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The IRS returned the 5558 and indicated that it was rejected because it was filed after the due date of the return. The TPA who filed the 5558 claims that it was postmarked no later than July 31st (PY is 12/31), but cannot provide proof of their claim. The client also recalls the TPA mentioning months ago that the return wasn't due until 8/31, so it seems pretty obvious that the TPA filed the 5558 late. It seems inevitable that the client will receive correspondence from the IRS after they file the return stating they must pay penalties, etc. because the return wasn't filed by 7/31 now that the 5558 is invalid. Is there a good chance that the IRS will waive the penalties, etc. if the client writes to the IRS when he receives the "penalty" letter and explains that he was reliant on the TPA who filed the 5558 late? Should he wait until the IRS contacts him, or send such an explanation now with his return? What recourse does the client have? The TPA did not have the client sign a service agreement - hopefully that will not give the TPA an "out" if the penalties can't be waived. All help is greatly appreciated.

My feeling is a first year filing is still not required even though the 5558 has been filed. That being said, however, the fact that the IRS now has a record of this plan in their system, via the 5558, they may expect a return since they have no idea whether or not the plan held less than $250K. If the IRS does not receive the filing they may generate correspondence asking about it, and even though the return wasn't legally required, you would have to explain the circumstances to them. It may be simpler in the long run to just file the return to avoid dealing with the IRS, not to mention possibly having to explain all of this to a confused client who will receive the IRS letter (and may bring up the classic argument "A tax form wasn't required? What am I paying your for?"

Thank you both for your responses. The doc does not elaborate on the topic - it basically just reprints the treas reg. Reading through the 'adequate security' provision, however, I'm having difficulty understanding its merits if eventually the beneficiary would have to repay the restricted amount back to the plan with interest. Is the sole advantage that it's a loan that can have flexible terms such as balloon or interest-only payments and whose maturity can be set to be a very long time from now? I suppose the beneficiary could take the 'safe' route and opt for the SLA, but that could be a hard sell when they know the plan can pay out a lump sum - once the final numbers have been determined we can present the risk/reward scenario, Would the SLA be based on the participant's or the non-spouse beneficiary's lifetime? The participant was in his 90's, so the periodic payment amounts could be vastly different. I'm not familiar with what's involved in requesting a PLR - does anyone know the approximate amount of user fees or time frame that would be needed to obtain one?

A plan has 3 participants who are all family members and HCEs. There have never been and will never be any other employees. The plan is underfunded for 417e purposes and one of the HCEs is due a distribution. The Treasury Regulations say that in most cases an HCE's distribution must be limited to an amount that would leave behind enough assets in the plan to at least equal 110% of the plan's remaining current liabilities. Treas. Reg. 1.401(a)(4)-5(b) states that the 110% restriction does not apply “if the Commissioner determines that such provisions are not necessary to prevent the prohibited discrimination that may occur in the event of an early termination of the plan” – do you think it would be reasonable to believe that “the Commissioner” would consider an unrestricted distribution to be nondiscriminatory since all of the participants are HCEs?

HCE dies while still employed. She has been receiving RMDs equal to 12 times her AB every year. She has a non-spouse beneficiary. Although the document addresses how long the beneficiary can keep the benefit in the plan if the participant dies before her required beginning date, it is silent on what the time frame is if the death occurs after the RBD. This may be advantageous as it can allow the plan administrator maximum flexibility on determining the time frame, and if this is the case, perhaps it would be reasonable to allow 5 years from the date of death. I wasn't able to find much in the law addressing the maximum time permitted in such a situation and wanted to be sure that we wouldn't be running afoul of any regs - would our assumption be reasonable or does anyone know if the benefit can remain in the plan longer than 5 years? We have also gotten widely varying opinions from actuaries regarding how the lump sum benefit should be calculated. Perhaps the most unsettling one we've been told is that since the plan's normal form is a life annuity, the benefit is deemed to have been annuitized when the RMDs began and now that the participant has died the beneficiary is not entitled to anything, as the "life annuity" benefit has ended. This would be quite disastrous because the participant has a very large benefit. Aside from defining the normal form, the document is silent on whether RMDs count as payment of a life annuity option. I would think that the participant would have to affirmatively elect to receive their benefit as a life annuity for the benefit to be considered totally paid upon death, in contrast to the RMDs being a payment over which she has no control. I am curious to see what members on this board think about this. Lastly, assuming the beneficiary is still entitled to a distribution, I imagine that the lump sum would be the PV of the vested AB unreduced for the RMDs - is this correct? This is the first time I've had to do such a calc and am a little nervous about it, especially given the large benefit involved. All help is greatly appreciated.

Is she a non-resident? You say she resides in the U.S. but there's a legal definition of residency (I'm not sure if it's dictated by the federal government or it's state-to-state) - one has to actually live in the U.S./state for a certain number of weeks or months every year to be considered a legal resident. Also, I'm guessing that it's not possible to have dual citizenship with China and that she is not a U.S. citizen - if that's not accurate that could also factor into the determination.

If it can be presumed that all 15 participants attained their NRA before they were due any RMDs, I wouldn't think there would be any actuarial adjustments needed, as the RMDs would've been 12 times their monthly benefit. It would seem reasonable to have the plan pay these amounts increased to date with the interest rate specified in the document's definition of actuarial equivalence without any consideration for mortality. I don't believe the IRS' decision on whether or not to waive the excise tax would affect the participants.

An employer wants to amend their existing profit sharing plan into a safe harbor 401(k) plan mid year - is this permissible? With the recent law changes that now allow 401(k) plans to remove their safe harbor provisions mid year and the fact that the first year of a 401(k) plan is not required to be 12 months long, it seems implied that such an amendment would be OK but I first wanted to see if anything was being overlooked. Also, is it accurate to say that neither the 415© or 401(a)(17) limits need to be prorated in this situation for the portion of the year the 401(k) provisions are in place, as both the plan year and limitation year will not be changing?

I would imagine that an SAR (possibly 2, if the merger happened mid-plan year or if the plan year is different after the merger) is required. In other words, a participant should receive SAR info at least every 12 months and there shouldn't be any gaps in the data from the time they received their last SAR, even if more than one plan administrator has to provide it.

A 401k plan for a 1-man company holds a life insurance policy for the owner/sole participant. We have been showing the value of the policy in the plan's assets as the accumulated amount of premiums that have been paid (all paid by the plan) rather than the policy's actual cash value, as the total premiums have always been less. The owner has now informed us that there will no longer be any premiums due, so it would appear that we would just show it having the same value every year from now on - is this the best way to account for the policy? Thanks for any help offered.

Looking through 1.401(a)(4)-8(b)(1) I found the method for calculating the gateway amount, but I could not locate any passage that describes the requirement for the gateway to be given to every NHCE who is being allocated any employer contribution, even if they wouldn't normally be eligible for a profit sharing allocation due to a 1,000 hour requirement (e.g., when participants must be given a minimum top heavy allocation). Does anyone know where in the regs this can be found?

Thank you both for your responses. The attachments, Tom, are greatly appreciated. I hope to one day soon be able to provide answers on these matters rather than just ask questions about them.

Over the years I have encountered plan consultants who perform cross testing using very different methods, some directly contradicting how others do it, some not knowing what the numbers mean and just assuming the computer did it right. I learned some of the basic rules regarding cross testing long ago, but after seeing such inconsistency among professionals, I would like to not only go over the basics but also become familiar with more involved designs, including cross testing for 401k plans. I've looked for online instruction/classes without any success. I would also welcome written instruction, especially if it includes examples. What type of resources and training is available for this purpose?

I would tend to say it's allowed. My reasoning would be that you could ask the same question about the many mutual funds that impose a $3,000 minimum initial purchase - it's likely that not every participant would be able to meet such a threshold.

Thank you all for your responses. The permanence aspect is a valid point and the employer has been informed that they shouldn't go more than just a few years before they make another contribution. At the heart of the issue is how the administrative cost will increase exponentially if the plan goes from having just 2 participants to several hundred. To Masteff's point, a cost analysis has determined that it would be less expensive to pay for the ongoing admin on a 2-life plan than to terminate the plan and then start up a new one once the employer goes back to just having 2 employees. As mention of a frozen DC plan was made, it appears that doing so is possible. However, since I've heard people refer to a plan as being frozen only because contributions are not being made, can this be taken to mean that it's OK for an amendment to also prohibit new employees from entering the plan?

A company sponsors a 401k plan where the two owners are the only participants (they are the only employees). They are planning on hiring dozens of people within the next few months and were wondering whether it was possible to "freeze" the plan via amendment so that these employees cannot become participants even if they would otherwise satisfy the plan's eligibility requirements. They do not want to terminate the plan because they will probably be back to just employing the owners in about 5 years, at which point they would "unfreeze" the plan and resume making deferrals and profit sharing contributions. Even though it's very likely that the overwhelming majority of these new employees will not defer and, therefore, not have any account balances in the plan, they would rather not have them participate as it would significantly increase the plan's administrative cost. Is it possible to do this?

Also, I believe if the compensation that can be considered for plan purposes is SE income, it's valid to do so since finalized totals usually cannot be determined until after the close of the year making deferrals allowable right up until the filing deadline (the deadline if SE income is involved would be 4/15).

A client recently mentioned that they received a 2012 1099-DIV for his qualified plan's account that incorrectly shows the earnings as being taxable. Although there is ample time for the investment firm to file a corrected form with the IRS, they are refusing to do so, claiming that they were never informed that the account was a non-taxable one, even though it has always been titled under the plan's name with the plan's trust ID number. The client even checked on the account's original application the box indicating that this will be a retirement plan account. The reasoning given by the firm is that years ago when the account's application was submitted, an additional box should have been checked indicating that the client believes the account is exempt from information reporting to the IRS (instructions for that box were very general and simplistic, with no details as to what type of reporting they were referring to). The client did not check the box because he knew he had to file 5500s every year and 1099Rs if distributions occur, and thus the account would not be exempt from information reporting. The investment firm is not acknowledging that the instructions for the box were vague and will only say they do not correct 1099 forms if it's the result of client error, as they deem this to be. Even if the client was "wrong" in not checking some box with poorly worded instructions on the application years ago, they will not accept that it may have been a misunderstanding and that they are now being given correct information that should result in a revised 1099 (they have been generating 1099s showing taxable earnings every year, but the client did not notice until now). The only help they can offer is that staring with the 2013 reporting, the earnings will be shown as nontaxable since the client sent them a W-9 showing the plan to be exempt the other day. Given that they now have accurate information and that the filing deadline has not passed yet, their reluctance to correct the 1099 seems to be a violation of the firm's responsibility - they are reporting a significant tax liability to the IRS that does not exist and will not do anything about it. What recourse does the client have? Is he forced to somehow file a corrected 1099 form himself (although finding one to fill out may be problematic)? Are there government agencies or watchdog groups that can be contacted for assistance and who can determine whether the firm is acting inappropriately?

A qualified plan is terminating and one of the participants who terminated many years ago cannot be located - her last known address is not valid and her SS# is not known. The amount due to the participant cannot be rolled over to a safe harbor IRA since a SS# is needed to do so, and presumably the SSA locator service cannot be used. The amount due is about $1,400, so hiring a private service to locate the individual may not be prudent since that would probably consume the majority of the benefit due, and it would seem very unlikely she would be found given the lack of available info. Are there any better options other than 1) escheating the amount to the state, or 2) paying it all out as 100% withholding? Are there any financial institutions that can set up an IRA without a SS#?

A plan was originally designed years ago with a 5-year cliff schedule and a 3-year cliff for top heavy years. When the plan was restated for EGTRRA in 2010 the vesting provisions were changed to say that a participant's interest will vest according to a 2/20 schedule, but for amounts contributed prior to 2007 the original cliff schedules would apply, specifically stating that the 3-year cliff schedule would apply for top heavy years prior to 2007. The plan actually operated liked this beginning with the 2007 plan year, although the doc wasn't amended until the EGTRRA restatement (the TPA said an amendment wasn't needed at the time and it was OK to wait until the restatement). The plan first became top heavy in 2011. There's a participant who terminated in 2008 with a very large account balance, the great majority of which was allocated to him prior to 2007. At the end of 2006, he only had 3 years of service and his entire balance was 0% vested under the old schedule. The small contribution he received in 2007 was vested under the 2/20 schedule and when he terminated in early 2008 he had a total of 4 years of service. From 2007 through 2010 he was shown being 0% vested in the large pre-2007 amount and 40% vested in the tiny 2007 amount. Now that the plan became top heavy in 2011, I am wondering if the vesting language, which is literally written as simply as I've described above, is adequate and whether it would be correct to still consider the pre-2007 amounts 0% vested? All help is greatly appreciated.

A plan was originally designed years ago with a 5-year cliff schedule and a 3-year cliff for top heavy years. When the plan was restated for EGTRRA in 2010 the vesting provisions were changed to say that a participant's interest will vest according to a 2/20 schedule, but for amounts contributed prior to 2007 the original cliff schedules would apply, specifically stating that the 3-year cliff schedule would apply for top heavy years prior to 2007. The plan actually operated liked this beginning with the 2007 plan year, although the doc wasn't amended until the EGTRRA restatement (the TPA said an amendment wasn't needed at the time and it was OK to wait until the restatement). The plan first became top heavy in 2011. There's a participant who terminated in 2008 with a very large account balance, the great majority of which was allocated to him prior to 2007. At the end of 2006, he only had 3 years of service and his entire balance was 0% vested under the old schedule. The small contribution he received in 2007 was vested under the 2/20 schedule and when he terminated in early 2008 he had a total of 4 years of service. From 2007 through 2010 he was shown being 0% vested in the large pre-2007 amount and 40% vested in the tiny 2007 amount. Now that the plan became top heavy in 2011, I am wondering if the vesting language, which is literally written as simply as I've described above, is adequate and whether it would be correct to still consider the pre-2007 amounts 0% vested? All help is greatly appreciated.

Thank you for your response. A 401(k) plan was one of the types that were being discussed, however they would prefer a PSP, as deferrals don't appeal to the contributing partner (it seems he isn't concerned about decreasing his personal tax liability). To 'exlude' the 2nd partner, perhaps a PSP can be set up that has an allocation group created for each participant (like a new comparability plan), and the decision every year is made to give 0% to Partner 2 - cross testing would pass since there are no NHCEs. Also, the doc would indicate that TH min benefits are only given to non-keys so that Partner 2 wouldn't require an allocation.

Partner 1 of a partnership wants to sponsor a plan but Partner 2 does not want to contribute at this time (they own the company 50/50). There are no other employees. Having Partner 2 sign a waiver of participation may not be the best option, as Partner 2 may want to start contributing somewhere down the line and such waivers I believe are irrevocable. Would it be acceptable for the plan doc to just use the name of Partner 1 as the definition of 'Eligible Employee', and then amend the definition once Partner 2 is ready? Thanks.

Most likely it does - a discrimination issue at the very least. Generally in such a plan, every participant should have the same opportunity to invest in every investment available in the plan - I couldn't see this happening with the car, or there being similar cars offered to the rest of the participants. BTW, the car shouldn't be used for personal reasons if it's owned by the plan, i.e., it shouldn't be driven or displayed, only stored, and, of course, be professionally appraised on a regular basis.

If a plan is being amended to eliminate its loan provision, is there a minimum number of days that must elapse between its adoption and effective dates? Also, is it acceptable to notify the participants no later than the amendment's adoption date? My understanding of protected benefits under 411(d) is that a participant loan provision is not considered to be an optional benefit and can be removed from a plan, as opposed to, e.g., an inservice distribution provision. All help is greatly appreciated.