Brenda Wren

Participant has a vested balance of $75,000 including an outstanding loan balance of $15,000. The highest outstanding loan balance in the last 12 months is $35,000. If the loan limit is 50% of the vested balance not to exceed $50,000 reduced by the highest outstanding loan balance, what is the maximum amount available for loan? Fifty percent of the vested balance is $37,500; $15,000 is outstanding leaving $22,500 available for a loan. But $50,000 less $35,000 is $15,000; $15,000 is less than $22,500, thus $15,000 is the maximum amount available for loan. Good so far? So the Participant takes a loan for $15,000 and now has total outstanding loans of $30,000. Does it not stand to reason that since loans were maxed out that the Participant now has $0 available to take another loan? Let's do the math again. Participant has a vested balance of $75,000 including outstanding loans of $30,000. The highest outstanding loan balance in the last 12 months remains at $35,000. Fifty percent of the vested balance is $37,500; $30,000 is outstanding leaving $7,500 available for a loan. The $50,000 limit less $35,000 is $15,000. Now $7,500 is less than $15,000, thus, what do you know, now we have $7,500 available for a new loan! So Participant is told that he is maxing out his loans on one day, only to find more available for a loan after taking the "maximum" loan the day before. I've been doing this a long time (perhaps too long!) and never came across this before. Do I have it right? Missing anything?

Thanks for the replies! Good ideas!

I believe I understood Ilene Ferenczy to say that if a LTPT employee exists, and chooses not to participate, the plan is subject to ERISA and can no longer file a 5500EZ in 2024 if it otherwise qualified to file as an EZ filer in past years. So if the plan is subject to ERISA, the plan is also now subject to the bonding rules in 2024. Case in point: Husband/wife plan only with an ineligible part-time employee for many years. Part-time employee is defined as LTPT employee on 1/1/24; chooses not to participate. Plan holds $5 million in non-qualifying assets. Now they have to get a bond in place on 1/1/24 for $5 million to bond their OWN assets (as if they would steal the assets from themselves, seriously!) or subject themselves to an audit for 2024. And they also have to disclose to the DOL, and the public, information about their plan. Any thoughts? I think I would choose to terminate the plan at this point.

We filed 2 extensions for 2 plans with plan year ending 4/30/21. The extensions were sent to Ogden, Utah, return receipt requested on November 3, 2021. One envelope, two extensions. We typically file extensions one month before the due date. Today, one of our clients received a denial of the extension request. Upon closer review of the crumpled, torn-up return receipt from the US Post Office, the stamped date of receipt was December 6, 2021. While this is after November 30, most assuredly the envelope was mailed in time as the US Post Office could never deliver anything from Florida to Utah in 6 days! So we notified the other client that they would likely receive a denial as well. Well, guess what? They received their letter from IRS today, too! But theirs WAS APPROVED! It's a darn shame that we are at the mercy of IRS and the US Post Office. This is totally unfair to all of us and our clients. IRS should immediately develop a system to electronically file extensions! Or do away with the 7 month deadline all together! It is painfully obvious that they do not have the manpower to conduct their "business". It took them 2 1/2 months to process a form! We are basically powerless to do anything other than pay $750 and file under the Delinquent Filing program. Not worth the aggravation to fight it or risk it for our client. I guess we need to file these 2 months early to TRY to avoid the problem we had with the 2019 filings. I don't think they got around to processing those requests until the following year! Has anyone figured out how IRS is able to have their letters delivered on the date they issue them? Time travel?

Thanks for the input. So it sounds like this could be just what I thought......not well thought out! I did not know that an extra 20% would apply! Even worse than I thought! I would rather not use my after-tax dollars when I retire to bridge the gap, especially since I have so much available in the HSA. I've saved religiously since 2007 so that I could retire early at age 62 if I wanted to. The last thing I want to do is pay ANY tax on my HSA dollars. I was hoping I could post something here in case anyone who specializes in this area could bring about change in the rules. It seems everybody else gets to pay health insurance premiums with pre-tax dollars except seniors! And the rule about not using it to pay Medicare supplement premiums is unfair too!

If I understand the current rules correctly, if I retire at age 62, I can use my HSA funds to pay COBRA health insurance premiums, but after that (18 months) I cannot without paying taxes on the withdrawal. Seems like a rule that wasn't very well thought out. Is this correct? Anyone else think this is unfair?

Wow, looks like I chimed in on that thread back in 2018! Senior moment! Well, in this case, I am not the TPA for either plan. So no ethical choice for me to make. This came to us from a CPA as he was preparing the 1040. Thanks to all!

Both deferrals were Roth. Recordkeepers are taking the position that at this point, April 20, there is no distributable event (as noted above). No mechanism in place to "separately track". Appears that participant will likely suffer no negative consequence and ultimately receive tax-free earnings on 2 deferrals for 2020, UNLESS something results from the filing of the 1040.

Deadline not extended, 2 unrelated plans, too late to remove the funds. There is no provision in the plans to remove the funds after the deadline since they are unrelated employers. What IRS will see is that $39,000 was contributed on the W-2's. But they see similar situations often and the remedy is that the amount over $19,500 is taxed with the 1040 return. But the Roth was already taxed, so no tax implication on the 1040. I'm thinking that the best course of action is to do nothing and wait to see what IRS says when the 1040 is filed. And I'd really like to see the regulation that addresses this situation. So far, I haven't been able to find anything.

This is a 2-part question. Was the deadline to distribute excess deferrals postponed to May 17 this year? Secondly, suppose an employee participated in two 401(k) plans during 2020 (unrelated employers) and funded $19,500 in Roth deferrals to both plans. (Yes, this is a true case!) Is there a remedy for this error or should we ALL be trying to do this??? The penalty of "double taxation" doesn't apply, so what does??

Ten-year-old ESOP, loan is now paid off. We're planning for 2020 and trying to determine how much to pay the terminees. Plan provides for typical 5 installments for distributions over $5,000 in the year following the year in which the loan is paid off. For example, a participant retired in 2017 with a $100,000 benefit was supposed to begin receiving distributions in 2018, but did not due to the outstanding loan. In 2020, does he receive $60,000 ($20,000 for 2018, 2019 and 2020)? Or does he receive $33,000 (1 of 3 remaining installments due)?

I have a large plan (over 300 lives) with a lot of rehires. Just wondering what the general practice is for other administrators. Do you provide formal notice of the forfeiture buy-back option to the affected participants?

27 reasons not to use "prior year" testing 27 Reasons not to use Prior Year Testing.pdf

New 401(k) established 10/1/17 with a 1/1/17 effective date. Plan includes Safe Harbor 3% provisions as well as a discretionary ACP safe harbor contribution and a discretionary PSP contribution. Of course, two owners were able to defer the maximum $24,000 before year-end. The rest of the 6 staffers were able to accumulate about $2,000 each in deferrals before year end. Is it too aggressive to allocate a stacked ACP safe harbor match limited to 4% of pay using full-year compensation?

Tom Poje, I found this thread interesting, too. I'm thinking the "fix" for the ethical TPA is to simply move the excess deferral and associated earnings to the pre-tax deferral account. Do you agree? From a tax reporting standpoint, IRS will receive two Forms W-2 indicating total Roth deferrals of $25,000 for this individual. So at this point, supposedly they are aware of the excess deferral. If the excess deferral had been distributed timely, a 1099-R would follow in the next tax year reporting the $7,000 distribution as non-taxable excess deferral with a Code P (??) Since it was not distributed timely, and thus not at all in this case, no further tax reporting will follow. I doubt this would raise a flag though. Seems so unfair to the individual to pay tax on the money twice, for just being a few weeks late in discovering the issue, but then again, very unfair to never pay tax on these earnings that could accumulate to quite a bit in 30 years!

Just want to chime in on this topic.....IRS Auditor sanctioned my DC client, EZ filer $15,000 (reduced from her original sanction of $25,000) for failure to value a real estate investment at fair market value. This "failure" created no harm to anyone and RMD's were not an issue. She threatened plan disqualification, not to go away and would find something else if the plan sponsor didn't "accept" the sanction. She picked up her $15,000 check (9/30/13 as I recall) and went on furlough that evening! Good advice from Larry! Qualified plans are NOT the place for non-traditional assets.

I emailed the author as well. Pet peeve of mine. It's like fingernails on the chalkboard when I hear someone say this.

Thank you to all responders. We have now received penalty notices for all the electronically filed forms we filed on behalf of our clients on 8/9/13. There were 6 of them. We are trying to determine if the problem is isolated to Datair users or all filers on 8/9/13. Any additional comments??

We received 3 penalty notices for 2012 Form 5500 filings so far this week. The common ingredient? All were filed on 8/9/13. All of them were on extension and in 2 of the cases, the clients received the extension acknowledgement on the same day as the penalty notice. Oddly, the IRS thinks it is okay to use whatever date they deem appropriate on their letters. The penalty notices were all dated 9/16/13. Is anyone else experiencing this?

The IRS has taken its final position. In lieu of retroactive disqualification back to 1991 (inception of the plan), they will accept a $15,000 sanction. They are claiming a violation of Section 1.401-1(a)(2) and Revenue Ruling 80-155 for failure to annually value the real estate parcels in the plan. To reiterate, this is a husband/wife plan only. And, contrary to my previous post, the spouse was NOT paid out.

Rev Proc 2013-12 may provide the answer..........ask for the money back and don't do it again. If you don't get the money back from the participant, move on.

Thanks very much to all responders, especially Masteff. If this audit is ever closed (it's been almost a year already), I'll post the outcome.

We have a 5500-EZ filer under IRS audit. She is indicating that the failure of the Trustee to obtain independent appraisals for the real estate parcels in the plan is a failure to follow the terms of the document and sanctions will be imposed. There are no real issues involved here. The only other participant was the owner's spouse who was paid out of the plan based on assumingly higher than market values. None of the participants are old enough for RMD's. Additionally, the plan document does not use the term "independent third party appraisal". It simply says the Trustee shall appraise all securities, property, etc. each year at the then fair market value for each asset. The 5500-EZ does not contain any questions about the valuation of non-liquid assets (and rightfully so since this is really a DOL issue anyway!). Has anyone else had experience with this in dealing with the IRS? It appears to me that she is working outside her jurisdiction. This is a DOL issue. No one was harmed other than the owner who is stuck with the real estate parcels purchased at the height of the market. The 5500-EZ was filed correctly; no changes are necessary. And, the plan document does not contain language specifying "independent third party appraisal". Real estate is worth whatever a buyer and seller agree upon. Seems to me that an argument could be made that since he was not willing to sell them at the bottom of the market, he has a valid reason for continuing to value them at cost....at least until a REAL issue arose within the plan such as RMD requirements. Does anyone disagree with me and agree with the IRS' position?

Benefits that are paid direct to IRS in response to a levy, are they reportable on 1099-R?

We just had one here on Monday.....guess it depends on the auditor or field office