Belgarath

Most of the plans I've seen define a termination of employment as a "Distributable Event." Although subsequent reemployment may prevent a break in service, these plans generally do allow the distribution in the situation you've described. Does the plan involved specifically prohibit a distribution in this situation? If not, then I wouldn't think there is any problem.

This question can get a little tricky depending upon the details. I'm assuming from your post that the participant terminated employment in 2000. I'm also assuming that the cure period ended 1-31-01. If this plan document is like most that I have seen, there would have been a deemed distribution and an immediate offset in 2001, which should have been reported on a 1099 for 2001. If there was an offset as mentioned above, then no further interest would accrue after the offset. When she takes the balance of her distribution (3,000) in 2002, it would have the mandatory 20% withholding if not a direct rollover, and a 1099 would be issued for 2002. This is further complicated by the fact that the final loan regs weren't final back then, so there were a lot of different interpretations and procedures by employers, trustees, and TPA's.

I agree with kjohnson. Although I may have missed something, my reading of 1.411(d)-4 does not indicate that the timing of a right to receive an optional benefit can be reduced or eliminated, except as provided. There's an example in Q&A 2 which allows only a de minimis change in the timing, and specifically mentions in-service withdrawals. We're treating in-service withdrawals as a protected benefit, which cannot be eliminated (except for benefits accrued after the amendment, of course)

It seems as if there are at least a couple of different situations to consider. 1. Suppose you have a cross tested PS plan only. Further suppose that you have a couple of participants who dropped below 1,000 hours, so are not eligible for a "regular" allocation of the employer contribution, but are eligible for a top-heavy minimum. Must they receive a Gateway contribution? It seems to me that they must, as under 410(B)-3, they are employees benefitting under the plan if it is a DC plan (not a 401(k) or (m)) and they receive an allocation taken into account under 1.401(a)(4)-2©(2)(ii). A top heavy contribution is not excluded under 1.401(a)(4)-2©(2)(ii). So although they do not receive a "normal" cross tested allocation, they must receive Gateway. And by the way, some people assume that Gateway is 5%. Although in reality it usually works out that way, it is actually the lesser of 5% or 1/3 of the highest allocation to a HC. 2. If you have a combined 401(k)/cross tested PS plan, where employees are eligible under the 401(k) portion, but have not satisfied eligibility for any employer contribution in the PS portion. Now this situation is different. Since 410(B)-7 provides for mandatory disaggregation, then it seems that no Gateway contribution could be required for the PS portion of the contribution for those employees who were excluded. If there were participants who were receiving a top heavy minimum in the PS portion, then they would have to receive Gateway.

I agree with mbozek. We would never handle something like this in such a manner, unless specifically instructed to (in writing) by the plan sponsor. Most plan documents grant the Trustee/Plan Administrator the power to interpret the document provisions, and administer the plan accordingly. At the very least, if I were the participant, I'd hire an attorney to see about a suit, and I'd complain to the DOL. As a plan sponsor, I'd think it was a pretty poor risk to follow the TPA's interpretation.

You are correct - Schedule A is not required when filing an EZ.

I agree with Pax. Although there isn't any specific guidance, since the alternate payee is treated as a beneficiary of the plan for 415, and since beneficiaries are included in the top heavy test, then it would seem logical to include the account balance inthis situation. (although I can see why people would argue against it) Also, as a practical matter, since this "distribution" would be for reasons other than separation from service, death, disability, or termination fo the plan, then wouldn't you have the 5-year lookback, at a bare minimum, even if you disagree with including this balance? I think you are stuck with counting it. I would hope that the IRS might come out with some guidance on this. Maybe someone can send this in as a question for the ASPA conference this fall?

b2kates - I just had to look into this for another purpose. According to the Joint Committee on Taxation technical explanation report, it is Section 401 of the Act.

I've got a rather unusual question for some of you attorneys out there. We have a client who has a life insurance policy in his pension plan. (and I don't want a debate about life insurance in qualified plans, please!) The client wants to purchase a new life insurance policy, within the plan, with another company. But they don't want to surrender and transfer the money to the new policy, because doing so would cause the new policy to be in MEC status. (And they know that MEC status doesn't make any difference while in plan, but they plan to purchase it from the plan in a couple of years.) What they are doing, on advice of counsel, is to do a 1035 exchange from company A to company B. Now, I'm not aware of anything in Section 1035 which says it CANNOT be used in a qualified plan. But I'm rather concerned that the act of assigning the policy to company B, even though part of an integrated 1035 transaction, might be considered a prohibited transaction as an impermissible assignment? Am I worrying about nothing? Any thoughts on this whole issue? Thanks.

For DC plans, the EGTRRA increased Section 415 limit is for Limitation years beginning 1-1-2002 or later. So in your case, it is 25%/35,000. The EGTRRA compensation limit is for Plan years beginning 1-1-2002 or later for benefit and allocation purposes, for fiscal years beginning 1-1-2002 for deduction purposes. This can get confusing if your plan, fiscal and limitation years years don't coincide.

Thanks Mike. I'm not involved with 1099's, so I didn't know diddly, and this helps.

Anybody know anything about these? I briefly skimmed the 1099 instructions and nothing jumped out at me, but I could have easily zipped right by. Basically, I wanted to find out if these can be filed electronically by the payor, and if so, what documentation still has to be sent to the participant. Thanks!

This is starting to get confusing. Did the owner receive W-2 income or not? If so, then a contribution can be made (or must be made if a pension plan as opposed to a profit sharing plan) to the profit sharing plan. Whether all or only a portion of the contribution is currently deductible is a separate question, which their CPA should be able to answer after doing some research. As I said before, I don't know the answer, but Archimage's answer seems right to me.

Hi Mike - no, I meant the more than two loan limit. There's no 3 loan limit that I saw in Q&A-20. If two loans have already been made, the third is a deemed distribution. The following is an excerpt and example - is there something else going on I don't know about (very possible!)? PROP-REG, PEN-RUL ¶20,249, IRS proposed regulations: Plan loans: Qualified plans: Refinancing: Multiple loans.-- , (July 31, 2000) (3) Multiple loans. For purposes of section 72(p)(2) and this section, a loan to a participant or beneficiary shall be treated as a deemed distribution if two or more loans have previously been made from the plan to the participant or beneficiary during the year. This limitation applies on the basis of a calendar year unless the plan applies this limit on the basis of the plan year or another consistent 12-month period. PROP-REG, PEN-RUL ¶20,249, IRS proposed regulations: Plan loans: Qualified plans: Refinancing: Multiple loans.-- , (July 31, 2000) Example 3. (i) A participant with a vested account balance that exceeds $100,000 borrows $20,000 from a plan on January 1, 2005 to be repaid in 20 quarterly installments of $1,245 each. On March 31, 2005, when the first installment is due, the participant receives a second loan equal to $1,245, with that March loan to be repaid in 20 quarterly installments of $78 each. On June 30, 2005, when the second installment is due on the January loan and the first installment is due on the March loan, the participant receives a third loan equal to $1,323 (which is the sum of the $1,245 installment and the $78 installment then due), with that June loan to be repaid in 20 quarterly installments of $82 each. On September 30, 2005, when the third installment is due on the January loan, the second installment is due on the March loan, and the first installment is due on the June loan, the participant receives a fourth loan equal to $1,405 (which is the sum of the $1,245 installment, the $78 installment and the $82 installment then due), with that September loan to be repaid in 20 quarterly installments of $88 each. On December 31, 2005, when the fourth installment is due on the January loan, the third installment is due on the March loan, the second installment is due on the June loan, and the first installment is due on the September loan, the participant receives a fifth loan equal to $1,493 (which is the sum of the $1,245 installment, the $78 installment, the $82 installment, and the $88 installment then due), with that December loan to be repaid in 20 quarterly installments of $93 each. (ii) Under paragraph (a)(3) of this Q&A-20, the participant has deemed distributions on June 30, 2005 equal to $1,323 (which is the amount of the June loan), on September 30, 2005 equal to $1,405 (which is the amount of the September loan), and on December 31, 2005 equal to $1,493 (which is the amount of the December loan) because on each of these dates the participant had previously received two loans from the plan during the year.

No specific waiting period. Unless the plan has one. But you are correct that more than two loans in one calendar year (or plan year or other consistent 12 month period that the plan designates if plan doesn't wish to use calendar year) will result in a deemed distribution.

Archimage's response seems reasonable to me, but I freely admit I don't know the answer. In response to your other question: no, I've never had a CPA ask this, and no, we do not ask it up front either. For a profit sharing plan, unless they tell us up front what contribution they want, we just calculate maximum (or most favorable maximum if cross-tested, etc.), based upon the W-2 income, then let them confirm what level of contribution they want.

Take a look at 417(a)(4), which says that you need spousal consent if 401(a)(11) applies. Since 401(a)(11) doesn't apply, then you are ok. But be careful - some documents require spousal consent in all situations, which would override the above.

Haven't looked at them recently, but at least as a starting point, look at 401(a)(11), and 1.401(a)-20, Q&A-3.

The cure period doesn't depend upon the date of the last payment. It can't be later than the last day of the calendar quarter following the calendar quarter in which the required installment payment was DUE. (1.72(p)-1 Q&A 10.) Of course, the cure period can be less, or there may not be one at all, according to the terms of the plan. But it's based upon when the last payment was due, not when the last payment was made.

Take a look at 1.411(d)-4 Q&A-10. In my opinion, you can't take it away from those folks who are in pay status, or indeed anyone who attains 70-1/2 prior to the start of the calendar year following the year of adoption of the amendment.

Right you are! Glad you're more awake than I am. Somehow lost track of this while wrestling with the mistake of fact issue. Now, help me work through this, if you don't mind. Say the amount of the deferrals was 10% of pay. They defer 10% of pay again in 2002. What can be deducted by the employer? The whole 20%, since it wouldn't exceed any 415 limits? Muchas Gracias.

mbozek - thanks for the response. Now, the excess can't be deducted in the next year (2002) because the DB contribution will continue to exceed the 25% limit, so only the DB cost will be deductible. So we're left with the mistake of fact. Since this is facts and circumstances determination, as per excerpt from 91-4 below, then we are left with very little guidance, other than the PLR 9144041, and Notice 89-52. In that guidance, the client would probably be stuck, as this situation wouldn't qualify. So other than requesting a PLR (which I wish somebody would, to help clarify this issue someday!) is there any other guidance or court cases you are aware of that have ruled on this mistake of fact? If the answer is just "roll the dice, make your argument, and hope the IRS buys it" that's fine - I can accept that, and tell the client to consult legal counsel to determine if they want to risk it or not. I just want to make sure I'm not missing some guidance that addresses the issue more fully. Thanks again. P.S. Logically, it would seem most unreasonable for the penalty to apply again in 2002 anyway, since the same 401(k) deferral only situation wouldn't cause any problem if it were done for the first time in 2002. But I'm not sure how I can get to that "safety zone" via statute or regulation. REV-RUL, PEN-RUL ¶19,740, Rev. Rul. 91-4, 1991-1 CB 57., Reversions: Employer contributions: Good faith mistakes. , (Jan. 01, 1991) The determination of whether a reversion due to a mistake of fact or the disallowance of a deduction with respect to a contribution that was conditioned on its deductibility is made under circumstances specified in section 403©(2)(A) and © of ERISA, and therefore will not adversely affect the qualification of an existing plan, will continue to be made on a case by case basis. In general, such reversions will be permissible only if the surrounding facts and circumstances indicate that the contribution of the amount that subsequently reverts to the employer is attributable to a good faith mistake of fact, or in the case of the disallowance of the deduction, a good faith mistake in determining the deductibility of the contribution.

mbozek - I understand that. And the plan contains such a provision. The problem is that for a DC plan, the mistake of fact is fairly limited. PLR 9144041 pretty clearly shows the thinking of he IRS. (I know it doesn't have the force of law) And Rev. Proc. 90-49, which provides for the return upon disallowance for DB plans, doesn't help at all in this situation. Are you aware of a similar Rev. Proc. or PLR which allows this for DC plans? Any cites would be very helpful. Thanks!

Does anybody have any practical experience with this? Here's what I'm wondering: In the "old days" when the 5500's were filed with the IRS, the IRS was pretty good about waiving the 25.00 per day penalty for late filing. And out of the many, many plans that have filed late with the IRS that I've seen, I have NEVER seen one where the DOL imposed their penalties, even if the IRS imposed the penalty. Now that these are being filed with DOL, does anybody have a feeling as to how reasonable the DOL will be about waiving their penalties? Since they will obviously now know directly if filed late, this is a real concern - do you opt for DFVC up-front, which is still expensive, or do you take your chances on penalties being waived? (And of course, the EZ filers aren't eligible for DFVC, so they will have to pray for reasonableness anyway) I also realize that under IRS Notice 2002-23, the IRS automatically waives the 25.00 per day if you are eligible for, and satisfy, the DFVC requirements. Anybody have "contacts" at the DOL to have garnered a feeling as to the mood on this? All discussion appreciated!

The document does provide for the return of contributions made under a mistake of fact. Problem is, this situation doesn't qualify as a mistake of fact, at least not according to the little guidance that I've ever seen. Certainly one could attempt to make this argument, but if unsuccessful, the consequences are worse than paying the nondeductible contribution tax. So I'm back to my original question - is there any way out of continuing to pay the tax each year it remains nondeductible? Any suggestions?