KateSmithPA

A client left us totally out of the loop with a hardship withdrawal taken in April. We have just found out that a participant took a hardship out of profit sharing dollars but the plan states that only deferrals may be used for hardship withdrawals. Also, the client did not suspend deferrals after the hardship. We believe the participant should reimburse the plan for the amount taken out of profit sharing. Would that be the correct fix to that problem? We also believe the deferrals that have been deposited after the hardship withdrawal should be returned to the participant, with earnings. Again, is that correct? Thank you.

In 2006, all employees of the employer, including the employer, terminated on May 1st (calendar year plan). Plan has not been terminated (not sure why). There was no contribution for 2006, however, a former participant was paid out and forfeited $8,500. Forfeitures are added to ER contributions. Plan has a 1000 hour/last day rule. Since no one was there on last day, should we use the fail safe provisions and allocate first to those with 1000 hours and then those with the next highest hours? There are 4 NHCEs and 1 HCE. 2 of the NHCEs worked 1000 hours, 2 worked less than 1000 hours but more than 500. The HCE worked 1000 hours. Could we allocate to the HCE and 3 NHCEs to pass coverage? Thank you.

Client allowed an ineligible employee to receive a matching contribution. She was not eligible because the plan requires terminees to complete 501 hours of service to be eligible for the match. However, they contribute the match each payroll period (we know that is a problem, we have tried to get them to change). Participant received the match, terminated, took a distribution and received the match distribution. Client tried to retrieve the match from the participant, but participant refused to return. What is the correction for this? From my reading, it appears that if the mistake had been discovered prior to distribution, the match could have been forfeited and that would have been that. Should the employer contribute the amount in question to the forfeiture account? Thank you.

According to the ERISA Outline Book, "once the participant reaches normal retirement age (or age 62, if later), the plan is permitted to require that distribution be taken. In that case, only the form of payment might be left to the participant's election. The plan may permit the participant to postpone distribution beyond normal retirement age, subject to the minimum distribution requirements." Participant has passed the NRA and is terminated. He is now requesting his RMD. The only form of payment allowed in the plan is lump-sum distribution, defined as one lump-sum payment in cash or property. May the plan require that the participant take a total distribution since he has requested a RMD? Thank you.

I'm afraid this is a stupid question, but I will ask, anyway. When calculating a required minimum distribution, is the cash value of a life insurance policy which is part of the participant's account added to the investment balance for the calculation? Thank you.

Appleby: I did wonder how both my threads got combined. I figured I had just done something wrong! Thanks for letting me know. We rarely deal with SEPs/SARSEPs but if we have to go forward on this project I think we will have to get the book that both you and Gary recommend. Kate

Gary: Again, you have been a great help, but I think I am getting a headache just thinking about how to get started. Thank you VERY much for your detailed answers. Kate Smith

I posted a question previously about a SARSEP that we believe has been administered incorrectly since its inception in 1996. At that time, I asked about corrections and Gary Lesser was kind enough to provide the link for the Rev. Proc. 2006-27, which I have read. I have also read through the IRS Form 5305A-SEP and the message boards. Our client is hoping to determine her maximum financial exposure if she were to correct all the problems. If I have read things correctly: 1. To correct failure to deposit the top-heavy minimum, she would have to contribute the top-heavy minimum for each year in which the plan was top-heavy, with earnings. 2. To correct failure of the deferral percentage limitation, she would have to make fully vested contributions to all eligible participants in the year of the failure in an amount great enough to bring the NHC deferral rate up to passing. Alternatively, she could withdraw the excess, adjusted for earnings, AND contribute the same amount of the withdrawal to the NHCs. 3. Failure to follow 50% participation rule. For every year of this failure, an amount up to the IRA contribution limit would be okay (except for payroll taxes?), but the excess amounts would be subject to a 6% excise tax, paid by the employee, and possibly a 10% tax on early distributions when withdrawn. Assuming we can obtain all the data necessary to make these calculations, it will clearly take a great deal of time to calculate. Is there an option to simply declare that since this plan was never operated in compliance with the document that there was never actually a plan, distribute all the assets and have the participants (there are only 3, including the owner) deal with distributions through their personal tax returns? Thank you.

Gary: Thank you very much. That is just what we needed to know. Kate Smith

I have been contacted by a business owner who put in a SARSEP at the last possible minute in 1996. She was assisted in this process by a large, national brokerage firm. Since that time, it is quite likely that the plan has not operated in compliance. She was unaware of the 50% participation rule, the non-discrimination testing and the top-heavy rules. She wants to know if there is a statute of limitations as to how far back she is subject to penalties, in the event her non-compliance was discovered. She also wants us to give her an idea of how much fixing it all would cost. Based on the number of years involved and the multitude of issues, I'm not even sure where to begin. Is there any correction program open to her that would make sense for her to use? There are only 3 people participating in her plan, herself included. Thank you.

We filed 5500-EZs for a new client for plan years going back to 1993 for both a profit sharing and money purchase pension plan. We included a letter with each return and the client, in turn, received a letter from the IRS penalizing $15,000 per year. We wrote letters for the client to send to the IRS requesting that the penalties be waived. So far all the MPP penalties have been waived and the PSP penalties are being waived one by one. Good Luck.

Several doctor groups are merging into one. All had existing plans. Some decided to merge their plans into one new plan. 3 groups were going to terminate their plans prior to the merger. We had asked that the board resolutions to terminate the plans be in place prior to the merger. One of the company's current TPA has told them they should not terminate the plan, but freeze it instead. Not sure why, but that doesn't matter to us. However, if they freeze the plan do the assets of that plan count in the Top-Heavy test of the new plan? Since I cannot find an answer to this in the usual places, I am beginning to think the answer to my question is NO, but I am hoping someone out there might be able to give me a definitive answer. Thank you.

Qualfied plan allows self-directed brokerage accounts. Participant opens a SDB and has annual contributions deposited over several years. Plan is not in name of plan but in name of participant. Now participant is terminated and wants to rollover account, but investment company won't rollover the funds since the account is not titled in the name of the plan. May the trustee correct this by having the SDB account retitled in the name of the plan? Are there more serious consequences? By the way, I have no idea how this happened. Not a client, but one of my partners posed the question.

How does this work in practical terms? Is it possible that the group of participants who defer but are not eligible for a Safe Harbor contribution could fail the ADP test?

We have a plan for a large company that owns several hotels and restaurants. They would like to implement a negative enrollment program but would like to exclude from the negative enrollment those employees whose compensation is primarily made up of tips. They feel it would be unfair to those employees because of the uncertainty of their income from week to week. They do not want to exclude these employees from the plan, they just don't want them to be subject to the negative enrollment. Can they do this?

In perusing another topic on this board, Tom Poje mentioned in passing that if one classification in a cross-tested plan is "Owners" then the children of the owners are in. We have a plan, drafted by a law firm, that has "Owners" as one class and "Children of Owners" as another group. Is this a problem? That is, are the children already included in the first group? And, if they are, how do you keep them out of that group?

My manager has asked me to try to locate a sample letter we can send to a prospective defined benefit plan client to explain DB plans. We don't actually administer DB plans, but have an agreement with an actuary. I have checked these boards and another service we use, RIA, but without success. I have also sent an email to the actuary to see if he has any suggestions. Any ideas? Thank you.

If a participant fails to take RMDs for more than one year and then makes up for it in a subsequent year - taking all required up to that date - how is the distribution taxed? Is it all taxed in the year of distribution, or does the participant have to amend previous tax returns to include what should have occurred?

In searching the boards for an answer to a question I came across this thread. Although my question is different from the question that started the thread, the points in the thread seem to answer my question. However, I would like some clarifcation. In Notice 2000-3 the IRS states that if a plan is not a Safe Harbor plan, the employer may issue a "Maybe" notice saying that there might be a 3% SHNEC for the following year. Then, if the employer wants to make the SHNEC, they must issue another notice prior to the end of the year stating that the plan will be amended for that year to a SH plan and letting participants know what the SH contribution will be. According to this notice, this may be done on a year-to-year basis. We have a plan that is being audited for 2003. In 2002, the employer issued a "Maybe" notice to the participants. The plan terminated in November, 2003 and did not make the SHNEC. But, the plan was a Safe Harbor plan by design. That is, the adoption agreement said it was a SH plan. Is an employer allowed to issue a "Maybe" notice when the document states the plan is a SH plan?

Tom: Client did not contribute 2003 SHNEC. We are going back and doing ADP test. They will correct by contributing a QNEC (it is cheaper than one-to-one). You said above that the SH must be included in the nondiscrimination testing. Is it included in the ADP or the ACP? If ACP, since there was no other employer contribution, it should pass, correct? Also, to anyone out there, do we caclulate earnings on the QNEC and/or the SHNEC which they still haven't contributed? If so, from what date?

May a charity be named as the beneficiary of a qualified plan? Does it make any difference if it is a charitable trust?

Thank you all for your replies. I agree it would be best for Company A to terminate the plan and distribute all balances. However, may Company A still terminate the plan even though the purchase of the company assets was months ago? Or, did Company B, in effect, already assume sponsorship of the plan when they started depositing the deferrals of the former employees of Company A into the Company A plan?

Company B buys all assets of Company A. Both companies have 401(k) plans. Purchase was effective 3/1/2005. Company B wants to assume sponsorship of Company A's plan and then terminate the plan. I don't know why Company A just doesn't terminate the plan, but this is the situation with which we have been presented. To further muddy the water, some of the employees of Company A have gone to work for Company B. They continued to have deferrals taken from their pay but the deferrals have been deposited to Company A's plan. 1. Is it okay for Company B to assume sponsorship of A's plan and then turn around and terminate it? If so, does this action have any impact on the A employees who have gone to work for B? 2. Does anything have to be done about the deposits to the A plan from wages of employees who now work for B?

Plan has not filed 5500's for 11 years. We have prepared the 5500's for these years and the plan will file under DFVC program. Employer will pay DFVC fees. Our fee for the preparation of the 5500's is almost $15,000. Client wants to pay fees from plan assets. Although we agree the plan may be charged with normal fees for preparing 5500, is is alright to charge these fees against the current year assets when they pertain to the last 11 years? Although the workforce was fairly stable over that time period, about half the participants left the plan and took distributions during 2004 as the result of one owner breaking away to start his own business. Therefore, the remaining participants will bear the cost.

Thanks to all for your answers. Tom, I have considered changing from PA to VA since I now reside in Virginia. Always make it a point to attend your sessions at the ASPA annual meeting. One last question on the topic. Can anyone define ancillary life insurance for me? Do variable annuities meet this definitions. Again, thanks.