AndrewZ

There's a theoretical new plan, effective 1/1/08 (for profit sharing allocations), adopted 9/30/08 with Safe Harbor match effective 10/1/08. The match is to be calculated annually (not per-payroll). Can you calculate the SH match based on compensation from 1/1/08, or is it restricted to 10/1/08? It seems clear to me that compensation for purposes of calculating the SH match would be restricted to 10/1/08-12/31/08, but others disagree with me. It doesn't seem to be explicitly addressed in the regs, other than the requirement that the SH is effective only after the plan is adopted, and I believe that includes the entire SH contribution formula. Without it being explicitly addressed, I think it may be aggressive to use 12-month compensation, as it would be discriminatory for for NHCEs to have to defer 16% of their last 3 months' compensation to get the full match, while it's easier for the HCEs to afford to so. Conversely, however, if this were a Safe Harbor nonelective contribution, the NHCEs would only benefit more from SH being determined on 12 months' compensation, so I don't think the IRS would take issue with that. The plan document doesn't specifically address this either, but we are able to custom-define compensation periods to meet our objectives. Finally, what about a self-employed HCE in this situation, or any other with partial-year eligibility? My understanding is that the total compensation is deemed to be earned on 12/31/08, but that also seems discriminatory. Do any of you pro-rate self-employment compensation in this case? Thanks.

We have a 401(k) plan being audited by the IRS, where one of the owners defaulted on his loan. We issued a 1099-R in 2003 in accordance with 72(p), but kept the loan on the books as there was no distributable event (the participant is still employed and is under age 59 1/2). IRS agents are telling me that they treat participant loans lose the P/T exemption under 4975(d)(1) once they go into default. However, I can't find anything to support this in the regs--4975(d)(1)(E) says the loan must be "made in accordance with the plan's terms" which it was - the participant just didn't comply with the loan terms. Our agent directed me to 1.72(p) Q&A 16 stating that taxation of a defaulted loan that is a P/T doesn't correct the P/T, but that doesn't state that the default status creates a P/T. The agent is requiring that the loan principal and accrued interest be repaid in order to fix the P/T. What happens when a participant refuses to make payments - would the employer be subject to P/T excise taxes each year forever? This case is different, because the participant is an owner and will be partly responsible for P/T taxes, but there's no distinction in 4975(d)(1) between owner and non-owner participants. Does anyone have experience dealing with the IRS on this issue? Thanks [Additional clarification] Payments were originally made in accordance with the loan's terms, then stopped due to financial difficulty. Additionally, the loan fully complied with the plan's loan program and was bonafide when issued.

You can't distribute excess deferrals after 4/15, but you still have to correct by issuing a 1099-R and tax the participant. Thus, they will be taxed again eventually when the participant taxes a regular distribution. For the initial correction, the principal is taxed in the year contributed (1099-R code P if prior year), and the gain/loss in the year of distribution (code 8).

Thanks for the responses, I think we'll just go ahead and tell our client that we are issuing 2003 1099-Rs in accordance with the IRS' instructions. It's not a big deal for us to do, and doesn't affect the plan itself.

Thanks, Brett - But the obligation (to fund the employer contributions) is not directly on the trustees, but on the corporation. The trustees forfeited their accounts to cover for the corporation, but had no direct liability for the funding (except for the fact that are also corporate officers). That's different than a QDRO where the financial obligation is a personal one. So I would think any taxable consequences resulting from this would be on the corporation (e.g. a disallowed deduction for the match which was funded from an alternate source).

I would seriously doubt they would disqualify the plan, that's a pretty minor issue, not abusive nor harmful to any participants. I think worst-case they would make you do the distributions now, and possibly impose the 50% penalty on the participants.

Regarding the same plan under audit in my last post - the employer still owes some 2001 matching contributions. The IRS agent wants it to fund the missing contributions, then put the plan through Audit CAP to avoid disqualification for "failure to operate in accordance with the document." I can't think of any statutory authority to support this, as long as the contributions are eventually made (or does the fact that the audit has been initiated create an artificial "deadline" that the employer has passed?). I don't believe there are any statutory deadlines for employer contributions, other than for the purposes of deduction and 415. Also, the IRS agent wants to accrue interest on the matching contributions - again, I don't believe there is any requirement for this on employer contributions, only required by the DOL on employee contributions.

We have a plan under IRS audit - previously, the employer owed some unfunded required matching contributions, and the DOL instructed us to "forfeit" the trustees' accounts to fund those contributions. It did not instruct us to treat those amounts as taxable to the trustees. The IRS says 1099-Rs should be issued, as the funds are considered "distributed" and then deposited to the plan from the trustees' personal finances. I disagree, as the benefits were treated as forfeitures and transferred within the trust, not actually distributed. In addition, though the trustees made pre-tax deferrals to their accounts, they will realize no personal tax benefits as they have forfeited those contributions. I do realize that there may be problems with the corporate contribution deductions, if it took deductions for the trustees' 401(k) contributions, and again for matching contributions funded by those same 401(k) contributions... but that's not a plan issue. Has anyone else encounted this issue with the IRS? Thanks

As I recall EPRSC (Rev Proc 2003-44) allows a plan to self-correct by making the RMD at the time the failure is discovered. I don't remember the details off-hand, but you can review the Rev Proc. I'm not sure if there's a deadline, or if you can do it for the year under axamination, but it might help.

Without doublechecking myself, this is what I understand the rules to be in that situation. 1. The loan is deemed to be in default based on deadlines set forth by the plan's Loan Policy or the determination of the Trustee. The IRS sets a maximum time limit of the end of the quarter following the quarter in which the first missed payment was due. In your example, it appears the default date is June 30, 2002? 2. The defaulted loan becomes taxable to the participant via a 1099-R with code "L" or "L1." It is not eligible for rollover, as indicated by the code "L." If the account balance cannot be offset due to restrictions on 401(k) distributions or if the participant is not eligible for any inservice distributions allowed by the plan document, then it must continue to be carried in the participant's account, but would create an after-tax basis and be reported as non-taxable on the 1099-R when distributed. 3. The Trustee is still required to attempt to collect payments. Any payments made would create an after-tax "basis" in the receiving accounts, which must be tracked for 1099-R purposes when the account is later distributed. Hope this helps.

Thanks, DP - I'll try that address and see what happens. We had been instructed to order them from Rancho Cordova CA (Sacramento), I guess that's the office that serves San Francisco. We did receive an order a couple of weeks ago, but we knew the IRS was evaluating whether to discontinue the 8109-B program. Then they sent us a notice for our last order that they wouldn't provide any more.

We have been manually filling out 8109-B coupons for our clients when they have 945 tax deposits due, but the IRS will no longer provide the blank coupons. They want our clients to order the pre-printed coupons. The problem is, if we can get our clients to request the coupons, then they eventually (if they're lucky) get what looks like payroll tax coupons addressed just to the corp., and of course they would discard them because someone else handles they payroll taxes or they transmit electronically. We are thinking about setting up our non interest-bearing trust account, with its own EIN and processing all deposits and 1099-Rs through it, similar to what the institutional custodians do. Of course, this may raise issues with funds flowing through an account that is not part of original retirement plan trust, and being commingled with other funds. However, if this is just a conduit and there is no interest paid, the feds may not be too concerned about it. Does anyone have any experience or advice with doing what I have described? Thanks

I'm a Relius Admin user, and am pleased with the functionality and support. It's much improved over a few years ago. If you do cross-tested plans, one drawback is that it doesn't do cross-tested calculations, and the separate Relius Proposal software isn't sophisticated enough. However, they are supposed be integrating the two systems, and it should be functional then. Also, many of the built-in reports are lacking, and it takes a lot of technical knowledge to modify or design them in Crystal Reports. This flexibility can also be an advantage though. Feel free to email me if you have any questions.

For the year of the divorce, ex-spouse is still a Key employee through attribution. After that he/she is a "Former Key" employee and is disregarded for Top Heavy testing.

We've also been researching this for our GUST restatements. If the plan allows for in-service distributions upon early or normal retirement age (or 59 1/2, etc.), it seems to me that you would need to preserve the in-service distribution rights for benefits accrued at the time of amendment: Reg § 1.411(d)-4 states that the timing of a benefit distribution is an optional form of benefit that may be protected. Reg § 1.411(d)-4, Q&A 2(e) provides that an optional form of benefit may be eliminated as long as an "otherwise identical" single-sum distribution option is available. However, it requires that the commencement timing of this distribution option remain identical to the one being eliminated, so it seems that this doesn't allow you to eliminate in-service distributions as an optional form of benefit.

Another issue - To be treated as "annual additions" for 415 testing for a plan year, contributions must be made no later than 30 days after the filing deadline for company's fiscal year in which the plan year ends (Reg 1.415-6(B)(7)(i)). Otherwise, even if you allocate the contributions in a prior year, you must test them for 415 in the following year. Also, the 2001 contribution is subject to the 25%-of-compensation deduction limit for 2002, so a full 25% contribution would not be able to be allocated and deducted in 2002. Blinky, I've never heard of the "includible contribution" rule, and can't find it under IRC 404(a)(3) - I'd really appreciate if you can give me more info on this. Thanks.

Quantech won't solve for max/min benefits under new comparability - you have to purchase the Relius Proposal System for that.

A company terminated a SIMPLE IRA plan and began a regular 401(k) plan. It seems that contributions under the SIMPLE IRA would not be required to be included for 401(k) top heavy testing, as Reg § 1.416-1, Q&A T-8 indicates that SEPP IRAs are not required to be aggregated. But I can't find any guidance specifically relating to this issue with SIMPLE IRAs. Would the fact that SIMPLE IRAs are not subject to top heavy rules preclude them from the aggregation requirement? I appreciate any input.

"Earnings" on excess deferrals are required to be taxed in the year of distribution. When the principal amount is taxable in the prior year, and the earnings are negative (losses), how can you report negative earnings on a separate 1099-R? It seems the only solution is to report the net distribution (principal + losses) together on one 1099-R taxable in the prior year.

John Sample, See my earlier post about Quantech - esp. if you intend on using it for daily val. It does require expensive hardware (I think you can use one server for both files and data, even though they prefer separate servers). I had problems with updates changing the ADP testing and loan module. Also, Corbel was unresponsive to some other problems we had. As far as conversion, InvestLink's startup costs include converting all your plans for you, though I don't know if they can transfer it from your current system directly, or if you have to export data to ASCII files first. I went through conversion from Corbel's Pentabs to Quantech, and even though they had a utility, there was still of lot of manual cleanup work to do.

TamVol, Thanks very much to you, and everyone else, for your input. It's been very helpful. InvestLink sounds promising - I'll have to check out their new compliance module. Last time I talked to them they knew that we required it, and seemed to be taking it seriously. I have the impression that the reports available for the TPA to send to its clients are lacking, in functionality and design. Do you have any input on this also? Thanks. Andrew

SteveR, thanks for your input regarding InvestLink - it helps confirm my impressions. As far as Quantech, I've heard from many sources that its daily val system is problematic, and that it's really an enhanced balance-forward system, not a true daily val system. (I think one of the resulting issues is that you cannot easily make retroactive changes, as it rolls forward to a new period and closes the old one.) Additionally, I used Quantech's regular valuation system for a couple years, and I was very unsatisfied it due to some system design issues, and poor customer support. Also, I don't think it handles self-employed calcs or solves for optimal cross-testing results. However, it was pretty good at 401(a)(4) and ADP testing (except when a program update screwed up the ADP testing). Please email me if you would like additional information.

I'm searching for daily val software, and would greatly appreciate any input/advice from anyone who has experience with the software vendors and NSCC clearing agents. I'm currently looking at ASC, InvestLink, and Trustmark. I don't know of any others, except Quantech. We do complex nondiscrimination testing, and I know InvestLink & Trustmark are weak in this. Thanks.