sponsor would then be subject to vesting. The participant ends up with a higher vested balance than he should have. Example: Participant terminates with an account balnace of 1,000 in which he is 20% vested. He receives a distribution of 200 and forfeits 800. He is rehired and pays back the 200, which is put in a 100% vested after tax account. The employer restores the 800 in a pre-tax account with 80% vesting. The participant has an incorrect vested balance of 360, 200 in the after tax account and 160 in the pre tax account. The participant's repayment and the plan sponsor's restoration of the forfeiture should go back to the pre-tax account that it originated from, but with basis if the participant repaid out of after tax funds. [This message has been edited by Richard Anderson (edited 06-28-2000).]

414(a) requires service with the aquired plan's employer to be recognized as service after the merger of plans. But, I believe that does not necessarily mean that all participants in the acquired plan must also immediately participate in the merged plan. Assume the acquired plan had immediate entry and the merged plan requires a YOS. If an employee of the acquired plan's sponsor was hired one month before the merger, I believe that the merged plan could require a YOS before participation. 414(a) requires service to be granted for the prior employer, but it does not require that participants in the acquired plan automatically become participants in the merged plan. The question of whether someone has to be allowed immediate entry or next entry date arises when someone has already exceeded the maximum 410(a) statutory time. An example is someone from the acquired group who would have met the entry requirements of the merged plan as of 10/11/95 (he has a hire date of 10/11/94). Per 410(a) this employee must enter the plan by the earlier of the 1st day of the next plan year or six months after meeting eligibility. Therefore, the 410(a) statutory latest time this employee may enter the plan is 1/1/96. I believe the code may require this employee to enter the merged plan immediately. I don't know of any exceptions to 410(a).

Yes. If forfeitures lower the contribution, then the deductible amount is the contribution less forfeitures.

Whose is going to get a distribution? Subs C. D. and E were sold, but Corp A and Sub B were the participating employers.

Section 6 of Rev Proc 2000-16 provides "correction principles and rules of general applicability." The correction should be reasonable and appropriate and should resemble if possible one already provided for in existing guidance. Either providing the HCE with a QNEC in the amount of ADP of the only group (NHE), or providing a QNEC of 4%, since that is what he elected in the next year, might be considered "reasonable and appropriate." I would not be comfortable with any correction in this instance without submitting under VCR to get IRS blessing. The IRS might tell you to "find" his election form, where he elected to defer zero.

If the funds for repayment come from a conduit IRA there will be no basis and you would allocate the repayment to the appropiate pre-tax account (match, p.s.). If all or any part of the repayment comes from personal funds, the repayment amount that came from personal funds will be the participant's basis in that account. If your software will track basis in a pre-tax account, you should not have to set up an after-tax account.

Thanks Tom. I agree with all of your points. It does seem to be pushing the rules, but the argument can be made that the employer wants to also benefit those employees that can not afford to make deferrals. Therefore he wants to do a profit sharing contribution, but the employer is already contributing a match to those who are deferring, and he does not want to increase his contribution to that group. Therefore he wants to make a smaller contribution only to those not deferring. Here's what the real deal is. This plan has 5 HCEs. The owner HCE is the only HCE to get the profit sharing contribution. It will take contribution of about 1.3% of comp for the benefiting NHCEs in order for there to be enough NHCEs in the owners rate group. There are about 50 NHCEs eligible in this plan. Even at 1.3%, the contribution is well above what the employer is willing to do. With only 1 HCE benefiting, if I can eliminate one-half or more of the NHCEs from the contribution, it still passes a(4) easily. The plan easily passes ADP also. 5.98% for NHCE and 2.11% for HCE. The plan has a lot of relatively high paid NHCEs that are deferring high percentages, and I doubt that a 1.3% ps contribution will deter them from contributing. The plan would easily pass non-discrimination, but I would like a little bit of comfort that the IRS would allow it, before we try to sell it to the client.

If you are wanting to impute disparity on the 3% safe harbor contribtion, I don't believe that you can do that. Notice 98-52 says: "However, pursuant to section 401(k)(12)(E)(ii), to the extent they are needed to satisfy the safe harbor contribution requirement of section V.B, safe harbor nonelective contributions may not be taken into account under any plan for purposes of section 401(l) (including the imputation of permitted disparity under section 1.401(a)(4)-7)." Section 1.401(a)(4)-7 describes imputing permitted disparity for the general test.

For a CT 401(k) plan, could these be the participant classes: 1. Owners 2. Non owners who have elected not to defer The employer would then provide a matching contribution to those that defer and a p.s. allocation to those who did not defer. I'm sure that the employer could not allocate a p.s. contribution to only those that defer; that's the definition of a match. But, can a class exclude those who are deferring?

A 5% owner took a lump sum distribution from a Defined Benefit plan that was about $200,000 more than the plan formula allows. I don't know if he is going to return it to the plan or not. The ERISA Outline Book states "A little known provision in the tax code, IRC 72(m)(5), imposes a 10% penalty on a distribution made to a 5% owner which exceeds the benefits provided for such individual under the plan formula." Does IRC 72(m)(5) apply in this situation, and if so does it apply if he returns the overdistribution? If it applies, is the 10% penalty on the entire distribution or just on the portion that exceeds the correct distribution amount?

A company is acquired in an asset purchase and the acquired company's 401(k) plan is merged with the acquiring company's 401(k) plan. Is this a related or unrelated rollover, or something else? Included in top heavy test or not?

One company acquires the assets or stock of another company. Both the acquired and acquiring companies have plans. The two plans are merged. I understand that service must be granted in the merged plan for service with the acquired company. May those employees from the acquired company that meet the eligibility requirements of the merged plan on the date of the merger be required to wait until the next entry date of the plan or must they enter the plan immediately?

If the plan administrator wants to correct the failed ADP test by distributing excess contributions to an HCE that has received a previous distribution of his or her total account balance, the plan administrator may do so. Two 1099's should be issued for the one distribution from the plan's trust. One 1099 will show a taxable distribution for the amount of the excess contribution, plus earnings. If this was a calendar year plan, the 1099 for the excess, plus earnings will be taxable in 1999 if the distribution occurred by March 15, 2000. If the distribution occurred after March, 15, 2000 the excess and earnings are taxable in 2000, and the employer must file Form 5330 to pay the 10% excise tax on the excess contribution as required under IRC 4979. The other 1099 will be a non-taxable rollover of the remainder of the amount that was distributed. The plan administrator should instruct the IRA custodian to refund the amount of the excess contribution, plus earnings; as this amount was not an eligible rollover distribution. The IRA should not issue a 1099 for the withdrawal of the excess contribution, plus earnings. [This message has been edited by Richard Anderson (edited 06-03-2000).]

Jeff, The least costly method for bottom up QNECs is not to begin with the individual with the smallest amount of deferrals. The least costly would begin with the person with the least comp. and give them a QNEC up to their 415 limit until the ADP is passed. Some participants may have terminated very early in the year and have very little comp to apply the QNEC to, so the actual dollar amount for them is low, but for the ADP test, their percentage is 25%.