Kathy

:confused: We have a copy of an court order for a participant to stop making his 401(k) loan repayments as a part of his Chapter 13 bankruptcy. However, we are concerned that stopping loan repayments through payroll deduction will put the Trustee in a bad position. The loan program, note and pledge say that the participant will repay the loan through payroll deduction. As long as the participant is drawing a paycheck, isn't it the obligation of the administrator and trustee to make sure that loan is repaid as required? Can this ruling supersede those obligations? And, if the employer/trustee/administrator allows him to stop his loan payments, do we default the loan an ddeem a distribution? continue to accrue interest on the outstanding balance on the books? ever begin payments and collection again? when the participant does finally quit and receive a distribution of the rest of his account, what do we do with the accrued interest since the default/deemed distribution as I don't think we include it in the taxable distribution reported to the participant? Thanks for your help!

Thank you! I finally found the article I was remembering. It was an EBIA article that mentioned a case where a judge ordered a plan to pay just such a claim because the SPD said expenses "incurred" in the covered period and the employee interpreted that to mean "paid" in the covered period. Furthermore, the SPD referred the participant to Pub. 502 for further guidance and the publication, speaking about deductible medical expenses, said expenses "paid" in the current tax year. So, the judge apparently went against the regulations and found in favor of the participant who believed he was following the rules when he submitted claims for expenses paid in the current period even though the medical care that gave rise to them was in the previous period. I don't think this helps my client. Thanks for answering though!!!

I have a client who incurred a medical expense toward the very end of the last plan year (hospitalization) but was not billed for it until this year. I vaguely remember reading an article that said the IRS would allow such expenses to be reimbursed with current year medical flexible spending account dollars but can’t seem to find it now. Is old age getting to me or does anyone else remember the article?

Hi all! I love Gary's answer from last August. Do we have any thing more on this one (like a reg. or a statute)since then? I'm in the situation again and haven't looked at it since last year. I'm telling my client about the LRMs but would love to have something more authoritative to show as well. Thanks for your input

Maybe. Does the plan document provide for a discretionary match and is this being done by board resolution in accordance with the terms of the document or has there been an amendment to the plan? Does the plan document specify that the match be made on a "per pay period basis"? or does it actually talk about basisng the match on a plan year? If it bases the match on a plan year, you'll have to "true everyone up" at the end of the year. ACP test will be interesting. My assumption is that the people who can afford to max out in the 401(k) salary deferral early in the year are probably at the HCE end of the scale so chances are it might not be discriminatory. Question - do the two different match formulas have to be tested under 401(a)(4) and/or 410(B)?????

I beg to differ on this one - as an ex-Federal employee, I was able to roll my thrift money over to an IRA. This was many years ago but I don't things have changed that much? I would do a little more research before I said NO.

Top Heavy minimums must be made for an employee who has met the eligibility and entry date requirements of the plan and who is an employee on the last day of the year, regardless of hours of service. This means that all those employees who got a 10% contribution have more than met the minimum. You simply make the minimum contribution for those who have not. This is not a discrimination issue - 416 says they must get at least that much but doesn't require them to get more unless they meet the plan's contribution requirements. Those who have already received at least the minimum based on the plan's normal allocation method don't need to get any more.

Participants have to start taking some responsibility for checking their statements a little more frequently than every 15 months!!!! I don't think you are required to go back and correct for a prior year for which the participant has received a final statement. ERISA requires that they get statements at least once a year. I believe that if they haven't notified you of an error within a resonable time after receiving the statement, it is as if they are approving of the salary deferral that was actually made, accepting it rather than the amount they originally requested. I don't see any need to go back an make a matching contribution on something they didn't contribute. After all, this participant probably got pay stubs showing the contributions each pay period as well as plan account balance statements. Furthermore, under a 401(k), you cannot defer income once it has been received so you can't go back and put money in for the prior year and, if you decide to make some sort of correction in the current year, you'll have to keep in mind the current year 402(g) and 415 limits. I highly recommend putting some sort of a disclaimer on the statements indicating that errors must be brought to the attention of the administrator within 90 days or the information will be treated as being correct from that point forward.

Unfortunately, the tax-deferred contribution bucket is only so big and if the deferrals and the employer contributions going into it are greater than the overall annual additions limitations allow, something has to spill out into taxable income land. Obviously the best solution is to cut back on the deferrals before the end of the year so nothing has to spill out and the bucket is neatly filled with employer money and then just enough deferrals to level it off. However, if this isn't possible, check your plan document. Some plans allow 415 excesses to treated as 401(k) contributions first and then employer contributions (1.415(6)(B)(6) allows 401(k) contributions in excess of the 415 limits to be returned to the employee.) However, if the document says that employer contributions can not be made in excess of the 415 limits, then yes, the employee loses out on employer dollars in order to have the tax deferral on the salary reduction. Some plans do allow the administrator to cut any one back at any time in order to avoid a test failure of any type. If your document provides for this, cut the participant off - even if he does complain - it's easy to explain that your making room in the bucket for more employer money.

Generally, a qualified plan (which allows for rollover contributions under the document's terms) may accept a rollover from another qualified plan. Since the money coming out of the first plan is coming out as a distribution, it is not relevent whether the distributing plan is a DB or a DC. Keoghs are simply qualified retirement plans for self-employed individuals. However, as the receiving plan, I think I would ask for verification that this plan is qualified. Unfortunately, there are quite a few Keoghs out ther that have not been kept up to date.

Ok, the real problem is that he is in default. No payments for several years. Now they're bringing me in to offer suggestions to fix. Ideas?

Can you help? I am working with a client with a loan taken out in 1986, met the $50,000 limit (which was probably less than 1/2 his vested account balance at the time) secured by his principal residence. The loan papers required that he annually pay accrued interest for the year (at what was probably a reasonable rate at the time)and one twentyfifth of the principal - obviously the loan period is 25 years. All of this met the terms of the plan document at the time. Now the plan has been amended (let's hope so, right??) to require payments at least quarterly. Are his old loan provisions grandfathered in? or must we make quarterly payments of principal and interest based on the amended document and more recent law changes but contrary to the agreement he signed originally???

No, you don't have to report your regular Roth IRA contributions on an 8606. The trustee will report your contribution to a Roth on a Form 5498 for you. You should report conversions from your traditional IRA to a Roth on the form 8606.

I think the first place to check is the plan document. How does it define compensation for testing?

This might be a good way to solve the problem. The form 5305 SEP says you may not maintain any other qualified retirement plans for the 5305 SEP to be valid. If the self-employed adopts a paired PS/MPPP, then the SEP isn't valid. Then the contributions to it are treated as normal IRA contributions. I believe they can then be removed from the IRA as excess IRA contributions. You will want to check with the Custodian of the SEP IRA to determine exactly what they will require from the individual to "recode" the contribuions as regular IRA contribuitons and then remove them as excess IRA contributions.

RKS: You do have options! You can remove excess contributions from your IRA as long as you do so before your tax return due date or you can "recharacterize" your Roth contribution to a traditional IRA contribution, again by the tax return due date. It sounds like you need to be in touch with a financial or accounting professional to determine which option is best for you and then with the Custodians of your IRAs in order to obtain the correct paperwork to take care of it. Make sure you act on it early as IRA Custodians get very busy toward the end of the year and tax return filing time and you want to make sure you have plenty of time to correct any errors they may make in following your instructions. You may also want to take a look at the IRS Publication 590 which can be found at IRS.ustreas.gov in their forms and publications site.

AS far as I know, there is no limit on the number of employees you can have and still maintain an employer contribution SEP. The rule was 25 for a SAR/SEP.

It is my understanding that you can defer up to the lesser of your earned income or $6,000 and then also receive a match - I think the tricky part is calculating the compensation on which to base the match. I remember reading one place that you must subract the deferral before calculating the match for a self-employed but read somewhere else that you don't have to. I do know that, for people who earn less than $40,000, the SIMPLE can work out better.

You may combine your contributory and conversion Roth with no fear. The first money you withdraw from any Roth IRA you have is treated as a non-taxable distribution of your own contributions. Once those amounts have been withdrawn, the next amounts are the amounts you converted. If the withdrawal of converted funds occurs within five years of the conversion, they will be subject to a 10% penalty, if they would be subject to a 10% penalty coming out of the original IRA. Since money used for a "first-time home purchase" up to $10,000 is not subject to the premature distribution penalty, no 10% penalty there. After your own, previously taxed contributions and conversions come out, the earnings come out both subject to income tax and premature distribution penalty unless you have had any money in a Roth IRA for more than five tax years and meet one of the exceptions: Attainment of age 59 1/2 (exactly) Disability The purchase of a first home (no home ownership within 2 years) Death Sorry to be so long winded. Hope this helps!! [This message has been edited by Kathy (edited 10-29-1999).]

Basically, old SAR/SEPs never die, they just fade away. Since the assets end up in the IRAs of the employees and the employer has no control over them once the money is contributed, there is no trust to terminate and distribute. The employer will somehow need to notify the employees that no more contributions will be withheld from pay and deferred to the IRAs and since the employer contribution is usually discretionary, the employer simply decides not to contribute any more. No form 5310, nothing much else to do.

I'm not sure I agree with I B Watchin. First of all, your own Roth IRA contributions can be withdrawn tax-free, penalty-free, whenever you want. Secondly, the earnings can be withdrawn penalty-free if you fall under one of the penalty exceptions under 72(t) - I think the exception for higher education applies to Roth IRAs too. You will have to pay ordinary income tax on the earnings but not the penalty.

NO. The only money which can be rolled into a profit sharing plan would be money from another qualified retirement plan under section 401(a) of the code, either through a conduit IRA or from plan to plan. A SEP plan isn't really a qualified plan under 401(a) - it's covered by the IRA rules of 408.

If the plan satisfies coverage tests by excluding catagory A employees and they truly are not eligible for the plan, then they don't need to receive a top-heavy minimum. ------------------ Kathy Hull Retirement Plans Consultant khull@fuse.net

Wouldn't it be SIMPLE if they could? But, alas, no. The employees must establish separate IRAs to recieve their rollover distributions (or they can roll into existing traditional IRAs if they never mean to roll the money back into another qualified plan in the future.) SIMPLE IRAs may only receive SIMPLE contributions through an employer.

I'm not even sure if this is relevant but is this a stock transaction or an asset transaction? If it's an asset acquisition, then I would think (have no cite though) that the company could "terminate" the SIMPLE (Old SIMPLEs never die, they just become complex???) on the day it no longer exists and that the employees could participate in their new employer's plan 401(k). Stock transaction though makes it more complicated, I think. [This message has been edited by Kathy (edited 09-25-1999).]