Inclusion of Ineligible Employees

[waid10]

As part of a controlled group, a large tax-exempt parent sponsors both 401(k) and 403(b) plans. The parent has exempt as well as taxable subsidiaries. Employees of one of the taxable subs have been participating in the parents' 403(b). I still don't have data to indicate how "significant" the error is (i.e., number of employees from the sub compared to the number of total participants, etc.), but what will be the appropriate correction method and procedure?

Thanks.

[Peter Gulia]

Concerning several organizations, I've handled problems of the kind you describe. It happens with many health systems and some other charities. Depending on the facts, there is a solution that has been successful (most often, with zero tax or sanction cost). Because it's not published by the IRS and has at least two aspects that are a little fact-sensitive, I prefer to discuss it directly. Please feel free to call me.

[Guest mjb]

As part of a controlled group, a large tax-exempt parent sponsors both 401(k) and 403(b) plans. The parent has exempt as well as taxable subsidiaries. Employees of one of the taxable subs have been participating in the parents' 403(b). I still don't have data to indicate how "significant" the error is (i.e., number of employees from the sub compared to the number of total participants, etc.), but what will be the appropriate correction method and procedure?

Thanks.

Were the funds invested in individual annuity contracts, mutual funds or a group annuity?

How long have the contributions been made?

What are the circumstances? Were contributions made to 403b contracts for employees who received comp only from a taxable subsidiary?

[waid10]

The contributions have been made since January 2006. I am unsure how the funds were invested. Contributions were made on behalf of employees of the exempt parent as well as employees of the taxable sub.

[Guest mjb]

The contributions have been made since January 2006. I am unsure how the funds were invested. Contributions were made on behalf of employees of the exempt parent as well as employees of the taxable sub.

you need to find out how the contributions were invested. If they were invested in an annuity contract the funds should be reported as taxable income for the year contributed because they were not permitted be deferred from taxation. I dont know if they would be reported on a 1099 or w-2 wages. The employee would have to file an amended income tax return for 2006 and 2007.