TAG Frequently Asked Questions. Presented By: Susan M. Wright, CPA, APM

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1 TAG Frequently Asked Questions Presented By: Susan M. Wright, CPA, APM

2 About TAG Ability to ask retirement plan questions our TAG specialists have, on average, over 25 years of experience Searchable FAQ database with around 4,000 questions & answers Daily News (going back six weeks) Research tools 35,000 government documents (DOL, PBGC, IRS and court cases) Quick Reference (spreadsheets, calculators & charts) Resource Center (information on plan types & plan operation issues) Visit 2

3 TAG Website Demonstration

4 Plan Corrections under EPCRS

5 Plan Corrections Fact Pattern I 401(k) Plan Employer mistakenly allowed an active employee to take a full termination distribution Distribution was made in February Distributed funds were rolled to an IRA Employee will terminate in August

6 Plan Corrections The Question What is the proper correction for this error, and does the fact that he will be terminated in August make any difference in the correction method?

7 Plan Corrections The Answer The employer should take reasonable steps to have the overpayment, adjusted for related earnings, returned by the participant to the plan. If the participant refuses, the employer (or another person) must contribute the amount, adjusted for earnings, to the plan. The participant must also be notified that the amount was not eligible for rollover.

8 Plan Corrections The Answer (cont.) Even though it seems this error will "self correct", the problem here is that the distribution was not eligible for rollover at the time made. From Rev. Proc : the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under 402(c)(8)(B) (and, specifically, was not eligible for tax free rollover)

9 Plan Corrections Fact Pattern II Participant received a 2016 RMD Participant is not a 5% owner and is actively employed Plan does not require RMDs for active participants who are not 5% owners Plan does not permit in service distributions

10 Plan Corrections The Question If a participant receives a Required Minimum Distribution in error in the prior year, do future RMDs need to continue to be processed?

11 Plan Corrections The Answer No. If the participant is not required to receive RMDs under the terms of the plan, then the plan should not be paying RMDs just because the plan made an error in a prior year. Rather, the plan needs to address the operational error that occurred (i.e. failure to follow the terms of the plan document).

12 Plan Corrections The Answer (cont.) In general, the correction is for the overpayment to be returned to the plan by the participant, adjusted at the plan's earnings rate. There is an exception to this repayment rule, however, when the distribution would have otherwise permissible under the Code/regulations if allowed under the plan (which would seem to apply in this particular situation).

13 Plan Corrections From Rev. Proc : Make whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan s earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (e.g. an impermissible in service distribution)).

14 Plan Corrections Fact Pattern III Excess contribution under 402(g) in a single plan EPCRS section 6.02(5)(b) provides that "If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution.

15 Plan Corrections The Questions Is a 402(g) excess of less than $1 considered a small benefit that would not be required to be distributed if the costs of processing the distribution excess the amount of the distribution? If so, could 402(g) excesses of up to $75 be considered a small benefit that would not need to be distributed if the cost of processing the distribution is $75?

16 Plan Corrections The Answer Not quite. A 402(g) excess is an "Excess Amount as defined under Rev. Proc There is an exception that may apply in this particular situation; however, it is not found under Section 6.02(5)(b).

17 Plan Corrections Section 6.02(5)(e) applies which provides that "if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $100 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax free rollover)."

18 Plan Corrections The Answer (cont.) Regardless of whether the 402(g) excess is $100 or less, the plan sponsor will want to consider the recordkeeping issues that would be required if the plan were to rely on this exception (i.e. tracking the excess amount on an ongoing basis, along with related earnings, so that the amount could be reported properly when distributed from the plan at a later date).

19 Plan Corrections Fact Pattern IV Plan fails ADP testing for 2014 Plan Year Plan is using the one to one correction method to correct 2014 failure Plan is has self directed brokerage accounts

20 Plan Corrections The Questions Can earnings be calculated on excess contributions based on actual overall plan returns or should earnings be determined based on the HCE s individual returns over the specified period based?

21 Plan Corrections The Answer Related earnings must be determined based on the HCE's actual earnings, in the same manner that they would have been for a corrective distribution that was issued timely except that related earnings must be calculated through the date of the correction.

22 Plan Corrections The Answer Sec.3.01(1)(d) of App. B of Rev. Proc states that the earnings adjustment methods provided for under this section may NOT be used for the one to one correction method. The 401(k) regulations provide the method for calculating related earnings which must be followed (except earnings must be calculated through the date of the correction).

23 Plan Corrections Fact Pattern V 401(k) Plan with age 21 and year of service requirement Dual entry dates (January 1 and July 1) Plan sponsor let an employee participate before they were eligible Employee became eligible January 1, 2017 but made deferrals in 2016

24 Plan Corrections The Question What should be returned for self correction, deferrals and interest with a 2017 taxable 1099 R?

25 Plan Corrections The Answer The general correction method under Rev. Proc is for the plan to be amended retroactively to conform the terms of the plan to how it was operated, provided the amendment predominately impacts NHCEs. The IRS has also indicated in EPCRS phone forums that ineligible deferrals may be distributed under the general correction principles of EPCRS.

26 Plan Corrections The Answer (cont.) Deferrals, plus related earnings, would be distributed and any related match would be forfeited. The distribution would be reported as taxable on a 2017 Form 1099 R using Code E Distributions under Employee Plans Compliance Resolution System (EPCRS).

27 Plan Corrections The Answer (cont.) In a 2013 IRS Phone Forum, the IRS suggested that making a correction in this manner might require the participant to file an amended individual tax return (implying the amount would be taxable for 2016). It is unclear how this informal IRS guidance could be applied. Since the distribution is being made in 2017, it should be reported on a 2017 Form 1099 R (regardless of the fact that it relates to deferrals made in 2016). Code E should be used to report the distribution and there is no code that could be used to indicate the distribution should be taxable for the prior year. It seems the only option would be to report it as taxable in the year of the distribution.

28 Required Minimum Distributions

29 Required Minimum Distributions Fact Pattern VI 401(k) Plan The 5% owner who is 70 1/2 is an employee The Question Can he still contribute to the 401(k) plan? I am reading that he/she cannot.

30 Required Minimum Distributions The Answer Yes; the owner can continue to defer under the 401(k) plan after he attains age 70 1/2. IRC 410(a)(2) states that "A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part excludes from participation (on the basis of age) employees who have attained a specified age."

31 Required Minimum Distributions Fact Pattern VII A 401(k) plan is terminating and assets will be paid out by 12/31/2017 The plan has two active (non owner) employees that are over age 70 ½ Both employees will roll over their balances to an IRA

32 Required Minimum Distributions The Question Do the employees have to take an RMD distribution before rolling their balances to an IRA? Would the answer change if the plan permitted inservice distributions at age 59 ½?

33 Required Minimum Distributions The Answer It depends. Plan termination, in and of itself, does not cause RMDs to become due. Unless the participants are otherwise required to receive RMDs under the terms of the plan, their entire balances would be eligible for rollover. The answer is not impacted by whether the plan has an in service distribution provision.

34 Required Minimum Distributions Fact Pattern VIII 401(k) plan with a non owner who is 73 and still working He is RMD age, but not required to receive RMDs under the terms of the plan

35 Required Minimum Distributions The Question If he wants to withdraw funds, is it processed as a minimum distribution with 10% withholding or as an in service with 20% withholding?

36 Required Minimum Distributions The Answer If the participant is not required to receive RMDs under the terms of the plan, then the entire inservice distribution is eligible for rollover and subject to 20% mandatory federal withholding. It is not an RMD.

37 Required Minimum Distributions Fact Pattern IX Company owner turns 70 1/2 on July 9, 2017 He rolled over most of his plan balance to an IRA in April 2017 His remaining plan balance is enough so that his 2017 RMD may be distributed from it

38 Required Minimum Distributions The Question Can his 2017 RMD be paid out of his remaining plan balance? Or should the rollover be reversed and his 2017 RMD paid first?

39 Required Minimum Distributions The Answer Technically, his 2017 RMD should have been paid prior to (or coincident with) the rollover. Treas. Reg (c) 2, Q&A 7 states that if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied

40 Required Minimum Distributions The Answer (cont.) It doesn t seem necessary to "reverse" the rollover. Since it is the same tax year, we don't think the IRS would challenge this as long as the RMD is paid from the plan (even if after the rollover). The tax implications are the same regardless and the RMD has been (or rather, will be) made from the plan.

41 Required Minimum Distributions Fact Pattern X Client who is over 5% owner would like to gift his RMD to Auburn University to keep AGI down Client s CPA has assured him that he can pay the RMD directly to a third party to avoid RMD counted as income I believe the CPA is assuming the Qualified Charitable Distributions (QCD) are available to 401(k) plans as well as IRAs Maybe I missed something and now they are, but all I can see is that it applies to IRAs only and was made permanent in 2016

42 Required Minimum Distributions The Question Can a greater than 5% owner donate his RMD directly to a charitable organization to avoid including in income?

43 Required Minimum Distributions The Answer No; this cannot be done from a 401(k) plan. The QCD (Qualified Charitable Distribution) provision only applies to IRAs (excluding SEPs and SIMPLE IRAs). IRS Publication 590 B (2016) states that A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions.

44 Various Technical Issues

45 Mid Year Changes to SH Plans Fact Pattern XI Safe harbor 401(k) plan with a 3% safe harbor nonelective contribution Plan sponsor would like to change to a safe harbor matching contribution formula mid year

46 Mid Year Changes to SH Plans The Question With the issuance of Notice , can a plan sponsor amend their plan mid year from a 3% nonelective safe harbor contribution to a Basic or Enhanced Safe Harbor Matching contribution? Or vice versa?

47 Mid Year Changes to SH Plans The Answer No; this is not permissible mid year for several reasons. This would be considered a reduction in the safe harbor contribution so the plan would have to meet the regulatory requirements (i.e. it would not be a safe harbor plan for the plan year). A non safe harbor 401(k) plan cannot add a safe harbor feature mid year. Further, IRS Notice specifically prohibits a change to the "type" of safe harbor plan mid year.

48 Safe Harbor Plan Compensation Fact Pattern XII We have a 3% QACA plan The definition of compensation is 3401(a) and excludes overtime pay, commission, and differential pay for allocation purposes

49 Safe Harbor Plan Compensation The Question Is this an acceptable definition of compensation to use for the safe harbor QACA contribution as long as it satisfies the 414(s) test?

50 Safe Harbor Plan Compensation The Answer Yes; a plan's definition of compensation may exclude certain compensation items (such as overtime) for purposes of safe harbor contributions (match or non elective), provided the definition is nondiscriminatory under IRC 414(s). The compensation ratio test would need to be performed each year. This requirement is the same regardless of whether the plan is a "traditional" safe harbor plan or a QACA.

51 ERISA Budget Accounts Fact Pattern XIII Provider established an ERISA Budget Accounts for a 401(k) plan The Question I think the money in the ERISA Budget Account can be used for plan expenses. Can the money in the ERISA Budget Account be used to reduce future Employer Matching Contributions to the plan?

52 ERISA Budget Accounts The Answer No, this is not permissible. The monies would either have to be used to pay plan expenses or be reallocated to participants (as earnings). An "ERISA Budget Account" (often also referred to as an ERISA bucket account, or a revenue holding account), is an account that is used to accept revenue sharing payments generated by the plan's investment alternatives (such as recordkeeping service fees, commissions, etc.). The proceeds are then generally used to pay plan expenses.

53 ERISA Budget Accounts The Answer (cont.) If there are excess amounts, then the amounts should be allocated to participant accounts as earnings (since the amounts were generated from the plan's investments). The plan administrator should have a policy for allocating any such amounts (at least) annually. They may not be used to reduce employer contributions. This is not a forfeiture account.

54 Self Directed Brokerage Accounts Fact Pattern XIV A client wants to add a brokerage window to their retirement plan Only a few HCEs will use this option, but I understand it needs to be made available to all participants

55 Self Directed Brokerage Accounts The Question What type of notification must be provided to participants of this new option? Any other guidance you can share is appreciated.

56 Self Directed Brokerage Accounts The Answer There are specific disclosure requirements under 404a 5 for plans that offer self directed brokerage accounts, and when there is a change to any of the general plan related information (which includes a description of the self directed brokerage account option). The changes must be disclosed to plan participants 30 to 90 days in advance of the effective date of the change (i.e. before this option becomes available).

57 Self Directed Brokerage Accounts The Answer (cont.) The 404a 5 disclosure must include a general description of the availability of self directed brokerage accounts. The description must include, at a minimum, how to give investment instructions, any account balance restrictions, other restrictions or limitations on trading, how the features differ from the designated investment alternatives offered under the plan (if applicable); and the party to contact with questions.

58 Self Directed Brokerage Accounts The Answer (cont.) The disclosure must also include a description of any individual fees and expenses that may be charged to an individual participant's account. The DOL allows for a general statement that these fees exist and that they may be charged to a participant's account as long as that the disclosure provides instructions on how to obtain such information and meets other requirements.

59 Self Directed Brokerage Accounts The Answer (cont.) In addition, on at least a quarterly basis, the plan administrator must provide participants with a statement of the actual dollar amount of any fees charged to the their accounts with a clear description of the charges. The disclosure may be provided on a participant statement or any other document (ex. brokerage statement or trade confirmation), as long as they are written in a manner as to be understood by the average plan participant.

60 Questions?

tagdata.com EPCRS Case Studies August 3, 2017

tagdata.com EPCRS Case Studies August 3, 2017 Presented by Susan M. Wright, CPA Editor, TAG Correction Programs IRS Rev. Proc. 2016-51 - Employee Plans Compliance Resolution System ( EPCRS ) Rev. Proc.