BTH

An existing Profit Sharing Plan is amended to a Safe Harbor 401(k) on 7/1/2008. Although the 401(k) deferrals start effective 7/1, the 3% Safe Harbor contribution is based on the full year compensation. A participant terminates employment on 2/28/2008. Is this participant eligible for the 3% Safe Harbor? The Plan defines eligibility for the Safe Harbor as "a Participant who is eligible to make Elective Deferrals under the Plan for any part of the Plan Year." Since the participant terminated prior to being able to make any Elective Deferrals, I'm thinking that the terminated participant may be excluded here. Any thoughts? Thanks.

Profit Sharing Plan that has J&S provisions, so requires spousal consent on distributions over $5,000. Active participant is requesting a Hardship Distribution and has a balance of less than $5,000. Is spousal consent required? Thanks.

I have seen quite a few posts here on what happens when someone rolls over their entire account balance in a year when they should have first received a RMD (excess IRA contribution, etc.) Most of these examples seem to relate to correcting something that has already happened. So I want to get some thoughts on the following current situation: We have a participant who has elected a Direct Rollover of his account balance, but also needs to take his initial RMD for 2007. We informed him of the fact that he needs to take the RMD and that the remainder of his account balance may be rolled over. However, the participant (who also happens to be one of the Plan's Trustees) is insisting (quite strongly) that 100% of the account balance be rolled over to his IRA and that he will take the RMD from there. The IRA custodian has indicated that they "do this all of the time" and it's not a problem. Naturally, my concern is from the standpoint of the Plan and our administration of it. It seems to me that the RMD is not an eligible rollover and to go ahead and process it as a rollover may be putting the Plan unnecessarily at risk. Upon an audit of the Plan, I doubt the reviewer is going to look at whether the participant eventually received his RMD out of his IRA, but rather the fact that the Plan improperly rolled over a RMD. Any thoughts on what should be done here and what the Plan/TPA's responsibility is with respect to this situation? Thanks. BTH

A participant takes out a loan in 2001 with the final payment due in 2006. In 2004, he wants to take an additional loan with a 5-year repayment period and include the initial loan as part of the new loan. Since the new repayment period would extend beyond the due date of the initial loan, as long as the outstanding balance of the old loan plus the total of the new loan do not exceed the 1/2 vested balance/$50,000 limit, is everything fine within the rules/regulations? Any other considerations? Thanks.

I haven't thought about Cafeteria Plans in years (I deal with Pensions), so forgive my ignorance with this question. A relative of mine (single, no dependants) started a new job last July and while she was filling out all of the various paperwork, for some reason completed a Cafeteria Plan enrollment form authorzing the company to deduct monies for health insurance. This was even though they were deducting money for health coverage already. I guess she didn't know what the Cafeteria Plan form meant. Anyway, she doesn't renew the Cafeteria election as of January 1st, realizes that her paycheck is significan't higher now, and finally realizes what happened, that more money was being deducted for health insurance than she wanted or needed. I'm pretty sure I know the answer to this since it really was her fault, but does she have any options in getting the money back that was deducted "by mistake?" Thanks for any input. BTH

When there is an ADP test failure and excess contributions are returned, generally it is after the Plan Year ends, the correcting distributions are made and 1099's issued. However, if it is determined that the ADP test will fail prior to the end of the year, but deferrals have already been made, is it possible to handle this in a different way? For instance, since the contributions could be returned before the end of the year, is it possible to return to funds to employer as a mistake-of-fact and thereby not have to issue a 1099? The funds would then be given to the HCE's and their W-2's adjusted accordingly. It seems "cleaner" for the HCE, but is something like this allowable or do you have use the actual excess contribution rules no matter when the money is refunded? Thanks. BTH

Recently, we filed a 5310 for a Profit Sharing Plan where we indicated that the business' adverse business conditions didn't allow it to continue to fund or maintain the Plan. The business had been in bad shape for a number of years and no contributions had been made since the mid-90's. The IRS reviewer actually did come back and ask why no contributions had been made to the Plan, even though he acknowledged our adverse business conditions answer. While he may have been reviewing the contribution question on the 5310 and not necessarily the reason for termination, it does show that the IRS does actually look at this stuff sometimes. BTH

In this situation, I have the impression that the participant cannot get the spousal consent necessary for a lump sum. We are, in fact, charging the plan's administrative expenses to the Plan and since she is the only participant, that ends up being out of her account. We informed her of this many times over the past year and a half and still nothing. I did a search before posting and, as KJohnson pointed out, there doesn't seem to be a good/easy answer to the question! BTH

We have a situation with a small, terminated Money Purchase Plan where there is one remaining participant who refuses to make an affirmative election as to taking her funds. The account balance is over $5,000. The “normal” form of benefit under the Plan is a Joint and Survivor Annuity, which we told the participant will be purchased absent an election for a rollover/lump sum, etc. The problem is that we cannot find an insurance company (in Pennsylvania), that will set up an annuity without the participant’s signature. Does anyone know of a company that will do this or perhaps accept the Trustee’s signature? Thanks. BTH

I was thinking that would be the case and it makes sense that the catch-up rules would work that way. But, as with many things in this business, you never know... Thanks for the help. BTH

A 401(k) has a plan year that runs 7/1 through 6/30. During calendar year 2002, a HCE contributes up to the 402(g) limit of $11,000 and thus can make a $1,000 catch-up contribution to get to $12,000. Starting 1/1/2003, the HCE decides not to contribute anymore to the 401(k) so for the Plan Year Ending 6/30/2003, his total deferrals are below any sort of Plan or ADP Testing limit. My question is how is the $1,000 that was a catch-up contribution in 2002 treated for the 6/30/2003 PYE? Is it still considered a catch-up contribution for testing purposes? Or is it not a catch-up because the participant has not exceeded any Plan or ADP limit for the Plan Year? Thanks! BTH

I have situation with a small plan that terminated in 2001, received a favorable IRS letter, but cannot be closed out because there are two participants who refuse to take their distributions for whatever reason. We have contacted them numerous times regarding their balances and options. Each of them has a balance over $5,000 and the Plan does have J&S annuity as the "normal" form of benefit. The Plan document, of course, does not specifically detail what to do in this type of situation -- it only deals with "lost" participants. My thought is to purchase J&S annuities without their affirmative consent as long as they are informed that is going to happen. Another option would be to rollover their balances to an IRA that can be opened without signatures. Any thoughts on what the best way to go here is? Thanks. BTH

Small Plan Audit Waiver question on Schedule I.

I was under the impression that the IRS was supposed to have come out with a new Form 5310 earlier this year, but the old form is still on their website. Are you supposed to still use the old form at this point? Is a new 5310 supposed to be released soon? Thanks. BTH

Our firm generally handles small plans and recently had a client audited by the DOL because of late deferrals. During the audit, the reviewer gave some insight on what the DOL tries to look at as far as late deposits. We figured that they would determine how quickly contributions could be made (the as soon as administratively feasible standard), and then compare that to when deposits were actually made. However, what they seem to do is try to establish a "pattern" of the 401(k) contributions to see what is normal for that firm. For instance, if on average deposits are made within 10 days of the paycheck, they will use that as the benchmark. If, then, a particular contribution is deposited 30 days after a paycheck, it would be considered late by 20 days. We suggested that the client begin wiring or FEDEXing the deposit the next day after the payroll. The reviewer said that would not be a good idea because it would establish a pattern, and if a deposit was not made within that time frame, it would be considered late! So you could have a situation where the client sends in the check the next day after payroll each time, but then has a deposit that goes in 5 days after payroll and would be late. But the same client who consistently makes deposits 10 days after payroll would not be late. Go figure.

I think that you could distribute the assets before receiving a determination letter. However, in the event the IRS has some questions/issues with the termination, it is probably best to wait. And, in the situation you describe, there doesn't seem to be any reason to rush to get the assets rolled over. As far as actually applying for a determination letter in a very small plan situation, we like to present the pros & cons to our clients and let them make the decision. Having the "insurance policy" of a determination letter doesn't hurt in the event of a future audit, but there are certainly costs involved.

I believe that Department of Labor regulations require that 401(k) deferrals be transmitted by the earliest possible date that they can be segregated from the employer's assets, but no later than the 15th business day of the month following the month in which the amounts at withheld from the employee's paycheck. I don't know the specific penalties that might be involved, but from what I have read, the DOL is fairly strict on compliance if you were to get audited. To avoid problems, we always recommend to our clients to make the contribution immediately. BTH

A small employer who has maintained a Top Heavy Profit Sharing Plan for a number of years decides that he would be better off with a Safe Harbor 401(k), using the Basic Matching contribution. While starting in 2002, Safe Harbor plans using the basic match are not subject to Top Heavy minimums, are there issues since he has been Top Heavy in the past if: 1. He terminates the existing Profit Sharing Plan and establishes a separate new Safe Harbor 401(k)? 2. He amends the existing Profit Sharing Plan into a Safe Harbor 401(k)? Any comments or observations would be appreciated. BTH

In a situation where there is a short initial plan-year running from 7/1/2000 - 12/31/2000, is the deductibilty limit under Section 404 based on the full-year compensation or only the compensation for half of the year? Thanks.

Assume that a participant stops making payments on a loan in November of 1999. The plan allows for a grace period for that extends to the last day of the calendar quarter following the date of the missed payment, or March 31, 2000. The participant does not make any payments by the end of the grace period, making the loan taxable as a deemed distribution. Is the loan considered taxable in 1999 (the due date of the original payment) or is it taxable in 2000 (taking into account the grace period)? Thanks.

There are two areas regarding rollovers to qualified plans (not IRA's) that I would like some opinions. First, if "plan A" does a Direct Rollover to a former employee's new plan (plan b) and plan B turns out not to be qualified, what are the penalities (if any) to the Trustee of plan A? Second, what types of steps are taken before a rollover such as this are made? Do you require a copy of an IRS determination letter? Simply a letter from the recipient plan stating that it is qualified? Or nothing at all? Any input would be appreciated.

I have a situation where a small employer has contributed the close to the maximum 15% deductibility limit to their Profit Sharing Plan. On top of this, there is a fairly large forfeiture account that is to be re-allocated. As long as the 415 limit is not exceeded for individual participants, I can't see where this is a problem since the 15% is a deductibility limit and, of course, re-allocated forfeitures are not deductible. The plan states that forfeitures shall be "added to the employer contribution." Any input would be appreciated.