Belgarath

How did you advise them to correct? VCP or SCP? If they were the only two eligible employees, and they were both excluded for 5 years, then I think you have to correct under VCP. That aside, what are the possible consequences? Loss of deductions, penalties, and possible plan disqualification. I don't have time to look for any citations for SEP's specifically, but for plans under 401(a), where you have an operational violation, see Martin Fireproofing Profit-Sharing Plan & Tr. v. Commissioner, or Michael C. Hollen, D.D.S., P.C. v. Commissioner. A plan that does not follow the terms of the plan document is not a "definite written program: as required under 1.401-1(a)(2. Perhaps someone else here has a citation handy for a SEP.

I wonder why the difference (last known mailing address for the participant, but omitting the words "last known" for the alternate payee)? Maybe because the alternate payee is actually the one receiving the funds, so a current address is more important? Or maybe just a drafting error? Not that the reason really matters at this point...

You should be grateful. We had cows when I was growing up, and although they are stupid, they do possess a low peasant cunning when it comes to getting out of the fences and terrorizing the local countryside. At one time, there was a theory that the wrinkles on the brain equated to intelligence - the more wrinkles, the more intelligence. We had a neighbor who lived up the road a few miles, and he stopped by one day when I was working on the fence with my Dad, and after observing a cow doing something ridiculous, he said, "There ain't NUTHIN as stupid as a cow. Brain as big as a washtub, and not a gawd damned wrinkle on it!" Tom, I saw (really) some stationary made of sheep excrement. If I see it again, I'll try to remember to send you some...

For smaller firms, I prefer the "one-person handles it all" approach, with some modifications if staffing allows - an IT person, perhaps, or a document/compliance person, etc. There's a certain comfort level in this, particularly in a small firm that has to run lean, in that when "something" happens (and it always does - sickness, disability, someone quits, gets fired, caring for aged parent, whatever) it is much easier for remaining folks to temporarily pick up the slack. If everything is compartmentalized, it is much more difficult for someone else to step in, as a general rule. But as Mr. Bagwell notes, either approach can (and does) work.

Aw, c'mon, you're just Putin me on...

I'm guessing that the document was a non-standardized PROTOTYPE? If so, then even though I believe the insurance company probably CAN find a blank document in their archives, or obtain one from the IRS, they may just not be willing to try very hard. The IRS will certainly have on file a listing of all prototypes sponsored by that insurance company during that time period. So you might possibly at least be able to obtain a blank document. Is there life insurance involved, or just investment funds? If life or annuity, the actual application might have some useful information. Also, you might consider a formal complaint to the state Banking and Insurance department. This might move the insurance company to a more diligent search. A blank document would at least give you some small amount of information that might be helpful. Presumably, the investments held under the plan are registered to the Trustees of the "X" Profit Sharing Plan, or whatever it is titled. This is a job for an ERISA attorney - presumably the surviving spouse/estate can apply for benefits, and possibly at some point an interpleader motion can be filed to let the courts determine who is entitled to the funds. So I have no good ideas here, other than to take this to an ERISA attorney to tell you what can be done, and how to go about it. Way outside of my knowledge base. Good luck!

Your thoughts are certainly reasonable, but I'm inclined to think the IRS might view it differently. If employer matching contributions were made, then the HCE's have lost certain amounts. If they are inconsequential, why not just give it to them as part of the correction? If the amounts are substantial, then that may push it in the direction of the IRS not accepting this correction. But to answer your other question, I haven't had a situation quite like this, so maybe someone else has, and can give you a different and better answer.

Sure, no problem.

1.401(k)-1(d)(3)(iv)(E) is where the distribution is "deemed" necessary to satisfy the immediate and heavy financial need. And one of those conditions is the 6-month suspension. However, if you use the facts and circumstances test under 1.401(k)-1(d)(3)(iv)(B), the "non-safe harbor" determination, then the 6-month suspension requirement doesn't apply. If you are using a pre-approved document, check the language. Many of them have the different language - i.e. suspension for 6 months if you are using the "safe harbor" definition, no 6-month suspension if using the facts and circumstances determination. About 95% of our plans use the safe harbor, but some don't - and it is generally a royal PIA.

I would LOVE a job classification(s) that work. As I said earlier, however, I've got no good information at this point, and I'm operating on a mostly theoretical basis until then. Thanks.

Thanks. Yeah, like I said, at this point, don't really have any good data - just a general expressed "desire" on a potential plan. Once we actually have specifics on employment classifications, etc., etc. then we may be able to narrow this down. And yes, if questionable we would, as always, recommend ERISA counsel. I'm just trying to think ahead to some possibilities.

If I were the Plan Administrator, I'd deny the request, absent unusual circumstances. To take an extreme example, just to illustrate the point: Suppose the second request is made 1 week later. Then a week after that a third request is made. Then a week after that, a 4th request is made. Do you keep allowing "hardship" withdrawals just because the "need" still exists, while the participant then jets off to Bermuda on vacation using all of the previous "hardship" withdrawals? I grant you that my example is absurd, but I'm just saying... I would generally not want to be in the position of defending the second withdrawal for the same invoice, although things are not always black and white and I can imagine an unusual set of circumstances where it might be legit. You take a hardship to prevent eviction in 30 days, but next day your spouse dies, and you have to pay for funeral expenses right now, so you use the "eviction hardship distribution" to pay funeral expenses. You still face eviction. In a circumstance such as this, I'd approve a second withdrawal to pay the mortgage. In the far more likely scenario where the employee just spent the money for a "non-hardship" purpose, then I'd deny the second request for the same invoice.

FWIW, I posed the following to a friend who was a senior claims examiner for many years at a major insurance company: Suppose you had a policy (sold in a Section 125 cafeteria plan) that by its legal terms stated that the death benefit on a spousal insurance policy (not on the employee) could ONLY have the employee as beneficiary. The spouse incorrectly fills out the beneficiary designation naming the children as beneficiaries, and the insurance company doesn’t notice. Insured then dies. Do you pay the employee? Or are you bound by the beneficiary designation? Or if someone sues on behalf of the children, do you file an interpleader motion and let the courts decide? It seems to me that the legal policy terms override the bene designation, although possible that a legal challenge might survive this presumption. Here's his response, and I stress that this is just an off the cuff response to a friend, not in any way a formal discussion of the issue. (As you can see, I wasn't quite accurate in my question to him, as it is the EMPLOYEE who made the incorrect beneficiary designation. But I don't think it alters the basic premise.) First, for the situation that you describe, I would not think there would even be a beneficiary form available to be filled out. However, my initial reaction is that the contract would dictate and the benefit would be payable to the employee. I don’t think you would be bound by the bene designation, since it sounds like the spouse had no right to make the election. In the event that a legal action was pursued an interpleader is often used to avoid the cost and time to the company and it at least shows a willingness to make payment of the benefit in good faith.

Sometimes a tricky subject. Suppose you have a business that has a large majority of employees who might work anywhere from 500 hours to 1400 hours. The business would like to set up a plan that EXCLUDES ALL the H/C employees, as well as ALL the employees in the 500 to 1400 hour classification, and only covers the rest of the employees, who, (purely coincidentally) are full time. Don't really have any demographics or job classifications/functions yet. The guidance on this is a little strange. Under 401(a)(5) for example, there would be no problem with excluding all these employees IF they here all hourly. If all the rest are salaried, then everything is clean. On the other hand, under 1.410(a)-3(e)(1) you can't have an exclusion category that would "indirectly" impose an impermissible age or service condition. And you have QAB FY-2006-3 which give s some guidance. Suppose you have an exclusion category that says anyone earning W-2 compensation of less than "x" is excluded. And everyone earning less than "x" isn't in the full-time category. This would not appear to pass the "smell" test, even though if everyone earning less than "x" was hourly, it would be perfectly acceptable to exclude them as hourly. It appears that if the exclusion category doesn't relate to service, that it is generally acceptable. So would you say that using a salary level is acceptable? I keep returning to 1.410(a)-3(e) on this, but I think this doesn't ultimately impose an age or service requirement. I've just never seen a plan do this. Thoughts?

My gut reaction is just the opposite - I'd say the policy provisions override a beneficiary designation that is, under the legal terms of the policy, invalid. Now, I'll defer to the lawyers here who will have more informed opinions.

Good point, but this is a Profit Sharing plan, so nothing to worry about from this angle, right? I'm not entirely certain what you are saying.

Not from my viewpoint. I've seen plans like this before. Everyone is 100% vested, and it just goes merrily along. Sometimes they actually intend to start contributing again if business improves, sometimes they want the added shield from a lawsuit judgment, etc., etc. These are sometimes small/family plan situations, so if it goes on a long time, might be worth consideration of having a successor trustee in place, (if there isn't already) depending upon age and/or health of the owner.

Yes. 6 month suspension isn't required for non-safe harbor definition of hardship.

Rarely. But once in a while, after someone has chewed your tail and basically told you don't know what you are talking about, because "they read an article" or "their (insert relative) works in the business and told them we don't know what we are talking about" there's a certain satisfaction to be able to point to the e-mail and mention that you DID advise them of this.

Presumably separate 5500 forms if separate plans. By any chance, did the drug plan have fewer than 100 participants?

Thanks - actually, it isn't a 403(b) - I just used the term "vendor" generically. Could have said custodian, fund, etc...

The things you find out long after they have already happened months ago! Employer apparently, in mid-2016, simply wrote a check to a participant - did not run it through payroll. This was apparently treated as a "bonus" for no discernible reason. The employee held the check, then deposited it in DECEMBER. It was deposited (endorsed directly by the participant to the vendor) to the employee's deferral account at the vendor. This is wrong on several levels. First, as an aside, the plan does not allow a separate deferral election on bonuses, so even if this had been done directly and otherwise correctly through payroll, it wouldn't have been allowable. Aside from that, this isn't a "deferral" because the participant already received the check directly. So really, this is an employee after-tax contribution. Also not allowable under the terms of the plan. Only correction I see is distributing the amount, plus earnings. Seems like this would be reported in Box 1 and Box 5 on the 1099-R, since it is a return of after-tax employee contribution, (and a Code E in Box 7?) and the earnings would be reported in Box 2? Earnings, of course, would be taxable. As to whether the employer correctly reported this on W-2 and did appropriate SS tax, etc., etc., it is their problem. We'll mention it to them, and they can work with their CPA... Any thoughts would be appreciated.

Trying to dream up a scenario where the participant is "damaged." What about the 6-month suspension of deferrals (if applicable) where employer does a hefty match, that the participant now "loses" - I leave it to you lawyers as to whether this might legitimately be a claim that would be upheld.

Thanks!

There's been some discussion on this topic over the years, and as far as I know, there's no concrete guidance from the IRS. Situation is where a participant legitimately requests hardship withdrawal, has all proper paperwork, etc., check is issued, cashed and deposited and deal falls through at closing. (And closing go sour quite often...) Participant wants to know if funds can be deposited back into plan. I've seen various solutions. QDROphile has sensibly suggested in the past that funds be delivered to escrow, then if closing falls through, redeposit to the plan. Seems defensible. My question on this is do you have problems with the investment provider and reporting, particularly due to withholding if it crosses calendar years? Someone else (I think it was KevinC) suggested it could be corrected under EPCRS as an overpayment. While probably true, this should theoretically work only once, because part of SCP correction is changing procedures so it doesn't happen again. You could just allow it to be re-deposited, under a "common sense" approach. Again, I'm not sure how different vendors/platforms might view or allow/disallow this. You could take the approach that "too bad - it was a legitimate hardship when made, and you can't undo it." This actually seems like probably the most appropriate answer, although perhaps an unjustifiably harsh result for the participant. All of this of course tempered by some of the incredibly asinine requirements by many mortgage LENDERS and what/how/when they require things to be done. It's conceivable that they might not allow the closing if the funds are in escrow? Seems ridiculous, but I've heard some strange scenarios. Really just wondering if anyone has any other brilliant ideas/insights, or has heard of any pending guidance, discussion from the podium at conferences, etc... Thanks!!