R. Butler

John A The participant is definitely responsible for tracking the excess deferrals in this case. I don't really know whether or not has a duty to notify the Plan. Even if there is not such a duty, I'm concerned even about potential lawsuits. Even if the TPA isn't liable, he/she may still have to defend themselves at some point.

The excess deferrals and the gains on them are not eligible for rollover. If the Plans never knew probably not a problem, but now it appears they do know.

If the Plan did not have timely notice I would agree that the SVP correction method cannot be used. It was worth a shot, it can be a bear to keep track of the excess deferrals and the related gains separately.

SVP is only available for specified operational failures. So whether or not you colud use SVP does depend on circumstances. Every document I have seen has a provision stating something to the effect that the participant can notify the Plan by March 1 (and I am fairly certain IRS regs extend the deadline to 4/15) that are excess deferrals. The notified Plan would then have to distribute such deferrals. If the Plan was properly notified, in a timely manner, but did not make the distribution you have an operational failure. The key questions for me are: 1. Does the document have such a notice provision? 2. If #1 is yes, did the participant give notice in a timely manner? I would also add that this can be self-corrected using the SVP correction method.

I would disagree that there is no authority to distribute deferrals after 4/15. Under the IRS standardized VCR procedures the appropriate correction for failing to distribute excess deferrals is to distribute the amount to the employee. The employee should include the amount in income in both the year it was deferred and the year it was distributed.

The excess deferral must be distributed. The plan document should have provisions covering this exact scenario. The excess deferral should be distributed by April 15 following the close of the taxable year in which the deferral arose. If excess deferrals are not timely distributed, the amount of the excess deferral will be included in the employee's gross income not only in the year in which it arose, but also in the year of distribution.

Can a non-spousal beneficiary simply maintain the inherited IRA in the name of the decedent without taking a distribution thereby avoiding a taxable event? I believe the answer is Yes, just hoping for some verification.

Yes. I have seen numerous prototypes that actually do have such provisions.

A SIMPLE IRA is not subject to either the 15% or 25% limit. A SIMPLE 401(k) is not subject to the 15% limit, but I'm not sure about the 25% limit.

There are alot of issues here. I would pretty much start with PAX advice and contact the DOL if necessary. One issue that is relevant, if the ex-husband never remarried and did not name a subsequent beneficiary and if somehow the ex-spouse isn't entitled, the kids would be beneficiaries by law in most states.

I'd be careful about the retroactive thing. Employer does not really adopt the plan retroactively, but merely defines comp. over an entire calendar year. I'd make sure the plan allows deferrals to start by October 1.

I understand the reason for requiring the nonelective for the safe harbor 401k's if not adopted by the start of the year, it just does not make sense that the existing profit sharing plan gets the choice. Employer has a profit sharing plan. Employer wants to add safe harbor 401(k), but wants to minimize contributions. We are going to advise the client to wait until 3 months prior to the end of the plan year to add the s/h 401k. HCE's will be able to maximize deferrals in the last 3 months; economically it is generally not feasible for the NHCE's to do the same. Thus, since the employer has a choice of contributions, employer will choose the match and reduce contributions by 75% to NHCE's. Now I am glad we can propose this to a client. It makes the employer happy, but he is getting a benefit not available to existing 401k's

Good point Alf.

I agree with MR. Rev. Proc. 2000-16, Section 6 is clear that a complete correction requires that the participant be put in at least the same position that he/she would have been had the error not occurred. The only way the participant can be made whole is to make both the ADP plus the safe harbor. Clearly the safe harbor must be made, else I wouldn't think it would even meet the safe harbor requirements because all eligible employees didn't get the required contribution.

IRS Notice 98-52 states that the contribution requirement is satisfied if the employer is required to make a safe harbor nonelective contribution on behalf of each NHCE who is an "eligible employee". Although I don't know of anything that states it verbatim, it is my understanding that "eligible employee" refers to individuals eligible to make deferrals.

A federal district court recently dismisse claims by current and former employees of First Union that the firm's practice of limiting investment options for its 401(k) plan to its own mutual funds viloated ERISA. Does anyone have a cite for this case? I want to read the actual opinion and not merely commentaries.

An employer with an existing profit sharing plan wants to wait until mid-year to add a 401(k) safe harbor provision. This is permissable under Notice 2000-3. My question is in the first year does the employer have a choice between using the matching formula and the nonelective formula or is the employer stuck with the nonelective formula? I can't find anything that says the employer is stuck with the 3% nonelective, but it really doesn't seem consistent to allow this employer to choose and require that the employer with an existing 401(k) plan use the nonelective if safe harbor adopted mid-year.

Depending on all the facts & circumstances I may be inclined to disagree with Becky Miller. If you are confident that a complete correction has been made and comfortable that the plan is other wise compliant, I would try to get a refund. The excise tax should be calculated on the "amount involved", i.e. interest, rather than the calculated on the full amount of the late deposit. The alternative view Becky presents is not a widely accepted when calculating the excise tax on late deposits. It is my understanding that the alternative view is used only when there has been a "taking" of plan assets, i.e. the employer never intended to make the deposit. If you have made a complete correction and are comfortable the plan is otherwise compliant, I don't see what you have to lose by requesting a refund. I don't agree that this somehow will raise the bar for chronic late filers; if anything it may provide a definitive answer on how the tax should be calculated.

I agree that currently the DOL merely requires that the assets be segregated from plan assets and not necessarily invested into individual accounts. However, if there are late deposits the DOL wants the plan to calculate lost earnings using rates of return on the plans investments. The position seems inconsistent. I am curious if anyone has taken the position that lost earnings should be calculated using an interest rate equivalent to that of an interest bearing checking account. If all that is required is that the assets be segregated and not invested according to participant's selections, the DOL should not force plans to perform tedious and very time consuming gain calcs when computing lost earnings. It is not the excise tax most administrator's are concerned about. The tax is usually very nominal. Computing lost earnings, however, can be difficult.

Hypothetically this really shouldn't be a big problem. Just remember to report participants as paid out (Code D)after they have been distributed their vested benefits. Clearly mistakes will happen; we will forget to report somebody that has been paid out, but those cases are very rare, much less frequent than many other errors that actaully could disqualify the plan.

I have worked for 2 companies. Both companies filed the SSA. Furthermore, for defined contribution plans, in participants were generally reported each year until they were paid, using Code B. The reason being is that the amount of the vested benefit changes due to gains and losses. When the participants were paid out we reported them on the SSA using Code D. This lets the SSA know the participant is no longer entitled to vested benefits under the plan. The problem I would have with not filing is the possible penalty for failing to file.

A partially vested participant who terminates service, is not paid the vested accrued benefit, and does not incur a one year break in service prior to the date of termination must become 100% vested upon termination of the plan. Some IRS district offices interpret this rule to require that terminated participants that have not been paid out and have incurred breaks in service of less than 5 years be fully vested. The documents we deal with all state that forfeiture occur upon the earlier of payout or five consecutive breaks in service. For that reason we have taken the positon that terminated participants with a balance and less than than 5 consecutive breaks in service do become 100% vested upon plan termination. The plan termination itself does not trigger a forfeiture.

At a 5500 preparer's workshop put on by Corbel, the speaker indicated that the DOL is unlikely to assess penalties on any 5500 filed by the end of the year.

John A. Good question. I didn't mention QNEC's because her question does not ask how to correct the ADP test, but rather what to do with the excess contributions. By definition there are no excess contributions if a QNEC is made. Maybe I shouldn't have, but I assumed that the QNEC option had already been explored and dismissed.

The IRS is clear that excess contributions must be either be recharacterized within 2 1/2 months after the close of the plan year(assuming the plan allows)or distributed before the end of the plan year following the plan year for which the excess contributions were made. Failure to make the corrective contribution will disqualify the plan for the plan year for which the excess contribution occured and for all subsequent plan years during which the contributions reamin in the plan. (Reg. 1.401(k)-1(f)(6)(ii). Reducing contributions in a future year is irrelevant to correcting a failed ADP test. The client needs to understand that the plan and the company are separate. The distribution must be made from the plan. A distribution from directly from the corporation is really just a paycheck. Please remember that if the distribution is not made within 2 1/2 months after the plan year an excise tax is due. Also earnings attribtuable to the excess contribution must be distributed.