Cynchbeast

Thank you all for your input. And yes, neither the employer nor the participant noticed the error for almost 2 years. Out of sight out of mind. We will work with the sponsor on our submission to VCP, but I have 2 questions: 1) They have in the range of 30+ participants, so fee appears to be $1,000. Does this qualify for 50% reduction in fee as per 8(d) of form 8951? 2) We understand the VCP process can take quite a long time to complete. In the meantime, any suggestions on how to proceed? Does it make sense to declare the deemed distribution and re-finance the loan at this time rather allow the default to continue to grow? Participant wants to extend it for 5 years.

Thank you all for the responses. A few notes: this was not an asset purchase but a stock purchase. Co. A became sole owner of Co. B, then later dissolved Co. B and moved all employees over to payroll of Co. A. So we have a controlled group as of 01/01/12, at which point we will take the safest position that we then recognize all service of Co. B's employees from date of hire. This brings a lot of people into the plan in 2012 who never had a chance to defer so, aside from paying a QNEC for lost opportunity, we won't pass 410(b). HOWEVER; we have 7 HCEs only 1 of whom deferred. I think we can resolve this if we EXCLUDE employees from Co. B and also one or more HCEs. That way, plan should pass 410(b) and ADP and there will be no error to correct. This would require a retro-active amendment to 01/01/12. Does this sound feasible?

We have client that overlooked payroll deduction of loan payments since 2011. We just discovered this with data rec'd for 2012 plan year. Technically, default occurred in 2011, but was only discovered this past month. We have calculated default (Princ + accrued interest), and participant wants to refinance loan for 5 year term as there are only 5 pay periods remaining on original term. Q1) Any concerns with us writing 2nd loan for 5 year term to refinance default? Q2) Watching a webcast from ASCi on EPCRS, an example presented of using VCP was "you want to not recognize a loan default in the year of default but actually in the year of correction." Does this mean we cannot just self-correct (SCP) but have to submit under VCP?

BACKGROUND: We have a client (Co. A) with a 401(k) . A few years after the plan originated, Co. A purchased part ownership of another company (Co. B). Both are restaurants. Ownership interests in Co. B have changed several times in the past few years, but at all times prior to 2012, Co. A owned no more than 40% of Co. B so there was not a controlled group. Effective 01/01/12, Co. A bought out other owners and became sole owner of Co. B, so effective January, 2012 we are dealing with a controlled group; however the employees continued on Co. B's payroll through April, 2012. Co. B never adopted Co. A's plan and although we haven't finished final testing for 2012, for argument's sake, let's assume the plan passes 410(b) even with everyone form Co. B excluded. Co. B was then dissolved and all employees transferred to Co. A. effective 04/01/12 with a hire date of 04/01/12 QUESTIONS RE 401(k) PLAN: 1) Does Co. A have to give former Co. B employees eligibility credit for past service or can they consider them all hired on 04/01/12? 2) Does the answer to 1) above change if the employer instead recognized Co. B employees' original hire dates and seniority for other benefits? 3) If we have to give credit for prior service, some of the former Co. B employees would have entered the plan in 2012, but were never offered the opportunity to defer (since Co. A treated hire date as 04/01/12). How do we resolve this? (it's a large plan and many don't defer; although both HCE & NHCE ADP rates are less than 1%, some individual rates are as high as 10%)

I have a client that was covered by insurance in his 401k plan. Each year we received a letter from his insurance agent with the PS58 costs (Table 2001) and included that amount on his personal income tax return. In the middle of 2012 the plan sold the policy for cash -- so as of 12/31/12 there was no insurance policy in the plan. What do I have to report for the PS58 cost on his tax return? Here are some options Nothing -- because there was no life insurance as of 12/31/12 A prorated amount based on the number of days the policy was owned divided by 365 It depends on when the premium was actually paid. If paid while still owned by 401k, then a full year’s PS58 cost has to be included --- and if paid after policy sold then nothing to include Other

It was an asset purchase. So how do we give the newly hired employees credit for prior service? Board resolution? Plan amendment? Some other means?

I don't know - but will find out. Meanwhile, could we look at both scenarios?

We discovered 6 employees on a client's 2012 census who deferred to the 401(k), had never been listed in prior years and had hire dates going back to the 1990's. We found that these were employees from a company they purchased effective 10/01/12 and they gave them credit for service with the prior company so they could participate in the plan. 1) Can they adopt an amendment now, retroactive to 10/01/12 allowing prior service with previous employer for eligibility and vesting purposes? 2) If they cannot adopt a retroactive amendment, and short of returning deferrals to them as a mistake of fact, can anyone suggest any other solutions?

Participant in plan has an outstanding loan from 2008 (maturity = July, 2013). For 2 years, payments were made timely, but upon receiving Y/E data for 2012 we have discovered that she stopped paying on the loan in 2011 and made no payments during 2012. Participant and plan sponsor both honestly thought it had been paid in full. We believe it was an honest mistake on both their parts, due to changes in payroll and no one paying attention. The obvious answer is to declare a deemed distribution, and for her to repay the remaining balance plus interest. This would come to approximately $20,000 and since she is under 59 1/2, we are looking at a sizeable tax hit. My questions are: 1) Do we have flexibility in how she repays the loan? Can we re-write it or must it be repaid by the original maturity date (07/2013)? Can we reduce the interest rate (was 7.0% but at current prime new loan would be 5.25%) 2) Is there any way to get around the deemed distribution and consequent tax hit? Would this qualify for EPCRS? Again, it appears to have been an honest error. Granted participant should have known that she hadn't repaid nearly all the loan and that it wasn't being taken out of her checks, but as is all too commonly the case, no one was paying attention.

We have a client with a DB and a 401(k). Owner only, no employees. The plans have separate accounts and each has its own employer ID number. Can the sponsor purchase real estate with money from each of the two plans?

Good points. Thank you very much for your response.

We have a plan where one of the owners is in the process of a divorce and his wife - soon to be ex-wife - also works for the company. Is there any point in the divorce proceedings short of the final divorce when the wife can cease to be considered HCE and Key? Or must we wait until the final divorce?

I know the automatic cash out and rollover rules get confusing, and to make matters worse, I just studied for and passed ERPA-SEE Part II, so now I have just enough knowledge. Anyway, we have 401(k) with auto rollover limit at $5,000 and a LOT of terminated participants they have not been able to contact. I know participants with over $5,000 must be left in the plan. But my ERPA studies said that the automatic rollover can only be done before the later of age 62 or NRA (NRA per plan is 65). We have a couple participants who are already age 65. But then the Adoption Agreement says something about involuntary cash-out above $5,000 is deferred until required beginning date. I would appreciate any enlightenment that can be provided on the topic. Thanks.

Thank you all for very helpful suggestions.

We have client with funds in John Hancock. Owner was instructed to take RMD of $3,893 BEFORE 12/31/12. We provided him with JH form, which we just got back from him in the mail YESTERDAY asking if it was completed properly. Does anyone see any way we can have this treated as a 2012 RMD as it was intended in order to avoid the penalty?

Thank you for your responses. I have reviewed the documents and can find no mention anywhere of either allowing match to be treated as catch-up, or limiting match to prevent failed ACP test. So - would I be correct in assuming then that the sponsor must pay the additional match, then take back the entire excess amount? Because it certainly would be preferable to tell them to skip the additional $100 and only take back $370.21.

I have small 401(k) plan with 1 HCE deferring and 2 NHCEs. The plan initially failed both ADP & ACP, but passed ADP when excess deferrals recharacterized as Catch-up (over 50). The calculated reduction for Match is $470.21. Question: Per plan formula, the sponsor still owes HCE $100 additional ER match. Can they skip that and reduce the match already paid by $370.21 (move to cash account), or must they still contribution the $100 to fulfill the match required by formula, then reduce by $470.21?

We have a Profit Sharing plan that the sponsor wanted to terminate in 2012. All termination paperwork is complete and all remaining participants (about 20) have been paid out. Total distributions approximately $773,000 All money had been moved into one checking account. I received confirmation from the plan administrator that all final checks as well as the taxes withheld were cashed as of 12/31/12 (PYE) EXCEPT for one IRA rollover in the amount of $20,000. Question: We end 2012 with a checking balance of $20,000 and an outstanding check for $20,000. Can we consider the plan terminated in 2012 since the net trust balance is $0, or must we carry it over into 2013 since technically the trust still had some assets?

Thank you both for very useful information. I checked the IRS notice, and it pretty much answers any questions we have.

We have a participant in a Defined contribution plan (still employed, plan allows for in-service distributions and he is eligible) who wants to convert part of his account into a Roth IRA (plan also allows for Roth). We are not sure at this time if we are looking at Profit Sharing money, salary deferrals, or other ER money (match, Safe Harbor, QNEC). Could someone please enlighten me on the mechanics of converting pre-tax contributions to Roth IRA while leaving the money in the plan? Is it as simple as just issuing a 1099-R for the amount involved and reclassifying the account balance as Roth?

So this brings up a follow-up question. If we withhold 10% on the RMD, and 20% on the distribution in excess of that amount, can we still issue just one 1099-R in January for the combined totals?

Plan participant (owner) wants to withdraw in excess of the required MRD: 1. Is the withdrawal subject to witholding? 2. If yes: How much is the witholding from the MRD portion and how much from the excess withdrawal? We were told by the participant that her accountant told her that no witholding is required.

Corporation started on 9/1/2010 with 2 full time employees. The owners did not take any salary until 01/01/2012. Corporation wants to adopt a DB plan as of 01/01/2012. Can it be assumed the owners hire date was 09/01/2010 and give them past service credit?

Thank you for a great suggestion. I am trying to find the webinare on the relius site; can you give me a hint as to how to get to it?

Employer wants to adopt a retirement plan but does not want the plan name to include the name of the sponsoring busines. He wants such inconspicous name as "RMZ Pension Plan" As long as the employer EIN is correct in the filing, is there anything that forbids the plan sponsor to name the plan without including the sponor's business name?