Disco Stu

To reiterate points made by previous posts in this thread and ad nauseum in other threads on these boards in past years...the 401(a)(17) limit has nothing to do with allowing or disallowing salary deferral contributions at different points during a plan year for those individuals earning more than the limit. The reason 401(a)(17) is not mentioned as one of the limits that ketchup contributions are allowed to exceed, is that it does not limit salary deferrals in the first place.

I administer a multiple employer plan that added an additional participating employer this year. The new member is a newly established company. A couple of the HCEs from one of the existing employers went to work at the new company. My feeling is that this new company will have no HCEs (based on compensation) in their first year of existence because no one earned any wages during the prior year. I have had someone tell me I am mistaken on this, that compensation earned at another participating employer would be used in determining HCE status. I've been looking for some guidance of a less anecdotal nature, but haven't found much. Anyone have any cites that would help me?

To go into slightly more detail....all of the employer stock, whether released or in suspense, is reported on the same line as an asset of the plan. The remaining principal balance on the loan is reported in the liabilities section.

Howdy I have a divorce situation where both husband and wife are participants in the plan. I haven't seen a DRO yet, but the question came up regarding moving balances between the two accounts in the plan. I don't see anything wrong in doing that. I'm wondering about recordkeeping the accounts after the QDRO. I'm thinking the QDRO dollars would need to be accounted for separately...mainly because of the fact that an alternate payee isn't subject to the early withdrawal penalty on a QDRO distribution. I assume that things like this aren't totally uncommon. Anyone out there have any insight on this situation or disagree with any of my assumptions? I get this feeling there are things that I haven't thought of. Thanks for any input.

They were kind enough to make the instructions a little more specific this year. The instructions for this item indicate that participant directed accounts do not need to be considered in looking at the 20% threshhold. If the mutual funds you speak of are not participant directed, my understanding is that they would count for the 20% threshhold. Although the only support I have for this is anecdotal.

In reponse to Kirk, I don't think that I disagree with giving a 1099 to the participant that received the money. If there wasn't the problem of the lask of spousal consent and the continuing unwillingness of the spouse to consent after the fact, I might be inclined to agree that the 1099 would be the end of the discussion. Given the facts and the possiblity of an impending QDRO, the trustee may have larger problems than just making the bogus loan taxable. In the Q&A columns, #'s 88-90 discuss possibilities for dealing with the lack of spousal consent. There is some discussion in there of the previously mentioned annuity. That approach would likey be more pallateable to the employer than the restoration of the account balance that I suggested.

You proposed solution is problematic (by my way of thinking) for two reasons. 1. Even though in theory you can self correct this, in your case you won't have corrected until two years from now. The trustee has his/her pants down for this entire two year period. In the IRS' view, the problem isn't corrected at all until it is fully corrected. 2. Without a signature from the participant agreeing to the salary reduction, I still think you'll have trouble forcing it on him. Especially if he's in a fighting mood. Another thought I had on this...isn't this a prohibited transaction? Essentially, IRC 4975 says that all loans are prohibited transactions unless they fall under the excetions that are listed. The fact that you don't have any loan documents or promise to pay, makes me wonder if you need to declare this as a PT. If you do that, you increase the likelyhood that the IRS will find their way to this client's door within the next two years.

Not sure about the 15 day reference, but the 2 plan year thing could be referring to the EPCRS program which allows for self correction of operational errors. If I'm remembering right, insignificant operational errors can be self corrected at any time. Significant errors can be self corrected within two years. Keep in mind though that if the IRS or DOL catches the problem before you fix it, that you don't get to use self correction. If you haven't done so, you might check through the Q&A columns on BenefitsLink. You might find some other recommendations in there.

I'm in agreement with your last post...the lack of spousal consent makes this a very difficult spot. Maybe this isn't an option, but I think the cleanest of the clean responses to this is to have the trustee pony up the dough to make the participant's account whole. Then they could pusue collection on their own, outside of the plan. If the spouse's attorney is sharp, the trustee may end up on the hook anyway...depending on the division of the assets. This has happened in other similar situations where a plan benefit was paid to someone other than the rightful beneficiary or alternate payee. I'm not sure you can force the salary reduction agreement on the employee. If the participant agreed to the salary reduction in the loan note, you'd have stronger footing, but in general if the participant wants to put up a fight, I'm not sure you can force the repayment via salary reduction.

One other thing to consider regarding the ACP test implications of putting in an after tax feature... If you happen to have some extra room in the ADP side of the discrimination testing, you can slide that excess over to the ACP side of the equation. That might allow HCEs to make a little more in after-tax contributions than they otherwise would.

Well...based on the facts given, the company's maximum deductible contribition is only $13,500 (15% of gross wages less pre-tax items). And this assumes that there were no cafeteria plan deferrals. If there were, the deductible limit would be less. But since participant B has a 415 excess of $2,833, this amount is not deductible under section 404, so don't count this in your deductibility anaysis. By my calculations, there are non-deducitble contributions of $5,667. I would not stop there in deciding whether or not there were really non-deducitlbe contributions though. As I mentioned in my first post, the company should at least explore the idea of pre-87 carry forward. If any exists, it could save their skins. Their tax accountants should be able to help them with this. If in fact you do have non-deductible contributions, I don't beleive that distributions or forfeitures are allowed to "correct" the problem. The non-deductible amount is carried over and deducted in the next year. This creates compounding problems if you have multiple years in a row of non-deductible contributions. With the client that I had that went through an IRS audit, they had to stop making all contributions until they reached the year when they could deduct everything that had been carried over. It was painful. You are correct about the need for 5330s and excise taxes for all of the years involved if there are non-deductible contributions. Should we ask why two participants with such similar compensation received vastly different employer contributions?

I completely disagree. Liver (when properly prepared) is delicious. Regarding the top-heavy stuff...my reading would be in agreement with Tom's. Although I can't imagine anyone really caring that much about top-heavy issues in the face of such blasphemy about liver.

If we are talking about contributions in excess of the annual additions limt (IRC 415©), there is no excise tax for a failure to correct. In fact, there is no written in stone deadline for correction. What makes me think we still have problems with terminology is that the annual additions limit for 1999 and 2000 was 25% of gross compensation. The 22% of adjusted comp number you quote does not appear to be in excess of this limit. Also the annual additions limit applies to individual participants in the plan and not to the plan as a whole. A company's deductible limit (IRC 404) for 1999 and 2000 was generally 15% of taxable compensation. There are excise taxes imposed for contributions made in excess of this limit. They compound if the non-deductible contributions spread across multiple years, which can be quite nasty.

The employer can always ask the participant for the money back. Unless it's a lot of money, it's been my experience that most employers don't bother. Technically, you should probably make sure the ineligible amounts weren't rolled over. Even if they were, I'm not sure I'd spend a lot of time on it. I've heard anecdotally that the IRS doesn't try to track that kind of stuff down once it's out of the plan. Someone else may have a different opinion on that though. BTW...if you're a new recordkeeper on the case, you should make sure the employer is certain that there is not carryforward available...it could be that those contributions really were deductible. It's a lot of work to try to figure that out, because the carryforward has to be from prior to 1987 (?). But given the choice of filing the 5330 and running an increased audit risk, it might be time well spent. I should also mention that my comments assume that the question you ask refers to contributions in excess of the company's deductible limit for these years. When you posed this question on the "Corrections" board, you referred to these as excess annual additions. Given the facts stated, I doesn't seem likely that you are dealing with excess annual additions.

In addition to the excise tax mentioed above, another cost to factor into the equation is the cost of being audited by the DOL. They use that 5500 question as a BIG audit flag. At a seminar I attended, the speaker said that if you answer that question stating you had late salary deferrals, you may as well include a suggested time for the DOL to come by.

You need to match the line the income is reported on in question 2, to the line the assets are reported on in question 1. The instructions for questions 2b(6-10) indicate that all types of income (realized, unrealized, etc...) for these types of assets are to be reported on these lines. I learned this one the hard way. I got a letter from the IRS & had to file an amended return for a client.

Just a couple of additional pieces of information for consideration... If no one in the plan received a matching contribution, it could be that the plan's matching contribution is discretionary. It is very common, even in situations where a company plans to always match at a certain level, that the amount of the match or the fact that there is a match at all, is discretionary from year to year. The other point to consider is that the company really has until they file their corporate tax return to deposit any employer contributions for 2000. With an extension, this date could be as late as 9/15/01 (assuming 12/31/00 corporate tax year end). While I would agree that you should continue to push for answers, it might very well be the case that the employer has not done anything wrong and is still trying to make a decision on what if anything will be done for the 2000 year.

I confused by these two statements that you made One... they do not have a full trustee's report, certified by the trustee two... if they cannot get a report by someone regulated, then the CPA has to check everything In a hypothetical example, I have a client who's plan is self trusteed. The plan's investments are solely in pooled separate accounts at an insurance company. The insurance company provides a nice, certified annual report. Are you saying that the auditor will not do the limited scope audit because the annual report is not produced by the trustee?

Twice in the last two weeks, I've had an auditor tell me that they cannot perform a limited scope audit if a plan is self trusteed. The first auditor was from a firm that I'm usually sceptical of anyway, so it didn't give the issue a lot of thought. Now the issue has come up again and I can't help but wonder if I'm missing something. My understanding of the limited scope audit was that if the assets were in the CUSTODY of a bank or insurance company or similarly regulated entity, that the auditor could perform a limited scope audit. The assertion that has been made to me is, that if one of these types of entities is not the TRUSTEE of the plan, a full scope audit must be performed. I've read 29 CFR 2520.103-8 and do not see the word trustee anywhere. I guess I'm looking for a little reassurance that I'm not off my rocker. Any input would be appreciated.

Unfortunately the opportunity to take advantage of the NUA rules is lost if the securities are rolled to another qualified plan or IRA. I believe that the cite would be under 402(e)(4), which states that the NUA rules apply to... "...any lump sum distribution which includes securities of the employer corporation..." Once the distribution comes out of another plan, the securities are no longer from the employer corporation. It very well may be in the person's interest to take a taxable distribution of the stock now. He will get taxed on his basis now and pay tax on the capital gains when he sells the stock. If the shares are rolled to another plan, he will pay tax on the fair market value of the stock when the shares are eventually distributed. This participant should talk to a tax advisor about his/her situation. Depending on the particulars, rolling these shares could be a big mistake, resulting in a much higher tax bill later in life.

Anyone have any experience with penalties being assessed for failure to file a form 945? All withholding was paid in a timely manner, but no 945 was filed for a couple years. I am having trouble locating info on penalties. Thanks for any responses.

I agree with the previous post regarding constructive receipt and taxability. I don't think the distributing plan can take it back. In addition, if this participant wants to avoid taxes on the distribution (including the loan) all she needs to do is roll it to an IRA or another qualified plan. There is still a 60 day window in which a taxable distribution can be rolled over. Assuming that the loan was not previously a deemed distribution, it too can be rolled over.

I'm wondering if it is possible to have a discretionary matching contribution in a prototype plan where the cap on the match is also disrectionary from year to year. For example, one year the employer could choose to match a certain percentage on the first 6% of salary deferred and then only match the first 4% next year. Thanks for any input.

Only the first $6,800 of the participant's salary deferrals may be matched based on the 4% limitation. A 50% match on those deferrals is $3,400. The issue of salary deferrals after reaching the comp limit has been discussed ad nauseum on these boards. I would suggest that if anyone has questions in that area, they use the search engine and read some of the previous discussions.

$3,400