Belgarath

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.

Nope - would have to be W-2. See Durando decision, as well as PLR 8716060. Probably other references as well...

I find that clients and their "advisors" often refuse to believe me when I tell them this. Refer them to ERISA 4041(e) if they do - that usually quiets them down!

Thank you, Carolyn. That's the same answer that a couple of us cameup with yesterday when discussing the problem. What we didn't resolve was the following - to get down to brass tacks, how do you include these people for the 70% test? 1. Do you exclude them altogether, even though they don't fall into a "statutorily excludable" category? In other words, do they fall into an "other" category which the nondiscrimination statutes didn't address, and you exclude them from both the numerator and the denominator? 2. Do you include them as eligible, but not benefitting since they do not receive a contribution? 3. Or, do you include them as eligible and as benefitting? Although #1 seems more reasonable from a common sense point of view, I'm just not sure how to approach this. I'd love to hear any opinions on this.

Right. They aren't eligible for EZ filing, unless they are spouses.

No rule that I'm aware of which specifically names these items, but it would be such an obvious violation of the fiduciary prudence rules that you might just as well surrender to the DOL in advance!

I found this thread interesting, as yesterday I was wrestling with the question as to whether to consider them "terminated" (with an asterisk) or not. It isn't merely an academic question - if they are actually terminated, subject, of course, to all subsequent reemployment rights under USERRA if they qualify, then they would also be eligible for a distribution. If they are NOT terminated, then it would be an impermissible distribution. The statute simply doesn't address these everyday administrative questions, so you are left to take your best guess at a proper interpretation. If you simply consider them terminated, like any other participant (until such time as they qualify for USERRA rights upon reemployment) then the issues generally become clearer - they are included in testing as applicable, they are eligible for a distribution, etc.) - but what about reallocating forfeitures? I would interpret this to be that no forfeiture occurs, since no break in service. Has anybody spoken with DOL/IRS officials about this issue? Any word on any guidance or opinion, either formal or informal?

Dave, I was clicking on the "new topic" button. I was in the general retirement plan section of the message boards, and couldn't post a "new topic." So I tried elsewhere, which evidently worked, although I have no idea how! So, could you kindly explain what is now the proper procedure if I wish to enter a new post under a particular area of the message boards? Thanks in advance.

I'm obviously doing something wrong. When I try to post a new thread, I get a reply "Sorry, you are not authorized," etc...... and it tells me to log in and enter my password. When I do, and try to start a thread, I get the same thing all over again. Never had this trouble before, but I'm completely hopeless as a computer user, so maybe someone can tell me how to use this new-fangled software to post a thread. Thanks!

Ok, and thanks much for the input.