Kathy

§ 1.402(g)-1 Limitation on exclusion for elective deferrals.... (iv) Distributions of excess deferrals from a designated Roth account. The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402©(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income. If I'm reading this right, the Roth Deferrals become taxable when distributed and so do the related earnings?

If the plan allows a loan in excess of the 72(p) rules wouldn't that be 1. a prohibited transaction subject to an excise tax which can go up to 100%? and 2. could it be construed as a distribuiton without a distributable event and therefore disqualifiy the plan? I can't imagine a plan not including the language limiting the loan, at least by reference. An interesting idea.

In response to Bird, many of my clients who own their own businesses and are working past age 70 1/2, do need the money. Many of them have spent their lives working for a living and raising their families and are not necessarily wealthy. They just work for themselves rather than someone else and many of them are continuing to work because 1. they're quite able and capable, 2. they still need to earn a living because they haven't saved as they should have and 3. they enjoy their work. They can take the distribution and pay taxes on it and then reinvest so they're not losing out on the potential gains when the market comes back but it still concerns me that the distribution is calculated using an overinflated value of 12/31/2007 and then they have to sell twice as much as they would have had to had the distribution been done in January '08. This reduces their tax deferred account which, in their minds, means they may have to work even longer to build it back up. As Americans live longer I believe we may need to reconsider the 70 1/2 rule. My own parents are in their 70s and very active people. Both of my grandmothers passed away in their 90s and my Great Aunt Billie celebrated her 102nd birthday this past year. She is still able to live on her own with only a little assistance from her kids. That's over 30 year's over the 70 1/2 mark! I hate to see my own Dad have to take IRA distributions that are going to deplete their tax deferred accounts sooner than they run out of need for them (and I'm hoping that's at least another 30 years!)

I guess I was hoping for something for the 2008 distributions - the ones calculated on balances that were much higher than they are now. Something like, if you haven't taken your distribution for '08 yet you can only take 1/2 and, if you already took it this year, you may reinvest up to 50% of the RMD back into your plan or IRA by 4/15/09 and not pay taxes on that 1/2 or something to help people who are having to sell investments now when the market is down so low. I don't see this as all that helpful.

Am I reading the bill that Congress passed correctly? If a more than 5% owner is well past his required beginning date, we value the 401(k) plan as of 12/31/07 (assume calendar year) and then sell assets that are now worth 50% of what they were then (therefore selling twice as much as we would have had to had he had the forsight to take the distribution at the beginning of the year) and make the taxable distribution by 12/31/08 for him. But, he doesn't have to take a distribuion in 2009 (which would have been calculated on a very small balance as of 12/31/08)? This doesn't seem as helpful as I'd hoped. If a more than 5% owner's RBD is 4/1/09, does this mean he doesn't have to take the first RMD (for the 2008 year but postponed to 4/1/09) or the second RMD (which would be for the 2009 year)???

We have a 125 with FSAs that operates on fiscal year. Dependent Care participant paid for entire summer's day care with one check at beginning of summer. The plan year ended in the middle of the summer (i.e.: about 1/2 of what she paid was for the weeks before the plan). Participant sent in copy of check and tuition bill for the total. I've always told participants that the dependent care service is incurred on the last day of the period for which you paid. i.e. you pay on Monday for the full week but the service isn't incurred until Friday. Therefore we can't reimburse until after Friday and then only up to what you have in the Dependent Care FSA at that time and only based on the plan year that includes that Friday. I've even mentioned monthly payments in employee enrollment meetings - i.e.: you pay for the whole month at the first of the month but the service isn't incurred until the last day of the month. So, do I reimburse the part of the expense that incurred in the plan year that ended mid-summer with dollars set aside for that year and the rest with dollars set aside this year? or is all reimbursable only with this year's dollars since the last day of the period fell in this plan year? (Which means participant forfeits last year's dollars). And, what other documentation do I request since the bill was for the whole period as was the check they wrote? Thanks for any help and cites you can give!!

2 quick notes - 1, what does the plan document say about what expenses are covered? and 2, although we can all debate the moral and ethical issues all day, the participant can have a licensed medical professional (physiatrist) certify that gender reassignment is the recognized medically necessary treatment to alleviate gender identity disorder and the related depression that can accompany GID.

This has been a very interesting post. Following the logic, we could say the plan was never qualified because we have no evidence it was. There have been no contributions in recent years so now it's just an investment account. What about capital gains, etc... do you have information with regard to the investments in the plan, dates, cost, shares, etc... If I sell stock for which I have not records, don't I have to treat the whole thing as a capital gain?? Just wondering out loud.

Stupid question - very small client has SEP for which all employees are eligible and receive around 5% per year. Most employees (5 of 8) are part time - less than 1,000 hours per year. Employer does not want to decrease benefits for anyone but wants more for self. I don't think there are any prohibitions against continuing SEP as is (everyone is eligible and receives 5%) and adding a 401(k) Profit Sharing with 1 year (1,000 hours), age 21, semiannual entry so that the owner and the 2 other employees could also defer salary and perhaps receive Safe Harbor contribution and discretionary contribution as long as we satisfy top heavy (5% in SEP would do it, wouldn't it?), 415 and deductibility, etc... What am I missing? Thanks, Kathy

What does the plan say about changes in the FSA for "status change"? In my experience, the status changes that apply for the insurance elections and dependent care elections aren't always available for Medical FSA - that is, most of the plans with which I work won't allow a change to a Medical FSA annual election even though there is a change that would allow the employee to change health insurance coverage. But, the document rules!!

Thank you! Guess I should have looked a little harder.

1099R instructions don't seem to allow for using 2 as the distribution code for a QDRO. Alternate payee was under 59 1/2. Do we use 1? or 7?

Wow, Thank you! This is very helpful!

40 Views and no answers yet... just thought I could move it back up the list... Still hoping for some guidance as to how to get started on this one...

Hi all, We have a participant that recently passed away. Beneficiary designation form indicates that part of account is to go to two relatives in BWI. Do we look to the tax treaty with UK? Can you give me a "quick and dirty" explanation of what I need to do to get the money out of the plan and to the benes? (If it wasn't hurricane season in what seems to be one of the worst seasons ever, I'd deliver the money myself!!) Thanks, Kathy

Thank you for your help! I did a little further research and found that the stock is actually trading now - at 13 cents a share. Guess the poor guy is really going to take a hit on it as he does have other IRAs as well. Guess I'll have him find one with cash and take it from that IRA. Oh well, at least next year he won't have to take such a large distribution!

Help please - just need to know where to look and memory fails me. An individual with an IRA that is invested in the stock of a company that is in court - bankruptcy I think or SEC investigation or something. He can't sell the stock - it's restricted. 12/31/02 statement shows and estimated value (actual isn't available because stock was restricted) which is substantially higher than the estimated values being shown on 9/30/03 statement and broker and client are convinced the stock is now actually worthless. Where do I look to find info. on calculating RMD? How is he to take distribution if he can't sell the stock? Nothing like waiting 'til the last minute. Thanks, Kathy

I just want to point out how funny it is to go back and reread the first posts in this thread knowing what we know now! I still have the same types of questions about where we draw the line and the documentation to require but at least we have some relief from the inability to reimburse valid medical expenses that were preveiously just not allowed!

Maybe I'm even dumber than I thought. It came to us that way from one of the large (big 8, big 6, big?) accounting firms. The sponsoring employer filed a form 5500 and then the adopting employer filed a 5500 because they were unrelated. We just followed what they had been doing for the several years prior to our take over in 2001 - they're always right aren't they?

Stupid, I know. I'm a little frazzled. Prior to 2002 there was enough separate ownernship that the plan sponsor and adopting employer were not sufficiently related to create a controlled group. Therefore we always filed 2 Forms 5500. One plan, 2 unrelated employers, 2 forms 5500. Well, in 2002 everything changed. They are now a controlled group. So, one plan, one employer, one 5500 - right? How do I do that? There was no merger of plans, no termination, no distributions. Just a little sharing of some stock. Oh please help! So won't the IRS still be looking for 2 returns? I can't figure out how to tell them there just shouldn't be 2 this year!

I know I should keep up better than this but we've just been swamped. Whatever happened to the President's proposal to allow Healthcare Flexible Spending Account participants carry over up to $500 of their unused money to the following year rather than forfeit it?

Thank you Brian. Can you provide me with a cite or reference for your answer?

We always called that "orphan match" and I thought the excess was always treated as having occured on the first day of the plan year - that's where you run into trouble with off calendar years - you end up with an excess actually occuring on the first of the plan year which is usually 2 calendar years ago. But, I could be wrong - I think it might have happened once before.

Once we're all amended for GUST, we must use prior year ADP test results for Non-HCEs to determine amount current year HCEs may defer as the default method. If we choose to use current year results we must document this fact and stick with it for at least 5 years - right? However, during the GUST RAP we were allowed to continue to use current year without obligating the employer to stick with that method for the 5 years following the year on which we were working, right? So, for my employers whose remedial amendment period has been extended yet again, may I use current year for calendar year 2002 and still use prior year in 2003 as long as I document all this when their documents are finally compeleted? That will give me the flexibility to change to current year at some point in the future if I want to but won't obligate me to do for 5 years until then. Am I on track? or way off base?

Thank you all for your help. Our concern is to protect the trustee who was completely unaware of the bankruptcy until he received a copy of a page of what appears to be the order to stop contributions an dloan payments to the 401(k). The participant wants the loan payments stopped. However, we feel the trustee has an obligation to collect the payments owed the trust if at all possible, unless he has something more official from the court telling him not to. We did immediately direct him to seek counsel from his attorney so hopefully they can get the correct documentation. Thanks again.