Belgarath

I believe participant would qualify for the exemption from the 10% penalty tax, but I haven't looked it up to make sure, so I wouldn't trust my opinion just yet!

You can't roll the nontaxable portion of an IRA to a 401(a) plan. See 408(d)(3) as amended by EGTRRA Section 642.

Archimage - are you certain on this? I'm sometimes overly conservative on these questions - particularly with the DOL, but I'd have said that first, unless the participant is actually furnished the statement, at least annually, from the regulated financial institution, that you don't even necessarily pass the qualifying asset test. Admittedly, the investments are likely "held by" a regulated financial institution, but even if they pass this test, and are therefore qualifying assets, they wouldn't pass under the "participant directed account" exception to the SAR disclosure. Of course, the TPA could actually be the regulated financial institution, but if not, I think the SAR disclosure is required. Maybe I just worry too much... what do you think?

Are you asking for purposes of the Small Plan Audit Waiver requirements? If so, note that participant loans are not required to be reported on the SAR for this purpose.

Try 1.411(d)-2(d)(1). It's not perfect, but better than nothing. Also, IRS audit guidelines in IRS Announcement 94-101.

See 402©(8)(b), and 408(d)(3)(A)(ii).

FWIW - why not amend the plan in the other direction? In other words, instead of making the entire balance subject to J&S and spousal consent, why not create a "prior pension account" or whatever wording you want to use - make this account subject to J&S, spousal consent, etc? Then you can still have the profit sharing account money available for in-service withdrawals. Maybe I'm missing the point of what you really wish to accomplish, but this seems relatively simple, yet retains the flexibility for in-service without the spousal consent hoopla.

Rmeigs - thank you.

I'm not aware of any change. Doesn't make sense to me that they would ever be considered a "qualifying asset" - I'd be surprised if such a change were seriously considered, and even more surprised if it took place. Of course, my ability as a prognosticator is generally questioned by anyone who is sane, so I'd advise a second opinion...

1. Yes, but only if the "2 year period" has been satisfied. 2. No. Simple IRA's cannot accept rollovers other than from another Simple IRA.

I'd say it depends upon the terms of your contract with the client. I do not believe you can simply refuse to make payouts to participants who are entitled to them. But perhaps your contract specifies that you can cancel services for nonpayment of fees. In which case you wash your hands of the whole thing, and the Trustee is now responsible for payouts, recordkeeping, etc... I'd certainly check with your legal counsel first.

I'm not getting involved in the merits of the arguments for either side of this issue - there are some pretty strong opinions out there! I'm just interested to see if anyone knows of the CURRENT status of this issue? I saw the link provided by GBurns from ASPA on 12-19, but I've heard nothing regarding the current status. I'm assuming that there would be ASPA updates, etc., if anything had happened, but I though some of you folks might know something through unofficial contacts? Just curious. Thanks.

That's correct. There is an "ordering rule" for purposes of determining the taxable portion of a nonqualified distribution. And the nonqualified distribution is treated as coming first from contributions. Have your tax counsel refer to IRC 408(A)(d) and the accompanying Treasury Regulations.

I'm not sure. I'm not aware of a specific penalty under ERISA. However, ERISA 412(b) states that it is "unlawful" for a fiduciary to handle plan funds without being bonded. I believe it would also be a fiduciary breach under ERISA 409, which requires the fiduciary to be personally liable for any plan losses due to the breach. However, I don't see a specific loss here. The fiduciary could be removed (and for a small employer, being removes as fiduciary on your own plan might be more onerous than for a larger company) Also ERISA 502(l) lets the DOL assess a 20% civil penalty. But I believe that is 20% of the recovery amount. What this would be, I don't know, since I'm not sure that there would be any recovery. I've never actually seen a situation where any enforcement happened under this requirement. So I'm only speculating...

The contribution can be paid after the end of the plan year. As far as insurer flexibility, Merlin is correct - this is up to the individual company. Note, however, 1.412(i)-1(b)(2)(v), which allows additional time over and above the normal lapse period, assuming the insurance carrier will also allow it. We've done administration for at least one insurance carrier that allows this extra time, but they may be more flexible than most. The "lapse date" and hence the time allowed under the above referenced section could also depend upon whether the plan is BOY or EOY, and the anniversary date of the insurance policy(ies).

Agreed. Never had it happen. In nearly all cases, the participants who are partially vested are the NHC, and their forfeited amounts aren't generally worth filing suit, even if they do want to fight it, I'm guessing. Which brings up an interesting question, to which I don't know the answer. Suppose a participant does file suit? What can they collect? Are they limited to "equitable relief" or some such limitation, or can they collect punitive damages, etc.? Perhaps one of you attorneys can answer this. We always advise our clients to consult legal/tax counsel before making decisions of this nature anyway, as it makes no difference to us one way or the other whether they vest or not. So either they never consult with counsel (which is likely) or counsel has never had a problem with the approach.

Here's what we do in the situation you describe. We contact the employer, and tell them they have the option: make them 100% vested, or file the termination with the IRS WITHOUT 100% vesting, and see if the IRS comes back and requires it. Naturally, the employer says file without vesting. We've done stacks of these, and I think the IRS has only required the vesting in less than 1% of the cases.

Server crashed, I'll try again. I think they are fine to roll over without the pro rata treatment. IRC 402©(2), as amended by JCWAA 411(q), treats the distribution as being first attributable to the taxable portion of the distribution.

412(i) plans are a different breed than "normal" defined benefit plans. They are not subject to the 8-1/2 month minimum funding deadline that applies to regular pension plans. So the required dates for funding will be dependent upon the plan document, as well as the premium deadlines for the underlying annuity and insurance investments.

Under IRC 4972©(3), as long as the contribution is returned before the end of the 404(a)(6) period for the taxable year, no excise tax for a nondeductible contribution is imposed. Now, there may be a problem determining if this return of excess is allowable as a "mistake of fact." Technically, it probably isn't a mistake of fact. But the accountant could likely come up with some sheets showing botched calculations which would cover this problem. Given the circumstances, I suspect a pretty good argument could be made that this is a "mistake of fact." Given that this is a 401(k) plan, and that the IRS has standard options for fixing excess deferrals, I doubt this would ever get questioned. They probably wouldn't dig that deep. They haven't on the plan audits I've seen. Certainly, the employer should discuss with tax/legal counsel.

I'd treat as a 415 violation, which can generally be corrected under SCP. Appendix A(.08) of Rev. Proc. 2002-47 states that the correction can be made "using a method similar to that described under 1.415-6(b)(6)(iv)."

I can't give you a cite for this - it is only my opinion, in general, not knowing the specifics of timing, etc. Let's say the PPT occurred in 2002, and you are doing a 12-31-2002 valuation. The individual is rehired in 2003, and is immediately eligible. I'd say that since the PPT occurred in a prior year, you'd have to count him as 100% vested as of 12-31-2002. And this cannot then be taken away. If the PPT and rehire take place during the same plan year, then it seems tricker, and I don't have much of an opinion without thinking about it for a while!

FWIW - I called the IRS a couple of weeks ago, and received a return call last Friday. The IRS rep said that in the year they leave, you exclude them from all nondiscrimination testing, including rate group testing, EVEN if they receive a regular allocation based upon the plan's requirements. Since this is what we had decided to do anyway, it was some comfort to hear it from the IRS, even if not in an "official" release. I was so harried on Friday that I never thought to ask if the IRS was planning any written release of guidance.

The following excerpt is from IRS Announcement 94-101, and their audit guidelines. This is just an indicator that they might investigate more closely - I agree completely with Mike that there's a lot of gray area, and "facts and circumstances" determination. Also, I do not know if IRS has updated their audit guidelines for this issue. IRS-ANNCMT, PEN-RUL ¶17,097N-44, IRS Announcement 94-101, I.R.B. 1994-35, August 29, 1994., IRS plan examination guidelines , (Aug. 29, 1994) PART 01 OF 02. (2) Discontinuance of Contributions (a) IRC 411(d)(3) requires that, in the case of a plan to which IRC 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such discontinuance, to the extent funded as of such date, or the amounts credited to the employees accounts, must be nonforfeitable. (b) A determination that contributions have been discontinued and the date upon which such discontinuance occurred requires a consideration of all the relevant facts and circumstances. See Reg. 1.411(d)-2(d). © A discontinuance of contributions may occur even though some amounts are contributed by the employer under the plan if such amounts are not substantial enough to reflect the intent on the part of the employer to continue to maintain the plan. A discontinuance becomes effective, and full vesting will become applicable, not later than the last day of the taxable year following the last taxable year for which a substantial contribution was made under the plan. Note: If the employer has failed to make substantial contributions in 3 out of 5 years, and there is a pattern of profits earned, specialists should consider the issue of discontinuance of contributions.

Let's see...first, I don't think 1.410(b)-1 would apply, as it applies prior to 1994. Beyond that, I'm still groping. As far as the compensation question, FWIW, I'm of the opinion that the employer isn't necessarily required to take into account increases in pay. But, if they were contractually guaranteed, this might be a poor argument! Likewise, if a 3% raise was given across the board, to rank & file employees, it might be hard to justify denying it under USERRA. If a salaried employee, where raises are given based upon performance, whim of the employer, etc., then I think it would be reasonable not to assume an increase. As a rule of thumb, I'm of the opinion that you give the benefit of the doubt in favor of the employee. What's your opinion on the 70% test in the year in which military service begins? Suppose plan has 1000 hour/last day, but employee only works 700 hours. Do you exclude them? Or better yet, they leave with less than 500 hours. If they can't be considered "terminated" then I can't find statutory support for excluding them. And yet it doesn't seem reasonable to include them as not benefitting, and possibly cause employer to fail testing, when the employer must subsequently give them contributions if they qualify. Sort of a doubly-whammy on the employer. So it seems most reasonable to me to exclude them altogether. I just feel uncomfortable with this without some IRS/DOL guidance, or at least affirmation from some of the gurus out there.