John A

R. Butler, I think part of the problem with deciding on the proper correction is whether or not you view the improper "deferrals" as deferrals. If the employer contribution to the plan that equals the amount withheld from the employee is considered a deferral, then there are grounds for distributing the deferral. However, if the employer's deposit to the plan trust is considered an employer contribution that has been improperly allocated to a participant (or to a non-participant), then you either have to go the forfeiture route, or explore the plan's provisions for returning an improper employer contribution due to mistake of fact. Also, if you do distribute the "deferrals" and the IRS decides that no distributable event had occurred that would allow assets to leave the plan, then the correction used has caused another plan qualification issue (which is in conflict with another general correction principle in 2000-16). The Code seems to be intentionally very narrow about when corrective distributions will be allowed. Distributions are only allowed for deferrals that were proper under the terms of the plan but that caused failures under 415, ADP, or 402(g). Nothing in Rev. Proc. 2000-16 broadens this scope to allow distribution of amounts that would not be allowable deferrals under the plan's terms. If the improper "deferral" is viewed as an improper employer deposit, then forfeiture does resemble corrections provided for in other cases of improper allocation of a contribution. Making the employee whole outside the plan is probably not covered by qualified plan rules, but not making the employee whole would be a pretty bad decision for most employers. I do find it interesting that this is the one "common" operational plan defect that the IRS decided not to cover in Rev. Proc. 2000-16. Unfortunately it leaves a split in decisions of how to deal with the problem: some will opt to follow the 1998 ASPA IRS answer and distribute the money, others will follow the 1999 ASPA IRS answer and conclude that distributing the money is NOT an option. Other practitioners I've talked to seem to be firmly on one side of the fence or the other and there is no consensus. Perhaps the only safe way to handle this situation is to use VCR (rather than APRSC) and make the IRS decide (and from the 1999 ASPA IRS answer, you still could not apply the VCR conclusion to the same issue that came up again and do APRSC next time - you'd still need to go VCR). Until the IRS issues written guidance, I don't think there will be agreement on handling the issue of improper "deferrals".

Does the 1999 IRS response contradict the 1998 IRS response? Also, this brings up the general question: when can and when can't "improper" deferrals be distributed to a participant. If there is any situation in which "improper" deferrals cannot be distributed, what is the appropriate correction? Clearly, deferrals can be distributed to a participant due to ADP test failures (excess contributions), 402(g) limit failures (excess deferrals), and 415 limit failures (excess annual additions), including failures under EPCRS because the original possible corrective distribution was not made on a timely basis. However, can deferrals be distributed for: 1) deferrals in excess of plan limit (the ASPA questions), 2) deferrals by employees who are not yet eligible for the plan 3) deferrals that should not have been allowed due to a hardship withdrawal restriction (the 12-month wait) 4) deferrals that were accepted by the trust even though the money came from a company that had been spun off and did not continue maintaining the plan, 5) deferrals by an employee who had changed employment status to a status not eligible for the plan 6) deferrals from severance pay that was received long after termination of employment, 7) deferrals from an independent contractor, 8) deferrals that resulted from a coding error (21% was withheld rather than the correct 12% deferral) 9) etc., etc., etc.

IRS Publication 575, the 1099-R instructions, and Notice 89-32 all seem to be clear that for excess deferrals with a loss, the check should be for the net amount, the gross is reported on the 1099-R and the loss is reported on the 1040. 3items: 1) Why are the instructions silent regarding losses on excess contributions, excess aggregate contributions, and excess annual additions? Should these distributions be for the gross amount rather than the net? 2) Is there any requirement to report to the participant that the loss amount can be reported on the 1040, or does the participant need to figure that out based on their 1099-R showing a greater amount than what they actually received? 3) If the check is cut for the gross amount (the excess unajusted by loss) for an excess annual addition, can the participant still report the loss on the 1040?

In the case of a person who has a balance in a plan because the person is an alternate payee of a QDRO, the required minimum distribution rules apply. Whose age is used, the original participant or the alternate payee?

When 415 excesses are returned, is a 5330 required?

MoJo, While opt-outs would almost certainly increase, I believe the experience of at least one plan that tried this approach was that reductions were by far more common than opt-outs, and plan participants sought out education and made, at least arguably, educated decisions about their election. And some newly educated participants increased their election. The reaction in any particular plan might have a lot to do with the demographics of the plan population. The high percentage only works if it causes employees to talk to plan represetatives about how the plan works, and the plan representatives are equipped to talk about the advantages of deferrals.

One possiblity is to change the automatic enrollment to a percentage high enough to get people's attention - say 7% or 10%. While this has some obvious drawbacks (especially if there is a match), - it does tend to force people into thinking about what they really want to do. 2% may not be worth bothering about, a higher percentage generally is. Plan sponsors should be made aware of the possible costs if they take this approach.

If a plan sponsor has passed out the safe-harbor 401(k) notices, but has not currently amended the plan for the safe-harbor 401(k) language: 1) Is the plan a safe-harbor 401(k) plan? (Has the plan sponsor oligated itself to do a safe-harbor 401(k) amendment? Can the amendment be done as part of the GUST restatement process?) 2) Is the plan required to do ADP/ACP testing because it is not a safe-harbor 401(k) plan due to the lack of an amendment, despite meeting the notice requirement? 3) What action should the plan sponsor take at this point?

There is an active participant who is not a 5% owner, and turned age 70 ½ in March of 1999. The plan document has always required all active participants to start minimum distributions in accordance with the “old” rules and has not and will not be amended to allow participants to defer. The plan document allows in-service withdrawals after age 65. The minimum distribution for 1999, to be paid by April 1, 2000 was calculated to be $2,000. The participant took an in-service withdrawal of $5,000 on March 31, 2000. The minimum distribution for 2000, to be paid by December 31, 2000 was calculated to be $1,500. The participant took an in-service withdrawal of $2,000 on December 31, 2000. What amount is eligible for rollover from the 1999 distributions? From IRS Notice 97-75: Q-9: If distributions are made under a plan to an employee (other than a 5-percent owner) who did not retire before January 1, 1997 from employment with the employer maintaining the plan, is any portion of a distribution made after attainment of age 70 1/2 a required distribution under section 401(a)(9) for purposes of section 402©(4)(B)? A-9: (a) General Rule. Section 402©(4)(B) provides that a distribution is not an eligible rollover distribution to the extent that it is required under section 401(a)(9). As noted in Q&A-6, for purposes of determining the amount of minimum distributions that are required after December 31, 1996, the required beginning date for an employee who did not retire before January 1, 1997 from employment with the employer maintaining the plan is redetermined under section 401(a)(9)©, as amended by the SBJPA. Therefore, whether or not a plan allows an employee who attained age 70 1/2 before January 1, 1997, but did not retire from employment with the employer maintaining the plan before that date, to stop receiving distributions in accordance with Q&A-7, a distribution to such an employee prior to the year the employee retires is not a required distribution under section 401(a)(9). Such a distribution is an eligible rollover distribution unless it is excepted for some other reason. An exception is provided under section 402©(4)(A) for a series of substantially equal periodic payments made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and the employee's designated beneficiary, or for a specified period of 10 years or more. If an employee's benefit is being distributed in a series of annual payments that would equal the required minimum distribution determined in accordance with Q&A F-1 of section 1.401(a)(9)-1 of the proposed Income Tax Regulations, then the series of payments will be considered a series of substantially equal payments over the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and the employee's designated beneficiary, or for a specified period of 10 years or more, in accordance with Q&A-5 of section 1.402©-2 of the Income Tax Regulations. Therefore, payments under such a series of payments are not eligible rollover distributions.

Does the following excerpt from Rev. Proc. 2000-20 mean that sponsors of regional prototype plans do not need to send annual notices or the IRS certification letter in January of 2001 that was required in January of 2000 (required by Rev. Proc. 95-42 and 89-13)? This revenue procedure simplifies the record keeping requirements that applied to regional prototype plan sponsors under Rev. Proc. 89-13 and applies these simplified requirements to all sponsors. Under this revenue procedure, every sponsor will be required to maintain or have maintained on its behalf, and to provide to the Service when requested, a list of the employers that have adopted its plan, but sponsors will not have to provide the annual notices that were required by Rev. Proc. 89-13.

I am not aware of any exception. However, I have talked to practitioners over the years who had an internal policy of not distributing any amount under $1 (I do not believe there is any authority to do even that). The only de minimis distribution rule I know of is the one that states that, for plan qualification correction purposes (Rev. Proc. 2000-16 and preceding), distributions under $20 may not have to be made if the cost of processing the distribution would be greater than $20. I'd love to hear others practices and opinions on this issue of very small distribution amounts.

Thank you both. I always do a 204(h) notice for both DB plans and money purchase plans prior to terminating the plan. However, it appeared that someone in our office may have done the Notice of Intent to Terminate for money purchase plans in the past. I did not think that was required and I appreciate having it confirmed.

What happens to forfeitures from (hanging, orphan, related, "attributable-to", associated) match? Do these forfeitures get treated the same way as any other forfeiture unless the plan document specifically provides otherwise? If the plan document does not specifically address how these match forfeitures are to be handles, can the plan sponsor choose what to do each year (use to reduce expenses, use to reduce future contributions, reallocate)?

The Required Minimum Distribution for an active employee in a 401(k) plan is calculated incorrectly (caluclated using single life rather than the correct joint life calculation), resulting in too large a distribution for 2 consecutive years. The plan document does not allow for in-service distributions. Must this be corrected? If so, what is the correction (follow the overpayment correction guidelines in Rev. Proc. 2000-16)? How is the 3rd year required minimum distribution calculated (using the actual prior year 12/31 balance, or the 12/31 balance that would have resulted from paying the correct amounts)? Can this be corrected by reducing the 3rd year required minimum distribution by the amounts of the overpayments (possibly adjusted for interest) in the prior 2 years?

Is a Notice of Intent to Terminate ever required for a money purchase or other defined contribution plan, or is it strictly a defined benefit plan requirement?

Is the following a correct understanding of nondiscrimination testing for controlled groups? 1) All employees of the controlled group will be treated as employees of one employer for qualified plan purposes. 2) If different employers within the controlled group have different plans, each covering only their own employees, then: 1. If each plan passes 410(B) coverage testing, then the other nondiscrimination tests (ADP,ACP,401(a)(4)) can apply to each plan separately. 2. If each plan cannot pass 410(B) coverage testing separately, then the plans will be treated as component parts of the same plan, and must pass the other nondiscrimination tests (ADP,ACP, 401(a)(4)) combining all participants from both plans. What else is important when doing nondiscrimination and other qualified plan testing for controlled groups?

I believe all of the following statements are true regarding changing a vesting schedule. Does anyone disagree? Any participant with 3 years of service must be given the choice as to which schedule to vest under. The vesting percentage of a participant cannot ever be lowered by a change in vesting schedule. The new vesting schedule can apply to all new participants if the amendment changing the vesting schedule is worded that way. The plan amendment may provide for whichever schedule give the participant a higher vesting percentage in each year, but is not required to. A plan can adopt an amendment that specifically states that any employer contribution made after the effective date of the amendment would vest under the new schedule, regardless of the participant's vesting percentage under the old schedule (or at least, no guidance specifically prevents it).

A top-heavy defined benefit plan was terminated 6/30/00 and all assets paid out. A new 401(k) plan was effective 1/1/00. What is the top-heavy contribution requirement in the 401(k) plan (3% of full-year compensation, 3% of compensation for 7/1/00-12/31/00, required for all participants, required only for participant that did not benefit in the DB plan, other)? Is the top-heavy contribution requirement in the 401(k) plan affected by any top-heavy accrual in the DB plan? For example, if a participant had 1,000 hours of service in 2000 and received a year of top-heavy service in their accrued benefit determination, does that person have to also receive a top-heavy 401(k) plan contribution (since there was a short plan year ended 6/30/00, the participant did not get the benefit of using 2000 compensation in the top-heavy determination, but did get an additional year of top-heavy service)? The safest and easiest course of action would seem to be to just give a 3% contribution to everyone in the 401(k) plan for 2000, but does anyone know it the plan sponsor could be okay not giving it to some participants (that had DB benefits), or giving less than 3% to participants who had DB accruals?

Yes, the IRS is accepting 5310s during the restatement process - the plan will have to be amended for GUST. If you are talking about defined contribution plans, then the question of whether or not you can pay everyone out prior to getting IRS approval has been discussed before and I'm still not entirely clear on the answer, but it is generally recommended not to make payments until approval is obtained. However, some would say that terminated participants should continue to be paid, even before approval is obtained, unless its a case where every participant terminated employment (business was shut down). I'm still interested in other's opinions on who, if anyone, should be paid out while waiting for an approval letter on the termination, and if everyone is made to wait, when does the wait start (as of the proposed date of plan termination but pay if application for distribution received before that date?).

Are there any exceptions to the general rule that any reimbursement of plan expenses by an employer will be considered an employer contribution? I have heard that an employer can reimburse the plan for the expense of getting out of certain annuity contracts without this being considered an employer contribution, and that this is "done all the time." Does anyone know of a letter ruling or some other guidance that indicates that this is true?

How are corrective distributions treated for top-heavy determination purposes? Are they treated like any other distribution? Does it make any difference if the corrective distribution is for excess contributions, excess aggregate contributions, excess deferrals, or 415 excesses?

Tom, Thanks for the reply. If the notices were given by Dec. 1, then what would the deadline be for doing the amendment? Is there any way that the deadline would be the end of the remedial amendment period?

Can an existing calendar year 401(k) plan be treated as a safe harbor 401(k) plan right now (for 2001) if the required notices are distributed immediately, and the plan is amended to include the safe harbor provisions by the end of the remedial amendment period?

XYZ, Inc. had an individual that was not able to enroll at the time enrollment meetings were held due to a life threatening problem. This individual was hospitalized and is now coming home. Are there any guidelines on allowing the participant to make up the deferral contributions (other than the catch-up provisions of the document)? XYZ, Inc. has an individually designed document that allows for catch-up contributions for the Year 2000. Since the catch-up language is in the document, is there any problem with this individual making up pre-tax contributions (this participant was being paid compensation while he was out). Are there any applicable guidelines other than not exceeding the plan and IRS limits? The document addresses the "misclassification or mistake of fact". ..."If a misclassification or mistake is made concerning the participation of an Employee in the Plan, either by including an ineligible Employee, or excluding an eligible Employee, and if such mistake is not timely discovered and corrected for the Plan Year in which it occurred, upon discovery of such error in a subsequent Plan Year an adjustment to the Employee's Account Balance shall be made." Later in the same section it reads "In the case of the exclusion of an eligible Employee, the Company shall correct such error as soon as practicable by making a Qualified Nonelective Contribution to the Plan on behalf of the Employee that is equal to the Actual Deferral Percentage for the Employee's group(either HCE or NHCE), as applicable, for each Plan Year during which the Employee was omitted from participation in the Plan." This was a start-up plan (resulting from a terminated DB Plan). The employer did not send the enrollment package to the participant because he was on life support. Once the employer found out that the participant was doing better and was transferred to a rehab center, he mailed the enrollment package to the participant’s wife. Considering the circumstances, does the "excluding an eligible Employee" scenario apply?

While the following issues may not be directly on point, I believe they are at least reasonably related to the topic. 1)In situations where the match has been made on a payroll by payroll basis and there has been a last day requirement for the match, I have heard that recent court cases have awarded the match to employees who terminated during the year and did not meet the last day requirement, especially if the match showed up on a voice response system or benefit statement without a warning of possible forfeiture. Has anyone else heard that or does anyone know of applicable cases? It seems ridiculous to me to match on a payroll basis if there is a last day requirement, but it seems to have been done. How have others handled this issue? 2) If the match is discretionary, does it have to be stated in writing prior to the beginning of the year? If a different match is stated in writing each year, is each one an amendment to the plan? For example, if in Year 1 the plan sponsor declares the discretionary match will be 100% of deferrals up to 6% of compensation on an annual basis, and in Year 2 the plan sponsor declares the discretionary match will be 50% of deferrals up to 4% of compensation on a payroll by payroll basis, is this acceptable? Is either declaration a plan amendment? Does the declaration have to be in writing and prior to the beginning of the plan year? 3. Is it ever acceptable for a plan sponsor to declare the discretionary match during the plan year or after the end of the plan year? If so, how is it meeting the definitely determinable allocation formula rules?