justanotheradmin

Has anyone else had a problem with the IRS issuing letters stating that an IRA rollover is taxable income? Five different participants rolled traditional IRA money into their 401(k) plans (4 separate plans, all different employers) in 2016. the 1099-Rs appear to have been issued correctly, showing a code G since they were all direct transfers, and zero taxable amount. These five individuals all received letters in the last few months stating the amounts rolled over were taxable and listed the amount of tax and interest due. In at least one instance the letter even mentioned that the 1099 had a code G on it. I'm not sure, but I think the common denominator may be that none of these individuals reported the rollover on their personal tax returns. Rather than reporting the rollover with zero listed as taxable, I think it was left off the return completely. I can't confirm for all of them, but for at least one this is the case. I do know the IRS sends out letters if things are reported to them by employers / financial institutions / etc and don't match up with what some reports on their personal return. But ultimately, the amounts aren't taxable, so saying the rollover IS taxable seems ridiculous. We see our clients do a lot of rollovers, usually without a blip from the IRS, so to have several this year with inquiries feels like a lot, but maybe it is typical for the IRS.

Correct, the rules do not change. If the participant took a private loan from a bank, the loan payments back to the bank would be post tax, the fact that the loan is from the plan does not change how loan payments are treated under the internal revenue code.

I agree with Larry. See §1.401(a)(9)-2 A-2(c) "For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2." She turns 70.5 in 2019, she's not a 5% owner in 2019.

That depends - has the plan been terminated? Just because the practice was sold doesn't mean the plan is terminated. Was it a stock sale? Do the new owners want to keep the plan? Was it an asset sale? Are the current owners terminating the plan? Upon plan termination full and immediate vesting is required for all affected participants. When there is a partial termination the IRS is clear that only those that terminated during the year are made 100% vested. For full plan termination though, everyone with a balance is affected, so I don't see how the doctor wouldn't be 100% vested. Maybe someone can provide a cite for what "affected participant" means if different than my understanding.

I'm curious, maybe someone will indulge my side question - Wasn't there some prohibition on using plan assets to pay employees to do administration? For example, a company does all of their plan's admin in-house with a person in accounting/HR responsible for it (no outside TPA firm). The plan could not pay for the cost of the employee that runs the plan. Plan assets can't be used. The company pays for that employee. Am I remembering this correctly? But if an outside TPA firm was hired to do the same function, their fees could be paid from plan assets. If so, does the same rule apply to MEPs? Can the plan sponsor that is running the MEP pay for their employees that are administering the plan pay for those employees out of plan assets? Is that why in the example on this thread the MEP sponsor is only taking revenue sharing and no regular admin fees from plan assets?

Maybe the document says something? Some of our docs provide some default guidance in the event the amendment is silent. But we try hard to make amendments crystal clear as to how it is to be effective, so usually it doesn't matter.

In general terms, yes - participants who are still employed by the sponsor take in-service withdrawals receive 1099-Rs and W-2s. Some even take them as cash (non-rollovers) in which case the 1099-R generally shows the income as taxable (different for Roth and after-tax). As long as the withdrawal is allowed under the terms of the plan, and the participant is making the written election, its probably fine. The 1099-R and W-2 combo occurs quite often, even for non-RMD participants. Maybe you are thinking there is a conflict if the participant was receiving 1099-Misc as an independent contractor + W-2 as common law employee? That's a different discussion.

I agree with ETA consulting. the only time I have seen it be an issue was a plan that typically only does deferral and SH Match, AND the plan was top heavy. The HCEs deferred (they were also the keys), but received no other contributions. The SH Match, as the only ER contribution, under the terms of the pre-approved doc, was deemed to satisfy the TH min. One year the employer wanted to give 3 managers an additional contribution. But doing so meant the SH match was no longer the only ER contribution, and the full regular TH minimums would apply. It would mean a number of NHCEs who were not deferring would have needed to receive a 3% TH minimum, which they did not want to do. The employer ultimately decided not to do the contribution to the 3 managers.

That's a start. I wasn't looking for a published rate of fines, even under EPCRS the types of taxes and penalties vary greatly, but there is a list of what things the IRS considers when coming up with their penalty number. I'm only familiar with the IRS prohibited transaction excise tax 15% and 100% respectively of the amount involved. For the small plans I primarily see, even the amount involved in minuscule (less than $100 usually), so if the difference is paying a TPA/ CPA / Attorney hundreds of dollars to prepare an submit a VFCP I could see the plan sponsor opting to just pay the 100% excise tax. Perhaps this is splitting hairs, but I would argue there is a technical difference between "making the plan whole" and reporting the failure and subsequent correction to the DOL. the later is procedural, and protects the fiduciary from penalty, the former provides the benefit due to the participants. If anyone has clients that have received these newer threatening letters that decided not to do anything about them, what kind of response has come from the DOL after the 60 days is up? I'd be curious if anyone is willing to share. I'm agree the late deposit itself is a prohibited transaction - Is the failure to report the late deposit and the subsequent correction to the VFCP a prohibited transaction? Is the argument that failure to comply that with technical requirement for "completeness" negates the other parts of the correction that were done (lost earnings, 5330, excise tax etc.)? Such that if you don't correct perfectly and in full, the penalties are the same as if no correction was done at all? I don't think any reasonable person would make that argument. So i'm not asking about the penalties for the late deposit - I'm asking about the penalty for failure to check the last box and submit to the VFCP. If anyone has ideas about that, I'd be curious to hear. I'm sure there must be something out there, even if just informal information from a PLR or a Q & A session or something.

If a plan sponsor files their 5500 late, there are published daily penalties, if there are problems found under Audit CAP EPCRS provides parameters from which penalties are derived. Surely there is similar guidance for VFCP?

that may be the case for some - in which case they need to know the penalties for failing to do that part of the correction so the fiduciaries can make an informed decision. I'm still waiting for someone to give a link or citation that gives guidance on what those penalties might be. Specifically the penalty for failing to submit.

Also, just because VFCP might be easy for some, does that mean it should be required under threat of enforcement? For many small employers it is intimidating and they would not be comfortable doing it themselves. They WANT to run their plan correctly, and would end up spending money on an outside provider to do it for them.

The burden of an audit is a scare tactic. It doesn't answer my questions - why the DOL would want to start this now? I didn't think increasing their audit case load was something they were trying to do, nor is an audit a civil penalty for failure to submit to the VFCP. Even assuming an audit is done and there are NO other issues, where is the dollar amount / formula / parameters listed for a civil enforcement action for failure to submit to VFCP?

Why take this enforcement action now? I suppose that is what I don't understand. So if the small plan sponsor doesn't submit a VFCP - and then the DOL does their enforcement measures - what civil penalties would be assessed? I've never looked into it because I've never seen civil penalties assessed for late deposits - The fiduciary breach in my example has been corrected, the participants have been made whole, new processes or cross-checks in place to prevent reoccurance, etc. Its just that the breach and correction weren't reported to the DOL. So honest question, in this example what is the civil penalty for failing to use the Voluntary Fiduciary Correction Program? I'm sure someone smarter than me has a citation for it that I can review.

This is definitely NOT the same letter. The prior letter was way friendlier and did not require a VFCP submission in 60 days. Also, it does cost something. For a small employer, it either comes at their own time to figure it out, or they have to hire an attorney, CPA, or TPA to figure it out for them. For a small employer the difference between using the actual rate of return and the DOL calculator is small. We routinely see plans with lost earnings to make up of less than $10, but we charge hundreds to do the calculations / 5500/ VFCP etc. using the DOL calculator to save a few cents is not enough incentive. But saving the additional TPA / CPA/ Attorney fee to prepare the forms, plus all the back-up documentation (payroll records, deposit records, etc) can be substantial for a small plan. If the plan sponsor has already made the participants whole, plus filed and paid an excise tax, the VFCP should be voluntary, which the ARA has been pushing for. The DOL threatening enforcement measures is definitely new.

Anyone else find this alarming?! Seriously? What if i'm a small plan sponsor and I've done my own lost earnings calc and deposited to the participant accounts, I've done an amount involved calc and filed and paid excise tax with the Form 5330. Seriously, the DOL is going to come after me for also not filing a VFCP?! ARA article: https://www.napa-net.org/news/technical-competence/regulatory-agencies/ebsa-threats-of-alternative-enforcement-actions-trigger-ara-response/ Letter from the DOL (see the last paragraph in particular): https://www.napa-net.org/wp-content/uploads/letter-from-DOL-4.27.2018-002.pdf ARA letter to DOL: https://www.napa-net.org/wp-content/uploads/18.06.07DOLEnforcementFinal.pdf

The terms of the plans would govern. 1. Does the plan document automatically revoke beneficiary designations to a spouse upon divorce? Some do. 2. If it does, (or there is no signed beneficiary form) the order of benefit named in the document governs. typically, spouse, children, sometimes parents, and then estate. I've never seen a document that includes ex-spouses in the order of default beneficiaries. So unless his parents are alive, likely whoever is getting the rest of his estate would get the money.

So - to play devils advocate - could a participant take a hardship to make a mortgage payment? perhaps for the portion of the payment that is principal and not interest? They are "purchasing" that part of the home back from the bank. I've always said no - the participant should demonstrate foreclosure related paperwork, but perhaps I've been looking at it wrong. And would the answer be state specific? I understand in some states the lender has a much more protected right in the home than others, and may hold primary title, etc. I don't really know, i'm not real estate lawyer, but maybe someone else here does know.

I've never heard otherwise. Not having an account should never be a barrier to receiving a required benefit. I'm guessing the plan and trust is set up for each participant to have their own individual recordkept account (as opposed to some sort of pooled arrangement). Whether someone has an actual physical account for their money, or if the plan just maintains an account on paper, the contribution should show as being for that participant. The participant's consent is not needed to set-up an account. I have occasionally seen sponsors deposit the corrective amount into a holding or suspense account for the plan, and then immediately pay it out (subject to the plan's distribution force-out rules). In that case, the participant's account something that is tracked or shown on the year end accounting, but isn't necessarily going to show up on any statements from the financial institution because the money will be labeled "holding account" or whatever. what kind of plan is it? 401(k)? 403(b)? what is the asset arrangement? recordkeeping accounts subject to participant direction? brokerage account? pooled investment account?

Thank you Larry, this helps.

Thanks Mike! I was thinking more along the lines if there was a specific exemption/waiver that it would be written somewhere and possible to cite, but yes, I see what you mean about citations. We've gotten pushback, so if there was a citation I could go look up, I would have wanted to read it. I rarely work with PBGC covered plans, so its just not an area I have much familiarity.

I would read the plan document - ours says that they are a participant for purposes of their rollover account only, and specifically addresses loans from rollover accounts for limited participants. Our doc allows them (assuming the plan allows loans) unless a limitation on such has been written into the adoption agreement (there is a specific spot available to do so).

hmm - maybe start a new plan for the spouse, write it however you want - test it with the existing plan at year end - then merge the two for next year? Or maybe the doc for the existing plan allows for different contribution allocation formulas for different participating employers? More like a multiple employer plan would be drafted (but not actually since you say they are control group)?

Are PBGC plans exempt from an ERISA bond? Specifically asking about small DB plans that typically would not be subject to audit if the bond requirement is met. Does anyone have a citation for an answer?

We submitted a determination letter request for a defined benefit plan with a normal retirement age of considerably less than 62. The IRS is asking for statistical data to verify the NRA of less than 62 is acceptable for the industry standard. The plan is a one person plan for a professional athlete with endorsement deals. Can anyone point me to what kind of information and sources of information the IRS is willing to accept? Are there other threads that have already covered this question?