Luke Bailey

If you don't want to forfeit the amounts (which of course has potential HR fallout), you can amend plan retroactively to include the true-up and file that under VCP.

Santo Gold, there is a two-year wait. The two-year period starts for each employee on the date he or she first receives a contribution under the SIMPLE. So yes, they could park the money from the k plan in a rollover IRA, wait until 2 years after they each receive first contribution to the SIMPLE, and then roll from IRA to SIMPLE IRA. It's a rule of convenience. 72(t)(6) imposes the higher, 25% early distribution penalty on amounts coming out of the SIMPLE during first two years of participation in SIMPLE. Of course the early distribution penalty for amounts coming out of a k plan and not rolled is only 10%. But to avoid having to require custodians to segregate rollovers to a SIMPLE IRA from new contributions in the SIMPLE IRA, they don't let you roll non-SIMPLE money to a SIMPLE for two years, just like you can't roll SIMPLE money to a non-simple for two years, since then, unless there was some tracing rule (which would be an admin "nightmare"), you could wash the money through the new, non-SIMPLE plan, take a quick distribution (most plans allow distributions of rollover accounts at any time), and avoid the 15% of the 25% penalty.

Thanks, Doc Ument. To clarify my understanding of the issue that I think Kac1214 is raising, the AA language quoted by Kac1214 seems to require (or provide the option to elect; not clear to me from excerpt) that Roth elective account can be used to fund hardship only to extent the distribution would be qualified for complete federal income tax exclusion. As you point out, though permissible, that is not a requirement of Code or regs, and seems like an odd design choice. If the participant needs the money, he/she needs the money.

I think you mean 410(b). 410(a) is the "no cost" exclusions, i.e. union if plan was subject of bargaining, NRA's with no U.S. source income, etc. I think what you are asking is whether "adjunct professionals" would be excludable, even if not listed in 410(a), if without them your plan still meets 410(b). Generally, the answer is yes, provided that this is a bona fide employee distinction established in your employee handbook, etc., and employees know when they are classified as one or the other, so check the HR infrastructure you have for the classification. It can't just be words you stick in the plan document and then the plan administrator arbitrarily decides who is one.

Kac1214's advice is certainly sound, but I will tell you that in terms of Code and regs, the rules for hardship withdrawals are indifferent as to whether elective deferral source consists of pre-tax, Roth, or both. Only the taxation of the amounts (basis not taxed, nothing taxed if Roth holding period met so that distribution "qualified") will be different, and those rules are very unlikely to be in plan document, although they may be in SPD. The plan should also have allocation rules where account includes Roth and non-Roth, but that is apparently not your case as everything appears to be Roth. Note that it would be unusual for a hardship distribution including amounts from designated Roth account to be "qualified," since, assuming five-year period has been met, most plans would permit distribution after 59-1/2 or disability without showing "hardship."

I think an issue in the background here is the legal responsibility, if any, of the plan sponsor to maintain the qualification of the plan. As far as I know, not a lot on that. Obviously, there are typically a lot of reasons why the employer will not want to see it's plan disqualified, but the plan is a separate legal person and, theoretically, taxpayer, as are the participants. The employer's deduction is most likely secure in any event, because the worst that can happen is the deduction for unvested contributions is delayed until the amounts vest. Of course plan documents and employee communications, and other facts and circumstances, could affect the answer to the question. To the extent there is an argument that the employer has no direct legal liability itself if the plan becomes disqualified, this strengthens the employer's negotiating position while it is in bankruptcy, but has no effect once it has emerged.

I see. You thinking she got slammed into the "gig" economy so to speak, Bird? Maybe. But seemed like question implied she had been shareholder. Guess original question got what he/she needed, anyway.

On page 3 of IRS "Instructions for the Requester of Form W-9," it says that payments of pensions are not subject to backup withholding, so I would think not in either, case, but I have not easily been able to find the authority for that rule, so will be interested in what others know.

Bird, the word "draw" is used to describe advances against profits. These are paid from (1) cash flow that may in fact be profits, but that has not yet been identified as such because the year is not over and accounting is incomplete, (2) line of credit, or (3) capital. I think what you are thinking of is what is called a "guaranteed payment" under Section 707(c) of Code. These occur where all or a portion of what the partnership owes the partner is a contractually set amount, not a percentage share of the firm's earnings. Because those amounts would be owed by the partnership, "come hell or high water," they would be self-employment earnings when paid. BTW, some firms or muddying the waters on the distinction by making their guaranteed payments contingent on the firm's profits, but giving them a priority share of profits, so as to try to qualify the otherwise predetermined amounts for 199A 20% deduction.

As many here will point out, you need to get hold of a copy of Derrin Watson's "Who's the Employer." I think current ed'n is 6th. Just Google that.

Right. In theory, self-employed person such as member of LLC taxable as partnership can only defer from self-employment earnings. Actual earnings are probably bunched towards end of year, and even if not really can't be determined until after end of year, when tax return for entity and K-1's prepared, so you have to estimate and then true up after end of year. This could in principle be viewed as invalidating elective deferrals made during year from "draws," even if eventually covered by earned income, but IRS included special rule in regs (1.401(k)-1(a)(6)(iv)) to make it OK to contribute from draws. But at the end of the day, elective deferrals on draws in excess of the amount determined as earned income for year would need to be refunded to llc member (the draws in excess of earned income from the year would reduce capital account).

To draw what I think is the correct conclusion from the link very helpfully provided by AMDG (who has the best avatar picture or whatever the heck you call it I've seen so far on the site), I think your facts are like Example 4, so you need to ask for a retro amendment in VCP. If your SPD and other employee communications strongly support the way plan was operated, you should get the correction you request based on prior experience.

JustMe I think what you describe in first paragraph is only correction IRS will give you. Since problem goes back more than two years, apparently, should include this in VCP unless you believe number of participants and dollar amounts sufficiently small that error "insignificant."

I think in theory the IRS would apply the basis recovery rules under Section 72 and you could have had some of the basis already coming out, it was just not reported.

OK. Yes, I believe the non-EPCRS corrections group would not negotiate away an excise tax. But I think you would have a shot at getting EPCRS to handle the "failure to follow plan" disqualification defect (in theory, you have to do that anyway, since you don't want both a plan that is disqualified and an employer that pays the excise tax, right), and then maybe the allocation would work retroactively with respect to the excise tax. I would talk it through with someone in EPCRS. It's really a complicated problem, right, because the money is in the plan and should have been allocated in the past under the plan's terms. It's not like the company can use any of it to pay the excise tax, I don't think. And if you allocate it all in the final year, you potentially face claims from folks no longer employed and also could run into 415(c) issues.

Good point. But it seems strange that the plan document did not parrot the Code provision re allocation, precluding an argument that disqualification for failure to follow plan's terms. If that does not work, then the IRS has a correction program outside of EPCRS for problems/errors that do not involve plan qualification. You can go to this web page: https://www.irs.gov/retirement-plans/employee-plans-voluntary-closing-agreements and check it out. Then you will probably want to call Paul Hogan or Thelma Diaz and explain your facts without divulging identity of client. Maybe then can help. If they will, they will give you a closing agreement.

The IRS has a correction program outside of EPCRS for problems/errors like this, which do not involve plan qualification. Go to this web page: https://www.irs.gov/retirement-plans/employee-plans-voluntary-closing-agreements and check it out. Then you will probably want to call Paul Hogan or Thelma Diaz and explain your facts without divulging identity of clients. Closed years present difficult correction issues. There may be a way to get the "make whole" money into a qualified plan or IRA, but will be complicated with basis issues, etc. For those who rolled over, the transferee vehicles may have to provide basis, and they will hate that.

Sounds like loan defaulted in second calendar quarter, so cure period ended 9/30/2018. Because he/she terminated, employer probably must under plan to do a loan offset (i.e., an actual) distribution of unpaid loan balance, rather than a "deemed." Participant will get 1099-R showing loan offset distribution, coded as such. If he/she rolls over that amount to an IRA by due date of tax return, then can claim rollover on 1040. That's the way the TCJA changes work.

EBECatty, 4980(d)(2)(C) requires the amount to be allocated ratably over the 7-year period, except to extent blocked by 415(c). I think you have to do VCP.

It seems to me at a minimum the 204(h) notice would have been required to describe the potential effect. Also, this strikes me as one of those where a really close reading of the plan document, as amended, may support one or the other interpretation, probably not the former actuary's. There are other potential legal problems.

An issue to add to the list is liability protection. House causes losses to third parties, e.g. a fire starts there, spreads to other houses, someone enters premises and is injured, etc. Very unlikely, but possible. There is nothing in state tort law that would limit damages to the single participant's account. In theory, plaintiffs could come after the entire plan, since the plan trust is the owner of property. At a minimum, make sure participant puts the property in an LLC, has adequate insurance, and signs an indemnification agreement with plan trustee.

Do you even need an amendment? The self-correction would be to distribute, then he could roll back once eligible. But he already is a participant, so has a deemed rollback.

I have drafted QDROs that specify particular assets, e.g. real estate developer with liquid and illiquid assets in profit sharing plan, wife's lawyer insists on taking only liquid. This is similar, my guess is the employer is an investment company and what you refer to as the "platform" account has more liquidity. If the plan is OK with it, it works fine. If the plan is not OK with it, not sure how the argument would come out, but probably not worth it, right?

Re the form of transaction, of course there would be a deed for the portion of the parcel being sold that would go to the buyer and a new deed showing remaining portion owned by plan. Consult a real estate lawyer or perehaps title company.

If the money has not been in an IRA, i.e., not deposited into an account governed by an IRA agreement entered into between broker and client, I think you would need to go through the waiver rules to see if a waiver of 60-day rollover period would apply. https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement#2