Elective Deferral Contribution by Ineligible Employee

[Guest AJM 34]

In 2006, the Plan mistakenly allowed an ineligible employee to make elective deferrals to the plan.

This was caught in 2007. The employee terminated in 11/06.

The Plan Document allows for the deferrals and earnings to be distributed to the ineligible employee.

My question is what tax code I should use on the 1099 R? The ineligible partipant is 36 years old.

[Tom Poje]

follow the guidelines of EPCRS (Rev Proc 2006-27)

under Appendix B, section 2.02 and amend plan to make that particular person eligible. thus the person is no longer ineligible.

personally I am a bit uncomfortable with a document that says you can do something with the 'ineligible' participant when (as far as I know) the IRS has frowned upon such a procdeure (otherwise why would the IRS have a recomended procdure for correcting such a failure)

[pmacduff]

IMHO - It was still pretax $$, even if participant was ineligible.

I think the 1099-R form ought to have a "1" code.

[JRN]

I think that simply amending the Plan is not enough. I think the Plan Sponsor also has to submit the amendment to IRS as part of a determination letter request in order to correct under App B. I wish you could self-correct by just doing the amendment, but I don't think that's the case.

[Tom Poje]

of course that is correct. on the other hand, where under EPCRS does it say 'simply return the $ because the person wasn't suppose to be in the plan'. and, if I recall correctly, at different ASPPA conferences the IRS personally has voiced similer opinions. now, if the plan ever got audited, would they make a big deal out of the issue? who knows.

now, lets take it one step further. suppose this person had not quit, and therefore didn't receive a 'distribution.' how would you handle that, and why should that be any different.

[austin3515]

Tom, I don't understand. Are you telling me that by following the terms of the Plan regarding how to handle an ineligible participant (close the account, return contributions, etc.), you could risk disqualification? Doesn't the favorable opinion/determination letter protect you from that sort of injustice?

[Tom Poje]

Austin,

what I saw on the original post was a note 'is there any guidance', and I simply pointed out what the IRS guidance was under EPCRS.

whether a document can actually have the language described is another matter. I have one document that says (for all practical purposes) the safe harbor is driven by the notice - but we know that is simply not true.

so, a document may have an approval letter, but even that doesn't mean the IRS might have missed something.