Lou S.

On its face I agee with Austin, seems like a staright forward PT. So unless there is PT exemption the Trustee can point out that allows them to do this I'd stay away. If it is covered by a PT exemption then sure you can do it but again, make sure you have your disclosures in order to the client and let them know of the potential conflict of interest.

Very timely just got one of these today. Thanks for this thread and the linked one by Tom Question about the 1099-R though (referenced in linked thread), the 1099-Rs went out in January and we are doing the test in February, do you prepare an amended 1099-R? And if yes what if you use a bundled provider that is reluctant to prepare corrected 1099-Rs? Any thoughts appreciated.

I agree with you but don't have a cite, sorry. I've always heard the IRS position is that you can amend up until the time at least one participant has earned the right to the benefit. So if 1,000 required you can amend up until the point someone is credited with 1,000 hours. If you have a last day requirement, I think you can amend up until the last day of the year. Of course it is possible the IRS has chancged its mind since last I heard them express this opinion.

Yes to consoldate to the SEP-IRA you would need to formally terminate the 401(k) if you are under 59 1/2, otherwise you can't take a distribution from the 401(k). If you do terminate the 401(k) you would not be able to start a new 401(k) for 12 months if that matters to you. Don't forget the final 5500 and 1099-R if you do term the 401(k). Yeah you could convert everything to ROTH, though you should probably check with your tax professional to see the impact of that first as we don't really know your financial situation here.

Are you terminating the 401(k) or are you over age 59 1/2? If not, I'm not sure you have a distributable event. I assume by self-employeed 401(k) you are the owner (Sch C or K-1 income) as such it is often difficult to convince the IRS you have a seperation from service for taking your money out.

I think the penalties section of circular E http://www.irs.gov/publications/p15/ar02.h...blink1000202484 may be helpful. I believe the penalty is 10% or 15% (depending on whether or not the client has been notified by the IRS) plus interest for the time the deposit should have been made.

I don't see a problem with it.

I'm going form memory here and unfortunatly don't have anything writen to go on so I could be wrong. But I agree with the no pay = no hours. I seem to recall this question coming up at more than on ASPPA meeting at the IRS responce from the podium was always, no the employee is not considered an employee. Again, I'm going on my memory of conferences and have nothing written to back it up so take that for what it is worth.

What is the definition of compensation in the plan document, from date of entry or full year? And does your plan document address if the the same definition applies to allocation and testing under 414(s)? For top-heavy 415© comp is full year even if allocation is from date of entry, but I've never heard the IRS requiring you use full year comp in testing unless that is written into your plan document.

And with a 1000 participanst I can only imagine what the independent audit looks like with all those individual contracts.

While this doesn't help in this situation, sounds like something that should be addressed going forward in the plan document. Question, has this ever happened before? Can you use what was done then as a guide for now? I'd be leary of giving just the 5% on the whole year unless that as is spelled out in the document and SPD as you could have a prohibited cut back issue, especially if the participant was expecting a 10% contribution credit at least with respect to service he had while in group A. I assume group A is something like "owners" and group B is something like "peasants". If you had people in the past move from B -> A mid year and get the full A benefit for the whole year that would support either "group at end of year" or "larger of two if you split groups" and I could see either being argued fairly successfully by a disgruntled participant absent language in the plan.

You may need an attorney involved but sometimes a letter telling the invesment company that are in direct violation of the trustee's written direction (along with the relavant portions of the Plan Document and Trust agreement) and that they are assuming full descrtionary fiduciary athourity over the assets that they refuse to transfer at the direction of the trustees and that they will be responsible for restoring any losses for failure to comply with the written request. We've found that rather effective in the past in situations such as this. If this does turn out to be individual 403(b) contracts and not a 401(k) plan though, you may be out of luck.

We have an employee who rolled over their total balance to a ROTH-IRA. The account indulded a ROTH-401(k) potrtion where the total account value is less than the sum of the ROTH 401(k) contributions. Example Roth account at time of rollover $9,000 total Roth contributions $10,000. The instructions for form 1099-R indicate you list the basis in box 5 - the $10,000 but our 1099-R program gives us and error when box 5 is greater than box 1. We think Box 1 - $9,000 (amount rolled) Box 2 - $0 since it was rolled Box 5 - $10,000 (roth basis) To me it seems obvious that the participant should carry over the $10,000 basis from the ROTH-401(k) but IRS guidence in 402(A) code & regs, such as it is doesn't apprear to address this situation. Any thoughts? Since we have about an hour ledt to mail 1099-Rs I think we'll do them with the error and file an amended/corrected 1099-R if we have to.

I would agree with you.

Thanks both of you. I guess my confussion is where does the mandatory requirement come in if there is no real penalty for failure to comply?

While I realize the likelyhood of getting caught is nearly non-existant I was still under the impression that Fell under this rule and the Plan Adminstrator (the client) is still responsible for the unpaid taxes they were supposed to withhold but did not. I was trying to findout what the actual penalties are though and must admit I'm coming up blank despite going through the penalty section of Pub 15 (circular E).

OK so small client had one tiny $500 distribution that they were supposed to send $400 to part and $100 to feds. They were just going to send $100 with 945 on the under $2,500 exemption. Staff person (now gone, isn't that always the case?) accidentially sent full $500 to part. Is the correct thing to do still send in the $100 with the 945, show the withholding on the 1099-R and request the $100 pack from the part? That seems like the way to do it but wanted to know if anyone else has run into this before.

I'm not aware of IRS formal guidance on whether or not earnings has to be restored but when we have encountered a partical termination like yours we have taken the same position you have. On one determination letter request we restored the forfeitures without earnings and the IRS did not seem to have a problem with it but the answer may or may not change depending on the reviewer.

It is coded as a rollover - code G, but the taxable amount in box 2 is the same as the gross amount in box 1, instead of $0.00 like most rollovers. That's my understanding. Does anyone have different info?

I'm with masteff on this one and the correction is to request a refund with the tax return. If you want to be super nice guys because you feel the error is yours, you can give him an interest free loan of $2,000 until he files his tax return. Not sure if that would be a prohibited transaction or the tax implications of giving him an interest free loan. But even if there are no tax ramafications and no PT, that would probably fall under the heading of "no good deed goes unpunished" before the saga ended. If you do go that route, you might want to run it by counsel which might be more more expensive than the fix.

Can't they file their taxes and get a refund?

The penalty applies to the year the distribution was not taken. (though you can request a waiver which I hear is often granted) The distribution is income in the year it is actually taken.

We came to the same conclusion when we researched a few years ago.

Great question! But unfortunately I think you answered it right here.

Not sure, I've never seen this particular set of fact but with the economy the way it is not surprising. You could try calling the reviewer who has been assigned to the case and see if they have a suggestion.