WCC

This topic was discussed briefly on another thread with a conclusion that concerned me. Is a non qualified Roth 401(k) cash distribution subject to the 10% early withdrawal penalty? Not just the earnings, but the entire distribution? I have always thought it was and would be shocked if both the basis and the earnings are not subject to 10%. However, the below paragraph from the IRS site is confusing me. I have also read material that suggests the basis of a non qualified Roth 401(k) distribution is not subject to the early withdrawal penalty. "Topic 558 - Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs To discourage the use of retirement funds for purposes other than normal retirement, the law imposes a 10% additional tax on certain early distributions from certain retirement plans. The additional tax is equal to 10% of the portion of the distribution that is includible in income. ..... Any clarification would be great as I cannot find a direct statement that says the Roth 401k basis is not subject to the 10% penalty in a non qualified distribution.

This topic was discussed briefly on another thread with a conclusion that concerned me. Is a non qualified Roth 401(k) cash distribution subject to the 10% early withdrawal penalty? Not just the earnings, but the entire distribution? I have always thought it was and would be shocked if both the basis and the earnings are not subject to 10%. However, the below paragraph from the IRS site is confusing me. I have also read material that suggests the basis of a non qualified Roth 401(k) distribution is not subject to the early withdrawal penalty. "Topic 558 - Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs To discourage the use of retirement funds for purposes other than normal retirement, the law imposes a 10% additional tax on certain early distributions from certain retirement plans. The additional tax is equal to 10% of the portion of the distribution that is includible in income. ..... Any clarification would be great as I cannot find a direct statement that says the Roth 401k basis is not subject to the 10% penalty in a non qualified distribution.

I found the below discussion (link at the end of my post) very helpful for my question; however, I would like to ask a question regarding what resolution would exist in the following scenario: Company A buys 100% of company B in a stock sale. Company A maintains a non safe harbor 401k plan. Company B maintains a safe harbor plan. The sponsor intends to keep both plans separate. However, based on preliminary testing, I cannot pass coverage when combined and I don't think I can pass ABT either. For example: Plan A (non safe harbor plan) - NHCE - 150 (all eligible) HCE - 10 (all eligible) Plan B (safe harbor plan) - NHCE - 3 (all eligible) HCE - 7 (all eligible) Coverage testing for plan B is 4.76% ((3/153)/(7/17)) Coverage testing for plan A is 166.67% ((150/153)/10/17)) I must be doing something wrong. I cannot combine a safe harbor and non safe harbor for a combined ADP/ACP test. Given the above participation in each plan, the sponsor cannot maintain these two plans separately, correct? Any thoughts? Thank you http://benefitslink.com/boards/index.php?/topic/34884-safe-harbor-and-controlled-group/?hl=%2Bcontrolled+%2Bgroup+%2Bsafe+%2Bharbor#entry182873

There are many threads on this topic but I cannot find the answer to my specific question: Participant takes a hardship 7/1/2012. Deferrals continue. July 2013 the auditor informs the sponsor that the deferrals for the six months immediately following the hardship must be returned. Vendor sends a check to the sponsor for the deferral amount and says "make the participant whole via payroll". Question: Logistically how does the correction via payroll happen? If the sponsor amends the participant's 2012 W2 then they also have to amend their quarterly tax filing and the participant has to amend his 2012 personal taxes. Is this really the only way to make the participant whole? I am thinking the answer to my second question is yes, but thought I would ask. Thank you

Thank you!

Thanks for the fast response. I agree but they are convinced that they don't want the plan for 3-4 employees who don't defer over the IRA limits. I do have a follow up question. The bundled recordkeeper is telling me that instead of spinning them off in to a new plan and then terminating that plan we should do the following: Treat the employees of the participating employer the same as if they are terminated employees of the plan sponsor. The employees are then considered terminated and a distributable event exists. Their reasoning is that the participating employer is severed from the plan and the employees of the participating employer are no longer eligible to participate; therefore the employees are terminated. The employees of the participating employer are then paid out. This sounds odd to me. In my research I cannot find any documentation that would support that approach. Am I missing something? Does their approach sound accurate? Thank you

Hello, The sponsor of a 401k safe harbor was purchased via a stock sale. The participating employer was not purchased. There is no longer common ownership between the new sponsor and the participating employer. The purchaser wants the participating employer to stop participating immediately. It is not cost effective for the participating employer to create its own plan (but may be necessary). Question: I know safe harbor plans can be terminated for cause if the employer is involved in a merger, acquisition, change of controlled group... However, the plan is not being terminated immediately, the participating employer is terminating participation immediately and they don't want to start a new plan. I am thinking that they would have to set up their own plan, and then terminate it. Otherwise no distributable event exists?? Any other thoughts? Thank you

see IRS EP phone forum September 7, 2012 slide 21. I don't like the idea of a free ride either, but this is one IRS agents answer to that question. http://www.irs.gov/Retirement-Plans/Phone-Forums-Retirement-Plans also copied below: Note: A Plan Sponsor cannot avoid liability to make corrective contributions for the missed deferral opportunity by making its employees responsible for checking pay records to ensure deferral election has been implemented. The employee’s elective deferrals (the sum of deferrals actually made and the missed deferrals, for which a corrective contribution is required) cannot exceed the 402(g) limits and must comply with all other applicable plan limits/requirements.

Hello, Here is the fact patter: participant takes a loan loan payments are withheld according to amortization schedule loan paments are sent to the recordkeeper timely This is where it gets interesting: recordkeeper rejects the loan payments (recordkeeper is the one who produced the amortization schedule and promissory note). the rejected loan payments are sent back to the sponsor and this goes on for two years (payment and rejection) and no questions are asked by the sponsor or the recordkeeper as to why their deposits don't add up. Plan sponsor thinks it must be some sort of fee rebate or something.... participant receives a 1099 for the defaulted loan balance two years ago. The participant just thinks this is normal and does not question the 10% penalty or the taxable amount. sponsor then figures out what is going on and makes a deposit for all the loan payments that were rejected and sent to the sponsor. We have late deposit issues and we can deal with that. The issue now seems to be a double taxation scenario (I understand the loan "double taxation" argument and am not asking for that to be debated again). I am saying that a 1099 has been issued and after the issue date now all the loan payments have been deposited. Question: My solution is to prove to the recordkeeper that loan payments were withheld and sent "timely". The recordkeeper should then issue a revised 1099 showing that there was no taxable amount. Based on the fact pattern, would you agree with that solution? Thanks

I just wanted to throw out the question. This was just a hypothetical and we are looking at the possibility of excluding executives only from the sh match (they would still be eligible to defer). As I was going through this i thought what if the scenario in the original post occured (which everyone agrees would cause problems). Thanks for the clarrification that it cannot just say executives and we must include HCE who is also ..... Thanks

Hello, Company sponsors a safe harbor 401k plan. Plan document excludes "executives" from receiving the safe harbor match. In this case "executives" will always be HCE's by comp except for the first year of employment. Question: company hires a new employee (immediate eligibility just to make this simply). Employee is hired as an executive and falls into this excluded group. However, this employee is not a HCE the first year of employment. I am thinking this employee will be required to receive the safe harbor match even though she is part of the executive group. Otherwise wouldn't we have a higher rate of match for HCE's, who are not excluded because they are not executives, than we would for this one executive who is currently not an HCE? Thanks

Lou - thanks for the answer. It led me to Chapter 6 of "What you should know about your retirement plan" publication by the DOL. This is pretty clear. Masteff - thanks for the discussion link. The SPD provides the info I needed on the claims procedure. Thanks for all your help and fast responses.

I agree with you that the reponsiblity belongs to the sponsor. My problem is the sponsor does not want my "I think, I believe..." answer. I have been trying to find something from the IRS that states the sponsor is repsonsible to prove that he was paid out. Thanks for the fast response. Anyone know of any IRS guidance that would confirm this?

Hello, After much searching I need to ask for some help. An employee terminated 20+ years ago. He recently receives a letter from the SSA stating he may have a benefit due under the plan. There are no records dating back 20 year ago from the sponsor or the recordkeeper. The sponsor has no proof he was paid and cannot find any. The sponsor thinks this person was paid out but they just forgot to list him as a code D the following year. Is there any IRS guidance that says who is responsible for proving the benefit still exists? The sponsor wants to take the stance that the "participant" should prove it. The "participant takes the stance that the employer should prove it. Any thoughts or references (if there are any) would be appreciated. Thank you.

The loan policy states that loan payments must be withheld via payroll and upon termination the loan balance is due or it defaults. Scenario: Participant terminates with an outstanding loan and sends personal checks for loan payments to the record keeper. The record keeper accepts them and does not default the loan. The plan sponsor realizes that this is happening six months later. What is the proper correction method? My thought is that this is an operational failure similar to the inclusion of an ineligible employee who is allowed to defer. In that scenario, either the plan is amended retroactively (411d6 issues may apply) or the ineligible deferrals are returned to the employee. Is it a stretch to apply the same logic in this loan scenario? It seems there are two options: 1. Stop accepting payments and default the loan during 2013 2. Return the loan payments and default the loan based on the outstanding balance at the time of termination (6 months ago) Any thougths? Thank you

The loan agreement they signed did have the amortization schedule, but it did not reference what happens at termination. Are you suggesting that the loan policy would not be sufficient to show that the loan was due at termination since the agreement did not mention it??

Yes it was in effect when the loan was taken. I have the signed loan docs. The signed docs don't say anything about payroll deduction nor the termination provision. This is why the participant is so upset.

I think the TPA was reading this board I just received the loan policy "the loan will become payable in full on your termination of employment" and "payments will be made through payroll deduction from each regular paycheck". Thanks for the fast responses.

With the plan allowing this terminated person to make loan payments with personal checks for 4 years, I wouldn't want to be the one to over-rule that decision. Changes to the loan program would apply to later loans, but they don't change the terms of an existing loan. How long until the loan is scheduled to be paid off? Now, if this person sent a check that bounced, I think the plan would have an obligation to insist on a form of payment that won't bounce. It is a 30 year home loan and all payments have been made timely. I really don't want to override what has happened nor do I really want to default the loan. I would just like to find some documentation so that if i have to prove why this was allowed, I can do it. At the same time I don't want to perpetuate an error, if it was an error.

It appears that you have already decided that no one would ever be allowed to continue to make payments beyond termination of employment; and that appears to be your default. I say this to illustrate that there is always a default position (what to do when you don't get your question answered). In this instance, do you assume that the loan policy allows continue payments beyond termination of employment since this is how it is being administered; and draft the new loan policy to continue with that operation? Or, do you take a default position that unless they show the language allowing continued payments, you'll assume it didn't exist and then file a VCP submission to correct that this wasn't how it was operated. Questions: Is the plan on an adoption agreement? Are the loan provisions written within the Basic Plan Document? Good Luck! Very well said, that is my exact scenario. The adoption agreement only states the following: Loans. This Paragraph shall apply to the extent that the Plan allows for loans. The provisions of Code Section 72(p) and Treas. Reg. 1.72(p)-l shall apply to the Plan and are hereby incorporated by reference. This wording obviously does not solve my problem. I will continue to try to obtain plan doc and the loan policy (if there is one). Thanks

I cannot get a reponse from the prior TPA after multiple requests for the loan policy. The participnat terminated 4 years ago and has been making payments. The participnat sent me all their loan docs and there is no reference to what happens upon termination.

After much searching, I have a question regarding a terminated employee with an outstanding loan. The loan policy does not require loan payments to be made via payroll. It is my understanding that in most cases loans go into default due to the loan policy requiring payment via payroll deduction, not necessarily because of termination alone. Since payments are not required to made via payroll, can a terminated employee continue making loan payments to avoid default? Are there any regs that would allow the sponsor to not accept a personal check for loan payments? I understand this is inconvenient, a hassel, not ideal, etc. Thank you