Printer Friendly

Current developments (Part II): this two-part article provides an overview of current developments in employee benefits, including executive compensation, welfare benefits and retirement plan requirements. Part II focuses on qualified retirement plans and welfare benefits.


* The IRS issued final regulations on Sec. 401(k) designated Roth contributions and proposed regulations on distributions from Roth 401(k) accounts.

* Rev. Proc. 2006-27 revised some of the EPCRS principles and added several new remedies for common plan qualification failures.

* Congress clarified the definition of a dependent and the IRS issued guidance on leave-sharing plans.


This two-part article covers the most significant developments in compensation and employee benefits over the past year (from August 2005 to August 2006). Part I, in the January 2007 issue, focused on compensation developments. Part II, below, covers fringe benefits and qualified plans.

Qualified Plans

Roth 401(k) Final Regs.

On Dec. 30, 2005, the IRS issued final regulations (13) on permitting Sec. 401(k) plan participants to make designated Roth contributions to separate Roth accounts within their plans. The final regulations--which were effective Jan. 3, 2006, and apply to plan years beginning after 2005--give plan sponsors much of the information they need to begin offering a Roth 401(k) option.

The regulations require employees to designate elective deferrals as Roth contributions "at the time of the cash or deferred election" Once made, the designation must be irrevocable. However, employees can change or revoke the designation when making future elections.

Under the final regulations, the rules on the frequency of elections to make pretax elective contributions also apply to elections to make designated Roth contributions. Thus, an employee must have an effective opportunity to make (or change) an election to make designated Roth contributions at least once per plan year.

Designated Roth contributions must be in lieu of all or a portion of the pretax elective contributions the participant is otherwise eligible to make under the plan. Thus, according to the preamble, a Sec. 401(k) plan must offer pretax elective contributions to provide for designated Roth contributions. This means employers may not offer Sec. 401(k) plans that accept only designated Roth contributions.

The final regulations clarify that plans may use automatic enrollment in conjunction with designated Roth contributions. Plans that take advantage of this must specify the extent to which default contributions are pretax elective contributions or designated Roth contributions. If the default contributions are designated Roth contributions, the automatic enrollee is deemed to have irrevocably designated the contributions as Roth contributions.

Plans that permit designated Roth contributions must establish separate accounts (designated Roth accounts) for each employee making such contributions, and maintain separate recordkeeping for each account. This separate accounting requirement begins when the designated Roth contribution is contributed and continues until all assets in such account have been distributed.

The regulations require plans to maintain a record of each employee's investment in the contract (i.e., designated Roth contributions that have not been distributed), and to allocate gains, losses and other credits or charges to each employee's designated Roth account (and other plan accounts) on "a reasonable and consistent basis." Neither matching contributions nor forfeitures may be allocated to designated Roth accounts.

Designated Roth contributions are subject to the same requirements as other elective deferrals to Sec. 401(k) plans, except they are taxable. Accordingly, the regulations specify that designated Roth contributions are immediately nonforfeitable and subject to the Sec. 401(k)(2)(B) restrictions on distributions. Similarly, designated Roth contributions may be treated as catch-up contributions and serve as the basis for a participant loan.

The regulations also subject designated Roth contributions to the Sec. 401(a)(9) required minimum distribution (RMD) rules. This is noteworthy, because the RMD rules generally do not apply to Roth IRAs. Designated Roth contributions rolled over to a Roth IRA would not continue to be subject to the RMD rules.

The regulations further provide that designated Roth contributions are elective contributions for purposes of the actual deferral percentage (ADP) test. For a plan that uses corrective distributions of excess contributions to cure a failed ADP test, the regulations permit plans to allow highly compensated employees to elect whether excess contributions are attributable to designated Roth contributions or to pretax elective deferrals. Any corrective distributions of excess contributions attributable to designated Roth contributions are not taxable, but the income attributable to such contributions is subject to tax. (Similar rules apply for using corrective distributions to cure actual contribution percentage testing failures.)

Prop. Regs. on Roth 401(k) Distributions

The IRS issued proposed regulations (14) on the tax treatment of distributions from Roth 401(k) accounts on Jan. 26, 2006. The proposed regulations deal with most questions relating to distributions from Roth 401(k) accounts, including questions about plan administrators' reporting requirements for such distributions.

Only qualified distributions from Roth 401 (k) accounts are eligible for tax-preferred treatment. A qualified distribution is one that occurs after a five-year period of participation and that either is (1) made on or after the date the employee attains age 59 1/2, (2) made after the employee's death or (3) attributable to the employee being disabled.

Under the proposed regulations, this five-year period would begin on the first day of the employee's tax year for which the employee first made designated Roth contributions to the plan and end at the completion of five consecutive tax years. The five-year period is plan-specific, so an individual making designated Roth contributions to more than one Roth 401(k) plan generally must satisfy the five-year period for each plan. However, in the case of a direct rollover from one Roth 401 (k) plan to another, the five-year period of participation for the receiving plan would begin on the first day of the employee's tax year for which he or she made designated Roth contributions to the transferring or receiving plan, whichever is earlier.

The proposed regulations would take a different approach for a rollover from a Roth 401(k) to a Roth IRA. A similar five-year rule applies to Roth IRA distributions, but the period begins with the first tax year for which the individual makes a contribution to any Roth IRA. However, rather than give individuals credit for the time since they first made contributions to the Roth 401(k), the proposed regulations would provide that this time does not count in applying the five-year rule to the Roth IRA. Of course, if the individual had established and started contributing to the Roth IRA at least five years before the rollover, the five-year rule would be satisfied for all assets in the account, including those attributable to the rollover.

For rollovers from one Roth 401(k) to another, the proposed regulations would require a direct rollover of any portion that would not be includible in the employee's income if distributed directly to the employee. Thus, the 60-day rollover option would not be available for these amounts. Additionally, these amounts could be rolled over only to another Sec. 401(k) plan, and not to a Sec. 403(b) plan. To ensure these amounts are properly accounted for by the receiving plan, the transferring plan would be required to report the amount of the investment in the contract and the first year of the five-year period to the receiving plan.

If a Roth 401 (k) makes an eligible rollover distribution directly to the employee, he or she could use the 60-day rollover option to transfer all or part of the distribution amount to a Roth IRA. An employee who receives an eligible rollover distribution directly from his or her Roth 401(k) could also use the 60-day rollover option to transfer the taxable portion to a Roth 401(k) or Roth 403(b) plan. In this case, the proposed regulations would require the receiving plan to notify the IRS that it has accepted the rollover contribution.

Designated Roth contributions are treated as elective deferrals for numerous purposes, including the Sec. 402(g) limit on elective deferrals. If an employee's total elective deferrals exceed the Sec. 402(g) limit for a year, the excess can be distributed by April 15 of the following year without adverse tax consequences to the employee. But if the excess deferrals are not distributed by that deadline, the proposed regulations would provide that any distribution attributable to an excess deferral that is a designated Roth contribution is includible in income and not eligible for rollover. The gap-period income rules also would apply to these excess deferrals.

In general, according to the proposed regulations, the same reporting requirements would apply to Roth 401(k) plans as apply to other plans. A contribution to and distribution from a Roth 401(k) must be reported on Forms W-2 and 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The preamble indicates that the IRS expects to change the instructions to Form 1099-R to require that a separate one be used to report the distribution from a Roth 401(k), the taxable amount and the first year of the five-year tax period. The proposed regulations would require plan administrators to track the five-year tax period for each employee and his or her designated Roth contributions. For direct rollovers, the transferring plan's administrator would be required to provide the receiving plan with a statement indicating either the first year of the five-year tax period and the portion of the distribution attributable to basis, or that the distribution is a qualified distribution. For distributions made directly to employees, the plan administrator would have to provide employees this same information on request, except the statement would not have to indicate the first year of the five-year tax period. This information would have to be provided to the receiving plan (or employee, if applicable) no later than 30 days after the direct rollover (or employee request).


The IRS released proposed regulations (15) addressing two issues surrounding corporate deductions of dividends paid on stock held in employee stock ownership plans (ESOPs). Although ESOPs may benefit the employees of several related employers, the proposed regulations clarify that only the corporation making the dividend payments on its stock may deduct such payments pursuant to Sec. 404(k).Additionally, a corporation may not take a deduction for payments in redemption of its securities held by an ESOP that are used to make benefit distributions to participants or beneficiaries. These proposed regulations formally reject the Ninth Circuit's interpretation of Secs. 162(k) and 404(k) in Boise Cascade. (16) The IRS later finalized the anti-Boise Cascade regulations. (17)

Sec. 72

A Tax Court decision serves as a useful reminder that different exceptions apply to the 10% penalty tax for early withdrawals from employer-sponsored retirement plans--such as Sec. 40l(k) plans--and IRAs. (18) Specifically at issue was the exception for withdrawals used to pay higher education expenses, which applies only to IRAs. But there are other differences of which plan sponsors and administrators should be aware when discussing the tax treatment of early withdrawals with participants.


The IRS updated its plan qualification correction program, the Employee Plans Compliance Resolution System (EPCRS), for the first time in almost three years. EPCRS allows plan sponsors to correct failures to satisfy plan qualification requirements, without suffering the severe consequences of plan disqualification. Rev. Proc. 2006-27 (19) retains the EPCRS basic structure, but adds several new remedies for common plan qualification failures and makes numerous (mostly liberalizing) technical changes.

Rev. Proc. 2006-27 revised some of the principles on which corrections are based. These affect the correction for excluded eligible participants from a Sec. 401(k) plan, plan loan violations and failure to obtain required spousal consent.

The new correction method takes the excluded employee's compensation for the pertinent period and multiplies it by a percentage based on plan deferral rates. (20) This "missed deferral" is then multiplied by 50%. IRS officials have stated that 50% is an approximation of the deferral's lost economic value, according to their own internal studies. Replacement matching contributions are then based on the full amount that the participant would have received if the "missed deferral" had actually been made. Earnings are then added from the date contributions should have been made through the correction date.

In a departure from past practice, Rev. Proc. 2006-27 requires the correction of any plan testing failures before addressing the operational failure (exclusion). The implications of that requirement are not clear. (21) Lastly, it appears that the improper exclusion of an eligible employee's compensation (i.e., not taking into account full compensation for deferral purposes) can be corrected under this "missed deferral" method, although Rev. Proc. 2006-27 does not include a specific statement to that effect. (22)

Loans: Plan loans to participants are, as a general rule, treated as distributions and taxed to participants, unless they comply with Sec. 72(p) restrictions on the loan amount, repayment period and level amortization of principal repayment. In addition, while a loan may initially satisfy Sec. 72(p), if the participant later defaulted, the unpaid balance would, at that time, be treated as a distribution and taxed. EPCRS had previously allowed plan qualification issues arising from improper loans to be resolved, but did not deal with the participants' income tax problems.

Rev. Proc. 2006-27 provides that when the plan loan failure is corrected through the Voluntary Correction Program (VCP) (not the Self-Correction Program (SCP) or the Audit Closing Agreement Program (CAP)), the participant is freed from any attendant income tax liability. The guidance allows a participant with loans in excess of the Sec. 72(p) limit to repay the excess in a lump sum. The remaining principal can then be reamortized in level installments over the remainder of the original loan period. When a loan's repayment term is too long, it may be shortened, again with reamortization of the principal. Lastly, a loan issued with uneven amortization, or on which the participant defaults, may be corrected by either a lump-sum repayment or an increase in periodic payments, to the extent needed to repay the principal and interest by the end of the loan's original term.

QJCAs: Benefits under defined-benefit and money-purchase plans must be distributed in the form of a qualified joint and survivor annuity (QJSA), unless the participant's spouse consents to a different form. If a non-QJSA distribution is made without spousal consent, EPCRS allows permission to be given retroactively. As alternatives, EPCRS allows the plan to commence automatic payment of a QJSA (with the participant's portion of the QJSA offset by payments already made) or a lump-sum equivalent of that amount; or, if the spouse did not consent, to pay the spousal portion of the QJSA to the spouse, on a claim by the spouse, but only if he or she becomes entitled to the benefit.

Rev. Proc. 2006-27 authorizes the waiver of excise taxes, available only through VCP--not SCP or Audit CAP--for nondeductible contributions, RMDs not made and excess elective deferrals not distributed within 2 1/2 months after the end of the plan year in which the failure occurred.

Orphan plans: Rev. Proc. 2006-27 contains special rules for "orphan plans"--those whose sponsor has gone out of business, cannot be located or is unable to maintain the plan. For orphan plans, an eligible party may correct plan defects either through VCP or Audit CAR Eligible parties include court-appointed representatives, a "qualified termination administrator" appointed in accordance with Department of Labor (DOL) regulations, or the surviving spouse of a sole participant in a plan that covers only the owner of a business (and possibly the spouse, too). In a departure from general correction principles under EPCRS, the IRS may permit such plans to make less than full corrections and may waive the VCP fee. Preserving the plan's qualified status will allow participants to roll over distributions that they receive on plan termination. Self-correction under SCP is possible only if full correction can be achieved. A plan is not an orphan plan under Rev. Proc. 2006-27 if it has already terminated under the special DOL regulations governing terminating abandoned individual account plans.

Plan sponsors may not make use of any EPCRS program (SCP, VCP or Audit CAP) to correct plan defects directly or indirectly related to an abusive tax avoidance transaction (ATAT). For purposes of EPCRS, ATATs consist of both employee plans and more general "listed transactions." The new ATAT disclosure increases the risk of filing a VCP submission for plan sponsors that have taken part in an ATAT; plan sponsors may have to settle their tax shelter issues before being able to obtain any plan compliance assurances.

Form 5500

The DOL published regulations (23) mandating electronic filing (e-filing) of annual reports (Form 5500, Annual Return/Report of Employee Benefit Plan), beginning with the 2008 plan year. A voluntary e-filing system is currently available through the Employee Retirement Income Security Act of 1974 (ERISA) Filing Acceptance System (EFAST), but the vast majority of Form 5500 filers (98% in 2001) still use paper forms. The DOL simultaneously issued proposed revisions (24) to Form 5500 to facilitate the new e-filing mandate.

Ann L. Combs, Assistant Secretary of Labor for the Employee Benefits Security Administration stated that,

[w]e are moving to a wholly electronic filing system that will be streamlined, cost-effective, and more efficient for plans. This new state-of-the-art system will increase the accuracy of information used by the public and the government. At the same time, we are proposing to update the content of Form 5500 to simplify filing and ensure compatibility with the electronic processing system.

The e-filing mandate applies only to Form 5500 annual reports required by ERISA Title I. However, the IRS has advised the DOL that e-filing Form 5500 together with the required schedules and attachments will satisfy the annual reporting requirements under Secs. 6058(a) (information about qualification, financial condition and operations of deferred-compensation plans) and 6059(a) (actuarial report for defined-benefit plans). Likewise, the Pension Benefit Guaranty Corporation has advised the DOL that e-filing a Form 5500 together with the required schedules and attachments will satisfy the Sec. 4065 annual reporting requirements for defined-benefit plans.

The final regulations were effective Sept. 19, 2006, but the mandatory e-filing requirement applies only to plan years beginning after 2007. As a result, most filers will have until at least July 2009 to make any needed adjustments to comply with the e-filing mandate. The DOL had proposed regulations on Aug. 30, 2005, that would mandate e filing of Form 5500 annual reports beginning with the 2007 plan year. The DOL'S proposal followed recommendations by the Government Accountability Office and by the ERISA Advisory Council. The DOL backed away from its original proposal to make the mandate applicable beginning with 2007 plan years, to give filers and service providers time to prepare to comply, and "to ensure an orderly and cost-effective migration to an electronic filing system."

Health and Welfare Plans

"Dependent" Definition Clarified

Congress included some important technical corrections in the Gulf Opportunity Zone Act of 2005 (GO Zone) to update the definition of "dependent" for purposes of employer-sponsored dependent-care assistance programs, including dependent-care flexible spending arrangements (FSAs) and health savings accounts.

Congress decided the earnings limit and certain other features of the post-2005 definition should not apply in all instances in which the Sec. 152 definition of dependent is used. For example, Sec. 105 (relating to payments by group health plans to reimburse medical expenses incurred by employees, their spouses and dependents) was clarified so that, for purposes of that section, the new dependent definition is applied without reference to the earnings limit and the special exclusions for individuals who are married or claimed as dependents on other taxpayers' returns. No similar change was made to Sec. 106, which provides a gross income exclusion for employer-provided health coverage, because the term "dependent" appears only in the regulations under that section, not in the statute. However, the IRS plans to update the Sec. 106 regulations to clarify that the dependent definition is the same for purposes of Secs. 106 and 105.

The GO Zone makes technical corrections to Secs. 21 and 223 to clarify that, for purposes of those sections, the new dependent definition is applied without reference to the earnings limit and the special exclusions for individuals who are married or claimed as dependents on other taxpayers' returns. As a practical matter, this means the same criteria for determining dependent status under the pre-2005 definition will continue to apply under the post-2004 definition for these purposes.

The IRS provided a temporary remedy to this problem in Notice 2004-43, (25) which provided a special exception to the high-deductible health plan (HDHP) requirement for individuals participating in plans that would be HDHPs, but for the fact that they comply with a state's first-dollar or low-deductible mandates in effect on Jan. 1, 2004. The temporary relief was available only through the end of 2005.


Rev. Rul. 2006-3626 addresses what happens to the unused balance in a health reimbursement account (HRA) after the employee, his or her spouse and all of his or her dependents are deceased. Rev. Rul. 2005-2427 held that the remaining funds could not be distributed to a designated beneficiary or the employee's estate. The new ruling follows up, by barring the reimbursement of a nonspouse or nondependent's medical expenses. Hence, it appears that the only alternative is to cancel all HRA credits after the last permissible beneficiary dies.

Definition: An HRA is a defined-contribution medical expense reimbursement account. The employer reimburses the otherwise uninsured medical costs of covered employees (including spouses and dependents) up to specified levels. Typically, credits are added each year and carry over from year to year. Often, they may be used even after the employee separates from service. Unlike medical FSAs, they are not funded by salary reduction. The reimbursements are in addition to all other compensation. In recent years, HRAs have become an important element of many programs designed to encourage greater consumer input into health care expenditures.

Under Sec. 105(b), an HRA's reimbursement of medical care expenses of an employee or spouse or dependents is tax free. The Sec. 105(b) regulations state, however, that this exclusion is not available if the reimbursement is made from amounts that the employee would have received regardless of whether he or she (or the spouse or dependents) incurred any medical expenses. That exception created an insurmountable obstacle to the techniques discussed in Rev. Ruls. 2005-24 and 2006-36. In the former case, it was certain that the entire amount credited to the HRA would eventually be paid out to the employee or his or her beneficiaries. The later ruling indicates that limiting distributions to medical expense reimbursements does not alter this result. The Service considers the key requirement for applying the Sec. 105(b) exclusion to a defined-contribution medical plan is that the account can be drawn on only if the employee or a spouse or dependent incurs medical expenses. It cannot be a general fund that might benefit anyone chosen by the employee.

If an HRA allows improper reimbursements, all reimbursements (including those for expenses incurred by the employee or by his or her spouse or dependents) are includible in the employee's taxable income. Whether any improper beneficiary ever actually receives anything from the account is not determinative. However, the ruling does not explicitly address reimbursements for expenses incurred by nondependent domestic partners, leaving uncertainty about whether they can be covered by an employee's HRA.

Rev. Rul. 2006-36 is effective for plan years beginning after 2008, for reimbursement plans containing a pro vision before August 15, 2006, stating that "... upon the death of a deceased employee's surviving spouse and last dependent, or upon the death of the employee, if there is no surviving spouse or dependents, any unused reimbursement amount will be paid as a reimbursement of substantiated medical care expenses of a beneficiary designated by the employee."

Notice 2006-59

The IRS issued Notice 2006-59 (28) to provide guidance on the Federal tax consequences of leave-sharing plans employers set up to help employees affected by major disasters. Basically, such plans (or "leave banks") are designed to help employees who have exhausted their annual leave allotments, but need to take additional time off from work due to unforeseen emergencies. Employees can donate their unused leave to the employer's leave bank; employees needing extra paid time off can withdraw the donated leave.

Notice 2006-59 applies to "major disaster leave-sharing plans" which are written plans that meet each of the following requirements:

1. The plan allows a leave donor to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster.

2. The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient.

3. A leave donor generally may not be allowed to contribute more than the maximum leave an employee normally accrues during the year.

4. A leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank. Each leave recipient must use this leave for purposes related to a major disaster.

5. The plan adopts a reasonable limit (based on the severity of the disaster) on the period of time after the major disaster occurs during which a leave donor may deposit leave in the bank, and a leave recipient must use the leave received from the bank.

6. A leave recipient may not convert leave received under the plan into cash in lieu of using the leave. However, a leave recipient may use leave received under the plan to eliminate a negative balance that arose from leave that was advanced to him or her because of the effects of a major disaster. A leave recipient may also substitute leave received under the plan for leave without pay used because of a major disaster.

7. The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the plan.

8. Leave deposited on account of one major disaster may be used only for employees affected by it.

Prohibited Tax Shelter Transactions

In 2006, Congress enacted the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which includes new excise taxes and disclosure rules for tax-exempt entities--including tax-qualified retirement plans--involved in certain potentially abusive tax shelter transactions. The IRS issued Notice 2006-65 (29) to provide an overview of the new excise taxes and disclosure rules, and to solicit comments on guidance it expects to release in the near future.

The TIPRA created new Sec. 4965, imposing an excise tax on (1) certain tax-exempt entities that are parties to "prohibited tax shelter transactions" (PTSTs) and (2)"entity managers" who cause a tax-exempt entity to be a party to a transaction they know or have reason to know is a PTST. The only excise tax relevant to tax-qualified retirement plans is the one on entity managers. The new disclosure rules apply to all tax-exempt entities, but entity managers must pay the penalties associated with fairing to comply.


A PTST is any of the IRS's "listed transactions" as well as "confidential transactions" (as defined by Regs. Sec. 1.6011-4(b)(3)) and any transactions with contractual protection (as defined by Regs. Sec. 1.6011-4(b)(4)). Confidential transactions are those "offered to a taxpayer under conditions of confidentiality and for which the taxpayer has paid an advisor a minimum fee." Transactions with contractual protection are those in which the taxpayer has a right to a full or partial fee refund Fall or part of the intended tax consequences from the transaction are not sustained, or those for which fees are contingent on the taxpayer realizing tax benefits.

An entity manager is anyone who approves or otherwise causes the entity to be a party to the PTST. In the case of qualified retirement plans, this could be the plan sponsor, plan administrator or any other plan fiduciary. An individual participant might also be an entity manager if he or she "has broad investment authority under the arrangement." It is not clear whether this would include participants in a participant-directed Sec. 401(k) plan; presumably, the Service will address this issue in future guidance.

The excise tax on entity managers is $20,000 for each approval or other act causing the entity to be a party to the PTST. This excise tax is in addition to any other applicable tax or penalty.

Disclosure Rules

As noted, the TIPRA also added new disclosure requirements for exempt entities that are parties to PTSTs. In general, every exempt entity that is a party to such a transaction must disclose this fact to the IRS, as well as the identity of any other parties to the transaction known to the exempt entity. The Service is supposed to issue guidance dictating the form, manner and timing of such disclosure.

If an exempt entity fails to disclose as required, there is a $100 penalty for each day during the period of failure, up to a maximum of $50,000 per required disclosure. If the IRS makes a written demand specifying a reasonable future date for filing the disclosure, an additional $100 penalty per day after the specified deadline expires applies, up to a maximum of $10,000 per disclosure. In the case of tax-qualified retirement plans, these penalties are imposed on the entity manager, not the plan.

The new excise tax applies to tax years ending after May 17, 2006, for PTSTs entered into before, on or after such date; no excise tax applies to income or proceeds properly allocable to any period ending before Aug. 16, 2006. The new disclosure requirements (and applicable penalties) apply to disclosures due after May 17, 2006.

(13) TD 9237 (12/30/05).

(14) REG-146459-05 (1/26/06).

(15) REG-133578-05 (8/25/05).

(16) Boise Cascade Corp., 329 F3d 751 (9th Cir. 2003).

(17) See TD 9282 (8/30/06).

(18) Richard L. Barbee, TC Summ. Op. 2006-71.

(19) Rev. Proc. 2006-27, IRB 2006-22, 945.

(20) Rev. Proc. 2006-27, Appendix A.05, clarifies that, for a typical Sec. 401 (k) plan, the "missed deferral" is the participant's compensation multiplied by the ADP of the comparable discrimination testing group (highly compensated or nonhighly compensated) for the year at issue. For a "safe harbor" plan that uses fixed contributions, the rate is a fixed 3%: for a safe-harbor plan that uses matching contributions, the percentage used is the highest percentage entitled to a 100% match (usually 3%).

(21) A broad principle of EPCRS is that the plan and the participants should be restored to the position they would have been in had the failure not occurred. Many believe that this principle, as applied, would require correction of the excluded employee before the test is rerun.

(22) This information has been conveyed by IRS representatives in several previous public discussions of the EPCRS update.

(23) See 71 Fed. Reg. 41,359 (7/21/06).

(24) 71 Fed. Reg. 41,616 (7/21/06).

(25) Notice 2004-43, IRB 2004-27, 10.

(26) Rev. Rul. 2006-36, IRB 2006-36, 353.

(27) Rev. Rul. 2005-24, IRB 2005-16, 892.

(28) Notice 2006-59, IRB 2006-28, 60.

(29) Notice 2006-65, IRB 2006-31, 102.

Deborah Walker, CPA


Deloitte Tax LLP

Washington, DC

Stephen LaGarde

Tax Senior

Deloitte Tax LLP

Washington, DC
COPYRIGHT 2007 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Employee Benefits & Pensions
Author:LaGarde, Stephen
Publication:The Tax Adviser
Date:Feb 1, 2007
Previous Article:Interaction of the AMT and S corporation basis rules (Part II): this two-part article examines how the alternative minimum tax affects S corporation...
Next Article:TEC initiatives.

Related Articles
Current developments in employee benefits.
Supplemental Retirement Benefits Part I: Section 457(a) and 457(f) Plans.
Supplemental Retirement Benefits Part II: Options for Deferred Compensation From Other Sources.
Current developments, part I.
Definition of eligible retirement benefit plan and application of Pennsylvania personal income tax: December 19, 2003.
Your retirement: federal changes that you need to know.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |