Belgarath

I just noticed that - didn't have time to edit my post. Oh well, I'm used to looking foolish anyway!

I haven't read the decision, so I don't know if the specific situation and decision changes the "normal" interpretation of current law or not. But based on my current understanding, I agree with Mbozek that you can exclude any class you want to (subject to a few restrictions) and I also agree with Moe that these excluded classes, if considered "employees" would have to be counted in the testing. So if you want to exclude your leased employees, no problem as long as you pass testing. Whether this decision says something different, I don't know until I read it. Moe, do you know the name of the case, or have a link to it? Thanks.

My experience on this is that once the bond is in place, the DOL doesn't proceed any further. No guarantee, of course, that the DOL would be this benign on every case, or that they will continue this practice...

Kirk - the 10% limitation is only for future benefit payments once benefits are in pay status. See 1.401(a)-13(d)(1). But for a single payment, (e)(1) and (2) would allow it. At least that's how I read it.

WDIK - but it was amusing. Maybe we'll have to add a category: Splendidly Sarcastic? Brilliantly Bantering? Inimically Ironic? Dangerously Discerning?

Most plans I've seen say something to the effect that if no beneficiary is named, then the benefit is payable to the spouse, (if there is one) and otherwise payable to the Participant's estate. Particularly if the amount is large, you should check with an attorney.

Singing or trumpet? Be careful if the trumpet - you might be accused of blowing your own horn... Will MTV be doing a music video of the performance?

Good luck! S. Derrin Watson, in "Who's the Employer" (my bible for CG/ASG) states that "Determining the value of stock in closely held corporations is one of the thorniest tasks of estate tax and divorce practitioners." He goes on to state that for CG issues, such considerations as voting rights, dividend rights, liquidation preferences, and potential for appreciation come into play. He gives a couple of basic examples - one for instance: "Consider a corporation with both common and voting preferred stock outstanding. Assume that upon liquidation the preferred stockholders are entitled to the first $100,000 in distributions. If the corporation is only worth $50,000 at present, almost all of the value will be in preferred stock." And, he mentions other convolutions as well. If questionable, might be very wise to request an IRS ruling on CG status. Yuck...

I think that a VOLUNTARY assignment is probably ok. See 1.401(a)-13(e)(1) and (2) for the requirements. I don't see why a hardship distribution would be treated any differently from another distribution for these purposes.

I seem to recall looking this up once upon a time, and found it rather frustrating. I THINK that there isn't necessarily a specific monetary penalty (i.e. - no set amount per day, etc.) but that there is a potential for a 20% penalty for a fiduciary breach, under ERISA 502(l). So if the DOL sues, as Tom mentioned, then I think this comes into the mix. Furthermore, if you don't have the fidelity bond, then you can't take advantage of the VFC program. So an inadvertent breach that is otherwise correctible under VFC could really come back to bite you. 8-16-05 update - I think the above paragraph is incorrect. The revised VFC program released in April modified Section 6 to remove the Fidelity Bond documentation requirement. Perhaps they may still come back and request it for violations that aren't really "minor" - I don't know.

Here's one I've never seen. Participant in a 401(k) requested a hardship withdrawal. TPA incorrectly calculated the allowable hardship, and told them they could take (x) when in fact they were only allowed to take (y), which was a couple of thousand dollars less than (x). By the time the error was discovered, check already cashed, and money spent. What would be your approach to correcting this? Seems like Rev. Proc. 2003-44, Appendix B, .04 (2)(a)(iii) is appropriate, but I'm wondering if there isn't a simpler method. I think recovery from the participant is unlikely, since they have no money which was why they took a hardship in the first place. And I'm dubious about the legality of the employer withholding this from pay if participant doesn't agree to it. So if participant can't pay, just code the excess on a separate 1099 as premature distribution, and that's that? It doesn't seem appropriate for the employer or TPA to deposit this into the plan as you would in some situations, since this would result in a windfall to the participant. Appreciate any thoughts!

I don't think so. 1.401 through 1.401-14(inclusive) reflect the provisions of 401 prior to ERISA. The reg sections following 1.401-14 and preceding 1.402(a) reflect the post-ERISA provisions of section 401.

KJohnson - Sal Tripodi, on page 7.496, discusses taxation of disqualified trusts, and states that the Grantor Trust rules generally don't apply. Don't know if he's right, or if you agree, just thought I'd pass along FWIW.

IMHO, the participant absolutely can be forced to sell. The investment is still owned by the Trustee of the plan, in spite of the fact that the participant has been allowed to direct where the Trustee invests the money. The right to direct investments, or the right to a particular investment, is not a protected benefit. See 1.411(d)-4, Q&A-1(d). Now, there may be an issue of fiduciary breach, where the Trustee/Plan Administrator allowed an investment that was too risky/didn't have sufficient liquidity, etc. - then sells it. The Trustee/Plan Administrator is still responsible for due diligence/prudence in the allowable investments, and while this may be mitigated if it is a 404© plan, it could get tricky. Especially depending upon the amount of money/loss, this one sounds like ERISA counsel should be called in.

Cool! Fortes fortuna juvat. Best of luck in whatever approach you take. The discussion has been interesting, and has prompted me to read up on some of this stuff, which is a good thing.

" .... but my sole question has always simply been ...Does the IRS require that the employer notification of "3% match/2% contribution" or "salary reduction agreement (employee election to defer)" have to be written? And finally the answer to that question is NO." At the risk of beating a dead horse, I remain unconvinced that the IRS will buy this argument. Maybe they will - I don't know. I wonder what would happen if your client applied for a PLR on this issue - would the IRS say OK, or would they come up with a resounding NYET? If you actually end up negotiating with them on this case, I'd love to hear the results. Of course, in this specific case, it sounds like the question is moot anyway, since they never provided the written SPD anyway, so they are up the creek regardless of the outcome of the Notice issue. Keep us posted if you hear anything from the IRS on this. For any of you that may be attending ASPPA conferences, etc., this might be a good question to "pre submit" so the IRS can discuss from the podium? While I know such discussion is unofficial, it is helpful in determining their general opinion. Thanks.

It's now too late to file a 5558 for a calendar year 2004 plan year. Assuming plan and fiscal years are the same, do they have a tax extension for 2004? If not, then I think all they can do is hop to it and get the 5500 forms filed promptly under the DFVC program.

I have no trouble believing that the employer did walk through and tell everyone that he was adopting a plan, and that the employer would match dollar for dollar, of whatever the employee contributed, up to 3% of salary. Or something generally in that vein. I furthermore have no trouble believing that none of the three employees elected to defer. But here's the thing - I don't think that matters a hoot. I flat out do not accept the argument that the client "complied" with the requirements. Your arguments as to how the employer complied, and what constitutes an "arrangement" - etc., etc., are creative, and if I were in the client's shoes, or perhaps the shoes of the advisor from the vendor who may possibly be on the hook for something, I'd attempt to use the same arguments plus anything else I could come up with. There's no alternative - if IRS comes calling on this, the client either pays the penalty, or hires counsel to hopefully successfully negotiate a lower settlement. Or, on advice of counsel they may approach the IRS voluntarily in the hopes that this would improve the chances of reduced penalty. I'm just not all that sanguine about their chances - but maybe the Service would cut them some slack. They do in a surprising number of situations. Good luck!

Thanks! I'm so accustomed to these not being available until after the end of the year that I didn't look on the EBSA website.

Do you by any chance mean the 2004 5500 forms, where instructions were released in 2005? I'm not aware of 2005 forms or instructions being released yet - if they have, I'd appreciate any info you might have on where to view them. (I looked at the IRS forms & pubs section on their website - only 2004 listed) Thanks.

Depends. If the distribution is from an IRA, then you can only roll the otherwise taxable portion. As to how this would work if there are deemd IRA accounts, I'm not sure, as I haven't looked into this. Our plan documents do not allow rolling in after tax money, so we avoid these problems.

No. The 10 year averaging applies to certain lump sum distributions from qualified plans, but not to IRA's.

I'm assuming that this person is a party in interest for reasons OTHER than her simply being a participant, so that the relief in Section 7©(1) of the revised VFC program is not available? That being the case, I believe you have a prohibited transaction, with all normal penalties. It must be reported and corrected. EBSA has a online calculator now to assist a client with calculating the plan asset restoration amounts. But even if they are a small plan, and don't have an ERISA lawyer, I'd still recommend they engage one here.

Just for instance... IF the sole prop has any intention of hiring employees and doesn't want to mess with it. Possible additional document revision/confusion/fees. For example, Congress passes something specific to 401(k) only, which requires an amendment to be adopted. If sole prop isn't interested in using the (k) feature to start with, he may have to pay for an amendment to a provision he didn't need/want in the first place. There may be other reasons - this is all I could think of off the top of my head.

Rcline - I respectfully disagree. The deemed IRA can be either a "regular" IRA or a ROTH. See Section 2 of the IRS model amendment from Rev. Proc 2003-13 for a quick confirmation of this. P.S. - here's a copy of the language. REV-PROC, PEN-RUL 17,299Q-61, Rev. Proc. 2003-13, I.R.B. 2003-4, January 27, 2003. SECTION ___. DEEMED IRAs 1. Applicability and effective date. This section shall apply if elected by the employer in the adoption agreement and shall be effective for plan years beginning after the date specified in the adoption agreement. 2. Deemed IRAs. Each participant may make voluntary employee contributions to the participant's ___[insert “traditional” or “Roth”] IRA under the plan. The plan shall establish a separate ___[insert “account” or “annuity”] for the designated IRA contributions of each participant and any earnings properly allocable to the contributions, and maintain separate recordkeeping with respect to each such IRA. 3. Reporting duties. The ___[insert “trustee” or “issuer”] shall be subject to the reporting requirements of section 408(i) of the Internal Revenue Code with respect to all IRAs that are established and maintained under the plan. 4. Voluntary employee contributions. For purposes of this section, a voluntary employee contribution means any contribution (other than a mandatory contribution within the meaning of section 411©(2) of the Code) that is made by the participant and which the participant has designated, at or prior to the time of making the contribution, as a contribution to which this section applies. 5. IRAs established pursuant to this section shall be held in ___[insert “a trust” or “an annuity”] separate from the trust established under the plan to hold contributions other than deemed IRA contributions and shall satisfy the applicable requirements of sections 408 and 408A of the Code, which requirements are set forth in section ___[insert the section of the plan that contains the IRA requirements]. (Adoption agreement provisions) Section ___of the plan, Deemed IRAs: (check one) ___ shall be effective for plan years beginning after December 31, ___(enter a year later than 2001). ___ shall not apply.