Brenda Wren

I am not using it on ESOP's. In my opinion it is redundant and not what the DOL is looking for with this code. And like you said, it is not a requirement in ESOP's to purchase employer stock.....they just have to be primarily invested in ER stock.

So, it's strictly a document issue. The interest portion of the contribution is considered part of the 415 annual addition in a leveraged S-corp ESOP unless the document allows the use of current market value. Is that correct?

Stephen, in your first example you said the contribution of $25,000 released 200 shares at $100 per share. Is the remaining $5,000 of the contribution interest on the exempt loan? Or is it the difference in the current market price vs the inventory price, i.e. encumbered price?

There are many posts on this subject. I believe you'll find Notice 2003-44 helpful. Although I don't agree (at all!) with the IRS fix for this situation, apparently the "anyone but the employee is accountable" attitude of the IRS and DOL is that not only does the employer need to fund the missed deferral for the employee, but the match and earnings, too! So all you have to do if you're an employee is hope and pray that your employer screws up and not only will you get the fatter paycheck, but you'll get a big windfall when they finally figure out what they've done. If you're real lucky, they'll give you earnings on the fund that produced the highest return! I've heard that the IRS has been criticized for their position and may be changing it in the future......50% of the missed deferral, 100% of the match. Still not good enough in my opinion.

Thanks, Stephen. Unfortunately, I'm still confused. I use Relius software. Although there is no money in the cash account of the ESOP and no cash contributions were made, I did what you said and allocated the full $300,000 to cash just so that I could determine if anyone was hitting their 415 limit. There was one. His allocation of the $300,000 (including the interest on the loan) was cut back from $38,000 to $28,000 due to participation in the other 401(k) plan. However, not taking into account the $10,000 cutback, the value of the shares he is receiving is only $23,000. So from his perspective, he deferred $13,000 into the k-plan and is receiving employer stock valued at $23,000 for a total benefit of $36,000 for the year.....far from $41,000. It would appear that I am going to have to show the full contribution of $300,000, expense the interest, then "purchase" the shares so that I can run an accurate 415 test and also explain to the plan participant why his contribution was cut back. So what I'm saying is that if the interest on the loan is part of the 415 limit, it would appear that I HAVE to have it reflected in the allocation. In a C-corp scenario I have always considered the interest on the loan as a normal business expense and have not reflected it on the valuation at all. I realize that for 404 purposes the interest is excluded in a C-corp scenario and included in an S-corp scenario. I guess what I'm not understanding is the extension of these rules to 415. Comments? Help?

In a leveraged S-corp ESOP, 51% of the company is sold to the ESOP at the beginning of the year. At the end of the year the first payment of $300,000 is paid and shares are released and allocated to the plan participants. The principal portion of the payment is $250,000 and the interest is $50,000. 1. For 415 purposes, is the contribution $300,000 or $250,000 or the current value of the released shares (which, by the way is slightly higher than the encumbered price)? 2. Is the $50,000 of interest a factor in the participant allocation at all? I don't see how it could be. I believe the interest should be shown as a plan expense on Schedule I, but the allocation is simply the share allocation as determined by the release calculation (either the principal method or the principal & interest method as dictated by plan document).

Thanks for the replies. Sorry MBozek if my question wasn't clear. I was asking the question from a personal point of view, not as a TPA. I figured it was more of a state law question than ERISA. The recordkeeper involved is TIAA-CREF and they were very willing to do the complicated calculation. The QDRO was drafted in the State of Pennsylvania and clearly stated "60% of the accumulations attributable to premiums remitted from the date of the marriage through the date of separation". To me, this language is very clear that the earnings on the pre-marital portion are NOT considered marital. However the following sentence in the Order specified estimated dollar amounts (calculated by the Alternate Payee's attorney, of course) which were in conflict with the first sentence. These dollar amounts appear to have been calculated considering the earnings on the pre-marital portion as marital. TIAA-CREF has explained to the parties that they "must follow the money" and will be providing additional documentation of their calculation. The Order also contained a provision that if any portion of the Order was deemed invalid, the rest of the order still applied. I guess TIAA-CREF interpreted the estimated dollar amounts as invalid and processed the Order anyway.

Is it customary for earnings on the pre-marital portion of an account to be considered non-marital? For example, husband has $100,000 in his account on the date of marriage. Contributions of $300,000 are made during the marriage. Contributions of $5,000 are made after the marriage, prior to the QDRO. It is clear that $300,000 plus applicable earnings are marital. It is also clear that $5,000 plus applicable earnings are NOT marital. Although earnings on the $100,000 were earned during the marriage, are they typically considered part of the marital portion? I realize what the parties agree to and what the Order states are what goes. Looking for customary equitable distribution rules. Thanks!

Well, I'm looking at Sal's 2005 Edition, see your quote, and the example. Sal said it, it must be so. Sure wish I could understand it! Seems to me that the employee is able to take advantage of the catch-up provisions twice. What am I not understanding??

Not sure I'm following you, Trumpy. I agree with your second paragraph, but off-calendar year 401(k) plans with catch-up provisions create special challenges. If the employee is allowed to contribute $18,000 for the calendar year 2005, it would be as if the recharacterization of the 6/30/05 ADP refund to catch-up didn't occur or didn't matter.

Depends upon whether or not the plan has a true-up provision in it. Check the definition of "allocation date" in the document. Check the notice, too.

I'm with Death. Mike, in lieu of receiving $4,000 back to satisfy ADP, employee is using up his 2005 catch-up contribution. If he later defers $13,000 (achieving $18,000 2005 calendar year deferral), he has used his catch-up twice in the same calendar year. Or look at it like this......the refund of $4,000 was processed and not used as catch-up. Employee defers $13,000 more in the calendar year for a total of $18,000. His net deferral for 05 will be $14,000. I'm pretty sure the software we use (Relius) would agree......if the 2005 catch-up bucket had already been filled up, it wouldn't allow it to be used again.

Doesn't sound like you two are on the same page. Assuming the 50-year-old participant deferred $5,000 for the 2005 calendar year, $4,000 was reclassified as a catch-up on 6/30/05.....can he defer $9,000 for the remaining calendar year or $13,000? Appears Death is saying $9,000 and Trumpy is saying $13,000.

It is much easier to administer if you take from the fully vested account first, i.e. deferral.

I'm looking for recent guidance on how to rectify an employer's failure to deduct deferrals from employees' paychecks. I know that earlier guidance requires the employer to make up the deferral, match and earnings, but I really seem to remember reading somewhere a change in this guidance, i.e. an unfair windfall to the employee. But I sure can't find it now! I believe the example I read was extreme, i.e. employee elected to defer $12,000, employer didn't set it up in payroll, employee didn't notice for 18 months. The situation I'm dealing with now is much less extreme, small amounts over a short period of time, picked up on audit, never noticed by employee. It seems fair to me that the employee should receive the match, but it just doesn't make sense that he should be entitled to a QNEC and the fatter paycheck. Even if you decide to fund the QNEC and the match, it just doesn't make sense to me that you should give the employee earnings as well, isn't 100% return good enough??

We have just taken the plunge to high deductible insurance plans and HSA's. But I am very disappointed with the limited options on who will serve as Trustee for the HSA's and how much they are paid to do it. Seems to me that the banks take all the money, do little if anything to service the account and are making a killing in fees. The bank trustee we are using charges a $3 monthly fee, $1.50 for each electronic debit plus numerous other typical bank fees. No statement is generated; only available on the web. A 1099 is generated each year. The account holder is fully responsible for determining the amount of the deductible contribution and the qualification of the disbursements. All services appear to be electronic and no human intervention is needed to maintain the account. I could accept the fees of $50 or so per year, per participant if at some point the fees were waived if the account balance exceeded $2500 or something. I also have discovered that part of the $36 annual service fees are going back to the agent, I suppose to compensate him for the lower commission he earns for the high-deductible plan he sold. Does anyone know of a bank that is willing to serve as Trustee for less? Maybe I should apply to the IRS to become a non-bank trustee for HSA's!

Under the current IRS rules governing the referenced qualified plan, you are considered a highly compensated participant. In order to satisfy the plan's nondiscrimination requirements, you will be receiving a check for $4,326.93 shortly. Please be advised this is taxable to you for 2004. However, you will not receive Form 1099-R until January 31, 2006. The 2005 1099-R form will be coded to indicate to IRS that the income is taxable in the previous year, 2004. Be sure to give a copy of this letter to your tax return preparer. If you have any questions, please contact

The reason we don't want to go the "maybe" route is because once the key employees defer, top heavy minimums are triggered unless we are "solely safe harbor". So we know from the beginning that we want to go the safe harbor route. There are a couple of $100,000 plus HCE's (not key) that could be expensive to fund in a lean year. Yes, we could go the "maybe" route and have the keys hold off on deferrals until they are comfortable with the 3% for all. But we would rather allow everyone to defer, keys too, and just not commit to the HCE's up front. Am I making sense? So back to my original question, is there a problem with amending the plan mid-year or after year-end to include the HCE's in the safe harbor contribution?

Have a client considering the addition of 401(k) safe harbor language to his existing top heavy PSP. He is concerned about the financial commitment in lean years. Question: If we design the plan and the notice to commit the Safe Harbor contribution to only NHCE's, can we amend that provision during and/or after the plan year to include the HCE's? As a solely safe harbor plan, appears that we don't have an issue with the HCE non-key employees not receiving a top heavy contribution in a plan year in which the HCE's are excluded from the safe harbor contribution.

I had this exact scenario occur on a case we consulted on a few years ago that was being audited by the DOL. At the time I had a relationship with the local IRS auditor. The biggest concern to me was that the terms of the plan had not been followed. The IRS auditor (he was not involved; I just asked him anonymously of his opinion) said that if the case was referred to their office, the likely correction would be a 6% contribution to everyone, not just those that deferred. The logic was that the contribution was really a profit-sharing contribution, not a match. However, the DOL was auditing for different reasons and didn't care much so the case was never referred to the IRS. My two cents for what it's worth!

Does the hurricane relief apply to the failure to correct a June 30, 2004 ADP test by 9/15/04?

Blinky, what is the source of your information regarding the 10/15 deadline for the annual addition? I don't recall ever reading or knowing about that rule.

Thank you Belgarath and FundeK! Actually, that was what I wanted to hear. Not that I have the time or energy to do all that work, but I don't think it's right just to simply make it "go away" with the 2003 funding. I believe the participants are due additional money. And yes, it is significant since there are only around 30 participants. The problem appears to be at least 5 years old and possible 7, way outside the self-correction time period. Thanks again.

UPDATE - Historical valuation for 2001 shows that forfeitures had already accumulated to $35,000 as of 12/31/00. On the surface, it does not appear that we have a partial termination issue. For now I am concluding that forfeitures have been building up year after year beginning in 1999. Fellow practitioners out there - please provide your opinion. To review the issue, I have inherited a 401(k) plan with over $60,000 in unallocated forfeitures. I need to provide a recommendation to the client on the best way to fix this problem. In 2001 there were over $15,000 generated in new forfeitures and there was no employer contribution allocated, therefore nothing to reduce anyway. I see this as more than a deduction problem. What would you do? Am I overly concerned?

Thanks for the input guys. I think I am overly concerned envisioning the DOL hammering the client about violating the rule "cannot exceed the amount required to meet the immediate financial burden".