Brenda Wren

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".

Thanks, Brian. Living in Florida, I never think about state taxes. This guy lives in Arizona; I have no idea if they have a state income tax or not. He makes around $50K. But I have no clue about other income or deductions. Are you saying that you would gross up the amount....25% for taxes plus 10% for the penalty to arrive at $8430 and therefore process the hardship at the original $8,000 he requested? I normally wouldn't belabor such a silly thing as this, but I've been dealing with IRS and DOL auditors lately and it seems my clients are having to justify at great length every tiny thing they do upon audit.

I understand that (1) hardships can be used to purchase a primary residence, (2) hardship withdrawal amounts can be grossed up for taxes and penalties and (3) withholding is optional. I have a hardship withdrawal on my desk with a Good Faith Estimate indicating that the ee needs to bring $5,480 to home purchase closing. The participant is requesting $8,000 with no withholding. The client is looking to me to bless the amount needed to satisfy the "immediate financial burden". Since no one really knows the tax liability, i.e. tax rate, until the end of the year (except the rich folks, of course) is there any guidance from IRS on the appropriate tax rate to assume when grossing up the hardship distribution for taxes and penalties? I am inclined to recommend 15% plus 10% which would put the actual hardship distribution amount at $7306.67, but I really have no basis for that thinking. Also, not that I want to make up rules, but it doesn't seem logical that an employee can elect to have the distribution grossed up for taxes and penalties, then turn around and also elect no withholding. Of course, logic is not law or guidance for that matter! Sal's book says "reasonable". What would you do?

But what is the point? What does a deemed IRA offer than a 401(k) deferral doesn't?

Can anyone briefly explain the purpose of the "deemed IRA"? When these were first introduced, I recall hearing the experts indicate that they didn't really see much use for them. But now I see a lot of guidance that I honestly haven't taken the time to read. Any thoughts?

Fortunately, upon closer look, it does look like the fees came from the forfeiture account. Now I'm concerned that the reason there is so much money in the forfeiture account is because of a layoff in 2001. So we have possible termination in operation issues to consider now. But assuming there is not a termination in operation, I think there could be potential issues in years in which the employer funded their 404 limit and the excess was never reallocated. There is a DB plan, too. And even if there is not a termination in operation, and the forfeitures are legitimate, I still see a significant problem upon audit, even if 404 limit wasn't reached. If the employer chose to fund a contribution (and take a deduction) before allocating forfeitures, the forfeitures had to be reallocated in that plan year. Wouldn't you agree?