Alf

I am not clear about which rule you are asking about. Is it the substantially (>85%) all the assets distribution event rule in the code and regs or the less than substantially all (<85%) of the assets exception to the same desk rule?

What is the cite to the ruling you have a question about?

Treasury regulations are clear that losses are included as "allocable income." See TR 1.401(g)-1(e)(5)(i). When gains are involved, two 1099-Rs are required. One reporting the amount of excess deferrals (the amount of the distribution less allocable income) and one reporting allocable income (amount of distribution less the excess deferral amount). However with losses, we just report the distributed amount on one 1099 and we provide a seperate statement to the participant on how to report the amounts on the individual's tax return. Notice 89-32, 1989-1 C.B. 671 controls and explains these rules.

No. You are right. I am not sure about the technical basis for thier argument, but the IRS has consistently made it clear that severance pay that is paid before an employee's last day of work can be deferred, but ANY compensation paid after the participant terminates employment cannot be. If you re-post this on the 401(k) board you are sure to get the right cites.

Yeah, that's it. Thanks Lynn! K Man - The case doesn't help you any if you are a fiduciary. You situation is even tougher than that faced by a nonfiduciary TPA.

"This transition relief applies whether the 401(k) safe harbor method is adopted under a newly established 401(k) plan or under a preexisting 401(k) plan." Notice 00-3 Q&A-9 first paragraph fourth sentence!

An annual notice is always required in order to use either of the safe harbor formulas. See Section V. A of 99-52. Back to your earlier questions . . . The safe harbor method is one of the four (I think that is all) methods that is available to satisfy the ADP test (current, prior, SIMPLE, and safe harbor). If you utilize the supplemental notice method in A-1 of 00-3 you are using the safe harbor method and you do not need to run the ADP test. The reason that the current year requirement is included in A-1 of 00-3 is to prevent problems with double counting. If a plan that uses the prior year method decides for one year (say 2000) to use the supplemental notice provision in A-1 of 00-3, there are issues about how those QNECs would be treated in 2001 if the employer does not use the supplemental notice methodin 2001. The IRS avoided having to deal with issues about double counting the QNECs (in 2000 and 2001)by requiring that employers use the current year method to be eligible for the supplemental notice provision. That way, abuse of the system will be policed by the rules in 98-1 that prevent you from switching from current to prior year methods except in limited circumstances.

I think that you have to turn them in or sue them to be totally protected, especially if you are a fiduciary. There was a recent case involving this exact situation. I am not sure how it turned out, but the TPA was in court trying to avoid liability for discovering a prohibited transaction or fiduciary breach and not taking action to correct it. Check with your counsel to get the details.

I think that the safe harbor match has to be fully vested and that the only other option was to use QNECs (which have to be fully vested by definition). I don't think that the existing IRS guidance will stretch enough to cover this setup.

I am sure that adding the gain to the forfeiture amount is by far the most common practice. I bet that most employers haven't thought about it, but that this is what they have been doing for ever. I don't know what other choice there is unless the plan document has a specific provision that deals with earnings on the forfeiture account.

DITTO!!!! You get what you pay for. I would even question (or at least get independant legal counsel to review) an $850 plan document.

A-9 of IRS Notice 2000-3 (2000-4 I.R.B. 413) provides that a plan can adopt a safe harbor formula for the first time with respect to a plan year that begins on or after January 1,2000 and on or before June 1, 2000 if the notice is given on or before May 1, 2000. It clearly states that this transition relief applies whether the safe harbor forumla is adopted under a newly established 401(k) plan or under a preexisting 401(k) plan. To use this rule, the plan must meet the safe harbor requirements for the entire plan year.

Yes. Except for the one-time notice extension rule for 2000 (May 1st, I believe) (and even then, the safe harbor provisions need to be adopted retroactively back to 1.1.00), existing 401(k) plans cannot adopt safe harbor provisions mid-year.

I think that an extension automatically applies if the deadline for any act falls on a weekend or holiday. Based on this, I have always assumed that the 402(g) deadline was extended, but I could be wrong.

You can ALWAYS contribute $2,000 a year to IRAs, even if you are in a 401(k) plan. The $2,000 may not be deductible if you participate in a 401(k) plan during the same year, but it is $2,000. If you are under the income threshhold for a Roth, you can contribute the $2,000 to a Roth, otherwise you can make a contribution to a traditional non-deductible IRA (you can't make a contribution to a deductible IRA if you participate in a 401(k) plan).

The fiduciaries have a legal obligation to try and get the money back into the plan from someone. You will have to hit the ASA hard to see who is legally responsible, although the TPA has to know that they aren't going to get sued over 10,000. You also have a disqualification risk, because the terms of the plan document weren't followed, so you will have to make sure that you follow EPCRS.

There is nothing new since Martin. The IRS still has a "no-rule" position in place as of early 2000.

They almost certainly meant to give credit only to those employed on the date of the sale. Although the actual language of the amendment may be broad enough to include these coincidental transferring employees, I doubt it. 414(a) might help you. It provides rules dealing with service for predecessor employers.

If the plan document allows it, you have until December 31st to make a QNEC or recharacterize the excess contribution instead of distributing it.

EO Customer Service IRS ESP/EO Room 4010 P.O. Box 2508 Cincinnati, OH 45201 Phone: (877) 829-5500 Fax: (513) 684-5936

It won't happen. You can't legitimately get a tax free reimbursement to the employees to get the example to work. Money you receive from your employer is taxable, plain and simple. Is the reimbursement from the plan for medical benefits? If so, why wouldn't the employees have gotten this anyway. Have the benefits under the plan been increased???

Technically, I think that it will depend on when the severance is paid. I know the IRS position is that severance is not paid to an "employee" or for services rendered "on account of employment," so it shouldn't be taken into account under a qualified retirement plan. It is an unworkable standard, so I have heard that a safe approach is to count it (assuming that the plan doesn't exclude it) if it is included in a final paycheck or received (in advance) while the person is still an employee. Once the person leaves employment, amounts paid as severance shouldn't be included in plan compensation even if the plan definition includes it because it is not being paid to employees for services rendered.

Yes. 411(d)(6) is not a problem, but remember that amendments can't discriminate in favor of highly compensated people. Also, I believe that the availability of hardships is a right that must pass the requirements of code section 401(a)(4).

I don't think so. Check IRS Pub 502. That has the rules for deductibility for medical expenses, which are the rules used for health flexible spending accounts.

The requirement that all participants are employees is a basic requirement to be a cafeteria plan (see IRC 125(d)(1)(A)). The nondiscrimination rules are different (see IRC 125(b)). If the arrangement includes non-employees, it isn't a cafeteria plan and none of the pre-tax elections of any participants will be effective.