Belgarath

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

You may have even mets your mixtaphors. Hard to tell at this point. I agree that it would be better if no blood is spilled. One of the things I enjoy about these boards is the creativity of the questions/approaches - I learn a lot, and even though I frequently disagree, I respect the opinions. It's good once in a while for someone to point out that the Emperor isn't wearing any clothes, as long as the pointing is done with blunt instruments rather than sharp edges as you have noted. Happy Holidays to all!

Gotcha. Thanks!