Belgarath

Anyone know why the IRS doesn't allow SCP for "significant" violations in the 2-year correction period otherwise applicable for "regular" qualified plans? Just curious - seems strange to me. To add an example: Revenue Procedure 2013-12 allows SCP for SIMPLE-IRA plans, but only for “insignificant” violations. Suppose a relatively small business intends to terminate a SIMPLE-IRA, but due to their misunderstanding of the requirements, they do not give appropriate advance notice to the employees for 2014, although they do notify the custodian (sometime in mid-2014) that they are terminating the plan for 2014. When this error is discovered late in 2014, they realize this must be corrected, and that the correction will involve the normal 50% of the missed deferral opportunity, plus the full 3% match, for a total of 4.5% plus earnings for ALL eligible participants, based upon entire 2014 salaries. In spite of the fact that this involves all participants, it is a one-time occurrence. Can this reasonably be considered an “insignificant” violation eligible for SCP? My inclination is no, but I wondered what others think.

Thanks MoJo - a question, and this is just for my own edification, and nothing I'd discuss with a client. In such a situation, if there were an audit, and the penalty/correction would literally bankrupt a client, is the IRS typically open to some sort of "reasonable" negotiated settlement that allows a client to remain in business? That's an end of the business that I just don't see, so I really have no idea, and I'm just curious. Or is it just an unanswerable question, totally dependent upon facts/circumstances?

It's a conundrum. Just looking at a SIMPLE-IRA case where they have had the mandatory 2% contribution in place for nearly 20 years. Don't have all details yet, but it may be that for all those years, they only gave the 2% to those who CONTRIBUTED, not to everyone who is eligible - and it is a LOT of employees, not just a few. They will need to get the advice of counsel, but they are left with some unsavory choices. They have a lot of people improperly excluded, and they probably have no way that they can possibly raise the money for a full correction for all years, if it truly goes back that far. Submitting under VCP seems like a near guarantee that the prior years will be questioned. They can self-correct for two years, but technically to do that, they have to correct ALL years, even the closed years. Or they could terminate the plan (for 2016) and play the audit lottery. I suppose they could try a John Doe submission, but I'm not overly sanguine about their chances of getting an affordable solution approved. I'm not permitted to advise them based upon the audit chances, etc. - I can only tell them what a full correction would be. Ethics question - if they seek the advice of counsel (or they don't, even if I advise them to) and they decide to self-correct for the last two years only, am I committing unethical practice if I assist them in calculating the correction amounts/interest for those two years? If they instruct me in writing to consider all prior years as being in compliance even though I have reason to suspect they weren't?

Not saying the IRS is correct, but they take the interpretation that contributions to fund a safe harbor under 401(k)(12) must be nonforfeitable WHEN MADE to the plan, thus precluding the use of forfeitures. It seems like a pretty strained interpretation as far as I'm concerned, but who wants to try it in court? Plus, as far as I know, the pre-approved plan docs for PPA already incorporate this interpretation ('cause that's what the IRS wanted in the LRM's) so it is a moot point as to whether it is technically correct or not - that's what the plans say. Looks like Tom already beat me to it...

Good points. I like your approaches better than mine!

You are right, of course, but I understand that this is an attorney who is belligerent and argumentative by nature, and once the plan language is pointed out will then want proof that it isn't permissible under the Code/ERISA/Regulations. "Why is the Plan written this way?" I think you are all familiar with the type. So I thought I'd look at this in advance to try to forestall a lot of foolishness. Sigh...

Thanks Lou. The only other thing I could find was the Rodoni case. The Rodoni case in 1995 involved an IRA, and was, I believe, a case of first impression. It isn’t directly on point here, but it does provide some useful discussion as to the right to rollover contributions being specific to the individual.

Employer A sponsors Plan B. Mrs. X is a participant in Plan B. Mr. X works for an unrelated employer, and will be terminating, and wants to roll his money into his wife's (Mrs. X) account in Plan B. We all know you can't do this, but it is difficult to provide citations. All I could think of was the exclusive benefit rule under 401(a)(2) and ERISA 401(a)(1)(A), as well as the regulation under 1.401(a)(31)-1, Q&A 3 that specifies clearly specifies that a direct rollover that satisfies 401(a)(31) is “…an eligible rollover distribution that is paid directly to an eligible retirement plan for the benefit of the distributee.” Clearly the spouse is not the distribute. Not to mention, of course, the plan document, which naturally wouldn't allow this. Any other easy pertinent citations that I'm missing? I'm sure I've seen something on this before, but couldn't find the thread.

I agree, I don't think the regulations address this specifically. I vote for not counting the interest. It seems absurd to me to suggest that earnings on an IRA rollover, for example, which has nothing to do with employer contributions, should affect top heavy testing. And I would assume that was the intent of excluding non-related rollovers in the first place. FWIW, I checked with our folks who do valuations, and Relius does NOT include the earnings on unrelated rollovers.

ADP refunds are reported on a 1099-R, not a W-2. And yes, the employee has been told that the distributions are reported to the IRS. As I said, don't know why he refuses to cash the checks.

Kind of a gray area. Sal references a couple of PLR's - 201147032, and 201221059, where the IRS specifically ruled that the transferred funds couldn't be used to fund matching contributions, as you mentioned. However, he also makes the statement that a safe harbor 401(k) plan may be treated as a qualified replacement plan. I read the PLR's, and I agree with that. However, he doesn't address your specific issue of whether those funds can fund the safe harbor non-elective contribution requirement - and this specific question was not asked in the PLR's, nor did the IRS address it. Short of requesting a PLR on this specific question, it seems like "you pays your money and you takes your chances." I would be a little hesitant (as I typically am) to take the aggressive stance and say it is allowable. At the very least, I'd put it to the employer to use ERISA counsel to make the decision. Given the IRS general lack of flexibility on safe harbor plans, I'm not sure where they would stand on this question.

Just soliciting general discussion. Please ignore plan design issues, it has all been hashed over with the client before! We have a plan that fails ADP every year, and refunds are made, and of course properly reported. There is one active employee/participant who refuses to cash the refund checks. Why is an unknown, but I have a personal suspicion that in his pea-sized brain, he thinks that by not cashing them they aren't really taxable, so he doesn't include them when he files his taxes. Just speculating... So, this has gone on for 3 years now. The Plan has done everything appropriately. What other steps are available? (this isn't someone the employer will fire) One solution is to keep reissuing checks, (but no reporting or withholding necessary, as it has already been done) as the plan has an obligation to distribute the money. And since there is a distribution fee that is appropriately charged to the participant's account, perhaps when it is pointed out to him that he will get charged $100.00 per check, maybe it will sink into his thick skull. Any other general thoughts? Does it raise any fiduciary issues - charging him for reissuing checks? It seems to me that it shouldn't. Any limit on the number of times checks can be reissued? Etc.? Just wondering about what real-life solutions you might use in this rather unusual situation.

How about 414(w)(5)? 1.414(w)-1(b)(3)? However, as to a non-electing church plan I would, in the absence of additional research, say that the EACA regulations don't apply. Since I don't work with non-electing church plans, don't trust my guess on this!

Thanks.

About 30 years ago, when I worked for an insurance company and none of the plans were daily valued, etc., the checks for liquidated funds were always made payable to the Trustees of the plan - hence no 1099's as it wasn't a distribution from the plan. Then the Trustees had to issue the 1099's when they paid the Participants. I thought such practices had gone the way of the dinosaurs and compromises in Congress, but perhaps there are some that live on...

Not knowing doodley about cafeteria plans, I just wondered if there is any sort of a general answer to this, or is it purely dependent upon plan terms, or a combination of both, or perhaps neither? Can a plan permit an employee, on a personal leave of absence, to pay her health insurance premiums through payroll using her combined time off? If yes, can this continue being a pre-tax deduction or can this be done only as a post-tax deduction? I have a faint memory that you have to make an irrevocable salary deferral election prior to the beginning of the year, but this can perhaps be modified for a change in status? If an unpaid absence qualifies as such a change in status, then it would seem to me it ought to be possible to use CTO which presumably is run through normal payroll? Thanks.

See paragraph (b) below. Does anyone have a feel for whether the IRS interprets this unfavorably (from the client's point of view) in pre-approved documents that permit each employee in their own group? I understand that this document provision is for nondiscrimination testing of allocations, but does the IRS take the hard line on coverage testing, and consider this as having "substantially the same effect as enumeration by name" - or, is it not something they pursue? §1.410(b)-4 Nondiscriminatory classification test. (a) In general. A plan satisfies the nondiscriminatory classification test of this section for a plan year if and only if, for the plan year, the plan benefits the employees who qualify under a classification established by the employer in accordance with paragraph (b) of this section, and the classification of employees is nondiscriminatory under paragraph © of this section. (b) Reasonable classification established by the employer. A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification.

MM - I think you are misunderstanding what the "next payment interval" means here. The next payment interval ends on 4/1/2016. Note that this IS in the next calendar year, which means you don't have to make a second payment by 12/31/2015. The annuity payment interval cannot be longer than annual. So, you commence the RMD on 4/1/15, under an annual payment annuity payout. Let's just assume that the annual annuity payment will be $10,000 per year for life. April 1 of 2015, the recipient receives the first annual payment of $10,000. He does NOT have to receive a second payment by 12/31/15, because you are using the annuity payment method. HOWEVER, the next payment of $10,000 must be made April 1, 2016 (because the payment interval is annual.) It can NOT wait until 12/31/2016. The reason no one has been using 12/31/2016 is that this would fail to satisfy the minimum distribution requirement. Hope this helps.

Interesting question here. Suppose you have a Schedule C filer, single, who is independently wealthy, so works a little but has very little earned income - only, say, $10,000 net Schedule C after deductions and SS tax reduction. So, defers the whole $10,000 to Roth 401(k). Can he ALSO contribute to a Roth IRA? Although it is counterintuitive, I'm having trouble finding anything that prohibits it. In spite of the Roth 401(k) deferrals, he still has earned income to report on his 1040, right? And if so, I think he can technically contribute to a Roth IRA. But it doesn't feel right! What am I missing? Edit: I suppose, as I think about it, that this is consistent with a W-2 employee - say that an employee has $10,000 of W-2 income, and defers it all to a Roth 401(k) - the W-2 is still going to show $10,000 as taxable income, on which you could presumably contribute to a Roth IRA? I still have a feeling I'm missing something, but I can't find anything proving it is wrong.

Hi Tom - an interesting twist, and a good point. So let me ask you - (and I'm not trying to be a wise guy) if YOU had a client with a 3 million dollar account balance, would you advise, in that situation, that it was ok to put it off for another year? Would you do it for yourself if you were in that situation? I'm just curious as to how strongly you feel that the "aggressive" position is safe? (P.S. - if your account balance is 3 million, I salute you!) I'm not certain receiving a paycheck in January necessarily has any bearing upon this question. If we extend your example a bit to illustrate the point, suppose you terminated on December 23rd - but you get a paycheck in January. How does that have any bearing on whether you are considered terminated for the prior year or not? Anyway, I'll be interested in your opinion. Thanks.

FWIW, I think the transition period applies.

This issue has been debated endlessly, and as far as I know, there is no official guidance. If you can get hold of it, the IRS said UNOFFICIALLY, to the ABA Taxation section, back in 2003, that the last day of work is the date of retirement. Q&A - 12 of that session. I don't have it handy, or I'd post it, but it is unofficial anyway. That's the only source I know of. As far as taking a reasonable stance, while your position is arguably reasonable (I don't happen to agree, but that doesn't mean anything) - from a practical viewpoint, do you really want to advise your client to take the aggressive position when the penalty is 50%? Which likely won't get picked up for years, so it continues to accumulate each year? Hardly seems worth it to me - personally, I choose the conservative route. As an aside, I don't believe the IRS has much interest in taking a position that defers receipt of revenue, but that's just my own cynical view...

Thanks Kevin - I was afraid of that, which is why I asked the question. I was hoping for a different answer!

While this is actually regarding a SIMPLE-IRA plan, let's use a 401(k) as an example. Suppose someone should have been eligible to defer as of January 1, 2015. They were inadvertently excluded from being able to make deferrals until March 1, 2015 - well within the 3-month period allowed for "brief period" exclusions under Rev. Proc. 2013-12, Appendix B, Section 2.02(F). No other limitations in the plan on what can be deferred - up to the IRS limits. Matching formula is 100% up to 3%. So, there is no required contribution for "missed deferrals." But there is a contribution required, or potentially required, for missed match. My question is twofold. First, if an employee chooses NOT to defer for 2015, is there any required make-up for missed match? It seems to me that there should not be, but the language/example isn't all that clear to me. The Example 7 seems to contemplate a per payroll situation, and it doesn't seem reasonable to me to apply this to someone who elects not to defer at all. Second, if the answer to the above is that a missed match make-up contribution is required, then I'd assume it would simply be 3% of compensation for the improper exclusion period. Now, for someone who actually defers, if the match isn't calculated on a per payroll basis, then it seems like it can't be calculated until the end of the year. Suppose the employee elects to defer 10%. Compensation for the improper exclusion period is 10,000, and compensation for the remainder of the year is 50,000. So the employee defers 5,000. Since the match is 100% up to 3% of compensation ($60,000 x .03 = $1,800) there's no additional special make-up match for the exclusion period 'cause the deferral was sufficient to receive the maximum match anyway. I'd appreciate any thoughts on the above.

Not sure I understand what you are getting at? I'm talking about allowing in-service distribution at age 60 for all accounts other than pension funds - no problem with this. The ERD of 60 is simply to make them 100% vested (which everyone would have been under the age 60 NRD) in order to put everyone in the same position they would have been before, other than distributions of Pension funds. So although the ERD of 60 coincides with the age 60 in-service provision, it isn't the ERD that is the in-service distributable event - it is the age 60 provision.