R. Butler

MWeddell is correct about my cite. I didn't read your question carefully enough.

Must use current year. See IRS Notice 2000-3, Section III, Q&A #6

"R. Butler and any other lawyers, Please comment and clarify." Really at this point I'm just happy I passed the bar. If we can double my pay and increase job security without excluding non-attorneys, thats fine.

I haven't looked at the 2002 5500, but in past years the instructions had a nice little chart telling you when to file the schedule. It listed the Schedules down the side and plan types up top. Generally you will file a Schedule T, unless you are filing for a welfare plan, a DFE, or a fringe benefit plan.

I just found out a few hours ago that I passed the bar exam and I've had an epiphany. This is a great thing that the N.C. bar association is trying to do. Hopefully every state does this and maybe even expand it to cover all phases of adminsitration. Its amazing how much wiser I have gotten in just a few hours.

Why do you think the small plan bonding requirement applies? My understanding is that it only if applies less than 95% of the assets constitute qualying plan assets. 96% is greater than 95%, so you should be O.K. If you had only 94% in qualifying plan assets than the bonding requirement is 100% of the nonqualifying assets. That wouldn't be capped at $500,000, but by the same token it doesn't need to be in addition to the 10%.

I would report either as other income as pmacduff suggets, or as "other" on the contribution line. I don't see that it matters either way.

Rev. Proc. 94-22

Thanks. The e-mail options were all deselected in the Control Panel. I went ahead and checked the appropriate. I'm sure that will fix the problem.

I'm not getting the e-mail notification of new posts to threads in which I have posted. Does that feature still exist? Is there something else I must do now to get those notifictaions?

Lets just alter Blinky's example. Instead of $1,000, the NHCE has $50,000. The $50,000 error is discovered, but only after the HCE has cashed his check. There is nothing in the account. Obviously, the fiduciary needs to first try and recover from the HCE, but lets assume the HCE doesn't return the excess. The HCE is willing to litigate. If the fiduciary can't make the deposit for the error, then how is the NHCE ever going to get his money?. Is he forced to wait throught the litigation process? That doesn't seem reasonable, but lets assume he does. HCE invested everything in Enron, WorldCom and Adelphia. Fiduciary wins judgement, but the money is gone. You can't suck blood from a turnip. So is the NHCE just out of luck? If the fiduciary can't deposit for the error he would be. I guess really the bottom line is, if it is not reasonable to recover the overpaid amount from the participants, how else can the participants be made whole but through the fiduciary making up the difference?

The 10% withholding is optional, but the participant must affirmatively elect out of the withholding. See 3405(b).

I tend to agree with pmacduff. If it checks were issued prior to discovering the error it is at likely that some of those checks were cashed. The overpayment does affect the benefit owed other participants and the fiduciary has a duty to correct. Unless recovering the overpaid amount would be relatively easy, in a terminating plan I don't see wher the fiduciary has any other option, but to make up the lost amount. Blinky, in your extreme example, the only employee that could have been overpaid is the NHCE (the HCE wouldn't be able to cash the check because due to the loss the money is not really in the bank). If the fiduciary does have difficulty recovering the extra $100 from the NHCE, I wouldn't see it a problem if the fiduciary makes up that the lost $100.

1. Five year look back rule still applies to in-service distributions. 2. Yes. ( I assume no matching contributions are made based on your 3.77% calculation.)

I noticed a typo en my previous reply it should be math mistakes, not [I]match mistakes [/i]. "...but what if a particpant, who had previously been contributing to a plan, decided to stop and completed a form electing 0% rate and the employer withheld and deposited several months on their behalf? Could this not be considered a mistake of fact?" I don't know. I wouldn't want to tackle that situation; I am sure there are other legal issues that would require some kind of correction. That, however, is not analagous to refunding contributions to avoid top heavy contributions.

"...but under mistake of fact, wouldn't the deferrals be returned to the company and then returned to the employee through payroll?" What is the mistake of fact? It always has been my undrestanding that mistake of fact is limited to match mistakes or other inadvertent mistakes (i.e. participant entitled to $250, but due to a transcription error $520 gets deposited). Neither situation seems to apply here. Ultimately, I agree with you that it is not the tpa's decision. All we can do is advise and try to steer the client in the right direction. Its not even a matter of losing the client; my job is to advise, the fiduciaries job is to make the decision. Besides Maverick points out this correction method was accepted at least on one audit, so maybe client will get by with this.

"...I know its a risky proposition to return the deferrals, but the client may be adamant that it is corrected that way. It will be their decision and I am getting the proper documentation to cover our liability..." As you know returning the deferrals doesn't really correct the problem. It actually may make the problem worse. Whats the distributable event? Even you could plausibly argue that matching contributions be returned as a mistake of fact (which I don't see how that argument can be made), there is no basis for returning the deferrals. So not only is minimum contribution still required, but also a distribution has been made when there may not be a distributable event. "They did make a match in 2002 which could be used to offset the TH minimum. I'm assuming that the goal is to still get each employee a 3% ER contribution; does that mean that a person who does not defer to the plan will get a non-elective contribution up to 3% and the person that makes a deferral and gets a 3% match will get nothing other than the match?" The plan document should tell you to allocate minimum contributions. Assuming its been updated for EGTRRA you are probably correct.

"...Anyway, Q-10 says the plan is treated as two separate plans, and 'accordingly, a plan that uses one of the 401(k) safe harbor methods is not required to provide...blah, blah, blah. Those employees do not have to be treated as eligible for purposes of the 401(k) safe harbors, so long as the employer has elected to treat them separately for coverage purposes pursuant to section 410(b)(4)." My difficulty with this position is that Q&A 10 basically just allows us to apply the rules already established in 1.410(b)-7©(3) to safe harbor plans. If we were truly treating the disaggregated portion as a separate plan we would separate run a top heavy test on the disaggregated portion, but we all know that is not the case.

See Q&A 19(b) to the Final Loan Regs. Although it specifically deals with defaulted loans, there is no reason not to apply the same principles. If the loan isn't in arrears than only the loan balance is the principal.

I attended an ALI-ABA Spring Update Video Conference yesterday. I e-mailed them this question. Marjorie Hoffman with the IRS fielded the question. She indicated that in this situation the Plan would be top-heavy. Although I did ask whether the top-heavy minimum would only apply to the disaggregated portion, she did not specifically address that.

KJohnson is correct. The case is Flahertys Arden Bowl, Inc. v Commissioner.

We accrue the interest. I am unaware of any basis not to accrue interest.

You are correct that the match can be applied towards top-heavy minimum contribution requirement. If non-key is getting already a 4% match no additional contribution required for that individual. If another non-key is getting only a 2% match, an additional 1% top heavy contribution to that participant would generally be required. If yet another had no match, the full 3% top heavy would generally be required. You do not have to bring everybody to 4% simply because someone had a 4% match. I wouldn't have a difficulty explaining why the one person got 4%. He got a 4% match because he deferred a sufficient amount to get a 4% match. The difficulty I have is explaining to the person who did defer why he is not getting the additional 3%, while those that did nothing are getting 3%.

Agreed. I just automatically assumed employer was making a contribution for 2002, in 2003, but wanted to deduct in 2002. We all know what "assume" means.

3405( B )(1) is the cite for the 10% withholding. Beney can elect out of that 10% withholding.