Belgarath

Appleby - I'd argue that the code sections/regs you are quoting don't apply. I believe your reasoning is correct IF a minimum distribution is required. In other words, you clearly can't roll over a minimum distribution required under 401(a)(9) because such a required distribution isn't an "eligible rollover distribution." No argument there. However, the minimum distribution requirements in case of death occurring BEFORE the RBD (which clearly is the case here) are governed by 1.401(a)(9)-3. If you read the Q&A's under this section, there's no required distribution to a surviving spouse beneficiary in the year of death in the situation described, so the entire amount may be rolled over. It then falls under the IRA RMD rules as the IRA owned by the surviving spouse starting in 2005. At least that's how I see it.

I've always interpreted it same way as Mbozek, so I think in your situation the spouse can roll the entire amount. No excess contribution to the IRA for the 2004 rollover.

mbozek - While I like your idea of forfeiting from an administrative viewpoint, employers don't like it because once the money has been reallocated, the participant may show up and want their benefit, which the employer must restore. The employers would much rather get them out of the plan. And most employers couldn't care less if the ex-employee's funds escheat to the state eventually. Can't say as I blame them. As you correctly point out, employer is using uncompensated time to locate these folks, who can't be bothered to update a forwarding address. Question: while it would seem to be a reasonable approach (except perhaps to the DOL) to treat missing folks with cashout benefits the same as you can under FAB 2004-02 for terminating DC plans, (assuming you follow the mandatory search methods) I'd also think that this is risky. If the DOL wanted to allow this, they could have, but they specifically ducked the issue. So what are your opinions out there as to how this issue must be handled? What guidelines might one use to determine if someone is simply not responsive, or actually "missing?" What is the fiduciary obligation in terms of "searching" to make this determination? Anyone have DOL contacts to whom they might pose this question? And maybe I'm worrying over nothing. It's apparently permissible, after sending a distribution kit to last known address, to assume that a non-response is consent for an immediate distribution. So maybe the issue of "lost" participants doesn't arise unless the mail is returned with no forwarding address?

Agree with Blinky & AndyH - on #1, no can do. Re # 2 - this is a termination and establishment of a new plan. See ERISA 4041(e). #3 - certainly can't do it retroactively. But I honestly can't say if it is doable or not. I'd almost think that it might be ok for 2004, but I'd have to do a lot of checking before I'd dare to venture a real opinion - I've never seen it done, but that doesn't mean it can't be. I'm not necessarily sure what the advantage would be. #4. What Blinky said.

I have one issue I'm finding very confusing on this. If a participant doesn't make an election and you have mandatory cashouts, you have to do the mandatory rollover. So far so good. However, under the "miscellaneous" portion of the overview, it says that issues regarding missing participants are beyond the scope of this regulation. So how do you know if a participant is merely "nonresponsive" - in which case you do a mandatory rollover, or if they are "missing" and therefore beyond the scope of the regulation? And what do you do if they are determined to be "missing?" This may be much simpler than I'm making it out to be.

No RMD is required. See 1.401(a)(9)-3, Q&A-1.

Gburns - I suspect that he means the recent IRS memo regarding use of short term NHC to receive minimal contributions in order to pass testing. Not that it says that they are giving NHC too much - just the opposite in fact. http://www.irs.gov/pub/irs-tege/directive.pdf

1. Agree. IRC 4972©(4). This isn't limited to just the final year contribution, by the way. 2. Agree. Sleep well!

No, I'm not, but our EA is, so I'll get a copy from him. Thank you very much for this information!!

You have to hand it to those folks at the IRS - they sure know how to take minor things and blow them up into huge problems. We've had 3 cases in the last couple of weeks where the plan administrator has made distributions, done mandatory withholding, then tried to submit the withholding and had problems. First of all it won't go through electronically since they are using the TIN for the plan. (This is nothing new). Then they file with the 8109 coupon using the TIN. All 3 trustees have then been told that the number is not valid since has not been "active" in the last 3 years. On one case, the IRS automatically changed the number to the EIN for the business. On another, the accountant decided to change to the EIN and file under that. On the third case, the Administrator is looking to us for guidance, do they apply for a new TIN? She told the IRS reviewer that the number is active, they have had it for a long time and it has appeared on the 5500 forms, (Schedule P) - he replied that he didn't know anything about 5500 forms, he doesn't do pension plans. Has anyone else encountered this? If so, what did you do? This is the first time this has come up for us - appears to be something new. It isn't uncommon for a small plan to go 3 years without a distribution, which apparently makes the TIN "inactive" by the standards of the knuckleheads at the IRS. We can have them apply on-line for a new TIN, but I'm uncertain what other problems this may create. And at the very least, it can cause administrative and recordkeeping nightmares. Sheesh! Any suggestion for somone at the IRS to whom I should forward these concerns, stated a bit more diplomatically... Thanks!

Unfortunately, no.

Frogman - one thing to keep in mind - which you probably already have! You need to consider very carefully how far you want to pursue this. If you complain to the DOL, and they investigate, based upon the limited information available it seems reasonably certain that you will receive additional earnings. Now, you don't mention how much you deferred, but it's certainly possible that you are talking about a relatively small amount of earnings. You are then faced with the issue of whether a couple of hundred dollars in earnings (or maybe less?) is worth jeopardizing your relationship with your employer. There's a big difference between pursuing your administrative remedies under the SPD, as Pax mentioned, and calling on the big dogs of the DOL. Some of the information given to you here may enable you to present a reasonable argument that the employer will accept, without undue unpleasantry. I'm by no means counseling you not to fight for your rights here, nor am I advocating a big fight. I'm merely suggesting that you weigh the pros and cons of any action. The simple fact is that in most cases, the employer holds all the cards, and if they are vindictive types, then calling in the DOL will almost guarantee future misery for you. I've seen it happen. Sometimes it is worth it (especially if you have no intention of long term employment there) and sometimes it isn't. Best of luck however you go about it.

As a TPA, we're not really all that familiar with the investment companies available in the marketplace. Has anyone heard of a reputable vendor or vendors who will be handling these accounts - for ongoing plans and terminating DC plans? I just sent to PenChecks for some information - anybody know of others? And will they accept accounts of <1,000? We're just looking for the names of a couple of vendors so that our clients will at least have a starting place. Thanks.

I don't have any statistics - only that the vast majority do not choose partial distributions. I'm guessing 98% for us. But we don't formally track the percentage. This may vary substantially depending upon the demographics of the group and plan. As far as administrative expense, the DOl recently said it was ok to charge the per participant fees to the participants' accounts, as long as they have terminated and been given an opportunity to receive their distribution, so I'm not sure the fee issue is necessarily a big one? I believe this was DOL FAB 2003-3, but I don't have my copy handy.

Assuming he isn't a "5-percent owner" then no. He hasn't reached his required beginning date under 1.401(a)(9)-2.

I assume that as a controlled group, they are already contributing for B under the SEP? Assuming a contribution is made for 2004? They could terminate the SEP for 2004 and establish a 401(k) deferral only for all participants, perhaps? But realistically, they'd probably just want to do this for 2005. I don't think they can do anything special for this one person only, although if there are enough NHC there may be possibilities for doing something fancy. Some of the design wizards here may be able to suggest something clever if you can provide number of NHC and HC.

FWIW (This affirms what JanetM just told you) The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: A profit sharing plan provides that each eligible participant who is credited with 1,000 hours of service and who is employed on the last day of the plan year is entitled to receive an allocated share of the discretionary employer contribution. The plan sponsor intends to amend the plan to change the allocation formula, and the amendment could result in smaller allocations for some participants. To avoid any potential violation of the anti-cutback requirements, when should the amendment be adopted? a. Before any participant is credited with 1,000 hours of service? b. Before the last day of the plan year? c. Before the employer contribution is actually deposited to the plan? d. Within 2½ months after the end of the plan year? Response: In Technical Advice Memorandum (TAM) 9735001, issued on August 29, 1997, it was concluded that a participant’s right to an allocation is protected under Code section 411(d)(6) once the participant has satisfied all of the conditions necessary to receive the allocation. Therefore, the plan amendment would have to be adopted prior to the time that the participant satisfies the conditions necessary to receive the allocation. In this example, because the participant must be employed on the last day of the plan year to receive an allocation, the amendment could be adopted anytime prior to the last day of the plan year.

1:25 am? Is that cute kid in your picture keeping you up at night, or are you merely insane? The thought of thinking about qualified plan issues in the wee hours is too horrifying to contemplate!

Hi Blinky - you're absolutely right - I stated this very poorly. What I was trying to get across was that even with a conservative approach, none if this matters unless you are trying to make a deductible employer contribution to the DC plan - since even if you consider them to have "overlapping" participation, (7)(A) allows you to contribute the full DB cost even if greater than 25%. Your comment states it much more succinctly and accurately. Instead of fishing, I'll cut bait.

I agree with Blinky that there appears to be some confusion on the precise question being asked. Here's how I see it. If you have a DC and a DB plan, and no contributions other than employee deferrals are made to the DC plan, then your deductible limt under 404(a)(7)(A) will be the GREATER of 25% or the required funding for the DB plan. Where you run into potential problems is when your required funding for DB plan exceeds 25%, and you STILL want (or need) to make an employer contribution to the DC plan. To amplify a bit as to how this applied to the bizarre situation we ran into - Employer had both DB and PS plan. Plans were set up so that certain employees were excluded in both plans, so that there was NO overlapping participation. Then, due to a change in job status, a participant who had previously received contributions in the PS plan now became ineligible for further contributions in PS plan, but became eligible and covered in DB plan, which had a required contribution in excess of 25%. So the question arose as to whether there was "overlapping participation" which would preclude a deductible contribution to the PS plan. The client's tax counsel took a look at it and determined not to contribute to the PS plan based upon the uncertainty as to whether it would be deductible or not. Sal has a good writeup as Blinky mentioned - worth reading, and continues for a few pages beyond the deferral only question.

I'm not sure that it is necessarily good advice. It's conservative advice - you certainly can't get in trouble with the IRS by choosing this more conservative route. Conversely, the employer could lose out on a substantial, legitimate deduction if the IRS believes that it is ok. I should have mentioned that I wouldn't ever advise the client - I'd give him both sides of the argument, and tell him to consult tax/legal counsel to make the determination. We had a client with a similar set of circumstances, (although somewhat more convoluted) and the payroll was such that the PS contribution was around 200,000. When the client reviewed with tax counsel, they determined NOT to go ahead with a PS contribution.

The IRS has flip flopped on this one like a Blinky out of water so many times, that I wouldn't trust any answer from the podium. Being of an essentially conservative bent on such issues, I'd wait for something official before trusting that it is ok to "damn the torpedoes, full speed ahead."

Even a lot of the old SAR/SEP's didn't end up being "noncontributory." If they used the 5305A-SEP model, and any key employee deferred, the plan was deemed top heavy and minimum contributions were required for the nonkeys. I saw a fair number of people get shocked on this one.

While I agree that it is wise not to provoke the IRS, (and I suspect astonewall was using this for our reading pleasure, and wouldn't necessarily tell the service that they were inane), does it necessarily matter? My understanding is that there is an automatic abatement of the second tier tax (see IRC 4961) IF you correct it within the correction period under IRC 4963(e). In this case, you have 90 days after the IRS mails the notice of deficiency. So in spite of the fact that folks shouldn't deliberately confront the tiger in his lair, it doesn't remove your correction and abatement remedies available under the law. Of course, they might just then decide to audit your plan, etc... - so MGB's advice is very sound! I do agree that this is more of an annoyance than a real problem - the problem has been corrected, and you just have to prove that to the IRS. Again.

If I were informed that a participant may be going through a divorce, I would notify the Plan Administrator. But determining whether or not to allow a distribution is a fiduciary decision, and we are MOST careful to avoid this. If the Plan Administrator subsequently instructed us to process a withdrawal/distribution, we would do it.