Lou S.

I think the answer to my question is no - you can't do what I want but I thought I'd ask anyway. Plan fails the ADP and ACP test. The only participant due a refund is catch-up eligible and has not used any catch-up amounts prior to the ADP test for calendar year 2008. After running the ADP test the HCE needs an excess contribution refund of $3,000, but 100% of the refund is recharacterized as catch-up and no refund is made due or made by the plan. The plan also fails the ACP test and the HCE needs an excess aggregate contribution refund of $1,000 to correct the ACP testing failure. However, if 1% of the NHCE, ADP is shifted from the ADP test to the ACP test, the ACP test will pass but the ADP test will now have a larger refund due. Under these facts the HCE would now need refund of exactly $5,000 due to failed ADP after shift. Because the HCE had used no catch-up prior to the test 100% can be recharaterized as catchup. The Plan document allows for shifting, can this be done? It seems like gaming the system to me if it can be done but there are what I consider more abusive games (see cross testing and DB/DC combos) that can be played that are perfectly allowable under the code and regs.

You are correct. After 4/15 double taxation - deferral and reciept year. Gap period income was eliminated for 2008 plan years and later to conform to the elimination of GAP period income on excess contributions and excess aggragate contribuions.

My understanding is that reduction mid-year subjects you to testing. If the client changed for 2009 before notices were given out and said it would be 5% for 2009, you would be OK. You'll also be OK for 2010 if you keep this formula but even though you still have a more generous than required SH match you lose the SH exemption. It doesn't seem fair but I'm 99% sure that's how the rule works.

...doesn't mean that will be the IRS position. I agree with both you and Tom that it makes sense that the deferral is taxable in the year deferred but for some reason I was under the impression the IRS decided to treat all refunds as taxable in the year received for simplicity. I guess not, I'm glad we haven't process any excess deferrals yet. Oh and if there is a loss, which is very likely you won't have a 1099-R for it, just your letter to participant explaining the tax treatment, always fun to try to explain to the participant, their accountant, and HR department.

I'm pretty sure they added 402(g) refunds being taxable in the year distributed in a recent PPA technical corrections bill or in WRERA (if I got the accronym correct). If I can find the site I'll post. EDIT: I've found a few references to WRERA eliminating gap period income on 402(g) excess deferrals but I must say I have not found where it extends the tax treatment to the year distributed, instead of year deferred. I'll have to look a bit more I was pretty sure the excess deferrals got the same tretment as excess contributions but it would not surprise me if the IRS treats them diferrently.

As others have said the answer is simply a failure to follow the written terms of the plan document.

What happens when a plan fails the ADP test and needs to refund ROTH contributions when there is a loss? Assume Excess Contribution (all ROTH) is $5,000 Loss on excess is $2,000 Check to participant is $3,000 I understand that the taxable amount is $0 in this case. What I'm not sure of is - What hapens to the participant's ROTH basis? Is it reduced by the $5,000 excess or the $3,000 refund? If it is the $5,000 excess, can the participant claim the $2,000 on their tax return? If yes, how? What does the 1099-R look like in this case? I've seen this before on regular K and understand how ROTH with gain works (I think) but I'm perplexed by this set of facts. Any IRS cite would be appreciated. Thanks.

Quick followup on this idea. Since you have to make the 3% non-elective and it is 100% vested, does it count as a QNEC in the ADP test?

Sieve, thanks for the link, very helpful discussion in that thread and good food for though in the EGTRRA restatements. I also agree that being underwater does not fit the SH rules. K2r - yes, that is exactly right the additional required loan payment itself may create additional financial burden that the participant can't handle.

I agree. For counting the hours I see no way exclude them.

CinC, yes the participant can take a loan (we did offer that option). The participant does not want to take a loan, also a loan might not be quite large enough to cover the shortfall since it is limited to 1/2 vested account balance. The fact that if he did take a loan he would have further hardship is what would allow him to not be forced to take a loan if the hardship were permitted under safe harbor rules which it does not appear to be. Though as I understand it, absent an amendment changing to the non-safe harbor hardship rules, a loan may be his only option. I hope that made sense. As an aside what are practitioners doing in EGTRRA restatements if you have gotten that far? Are you using the safe harbor or facts-and-circumstance method?

Which, then, of the safe-harbor hardship categories are you thinking this situation might fit into? I don't think it fits neatly into any of them. The closest is "avoid forclosure" though I think that is a stretch, hence my original question. I think you could argue it that the funds are needed to cover the loan due to the sale but I don't know if the IRS would accept that logic. Thanks. In the past our proto-type did not allow for the non-safe harbor hardsip, but the EGTRRA doc does so that might be an option if the Plan Sponsor wants to go that route. On the loans yes I agree but there is an exception if taking the loan would "increase the hardship" which would likely be the case here. Thanks to both of you for your feedback.

I'm not sure it would make a difference. They are selling not trying to stay in the place and they need the cash to cover the difference between the sale proceeds (say $280,000) and the amount due on the mortgage (say $300,000). In this case one could argue that participant might be better off allowing the bank to forclose and take the property, though I'm sure there are many other negative implications to that such as adverse credit reporting and possible bankruptcy proceedings to consider. Does anyone know of any statutory athourity that would allow for a hardship in this case? I haven't found any yet but was wondering if I missed something.

Interesting question from a participant and I'm not sure where to look for the answer. The participant is $20,000 underwater on principal residence which they are trying to sell. Does this qualify as hardship to avoid foreclosure? Can the participant take a hardship in this case? The Plan uses the safe-harbor rules on what is allowed as hardship. I haven't run into this before but with this combination of housing market and economy I have a feeling this might not be the last time I get this question.

We had pretty much the same experience with both IRS and DOL audits of plans without them. That is they said, get one and show proof. But no penalty was issued to either plan, though each was at least 5 years ago so the kinder gentler IRS/DOL may not be so kind going forward. I think it probably all depends on the particular auditor you draw and if that is the only problem with the Plan. Both were routine random audits and other than the missing fidelity bond there were no other issues with either plan. If there were other problems uncovered maybe the results would have been different.

PPA §902(e)(2) - Starting with plan years beginning on or after 1/1/08 excess contributions will be includable in the tax year distributed. PPA §902(e)(3) - Eliminates GAP period income for plan years beginning on or after 1/1/08.

I'd say that is too much of a stretch but if you are trying to pawn it off, inculde it in VCP and see if the IRS gives its blessing. However, what would you gain? If the IRS says OK you are not top-heavy, presumably at this point the top-heavy minimum has already been made. The IRS almost certianly won't let you take it out of non-key accounts so if key-ees didn't also get a T-H you might find you have opened a different can of worms by allocating a contribution against the terms of the document. Now if your VCP is going back to 04 & 05 because no contribs were made, it might be worth a shot but I don't think the IRS will buy what you are selling. But I will give you points for creativity.

We've had the same problem as you in the few ESOP/401(k) combos we do and always did refunds in the past. Not sure what will happen going forward but our plan at this point is to continue with refunds only under EPCRS.

You are correct, the reversion does not apply to a tax-exempt organization. No form 5330 is required. As for other reporting, I am not sure but I'd guess it is probably reported somewhere on their 990 though you might want to ask their CPA.

I cases like this we make refunds during the plan year but after the termination date. We just did something similar for a plan that terminated 11/30. I don't have a cite to help you with but I don't see where the IRS would challege you. If the refund is made in 2008 it would have a taxable code indicating taxable in 2008 so yes I think 8 is the proper code. I assume they are trying to close the trust before 12/31 to avoid next year?

Very doubtful. The mistake of fact rules are fairly narrow if I remeber correctly and do not appear to apply in this case. I think you are going to be stuck with allocating a descretionary contribution under the terms of the plan. You might try this thread for some additional suggestions. http://benefitslink.com/boards/lofiversion...php/t14199.html

Bummer. I agree with Andy, have the trustee supply the value and recomend they have an appraisal done if they ask your advice but my best guess is the assets are $0 or something close to that. Hope they are looking for a big deduction because that is going to be one hell of required minimum contribution you are going to calculate for them.

GBurns, good post. It sounds like the person is eligible to me from the facts described. The issue would appear to be how do you pay her out if/when she is fired and how to report the distribution on a 1099-R since is sounds like she does not have a valid SSN.

He probably rolled over the other plan (less RMD) so I don't see how you can say the refund came from the other plan. If on the odd chance he took a taxable distribution from the other plan over and above RMD you could probably classify a portion of that as 402(g) refund but you may have trouble getting the other TPA to issue the 1099-R that way.

To use an example - Employee A works very part time and works only 400 hours in the first 6 months and does not enter the plan. But then that employee increases their hours such that they work 700 hoours in the second 6 months giving them a 1 year of service in the first 12 months. Or even more extreame Employee B works 600 hours a year (300 every 6 months) for 5 years then is hired full time at 2000 hours per year, employee B would come in under the 1-year of service rule. Unless you are checking eligibiliy every 6 month period and I'm missing the point. Usually what employers are trying to do with these conditions is to keep out part timers from the plan while bringing in the full time ees in less than one year. It is fine to do that but if one of your part timers who doesn't make the 500 hour rule 6-month rule later satifies the 1-year of service rule they have to come in. Typically with a 6 months service requirement you don't also have an hours requirement and everyone comes in after 6 months even the part timers is all I'm saying.