1999 IRS Q&A

Larry Starr and Criag Hoffman met with Mr. James E. Holland, Jr., Chief, Actuarial Branch 1, and Mr. Richard J. Wickersham, Chief, Projects Branch 3 of the Internal Revenue Service. The meeting took place in Arlington, VA on October 19, 1999.

The purpose of the meeting was to provide Mr. Holland and Mr. Wickersham with questions which were submitted by members of ASPPA. It is intended that the responses or deferrals to the questions provide the basis for discussion at the 1999 Pension Actuaries and Consultants Conference during the IRS Question and Answer session. The answers reflected in this presentation are Larry Starr's and Craig Hoffman's interpretation of Mr. Holland's and Mr. Wickersham's responses, and not direct quotes. They are intended to reflect as accurately as possible the statements made by the government representatives. This material does not represent the official position of the Internal Revenue Service, the Treasury Department, or any other government agency; nor has it been reviewed or approved by the Service or Treasury.

It is intended that this written material will meet the requirements necessary to qualify for Continuing Education Credits.

ASPPA wishes to thank Ms. Carol Gold, Mr. James Holland, and Mr. Richard Wickersham for agreeing to this meeting, and for their cooperation and assistance in making this portion of the program a success.

1999 Annual Conference - IRS Questions and Answers

1. It looks like the extension of the remedial amendment period does give plans an extra year for choosing their testing method (prior year or current year). However, if a plan switches from current year to prior year testing during the remedial amendment period window, but after the 1998 testing year, they may be subject to double counting limitations on certain contributions.

We tracked the rules as follows:

1. Rev. Proc. 97-41 delineates the original remedial amendment period for adopting SBJPA amendments (which include the testing rules), specifying that amendments must be made by the end of the 1999 plan year.

2. Notice 98-1 provides guidance and transitional relief for the testing changes. This notice specifically references Rev. Proc. 97-41 in its rules allowing plans to switch from current year testing to prior year testing. In the notice, the IRS explains that it believes that employers with existing plans should be given a period of time to decide whether to change from the current year testing method to the prior year testing method. Referring to Rev. Proc. 97-41, the Notice provides, among its permissible circumstances for change, that an employer may elect to switch a plan from the current year to the prior year testing method if "the change occurs during the plan's remedial amendment period for the SBJPA changes." (Changes from prior year to current year, of course, are permissible at any time.)

3. Rev. Proc. 99-23 extends "the remedial amendment period described in Rev. Proc. 97-41" to the last day of the 2000 plan year.

Because the Notice 98-1 window for permissible switches is tied to the remedial amendment period, rather than to a specific date, it is reasonable to conclude that plans have until the end of the new remedial amendment period to choose a testing method. | However, the double counting limitations that apply to changes from a current year to a prior year testing method are tied to a specific date, rather than to the remedial amendment period. Notice 98-1 provides generally that for a year in which a plan changes from current year to prior year testing, the ADP of NHCEs for the prior year is determined without regard to (1) QNCs used to satisfy the ADP or ACP test in the prior year, (2) elective contributions taken into account for ACP testing, and (3) QMACs. Similar rules apply to ACP testing. The Notice also provides that limitations on double counting do not apply for testing years beginning before Jan. 1, 1999. It appears, therefore, that any post-1998 change from current to prior year testing will be subject to the double counting limitations.

These are our conclusions based on the available documents. We've found no commentary or guidance so far that deals specifically with the effect of the extension on testing rules. Would you confirm or correct our conclusions.

Your conclusions are correct.

2. When can you terminate a SIMPLE IRA? Rumor has it that once you are passed the notification date, the employer must maintain the arrangement for the next entire calendar year.

It is either the notification date or the beginning of the next plan year. Though there is no official determination at this time, the conservative approach would be to use the notification date as the limit for termination.

3. Is the answer the same for a SIMPLE 401(k)?

Yes, and the penalty for violation would be potential disqualification.

4. I have heard that the IRS is contemplating taking the position that safe harbor 401(k) plans cannot be terminated before the end of their plan year. Is that true? If so, what is the reasoning? What is the consequence for a plan which has adopted the 3% option? What is the consequence for a plan that has adopted the matching contribution option? Is the same true for SIMPLE plans?

This will be discussed from the podium

5. Notice 98-52 implies that a profit sharing plan (without a coda) may not be amended into a safe harbor 401(k) during the plan year, that the effective date for the safe Harbor 401(k) provisions must be delayed until the start of a new plan year. Is this correct?

The decision to make the conversion would generally have to be made by 30 days prior to the end of the year in order to give the appropriate notice. This will be discussed further from the podium.

6. Under 401(k)(11) a non-elective contribution of 2% for all eligible employees whose compensation is at least $5,000 satisfies the SIMPLE 401(k) provisions. May an employer lower the $5,000 threshold, or would this violate the "no other contributions may be made other than contributions described in subclause (I) or(II)." requirement?

Yes; you may be more liberal so long as the document is appropriately modified.

7. Imputation of permitted disparity on the 401(k) safe harbor 3% contribution is not allowed. If an employer makes a contribution that exceeds 3% may permitted disparity be imputed on the amount in excess of 3%?

Yes; for (a)(4) testing this is permissible, but note you will not be able to count the initial 3% for permitted disparity on either a contributions or benefits basis for your non-elective 401(a) testing.

8. IRS 4973(c) imposes a 6% tax penalty when a person makes a "excess contribution" to a 403(b)(7) custodial account. This excess is either an excess under IRC 415 Annual Addition rules or 403(b)(2) Exclusion Allowance rules. The penalty applies until the excess is corrected by either withdrawal or undercontribution.

A. If the excess is the result of exceeding a 415 limit only and it is corrected within 12 months after the end of the calendar year (reg 1.415-6) does the 6% tax apply?

If the 415 excess is a result of a "reasonable error" in deferrals as provided under the regulations and you cure by distributing, the excise tax does not apply.

B. Are there are provisions in EPCRS that impact the imposition of the penalty described in 4973(c)?

EPCRS does not address excise taxes. In this case, it is not applicable anyway.

9. For IRAs, the penalty in 4973(b) does not apply if the excess is corrected by April 15th. Would the IRS consider adopting this rule for 403(b)(7) custodial accounts?

It's a statutory issue. We cannot change the law.

10. SAFE HARBOR 401(k) PLAN: Generally, what is the proper way to administer and test a plan that has dual eligibility but wishes to take advantage of the safe harbor matching contribution? Assume employees are immediately eligible to make 401(k) contributions, but are not eligible for a safe harbor matching contribution until they have completed one year of service:

A. Are safe harbor matching contributions based on compensation and deferrals only after the employee completes a year of service? Or, are they based on compensation and deferrals retroactive to the beginning of the plan year in which they complete a year of service?

B. If the former, then for purposes of testing the portion of the plan that covers excludable employees (the *non-safe harbor portion*), are the deferrals and matching contributions of highly compensated employees which are made to the safe harbor portion included in testing the non-safe harbor portion, as would be required if there were two plans?

C. If the latter, then for purposes of testing the non-safe harbor portion of the plan, are the employees who entered the safe harbor portion in that plan year considered as participating only in the safe harbor portion, or in both the safe harbor and non-safe harbor portions?

D. Does the answer in A depend on the language in the plan document? In other words, can the plan document in a safe harbor plan restrict the compensation (and deferrals) on which matching contributions are based to the compensation earned and deferrals made subsequent to becoming eligible for the match?

This will be discussed from the podium.

11. Concerning partial plan terminations, the courts and the IRS have ruled that a partial termination of a plan will occur if a significant percentage of employees are excluded from participation in the plan either by reason of plan amendment or by discharge from employment. Although analyzing if a partial termination exists is based on facts and circumstances, with respect to "discharge from employment" it appears that 20% is the the minimum "working" threshold for determining a "significant percentage" of excluded employees. When working with a 100 participant plan the threshold number of effected (discharged) participants would be 20. What about a 20 participant plan, a 5 participant plan, or a 2 participant plan? If a plan had 3 participants, 1 key/HCE and 2 rank and file employees, would the discharge of 1 rank and file employee constitute a partial termination? Under what circumstances would the discharge of the 1 rank and file employee in the above example constitute a partial termination? Is there a minimum threshold number of total participants where a partial termination could take place?

There is no minimum that would determine whether a partial termination has taken place. The termination of a single participant could result in a partial termination.

12. In a partnership that has a 401(k), since the partner's compensation is deemed available on the last day, would a partner with guaranteed payments be able to make an election on those payments at year end even though the money has been received during the course of the year?

Yes; guaranteed payments are treated just as partnership draws. They are not separately taxed or subject to withholding; they are like any other allocation of partnership income.

13. A defined contribution plan has a last day requirement, meaning a person must be employed on the last day of the plan year in order to receive an allocation of employer contributions or forfeitures. What is the status of a person who, 1) is out on worker's compensation; 2) maternity/paternity leave; or 3) family medical leave.? The real question is whether a person is considered as being employed on the last day. The courts have been inconsistent in their rulings especially in the circumstances of an individual being out on worker's compensation.

With regard to worker's compensation, it is a facts and circumstances determination as to whether the employment relationship still exists. During maternity/paternity leave or family medical leave, the employee/employer relationship continues.

14. As in 12, again a plan has a last day requirement. Can a plan use the "average benefits tests" to illustrate compliance with IRC 410(b) relative to individuals who are not sharing in an allocation because they are not employed on the last day of the plan year. The real issue is whether "being employed on the last day of the plan year" is considered to be a "reasonable classification" for the first part of the "average benefits test."

The last day requirement is not part of the testing for nondiscriminatory classification purposes. This will be discussed further from the podium.

15. The IRS has been requiring plan documents to delete all types of "fail-safe" language. What is National Office's position relative to fail-safe language relative to IRC 410(b)? This is especially relevant in smaller defined contribution plans with a last day requirement. The previously accepted language would allow for a procedure to include terminated employees in the allocation of the contribution in order to pass IRC 410(b). Currently many of our documents have this language and an IRS qualification letter while Cincinnati has required us to remove the fail-safe language in recent documents.

The National Office has not yet opined on fail safe issues. This will be discussed further from the podium.

16. If a plan sponsor is required by his collective bargaining agreement to contribute more to his defined benefit plan than is deductible under the full funding limitation, how may the excess be deducted, if at all?

The excess would be deducted under the normal deduction rules with a carryover to future years where it would be deductible in accordance with those usual rules. Note, the excise tax for nondeductible contributions will apply. The fact that there is a collective bargaining contract that requires the contribution does not change the tax status or penalty situation applicable to that contribution.

17. For purposes of the pro-rata benefit increase described in section 4980(d)(3),is the proration to be based on the present value of accrued benefits calculated on actuarial equivalents only, or on the present values actually payable, i.e.,with regard to 417(e) rates?

It would be determined based on the benefits actually payable, which presumable already includes the application of the 417(e) rules.

18. A business has two employees, each of whom is a 50% owner. For business and personal reasons one owner does not want to participate in the company's defined benefit plan. Can the requirements of section 401(a)(26) be satisfied by granting a de minimus benefit of $1/month? $10/month?


To avoid a failure of the prior benefit structure tests of 1.401(a)(26)-3, "meaningful" benefits would need to be provided to both owners. The test of meaningfulness is a facts and circumstances determination.

19. ESOP Loan Issue: Attorney who established an ESOP for a client created a securities acquisition loan providing for level principal payments plus interest for seven years. The client misunderstood the fact it was principal PLUS interest and was under the impression the TOTAL payment was the amount that turned out to be the principal portion only. When the first payment was due, the principal portion (the deduction amount) reduced the corporate profit almost to a net operating loss situation. This is not what the client had in mind.

Since the general rule under Reg. 54.4975-7 provides that the term of an exempt loan (including renewals and extensions) must not exceed ten years, what is the Service's and DOL's position on such renegotiations or refinancing? Is the above fact pattern reasonable cause to refinance and extend the due date to ten years from the original note date or will the Service/DOL consider this to violate anti-cutback or other "primary benefit of participant" rules? And if it is allowable to refinance the loan to extend the payoff to ten years, does the refinancing need to be transacted by the first day of the plan year in which the new loan payment will be payable?

Rev. Proc. 99-4 provided that the Service would not rule on ESOP loan refinancings. The policy continues in effect.

20. If an employer adopts a safe harbor 401(k) with 3% QNEC but then has financial difficulties, can the employer not make the 3% QNEC and either fall back on the ADP rules or not make salary deferrals for HCEs?

The current answer is NO. However, the determination of when the 3% has to be committed to is under review.

21. Can a typographical error made in the plan document within the last two years be treated as a operational error if the plan was administered according to the way it was intended, and if so is the plan eligible for the IRS self correction program?

This example would not be an operational error, but a scrivener's error, which is not available to be corrected in the self correction program. This would require a Walk In CAP filing for relief.

22. Will the IRS update the new 5500s less fequently than annually?

There is no expectation that 5500's will change less frequently than annually.

23. A plan is performing a correction under EPCRS that requires a participant to return to the plan amounts previously distributed. If the participant has rolled the distribution to an IRA, Code Section 408(d)(5)(B) provides that to the extent the rollover amount was based on erroneous information, it will not be includable in the participant's gross income if distributed by the IRA. Assuming the ineligible rollover amount exceeds the IRA contribution limit, is it subject to the 6% excise tax imposed by Section 4973 of the Code?

Yes, assuming the funds were returned after the income tax filing deadline.

24. If a profit sharing plan with QJSA language is merged into a plan which does not contain the qualified survivor language, may the surviving plan preserve the QJSA language as an optional form of benefit rather than the normal (required) form of payment?

Yes, and it MUST be preserved.

Would such a design require that spousal consent be obtained on distributions made from the balances of the merged plan ?

No.

25. SAME DESK RULE: There's a seldom used provision under the "same desk rule" whereby an employee can make an "elective transfer" of his assets to the acquiring company. For those participants electing to keep their accounts in their former company's 401(k) plan, they will not be able to access those accounts until they terminate employment with their new employer, become disabled, or qualify for hardship.

A. If a participant elects to keep his account at his former employer's 401(k) plan and subsequently applies for a hardship distribution under the terms of that former plan, must that former plan then pierce the veil of the participant's new plan to determine if there are other means under which the financial need could be met (e.g. loan, stock options)?

No. We believe that there is no need to look beyond the normal distribution rules, without reference to the other plan still maintained by the prior employer.

B. If the hardship is granted in the former participant's plan, is the former participant then precluded from making salary deferrals with his current employer (provided the current employer's plan uses the safe harbor rules that a 12 month suspension of deferrals)?

No.

26. An attorney involved in a submission of one of our plans received the following item from the IRS as part of a request for additional information:

"Please read the attached explanation regarding coordinating the top heavy with accrual benefit rules. Please either explain how the plan satisfies this requirement, or provide an amendment to satisfy this requirement."

The attached explanation reads as follows:

"The top heavy rules require that the accrued benefits of a top heavy plan may not be less at any point in time than the minimum top heavy benefit. Nothing in the top heavy rules permits a plan to fail to satisfy the accrued benefit rules. Consider, for example, a plan that provides 1/2 of 1% per year of service that becomes top heavy in year X after participant A has 6 years of service at age 55. The plan provides that the accrued benefit shall not be less than the top heavy minimum.

The accrual under the plan would be as follows:

Year X: Formula AB = 3%; TH Min = 0%; AB = 3%;
Year X+1: Formula AB = 3.5%; TH Min = 2%; AB = 3.5%; % Increase = .5%
Year X+2: Formula AB = 4%; TH Min = 4%; AB = 4%; % Increase = .5%
Year X+3: Formula AB = 4.5%; TH Min = 6%; AB = 6%; % Increase = 2%

This plan would fail to satisfy the 133 1/3% rule. It could also be shown to fail to satisfy other accrued benefit rules.

There are many ways in which this problem could be resolved. First the plan could (but is not required to) credit 2% for each top-heavy year as additional accruals until the 20% maximum is reached. This would satisfy both the top heavy minimum and the accrued benefit rules by providing more generous benefits. Second, the plan could provide an accelerated accrual less generous than the first alternative which would satisfy both the top heavy minimum and accrued benefit rules. This result may be achieved by providing future accruals not less than the greater of 1) the required top heavy minimum or 2) a ratable accrual from the current accrued benefit to the projected benefit at normal retirement age where such projected benefit includes the top heavy minimums. Other methods may also be acceptable."

Aside from the fact that the remedies presented for correcting the "problem" are confusing, the general point is relatively clear and I find it very alarming. This appears to be a new spin that the IRS is putting on the top heavy rules as they relate to the accrued benefit rules, which I was not aware was EVER an issue. It would seem to me that all unit benefit accrual plans that provide for an accrual of less than a 1.5% per year accrual are placed in jeopardy by this spin. And what does this all mean? Does it mean that the IRS is going to now say that these plans have been being administered improperly since 1984? Favorable determination letters offer protection regarding disqualification, but do they protect these plans from having to go back and recalculate benefits that have been paid out under the assumption that the unit benefit formulas in place (and approved) were acceptable?

This will be discussed from the podium.

27. What is the basis for either a belief that a commingled trust is not "legal" [sure seems to contradict the plain language in the 5500-C/R instructions which clearly contemplates such an animal] OR for the position that a contribution deposit to a commingled trust must be identified AT THE TIME OF DEPOSIT as belonging to a specific plan?

It seems to me that as long as before an ALLOCATION is done, the plan to which a deposit belongs is identified, this should be acceptable. I question the need to specify, at the time of deposit, which plan it belongs to.

Consider the typical MP + PS commingled trust. I generally [ready "always"] treat contribution deposits as belonging first to the MP until the required MP contribution has been made. Any additional amounts belong to the PS. A pretty straightforward and arguably logical basis for handling deposits to such a trust.

BUT you can't really know, for sure, what the required MP contribution is until the final info is in on participants [plan could have an end of year employment requirement and an active participant might terminate near year end], participant's compensation for the plan year, the "final" contribution formula [which could be decreased prior to the end of the plan year or even increased within the 412(c)(8) period AFTER the end of the plan year], etc. But addressing what belongs to which plan before allocating makes perfect sense. Comments?

This will be discussed from the podium.

28. A question regarding "corrective distributions" counting toward top heavy determination. It seems reasonable that a "corrective distribution" should not be considered a distribution as used in top heavy determination. It's simply dollars that should not have been in the plan in the first place. In some cases, corrective distributions (like unvested excess aggregate contributions) are not even distributed, they are forfeited.

Counting corrective distributions as distributions for top-heavy purposes leads to arguably nonsensical results, as in this client situation. The client had a brand new 401(k) plan with no matches and no profit sharing features. Because only key/HCEs contributed to the plan, all contributions were distributed as excess contributions. But, the plan was top-heavy, so the plan sponsor was theoretically stuck with a 3% contribution for non-key employees. Is this interpretation actually correct?

This is the correct interpretation.

29. If an ex-spouse of a key employee has a QDRO in a DB plan, do you count the value of the QDRO towards the top-heavy test? Does it matter if the QDRO is more than 5 years old? The regs don't seem to address this. My guess would be that you do count it until the earlier of the date the employee spouse has not worked for the employer for five years or the date five years after the QDRO is distributed. Is this a correct interpretation?

Yes.

30. 5 Year Averaging is available through the end of 1999 and then ceases. Does the Service intend to issue a new version of the 5 page Notice of Rollover (which currently discusses 5 year averaging) for use starting in 2000?

A new 402(f) notice is under preparation. We expect that it will be available for use in 2000.

31. An employer that has implemented a safe-harbor plan has a substantial downturn in business during a plan year. Recognizing that the safe-harbor contributions will be required for the part of the year that has already transpired, can the employer revoke the safe-harbor for the remainder of the plan year?

No. Once the safe-harbor status is elected, it applies for the entire plan year.

32. Is there any problem with changing eligibility during a plan year that has been declared a safe-harbor year? For example, a plan with immediate eligibility is amended prospectively to require 90 days employment.

This should be all right. Anything that you would normally be able to do in a plan with regard to eligibility should be available in a safe-harbor plan.

33. Where does the authority for the 4% threshold (on the discretionary matching contribution) come from?

There is no specific statutory authority for it; this was a decision made during the writing of the rules as a reasonable interpretation.

34. The exception to the 4% rule on discretionary matching contributions for the 1999 plan year - is this extended under Rev. Proc. 99-23 (for the remedial amendment period)?

No. This is a "hard coded" date in Notice 98-52, so the exception applies only for the 1999 plan year.

35. May the 1000 hour/last day rule apply for discretionary matching contributions that are intended to satisfy the ACP safe-harbor?

This will be discussed from the podium.

36. May a new SPD be issued each year to satisfy the safe-harbor notice requirements?

Yes. Note: no electronic means may be used to convey a safe-harbor notice (as of this writing), so paper SPD must be delivered.

37. May the employer restrict deferral elections in a safe-harbor plan to whole percentages?

Yes. Any reasonable rules about deferral elections are ok in meeting the "participant must be permitted to defer any lesser amount" criteria of the participant elections rights section of Notice 98-52.

38. If members of a controlled group participate in a single plan, may each separate member/division have its own safe-harbor matching formula? Assume each division can satisfy 410(b) separately.

No. Back to the rule that says no HCE can receive a safe-harbor allocation that is greater than an NHCE.

39. If a refund of 401(k) deferrals occurs to satisfy a 415 violation, what happens to a related safe-harbor match?

You must forfeit it as if the amount was never there.

40.
An employer uses matching contributions to satisfy the ADP safe harbor. No other matching contributions are made. When the employer ceases to elect the safe harbor, does the full vesting apply to future matching contributions? In other words, are safe harbor contributions treated as subject to a separate full and immediate vesting schedule (as a separate contribution source)?

This will be discussed from the podium.

41. Suppose a 401k plan that uses prior year testing is pulled for audit by IRS. Does the use of prior year testing effectively open TWO years for audit?

While we really haven't look at this because 1997 years are not yet being audited, it is reasonable to think that will be the result. The auditor will not be able to take the prior year result as fact without looking at the underlying data.

Comment: Another reason to use current year testing!!

42. A 401k plan allows participants to defer between 1% and 15% of their compensation. An employee elects 15% but, due to a payroll processing error, 17% of his compensation is deferred. The actual deferral is less than $10,000 and the error is not found until the subsequent plan year. There is no 415 violation. What, if anything, should the plan administrator do?

Refunding from the plan is NOT an acceptable APRSC solution, although it might work under VCR. The money should probably be forfeited and used in whatever way other forfeitures are used, with the employee being made whole outside the plan. However, we strongly argue that the "mistake of fact" argument does not apply to these contributions!

43. Plan Y is a 401k profit sharing plan. Compensation is defined to include bonuses. The plan sponsor has a special payroll in December for payment of bonuses, and it is discovered after the end of the plan year that deferral amounts were not deducted from the bonus payroll. What should be done?

The correct answer is that a QNEC should probably be made under APRSC. This will be discussed further from the podium.

44. Your firm is engaged to handle administration for a 401k plan. There was a change in the personnel manager at the end of 1998, and new participants weren't enrolled at January 1, 1999. There were enrolled so that deferrals commenced on the March 15 payroll. Solutions other than QNEC?

Rev. Proc 99-31 was designed to deal with issues like this. This will be discussed further from the podium.


45. An employee who terminated during the plan year is eligible to receive an allocation in a self-directed profit sharing plan.

A. How should that employee's allocation be deposited? Note, the plan would cash-out the employee immediately and the employee is 0% vested. Can we deposit directly into a suspense account?

B. Does the employee have to direct the investment of the account initially?

C. Can the trustee direct amount immediately until forfeiture is reallocated?

It is reasonable to forego direction of investment by the terminated employee and deposit the funds directly into the suspense account.

46. A participant took a 401k hardship distribution pursuant to the hardship safe harbor rules, but was allowed to continue making 401k deferral contributions in violation of the 12-month suspension rule. What are the possible methods of correcting this error under APRSC?

A. Start a full 12-month suspension when the error is discovered?
B. Distribute impermissible deferrals and earnings?
C. Return deferrals and suspend for balance of original 12-month period?

Starting a new 12-month period doesn't meet the rules. Deferrals (and match, if applicable) should be forfeited and the balance of the 12-month suspension should be applied. Of course, the employee should be made whole outside of the plan (i.e., no distribution from the plan to the employee).

47. The 1099-R instructions for box 5 in which total PS-58 costs would be shown upon distribution of a life insurance contract say that the total PS-58 costs should be shown "only if the life insurance contract itself is distributed." This contradicts letter ruling 8721083 from IRS that said these amounts were recoverable when the policy was surrendered by the Trust and the value of the life insurance policy was distributed to the participant, which I believe is the most recent formal guidance we have. Can we expect that these instructions will be changed to reflect the new approach of the letter ruling?

We will forward this issue on to the people who write the instructions.

48. Reg 1.401(a)(4)-5(a) says that the timing of a plan amendment or series of amendments must not be discriminatory, and that the establishment or termination of a plan is considered to be an amendment for this purpose.

If a new plan provides for immediate entry for those employed on a certain date, and a waiting period for those hired after that date, might this be considered a discriminatory amendment?

I do not know if Reg 1.401(a)(4)-5(a)was intended by its authors to apply to new plans where the employer had never before established a plan. I would have thought this section would have applied where an existing plan had been amended and terminated with a new plan established in its place. Nevertheless having this section apply to a new plan does not seem to be precluded. The examples do not seem to help much.

This provision is often seen in standardized prototypes which are supposed to be nondiscriminatory by design. I do not think present and future eligibility would have been approved in standardized prototype plans if this were not acceptable.

We do not see this eligibility provision as a discriminatory amendment under the -5 rules.

49. When will the anticipated guidance on correction of qualification failures be issued? How much guidance will we get?

Rev. Proc. 99-31 was issued and gives guidance in this area.

50. The Service extended the GUST remedial amendment period through the end of the year beginning in 2000. This was a welcome development and we are pleased that the decision was made early in 1999, rather than late in the year. What is the current schedule as to the availability of guidance and LRMs for the last GUST items? When will the determination program be fully opened?

We are working on them and expect to issue them shortly. This will be discussed further from the podium.

51. A employer has a profit sharing plan with individually directed accounts at a major mutual fund house. The participants are all being given the option of electing to use an investment manager for their accounts if they so desire. The management fees would be paid directly from the participant's account.

Only the HCEs have account balances at the minimum amount necessary, as established by the investment manager. I am concerned that the use of investment managers by the HCEs would violate the benefits, rights and features requirements of the nondiscrimination rules. Should I be?

This will be discussed from the podium.

52. At one time, the IRS National Office held the opinion that you could not have a 414(k) account in a defined benefit pension plan. That is, a participant who accrued a benefit in a defined benefit plan and who had a distributable event could not transfer the money into a defined contribution (quasi-rollover) account in the defined benefit plan and test the 415 limits at the time of the transfer, rather than at the time of the ultimate distribution. Does the IRS continue to hold that position?

This is not our present position. It there is a distributable event, with appropriate consents, the funds can be put into a separate account which "moves" the defined benefit money into a defined contribution account

53. Will adopters of volume submitters plans have an extension of their remedial amendment period to 12 months after the approval of the lead document?

We expect that to be the case. A Rev. Proc. will give the details.

54. Revenue Ruling 98-30 discuss the issues for 401(k) negative elections for new employees. Will the IRS issue a revenue ruling on negative elections for employees who are already working for the plan sponsor when a negative election program is adopted? If so, what additional issues will be dealt with in that guidance?

We expect that an additional Rev Proc will be issued to deal with this subject in greater detail. This will be discussed from the podium.

55. After a deemed distribution due to a loan default, does interest continue to be accrued and does the accrued interest reduce the amount paid out upon the eventual loan offset? Is the result the same in a defined benefit plan as in a defined contribution plan?

Yes and Yes.

56. Is there any problem with a defined benefit pension plan using the traditional unit credit funding method having a normal retirement age of the earlier of age 65 or six years of service, but not later than age 65 and the fifth anniversary of the commencement of participation?

This will be discussed from the podium.

57. What is the IRS' current position on "orphan plans?" Must a plan sponsor be actively engaged in business? Can a dormant, but legally existing, corporation continue its sponsorship of a plan with funds held for terminated employees only? Is there any difference with regard to a sole proprietor who is no longer producing any revenue in the sole proprietorship?

This will be discussed from the podium.

58. If independent contractors are reclassified by IRS as employees, how do now required contributions for past years count in a defined contribution plan for both 404 and 415 purposes? Can we include the previous years' compensations for current 404 purposes? Is the full amount deductible in the current year when made? What if they are reclassified by the employer and the matter is self-corrected under APRSC?

This will be discussed from the podium.

59. In a 401(k) plan, does 401(a)(17) preclude the following:

A. A earns $300,000 annually. He enrolls in 401(k) calendar year plan in August, after earning $175,000. He defers $10,000 in the balance of the year.

B. A earns $300,000 annually. He participates in a calendar year 401(k) plan making monthly deferrals of a flat dollar amount of 1/12 of $10,000 in 1998, even though his pay exceeded $160,000 before he was done making elective deferrals.

C. Same as 2, but deferrals are a percentage of pay (3.33333%).

We believe that all three scenarios should be ok. This will be discussed additionally from the podium.

60. Informal comments have been made by IRS representatives regarding the timing of an amendment to change the testing method used for the ADP or ACP test. Specifically, the issue is whether the method (e.g., current year method) must be specified in the plan before the plan year begins or whether the amendment can be made after the plan year has begun (or even made after the plan year has ended). Is this still the "informal" opinion of the IRS and if so, what is the rationale for this interpretation?

This is still our conclusion. This will be discussed from the podium.

61. When can we expect guidance on leased employees? Any chance we'll see something soon?

There is no guidance in process for this issue.

62. If a DC plan (a) decides to settle a claim for benefits not previously funded (in error) or (b) decides not to (or cannot) recover overpaid benefits and will make up the difference, where does it get the money from? Charge it against income? Can employer pay it into the plan? What IRS approvals, if any, are necessary?

The money must come from the employer. This is an acceptable use of APRSC if it otherwise meets the requirements.

63. Under APRSC what would be an aceptable way of correcting a situation where an eligible individual had not been advised of his eligibility to participate under a 401(k) plan? What would be the required contribution for him? How would the gain on his account be determined?

We suggest that Rev. Proc 99-31 would provide the needed guidance in this situation.

64. A company's owner sponsors one DC plan for himself and another for everyone else. The plans are aggregated for coverage testing, so benefits, rights and features must also be tested on an aggregated plan basis. The plans follow different investment approaches. Neither plan provides for the "404(c)" option. The owner is trustee of both plans, so in essence the owner directs his own accounts. Is this situation discriminatory?

No.

65. A participant in a large defined benefit plan elected early retirement at age 55. This entitled him to a monthly lifetime retirement benefit of $250.69, plus a pre-social security monthly allowance of $55.95 until he attained age 62. However, the plan administrators never reduced the monthly payment at age 62, continuing instead to pay $306.64 for the next 12 years after the retired participant reached age 62. The retiree did not realize there was an error.

Now the employer discovers his mistake and first asks for a lump sum payback or installment payments with interest of 5.44%. The retiree wrote a letter and the employer has now decided to withhold 25% of the $250.69 each month until the overpayment is repaid.

Is this an appropriate and legal method of correcting this error?

Rev. Proc. 99-31 provides a methodology which should be followed. The reduction proposed in this example would most likely not be adequate.

66. Is the IRS National Office EP Division paying more attention to employee classification issues?

This will be discussed from the podium.

67. What is the IRS position on elective deferrals from certain payments following the termination of employment, such as severance pay, accumulated vacation pay, and bonuses?

These payments are not eligible to have any part of them deferred under 401(k) since the participant MUST be an employee in order to defer and the employment relationship has ended prior to the payment of these amounts.

68. Can a plan charge participants and/or their account balances for the costs of distributions?

This is primarily a Title I/DOL issue, but we believe you should be very cautious when considering an action such as this.

69. Can 403(b) plans utilize the negative elections?

We believe this is questionable. This will be discussed in further detail from the podium.

70. A year or two ago, the IRS conducted a nationwide audit program to learn more about 401(k) plans and their operational and qualification issues. What were the results of that audit program? Will the information be released to the public?

The results of this program will be released soon.

71. Second to Die Life Insurance contracts have been available under profit sharing plans for many years. There is confusion as to the availability of this type of contract under money purchase and defined benefit plans. What is the Service's position on the availability of SDLI contracts in pension plans?

This will be discussed from the podium.

72. What constitutes a satisfactory method to distribute account balances (both less than and greater than $5,000) to lost participants in a terminated DC plan?

There is no good answer to this question currently. This requires a statutory fix. This will be further discussed the podium.

73. Would you confirm that retirement plan trusts should/must obtain and use a separate EIN (or Trust Tax Number) for reporting distributions, rather than using the employer's EIN?

Retirement trusts are required to have their own separate EIN, especially for purposes of holding assets. Distributions can be reported under the EIN of the plan sponsor in accordance with published rulings, but that does not eliminate the need of the trust to have its own EIN.

74. Do you have any results from the implementation of the APRSC program? Have you seen any decline in VCR filings?

We have seen a significant decline in the numbers of VCR filings since the APRSC program has gone into operation.

75. In some cases, when a distribution is requested, a mutual fund company may make the check payable to the employer. The employer then writes an equivalent check to the participant. The employer check is written and transmitted the same day the trust check is received. Is this permissible?

This is legally incorrect and should not be done.

76. It's 1999. The client expects to use the new otherwise excludable employee option to throw out short age/service NHCEs. One argument would say that the excluded contingent of NHCEs are all those who have not completed one year and attained age 21 by the end of the 1999 year. The rationale here is that the new rule only refers to 410(a)(1)(A), not (a)(4) which modifies (a)(1)(A).

A second view would say that the new rule flows from the old 410(b) option as interpreted in 410(b) regulations which reference the "greatest permissible age and service conditions" -- the whole point being not to punish an employer for bringing folks in sooner than the latest date required. Thus, the excludable group is determined using one year/age 21 and semiannual entry dates. And the same NHCEs are excluded under the new special rule.

Which is correct?

We believe the new ruling is different than permissible disaggregation and the first option listed above is the correct interpretation.

77. A participant has an account balance of 10 cents from elective deferrals. Is there a de minimis amount under which the Employer does not have to distribute the account balance? It costs the Employer $10 to have a check cut.

Legally, there is no minimum amount that can be ignored.

78. What is your opinion of replacing a sentence in a plan document due to "scrivener's error"? When the Employer's plan was restated, half of a sentence relating to the forfeiture provision was inadvertently not carried over to the restatement. It was never intended for the plan's forfeiture provision to be changed and the plan continued to operate under the forfeiture provision. Once it was discover that the plan was not operating under the forfeiture provision that was in the restated plan document, the plan had to enter into the VCR to correct. Under these circumstances, what is your opinion on inserting a replacement page with the correct forfeiture provision into the restated plan document on account of "scrivener's error"?

In our view, this needs to be handled under walk in CAP.


79. An Employer is merging two 401(k)/ profit sharing plans. Plan A is invested at New Investment Company and Plan B is invested at Old Investment Company. Plan B's assets are going to transfer from the Old Investment Company to the New Investment Company. When the assets are transferred, Old Investment Company is going to hit the assets with a back-end charge. Employer wants to make a payment equal to the amount of the back-end charge to the Plan, so that Participant's accounts are not reduced by the amount of the back-end charge. Do you see any problem with this?

Barring a fiduciary breach (which we do not see in the example above), we do not see any allowance for such a payment without it being considered a contribution to the plan subject to all the normal rules applicable to a contribution.

80. Professional Employer Organizations (PEO's) are contracting as co-employers of client employees. IRS guidance is thin on who is the sponsor of 401(k) plans in these arrangements. Can the PEO sponsor a 401(k) plan, with a separate benefit structure and separate testing for each client's employee pool?

The National Office is looking at this issue.

81. Will a flat benefit formula in a defined benefit plan that exceeds 100% of compensation reduced pro rata for participation less than 25 years and accrued over participation meet the requirements of a design based safe harbor if the Code Section 415 limitations are applied to the normal retirement pension before determining the accrued benefit? This will result in different accrual rates for participants having 25 or fewer years of participation at retirement. However, isn't the accrual rate of a participant irrelevant if his projected benefit is capped due to the 415 limit?

This will be discussed from the podium.

82. Man and woman each own a non-affiliated business and they have a child together. Does this mean that their non-controlled group is now controlled under 1563 (e) (6) and will be controlled until that child turns 18? - therefore never have children under 18?

That is correct - never have children under the age of 18!

83. Investment vendors, mutual funds, brokerage houses etc. are refusing to make distribution checks payable to participants on the theory that they are then responsible for withholding of taxes? Is there any justification for this when they are not the trustee or plan administrator?

No; there is no justification for this.

84. Does the IRS view the use of " Grouping of Accrual Rates" under Reg. §1.401(a)(4)-3(d)(3)(ii) on cross-tested defined contribution plans as inappropriate for small plans where the technique enables such small plans to satisfy the General Test for nondiscrimination in the amount of contributions under Reg.§ 1.401(a)(4)-2(c)(1)?

We do not view it as per se inappropriate; however, you must follow the rules and that might indeed make it difficult to effectively utilize grouping for small plans.

85. In a cross-tested allocation, when determining the accrual rate for a new participant who entered the plan during the plan year (definition of compensation is from date of participation) and is provided a 3% top-heavy minimum contribution based on total 415 compensation for the plan year, which compensation should be used in the accrual rate calculation (plan entry compensation or total 415 compensation)?

You can use either so long as you use the same period for all participants.

86. A calendar 401(k) plan changes its plan year to June 30-year end. There is a short year from January 1, 1999 to June 30, 1999. There is only one HCE who contributes $6,000 in the short year. The ADP test fails and the HCE receives back $3,000 by September 15th. The HCE will receive a l999 Form 1099-R for $3,000 plus income. For the remaining portion of calendar 1999, how much can the HCE contribute to the plan without violating the $10,000 deferral limit (let's assume that the June 30, 2000 ADP test will pass regardless of the answer)?

We believe the correct answer is $4,000. The $3,000 that was paid back must still be counted toward the total allowable deferral for the year.

87. What is the maturity date for a loan taken to refinance a pension loan? Can the second loan begin a "fresh" five-year repayment?

The existing guidance doesn't deal with this issue; therefore, the answer is unclear. We will provide additional guidance at some point. This will be discussed from the podium.

88. IRS routinely requires standard termination amendments to include detailed and lengthy description of SBJPA Section 415 limitations (per Rev Rul 98-1). For purposes of plan restatements, may much of this be incorporated by reference? Please clarify when and how plan documents may be simplified with limitations?

This will be discussed from the podium.

89. Two members of a controlled group of businesses sponsor a Profit Sharing Plan. The combined 15% limit is $60,000 based on total covered compensation of $400,000. Of the $60,000, $35,000 would be attributable to compensation paid by Business A and the remaining $25,000 would be attributable to compensation paid by Business B. Assuming that the two businesses would like to make a $50,000 contribution:

Under what circumstances, if any, could Business A deduct the entire $50,000? In general, assuming that the covered compensation can be clearly broken down between the two businesses, must the deductions be taken based upon 15% of the respective covered compensation for each business? If not, how much flexibility is allowed in determining the breakdown? Where in the regulations, etc.. is the guidance concerning this breakdown?

This will be discussed from the podium.

90. With respect to Minimum Required Distributions for employees other than 5% owners, has there been any guidance from the IRS with respect to the question of when an employee is considered to "retire"

Is the employee considered to be retired if he reduces his hours from 35 hours per week to 2 hours per week?

No guidance has been issued; this is a facts and circumstances determination.

If the plan sponsor terminates the plan and distributes the assets in 1999, could the employee (who is over age 70.5 but is not a 5% owner) transfer his entire account balance into an IRA without taking a minimum required distribution for 1999, either from the qualified plan or from the IRA?

Yes.

Assume that the business is sold, the plan is terminated due to the sale of the business, and the assets are distributed in 1999. Also, assume that the employee (who is over age 70.5 but is not a 5% owner) continues to work at the same desk following the sale of the business, could the employee transfer his entire account balance into an IRA without taking a minimum required distribution for 1999, either from the qualified plan or from the IRA?

Yes.

91. A calendar year DC plan uses one year and semi-annual entry dates of 6/30 and 12/31 in its eligibility provisions. An employee hired on 1/1/99 would enter the plan on the semi-annual entry date coincident with or next following the completion of one year of service. The question: Does this employee enter the plan in 1999 (12/31) or 2000 (6/30).

The argument is that the eligibility computation period hasn't finished until one second PAST 12 midnight on 12/31/1998 and it is at THAT instant that the person has earned 1 YoS for eligibility.. They enter the plan on 6/30/2000 because completion of 1 YoS was NOT coincident with an entry date. Others argue that the person meets the requirement on 12/31/99 and thus enters for the 1999 year. Some popular administration software offers an "inclusive" or "exclusive" definition for eligibility, just so that people could pick their own application of this rule. Is there a "right" answer?

Yes - 6/30/2000, but we don't agree that the reason equates to the "one second past midnight" argument. This will be discussed from the podium.

92. Can a money purchase plan with no last day employment requirement terminate now prospectively so that no contributions accrue for the rest of the year? Here are three possible ways of looking at it; which is correct?

A. Aggressive position - no contributions required or allowable for the CURRENT plan year. See RR-79-237.

B. Conservative position - contribution required for current plan year based on total compensation for the entire plan year.

C. Medium position - contribution required for current plan year but only based on compensation earned to the later of the adoption date or the effective date of the plan termination/plan amendment.

This will be discussed from the podium.

93. This question relates to the application of an ADP or ACP test when there has been a corporate acquisition or disposition in the middle of a plan year. The question is best described by way of example. The example deals with a spin-off. But, the same issue could arise when there is an acquisition.

A-B is a controlled group of corporations. Assume A-B sponsors a calendar year 401(k) plan. On July 1, 1999, the stock of B is sold to an unrelated person so there is no longer a controlled group of corporations. How is the ADP test processed for 1999?

Here are 2 suggested answers.

A. One ADP test is run for the entire year. The problem with this is that A and B are not part of a controlled group for the entire period and it is not to aggregate plans of unrelated employers. The Code Section 410(b)(6)(C) transition rule may apply, but that rule is only for 410(b) coverage purposes. Similarly, Code Section 413(c) does not permit aggregation of a multiple employer plan for nondiscrimination purposes.

B. One ADP test is run for the first 6 months of the year and a separate ADP test is run for the last 6 months for each separate company (i.e., a total of 3 ADP tests would need to be processed). This seems to be the correct answer but is clearly an administrative burden.

This will be discussed from the podium.


94. This question relates to the drafting of language to update defined benefit plans. Many existing defined benefit plans have fresh-start rules due to changes in prior laws or regulations (e.g., when the annual compensation limit was lowered to $150,000). Some of these rules may still apply to a plan such as the extended wear-away method or a method that increases a frozen accrued benefit for subsequent increases in compensation. To what extent do these methods need to be specified in a plan that is restated for GUST (or for any other reason)? Does the updated plan need to specify in detail all of the prior fresh-start rules or can the plan simply incorporate by reference any fresh-start rules that may have existed in the prior plan (e.g., any prior fresh-start rules shall continue to apply to this restated plan)?

This might work. We can only suggest that you submit for a determination letter and see what happens. There are no hard and fast rules on this issue at this time.

95. Regulation 1.401(a)(4)-11(g)(4) provides that a corrective amendment made to fix a Code Section 410(b) coverage failure is not taken into account to the extent it affects nonvested participants who terminated employment in the prior year. How should a corrective amendment be structured if the only participants causing the coverage failure are terminated participants who are not vested?

For example, a profit sharing plan requires employment at the end of the year to share in allocations. There is one HCE and 3 NHCEs all of whom are participants in the plan. One of the NHCEs terminates employment with over 500 hours of service and this NHCE is not vested. How would a corrective amendment be structured? Assuming the answer is that the amendment must provide for a vested contribution, what percentage or dollar amount must be vested (e.g., vest $1.00 of the contribution)?

The amendment must provide for a vested contribution. Certainly, 100% vesting of the contribution would be safe. Anything less would be less safe. You might want to consider as an alternative a vesting schedule in the plan that starts from year one or that provides a minimum vested percentage for all participants.

96. The rule of parity (Code Sections 410(a)(5)(D) and 411(a)(5)(D)) permits service to be disregarded for certain "nonvested participants." Can this rule be used if someone had terminated employment before the employer had even established a plan?

For example, an individual works for an employer for 3 years and then terminates employment. The employer does not have a retirement plan. The individual is rehired after 10 consecutive one-year breaks in service. The employer then establishes a retirement plan. Is the employee required to be credited with the prior 3 years of service or can the rule of parity be used to disregard the prior service?

The rule of parity applies to non-vested "participants". An employee who terminated prior to the plan effective date was never a participant and, thus, that prior service need not be counted.

97. Is it possible to have an initial short limitation year for a new plan? Regulation 1.415-2(b)(4) addresses short limitation years when there has been a change in limitation years. But, the regulation does not address initial limitation years. A sponsor may want an initial short limitation year if a new plan is established with a short plan year and the plan is top heavy. Top heavy minimums are based on 415 compensation for the limitation year and the sponsor would like to have the top-heavy minimums based on 415 compensation for a short limitation year.

The top heavy minimum is based on compensation for the short plan year, not the limitation year. The limitation year it not relevent.

98. When is the deadline for a sole proprietor to make salary deferral contributions to a SIMPLE IRA?

I have not been able to find anything that differentiates the time frame for a sole prop. versus an employee. The SIMPLE guidance |gives us the deadline of the "earliest date on which the contributions can reasonably be segregated from the general assets, but in no event later than 30 days following the last day of the month in which amounts would otherwise have been payable in cash". This seems to imply that the latest the sole prop. could make "salary deferrals" for the prior year would be (approx.) January 30. Since they (usually) haven't determined their net income yet, this has resulted in excess contributions.

This will be discussed from the podium.

99. I understand that if we use the top-paid group election to determine HCEs, there are no specific rounding rules that must be applied and that any reasonable method, consistently applied, is acceptable.

We have 8 non-excludable employees, two of whom are less than 5% owners earning in excess of $80,000. Since 20% of 8 is 1.6, if I want to use the top-paid group election in this case and only want to have to include one of these high paid employees in my HCE group, I appear to be able to do so by adopting a rounding convention of "rounding off". In this example, so long as I have fewer than 10 non-excludables, I should be able to exclude this one employee from the HCE group. Do you concur?

Yes.

100. Rev. Proc. 95-51, as modified by 98-10 allows for certain funding method changes without prior approval, presuming certain conditions are met. One of the conditions is that no change has been made in the past four years. Specifically, section 4.08 says automatic approval does not apply if: ". . . a funding method change . . . was made in any of the four (4) preceding plan years." The question is: is the original adoption of one method for the first plan year considered a "change" that would preclude an automatic approval for four years? I would believe that it would not, but would like your confirmation.

We concur. The original adoption of the plan and a funding method does not count as a change and an automatic change would be allowed as soon as the second year of the plan.