Disco Stu

I agree with your first post, that if the individual has already filed their 2002 taxes, they will need to amend. They don't really need to wait until a year from now when they will receieve the 2003 1099-R. If the participant keeps some kind of documentation of the transaction, they can go ahead and do the amended return right away. Your second post needs clarification. There is no need for two 1099-Rs in the situation you describe. Further, you cannot pay in federal withholding on distributions that are taxable in a prior tax year.

I had no idea what I was getting into when I posted this question. I certainly got a lot more that I expected. In answer to Tom's question, the plan has been just restated to the Corbel doc. Originally, I didn't think this was a subject that I needed to look in the document to get guidance on. Forfeiting 'hanging match' is one of those topics I had always assumed was a universal truth. I guess I've gotten a lesson on more than one issue here.

Hi I can't believe I've never had to think about this before, but here's my situation... I have a participant with a 402(g) excess for the 2002 calendar year. The plan's year is 7/1 - 6/30. I am tryring to decide whether and when I might have a match for free problem. I think the question comes down to whether the contributions which are to be refunded are determined on a FIFO basis as ADP excess amounts are. Obviously, my preference is to decide that the 402(g) excess amounts are from the contributions made after 7/1/02. I would prefer to avoid revising ADP/ACP tests that have already been completed for 6/30/02. Anyone have any suggestions about the plan year that I need to look for match for free in? Thanks

I'm dealing with a 401(k) plan that has received proceeds from the demutualization of the insurace company that holds the plan's investments. The trust now holds common stock which will shortly be sold for cash. The question at issue is the basis for allocating the proceeds to participant accounts. Based on information provided to the insurance company, policy holders in 12/2001 are the ones who received demutualization proceeds. However, the demtualization was not approved, and the proceeds were not issued until 10/2002. Obviously, neither my firm (recordkeeping) nor the client is overjoyed by the prospect of allocating these earnings to participant accounts based on their positions in 12/2001. Everyone involved would be much happier allocating the earnings based on the positions at 10/2002. Is this an issue where the trustee can exercise some discretion? The trustee is going to get the opinion of their attorney, but I am curious about the experience of others on these message boards. Is there any published guidance?

I believe that the 'employee contributions' referred to in the instructions are after tax contributions. After tax contributions are often referred to in this way, and like matching contributions, they are also tested under 401(m).

I would respectfully disagree with the previous post. In my opinion corrective distributions should be recorded on the 5500 in the year they acutally occur. The instructions for Schedule I state... "Include all distributions paid during the plan year...." This doesn't appear to leave much room for accruing distributions that take place after the end of the plan year. If you compare this to the instructions for the contribution lines... "Include the total cash contributions received and/or (for accrual basis plans) due to be received..." Maybe the CPAs on the message boards will disagree, but from an accounting perspective, I'm not sure that corrective distributions could be correctly classified as a liability for the year to which they are attributable. For the most part it isn't possible to make the distributions until some point during the next year.

An employer rehired an employee and was required to restore forfeitures to the participant. The balance in the forfeiture suspense account was not sufficient to cover the required restoration, so the employer had to contribute the rest. I'm trying to figure out how to report this on the Schedule H. I'm leaning towards using the employer contributions line. It doesn't seem exactly right, but I don't see any other lines on the form that are better. Does anyone agree or disagree?

I was reading the ASPA Q&A doument that Andy linked & wanted to clarify a point. From question 6, their position appears to be that a non-key participant who is only entitled to a top heavy minimum would not need to receive the gateway contribution. There seem to be conclusions to the contrary in some other threads on the message boards, stating that non-keys who were only entitled to a top heavy minimum needed to be bumped up to the gateway level. Does anyone have any cites that cast ASPA's opinion (or my reading of it) in doubt?

My understanding is that this is true. Here's a link to a previous discussion on this subject. http://benefitslink.com/boards/index.php?showtopic=10280

The rules regarding timing of refunds to fix failed ADP/ACP tests have not changed.

The answer depends on the method used to allocate the forfeitures. If the forfs are allocated based on compensation, then no, they would not be included in the ACP test. If the forfs are contingent on making a salary deferral (i.e. allocated in the same proportion as the matching contribution) then the forfeitures should be included in the ACP test. In my experience, the second approach is fairly uncommon, but check your plan document. The plan doc will also likely have some guidance about performing ADP/ACP tests. Although I didn't trudge through it, I would imagine that Treas. Reg. 1.401(m) would have some guidance here as well.

I'm with John A on this one & would add another to his list of reasons to do this. The IRS has relaxed their draconian rules about plan disqualification for accepting impermissible rollovers. They now allow plans to purge impremissible rollovers without jeopardizing the plan's qualified status. And with the EGTRRA changes, there aren't many impermissible rollovers left anyway. It is certainly possible to make accounting entries to record this transaction as a distribution from the deceased and a subsequent rollover contribution without actually initiating any transaction at the trust level. It's a good faith approach to an unusual situation. Even in the event the IRS comes in and takes issue, it seems to me that any correction is without consequence to the plan. The thing that I was thinking of as a roadblock to going ahead with the propsed transaction was if it could be viewed as an improper assignment of trust assets. Since it's staying inside the trust, I don't think this would be a good argument either though.

I need some more clarification on the nature of the dividends. Were these dividends paid on shares allocated to participant accounts inside the ESOP trust? I'm not familiar with a situation that would allow distributions to participants in this situation. Typically these dividends are held inside the trust.

If you asked them, they probably wouldn't be able to tell you, but the DOL should know. Reminds me of a Beatles song...

There is some conflicting information on this subject. IRS Notice 87-13 says that "A distribution to an employee from a qualified plan will be treated as within section 72(t)(2)(A)(v) if (i) it is made after the employee has separated from service for the employer maintaining the plan and (ii) such separation from service occurred during or after the calendar year in which the employee attained age 55." IRS Publication 575 also uses this language. Here's a link to that. http://ftp.fedworld.gov/pub/irs-pdf/p575.pdf This languarge seems to contradict what is in Section 72(t)(2)(A)(v). For the record, our firm uses the more lenient interpretation. I know we are not alone. Here is a link to a previous discussion on this subject. http://benefitslink.com/boards/index.php?showtopic=8580

If you find that comprehesive application, please let the rest of us know. Currently, I'm not sure it exists. For the last few years, our firm has been using one application for compliance testing and another for daily recordkeping. The data transfer between the two systems can be a bit of a pain, but we just haven't found a system that does daily recordkeeping that we could even consider for compliance testing. While Tbrown's comments about Datair being DOS based and inflexible are accurate, I do have some positive comments about their software. As far a compliance testing goes, I don't think they can be beaten. It does the standard tests (coverage, adp/acp and top heavy) well, but for my money, the real strength is its 401(a)(4) test. It can handle any testing option you want to utilize. It will also do non-discriminatory compensation testing. If you're looking at doing daily recordkeeping though, Datair won't cut it. We use SchwabRT (formerly TrustMark) for daily recordkeeping. It does a fine job there, but unless all of your plans are cookie cutter types, the testing package isn't even close. It can do coverage (ratio percentage only), ADP/ACP and top heavy. If you need to do any other kind of test, you're out of luck. Good luck, let us know your experience with whatever you choose.

Fred or Kirk, Would your opinion of the situation change if instead of cashing the check and handing over the proceeds, the participant simply signs the check over to the employer? I the end, this is form vs. substance, but would you be nervous about the form in this case?

I can't put my finger on this one, but it smells bad to me. I'm hopeful someone can clarify this issue for me. I have a client that wants to front the proceeds of a bona fide participant loan to a participant. They'll cut the individual a check now. When the loan check arrives from the trust, the participant will sign over the check to the employer. I want to say that the fronting of the money to the participant is a prohibited transaction, but am not sure. Anyone have anything specific they can point me to? Thanks.

If the only problem you have is that the matching contributions were based on compensation in excess of $170,000, then you don't have any refunds to do. You'll have to forfeit the match that was received in excess of what your plan allowed. This isn't a discrimination testing issue (which is what the 2 1/2 month deadline applies to). This is an operational error because you didn't caclulate the match the way your plan requires you to. Because this is an operational error, you can self correct using the IRS' self correction program (EPRCS). Unless there are other nasty things that have occurred, it sounds like you should be able to rely on the self correction program. This program doesn't require that you notify the IRS when self correcting. However you should keep good records which document that the correction was a complete correction.

If the refunds are made to the HCEs within 2.5 months from the end of the plan year, the dollars would be taxable for the year in which they were contributed to the plan. If the the HCEs involved actually didn't make any contributions during December 2000, then the refunds would be 2001 income. Of course if you wait until after 2/15/02 to make the refunds, they would be 2002 income for the HCEs.

Simbarat-One last thing, just for the sake of clarification... The previous statements made about net unrealized appreciation, capital gains and company stock only apply when the dealing with the stock of YOUR EMPLOYER held inside the plan. Generally the entire amount of a distribution will be considered ordinary income regardless of the trading practices used by the account. The distribution of the shares of your employer are the exception to this rule. This was the basis of the previous posts. Sorry if this is redundant. I wasn't sure if this was clear from the other posts.

The DOL is taking the postition that any deposit of lost earning is a PT? That's a pretty harsh stance. I'm curious if you could share the circumstances that led to the deposit of lost earnings in the cases you dealt with. Did that have ANY bearing on their position? For the set of facts given to us...and if it were my plan... I think I would make up the lost earnings and be done with it. You'd be making a reasonable, good faith correction, and there doesn't seem to be any CLEAR guidance that something like this is a PT. If the DOL is going to take this kind of position, I would make them come in and find the problem for themselves. I'm wary of declaring a PT unless it is absolutely certain that one has occurred. I had a client that declared a PT based on the advice of their auditors (and against my advice). The dollar amount involved was quite small & my client didn't want to waste their time arguing the point with their auditors. But...the PT flagged them for an IRS audit. Once the auditor arrived, he stated that he didn't feel that the transaction in question was a PT. However he did turn up an unrelated problem that turned out to be quite expensive for my client. The lesson my client took from this was that you'd better be sure you're doing the right thing before you stick your head up out of the foxhole.

While I'd agree restoring lost earnings is a good idea, I'm not sure I agree with the assertion that this is a prohibited transaction. The fact is that these are matching contributions, not salary deferrals and they were deposited within the proper time period. Even if the DOL came in and looked things over, I don't think they could get too upset about this unless they could prove the method in which the match was funded discriminated in favor of HCEs. Maybe it does & maybe it doesn't. It probably isn't in anyone's interest to try to figure that out. The company should make up the earnings because it's the right thing to do and because they don't want to have to defend what happened to the DOL. I would ask Demosthenes to explain the rationale behind declaring this as a PT though.

This isn't exactly on your point, but I'd like to hear others' feedback on this. Apparrently it is becoming more common for recordkeepers to maintain a "gain/loss account" either inside or outside a plan to offset obligations for recordkeeping errors. The rationale being that if a correction had to be made, and after that correction there were extra shares or dollars, they would be put into this gain/loss account. The next time an error occurred and the participant suffered a loss, the funds in the gain/loss account could be used to offset the damage to the recordkeeper. This raised a lot of alarms with me, but I have heard anecdotally that this pratice is widespread and that there has been some sort of IRS blessing. I seems like this would be easier to pull off in the bank or trust company setting, where there are omnibus accounts to hold this money. As a TPA, I wonder if such an arrangement is feasible. I don't see how you can hold unallocated money inside the trust. Even if I wanted to move money out of the trust, I wouldn't have a place to hold it. Does anyone have any experience with this? In answer to the original post, my firm has never made a mistake, and never will. :-)

There are a lot of issues that get beaten to death on these boards, but this one has got to be the deadest of the dead. Instead of rehashing old arguments and using up more space on Dave's servers, I'll respectfully suggest that you use the search engine to review what's been discussed in the past.