erinak03

I had a client with a penalty notice actually call the IRS. They were told that the filing was done timely but the issue is that the total listed on lines 6/7 do not equal line 9. Obviously lines 6-7 are used when reporting participants with Entry Code A, whereas line 9 (aka page 2) would list everyone reported on the filing. If this is accurate, sounds like whomever set up that algorithm to flag the issues goofed big time since any filing with a code B, C, or D seems like it would get flagged. Also a tough look for the IRS when their method of informing plan sponsors about a simple error is via a huge penalty!

Okay, I got additional details from the employer. It is a housing allowance that is considered a taxable fringe benefit as it does not qualify for a "for the convenience of the employer" exemption. It is subject to federal income tax and FICA taxes as well so it sounds like it's being handled correctly per IRS Pub 15-B. The relevant part of the plan compensation definition: "Compensation" means a Participant's Basic Compensation, adjusted by this Section, actually paid during the Compensation Computation Period, adjusted as follows: (a) excluding (even if includible in gross income) reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, and welfare benefits... In further conversation with the client, they switched payroll processors in 2019 and the current processor is correctly excluding the housing allowance in all deferral and matching calculations so my issue is really just tackling the error from 2018 and early 2019. Thanks Larry, I appreciate the conversation.

He's an "environmental assessor", from what I can tell. The payroll item references travel expenses so I imagine it is akin to taxable per diem. His salary alone is roughly $110k with an additional $13k in fringe benefits and he deferred the maximum in 2018. He definitely wouldn't have run into any limit issues had the fringe benefits correctly been excluded, fortunately. It comes down to either: 1) the plan sponsor withheld 16.75% of pay instead of the 15% requested on the election form; or 2) they withheld 15% on the paychecks they shouldn't have (if the taxable fringe was done in a completely separate paycheck). I'm leaning towards simply leaving the deferrals as-is, documenting the error, having the plan sponsor inform the participant of the change to future checks (to correct the current method), and using the correct compensation for the matching contribution. I'm just curious if there is anything glaring that suggests this is not the best route. Thanks.

I have a client whose plan defines compensation to not include taxable fringe benefits. I learned today that one of the employees is paid a "taxable living expense allowance", which I believe qualifies as a fringe benefit. He was permitted to defer from (and be matched on) the allowance throughout 2018, and I imagine most of 2019. I can deal with the excess match contributed but my question is if there is a "fix" for the failure as it pertains to the deferrals. I'll need to confirm with the client if the allowance is paid with his salary in the same paycheck (which would mean his 15% deferral election was actually a higher rate of deferral based on the lower eligible wage) or if it's done in a separate monthly check (in which case there shouldn't have been deferred from at all). Do I just document as an operational failure, implement new procedures, lecture the client and move on? The participant was clearly content with the deferrals as they were being withheld so I don't think a corrective distribution is the appropriate path as it would be a detriment to the participant. Thanks in advance for your thoughts.

I did confirm yesterday that the employee is not currently deferring from pay, so at least I can avoid that potentially ugly conversation. The client is going to follow up with the participant. The employer has had an employee write them a personal check to forward to JH for an early loan payoff so they have run into a similar situation in the past, albeit under a different set of circumstances.

The plan's assets are at JH so I don't believe check submissions are an option unless it goes through the plan sponsor.

The loan policy says the loan becomes due and payable upon termination and that any missed payments cause the loan to be defaulted after the cure period. So yes, eventually if enough loan repayments are underpaid/missed then the loan will be in default. But what about in the interim? Do I tell the plan sponsor that they need to continue to withhold the loan payments which may essentially not even allow the participant to receive a check when his gross wages are too low to fully cover the loan repayment? For example, his loan repayments are $85/paycheck. In a payday when he may only work a handful of hours and his net pay is only $60, does the plan sponsor need to withhold the full remaining paycheck amount (which, yes, would still not cover the payment and would render him behind schedule unless he can catch up later)? While the loan policy does state that the repayments are to be made by payroll deduction, the state does require that employers have permission from employees to withhold most items from paychecks. I suppose the employee does have the ability to revoke his permission to have these payments withheld from checks and subsequently default on the loan. Obviously this is not the optimal solution as it circumvents distribution rules and I know there are several posts on this subject but I'm not sure what the employer could do should the participant revoke permission. All that said, I guess the most appropriate response as the TPA is to simply inform the plan sponsor that, since the participant is still employed, the loan repayments are still in effect. If the paychecks are not sufficient to cover the full payment then the participant is subject to make up the difference. Thoughts?

I have a plan where a participant took a 5-year loan in 2015 and dropped back to part-time effective January 2016. At this point he is not terminated due to the part-time/on-call nature of his position so the loan is not officially due and payable per the loan policy. Since his paychecks are sometimes very small, his net pay is not often high enough to cover the loan repayment (or results in a very high percentage of his paycheck). The plan only allows for one loan and, while the policy allows for refinancing, his original loan was for the full 5 years so we can't refinance to extend the life of the loan beyond the original term. Should the payroll department be withholding as much as they can (even if it results in a $0 take-home check)? Or at what point does the employer determine that he's actually terminated and then rehired upon the next time he is accruing a paycheck (and the loan would therefore be due and payable and therefore defaulted upon)? Thanks for your input!

Does that help? From what I understand, the quote you gave is in reference to when a loan is originally issued. If a loan is issued and those items are not followed, the loan is automatically a prohibited transaction; the loan isn't even given the opportunity to be defaulted upon. Here is my one last piece of research on this subject (IRS 401(k) Fix-It Guide regarding participant loans): https://www.irs.gov/Retirement-Plans/401(k)-Plan-Fix-It-Guide-Participant-loans-do-not-conform-to-the-requirements-of-the-plan-document-and-IRC-section-72(p). (see question 9b) It does go into detail regarding what requirements must be met to avoid being a PT (same as you indicated above) but under the "How to find the mistake" section, item #5 says Review the disqualified person’s actual loan payments to determine whether he or she is following the loan document terms. The law treats amounts not timely paid per the loan terms as unsecured loans and prohibited transactions.I'm not entirely sure as to why an unpaid loan payment is considered an unsecured loan since the entire balance of the loan was secured at the time of issuance but that appears to be the IRS's stance given #5. Thoughts??

For what it's worth, here's the other piece of information that I found suggesting the defaulted loan causes a PT: https://www.irs.gov/pub/irs-tege/loans_phoneforum_transcript.pdf (see page 5) It's a transcript from an IRS phone forum on participant loans. It's a little cumbersome to read sometimes since it was originally spoken so the sentences are not always complete, etc. but this is the part that worries me: "if they default, a disqualified person defaults, they've come into a really expensive issue for themselves tax wise because it's not only a deemed distribution and they have to take it into income but they have to file 5330s and it's considered a prohibited transaction [...] so they're going to continue to have to file 5330s and they're going to owe excise tax until they have actually paid that amount of money back to the plan". As far as facts and circumstances go, he took the loan and made correct, timely payments on it for a year before he came into financial difficulties and stopped making the payment (unbeknownst to me, naturally) so I would argue that it was a bona fide loan and would like to merely deem it as a distribution and be done, just as Belgarath suggested. Can anyone poke holes in the transcript above??

I have an owner who took a distribution from his 401k plan. The terms of the loan followed all the requirements of 72(p) thereby making it a permissible loan and was not a prohibited transaction upon the loan issuance. Now the owner has defaulted on the loan. I've done extensive research regarding the ramifications of a disqualified person defaulting on a loan. I cannot find any direct information from code sections 72 or 4975 but I did find the following on two separate IRS communications (one was a phone forum, the link below is from a TEGE/EP Nationwide Tax Forum in 2013): a disqualified person defaulting on a loan results in a prohibited transaction. https://www.irs.gov/pub/irs-tege/forum13_loans_hardship_distns.pdf (the example is on page 22) Has anyone declared a defaulted loan to an owner as a PT and is there some regulations or code sections that I'm missing? The example from the IRS in the above link is very cut and dry but I'm irritated that I can't find an official regulation somewhere.

I have a client with a 3/31 YE profit sharing plan. The plan sponsor has been a C-Corp, also with a 3/31 YE. In 2013 the owners created a new S-Corp with a 12/31 YE and this new S-Corp is the plan sponsor for the profit sharing plan. I know that, for the 1/1/13-12/31/13 tax year, the S-Corp cannot deduct any contributions as the 4/1/13 - 3/31/14 plan year had not ended so the contribution they accrue for PYE 3/31/14 will be deducted on 2014 corporate tax return. Here is my question: when must that contribution be made? My initial thought was that it is based on the plan sponsor's tax return due date (so 9/15/15 with extension). However, we would accrue on the plan's books a $100k receivable as of 3/31/14 and then accrue the next year's receivable of $100k as of 3/31/15 before the original accrual is paid off on 9/15/15. Will we just be carrying two years' worth of accruals until the plan terminates?

I have a client who has a requirement that the participant must be employed on the last day of the plan year in order to share in the year's contribution allocation. The plan is also written that distributions cannot be made until following the end of the plan year. I have a participant who is trying to find a loophole and work on Dec. 31 and then quit that same day to be able to both receive a 2008 contribution as well as receive their money a week later in January. Is it possible to both be employed and terminated on the same day to get the benefits of both? My office keeps going back and forth on the subject and I cannot find any clear answers in my research.