DMcGovern

Controlled group with two separate 401(k) profit sharing plans. They recently filed as a QSLOB. An internal coding system has created a problem when employees transfer from Plan A to Plan B. Company A is coding them as terminated, and some employees have taken a distribution of their balance. They are working on a fix for the internal problem. Other than contacting these employees to notify them that they received a distribution in error and need to return the funds (ineligible for rollover, although I think all were lump sum) how is this corrected? Thanks for your help!

From the EOB, "If the participant has an outstanding loan at the time of death, the participant's death will usually result in an offset of the unpaid balance against the accrued benefit. The participant (or the participant's estate), not the beneficiary, will be liable for any taxes resulting from that offset, because the beneficiary is not a party to the loan agreement. The tax liability might be reported on the participant's final income tax return or on the estate's income tax return." Above from EOB Chapter 7, Section XIV Part I It also references Treas. Reg. Section 1.72(p)-1 for taxation of loan offsets. I also found that 72(t)(2)(A)(ii) provides an exception to the early withdrawal penalty for distributions made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Hope this helps!

My fault again for not providing all the data - as a part of the closing agreement in the correction program, the IRS said that what was originally claimed as income for the entity was to be passed through directly to the individual as unearned income. Makes sense about picking up the amounts previously reported on the 1099s. Thanks!

As a part of the closing agreement in the Voluntary Correction program for the non-entity, they are reversing the deduction taken in 2012 and paying income taxes on the personal tax return. The "somebody else" would not be able to sponsor the plan since there is no entity - only an individual. And not sure if would follow to file a 1041 for a trust that also essentially never existed. All of the assets become the property of one individual as a result of this nullification. I should have provided more details before - sorry!

Anyone had experience with the IRS disqualifying an entity that sponsored a DB plan? DB plan was established in 2012, funded in December 2012. The IRS reviewed the company in 2013 and determined that the entity was a nullity for tax reporting purposes due to changes in tax law requirements. They went through a Voluntary Disclosure program for the entity to make the corrections, pay taxes and penalties. Not sure if 1099's need to be issued for the gains in 2012 (very nominal amount), and 2013 (large amount)? Taxed as ordinary income or can it include capital gains? Any thoughts/guidance on this issue appreciated!

I agree with Austin. For retirement plan purposes, it is very likely that the recipient is the common-law employer of the employees. I may be a bit paranoid, but I think it is still worth reviewing just to make sure no one falls within the guidelines of being a true leased employee. Once that has been clarified, a review of the MEP provisions for exiting is important. It may require the assets of the exiting co-sponsor to be spun off and terminated. I have also seen documents that allow/require participants to leave their balances in the plan until certain criteria or events have occurred. A trustee-to-trustee transfer could also be done. But to return to the OP, if the recipient is the common-law employer of the employees, then they would not have severance from employment.

In these arrangements, it is important to look at who really is the common-law Employer of the employees. If the workers are employees of the PEO and fit the requirements of being leased to the recipient employer, then they either remain employees of the PEO or are terminated from the PEO and hired by a new employer (the former co-sponsor of the PEO plan). If they are employees of the former co-sponsor of the PEO plan, they remain as an employee regardless of what retirement plan they sponsor.

In Derrin Watson's "Who's the Employer", he cites a situation in which an independent real estate broker is considered a service organization. Investment in capital as a real estate broker is minimal, but income comes primarily from rendering personal services.

Here's the situation - Two brothers each own 50% of Company B, their parents own 90% of Company A. Both companies are currently participating in a PEO safe harbor match 401(k) profit sharing plan. Company B wants to exit the PEO plan and transfer the assets directly to their own safe harbor match 401(k) profit sharing plan. This transferee plan would be set up exactly like the PEO plan. Questions: 1. The ownership by the brothers was shifted to a Trust sometime during this plan year (percentages remained the same). Based on the attribution rules, I don't think this transaction would meet the criteria for change in ownership under 410(b)(6)©, correct? 2. Company B wants to do the transfer/setup before the end of this plan year. How does this affect the ability to set up the transferee plan as safe harbor, and the safe harbor in the PEO plan? I'm not finding much guidance on the safe harbor issues, so any advise would be greatly appreciated!

You do have to test as QSLOBs, until this election is officially revoked by filing form 5310-A. You have until 10/15 following the last day of the plan year for which it is effective to file this form.

From Rev Proc 2013-12, Appendix A, 2(d)(i), "If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a safe harbor Section 401(k) plan that uses a rate of match contributions to satisfy the safe harbor requirements of Section 401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee." That defines the "missed deferral". It further states, "The required QNEC on behalf of the excluded employee is equal to )i) 50% of the missed deferral, plus (ii) either (A) an amount equal to the contribution that would have been required as a matching contribution based on the missed deferral in the case of a safe harbor Section 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of Section 401(k)(12)...." My understanding of this is that the match would be based on the full "missed deferral" amount as calculated in the first sentence.

The instructions for 5310-A state: "Notice given by an employer applies to all plans maintained by the employer for plan years beginning in the testing year. Once the notification date for a testing year has passed, the employer is deemed to have irrevocably elected to apply the specified section(s) on the basis of QSLOBs for all plan years beginning in the testing year. In addition, after the notification date, notice cannot be modified, withdrawn, or revoked, and will be treated as applying to subsequent testing years unless the employer takes timely action to provide new notice." My take on this is that you must test on a QSLOB basis once you file 5310-A, and until you timely file another 5310-A to revoke QSLOB status.

See 1.401(a)(4)-9© Each component plan has to satisfy 401(a)(4) testing independently, as long as all the other requirements of this section are met. So yes, I believe you can use different methods to pass. Only gateway has to be satisfied on a plan-wide basis.

Just curious. If you do go through the process of checking for what would be "reasonable" interest rate for each and every participant that requests a loan - how are they documenting this?

Not familiar with non-safe harbor floor offset plans, but I offer the following: allocation rate under Section 1.401(a)(4)-2©(2)(i) - "The allocation rate for an employee for a plan year equals the sum of the allocations to the employee's account for the plan year, expressed either as a percentage of plan year compensation or as a dollar amount." 1.401(a)(4)-2©(2)(ii) - "The amounts taken into account in determining allocation rates for a plan year include all employer contributions and forfeitures that are allocated or treated as allocated to the account of an employee under the plan for the plan year, other than amounts described in paragraph ©(2)(iii) of this section." 1.401(a)(4)-2©(2)(iii)- "Allocations of income, expenses, gains, and losses attributable to the balance in an employee's account are not taken into account in determining allocation rates." and, 1.401(a)(4)-8©(2)(i) - "An employee's equivalent normal and most valuable allocation rates for a plan year are, respectively, the actuarial present value of the increase over the plan year in the benefit that would be taken into account in determining the employee's normal and most valuable accrual rates for the plan year, expressed either as a dollar amount or as a percentage of the employee's plan year compensation."

I think the insurance company (through the agent) would (and should) still issue a letter reporting the "PS58" costs. Even if the policy were held for one day in the year, there was still a death benefit available. And based on how this amount is calculated, there is no method available to pro-rate the amount.

Large 401(k) plan Sponsor submitted a file to the investment company (also a directed Trustee for the plan) for corrective distributions. Later that day, it was discovered that 3 of the people listed were catch-up eligible for a portion of the amount and the investment company was notified of the changes. The investment company confirmed that they would process the corrected amounts. Several days later (and before the 3/15 deadline), one of the 3 participants called the contact person at the Sponsor to tell him that he received a larger check than anticipated. Note the investment company did not notify the Sponsor of this error. Turns out all three participants have cashed the checks and the investment company is saying they will issue two 1099Rs - one for the smaller corrective distribution amount, and the second one for the extra amount, coded as "E", excess annual additions. Somehow this does not seem right. It seems correction should be the investment company's responsibility. What would be the best way to fix this? Thanks for your insights!

Thanks to all for the responses! There were no new employees this plan year and using comp less deferrals made the results worse, so I discussed the options with the client and they were happy to do the distribution (much better results than the prior year).

Thanks for the reply! Sorry, no match available and the participant had a gain on investments last year.

ADP Test fails and after reclassifying most of the correction amount as catch-up. Only 59 cents remains to be distributed. Obviously, it will cost a lot more to get this distribution processed than 59 cents. I can't find anything that would allow me to not make the distribution. I have re-confirmed everyone's compensation and deferral amounts. No new employees this year. Any thoughts would be appreciated. Thank you!

I have a 401(k) profit sharing plan and the sponsor is an LLC with a Sub-S election. Currently, the plan consists of the three members only, but they just hired a new employee. For plan purposes, how is the member compensation handled? (i.e. like a Corporation or a Partnership) Thanks for your help!

If a participant in a 401(k) plan dies without designating a beneficiary, I know that you would follow the terms of the plan to determine the beneficiary. What happens if someone else is named in the participant's will as beneficary of his/her 401(k) balance? Thanks for your help!

The regulations state that a hardship event for medical expenses must meet the following criteria: Expenses for (or necessary to obtain) medical care that would be deductible under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income); Deductible under 213d would mean amounts that the participant could deduct on Schedule A of their tax return. Publication 502 specifies that you may deduct medical expenses for "qualifiying relatives" A qualifying relative is a person: Who is your: Son, daughter, stepchild, or foster child, or a descendant of any of them (for example, your grandchild), Brother, sister, half brother, half sister, or a son or daughter of any of them, Father, mother, or an ancestor or sibling of either of them (for example, your grandmother, grandfather, aunt, or uncle), Stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, or Any other person (other than your spouse) who lived with you all year as a member of your household if your relationship did not violate local law, Who was not a qualifying child of any taxpayer for 2012, and For whom you provided over half of the support in 2012. I would double-check with your plan document provider, but if the participant meets the above requirements, then it seems it would be a hardship event.

401(k) Profit Sharing Plan, employer was a sole prop with employees. Upon the death of the owner (a lawyer), the business is no longer in existance. The plan document does not provide for what happens if there is only one Trustee and no one is appointed prior to his/her death. The spouse was appointed as Representative of the Estate. As such, she signed paperwork with investment companies to become the authorized signer on the accounts and did distributions to the other participants. Spouse also has an attorney helping her with the estate, and the attorney says she does not have the authority (nor will they recommend she take on the authority) to sign the amendment to terminate the plan (since the business no longer exists). Side note on the plan - the deceased owner may have had some prohibited transactions involving the assets of the plan. We are thinking that the attorney is trying to protect the spouse from dealing with this. The two actions seem contraditory to me.?? Either you have the authority to approve distributions AND to terminate the plan, or you cannot do either. Yes, No? Would the plan have been considered an abandoned plan? Is there something in the regs that I can cite with this attorney to explain the spouses position here? Thank you in advance for your help!

Mike is correct. Sorry you have to deal with this, Dave!