Luke Bailey

I think the technical issue is that when you instruct the plan administrator to use the $50k that you rolled over to pay off your loan, you have exercised dominion and control over the amount such as to make it a distribution from the plan, not the IRA. (Supporting this is the fact that your rollover account, which would exist for at least a nanosecond, disappears.)

If this dates back to 1999, it is too late to restate except as part of a "hope for the best/risk worst" strategy. The only certain remedy is to submit for a correction under VCP. Depending on facts and circumstances, correction might not be too onerous and would likely be negotiable.

I don't do plan administration, and may have missed some formal or informal guidance on this, but let me try to put it plainly. Suppose a completely compliant loan calls for quarterly payments of $1,000, which fully amortizes over 5 years, with reasonable interest. The plan doc and/or loan policy has typical loan provisions that don't really address minutiae of accounting for loan payments, but meet requirements of regs. Participant comes in on or about March 31 and says, "Hey, please accept this check for $4,000 and that will take care of me for entire calendar year." Plan accepts and does exactly that, i.e., treats as payment for full year. While I will readily admit that the above could cause admin system complexities and/or (more likely in my experience) errors, in a large plan, I do not see how it would create a distribution under 72(p). (If it is contrary to something in the 72(p) regs, I'm sure someone will point it out; I have not checked.) If the participant in question is already at the 415(c) limit, it could possibly cause a 415(c) violation under the IRS's general authority under 415(c) to treat something as a contribution based on facts and circumstances. The 415(c) issue could be dealt with, obviously, by recomputing the payments and either taking less than the full $4,000 or shaving payments and/or part of a payment off the back end of the loan.

It sounds like this was a prepayment, and that the new payment now would be a prepayment. That usually is permitted under the loan policy and would also not violate 72(p). The loan schedule amortized over 5 years at least quarterly. He's just paying ahead of the amortization schedule.

JWK raises a good point. I assumed was a health FSA that included dependents. If was a DCAP account, no uniform coverage required, but getting funds back could be difficult practically. Also, would the DCAP be covered by ERISA or state law wage laws for this issue? A lot of complexity for what is likely a small amount.

I believe leevena's answer is almost certainly going to be correct, but it assumes that in fact this was not an "error," but rather just a consequence of the rule in the Section 125 regs that the entire annual amount elected by the participant was required to be credited to her account as of the first day of the plan year, even though salary reductions were to occur periodically. Was that the case here, or was their actually an "error," e.g. you reimbursed more than the participant had elected for the year?

Right to all of the above, but of course giving a person a W-2 doesn't make him/her an employee. It is ultimately a legal determination based on the control test.

I take it you mean the value of the premium used to pay for coverage in excess of a $50,000 death benefit? (The cost on first $50,000 is simply excluded for income under Section 79.) Yes, the excess premium amount would not be counted if you are using 3401(a) because that excess premium amount, which is of course included in box 1, is not subject to withholding and 3401(a) defines wages subject to withholding.

I meant by the employer that was subject of Jim Chad's inquiry, of course.

I don't think you're going to get the custodian to file an amended anything, even assuming your analysis of facts and application of law are impeccable. Have you even got them to the point of not reporting the current fair market value as a taxable distribution in 2018? Assuming there was a PT in 2011 and that it involved the IRA owner (which IRS could kick the tires on if the assets are greatly appreciated so that LTCG reduced rate of tax outweighs the tax deferral), then you're proposed handling is consistent with our experience and thinking. Note that one thing to weigh in the analysis re whether to delay dealing with this and thus potentially have even 6-year statute run, in addition to the potential ethical and related issues (on which I take absolutely no position here), is the duty of consistency. We know that if the 6-year statute did run, the IRS would take the position that IRA owner had zero basis in distributed assets, and that case law would support IRS on this. If you waited beyond 6 years and zero basis, would you have a start date for your CG holding period? Just a question. Assuming you do file an amended return for 2011 and pay ordinary tax on then value, would seem like IRS could not challenge the basis or 6-year holding period. But there is no case exactly on point to best of my knowledge.

Assuming he really is a common law employee of the temp agency (big assumption) and also not a leased employee (less of one, but a significant assumption nonetheless), and that your plan has standard language regarding coverage, I don't think he would get the allocation. He's not an employee of employer, therefore not employed.

If I understand your question correctly, kgr12, it doesn't seem like you have a separation from service at the first break. The employer's expectation is above 20%, so the individual has not separated, even though now working as an ic, not employee. So then, to determine when a separation does occur, since the individual is an ic, it would appear that you have to shift to the 1.409A-1(h)(2) rules, so you can't pay the amount that is accumulated as an employee until you satisfy either (h)(2)(I) (complete end to contract with no expectation of renewal), or you go under the (h)(2)(ii) safe harbor, which you described in your question. If the good faith expected drop in service level at the time of transition from employee to ic was 20% or less (instead of 25% to 35% as in your question), then the outcome would be different because the initial break (transition from employee to ic) would likely be a separation from service.

I think that under 1.409A-1(h)(1)(ii) the 20% to 50% gray area applies to what actually happens after you initially determine this is a sep'n from service based on the 20% or less anticipated level, but it turns out that in fact the level is above 20%, but below 50%. Here, since the services are anticipated to be more than 20%, you don't have a separation from service as employee.

Chippy, if your facts are as stated and as I understand them, I think that the only way to fix officially is to go into VCP and request retroactive amendment to 2008 as correction. You should get it.

Is the "participant" a w-2 employee of the 501(c)(3) or school that sponsors the 403(b), or a 1099 independent contractor with respect to the 501(c)(3) or school?

I have not read all of the above, so may have misunderstood the question, but I think this issue has come up in this bulletin board several times with no definitive answer. The weight of authority seems to be that the acquirer can't ignore the service, because it was with a constituent entity (i.e., whether the acquired company is maintained as a sub or is merged into acquirer should get you same answer). Derrin Watson's "Who's the Employer" advocates this position, I believe. Others have pointed out that they received determination letters that say that service of controlled group members is only counted for the period during which the controlled group existed.

Answers to your questions, Vlad401(k), assuming the sloppiness that Mike points out with lettering and numbering doesn't completely distort meaning: (a) Yes. A brother-sister controlled group, assuming Employer 1 is an individual. Otherwise, two actual parent-sub groups, which aggregated into a single parent sub group under 414(b). (b) Yes. You would need to cover 70% of the NHCEs in the group, and you're covering 0%. If situation results from recent bona fide acquisition, 410(b)(6)(C) transition rule might apply as pointed out by Madison71.

U R welcome, JustMe.

I don’t think there is for a 401(a) plan. 1.403(b)-8(b) says the deadline for contributions to a 403(b) is what is “reasonable.”

I agree of course that you follow the plan doc. I would check the definitions in it very carefully, however, to see if they in fact say that the comp from a division of the employer that is not included in the contribution provisions is excluded. I have to think there are lots of documents, both individually designed and preapproved, that have clear provisions for limiting the allocation of contributions to employees in a particular group, but nevertheless in making the allocation count all comp from the plan's adopting employer, if not its entire controlled group. But I could be guessing wrong on that. If Vlad401(k) is still following this thread, would be interesting to know what he has discovered re what the plan doc in question says.

Right. There is nothing in Section 404 of the Code that says it had to be perfectly calculated and eligible for rollover when distributed to be deductible. Just has to be contributed to plan within the aggregate comp limits specified in Section 404.

Right. That definitely settles the matter, even though it seems to me the statute was at best ambiguous.

When I said "all comp from the employer," I intended to the stress to be on "from the employer." Yes, any 414(s)-compliant definition of comp can be used, but I question whether excluding comp just because it was earned in a different division of the employer would be reasonable under 1.414(s)-1(d)(2). In response to Vlad401(k)'s follow-up, it would seem at a minimum, even if 1.414(s)-1(d)(2) doesn't stop you, that the individual's comp from both divisions will be in the denominator of his 414(s) fraction, although if this individual is the only one with the issue and there are many other participants, the 414(s) nondiscrimination test would probably still be satisfied.

The 3% safe harbor is going to have to be on all comp from the employer, assuming the employee is an NHCE. The additional 2% will depend on the way the plan is written. Most likely the plan doc will include all compensation, even though it will say only Division B employees get an allocation. Could be interpreted different ways perhaps depending on whether the employment by the two divisions is in series or parallel.

Code 7 would apply if the participant is 59-1/2 or over, but since in your question the individual is leaving without being vested I am going to assume that in most cases the participant will be younger than 59-1/2. If the person is younger than 59-1/2, then you will use code 1 if the distribution does not qualify for an exception to the 10% early distribution tax of Section 72(t), which will probably be the case most of the time, otherwise use code 2. See the 1099-R instructions on pages 15 and 16. The "exception" for purposes of code 2 is the exception to the 72(t) 10% excise tax. It is possible that an exception would apply, e.g. the employee, even though not vested, terminated after attainment of age 55 (50 if public safety), but otherwise you would use 1. If the participant rolls the distribution over to an IRA or employer-sponsored plan, they would not, of course, pay the 10% excise tax. Note that in any of these cases, that is, regardless of whether code 7, 1, or 2 is used, if the distribution is an eligible rollover distribution (which it seems likely it would be, since I assume the refund is done as a lump sum) and the participant elects to roll it directly to an IRA or employer plan, then it appears you need to file a separate 1099-R for the same distribution, with Code G in Box 7. Again, see page 16 of the 1099-R instructions for the use of code G and its incompatibility with any of codes 1, 2, or 7, and see page 14 of the instructions with respect to what to do if two different codes apply, but the codes are not compatible. As always, there are parts of the 1099-R instructions that I find completely baffling.