Belgarath

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?

Let's suppose you have calendar year 2001 DB plan, and employer also has a 401(k). 401(k) is deferral only. Employer contributes the required amount to the DB, which is more than 25% of compensation. In addition, the employees all defer under the 401(k) plan - no one exceeds 415, a plan limit, or 402(g). So, the employer has a nondeductible contribution to the 401(k)for 2001. Pays the excise tax. What happens in 2002? How do they go about deducting this, since the DB cost will exceed 25% of comp every year for the forseeable future. Are they stuck paying the 10% tax for every year that it remains nondeductible, or is there another way out? (I'm thinking they are stuck, but I'm hoping one of you clever people can explain otherwise) Thanks.

I agree with Appleby. You can take a look at PLR 9144041 for some background. If it is a DB plan, as opposed to a DC plan, you may be able to get it back out if you qualify under Revenue Procedure 90-49.

bdeancpa - you are correct - this would not be a qualifying asset for purposes of the Small Plan Audit Waiver conditions.

Interesting question. I haven't thought it through for the 2002 plan year yet, but for 2001, the elective deferrals reduce the earned income for purposes of the deduction calculations, and count against the 15% deduction limitation. So in your example, they can't "double up" for 2001. Again, I haven't worked through it for 2002. I agree with you that seems unlikely such a scenario is possible, but I have no basis yet for saying that other than a gut feeling.

Beats me! I was assuming it is a DC plan, and that subsequent rollovers are allowed. But your point is well taken. I was discussing this issue earlier today with an attorney, who commented, and I can't quote him exactly, something like,"The remaining discontinuities in the rollover rules will offer unparalleled opportunities to trap the unwary."

There sure are a lot of clever people out there, and I'm not one of them! I would never have thought of this, but I can't see any reason why it wouldn't work. The custodian of the current IRA may well require the 2002 minimum distribution to be taken before the proceeds are transferred to the plan. There's been some previous discussion on these boards about whether or not this is required, which I'm not going to rehash, but just be prepared that this is quite likely to happen.

I agree, as per previous message. Note the phrase "for service in the calendar year." So I see no problem in your situation as described.

Also, there are some (albeit rare) circumstances where the employer contribution is very low, yet the income of the participant is sufficient so that the loss of IRA deduction is greater than the contribution they receive.

You can't, during any part of the calendar year, (2003) maintain another qualified plan "with respect to which contributions are made, or benefits are accrued, for service in the calendar year." So if no deferrals or contributions in 2003, then you are OK. Earnings do not count as contributions, and forfeitures do NOT count as a contribution unless they replace a contribution which is otherwise required. Transfers or rollovers also do not count.