J. Bringhurst

"Plan administrators are required to honor any domestic relations order that satisfies the requirements to be a QDRO. In the view of the department, therefore, a plan may not condition its determinations of QDRO status on the use of any particular form." This is from Question 2-7 from the following DOL site: http://www.dol.gov/ebsa/publications/qdros.html#section4

I'm not a big fan of model QDROs, but we have a client who has been using them for years and wants to continue to use them. We've been asked to review. In the course of discussing their procedures, we just found out that they categorically deny any DRO that is not drafted in the form of their model, whether or not the DRO otherwise meets the statutory qualification requirements. Is this permissible? Is there any rule that a plan administrator must accept any DRO that meets all of the technical requirements...? It doesn't seem right that a plan can deny a DRO as not qualified just because it doesn't like the form in which the DRO is prepared.

Just had a conference call with an IRS representative on this very issue, so I thought that I'd follow up with my original post. The IRS is standing firm on their requirement that the loan failures specifically enumerated in Rev. Proc. 2006-27 can only be corrected under VCP. They have said that this is one of those situations where they do not think self-correction should be available, and they want to approve the correction through submission through the program. Although changes are not imminent, they may, in the future, consider some kind of reduced fee schedule for this situation.

Yes, the plan is covered by the PBGC and is significanty OVERfunded. I think that we've decided to distribute for anyone who becomes entitled to benefits under the plan's terms. For anyone else, we wait until the PBGC period has expired. Thanks to all who responded!

Obviously, participant contributions/loan repayments that are not timely remitted to a plan's trust (i.e., as soon as administratively practicable) are a prohibited transaction and, if the time period for remitting such contributions to the trust is specified in the plan document, an operational failure to follow the plan's terms. What if a plan specifies the time period (e.g., monthly) for remitting matching contributions and that period is not met? It's an operational failure to follow the plan's terms, but is it also a prohibited transaction (i.e., impermissible extension of credit)? Are most out there fixing the prohibited transaction issue through VFCP, Form 5330 or both?

Rev. Proc 2006-27 adds new loan failure correction methods, but indicates that the corrections only apply if the failures are submitted under VCP. Since EPCRS usually provides that self-correction is available if the correction methodology specified in the rev. proc. is followed, this seems a bit out of step. Has anyone heard anything different on this issue or received any indication that the IRS may reconsider? We have a loan default in a plan with a large number of participants...seems a shame to have to correct under VCP and pay a huge fee just to correct one loan failure. Hmmm...

DB plan will be terminating 12/31/06. Client will be filing for a favorable determination letter as part of the termination process. 1. Would former participants otherwise eligible for a distribution from the plan (i.e., attainment of early or normal retirement age) during the FDL process be eligible to receive a distribution or must distribution wait until the FDL is received? If former participants must usually wait, is there an operational failure to follow the plan's terms? 2. Would participants active as of the termination date have to wait until the FDL is received? 3. If either or both categories must wait until the FDL is received, how should this be handled if part of the plan includes a cash balance element and the FDL could take much longer than normal? Thank you in advance.

When Revenue Procedure 2006-27 (revised EPCRS) was issued earlier this year, I rushed right out and printed myself a copy. The version that I have on file indicates that the $375 reduced fee for streamlined non-amender filings is "for each year of the failure." The version currently on the IRS website does not include this language. Does anyone know if technical corrections were issued to the Rev. Proc.?

Client and client plans all operate on fiscal year basis (10/1 through 9/30). Client sold a division of business 7/15/05 that had constituted one of three separate line of business (QSLOB) for which Form 5310-A had previously been filed. If client now wants to file another Form 5310-A to modify the prior filing to remove this particular QSLOB, would this filing be modifying the 2004 testing year or the 2005 testing year? Testing year is defined as the calendar year. The sale of the QSLOB obviously occurs during the 2004 testing year and during the plan year beginning 10/1/2004. However, for part of the 2004 testing year and the 2004 plan year, the prior election would still be valid (i.e., the QSLOB had not yet been sold). Anyone encounter this issue?

You need to check out the PBGC website, which provides specific procedures for missing participants. Generally, you must try to locate the missing participants in a diligent search, including contacting beneficiaries and/or using a commercial locator service...If they cannot be found, you can either pay the amount of their accrued benefit to the PBGC (and and report on Schedule MP with Appendix B) or you can purchase an annuity contract for them (and report on Schedule MP with Appendix A). http://www.pbgc.gov/practitioners/plan-ter.../page13263.html

Rev. Proc. 2003-44 is the most recent EPCRS out there...addresses this issue specifically.

We have not seen any officially sanctioned language, however, we have put together a document that would appear to meet the requirements. I would feel much better, however, once the IRS puts a model out there.

Client has prototype document that it failed to timely amend (complete and execute) for GUST and EGTRRA. Under Rev. Proc. 2003-44, would there have to be a contemporaneous determination letter filing even if this plan is a prototype document? Section 6.04 appears to provide that correction by plan amendment by adoption of a prototype would not require the determination letter filing, but I wanted to make sure.

Has anyone seen a version of the Special Tax Notice (402(f) Notice) that has been revised for the automatic rollover rules. I just checked the IRS website and couldn't find one there.

The Plan is the result of multiple acquisitions and client doesn't know the cause of the excess (e.g., overfunding, demutualization proceeds, etc.). All participants have been paid out and the Plan received a 1995 determination letter on its termination. Form 5500 has been timely filed and no participants/no benefit liabilities indicated in each year since termination. This raises another issue of whether the IRS could consider this some kind of tax haven (i.e., assets in Plan's trust for 10 years without benefiting participants). The question really is whether the plan has truly been terminated (See Rev. Rul. 89-87)...although all assets have not been timely distributed, all benefits have been paid out.

Client acquired frozen defined benefit plan and subsequently amended the plan for current law, terminated the plan (board action as well as appropriate IRS and PBGC filings) and distributed benefits to participants. It has now been several years, and the Plan's trust still contains residual assets. The Plan has not been timely amended for EGTRRA, but client has, however, been timely filing IRS Form 5500. Client is contemplating either (1) taking the reversion or (2) merging the Plan with one of their current plans. If they decide to merge the Plan, must they amend the Plan for EGRRRA as well as file under VCP as a late EGTRRA amender (which requires a contemporaneous determination letter filing) to avoid risk of tainting current plan?

I'm trying to come up with a list of general grandfathering rules for 401(a) plans. As an example, post-88 earnings on elective deferrals are not available for hardship withdrawal. So, any plan that has been around since 88 (or earlier) would have to watch out for this. Any other specific examples or a source for a more comprehensive list?

Since the employee was paid for services actually rendered (as opposed to some kind of severance payment), I don't know that there was an overpayment for Employee A with regard to his elective deferrals. If the plan provides for matching contributions to be made per payroll, I don't know that there is a problem here either. As for Employee B, you say that he was actually paid on the commissions, even though the sale was cancelled later? What happens to the cancelled sale...will future commissions be offset? Wouldn't this just come out in the wash later? If the plan provides for deferrals on commisions and commissions are actually paid, then the deferrals should be taken, yes? If there really is an overcontribution, the deferrals should be paid out to the participant and any associated match should be forfeited. To the extent a participant has terminated and taken these overcontributions, the participant should be contacted and informed that such amounts were not eligible for rollover. Some employers attempt to recover the match, but are pretty much aware that they'll never see it again.

Does anyone know if there is a statute of limitations on uncorrected prohibited transactions? We have failures going back to 1998 and plan to fully correct. Must we also file IRS Form 5330 for each of these years?

Since late participant contributions is such a hot topic, it would be nice to have clearer guidance. I tend to take a fairly conservative approach as to the earnings question (I've included it for those clients who are panic-stricken about being audited, but explained that most practitioners do NOT think that it should be included), especially whent he excise tax ends up being minimal.

My thinking is that the failure has not been fully corrected until the earnings on the late participant contribututions have been remitted. In addition, Rev. Ruling 2002-43, which provides guidance on how to calculate the excise tax for prohibited transactions that span several years, contains an example (in this case, a discrete loan rather than late deposits) that leads me to believe that earnings may be included. Perhaps I'm just reading the example wrong...since it's a bit different when there is determinable interest on a loan rather than having to come up with a fair market value for the amount involved. In addition, Katherine, as to your example...you indicate that the $100 is the amount involved (from which the excise tax is to be determined) ...is this not just the earnings on the late deposits rather than the fair market value of the use of the money. We've taken the position that these are two separate concepts (i.e., earnings and fair market value)...we usually use the client's corporate lending rate from a bank or the 6621 rate and apply this to the late deferrals...then we apply the excise tax. Some though have included the earnings when applying the corporate lending rate to get to the amount involved. Clear as mud?

Just taking a little poll here: How many of you out there think that the missed earnings on late deferrals should be included when calculating the "amount involved" for purposes of the 15% excise tax? Just curious.

At the very least, I'd contact affected participants and let them know that the excess amounts were not eligible for rollover....

Thank you!

Does anyone think that this will be a new trend with the DOL now that the prohibited transaction must be disclosed on Form 5500? It just seems weird that they'd come a calling and request that we file under their voluntary program.