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Also understand if the estate is small enough in many states the beneficiaries of the estate can use a "small estate affidavit" I am NOT an expert and it isn't really the TPA's job to educate people on them. But we see them on a regular basis and it seems to allow a fair amount of skipping of the probate process. You now know close to 100% of what I know and I am not sure if I helped or not.

To simplify an illustration, I deliberately left out expenses for initial and periodic valuations. About those expenses, the ERISA fiduciary questions and tax law nondiscrimination issues are similar. Would expenses for valuing the almond-ranch business be paid personally by, or charged against only the plan account of, the individual who directs that investment? If so, might such a condition for a directed investment disfavor nonhighly-compensated employees? Or if an expense is not borne by the directing individual alone, is it fair for others to be burdened with extra expense? And each year’s incremental expense for ERISA fidelity-bond insurance might be nontrivial in the small-plan context Dougsbpc describes. An insurer might require a bigger premium because the coverage limit is higher, or because the investment in the almond-farm business might involve ways of handling insured plan assets that lack some controls used regarding fund shares processed by a trust company or a registered investment company.

Not sure how this isn't a PT.... Under ERISA §3(13) states a party in interest as to an ERISA plan includes (C) an employer any of whose employees are covered by the plan... [and] (H) an employee ... of a person described in subparagraph (C)... Since this person is a participant in the plan, presumably he is an employee of an employer maintaining the plan. ERISA §406(a) prohibits various types of transactions between a plan and parties in interest including a direct or indirect ... transfer to, or use by or for the benefit of a party in interest, of any assets of the plan. Even if you use the one bite of the apple principle that might allow the initial purchase to be exempt, the ongoing business aspect of this investment seems fraught with risk.

This seems to run afoul of the rules that the plan asset cannot be used personally by the participant. Consider that a participant can invest their account in works of art, but cannot hang the works of art over their mantle at home. Similarly, a participant can invest their account in a antique car, but cannot drive it. The whole scheme to hire leased employees from a PEO to run the entity seems to be at best window dressing, and more likely is (pick one: a facade, hocus-pocus, deception, dissimulation, funny business, pretense, an illusion...) I certainly would not want to be in a co-fiduciary role in any capacity that is associated with this arrangement.

For an ERISA-governed retirement plan, a situation in which, without another valid beneficiary designation, the plan-provided default beneficiary is the personal representative of the decedent’s estate, the plan’s administrator decides what evidence persuades the administrator to approve a claim. A State’s law might be relevant in, and might support, an administrator’s fact-finding and decision-making about who is or isn’t a personal representative, and about whether the plan’s obligation to pay the decedent’s personal representative has been satisfied. Yet, the claims procedure and a fiduciary’s decision-making are governed by the documents governing the plan, including an ERISA § 503 claims procedure, and ERISA’s title I. Many administrators look for “letters testamentary” or “letters of administration”, or some other court order that grants or recognize a person’s authority to act for the decedent’s estate. And some administrators use further steps designed to test whether what’s presented as such a record or certificate is authentic or a forgery. Some administrators might act following a claimant’s small-estate affidavit if it meets the conditions under a relevant State’s law and meets any further conditions the plan or its administrator imposes. Other administrators do not consider a small-estate affidavit. (For a background, including views that might differ from some of my observations, see https://benefitslink.com/boards/topic/63408-does-a-plan-pay-on-a-small-estate-affidavit/.) If a plan’s administrator has not already done so, it should design, with its ERISA lawyer’s advice, a procedure for these situations—a procedure the administrator is ready to apply regularly, uniformly, and impartially, with no more than prudent plan-administration expense. An obedient and prudent fiduciary follows one’s claims procedure (except insofar as it’s contrary to ERISA’s title I or other Federal law). This is not advice to anyone.

Presumably the plan at issue utilizes the safe-harbor rules, as most do. If so, the rest of this post is purely academic. That said, a plan does not have to use the criteria set forth in Reg. Section 1.401(k)-1(d)(3)(iii)(B), cited above, for making hardship distributions. For example, funds in a profit-sharing plan (obviously with a 401(k) feature) generally may distribute employer contributions under more lenient hardship rules where the "hardship" is sufficiently defined in the plan, is consistently applied, and limits the distribution to vested amounts. See Rev. Rul. 71-224. If the plan at issue does not utilize the safe-harbor rules you must scrutinize the plan definition of hardship and perhaps how the plan has historically administered hardships under these circumstances.

That's a question that needs be directed to an attorney familiar with applicable state law. I'm the executor of my Dad's estate. After the court hearing to approve me as executor, the court provided a Letters Testamentary that shows I'm the executor of the estate. I'm in Texas, but would expect something similar in other states. The client's legal counsel should be able to tell them what kind of documentation is needed to show who represents the estate. If the participant didn't have enough assets to justify opening an estate, most states have rules for dealing with small estates without formally opening an estate. Again, the client's legal counsel should be able to assist. Just being named in the will as the executor doesn't necessarily mean they are the executor. At least in my state, the executor has to be approved by the court, if an estate is opened. Approval may just be a formality, but I did have to agree to it.

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We have a 401k plan participant who passed away recently. Her spouse died a few years ago and there is no beneficiary named. In this case then we would deal with her estate. But how (far) and what verification is needed to determine who is responsible? I assume we would need to see a copy of her will to see who is the named executor which would settle that. But (gulp) if there is no will, what would be the procedure? We can't just have a family member jump in without any verification and work everything out through them? Thank you

Everyone has made excellent points. Even if allowed(very doubtful) - consider the additional expenses of a periodic independent appraisal for valuation to report correct as a plan asset, as well as the expense of an ERISA bond covering a non-qualifying asset. Is the plan or employer willing to pay those expenses?

Thought experiment: For a retirement plan that allows a participant to direct investment beyond designated investment alternatives and brokerage windows, consider whether the plan might require, uniformly, that the directing participant at her personal expense deliver to the plan’s administrator the US Labor department’s prohibited-transaction exemption or a written opinion, addressed to the administrator, of a law firm acceptable to the administrator, that a proposed investment involves no nonexempt prohibited transaction. Reciting the idea reveals the risk about tax law’s nondiscrimination condition: The IRS or a court might perceive the uniform condition as favoring some highly-compensated employees, who might have or get money to spend on lawyering, when many nonhighly-compensated employees might lack that financial capability. But if the would-be directing participant doesn’t bear the expense, who does? Would getting advice that each proposed investment involves no nonexempt prohibited transaction be a loyal and prudent plan-administration expense for the plan’s exclusive purpose? If it is a proper expense, how would the administrator allocate the expense among individuals’ accounts? Would it be fair that an individual who directs investment only in designated fund shares is charged a portion of expenses incurred because others seek question-raising investments? Or, if the legal-advice expenses are charged only among individuals who requested question-raising investments, does that raise nondiscrimination issues (even if at a different layer)? Despite a participant’s otherwise proper direction, a plan’s fiduciary must not invest if she knows or, using an experienced fiduciary’s “care, skill, prudence, and diligence”, would know that the investment involves a nonexempt prohibited transaction. So, someone has to pay for the needed lawyering—whether that’s serving as an applicant’s representative in a submission to the Labor department, or researching law and analyzing facts to write a lawyer’s opinion. If a plan’s administrator, trustee, or other fiduciary doesn’t get some legal comfort, how would she show she acted prudently?

Why is the individual involving the plan in the purchase rather than buying the ranch entirely with personal (non-plan) funds? In these types of propositions I am concerned that the individual is using plan funds to serve personal (non-plan) interests, such as enabling the purchase when the participant does not have enough money outside the plan to cover the purchase price. That fits my understanding of a prohibited transaction. I also think it is a set-up for future PTs and other problems as the ranch is operated. Is the plan capable of covering its share of potentially unlimited demands for more capital? Qualified plans are not meant to operate businesses.

We administer a self-trusteed 401(k) plan that offers self-directed investment accounts to all participants. I believe each can purchase mutual funds through their American Funds account. The plan does not restrict each of these participant to just mutual funds but also allows for private investments. One of the participants wants to purchase a small Almond Ranch. He would like to personally invest $400,000 and invest $600,000 from his plan account. There would be strict accounting splitting the income and expenses each year for both the individual portion (40%) and the plan portion (60%). If this is followed we do not think there would be a prohibited transaction. We know somebody needs to run the Almond Growing entity. They could get 3 leased employees from a PEO. Correct me if I am wrong here (I very well could be). I believe that after this potential transaction, they would need to cover these leased employees in their plan if the leased employees are substantially full time. I believe substantially full time is 1,500 hours or more per year. What if they had 3 Leased employees who would be restricted to only 1,200 hours per year? I would think the leased employees would ever become eligible for the plan. Another Issue might be UBTI. Does anyone think UBTI would apply in this case? Thanks!

Artie M, now I see your observation. An organization that otherwise might tolerate some risk about a tax treatment of an employee’s compensation might be more cautious about a director’s compensation, because the directors govern the organization. Likewise, the organization’s C-suite executives, including the general counsel, might seek to maintain the directors’ respect, trust, and good graces, and might find that doing so is in the organization’s proper interests. Also, an organization’s caution regarding a director’s risk might be influenced by knowing that some, many, or all the directors each engages one’s personal counsel, independent of the organization’s inside and outside counsel. Further, many law firms could face positional or issue conflicts (even if not conduct-violating, at least practically) if they would provide arguably inconsistent advice even to differently situated clients.

@Peter GuliaI understand that service provider encompasses a broader group than just employee. I simply meant that the dynamics of determining advisee/advisor issues can be extremely different depending on the character of the service provider. if advising a company regarding an individual employee and the tax consequences under 409A, one often notes the adverse tax consequences, at least at this time, are almost entirely on the employee. In which case, the employer might take a riskier path than another. The dynamics change drastically if you tell the same company client the adverse tax consequence would land on the directors even if you have language stating the company doesn't guarantee any tax consequences and has no liability, etc.. That's all I was saying.

I was rushing meant to clarify that this is 100% the better solution. There was an IRS FAQ way back when this fact pattern was posed to the IRS and they said that an 11g was acceptable. It wasn't precisely the same but it was pretty much the same. The point was you dont have to be failing a test with no other means of passing to be able to do an 11g amendment, and the question was about making people eligible who were not previously eligible. I found it, it was the ASPPA Annual Conference Q&A from 2010. I know it is from behind the paywall where I got it, so not sure I can share it.

Agree with Bri, just check the top heavy i.e. which plan provides it? Hopefully only DC. If the DC plan allocation is by groups, make sure you still test 1/3 rule on gateway thoiugh.

Many plan sponsors design one’s plan to follow this: 26 C.F.R. § 1.401(k)-1(d)(3)(ii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B). Of the seven situations deemed an immediate and heavy financial need, EBP’s paraphrases are of –(B)(2) and –(B)(4).

Very common to add a second PS only plan and merge the 2 plans later. However, is this a cost-effective way to approach i.e. between the plan set up and annual administration? Afterall, you may only need a small amount of contribution to pass. As Bill mentioned, 11-g is a solution with the terminated employees but they will need a vesting adjustment, some say partial, some say 100% vesting. If they are already 100% vested, no issues. But, can you amend the plan now to increase the benefit retro to 2025 e.g. remove last day rule and/or 1000 rule only for 2025? I do not know the answer to it. If you can, then you can deduct for 2025. just thinking out loud with some random thoughts.

EBP - can you give me a citation to the sourced of you safe harbor hardship reasons. Thanks. David

Safe harbor hardship reasons include: (A) costs directly related to the purchase of the principal residence for the participant (excluding mortgage payments) or (B) payments necessary to prevent the eviction of the participant from the participant’s principal residence or foreclosure on the mortgage on that residence. A rent deposit is neither so does not qualify as a permitted hardship withdrawal under the safe harbor reasons. The inclusion of "mortage" in both of these reasons further supports the requirement that it be a purchase. See Peter Guilia's post for alternatives.

Although a nonexecutive director of an organization is not its employee, one is a service provider. Much in the § 409A rules is conceptually similar whether the relationship is employee-employer or service provider and service recipient.

I have done what you suggest in scenarios where the existing plan is a comp to comp or integrated allocation, and I ran the fact pattern by a highly respected compliance service. There is absolutely no rule against setting up a new profit sharing plan just because you have another existing one. That was the answer I received.