Richard Anderson

Assuming that the insurance contract is a participant directed investment, then expenses related to that investment should be allocated to that participant. The 3% employer contribution or any other asset in that participant's account can be used to pay the insurance premiums.

Looks correctable to me. In general, a correction must put the plan in the same position as if the failure had not occurred. This is what I think the IRS would require as a correction: Ask the participants to return the money to the plan. If they refuse, then the employer has to put the money back into the plan, thus putting each of the participant's accounts back to what it would have been if the distribution had not occurred.

The 402(g)regs state that if the excess deferral is distributed by April 15 then it is not subject to the early distribution tax of 72(t). In the section on distributions after April 15 there is no similar mention of exclusion from the penalty tax. I remember reading somewhere that the early distribution penalty tax applies on excess deferrals distributed after April 15. But, now I can't locate the source of that opinion. Does anyone believe the 10% tax applies to late distributions of excess deferrals.

The distributions will need to be added to the account balances for the next 4 years, also. If the plan has contributions other than deferrals (PS or match), then any contributions allocated for the first plan year must be included in the account balance used for top heavy testing. This includes contributions required by the document and any discretionary contributions that are allocated in the first plan year. After the first plan year accrued contributions are included in the account balance for top heavy calculations only if they are required by the plan document. Also, if a Board resolution to contribute a discretionary contribution is made befor the end of the plan year, then that contribution must be included for top heavy testing.

Does the top 20% election have to be in the plan document?

Is a corrective distribution of excess deferrals made after April 15 subject to 10% penalty tax?

He is an HCE. He is attributed the ownership of his parent. He therefore is a greater than 5% owner and an HCE. A participant is an HCE if either of the following is true: 1.a greater than 5% owner in the current or lookback year, or 2.greater than $80,000 comp in the 12 months prior to the current plan year. months.

Code Section 417(e) and 411(a)(11)(A) both refer to a plan. The regulations have examples of how to calculate the accrued benefit for the 5,000 limit. None mention aggregating plans for the limit. I'm sure the limit for the involuntary cash out rule is for each plan.

The correction must be "reasonable and appropriate" for the failure. I would think that losses should not be applied to the distribution. If the participant had gotten the correct amount in the first distribution, he or she would not have suffered the plan losses. If the correction was for an allocation shortage and the participant was still in the plan, then I think it might be OK to consider the losses.

Check Code Section 1.411(d)-4 Q&A 10. Relief from the anti-cutback rules of 411(d)(6)is provided for plan amendments that eliminate preretirement distributions commencing at age 70 1/2 to non 5% owners. A plan can be amended to eliminate the in-service distribution to non 5% owners, therefore if your plan amends there would be no RMD before retirement for the two employees that attained age 70 1/2 in 96 and 97. The amendment must be done by the end of the remedial amendment period for SBJPA.

I beleive that the 10% excise tax applies if excess contributions are distributed after 2 1/2 months after the plan year end. I don't think that late correction by QNEC is subject to a penalty tax.

An incorrect contribution allocation must be corrected, whether the affected participants are HCEs or NHCEs. The plan sponsor would correct this by crediting each affected HCE's account with the shorted match amount plus earnings. If these incorrect allocations occurred in plan years more than two years in the past, then it becomes important to distinguish if the operational failures were insignificant or significant. If the failures were insignificant, then correction can be through APRSC, otherwise VCR or Walk-in-CAP. In the situation you describe the factors most likely to determine whether the failures are significant would be the number of years involved, the number of participants affected, the magnitude of the contribution shortages, and the reason for the mistake. I beleive that it is probably significant. Significant operational failures can be corrected through VCR if certain eligibility requirements are met. Each plan year that is corrected would require retesting for non-discrimination. If any year failed the non-discrimination test after the allocation corrections, then further corrections would be required (QNECs to NHCEs). Looks like correcting one operational failure might cause a different failure.

A correction method must be "reasonable and appropriate" for the failure. Any standardized correction method under SVP is deemed to be reasonable and appropriate. Therefore, if the plan sponsor wishes to self-correct under APRSC, the SVP correction for a failed ADP test can be used. In order to self-correct under APRSC several eligibility standards must be met. 1. The plan sponsor or administrator must have established practices and procedures reasonably designed to promote compliance. 2. The plan must have a favorable letter. 3. The plan must not be under examination. For purposes of correcting failed ADP, ACP tests the two year correction period starts after the statutory 12 month correction period ends. The two year correction period would then begin on 12/31/98. A failed ADP for the plan year ended 12/31/97 could therefore be corrected under APRSC as late as 12/31/00.