Disco Stu

I read you question to say that an employee receives pay from each of the three companies, and that all three of these companies are part of the same controlled group. Is that correct? If so, the pay from all employers in the controlled group is applied to one 415 limit.

I don't know how you could segregate anything until you receive a DRO that you deem to be qualified. I have heard of trustees assuming control of the investement direction of participant accounts when they know a DRO will be coming. This would prevent the participant from "scuttling" the account in order to minimize what the ex-spouse will get. Other than that, the account balance belongs to the participant, and no one else until a QDRO exists.

Yes, this person would be included in the otherwise excludible group. Had the plan used the statutory max for participation, her participation date would have been 7/1/98. Since she terminated employment prior to that, she should be counted in the otherwise excludible group. Sounds like she's an HCE for 1998 though, so maybe that doesn't help your test so much.

Seems to me that if the regs meant "shall not share in earnings" then they would say that. I would qualify my answer by stating that most plans have specific language about how to handle restoration of forfietures. The few that I've looked at most recenly are more clear than the regs. They have stated that the amount restored definitely does not include any change in market value. If you wanted to take the approach that earnings could be included, I would make sure that my plan was extremely specific about how those earnigns would be calculated. Many plans move forfeited dollars to a fixed income type of investment prior to reallocation or other treatment. Would the earnings be the fixed income rate, or the earnings that the participant would have earned had the money remained in the investements they had chosen. The latter approach would certainly result in headaches for employers. Heck, so would the first approach. It's just not worth it.

IMHO this was handled in almost the right fashion, but not quite. Instead of sending the money back to the employer, I believe the better way to handle the error is to keep the money in the trust and just have the employer reduce their next contribution to the plan. It doesn't look like a reversion of plan assets that way. Hanging your hat on mistake of fact is always risky. There's really nothing at this point that you can do to put the cat back in the bag. But...your administrator is off base by stating that everything is OK cuz the money was returned by March 15. This doesn't have anything to do with ADP/ACP testing. Regardless of the circumstances, the mistaken contribution should not have included in the ACP test. The plan didn't allow for the contribution, so you shouldn't test it. In addition to this, many plans have language about how to handle mistaken contributions...you might take a look-see there.

If each plan is able to pass the coverage test, then it can stand on its own for the purposes of non-discrimination testing. [This message has been edited by Disco Stu (edited 02-21-99).]

This happens all the time. Just issue revised 1099R forms that reflect the distribution as they should have happened. The plan administrator will have to notify the HCE that rolled over, that portion of what was rolled was not an eligible rollover distribution. As long as the plan admin. puts something in writing, the HCE shouldn't have too much trouble getting the $$$ out of his/her new plan. As for the guy that took cash...not a big deal for him/her. You'll have to change the 1099s, but essentially the only thing different for him/her is that less of the distribution may be subject to the early withdrawal penalty. Off the top of my head, I don't think the fact that the plan is terminating has any effect on this.

I'm with you up until the point where you said "whether or not it has actually withheld such amount from the participant's distribution". Could you refer me to the portion of the regs you are referring to that support this?

Sorry for jumping in at the tail end of this one, but... In the first post, what are you referring to when you say that "It appears that (1) the plan administrator is still liable to pay the 20% to the IRS"? My first thought on this subject is to agree with greymann. Why not just report the distribution on the 1099 as it happened...taxable with nothing withheld. I too have not heard of any consequences arising from failing to withhold...assuming this is an isolated incident. [This message has been edited by Disco Stu (edited 02-18-99).]

The participant would have had to receive a match if they deferred. So, since no match was given, the participant can't be counted. To repeat...if anyone can point me toward some authority for this, I would be appreciative. What I have read, I believe to be credible, but there were no authoritative cites. Thanks for any help.

My understanding of the rules is that you would not be able to count the compensation of the participant in the scenario you stated. If the participant you mention would have been eligible for a match, had they deferred, then you could count their compensation towards the deductible limit. If anyone has a cite out there to back this up, I would be appreciative. The only information I have found on this was a article in CCH. They didn't mention any cites.

The plan document should give detailed instructions as to the timing and calculation of benefits. Most balance forward plans are quite specific about when distributions are made to separated participants. I'm going to go take a wild guess and say that the plan document in question does not tell you to pay out the previous year's ending balance and then an unspecified amount at a later date. Just follow the language in the plan doc, and you should be OK.

I'd like to ask a quick question before I put my two cents in. What's the point of moving forfeited dollars to a suspense account immediately upon distribution, if you're not going to reallocate them until a 5 year BIS? Doesn't that make for a recordkeeping nightmare? Given this scenario however, I would say that the forfeited amounts belong to the individuals that forfeited them until such time as they are allocated to someone else's account. They should be counted in that fashion for purposes of the top heavy test.

I'm in no position to either confirm or dispute the information provided by Wessex. It's certainly possbile that the IRS may take that stance. As Wessex says though...this is not an official position. In answer to your question, assuming that the employer would not be able to recover the overpayment from the participant...then yes, the participant would get double payment. The rationale for this would be that since the participant was not eligible to receive a distribution, his/her retirement benefit should not be affected by an error by the plan administrator. The employer should therefore make the plan (participant's account) whole. There are clear regs about under what circumstances salary deferrals can be distributed from a qualified plan. There are also rules about assignment & alienation of participant account balances. Additionally, this is the plan administrators screw up. If anyone is to be damaged by this debacle, it should be him/her. The qualified status of the plan should not be jeopardized. I think that the solution I suggest is the one that stays closest to the letter of the law. Granted...this is a pretty hard line, but it's probably the safest. Q&A #22 sort of addresses this issue. You may want to check it out & see how your fact pattern fits in with their opinions. [This message has been edited by Disco Stu (edited 02-09-99).]

I respectfully disagree with this approach. One thing that 98-22 says, is that the correction method should restore the plan to the point it would have been, had the error not occurred. IMHO, the employer should pony up the dough themselves to reimburse the plan. It was the employer's error to begin with. If the employer wants to be reimbursed by the participant, that is a seperate matter. The plan should come first however.