Disco Stu

This distribution was initiated at the participant's direction and the participant took no action to mitigate his investment losses once things went bad. I can't imagine anyone in this situation that would be willing to pony up for investment losses on this guy's chosen funds during his period of inaction. Your point about the TPA benefitting from this transaction is well taken though. Maybe they'd be willing to restore some sort of money market type gains based on the time they had the money, but even that seems generous to me. I'd certainly defer to someone more knowledgable on this subject, but I'm not so sure that these funds have been plan assets all this time. It sounds like this has gone on for a while...were these funds counted as plan assets on the last 5500? This clearing account you refer to...it sounds like that isn't a plan account. Is it one big account in the name of the mutual fund company that it uses for all of its clients? If so, there's probably a decent arguement that these are not plan assets. At least not until they are put back into the plan's accounts.

Lost earnings? For whom?

I also agree with your take. The fact that the participant was never in constructive receipt of the distribution means that there was no taxable distribution. I find it a little difficult to believe that your TPA suggested putting this money into the plan's forfeiture account. What would you do with the forfeitures at the end of the year? Reallocate it to the other participants? Until you can get the participant to respond, I guess I'd just put the money back into his account in the same fashion that it came out. Although I will say that I think the trustee would be within their discretion in putting the money into the plan's fixed income type investment or something else that he/she felt was prudent. Once this guy starts getting statements from your plan and notices all of his money in the fixed income account, I'd bet he'd respond fairly quickly.

This is only speculation, but I wouldn't jump to the conclusion that structuring the match this way would require the BRF testing. I administer a plan that has a match with different levels based on years of service. We do BRF testing on this becasue obviously the higher rates of match are not available to everyone in the plan. But in the scenario of basing the match on some measurable performance criteria, in theory wouldn't everyone have a opportunity to reach that top matching level?

I'm wondering about one of the exceptions to the early distribution penalty. In particular the one for separation from service after age 55. 72(t) makes the exception for distributions "made to an employee after separation from service after attainment of age 55." 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." 87-13 seems to allow the exception if the participant separates from service before age 55, as long as they turn 55 at some point during that calendar year. If the more lenient rule in 87-13 is being utilzed, why is this not in the IRC? I'm wondering if there is any more info out there on this subject and which rule is being utilized by practitioners and if this is the same one that the IRS is enforcing. Thanks for any input.

I have a client whose bank declined to accept their deposit of federal withholding. They have the deposit coupon with the trust's name and id# on it. The money is being drawn from an account at the bank in question. I am told by my client that the bank declined to accept the deposit because there was no documentation as to which individuals this withholding was for. Based on my limited knowledge in this area, I think the bank is off base here. Isn't that what the 945 is for? Is there any basis for the bank's position? The other possibility is that I'm not getting the whole story from my client. Are there other logical reasons why a bank would not accept the deposit? Thanks for any input.

To the best of my knowledge there is not a 75 participant limit on ESOPs of s-corps. I believe that there is a limit of 75 shareholders for an s-corp. The esop trust would only count as one shareholder. If the company has a knowledgeable service provider (accountant, attorney, recordkeeper) that provides administrative or legal services for the ESOP, they could likely handle a lot of the setup work involved with getting a new plan off the ground. Also, most of the people on this board are happy to answer general questions you might have about implementing a secondary plan to an esop. Keep in mind though that free advice is worth what you pay for it. If new employee beneifts are viewed as "a tremendous amount of work" and "an accounting nightmare" it sounds like you have an uphill fight though. I guess the point I would make to the employer regarding this would be that there are a lot of companies out there (big and small) that don't have the same viewpoint. All other things being equal, those companies are more attractive to potential employees than your company is. As far as the administrative burden...there are service providers (payroll, accounting etc.) out there that can do a lot of this work for the company.

You can put your concerns in writing to the trustee of the existing plan and to the owners of the company. It is possible to add 401(k) features to an existing ESOP. Many companies have ESOPs coupled with other types of plans. There may be very legitimate reasons for the company not to add another plan however. ESOPs can create a big cash crunch for non-publicly traded companies. Also depending on the ESOP, the company may also run afoul of the IRS deduction limits by adding another plan. An additional item to keep in mind regarding your investment in the existing ESOP...There is a diversification requirement in ESOPs for employees who have reached 55 years of age and 10 years of plan participation. The really short version is that you are able to diversify up to 50% of your positions. If the company doesn't offer suitably diverse investment choices in the ESOP or a related pension plan, you can take your money and roll it somewhere of your choosing. This requirement is in the Internal Revenue Code to prevent exactly what you are concerned about...retirees having positions in only one investment, and having it go bad just when they need the money most. Best of luck.

Really, the way the PT rules are set up, all loans are PTs. The section (4975) then goes on the define exceptions for certain transactions. Most loans qualify as an exception to the PT rules. Since your loan does not, it seems to me that it is a PT regardless of whether the plan in question has a bona fide loan program.

I would make a couple minor modifications. I think that the 800,000 dividend is more appropriate on the "other income" line. Also, I don't think it is appropriate to check line 3(f). I believe that they are looking for only assets with the items in question 3. The loan is a liability. Just to clarify the asset/liability section...the total value of the stock would be an asset and the outstanding loan balance would be a liability. These total to line 1©.

I've made a couple assumtions here...first, the 1998 ADP test was done using the current year method. The failure of this test was corrected in 1999 via a QNEC. Second, you are doing the 1999 testing using the prior year method. Check IRS Notice 98-1. Mainly it says not to double count. There is an exception for plan years beginning prior to 1/1/99 though. Tom, regarding your comment about the timing of the QNEC...I think you are referring to the near impossibiliy of fixing ADP failures via QNEC when using prior year testing. To fix a 1999 failure, you'd have to make a QNEC for 1998. 98-1 discusses this as well.

I hope I'm not beating a dead horse by mentioning this, but I believe that refunds in this case are not appropriate. Since you are dealing with a failed ADP test that was not corrected within 12 months of the close of the plan year, refunds are not a valid correction of the failure. The company needs to correct via a QNEC. Regardless of what you think this client will acutally do in the end, I think you are doing both yourself and the client a disservice by recommending anything other than correction via QNEC. I'm not sure I'd fire a client solely over this issue, but I'd certainly have a CYA letter in my file documenting this issue.

For HCEs, amounts contributed in excess of the 402(g) limit are included in the ADP test. For NHCEs those amounts are not included. I don't have a cite handy, but I'm sure you'll find it somewhere in 401(k).

In past years, I believe that the proper way to file for a multiple employer plan was that one Form 5500 was filed for the plan as a whole. The plan number was to be 333. Then a separate Form 5500 C/R was attached for each participating employer. It seems to me, they have the information from the previous years' forms to know what to expect this year. I can only assume that since the IRS/DOL designed this process, they will know how to administer it. If not, that's their problem.

As a TPA, I get this from auditors a lot. Most ask for benefits that were approved for payment prior to the end of the year but not actualy liquidated until the new year. I even had one auditor that used all terminated employees with balances as a payable. I agree that I doesn't seem appropriate to list payables. Additionally, the two methodologies that I detailed above don't seem an acurate way to come up with a payable anyway. If you were intent on listing payables, what about corrective distributions (402(g), ADP/ACP, 415)? Those are almost never distributed until the next year. Also an individual's first 70.5 distribution can be delayed until 4/1 of the following year. I'm sure there are other examples as well. But most qualified plan auditors don't have the background to come up with those sorts of things. I don't mean to throw stones at auditors. I'm just relating my experience that they focus almost entirely on the financial accounting aspects of the plan and give very little (if any) attention to plan qualification issues (ADP, 415, 401(a)(4) etc.) or deductibility of contributions. Sorry if I got a little off track there. Are there any auditors that utilize these boards? I would be interested to get their side of this issue.

I read the instructions a little differently. Any asset which is held by the plan on the last day of the plan year is an asset held for investment. The list of exclusions pertains to assets bought and sold during the plan year. Mutual funds are included on this list. So if Fund A was only owned by the plan for a two week period in August, you would not include that on the schedule. My experince as a TPA is that these assets schedules have been produced by the plan's auditors as part of their financial statements. I'd be curious if other TPAs out there have similar experiences.

I would agree with the previous posts, that the $$/participant formula would likely not be discriminatory, but you still have to allocate contributions according to the terms of the plan. If your plan doesn't say you can allocate a contribution in this fashion, you shouldn't do it without an amendment. You'll then be amending the plan again next year when you want to change the allocation formula back to your cross tested formula.

The instructions for these forms are notoriously non-helpful. Since the question is phrased that way on the form, I'd check all that apply. I don't think it really matters though. Once you check one of those choices, you don't need to fill out the remaining part of the form. As for the second part of your question. A match is still a match. Even if it is part of the Simple plan, it's still contingent on a salary deferral and thus not non-elective. I don't see any reason why it wouldn't be coded as 401(m) for the purposes of this schedule.

You really need to address this type of question to a professional financial planner. While the majority of contributors to these boards are fine, upstanding citezens, free advice in this area is worth exactly what you pay for it. With the assets that you've accumulated, you owe it to yourself and your family to make an informed decision on this.

Regarding the forfeitures...it seems to me that you would have to go ahead and put them into the plan. Especially if the plan reallocates all of the forfeitures. It the plan used these forfeitures to offset future contributions or expenses, you might have a better arguement for not contributing them initially.

I'm not familiar with the term "hanging match." If you are referring to match attributable to salary deferrals refunded due to an ADP failure, then that match cannot be refunded, it must be forfeited. I share a problem similar to the second part of your qeustion though. The plan I'm working with deposits the matching contributions annaully, after the close of the plan year. If ACP refunds are to be made, it doesn't seem logical to include income on the match. I'm concerned, because the answers to such questions are not always logical. Does anyone have any guidance that they could point me to?

I don't believe that it does. If you have a particular section in mind, please post it in. For more guidance in this area, you can check § 1.404(a)-9(B). The Pension Answer Book from Panel Publishers also has some good info on this subject.

The definition of 415 pay has changed. It is no longer reduced by pre-tax items. Compensation used for 404 purposes has not changed. 'Net' comp, at Tom puts it, is the correct comp to use in calculating a max deductible contribution. [This message has been edited by Disco Stu (edited 03-08-2000).]

This is certainly not the first time this question has come up in these forums. My personal view on the issue is that the new entrants on the 1st day of the PY should be in the BOY count. There have however been an number of past postings from contributors to these boards that indicate the IRS has told them that they need the BOY count to match last year's ending. They claim that this is an edit check in their system. I'm not exactly sure what to make of these claims. I've done plenty of 5500s where the BOY count didn't match last years ending. I've never had a client get anything from the IRS on the subject. Unless the IRS comes up with something more specific, I don't plan on changing my approach.

I'd agree with your thoughts with the exception of one. I don't have any support for this position, other than "I heard it at a seminar..." but I would put this on a 1099R. Rationale being that the IRS wants to see all money leaving a qualified trust to be reported on a 1099R (see disclaimer above). It also leaves a better audit trail. I'd probably make the 1099 look just like it was a 402(g) excess.