Belgarath

Thank you. In one way, this makes me feel a lot better - there are a lot of different opinions on this garbage, and not a lot of concrete answers, so maybe I'm not as stupid as I think. I'll count on the rest of you to be charitable in this regard... On situation # 1, we never recommend a refund under mistake of fact. But we do tell them to consult their legal counsel, and if counsel advises them to go ahead, then that's ok with us. I will say that this situation seems probably defensible - if you multiply 2 times 2 and get 6, as we've all done when stressed, it would seem to qualify. Re # 2, reading the various comments, it does seem as though the IRS has a fairly strong bias against refunding to the participant. (Not terribly rational, IMHO) but they hold all the cards. The link you attached was very helpful. I'm inclined to agree with Mike Preston, who doubted if the IRS would actually do anything if you went ahead and refunded. But, if you did jump into the deep end and go ahead and refund, that still leaves the open question on how to handle the match and earnings?

I would say yes. See attached: 29 CFR 2580.412-6 - Determining when ``funds or other property'' are ``handled'' so as to require bonding. Section Number: 2580.412-6 Section Name: Determining when ``funds or other property'' are ``handled'' so as to require bonding. -------------------------------------------------------------------------------- (a) General scope of term. (1) A plan administrator, officer, or employee shall be deemed to be ``handling'' funds or other property of a plan, so as to require bonding under section 13, whenever his duties or activities with respect to given funds or other property are such that there is a risk that such funds or other property could be lost in the event of fraud or dishonesty on the part of such person, acting either alone or in collusion with others. While ordinarily, those plan administrators, officers and employees who ``handle'' within the meaning of section 13 will be those persons with duties related to the receipt, safekeeping and disbursement of funds, the scope of the term ``handles'' and the prohibitions of paragraph (b) of section 13 shall be deemed to encompass any relationship of an administrator, officer or employee with respect to funds or other property which can give rise to a risk of loss through fraud or dishonesty. This shall include relationships such as those which involve access to funds or other property or decisionmaking powers with respect to funds or property which can give rise to such risk of loss. (2) Section 13 contains no exemptions based on the amount or value of funds or other property ``handled'', nor is the determination of the existence of risk of loss based on the amount involved. However, regardless of the amount involved, a given duty or relationship to funds or other property shall not be considered ``handling'', and bonding is not required, where it occurs under conditions and circumstances in which the risk that a loss will occur through fraud or dishonesty is negligible. This may be the case where the risk of mishandling is precluded by the nature of the funds or other property (e.g., checks, securities or title papers which can not be negotiated by the persons performing duties with respect to them). It may also be the case where significant risk of mishandling in the performance of duties of an essentially clerical character is precluded by fiscal controls. (b) General criteria for determining ``handling''. Subject to the application of the basic standard of risk of loss to each situation, general criteria for determining whether there is ``handling'' so as to require bonding are: (1) Physical contact. Physical contact with cash, checks or similar property generally constitutes ``handling''. However, persons who from time to time perform counting, packaging, tabulating, messenger or similar duties of an essentially clerical character involving physical contact with funds or other property would not be ``handling'' when they perform these duties under conditions and circumstances where risk of loss is negligible because of factors such as close supervision and control or the nature of the property. (2) Power to exercise physical contact or control. Whether or not physical contact actually takes place, the power to secure physical possession of cash, checks or similar property through factors such as access to a safe deposit box or similar depository, access to cash or negotiable assets, powers of custody or safekeeping, power to withdraw funds from a bank or other account generally constitutes ``handling'', regardless of whether the person in question has specific duties in these matters and regardless of whether the power or access is authorized. (3) Power to transfer to oneself or a third party or to negotiate for value. With respect to property such as mortgages, title to land and buildings, or securities, while physical contact or the possibility of physical contact may not, of itself, give rise to risk of loss so as to constitute ``handling'', a person shall be regarded as ``handling'' such items where he, through actual or apparent authority, can cause those items to be transferred to himself or to a third party or to be negotiated for value. (4) Disbursement. Persons who actually disburse funds or other property, such as officers or trustees authorized to sign checks or other negotiable instruments, or persons who make cash disbursements, shall be considered to be ``handling'' such funds or property. Whether other persons who may influence, authorize or direct disbursements or the signing or endorsing of checks or similar instruments will be considered to be ``handling'' funds or other property shall be determined by reference to the particular duties or responsibilities of such persons as applied to the basic criteria of risk of loss. (5) Signing or endorsing checks or other negotiable instruments. In connection with disbursements or otherwise, any persons with the power to sign or endorse checks or similar instruments or otherwise render them transferable, whether individually or as co-signers with one or more persons, shall each be considered to be ``handling'' such funds or other property. (6) Supervisory or decision making responsibility. To the extent a person's supervisory or decision making responsibility involves factors in relationship to funds discussed in paragraph (b)(1), (2), (3), (4), or (5) of this section, such persons shall be considered to be ``handling'' in the same manner as any person to whom the criteria of those paragraphs apply. To the extent that only general responsibility for the conduct of the business affairs of the plan is involved, including such functions as approval of contracts, authorization of disbursements, auditing of accounts, investment decisions, determination of benefit claims and similar responsibilities, such persons shall be considered to be ``handling'' whenever the facts of the particular case raise the possibility that funds or other property of the plan are likely to be lost in the event of their fraud or dishonesty. The mere fact of general supervision would not necessarily, in and of itself, mean that such persons are ``handling.'' Factors to be accorded weight are the system of fiscal controls, the closeness and continuity of supervision, who is in fact charged with, or actually exercising final responsibility for determining whether specific disbursements, investments, contracts, or benefit claims are bona fide, regular and made in accordance with the applicable trust instrument or other plan documents. (i) For example, persons having supervisory or decisionmaking responsibility would be ``handling'' to the extent they: (a) Act in the capacity of plan ``administrator'' and have ultimate responsibility for the plan within the meaning of the definition of ``administrator'' (except to the extent that it can be shown that such persons could not, in fact, cause a loss to the plan to occur through fraud or dishonesty); (b) Exercise close supervision over corporate trustees or other parties charged with dealing with plan funds or other property; exercise such close control over investment policy that they, in effect, determine all specific investments; © Conduct, in effect, a continuing daily audit of the persons who ``handle'' funds; (d) Regularly review and have veto power over the actions of a disbursing officer whose duties are essentially ministerial. (ii) On the other hand, persons having supervisory or decisionmaking responsibility would not be ``handling'' to the extent: (a) They merely conduct a periodic or sporadic audit of the persons who ``handle'' funds; (b) Their duties with respect to investment policy are essentially advisory; © They make a broad general allocation of funds or general authorization of disbursements intended to permit expenditures by a disbursing officer who has final responsibility for determining the propriety of any specific expenditure and making the actual disbursement; (d) A bank or corporate trustee has all the day to day functions of administering the plan; (e) They are in the nature of a Board of Directors of a corporation or similar authority acting for the corporation rather than for the plan and do not perform specific functions with respect to the operations of the plan. (7) Insured plan arrangements. In many cases, plan contributions made by employers or employee organizations or by withholding from employee's salaries are not segregated from the general assets of the employer or employee organization until payment for purchase of benefits from an insurance carrier or service or other organization. No bonding is required with respect to the payment of premiums or other payments made to purchase such benefits directly from general assests, nor with respect to the bare existence of the contract obligation to pay benefits. Such arrangements would not normally be subject to bonding except to the extent that monies returned by way of benefit payments, cash surrender, dividends, credits or otherwise, and which by the terms of the plan belonged to the plan (rather than to the employer, employee organization, insurance carrier or service or other organization) were subject to ``handling'' by plan administrators, officers or employees.

Grrr! I'm glad I don't work with these darn things (401(k) plans) much! This will undoubtedly seem like a foolish question to those of you who do, but here goes... Had a couple of questions come up which are fortunately hypothetical. Of course, I find that most of the hypothetical questions subsequently turn out to be real. 1. Suppose you have an employer who incorrectly calculates a QNEC or a match, and contributes too much. This could be forfeited and used to reduce future cost, I believe. But suppose they don't want to do this? Can this be refunded to the employer under the "mistake of fact?" PLR 9144041 does list a mathematical error as one of the items that could be construed as a mistake of fact. I'm always squeamish about refunding money to the employer if it can be avoided, but it seems as though probably ok in this situation. Opinions? 2. Ineligible participant is allowed to defer. Employer does NOT want to use the Rev. Proc. 2003-44 Appendix (B) method of retroactively amending plan to include the employee. So attempting to find a "reasonable" method of correction, it would seem that you could forfeit the deferrals and have payroll adjust the next check to the employee. Or, the plan could probably distribute directly to employee. Question is, what to do with any match and earnings on the improper deferral, especially if this isn't discovered for a while? Does the normal prohibition against keeping in an unallocated suspense account (1.401(m)-1(e)(1)(iii) as an advance apply to this situation?

Tom, here's what we are complaining about. 2003. 1986. (1978 Bucky bleeping Dent). 1975. 1967... Need we say more? Although you Detroit fans have tasted the bitter dregs of defeat for a little while, we BoSox (rhymes with BoTox, huh? How ironic) fans have endured agony beyond the scope of your worst nightmares. If the Yankees would move to Los Angeles, which after all isn't really part of the United States, then it wouldn't be so bad, but having them in our division is simply rubbing salt into the open sores. I refuse to watch the Lord of the Rings movies, as the books were some of the greatest ever written and I don't want to spoil them, but attempting to quote from memory the words of Gloin at the Council of Elrond, "Alas, when will come the day of our revenge?"

A business has a safe harbor nonelective 401(k). Does NOT use the "wait and see" approach. Has not yet contributed the 3% for 2003, and has already provided the safe harbor notice for 2004. Business is going down the toilet. First advice is for him to contact his legal counsel. But for my own edification, not being versed in bankruptcy issues, there are a few issues I'd like to explore briefly. First, for the 2003 nonelective, this is still required, but I assume the plan has to "stand in line" as a bankruptcy creditor? Are plans usually given priority in such a a situation? For 2004 - since there is no money, client wants to relieve the 3% nonelective obligation, insofar as that is possible. Only way I can see to avoid this is to terminate the plan - which should allow 3% nonelective obligation only on the compensation earned up to the termination date. I think. IRS Notice 2000-3 is helpful if the safe harbor is a match, but on the nonelective, I can't find much to enlighten me in this situation. I don't find any authority that simply allows him to "revoke" the 3% nonelective by simply notifying the employees that that is what he is going to do. Any thoughts? Thanks.

Effen, your comment reminds me of the story of the steeple painter. As he was 2/3 of the way done, he noticed he was getting low on paint. Since the climb down to the ground was an unattractive option, he simply dumped in some thinner. However, as he was nearing 90% completion, the same thing happened. So he made it thinner yet.When he was finished, the results were predictably less than satisfying, but he decided that nobody would notice. As he prepared to descend, he heard a voice out of the heavens, saying, "Repaint, and Thin No More!"

SUPPOSEDLY, according to an ASPA release last week, the 412(i) regs will be released prior to the Los Angeles Benefits Conference next week. Seems likely that it will be true this time, but just in case, I won't deprive myself of oxygen while I'm waiting...

I'll throw in another reason, which isn't uncommon in the small business marketplace. In many states, IRA protection in the event of bankruptcy or lawsuits is limited. If the money is in a DB plan, then there is generally ERISA protection. (I say generally because there is constant sniping at the one person plans) This can be a very big motivation for some folks.

Thanks. You know, I don't work with 401(k) administration on a nuts and bolts basis. But I have a great deal of respect for those who do. Taking all of these regulations, and translating them into real life to handle all the bizarre screw-ups that happen at the employer (and TPA) level, then having to reconcile them with various funding and accounting platform administrative restrictions, borders on the insane. It isn't so bad when everything stays within the pigeonholes, but once you get outside of that, look out!

I THINK I'm groping toward a proper understanding of this, but since there are lots of 401(k) experts on these boards, thought I'd check. Have I got this right: Suppose the HC deferred 6,000. There's a 50% match, so there's a 3,000 match. Once the ADP test is run, it is determined that 1,000 must be distributed to the HC. (Assume no catch-up, no earnings, and that the correction method will be distribution) This leaves 500 in match that must also be corrected. If I'm reading the regs correctly, this CANNOT remain unallocated and placed in suspense to be used as an advance - it must be used as a forfeiture. Have I got this right? Or is there an alternative, assuming the distribution correction method was used. That is how I read the regs - seems rather foolish to me, but I haven't bothered to consider whether there is a good reason for it or not. Maybe there is! Thanks in advance.

I'm assuming the partner is a plan participant. If not, then it was, and still is, a prohibited transaction. Assuming he is a participant, then no, there is no prohibited transaction. All participants in a plan are parties in interest. The exemption then applies to all participant loans if they meet the requirements. And as you mentioned, EGTRRA removed this restriction for the partners.

FWIW - I understand that either at or prior to the Los Angeles Benefits Conference at the end of this month, the IRS will be releasing information/guidance on whether they agree or not with the DOL on the payment of plan expenses from plan assets.

As Mbozek states, the plan termination filing forms list the reasons that the IRS uses as a kind of "safe harbor." In addition, since it is a PS plan, it is my understanding that the IRS generally won't challenge the permanency issue if it has been in force for at least 2 years, since under a PS plan you can have withdrawals under the "2 year rule" anyway. My knowledge of this is purely hearsay - I'm not aware of any ruling or citation that supports this, although maybe someone else is. We've never had a PS plan termination questioned for permanency.

That's ok, I'm not entirely sure I understand my response either! I really was thinking of DC plans. So ignore my initial response...

Did the spouse really opt out? Just because there was a waiver of J&S doesn't necessarily mean that the spouse gives up all beneficiary rights to any payments that aren't J&S.

Just wanted to see if I'm off base here. It appears that since the new IRC 7528 was added and EGTRRA Section 620 was repealed, the waiver of user fees for determination letters (including plan termination) in certain circumstances for small employers is now gone, and that any such determination letters will be subject to the user fee schedule in 2004-8. (Effective 1-20-04) Agree/disagree? Comments? Thanks. Ok - just looked at the actual code section, and not just the Revenue Procedure 2004-8. Even though EGTRRA 620 was repealed, the new IRC 7528 does retain the waiver of user fees...

Yeah, I'd about reached that point. It's just that after being in this business long enough, I'm always willing to consider that I'm wrong on something I think I know - hence I try to investigate first! Thanks.

I agree with Sal. The Conference Committee Report specically discusses both participants and beneficiaries when discussing the reason for the change and the explanation of provisions, so I believe the inclusion of beneficiaries in the 411(d)(6)(D) addition was intentional.

Date tax return is due (plus extensions). IRC 404(a)(6). There's no special deadline just because it is top heavy - deadline for a top heavy contribution is same as deadline for a regular employer contribution.

We don't handle the bonding - we just tell them that they have to be bonded, and require that they confirm company and amount. However, it seems to me to be common sense that each Trustee would have to be covered for the full amount of the required bond. Generally, at least in small plans, one Trustee can abscond/misuse all the funds - there's no plan restriction that limits the withdrawal amount per Trustee. So if you have 1 million in plan assets, I'd say that EACH Trustee must be bonded for minimum of 100,000. On another note, I did see something a couple of weeks ago that indicated Trustee fidelity bond prices were going to skyrocket - the Enron effect - the bonding companies are scared of getting burned.

We have someone asserting that for self-employed, the 5500 MUST be prepared using the modified accrual method. But no one can find any guidance or instruction that says this. Has anyone ever heard this, or have a reason why someone would think this? I've checked 5500 instructions going back years and years, and can find no such requirement. Thanks.

Some of the attorneys here can undoubtedly give you a better answer, but I suspect it is more of a facts and circumstances test. I'm unaware of any ERISA section that specfies exact penalties, in general, for a late distributiion of the SAR. However, ERISA 501 provides for monetary and criminal prosecution if the disclosure requirement is willfully violated. ((5,000 and up to 1 year in prison, or up to 100,000 if corporation rather than individual.) I have no experience with this, but I'd be surprised if this rather drastic step was taken unless the DOL was trying to nail them for something else. Other than that, I suppose a participant might bring suit, but again, I'd be surprised if this step was taken very frequently, unless there's something else going on. I'd guess, and it's only a guess, that a good faith error, where they are distributed once the lack of distribution has been discovered, probably wouldn't generate penalties. I personally have never seen a case where penalties have been imposed, but that's probably because most clients/advisors choose to comply rather than risk a firsthand experience.

A document can exclude key employees from receiving top heavy. BUT, if it does not, then you cannot exclude an employee who has satisfied initial plan eligibility requirements who is employed on the last day of the plan year, regardless of hours. See 1.416-1, M-10.

Depends upon what penalties you are talking about. There might be withdrawal charges or something. However, assuming you are talking about the 10% premature distribution penalties, one of the exceptions under 72(t) is for disability, within the meaning of subsection (m)(7).

From ASPA: As we informed you on December 12, in ASAP 03-28, the Texas IRS office announced in a newsletter that they would begin to reject Forms 2848 filed by unauthorized representatives beginning in January. Since then, we have had several meetings/conversations with officials in the Employee Plans (EP) division of the IRS to discuss the significant ramifications of this proposed change in policy. We have discussed several possible solutions/alternatives to deal with this issue, including a delayed effective date to cover the current determination letter process as well as a more permanent solution to allow TPAs to continue to represent client plans through future determination letter requests. EP officials are clearly sympathetic to the concerns that we have raised and they have been discussing these concerns with the Office of Professional Responsibility, which is in charge of Form 2848. Although no final decisions have been made, we are optimistic that these issues will be resolved in a reasonably favorable manner. We hope to have a final answer from the IRS fairly soon. Although we would have preferred to have had a more definitive answer for you, we wanted to let you know as much as possible before the holidays to help allay any concerns. Happy holidays and best wishes for the New Year. Brian Graff, Esq. ASPA Executive Director