ineligible employe deferrals

[maverick]

Situation:

Company A and Company B both owned by Mr. X.

Company A maintained a 401(k) plan with ees of Co A and Co B participating.

As of 1/1/03, ownership of Co B changed so it was no longer part of controlled group.

Since they were located in the same building and trying to help each other during the transition, Co B's payrolls were run on Co A's software. Guess what? Co A's payroll system already had 401(k) deductions loaded, so deferrals were taken from Co B ee's checks until late February. Deferral $$ were deposited in single pooled Schwab account that was used for both companies in 2002.

I want to get the ineligible deferrals out of the plan, but am not sure of the mechanics of the process. Would I distribute the ineligible deferrals using code 2 (early, but exception applies) on the 1099R? I know the exceptions under code 2 do not fit this situation, but am trying to figure out a way to refund the $$ and not have the ineligible participants pay 10% early dist penalty.

Thanks.

[E as in ERISA]

Did you first make certain that they are in fact ineligibles. Depending on the terms of the plan, Company B could still be a participating employer after the change in ownership. The plan would then be a multiple employer plan.

[maverick]

Yes, they are ineligible.

[Earl]

So they are ineligible for A's plan but not B's?

If so I would be afraid to distribute them. I would transfer to B's plan just saying that there was a clerical error in the payroll. If they were intensional deferrals, I don't think you can distribute. Although you might be able to distribute the pre 2003 account balances under those new guidelines, I haven't thought that through.

1099, I would either treat as a non-elective transfer and not 1099 or 1099 as a roll to new plan.

[Kirk Maldonado]

Have you considered trying to treat the situation as a multiple employer plan? (I don't know that it works; I'm just throwing it out as an idea to consisder.)