Vlad401k

TPApril, The 1099-R applies to the year in which the distribution is done. Just because it's code P, doesn't mean you should issue the 1099-R earlier than usual. Remember, the participant will pay taxes on his tax return because he won't be able to deduct the whole amount he deferred. The 1099-R with code P simply states that the amount distributed has already been taxed in the prior year, so it doesn't need to be taxed again. I've done a lot of research on this subject and there is just one aspect of excess deferrals that still doesn't make sense. If a participant deferred too much Roth contributions in the prior year AND there was a loss on those Roth contributions, how are the losses treated for tax purposes? I know that the whole amount will be distributed (and if it's after year end, the code will be "BP"). However, can the participant deduct the losses on the following tax return?? I know he can for normal elective deferrals, but since the Roth deferrals have already been taxed, it logically seems that the participant should not be able to deduct the losses! Even the ERISA books don't provide guidance regarding this question.

Thanks for the reply guys. That helps to clarify some of the confusion. NJ MIke, I just have one quick question regarding what you stated and maybe I'm misinterpreting. Let's say the participant is 65 (0 years to retirement) and another participant is 75 (0 years to retirement as well), do you believe that their EBAR should be different? The reason I ask is because the Cross-Testing factor table I have access to (the one in DC-3 book among other source) lists factors based on number of years until retirement. From what I understand the EBAR formula references that table, but does not actually have anything to do with the participant's exact age: EBAR = (contribution)/(factor*compensation) Since the factor is only based on the number of years until retirement, which presumably everybody at 65 and over has 0 years until retirement, I'm trying to understand why the EBAR seems to increase for anyone over 65. Is there another table that's being referenced?

How do you calculate the EBAR for someone who is nearing or has reached NRA? Our testing system (DATAIR) for some reason assumes that once the participant reaches NRA (let's say the participant is 67 years old), that his retirement is always 2 years from that point (so in this case, it would be at 69 years old). It uses these numbers for the calculation of EBAR. So, what happens is that once is someone above 65, his EBAR actually starts increasing (as opposed to decreasing when a participant normally becomes older, assuming everything else is equal). For some reason, that does not seem right to me. Logically, once the participant reached NRA, he should continue to have 0 years until retirement and the calculation of EBAR should be based on the cross-testing factor table in which the years until retirement should be 0. So basically, it would make sense to me that if the participant receives the same Profit Sharing contribution as a percentage of his compensation year after year, his EBAR should be the same for any age after NRA (65 years of age in our case). Our documents provide no guidance on this issue. Could someone with experience with EBARs provide some guidance on this issue? Thank you for your time.

We have one participant who received a QNEC in 2015 because the company incorrectly believed he never enrolled. However, he has submitted enrollment paper work to them a couple of years ago and was attributable to receive the amount he chose to defer. Now, the QNECs have been funded on his behalf to compensate him for missed deferrals. I have a couple of questions: 1) Should these QNECs be counted in the ADP/ACP tests or should they be ignored? 2) Since the participant missed deferrals for a couple of years and received the QNEC in 2015, should that QNEC be counted as received in 2015 (and tested only in 2015), or be considered individually for the years in which the failure took place (and be counted for testing in those years)? Thanks for your help.

So, if the "limitation year" is defined as "plan year" and the first plan year is a short plan year, then the 415 limit, 401(a)17 limit and the allocation hours get pro-rated. Is my line of thinking correct here?

Tom, Thanks for posting the 1099-R guidance here. As this appears to be a rather rare case (most of what I see posted in the publication is based on regular (pre-tax) deferrals, would you agree that "deducting" losses on 2016 tax return doesn't make sense as it's a Roth account? Should there be just a check issued for $900 with code "BP" based on the example in the original post?

Lou, Please help me follow your line of thought. We can both agree that the check amount will be for $900, right? If that's the case, shouldn't the 1099-R reflect $900 as the distribution amount (and $0 as the taxable amount, as it's a Roth distribution? How could you code $1,000 on 1099-R? Also, I understand what you're saying about the loss as being applicable to 2016 and is normally used to reduce income for regular (pre-tax) deferrals. However, since it's an excess Roth Deferral, the whole deduction of taxes on 2016 tax return wouldn't apply, right? Or am I missing something?

We have a participant who exceeded the 402(g) limit with Roth deferrals. He also had losses on the contributions. How should this distribution be reported on 1099-R? As I understand it, code "PB" must be used, but how do the losses come into play? Let's say the participant made $50,000 for the 2015 calendar year. He contributed $19,000 in Roth Deferrals. $1,000 of that must be refunded back to him and there were losses of $100 on that amount. So, he'll receive a check for $900 in this year (2016) coded as "PB". The way I see it is that he'll pay taxes on the entire $50,000 for this year and the losses are irrelevant (they would be relevant had it been excess of normal pre-tax deferrals). Am I looking at this the correct way?

For this plan, the effective date is actually the same as the adoption date (8/1/2015). Everyone worked less than 1,000 hours as this is a new plan, but the Profit Sharing contribution requires 1,000 hours. It does not appear that the document provides guidance in regards to this particular issue, but do you think the allocation condition hours requirement can be pro-rated in this case?

We have one plan that has an allocation condition for profit sharing contributions of 1,000 hours. However, the plan started towards the end of the year (in existence for last 4 months of the year) and everybody worked on 700 hours or so. Are the allocation hours prorated (to 333 hours in this case)? The plan document provides no guidance on this issue. Thanks.

Lou, So, what you're saying is that it should be code "8" as it's distributed in 2016 (even though the excess occurred in 2015)? Any other opinions on this distribution? I would tend to agree with Lou on this, but would like to see what everyone else thinks. Thanks.

We have one participant who was terminated during 2015 and received a large severance check. He had deferrals withheld on that check even though he was not allowed to (since he's no longer a participant). How do we handle the distribution of these excess deferrals in the plan? Should we simply use code "8" and have the amount distributed be taxable for 2016 or do we need to use code "P" for the amount contributed (taxable for 2015) and code "8" for any earnings (taxable in 2016)?

One of our clients made a mistake with an elective deferral for one of their participants. This participant wanted to put in a rather large (a few thousand dollar) contribution at the end of the year, but somehow the request was not processed due to payroll company error. It's now past the end of the year and the participant missed out on maxing out their elective deferrals for 2015. They also did not receive the match that was attributable to that contribution. What should be the correct correction method? I realize that there was recently a revenue procedure from the IRS stating that if the error is corrected within the first 3 months, the QNEC is not required to replace the missed deferrals. However, the match that would have been attributable to the deferrals is still required, correct? Thank you.

We do not know yet. Assuming the son is the beneficiary, does he immediately become HCE? Does the father also become an HCE by attribution? What if someone else is the beneficiary, like a charity. Does no one receive the ownership interest in that case?

Now I'm rethinking my position... if the trust is irrevocable, is the father even considered an owner? Assuming all of his shares are in the irrevocable living trust, doesn't he surrender all ownership of those assets? Are the beneficiaries of the irrevocable living trust considered owners?

We have a situation where a father is an over 5% owner in a company. He has a son who works at the company as well. So, the son should automatically be an HCE by attribution. However, the stock shares that the father owns are in an irrevocable trust! The question is this: is the son still considered an HCE? My thinking is that the fact that the trust is irrevocable should not affect the ownership and the son is still an HCE. What do you think?

We have a participant in a 401k plan who recently deceased. He was married and his wife wants to know what will happen to the outstanding loan balance. Our plan document does not provide guidance regarding this particular provision. Will the loan be taxable to him, his estate or to her (the beneficiary)?

I have a quick question about the Roth Distributions... Let's say a participant takes a partial distribution, does basis leave first or is the distribution taken pro-rata from basis and gains? It's my understanding that the treatment is different depending on if it's a 401k account or an IRA account: 1) For 401k distributions, the distribution of Roth source is considered to be taken pro-rata from the basis and earnings. 2) For a Roth IRA, the basis is considered to be taken first until all of the basis is taken out. Once all of the basis leaves the account, the earnings will have to be pulled. Is my line of thinking correct?

Let's say a participant terminates employment on 1/1/2010 and he's 50% vested in the matching portion of the account, can the plan forfeit the non-vested balance right away? I know that the IRS states that the forfeiture of more than 0% but less than 100% vested account can be recognized at the earlier of 1) 5 years of break in service and 2) participant electing a distribution. Is it possible for the plan document or the adoption agreement to have language that allows to forfeit the account before such date occurs?

Let's say a participant has 2 IRAs and needs to take an RMD this year. I know that he can take the RMD from just one of the IRAs (unlike the requirement to take RMDs from each 401k plan). My question is this: can this participant take a direct rollover from one of the IRAs first, before taking the required RMD for the year? Let's say the participant has $10,000 in each of the IRAs and his RMD for the year is $1,000. Can he rollover $5,000 from one of the IRAs early on in the year and then later take the required RMD of $1,000 from one the IRAs, or must he first take an RMD and only then be allowed to rollover?

Any thoughts?

Thanks for your help. In regard to compliance testing, do you know if the plans have to be aggregated for anything else other than the top heavy test?

I have a quick question regarding Control Groups. Here's the scenario: Company A did an asset purchase of Company B. They now form a control group. Company A has a SEP IRA and Company B has a 401k. Can both of these plans be maintained under this scenario?

We have a participant who exceeded the 402(g) limit by about $4,000 for 2015. Now, we want to process the corrective distribution for him. He's had a net loss for the year. I have 2 questions in regards to this distribution: 1) I believe the IRS allows for any reasonable method to calculate the gain/loss. I'm trying to figure out what's best to use as the "beginning date" of the failure for gain/loss calculation purposes. Would setting the beginning date as the date on which the participant first exceeded the 402(g) limit be reasonable, or must the whole year be used (until the date of distribution) for gain/loss calculation purposes? 2) Do we simply send out the check and 1099-R that's adjusted for the loss? Would the IRS know that there was a loss when they see that the 1099-R amount is less than the amount by which the participant exceeded the 402(g) limit?

A participant in one of our plans contributed over the 402(g) limit for 2015. We're working on doing a distribution of the excess right now. How would you calculate the gain/loss? Would you consider the date when the deferral first exceeded the 402(g) limit as the start date and the date of distribution as the end date for gain/loss calculation purposes? Also, there were SafeMatch contributions associated with these excess deferrals. Do you calculate the gain/loss for those as well?