Brenda Wren

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

Thank you for your response. Do you think a short plan year ending 12/31/12 (11 months) would solve the problem?

I'm trying to determine if an owner has the ability to relinquish his stock at this point to avoid RMD's when he attains age 70 1/2. Here are the facts: DOB = 1/2/43, Attains 70 1/2 on 7/2/13. However, the plan year is 1/31. As of today, he owns +5%. The current plan year is 2/1/12 - 1/31/13. This is where I'm getting tripped up. According to Sal's Book, Chapter 6, Section VII, Part B.1.d, "the 5% owner rules applies to a participant who is a 5% owner for the plan year ending in the calendar year in which the employee attains age 70 1/2. So in my example, my owner turns 70 1/2 in the calendar year 2013. The plan year ending in 2013 is 1/31/13 which is the current year. Is it too late to relinquish the stock? If so, what date would he have had to relinquish the stock to avoid RMD's going forward? Is changing the plan year to 12/31/12 at this date a viable option?

Given: RMD's apply to Roth monies inside qualified plans, but not to Roth IRA's. Obviously, RMD rules are in place to ensure that taxes are ultimately paid on tax-deferred monies. But is there a rule that states that when an RMD is taken, that the participant cannot choose to have the withdrawal made from his Roth account? I have searched everywhere and asked everyone I can think of. I can only conclude that there is no answer and that the IRS didn't think through these rules very well when they decided to require the inclusion of Roth monies in the calculation of the RMD for qualified plans. In my situation, the plan does not allow for in-service withdrawals, yet anyway. The business owner converted about $500K of pre-tax monies to Roth monies in 2010 (had a huge NOL in 2010 so no taxes were due). His RMD is about $40K. I would like to be able to give him the choice of taking $40K in income in 2011, OR taking the $40K from his after-tax Roth account, thus only having to pay taxes on the earnings portion of the Roth. Any input would be much appreciated. I cannot find the answer in Sal's Book although I've been told that it says the participant can choose the money source.

Most disability plans are paid 100% by the employee with after-tax dollars. Even if the employer wants to pay part of the premium, it is usually bonused to the employee so that the employee can pay the premiums with after-tax monies and enjoy tax-free benefits if a claim is made in the future. If that's the case, the benefits are "reportable" on W-2, but not "taxable". The benefits do not flow through to Box 1, 3 or 5. Rather they are reported in Box 12a with a code J. Since the benefits are not taxable and not subject to FIT or FICA, they should not be included for any plan purpose either. If the disability plan is being paid with pre-tax dollars, I don't know the answer.

I'm sorry, but this thread went off in a different direction and I am still pondering the original question. Yes, under EPCRS, the plan can be fixed by making up the missed contribution, with earnings. So we have two options: SCP (no IRS involvement) and VCP (with IRS involvement). Since SCP is limited to operational errors, is this a qualification error that must be submitted through VCP? Or, can qualification errors that occur within 2 years be corrected through SCP?

Due to the economy, client was not able to fund their 2008 Safe Harbor 3% nonelective contribution. They are able to do so now. Since we are past 12 months following the plan year, but still within the 2 year self-correction period, is this eligible for self-correction? Or, is this a qualification issue and as such must be submitted under VCP?

Looking at Sal's Book, it appears the ASPPA speaker and her outline were wrong. (Or I interpreted her incorrectly!) QACA's have the same rules as regular SH plans with regard to using a plan year basis or a payroll period basis to calculate the match. Either method is okay. My bet goes with Sal!

I heard at the 2009 ASPPA conference that a QACA (to take advantage of the slightly lower match and longer 2 year vesting schedule) must calculate the match based on all compensation, thus the plan must have true-up language in it if the match is funded each pay period. Reviewing the outline it says, "The QACA requires that you use all compensation while eligible. So this may require a true-up conribution if deferrals do not begin on eligibility date." Listening to the CD, the speaker says that this means that QACA's must have true-up provisions in them. For those of you that have tackled QACA's, is this what you're doing and is this your understanding of the regs, too?

Participant took a loan in March 2008. Although payments were supposed to be withheld from paychecks, it didn't happen and no one noticed until the plan changed recordkeepers in December 2008. The original recordkeeper defaulted the loan in June 2008 and issued a 1099-R to the participant in January 2009. It appears that the employer still has an obligation to institute the loan repayments from payroll. Questions: 1. Is it possible to void the 1099-R, i.e. taxation to the participant, since this could be argued that the employer was at fault? If so, is it recommended? 2. Are there any prescribed methods of correction from IRS in this situation?

Page 1.397 of Sal's book notes that since IRC 414(N) does not cross-reference IRS 409(I), the IRS apparently is of the view that leased employees may not participate in an ESOP maintained by the recipient organization. Am I reading this correctly that leased employees are simply ignored regardless of any coverage failures that would occur if included as not benefiting? Leased employees are specifically excluded in the ESOP plan document, but I'm not sure if I should show them in the 410(b) test as included and not benefiting and if so, would they be required to be included to the extent necessary to pass 410(b) if it failed.

Terminating employees that do not pay off their loans and the loan is called......is the loan offset shown on Schedule H (or I) as a "benefit payment directly to participant" or a "deemed distribution". The 5500 instructions are not clear to me. However, logic tells me that the only loans that should be reported as a "deemed distribution" are those that violate 72(p), i.e. participant stopped paying and is still working, amount of loan too high, etc. The above example is not violating any provisions of 72(p) since a distributable event has occurred. I have always reported such loan defaults as a regular distributions, but reviewing the 5500 of an audited takeover plan made me question this issue.

Starting up a new qualified plan in 2008 and client is undecided at this point if he wants to commit to the 3% safe harbor. However he does like the idea of automatic enrollment and he likes the idea of a 2-year vesting schedule if he does later commit to the safe harbor 3%. Is anyone aware of anything in the current regulations that would probibit a "maybe" notice with a QACA?