K2retire

A client has asked how to treat the final paycheck(s) of a deceased employee for plan purposes. It seems to me that it would be treated the same as the final paycheck of any other terminated employee. But I know that the income tax treatment of Income in Respect of a Decedent has some specific rules (that I no longer remember) and I wondered if that makes any difference for plan purposes.

I've heard several vendors express the opinion that there is some sort of legal requirement to allow a full 30 days after mailing a notice before they can begin default deferrals, even for rehires.

Some record keepers require the signature of a trustee on everything even though that is not legally correct.

Participant deferred 15% until reaching 402(g) limit. Match formula is 100% of deferrals up to 5% of pay. ADP refund can easily be made without reducing any single pay period to below 5% of pay. After pointing out the document language that says to refund unmatched deferrals first for an ADP failure, this is the response we received from the record keeper about why they believe they are correct. Testing was done using the compensation associated with the deferrals. Any compensation were there was not a deferral present cannot be used to calculate match. This is why we have maintained that you cannot use the annual compensation to qualify the Match contributions. If you calculate using the payroll by payroll information you were provided you will see that based on the pay periods there deferral was taken from the employees pay, they were matched at 5%. Only when you use compensation not associated with a deferral will the calculation show that the match came in an less than 5%. The testing was calculated correct due to the IRS guidelines.

So, I pay you $2,000 a year to do a job for me and you are going to charge me $200/hr more to explain it to me? Not a very client-friendly business model. I suspect they are paying far less than that as this particular service provider is known for being low cost (and low service). Based on this issue we're hoping to persuade them to move the plan.

We are the advisor on a bundled plan whose ADP/ACP testing was done incorrectly. The client questioned it and eventually was told that any further questions would result in a $200 per hour fee to answer. Then they came to us for assistance. The explanation I received from from the provider when I was unable to duplicate their results was that the difference related to orphan match due to the ADP test refunds. According to my calculations, both of the people receiving ADP refunds had sufficient remaining deferrals to justify the full match remaining in their accounts. When pressed for an explanation, I was told that because the plan requires a match per pay period and they refund the most recent deferrals first, the match associated with those pay periods must be forfeited. I had never heard of doing it that way, and told them so (hoping my ASPPA designations would carry at least some weight). They responded saying that they had never heard of refunding unmatched deferrals first as I suggested and they didn't believe it would be allowed. A brief review of their basic plan document revealed language requiring that unmatched deferrals be refunded first. I referred them to that language and asked that the tests be corrected. In response, I was told that they would look into it. Ignoring the language in this document, has anyone ever heard of refunding based on LIFO as a basis for determining orphan match to be forfeited? How long would you wait for an answer?

Although the funds were moved to an account for the alternate payee, there has been no distribution.

I don't know. Based on the ages, I'm pretty sure it wasn't related to child support. But it could be some form of spousal support related to a legal separation.

Supposedly they paid their attorneys to have the order reversed.

Well here's a new one (at least for me). Participant and spouse file for divorce, obtain a QDRO and submit it for processing. They subsequently reconcile and request that the QDRO not be processed -- but the transfer has already happened. Is any correction required/allowed?

The 1099-R will be issued directly to the estate. I have no idea how estate taxes work however I think generally administrator responsibility is only to know who to issue the report to not offer tax advice. As MoJo so aptly puts it, for that it's attorney time. David is right, but in the interest of general learning here's a bit more info. For tax purposes the estate is considered to be a separate entity (much like a plan is separate from the employer). If the income payable to the estate is distributed to one or more beneficiaries, it is taxed to the receiving beneficiary. However, if the income remains in the estate, it is taxed to the estate. Back in the 80's the income tax rates for trusts and estates that did not distribute all income were particularly high (presumably to encourage distribution of the income). However there have been enough tax law changes since then that I have no idea if that is still the case.

The beneficiary of the estate could be someone entirely different than the contingent beneficiary under the plan. If there are significant debts in the estate, the fund could en up going there, rather than to any beneficiary. (Although that seems to be a great reason for the son to want to take the funds directly.) The son may be under the mistaken impression that he would owe a 10% penalty on the distribution, but the estate would not. Or he might believe that he has legal liability for his father's debts. In that case, he might think it preferable to have the estate pay the income tax and pay the debts directly. Or maybe he already has more money than he knows what to do with -- in which case I'd like to volunteer to help him out!

I'm guessing the reason the buyer insisted that the plan termination occur before closing was in hopes of avoiding any responsibility for accrued benefits. They won't be top heavy and don't match, but I suspect they'll fail ADP.

I just returned from vacation to discover that a plan for which I am the TPA and document provider persuaded an attorney to draft a plan termination resolution effective upon signing (last week). No advance notice was provided to the employees. The termination was required by the company purchasing the stock of the plan sponsor, who failed to act do anything until the day before the closing. What are the possible repercussions of failing to provide appropriate notice of terminating the safe harbor contribution? I don't know if the employees are still being paid by the plan sponsor, or are now being paid by the new company. The plan calls for a 3% non-elective safe harbor contribution based on full year compensation (even for mid year entrants). The recordkeeper was directed not to accept any additional contributions as of last week, although additional contributions will be required for any 2016 new entrants. Our relationship with the recordkeeper is such that I expect to be able to fix this. Since the deal has apparently already gone through, what happens if the new owner refuses to fund the required contributions?

I believe the actual assets likely are valued daily. The manual calculation of what proportion of of the income, loss, expenses, etc. are allocated to each participant is the piece that is only done annually. As a practical matter, by the time you gather the necessary data to do that calculation, the values have moved on. In many cases, the participant can choose when to request a distribution if he or she is concerned about the impact of changes in the market.

If I remember correctly, it also lowers the deductible amount available for 2016.

I remember having that problem when we were still filing Schedule Ps and being told that a Schedule P didn't count as a filing.

Besides the list of allowable reasons for a hardship, there is the part of the rule that says there must be no other source of funds to pay for it. In this case, it sounds like there is another source of funds available.

The issue is probably that someone told them they only need to keep payroll records for 6 years. Those record retention suggestions tend to forget about retirement plans.

Doesn't it get reported on the K-1 then flow through to the 1040 from there?

Why would they want to do that?

The document doesn't mention anything about being a multiple employer plan. And since I know this company has some union employees, I also checked to be sure that union employees are excluded.

And since I started in this business in 1999, that explains why I don't remember it!

One plan.

I've been asked to help interpret an ADP test done by someone else - always a potentially scary thing - and predict how much the HCEs can defer in 2016. The plan covers about 20 companies that are part of a controlled group. Overall, the test appears to me to fail with an HCE ADP of 1.43% and an NHCE rate of 0.57%. The bundled service provider is saying it passes by using disaggregation. I initially thought they were referring to disaggregating the otherwise excludables. Looking at the actual test, it appears that they are disaggregating by geographic location or possibly by job title (not enough information to tell for sure) in addition to excludable and non-excludable categories. The test shows Group A excludable, Group A non-excludable, Group B excludable, Group B non-excludable, etc. Each group passes. I thought the point of the controlled group rules was to require combined testing of the related companies. Is there some rule that I've forgotten about that allows this sort of disaggregation?