Alf

Yes, if the plan qualifies for the prototype extension. Although knowing that they were in a VS and adopted a prototype makes it likely that the extension applies, you should confirm that the propotype sponsor qualifes. Also, the prototype restatement process is not as easy as you would expect, so I would advise you to begin the process with the prototype sponsor and not wait any longer.

I understand the conservative approach, but (1) the statutory language "any other act required under authority of the internal revenue laws to be performed" is so broad that the IRS can't seriously use resources to argue this point (aren't there shelter promoters out there to catch or something) and (2) ADP/ACP refunds do directly relate to the "determination, collection or refund of taxes" anyway, don't they?

Yes. The IRS has recognized the issue, but not many have focused on it. See the subsection on "Section 411(d)(6)" in Part III of IRS Notice 2001-42. Also, I think that Corbel had a news item on this issue late last year on their web site. Top-heavy plans are an issue because of all of the changes in those rules, but otherwise, it is the compensation limit change that can cause problems if a contribution is not a fixed percent of compensation and some employees earned between 170 and 200K. The answer is to use the old 170K compensation limit for 2002 (and part of 2003 if there is no 1K HOS or LDY allocation requirement) and don't use 200K until the amendment is signed. Other than top-heavy and compensation, I don't think that I have heard of anything.

Should be. IRS Pub. 509 states that "if a due date for performing any act for tax purposes fall on on a Saturday, Sunday, or legal holiday, it is delayed until the next business day." So the next Monday rule does not just apply to IRS filing deadlines.

There is nothing out there that we know about. We think it is important to weigh the risk of adjustments on audit when considering the factors. If you are using a generous correction using the IRS standard correction methods, we worry less about getting challenged on the factors because the IRS is only out the compliance fee, which can't be a big consideration to the auditor.

The terms of the plans control. If drafted correctly (according to IRS PLRs approving the wrap arrangement), all HCE contributions go to the nonqualified plan until the end of the year. After the ADP test is run, the employer determines how much can be contributed by the HCEs and that amount is transferred to the qualified plan, so the ADP test is run with just the NHCE contributions and then the HCE contributions are transferred.

The fiduciaries must attempt to get the money back. A lawsuit is almost never practical. Really, the party who made the mistake should restore the plan under an IRS correction program. I also believe that there is a mechanism to notify the trustee of the receiving IRA or qualified plan that the excess amount is not eligible for rollover if it was a rollover and not paid back.

Actually the restatement was an amendment as well. Renumber the amendments after a restatement as they are amendments to the most recent restatement, not prior versions.

The match has to be returned even in a pay period match plan or else 1) the HCE gets a higer overall match rate than others which is discriminatory and 2) the plan says the match is X of deferrals and if she gets more, the plan terms are being violated.

The IRA $ would just be a rollover, not a deemed IRA. I don' t know why rollover IRA amounts can't be available for loans.

I think it is a participant limit that is not affected by the plan year, so employees should be able to make $1,000 from 1/1/02-12/31/02 even in a fiscal plan year, but I am not sure about administration or testing. Does anyone else know if this is correct?

If 13 was deferred initally, 1 returned under 402(g) and 1 returned under 415, shouldn't 11 be on the w-2 (13-1-1=11).

If separate from the plan (which yours is), I would think it becomes part of the "plan" and I would not want to have the SPD included in that characterization. Anyway, the SPD should be brief, while the loan program should be much more detailed and legalistic (is that a word?). .

I think there is a problem with 402(g) regardless. Without the 402(g) correction, you have a $2,000 excess for 415. The 402(g) return makes your 415 excess just $1,000. Before 415 testing, you should have $11,000 subject to ADP, not $12,000 because the catch up should not be included in ADP, I don't think. After 415, there are only $10,000 deferrals for the ADP test. Also, shouldn't the W-2 show $11,000 at the end of the day ($10,000 deferrals and $1,000 catch up)?

$1,200, especially if the IRS model amendment was used to adopt the catch-up provision. Although the IRS amendment does not address the match, it certainly does not affect the existing match formula and limits. I don't believe that the catch-up should be treated as a deferral subject to match if the IRS amendment is used unless the amendment also specifically includes catch-ups in the matching calculation.

I don't believe the receiving plan has to specifically permit loans to be rolled over. If you treat the loan as an accounts receivable asset (which it is), you should be able to accept it as any other asset unless the plan says that all rollovers must be in cash (not in property) or that no loan rollovers are permitted. Also, the receiving plan must, of course permit loans generally I imagine.

I would sure try and recharacterize it as a merger of the plans (which is what should have been done originally) by amending the receiving plan to address the merger and treating the one non-rollover contribution as an improper distribution. I don't know what the 5500 reporting is for a plan that is merged into another, but I guess that a final 5500 has to be filed for that as well. Otherwise, you are going to wind up with two 401(k) plans that have to be merged in the future anyway.

For communications with participants (and managing their expectations), I suggest stating the match cap. Legally, the match can be totally discretionary, but if you put it in the plan and want to change it, you either need to amend the plan before the plan year starts if there is no last day of year requirement to receive the match or amend it before the last day of the plan year if there is a last day of the year requirement to get a match. Based on our experiences, employees try and defer just enough to get the maximum match and are not very happy when an employer decides at the end of the year that the match is going to be capped at a lower deferral % than in the past.

What were the excesses? Were they refunded deferrals from a failed 401(k) test, refunded matchs from a failed match test, or refunded vested matches that related to refunded deferrals? Also, you question only makes sense if the original plan was from an unrelated employer because otherwise, distributions from the terminated 401(k) plan wouldn't be permitted on the termination. Is thi correct? If so, the second employer should be entitled to rely on representations from the distributing plan that it was qualified and that the amounts were eligible for rollover. If this is the case, but the second employer finds out that these amounts should not be ERDs, the rollover regulations provide a mechanism for returning the money and you shouldn't have to worry about SCP.

The approach I suggest is to file it with the IRS as is. They will send you a list of amendments they require along with their sample language that can pretty much be adopted as is. When they say "restatement" what they really want is a working copy that can even be done by hand with circles and arrows if you want. It will be sloppy, but you don't care in a terminating plan. Another advantage to this approach is that the IRS will never catch everything that has to be amended, so your amendment will be much shorter that it would be if a TPA or lawyer drafted it. Good luck!

Limitations on loans should be tested, but your facts should pass automatically because all employees are eligible for deferrals whether or not they choose to make them, so loans are actually available to all.

Is it clear that the 1.457-8(B)(2) regulations signal that participant directed investments in nqdc plan of for-profit employes are ok? Aren't 457 plans subject to substantial risk of forfeiture and doesn't that make them different with respect to this issue?

Can someone help me with two questions about the proposed regulations? 1) What is taxed at vesting for discounted options? The spread only or does value have to be given to the option element under bs? 2) Do the regulations apply to employee deferrals only or employer money only?

The refunds should never go to the employer. They should either stay in the plan as forfeitures (which might be able to be used by the employer to pay expenses or offset contributions) or returned to vested participants, depending on what the refund is. Under the section you mentioned, matching contributions can be forfeited by all employees if they are made on amounts that end up being refunded. However, if the matching contribution itself is causing the test to fail and has to be refunded, only the unvested match can only be forefeited and the vested match has to be distributed to the employees (not the employer). That is why the provision you cite says "matching contributions which relate to" distributions of excesses, because if the match itself is the excess, it can't be forfeited from vested participants.

It is better to not get involved in their distributions and reporting. I don't think they have a reporting position for 1099Rs if the plan is not qualified. Also, I think there may be a requirement to notify the receiving IRA custodians that distributions are not eligible rollover distributions.