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The Latest Q&As for TPAs

Posted By NIPA Headquarters, Thursday, October 18, 2012

Q: Is spousal consent required for a minimum required distribution from a plan that is subject to the QJSA rules?  If not, must the distribution be in the form of an annuity?

A: Spousal consent is not required for RMDs. See 1.401(a)(9)-8, A-4.2.

Absent spousal consent, the plan may distribute in the form of a QJSA, and the consent requirements of sections 411(a)(11) and 417(e) are deemed to be satisfied if the plan has made reasonable efforts to obtain consent from the participant's spouse. Check the plan document for any specific provisions.

Q: John is in the real estate business. He buys buildings and holds them in an LLC.  Each building is owned by a separate LLC and John personally has a 3% to 60% ownership interest in each LLC. John also is the Managing member of each LLC.  Some of the LLCs have employees. In addition, John owns 100% of JMC, Inc. (John's Management Company).  JMC manages the buildings and has employees.

Client wants to set up a plan that covers only JMC, Inc.  Are the LLCs part of an Affiliated Service Group? Or put another way, does John need to also cover the employees in the LLCs?

A: Assuming that the LLCs are not all related (as defined under section 144(a)(3), below) to each other, John does not need to consider the employees in the LLCs.

Q: A 401(k) plan was taken over in 2008 from prior administrator. Eligibility in document is 3 months of service. Plan is tested on statutory basis. Realized now (2012) that employees who are part time were not offered the option to defer over the years. They were using other benefit guidelines in determining who was eligible for the plan then applied the 3 months. Plan had a match formula that was discretionary.

If the plan was administered with different legibility rules, is there any way the document can now be amended to cover what they were doing in practice?

A: If the plan incorrectly excluded eligible employees, correction by retroactive amendment is not available.

Q: If they need to correct, what rate do we use for the deferrals when it was tested statutorily?

A: I'm sorry; what does "tested statutorily" mean in this context? If you are referring to the ADP test, the employer must contribute an amount equal to the NHCE ADP times the participant's compensation times 50%. All of the eligible NHCEs in a given plan year must be included in determining the NHCE ADP for this purpose.

Q: For the match do we just use the compensation from the entire period up to the point they stopped the match?  

A: Yes. And you base the match on the NHCE ADP, not the 50% amount.

Q: Are there lost earnings on the deferrals? Lost earnings on the match?  

A: Yes, and yes.

Q: Is a 5330 needed for anything besides the lost earnings?

A: Form 5330 is not needed for lost earnings or anything else.  The employer contributions are not participant deferrals, so there is no prohibited transaction.

Q: Client (non-profit organization) has a 403(b) plan with a September 30 year end. They wanted to do a 5% flat discretionary contribution, annual calculation. They calculated this amount in December and deposited it without running it by me.It turns out that the contribution figures they deposited are wrong. They did NOT abide by the "comp while participant" and "monthly entry dates" rules of their plan.

I did a correction report for them, but they REFUSE to submit it to the provider. They say that it is "discriminatory" to take money back from some people and not others. I, on the other hand, have informed them that it is discriminatory to give money to people who didn't earn it.

A: This is not really a nondiscrimination issue.  Failure to follow the terms of the plan document is an operational failure.

Q: Because this is a 403(b) Plan (no owners, no HCEs), I can't tell them that they will "lose qualified status." What can I tell them?

A: That penalties may be assessed by the IRS?That the value of the 403(b) policies will become currently taxable to the affected participants.  In this case, all participants are affected.  See §1.403(b)-3(d)(1)(ii).

Q: Employer has a 3% non elective safe harbor 401(k) plan. No problem there. Then outside of the plan they give employees 1% in company stock for any deferral contributions they make from 4% to 6%. So, everyone gets 3% in the plan whether they defer or not and then people who defer more than 3% they receive employer stock outside of the plan.  

Not sure what to think here. . . on one hand the stock is not being contributed to the plan so, no big deal. But, on the other hand, they are influencing how much people defer based on this incentive they are giving outside of the plan.  Is there a problem with this arrangement?

A: Yes. Specifically:   §1.401(k)-1(e)(6)(i) provides that "A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee’s electing to make or not to make elective contributions under the arrangement."  

§1.401(k)-1(a)(5)(ii) provides that the deferrals are treated as non elective employer contributions for purposes of  sections 401(a), 404, 409, 411, 412, 415, 416, and 417.  

§1.401(k)-1(a)(5)(iii) provides that the 401(k) deferrals are currently taxable to the participants.

Q: I am getting conflicting answers from numerous different outlets on what is the permissible  way to correct a 402(g) failure. Can you please tell me the proper way to correct this type of failure, for both in the current year, and previous year?

A: The correction methodology depends on whether the excess occurred in a plan (or plans) sponsored by the same employer or controlled group, or if there is an excess because the participant deferred into 2 plans of unrelated employers, but there is not an excess in either plan.  

The section 402(g) limit applies to an individual. A 402(g) excess can exist if the participant defers more than the maximum amount ($17,000 for 2012) into 2 (or more) plans of unrelated employers, even if the deferral made to each plan does not exceed the limit.  

Section 401(a)(30) requires a 401(k) plan to provide that the amount of a participant's deferrals "under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A)"  

So, an individual who defers (say) $15,000 into each of two 401(k) plans sponsored by unrelated employers violates section 402(g), but neither plan violates section 401(a)(30).  

Since neither plan violates section 401(a)(30), a corrective distribution is not required to prevent a plan qualification failure.  In this case, a plan may provide that a participant can request the plan to distribute the amount of the 402(g) excess. Such excess must be distributed by the April 15 following the calendar year in which the excess arose. Note that this is an optional plan provision; a plan is not required to make such corrective distribution.  

If the plan does not distribute the 402(g) excess by April 15 (pursuant to the participant's request), the excess cannot be distributed until there is a distributable event. In this case, the amount of the 402(g) excess is treated as any other pre-tax deferral for distribution purposes; it is eligible for rollover, and is a taxable distribution to the participant if not rolled over.  

Now, if the participant were to defer the same $30,000 into a single plan, we would have a 402(g) excess. We would also have a violation of section 401(a)(30). Because compliance with section 401(a)(30) is a qualification requirement, the plan must distribute the excess by April 15. If the excess is not distributed by April 15, the plan has a qualification failure. The regulations do not allow such excess to be distributed prior to a distributable event. However, because this is a qualification failure, a correction can be made under Rev Proc 2008-50. Specifically, the plan can distribute the excess after April 15, even if there is not a distributable event. Under this correction method, the distribution is taxable in the year distributed, and is not eligible for rollover.


TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and

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