ESOP Guy

No the person doesn't pay the 50% penalty because the RMD happened. The 1099-Rs ought to reflect that fact. One should show the RMD being made and another showing a rollover to teh IRA. The issue is the RMD is in an IRA. So they can be issues/penalties because money has been put into an IRA that can't be there. I haven't answered your 2nd question because I am not sure I understand it. The one part I think I can answer is a payment to Alt Payee because of a QDRO doesn't count towards the RMD and the first dollars of that payment are NOT the RMD. I am just not sure what you mean by a payment TO a participant as a loan payment or advisory fee payment.

Thanks Tom

I am still trying to see how it could make a difference but I admit SH plans aren't an area I have a deep knowledge about.

I get this is a hard issue and no on wants extra expenses but you need to find a way to encourage this lady to get in touch with a CPA to help her with the tax returns that have not been filed. Does this lady have any family? It sounds like there might need to be some kind of discussion of setting up the legal infrastructure to allow a trusted person to help her with her finances before these issues become even more expensive. And yes the IRS can go after such money so being proactive is best.

The only way I know how to do this right is chart it out in a spreadsheet. You need to keep straight the Annual Additions are plan year based and the 402g limit is always a calendar year limit. 1) So you make the first cell in your spreadsheet 1/1/2015 to 10/31/2015 deferrals. 2) Next is you need a cell that is 11/1/2015 to 12/31/2015 deferrals. 3)You next need a 1/1/2016 to 10/31/2016 deferrals in a cell. 4) You need 11/1/2016 to 12/31/2016 deferrals in a cell. 5) Since you are asking for PYE 2016 Annual additions you need all annual additions beside 4k in the last cell. A) 1+2 = is what is compared to 402g for 2015. Was there any catch up in 2015. If so, we tend to treat them as being part of 2 so it is in the current plan year. I am not sure I can give you a cite. I have been doing it that way for a long time. B) 3+4= is what you compared to 402g for 2016. Same assumption it is 4 where there is it went over the limit 5+3+4= Total Annual additions for PYE are you over 415 limit? If so, is there any room in catch up from B as we tend to use that same thing we use PYE to decided what calendar year to do the shift. I hope I did that right. We have a standard spreadsheet around here we use. I am not sure I can give cites on using those end of the year of PYE as the point the overage happens but we are consistent on it and doing for a very long time.

It has been much longer since I worked on 4k plans but I don't see this correction as a QMAC. I see it as simply a correction and I would subject the correction amounts to vesting. Once again the guiding principle to SPC and VCP corrections are to make the person be the same as they would have been if no error had been made. This isn't the same thinking with ADP or ACP failures. In those cases you have a choice at least at first to refund or add money to get the ratios to work. If you think about the refund option would get the people back (or at least it used to before they made the rule about refunding the person who deferred the most instead of having the highest ratio) where they would have been if no error had been made.

It sounds like you are correcting missed Employer Discretionary Contributions. If so, these aren't QNECs. To me they are simply a correction. I would subject the corrected amounts to the vesting schedule. The point of any correction method is to get a person back to where they are no better or worse off had the mistake not been made. To give them more vesting could make them better off then if the mistake wasn't made. What I just described is how we do it any time we do this type of correction and when done via VCP it has always been blessed by the IRS. As for VCP or SCP it depends on how many people and how many years. I forget the exact words the SCP rules use but the error can't be significant and frequent. So if it a large group of people or over many years I would lean towards a VCP. In the end I would get an ERISA attorney's opinion unless it was just 1 or 2 people over 1 or 2 years.

Link to instructions as I was about to say the same thing as CuseFan https://www.irs.gov/pub/irs-pdf/i5500ez.pdf Page 2

Here are the regs on this: Q-7: When is a distribution from a plan a required minimum distribution under section 401(a)(9)? A-7: (a)General rule. Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. For example, if an employee is required under section 401(a)(9) to receive a required minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies. If the total section 401(a)(9) required minimum distribution for a calendar year is not distributed in that calendar year (e.g., when the distribution for the calendar year in which the employee reaches age 70 1/2 is made on the following April 1), the amount that was required but not distributed is added to the amount required to be distributed for the next calendar year in determining the portion of any distribution in the next calendar year that is a required minimum distribution. https://www.law.cornell.edu/cfr/text/26/1.402(c)-2 Note it is clear and say if an RMD is required for a calendar year the amounts distributed during that year are treated as having the first dollars be the RMDs. Note is doesn't say amounts distributed after the person terminates and then an RMD is required. If at any time in a year an RMD ever becomes required for 2017- which your facts say "yes" to that idea- any distribution during that year has the RMD in it. It can literally become a retroactive RMD upon the person's termination. So while it is true if you give this lady an in-service today there is no RMD in the amount paid. If she quits any time in 2017 then any payment in 2017 has an RMD in it. So if that RMD ended up in the IRA it doesn't belong there. This idea you might give an in-service not knowing if the 70.5 year old person might terminated later is a known quirk but how I described it is clearly how the regs read.

As a practical matter in the IRS' mind it seems like it is more the a rule of thumb. I am not really disagreeing here (I think) as much as expanding. It seems like any time we have an IRS auditor before one of our clients and the ratio goes over 20% in their mind it becomes a presumption there was a Partial Termination that you now have to rebut. We have had some interesting times with IRS agents with our staffing firm and convenient store clients. When I software calculates the ratio to help us decide if there is an issue or not those clients are often times in the 80%+ range. We have had to go to the auditor's supervisor on some of these to get them to back down on making all terms 100% vested. By the auditor's logic those industries can't have anything but a 100% vesting sch. One last observation: Since this is a facts and circumstances determination you need to at least be open to the idea of a 15% or 10% RIF could be a Partial Termination. RIFs at that level do get looked at less by the IRS as they focus on that 20% level for their presumption but the way the law is written a lower level could require 100% vesting.

What do DOL auditor care if the person benefits or not? it isn't their money there are rules to be followed. At the risk of getting ideological while government is necessary this is big part of why it will never run well. There is no go way to align the employee's compensation to the actual good public policy. You can't have them making up their own policy as the attachment in the original post makes clear as some will demand things like you make all possible effort to find there people. You can't write a rule that covers all situations. You wish you could count on good regulatory discretion by them but there is too much evidence to the contrary.

So is the Sponsor not willing to declare a contribution equal to the remaining forfeitures?

I don't think that solves the issue if you mean you gave her 100% of her balance today. If she terminates in 2017 (even after the payment is made) then she still needs a 2017 RMD. The amount in the IRA that would be the RMD is no longer allowed in the IRA. Which means she has to get it out of the IRA NOW (not next April) and the plan should still prepare two 1099-Rs. One showing a taxable distribution and one show a rollover. The only way that solves the problem is if she moves her retirement date to at least 1/1/2018.

I would ask the Plan Sponsor to go back and declare a PSP contribution for exactly what is left so you can allocate the forfeitures. I agree they shouldn't have any objection to do that.

I would start with talking with your former employer and see what they think happened. It is their duty to get it right and get it fixed. So take some pay stubs to them and ask if loan payments were taken from my check why is Fidelity saying my loan wasn't paid? Make sure Fidelity isn't saying your loan in now in or heading to default because of your termination and something in the loan agreement says upon termination the loan become 100% due. Most plans give you some time to repay if you have the cash but that is a possibility. If they don't give a good answer come back and the professionals here can help you come up with good next steps.

I will admit I don't hold myself out as a ROBS expert but I understand the basic idea of them and 401(k)s in general. Your question doesn't make any sense to me. What do you mean when you say "get a ROBS 401(k) from an existing individual 401(k)"? Get a ROBS??? Are you talking about setting up a new 4k plan that will be the ROBS? If so, then what doing some kind of transfer/ rollover to the new plan from the old plan? Merging the plans? Are you just planning on having the existing 4k plan buy the stock? Like I said "get a ROBS" is terms I don't understand. I can't for the life of me figure out what the loan has to do with any of this but that might be due to the fact I can't figure out the flow of assets between the ROBS and the existing plan in your mind.

In those situations were the amount is so small we tend to leave in plan and just net it out of the next regular deposit.

I would agree with the conclusion I made bold.

This just reminds me why I used to cringe when I was taking over a plan and found out there life insurance in it. It seemed like it was always a pain and done wrong. A side issue depending on how this whole thing was resolved there could be basis on some of this money as these people were supposed to be getting 1099-Rs each yer for their PS-52 costs. So you don't want them to be taxed twice. I can't remember what happens if the 1099-Rs weren't issued as I was fortunately never a part of that mistake. You might want to look into all of this before you start actually taking actions as tax issues might be an important factor in people's decisions. Also, remember the purchase the policy option might be a good solution for those that want the insurance. They need to buy the policy for FMV which is cash surrender value. If I recall (and someone here will tell you if I recall incorrectly) the plan can take out a policy loan for 100% of the cash value of the policy. The FMV of the policy is now $0 so it is easy to purchase the insurance. This could come in handy if a person is now uninsurable but would like the protection of the policy.

My wife has told me we are divorce proof if I ever have an "other friend" as MoJo puts it because she knows where the gun is and I made the mistake of teaching her how to use it. It has kept me on the straight and narrow for 30 years now!

Still not sure "your" makes the match allocated per the plan document. Even if the plan document says it is deposited into "your" conditional account. The allocation provisions are going to tell you when a person has earned a right to the benefit. Let me be clear I am using what I think is logic here and plan law isn't always logical but to me a reasonable reading of the document says this isn't allocated. All plan documents have a provision that allows the PA to interpret the document in a reasonable way that is non-discriminatory. We use that plan language more in the ESOP world (I used to do both 4ks and ESOPs now pretty much just ESOPs) as there simply are more unique sets of facts that seem to come up. I don't think you are going to find a regulation one way or another. Maybe whoever thought this up wrote the plan to think of these things. But absent real clear provisions to the contrary I don't see an allocation. The person has not earned a right to the benefits until the allocation provisions have been met. I think that can be seen as a reasonable non-discriminatory take on the plan document as it is understood in this conversation.

I think I take issue with your term "contingent allocation" as it service no legit purpose and is causing your confusion. You are correct there is no such thing. Per the plan document either the amounts are allocated or they aren't. So to me the real question is merely depositing the funds into an account that bears someone's name an "allocation" or not? It isn't an allocation per the plan document. Maybe it is because I come out of a mostly balance forward world but I have seen plenty of times when an employer would deposit funds into a balance forward trust during the year and then those amounts would get allocated. While there is a person's name associated with where the funds are put are they allocated or merely deposited? If merely deposited then I don't see an issue. And I do think the funds are merely deposited as the plan terms have not said the funds are allocated. I think this is a silly thing to do for all the reasons this thread is giving but I think you can make the case the funds aren't allocated. So you can take them out of the account not because it is a forfeiture but because it was never allocated to the person.

Back when I worked for the IRS in the '80s we would have people ask for us for our official credentials (only CID had badges and guns). We were told they were looking at either a date or which director's signature was on it- I don't fully recall. That gave them an indication of how new or experienced the agent was and they incorporated that into their tactics.

Wow and I thought I had good stories from when I worked for the IRS!

Yes you could write a DC plan document that way. In fact a very large number are that way. The forfeitures simply reduce the cost to the employer. For example forfeitures are $13k and the Profit Sharing contribution (or match due) is $25k many plans would say the employer needs to only put in the remaining $12k. Obviously the $13k of forfeitures plus the $12k deposit equal $25k. But you could write the plan such that the employer puts in the full $25k and they employees get the $13k also. I am ignoring things like 415 for purposes of this discussion. And to now give you more answer then you wanted you can write a DC plan to give the plan administrator all kinds of discretion. It could give them the option to use the $13k above to pay fees or not, then reduce the employer's contribution for example. Lastly, the other thing forfeitures are used for in a DC plan that MIGHT like a DB plan is they are used to restore people who forfeiture in the past and if their balance needs to be restored upon rehire that almost always comes from current forfeiture. Such a restore increases the benefits due in a DB plan so it needs to be funded and as you say all funding is forfeitures or contributions- ignoring earnings of this conversation.