Lou S.

Somebody who has gone through this before may have more experience than me, but my understand is that you have to pay the excise tax and then request a refund when the waiver is approved. I know it sounds dumb but the IRS and PBGC aren't always the most logical entities.

Assuming there is no after tax basis or roth-k refund, $900.

Were the non-owner terms paid out? If not I would think you are still PBGC but once the last non-owner has been paid whether by lump-sum or annuity purchase, our experience is the PBGC is very good about giving a "no longer covered letter." On a related question we have a plan that has always covered just 2 substantial owners. One of the owners, brothers not that that really matters, has just bought out the other but both are still working. When does this plan become PBGC covered? Is the guy who sold out considered a substantial owner for a period of time after the stock sale? I seem to recall a 5-year look back. Am I dreaming or is this plan immediatley PBGC? If no one knows off hand I guess we'll request coverage determination from the PBGC.

You have a 415 excess. Correct through EPCRS.

Unless it is going to create a balckout period of more than 3 days, I'm not aware of any legaly required notices. That said, it is probably best practices to notify particpiants before the change and give them "adaquate" time to move their funds to a different investment than the one the trustee has chosen if they are not happy with the new investment. What represents "adaquate time" would probably vary with the size of plan and sophistication of the participants but I'd think 30 days would be a good guideline though if the trustee thinks the fund is really bad they might want to do it quicker to avoid large losses. Something like a suspected "Madoff type fund".

Don't let people write personal checks to the plan unless they are self-employed. I tell them it needs to run thorugh their payroll and be reflected on the W-2, then of they don't do that way it is their problem not mine. If you let the owner write a check when he/she wants then you have a problem when some non-owner comes in and wants to write a check to the plan and call it a deferral.

For #1 was he a key becuase he was a more than 5% owner at any time in 2008? If yes he'll be a key for 2009 but a former-key for 2010.

This is the answer the IRS gave at both the ASPPA (10/08) annual conference and LABC (1/09). The wording from my handout is - Once the employer contribution is made, the salary deferrals in excess of the 415 limit are reclassified to be catch-up contributions.

Yet another question about the safe-harbor non-elective contribution. Clearly at this point owners can't waive for 2008, at least not unde the rules as I understand them so the contribution due for 2008 has to be made, absent backruptcy along with plan termination where the IRS might have some pity for the client. And I think I've found this answer in at lest two threads in my search. You have the dual problems of following written Plan terms and 411 cut back issues. But can the plan be amended now for 2009 to elimiante the safe-harbor nonelective only for HCEs who are more than 5% owners? That is NHCEs and non-owner-HCEs still get the 3% contribution. Or at worst freeze the 3% contrib for owners through date of amendment but full year 3% for all others? Has anyone seen this before? Probably a better question for the IRS than here but thought I'd try to get some other opinions. I think the answer is no even though the alternative might be terminating the entire plan which just seems counter to good retirement policy. I know the IRS position is "well you should have done a maybe notice" but it is a bit late for that.

Split funding is currently dead under PPA (for min /max). There is a bit of a grey area though now with WRERA (I think this can in with WRERA) where you "add expenses to the TNC", the question becomes "what are expenses?" This came up at the LA Benefits conference in January and there wasn't really a clear answer from the IRS. It is anticipated that in technical corrections or regulations that expenses will be clarified to read "administrative expenses" but how that will relate to insurance is still a bit of a mystery to me. Like you we have very few DBs with insurance but this does have a big impact on the max deductible contribution for those plans.

Thanks. I knew I should have used the search function.

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.