t.haley

Client has a pre-approved 401k plan. Recently discovered error allowing early inclusion of noneligible employees following purchase of company. Employees of purchased company were allowed to enter plan immediately; however, plan requires one year of service. Client would like to retroactively amend plan to allow immediate entry into plan for these employees in conjunction with the purchase. Rev. Proc. 2016-51, Appendix B, Section 2.07 allows correction by plan amendment and requires submission of the amendment to the IRS for a determination letter. Section 6.05 states that determination letters shall not be submitted with the VCP application and addresses determination letters and pre-approved plans under VCP or Audit CAP (but does not mention SCP). Can anyone confirm for me that if we correct through SCP with a retroactive amendment to a pre-approved plan whether we are required to submit the amendment (i.e. the plan) for a determination letter?

BG5150 - I have searched EPCRS too for some kind of qualifying language to address this but have come up empty-handed also!

I am looking for some guidance on how to address the calculation of earnings on a QNEC, specifically how to handle the calculation of earnings for the lag time between the funding of the QNEC and when it actually hits a participant's account. I am being told by the record keeper that there may be as much as a 3-5 day lag between the time the employer's bank account is debited for the QNEC (plus earnings thru that date) and when it actually is deposited in the participant accounts. They propose calculating earnings up to the day the money leaves the employer's account. I read EPCRS to require earnings up to the date the "contribution is made" to the participant account. For some reason they are balking at carrying the earnings calculation forward to account for this possible lag time. It would be helpful to provide them with some official guidance, etc. addressing this. Any help would be appreciated!

Employer has an HRA that they are trying to phase out. The plan has been closed to new participants since 2004. The employer ceased contributions to the plan as of 12/31/16. Active participants with balances may "spend down" their accounts over a certain period of time based on their account balance (higher balances get longer to spend down). Terminated employees forfeit their balance upon termination, subject to a run-out period following termination for expenses incurred prior to termination. My question is how to administer COBRA for this plan. Generally, COBRA must be offered for an HRA. Under general COBRA rules, a qualified beneficiary who elects COBRA will have access to their unspent account balance and be entitled to HRA accruals that active employees get. In this case, there are no employer contributions for active employees - only balances, which are forfeited upon termination. Are we required to offer terminated employees the option to continue their HRA coverage by paying a COBRA premium that will in essence fund their account going forward? This would give them greater rights than the active employees - that doesn't sound right? Help!

Premiums for health insurance plan based on what "salary band" an employee is in. If an employee gets a raise mid-year such that he jumps up to another salary band (which raises his premium), is this a change in status under Section 125 allowing a change to the employee's election for the remainder of the year?

EPRCS Section 6.02(5)(b) states that if a corrective distribution is less than $75 the plan sponsor is not required to make the corrective distribution if the cost to make the distribution exceeds the distribution amount. This section goes on to state that it does not apply to corrective contributions "with respect to a participant with an account under the plan." Can I apply this "de minimus" rule in the following situation: employee is improperly excluded from auto enrollment in plan with 2% contribution but the mistake is discovered after employee has terminated and therefore does not have an "account under the plan" (assuming the amount of the QNEC is less than $75)? EPCRS requires a corrective contribution (100% vested QNEC plus earnings) which should be distributed to the employee ("corrective distribution"?).

What is the correction for failure to implement auto enrollment in 401k plan where the employee has since temrinated? For example, Employee A was hired in 2014 and eligible for auto enrollment. Employee A was not auto enrolled and continued working until 2015. The error was discovered in 2016. I am aware of the correction procedure in Rev Proc 2015-28 but it requires "correct deferrals" to begin within a certain time period. We cannot do this because there is no compensation for this employee. Which brings me to the general correction for exclusion of an eligible employee - 50% QNEC. How is this contribution made? There is no plan account - is one created and then distributed to the former employee? Any advice is appreciated!

Yes - those are the nondiscrimination rules I am referring to, and the regulations issued in May. My client, who does not fall within the definition of a "covered entity" under the regulations is in a controlled group with another entity that is a "covered entity." I am looking for any authority/guidance on the question of whether a not otherwise covered entity will be deemed to be a covered entity (and therefore subject to the nondiscrimination rules, notice requirements) simply by being in a controlled group with a covered entity. So far, I have been unable to find anything.

I know that the ACA has adopted the controlled group rules for purposes of the employer mandate. What about for the nondiscrimination rules? I have reviewed the final regs issued 5-18-16 and cannot find any discussion about it. I have a group the does not provide health services and receives no federal funding; however, they may be in a controlled group with an entity that provides health services and receives federal funding. Does the fact that the two entities are in a controlled group mean that the "non-health care" entity is now subject to the nondiscrimination rules just by virtue of being in a controlled group with the health care entity? Any guidance would be greatly appreciated!

There is language in the instructions to Form 8928 relating to correction of a failure which states that a failure is deemed to be corrected if a "person to whom the failure relates is placed in a financial position which is good as such person would have been in had the failure not occurred." This seems to indicate that there is not a "person to whom the failure relates" unless there was some sort of financial injury. If the lifetime limit was not imposed on any plan participants (and thus did not impose financial injury on any plan participants), I would argue that there were no affected persons and therefore no excise tax due.

I am trying to confirm that no excise tax under Sec. 4890D is due if no plan participants are affected by a failure. Example - plan fails to remove lifetime limit provision until 2014. The limit was never imposed on a plan participant in any way (i.e., no participant was denied benefits because they went over the limit). The way I read Form 8928, there is no excise tax due because there are no "individuals to whom the failure applies." Section 4980D nor the instructions to Form 8928 do not define the phrase "individual to whom such failure relates." Has anyone run across any guidance, etc. that speaks to this? A related question is whether a Form 8928 must be filed if there is no tax due. I would think the return would still need to be filed to report the failure. Any help would be greatly appreciated!

Thanks for the replies. The employer is in an odd situatuion. The plan has been frozen since 2010 and they are wondering if it would be best to terminate the plan instead of incurring the costs to maintain the plan. They want to avoid making cash distributions or being required to buy back stock distributed under the put option due to lack of cash. In essence, they want to make all stock distributions upon termination of the plan and not be subject to a put option due to lack of funds. There are very few participants in this plan so we don't really have a problem with going over the max number for a sub-s corporation. I am trying to explore all possible solutions for them. At this point, it may just be best to continue the plan and pay out the participants as they retire or terminate employment.

QDROphile - that's what I was thinking also. Could the plan be amended prospectively (to only apply to distributions made after 1-1-16 for calendar year plan) to add language that in the event the corporation elects sub-s status, the provisions of 409(h) would apply and the put option would not be required?

ESOP established in 2002, non-publicly traded stock. Corporation elected sub-s status in 2008. I understand that Code 409(h) excepts ESOPs maintained by sub-s corporation from the put option requirement. But must the plan document contain language to that effect? Currently the plan document contains the required put option language but does not contain any language referencing 409(h) in the event the corporation elects sub-s status. Corporation is considering terminating the ESOP and wants to know if they can make distributions in stock without having to deal with put options.

Client currently offers variety of ERISA-covered welfare plans and wants to consolidate into single wrap plan. Plans include a self-insured health plan (with VEBA) and a combination 125/health FSA/dependent care plan (single plan document, single plan number). I have read conflicting opinions on whether including a health FSA in a wrap is advisable given the existence of the self-insured health plan/trust. Some advise against it because the trust requirement (which would not otherwise apply to the health FSA given DOL 92-01) will then apply to the FSA pre-tax contributions. Thoughts?

Belgarath - thanks for the reply. We are opting for a "corrective" amendment to the plan stating that the trustee named in the plan never acted as the trustee and the "correct" trustee has acted as the trustee since the original effective date of the plan.

DB plan started 1-1-13. Based on information from client, named Company X as plan trustee. Plan document and SPD identify Company X as plan trustee (but Company X did not sign the plan document or any other document accepting position as trustee). Now plan sponsor wants to "remove" trustee and appoint himself as new trustee. Company X says it did not know it was the trustee and never meant to be the trustee, just investment provider. Any ideas on the best way to fix this?

Does anyone know of a requirement to file a notice with either the IRS or DOL when instituting a new health plan? Client got the idea that if they start a new health plan (after not offering one in the past) they must file something with either the IRS or DOL notifying them that a plan has been implemented. I cannot find anything on this. I initially thought the client was referring to the 6055 and 6056 reporting requirements but they assure me they "heard somewhere" that they have to file something "with the government" to show they are now offering a health plan or they will be subject to a penalty. Any ideas?

spriritrider - Yes! after the IRA was issued the company realized the mistake and had the employee/husband sign a written amendment removing his wife as a joint owner but leaving her as a joint annuitant. What I am trying to determine is whether such a mistake can be corrected or whether it "taints" the IRA from the beginning.

Employee/husband takes valid in-service distribution from 401k plan and rolls it over to a qualified IRA. At time of rollover employee/husband is age 73. Original IRA application names husband and wife as joint owners and joint annuitants. A month after the rollover contribution is made, the IRA is changed through a written amendment to remove the wife as a joint owner. Three years later the husband dies and wife "takes over" as new IRA owner (pursuant to terms of the IRA) and receives the annuity payments. She is now filing bankruptcy and claiming the IRA as exempt property. I have been unable to find any information on whether the qualified status of the IRA should be questioned because there were "joint owners" when the IRA was opened and the rollover contribution made. Does the later amendment "save" the qualified status? Also, I have found information on IRS website stating that individuals over age 70 1/2 cannot make traditional contributions to a qualified IRA but there is no such age limit for rollover contributions. However, I cannot find a cite to a statute or regulation for this. I assume that the rollover contribution made by the employee/husband was valid even though he was age 73 at the time. My client is looking for statutory or regulatory authority for this. Any information and/or insights would be appreciated!

Thanks Lou S. - to my knowledge there is no QDRO. There are some disrepancies in the IRA paperwork that make me think "no one was at the helm" when this rollover was done in 2007. The application for the IRA shows husband and wife joint owners (not allowed for a qualified IRA); however the actual IRA paperwork issued shows the wife as the sole owner. In the 401k distribution paperwork the participant directed the plan to rollover his account to a "New IRA" and the check was made payable to the IRA provider "for the benefit of" the participant. Lots of issues and incomplete records. My present issue is the wife is claiming the IRA as exempt in bankruptcy. Under state law, it is exempt if it is a "qualified" IRA. Given these circumstances, I'm not sure if the original rollover was proper in the first place. How does this affect the qualified status of the IRA now?

FACTS: participant takes early withdrawal from 401k plan and does a direct rollover into an IRA. Based on the documentation, the IRA that accepted the rollover is owned solely by the participant's wife. Is this a valid rollover/IRA contribution? I have taken for granted that a direct rollover from a 401k plan can only be made to an IRA that is owned by the plan participant. However, I cannot find any statutory authority for this. Everything I have read states that you can rollover over a 401k distribution to "an IRA". I have found discussions on contributions to spousal IRAs but nothing specific about the source of the contribution. Any revelations on this subject would be greatly appreciated!

Plan loan policy (that is incorporated into the plan document by reference) provides that a participant that has defaulted on a loan in the past is not eligible to receive another plan loan. Several such participants were allowed to have another plan loan in violation of this policy over several plan years. Is this an error that can be corrected through EPCRS? Is it a "plan loan failure" to be reported and corrected on Schedule 9 to Appendix C? The loans that were granted met the other requirements of the loan policy and Section 72(p). The plan sponsor wants to retroactively amend the loan policy to remove the "no loan if previous default" provision.

Thank you for the replies. Regarding the potential prohibition transaction issue - that was one of the first red flags that went up in my mind. The person who received the money is an accountant and previously had common clients with the participant (who owns a TPA business), however, the accountant does no work for the plan or for the participant personally or for the TPA business. The prohibited transaction statute defines a prohibited transaction as between the plan and a disqualified person. Would a participant investment (of the type I described or any investment in a mutual fund, etc.) ever be considered a transaction between the plan and that investment/fund? Maybe if the participant was also an owner of the plan sponsor and the investment was a separate business venture of his. Outside of those type of circumstances, I don't think there could be a prohibited transaction issue.

Self-directed plan participant directed "investment" of portion of his account ($40,000) to individual, secured with a promissory note. Individual has not been making payments for two years. Participant is also a co-trustee. Other trustee not comfortable with this. Have not seen plan document yet, but initial question is whether this is even allowed as an "investment"? Can a participant direct the plan to transfer a portion of his account balance to an individual and "secure" the investment with a promissory note? Is this any different that using plan account funds to invest in a business? real estate?