John A

How is ADP/ACP testing done after an APRSC correction in which the plan sponsor made correcting contributions for missed deferrals and match? Are the correcting contributions for missed deferrals treated as QNECs and the correcting contributions for match treated as QMACs? Is interest included in the correcting contributions ignored for purposes of the ADP and ACP tests?

Jon, yes it all makes sense and is helpful. However, leaving aside the question of what is practical and using your numbers, would it be permissible to charge the 1 particpant choosing the pooled option the $5,000? Would it be permissible if the fee were a smaller amount, or if there were 1,000 participants charged $5 each (still leaving aside the question of what is practical)?

Jon, thanks for the response. Do the following additional details change the answer? There will be specific fees charged by the trustee and TPA specifically due to the plan sponsor providing this pooled account investment option. If only 1 participant chooses this option, then that participant would essentially be paying the entire cost of the plan having this option. If 2 participants choose this option, those 2 (through the assets they invest in the option) would each be paying 50% of the TPA and trustee fees to the plan for having this option. With this additional information, is it okay for the trustee and TPA fees for this pooled investment option to come strictly out of the assets invested in that option, or must the employer pay the TPA and trustee fees? If a self-directed brokerage window were an option, could TPA and trustee fees be taken out of the assets of each participant who selected a self-directed brokerage option?

If the correction under an IRS correction program is for the plan sponsor to make a QNEC contribution (for example, a failed ADP tested not corrected by the end of the following plan year), but the plan document does not provide for QNEC contributions, must the plan document be amended before the correcting QNEC contributions can be made?

If a plan sponsor maintains a pooled account as one of their investment options, can the expenses associated with the pooled account option be taken from the participant’s account balances pro-rata (provided the plan document allows it), or must the expenses be paid by the employer?

Should Form 5330 continue to be filed at the addresses currently shown on the Form 5330 instructions (last revised in 1998 I believe), or will the filing place be changed to PWBA or somewhere else? If the filing place is to change, as of what date should the new place be used?

If an employee in a 401(k) plan designates minor children as the beneficiaries under the 401k plan, what would happen in the event of the participant's death? Would the money go into an account in the children’s' names, which they could then access once they came of age? Could a legal guardian access the money before they came of age? Does this vary by state? If it varies by state, is there a good resource to research state law?

The 1099-R instructions seem clear that, in the case of an excess deferral refund of $400 ($500 excess deferral with a $100 loss) paid in January from deferrals in the prior year, the 1099-R would show $400 in boxes 1 and 2a, with a code of P in Box 7. However, the instructions also indicate that the participant must show $500 on their 1040 for the prior year (the year of deferral), and may show the $100 loss on the 1040 for the year the distribution was made. How is a participant supposed to know that their 1040 is supposed to disagree with the amount shown on the 1099-R? Does anyone out there have a standard notice that is sent with the 1099-R to the participant?

I now believe that AFoodman is correct regarding corrective distributions for 415 excesses and that these should not only be for the full amount of the excess despite the loss, but that other funds would need to be tapped in the situation that LuisG presents. All other corrective distributions would be adjusted for loss, but 415 would not.

What is your policy on the treatment of excess cash created from corrective trading? Should it be given to the participants involved in the correction? Should it be moved to the forfeiture acct? Should an allocation be done across all participants? To clarify, excess cash created from corrective trading for this question means: If a purchase trade is placed in error (for example, a mistake is made and a contribution is traded without funding, so the trades are reversed), depending on the market swing there can be a gain when the shares are sold back. Also, when a corrective trade is made and it is necessary to buy a certain number of shares, since buys can only be in dollars, estimation can lead to excess shares, and when those excess shares are sold back, and depending on the market, there can be a gain there as well.

Yes, the 415 dollar limit is prorated: 1.415-2(B)(4) (4) Effect of change of limitation year. (i) Once established, the limitation year may be changed only by making the election in the manner described in subparagraph (2) of this paragraph. (ii) Any change in the limitation year must be a change to a twelve-month period commencing with any day within the current limitation year. (iii) For purposes of this paragraph, the limitations of section 415 are to be applied in the normal manner to the new limitation year. Moreover, the limitations of section 415 are to be separately applied to a ``limitation period'' which begins with the first day of the current limitation year and which ends on the day before the first day of the first limitation year for which the change is effective. The dollar limitation with respect to this limitation period is determined by multiplying (A) the applicable dollar limitation for the calendar year in which the limitation period ends by (B) a fraction, the numerator of which is the number of months (including any fractional parts of a month) in the limitation period, and the denominator of which is 12. This adjustment of the dollar limitation only applies to a defined contribution plan. (iv) For a special effective date with respect to this paragraph, see § 1.415-1(f)(7). (v) The provisions of this subparagraph may be illustrated by the following example: Example. In 1981, an employer with a qualified defined contribution plan using the calendar year as the limitation year elects to change the limitation year to a period beginning July 1 and ending June 30. Because of this change, the plan must satisfy the limitations of section 415© for the limitation period beginning January 1, 1981 and ending June 30 of that year. In applying the limitations of section 415© to this limitation period, the amount of compensation taken into account may only include compensation for this period. Furthermore, the dollar limitation for this period is the otherwise applicable dollar limitation for calendar year 1981, multiplied by 6/12.

jkharvey, I do not think the IRS has ever stated a position on this issue, other than the amendment solution in Rev. Proc. 2000-17. I still like the Wessex answer above the best but believe it carries more risk (although perhaps very little more) than the option of keeping the money in the plan and making the participant whole outside the plan. The IRS had a great opportunity to make this crystal clear in Rev. Proc. 2000-17 and chose not to address the issue. If distributing from the plan to the ineligible employee is chosen, it begs several questions: 1) Should gains on the deferrals be distributed also? 2) What should be distributed if there have been losses on the deferrals? 3)Should a 1099-R be done to report the distribution, or how should the distribution be reported? 4)If the distribution is reported on a 1099-R, what code or codes should be used? 5) Is any adjustment to a W-2 necessary? 6) Is the plan risking disqualification by distributing plan assets to non-participants when there is no official guidance that clearly provides for this correction (although I like Wessex's cites above)? The option of correcting outside the plan and forfeiting the "deferrals" seems to be a safer but less appealing option, and it also begs questions, such as 1) does any W-2 need to be adjusted under this option (presumably yes, since the W-2 should be corrected to be sure it does not show the amounts contributed as deferrals), 2) how does the payment outside the plan get reported (ordinary income on the W-2, some other type of income)? I believe there are very strong arguments for and against both options, but the majority opinion seems to be to distribute the "deferrals." The IRS has not stated an official position. And I believe prior threads have stated that the IRS offered differing opinions in 2 different ASPA meetings. I am very disappointed that the IRS did not use Rev. Proc. 2000-17 to end this debate!

Can a Plan establish some parameters on who is eligible for self-directed brokerage accounts? Are there any standards out there that have been approved and are not considered discriminatory? Could a plan use the SEC definition of an "accredited investor" even though that is someone who has relatively high net worth? Or is the answer no to all of the above due to the current and effective availability tests for benefits, rights and features?

Can a plan that has used permissive disaggregation and current year testing change in the next plan year to use prior year testing and not use permissive disaggregation? I have been trying to understand Notice 98-1, and it appears to me that this is possible, although the disaggregation change would constiture a "plan coverage change." It appears to me that this would mean the plan could treat the disaggregated groups as the "prior year subgroups." Has anyone done this before?

Sean, thank you for the correction - you are right, my note is wrong. Also, the de minimis ($100) is determined before any allocable gain or loss.

When an excess contribution is distributed within the first 2 1/2 months after the end of the plan year, and there is a loss associated with the distribution: 1) Should the check be cut for the amount adjusted for the loss (answer appears to be yes to me since 401(k) regs seems to say that losses should be taken into account, 2) how is distribution and loss reported, and for which year? (if it were a gain instead of a loss, then the deferral would be reported for the prior year, and the gain would be reported in the year of distribution; for a loss, is the gross amount reported on the 1099-R as being taxable in the prior year, but the loss reported on the 1040 for the year of the distribution?) The question is for a calendar year plan year. Does anyone just report the gross amount on the 1099-R and not worry about reporting the loss?

Tom, Yes, Key employees are excluded from top-heavy minimums. And while I think I know the answer to this, if keys were included, what would the other problems be? For purposes of the question, assume the company is looking at how much of a top-heavy contribution they have to make on the date specified, and will make that amount on that date. For September 15, 1999, it is pretty clear that a contribution can be treated as if it was made on December 31, 1998. But I am not aware of any rule as to whether a QNEC contribution should be used for the 1998 top-heavy requirement. For December 31, 1999, this is clearly within the allowed time for making a QNEC to satisfy the ADP failure, but some practitioners would say it was past the due date for the 1998 top-heavy contribution, while others would argue that it is the due date for the 1998 top-heavy contribution requirement. Again, I do not know if there is anything that would say the QNEC can be used to satisfy the 1998 top-heavy requirement, or if it is possible that it could be used to satisfy the 1999 top-heavy requirement due to the due date difference of top-heavy and ADP correcting contributions (similar to the way a contribution may be used to satisfy minimum funding in one year and yet be deductible in a different year). For the March, 2000 APRSC correcting contribution, I am not aware if the QNEC contribution could be used towards a 1998 top-heavy contribution failure also, or if it could be used towards a 1999 or 2000 top-heavy requirement. And you're right about the additional issue - I also do not know how the QNEC contributions affect the top-heavy determination for any particular plan year.

My understanding is that QNEC contributions for NHCEs can always be used towards satisfying top-heavy minimum contributions. Is that correct? Which year does the QNEC contribution get applied to for satisfying the top-heavy minimum contribution in the following situations: Plan year is calendar year and plan is top-heavy every year. Plan fails the ADP test for 1998. To satisfy the ADP test, QNEC contributions are made to NHCEs as of: 1) September 15, 1999 2) December 31, 1999 3) March 31, 2000 (with interest under APRSC) In each of these 3 cases, does the plan sponsor have a choice of which year's top-heavy contribution to apply the QNEC contribution to, or is there a specific year each QNEC contribution must be applied to?

Same EIN is used.

First: 401(k) deferrals may not be forfeited due to death (which is allowed for other sources under 411(a)(3)). From 1.401(k)-1©(1)(i): "A contribution that is subject to forfeitures or suspensions permitted by section 411(a)(3) does not satisfy the requirements of this paragraph ©." Second: The spouse portion of a QJSA may also not be forfeited due to death. Third: However, I believe other contributions (like a straight profit sharing contribution that is not subject to QJSA rules) may be forfeited upon death if the plan so provides. Although most plan documents I've seen provide for 100% vesting upon death, I do not believe this is required.

When more than one plan is in a trust, and payments are made from both plans, is it ever acceptable to issue 1 1099-R showing the total payment from the trust? Or do separate 1099-Rs for each plan always have to be done? Why?

If a corrective distribution is made for a calendar year plan year plan for excess contributions or excess aggregate contributions in the first 2 1/2 months after 12/31, the distribution is reported on the 2001 1099-R as taxable in 2000. If the particpant elected withholding on the distribution, does the participant get credit for this withholding on their 2000 1040 tax return, or not until the 2001 1040?

Does anyone have a good, fairly brief, reasonably understandable definition of the types of Direct Filing Entities: Master Trust Investment Accounts (MTIAs) Common or Collective Trusts (CCTs) of banks, Pooled Separate Accounts (PSAs) of insurance companies, 103-12 Investment Entities (103-12 IEs), and/or Group Insurance Arrangements (GIAs)? Definitions in Form 5500 instructions seem a bit complex - any way to tranlate them into "plain English" for plan sponsors looking to understand them?

What is your practice pertaining to Copies D, 1 and 2 of the 1099-R? One of the copies of 1099-R that we ordered says "State Copy or Copy D for Payer." The 1099-R Copy D on the IRS website only says "Copy D for Payer." Does anyone else order copies that read state copy or copy for payer? Does everyone else send out Copy 1 and/or Copy 2? Does anyone send more than 1 copy of Copy 1 or Copy2?

Becky, Just to clarify: Are you implying that the 80-120 rule cannot be used in determining the audit requirement? Or are you just pointing out that the 80-120 rule must be based on beginning of plan year participant counts?