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Perhaps I didn't read your post close enough but when I read "to be paid, from plan assets" my focus was on the plan restoring the amounts.

An Individual Retirement Account’s trustee or custodian is a bank, trust company, or Treasury-approved nonbank custodian, typically a securities broker-dealer. An Individual Retirement Annuity’s insurer must be an insurance company. If neither the check nor any accompanying instructions names the individual, won’t the payee financial-services business decline to accept the payment?

This client isn't looking to reverse or recharacterize the funds. They really do want the pre-tax funds to now be Roth and intended to pay the taxes. The funds weren't eligible to leave the Plan. This transaction was supposed to be an In Plan Roth Conversion. They should have rolled into a Roth 401(k) account inside the Plan...not a Roth IRA outside of the Plan. I am struggling with the Custodian to return the funds to the 401(k) Plan since they never should have left.

Former employee returned standard distribution election form (CCH): Rollover to "IRA" Name of IRA: "xxx xxxx Corp" We have always instructed trustee to make checks payable to : "xxx Corp IRA FBO former participant" Any thoughts on if writing the check to just a Corp. is ok? Does it leave the plan with any liability as to the tax exempt status of the distribution?

If the employer has enough money: Might the plan’s sponsor amend, with retroactive effect, the plan so all participants get for 2025 the same higher matching contribution—what had been provided only for nonhighly-compensated employees? BenefitsLink mavens, would this be feasible or infeasible?

An IRA can not be part of a qualified plan. A Roth IRA can not be rolled over into a Roth account in a qualified plan. Just set up the new account. Do it right.

Participant is subject to the Roth catch-up mandate in 2026. He has an old Roth IRA that is not part of the 401k plan. Participants direct their own brokerage accounts. He is asking if he rolls the Roth IRA to the Plan, will this enable him to deposit the Roth catch-up into the Roth rollover account. He is trying to avoid setting up another brokerage account just for the Roth catch-up. Is there anything else he should be concerned about in this scenario?

Well, the 31% limit is going to be 117,800. The DC portion of that can't go over 95,000. If there is a mandatory DB amount that's nonzero, that eats into the 117,800.

Owner must start taking RMD in 2026. He has Roth Assets of 500,000 12/31/25 Pre-Tax assets of 500,000 12/31/25 A current life insurance policy is also in the account. The "cash value" as of 12/31/25 per the policy statement is 120,000. The life policy will remain active with premiums being paid. is the RMD calculated on 500,000 or 620,000? it seems to read on the IRS website that the life policy would not be included in an RMD calculation unless it is the year that the life policy is being distributed. But I am not sure if I am reading that correctly. I have found conflicting information elsewhere. Any insight would be appreciated.

$40,000 is maximum and not mandatory since 430 is much less. I agree it would be 25% in the PS and nothing in DB but wondering if anyone doing anything different or if a combination of $40,000 in the DB plus $55,000 as PS would be ok (though I don't see anyone wanting to do that considering the overfunding issue in the DB).

The person that ought to have been responsible to pay, or reimburse payment of, a penalty—whether an ERISA title I penalty, or a tax law penalty—restores to the plan the money the plan was not responsible to pay, with interest or another measure of the time or investment value of the money. And, if the person that ought to have been responsible obtained a gain by having the use of what in conscience was the plan’s money, the person disgorges not only the money had but also its gain and pays it over to the plan. The “interest” portion of the plan’s recovery is the greater of the time or investment value of the money or the other person’s gain by having the use of what in conscience was the plan’s money. Equitable remedies run to the plan that was deprived of what in conscience was the plan’s money, other property, and rights. Restoration or disgorgement does not come from the plan. These remedies come from the person that had the money that ought to have been in the plan, and go to the plan to be made whole. This is not advice to anyone.

Thanks for the advice/warnings, at this time I am researching on what can be done if anything. Nothing would be done without a lawyer.

Usually, I would not add anything to the responses of the wise folks on this thread but I have to commend the OP for questioning the response they received from "AI". While AI may give one a starting point, AI responses can be flat out wrong so, in my view, AI responses should always be viewed extremely critically. I fully agree with @Peter Gulia and @austin3515. I would like to add a couple of thoughts. OP notes that their initial query is in response to IRS Notice CP1348. The IRS's purview does not cover the entire universe of whether plan amounts can be used to pay penalties. So what occurs in an IRS Notice regarding prohibited transactions may not be the end of the story. Their purview only covers whether there is a prohibited transaction under 4975 and the consequences under the tax code. @austin3515 and, ultimately, @Peter Gulia look at the entire universe in bringing up the views of the DOL under ERISA. Also note that the concept of "plan assets" is an ERISA concept monitored by the DOL. In my experience, under ERISA, civil penalties assessed against fiduciaries, plan sponsors, or other parties for some sort of legal violations or prohibited transaction cannot be paid using plan assets. Plan assets must be used exclusively to provide benefits to participants and beneficiaries and to defray "reasonable administrative expenses." I have not researched this recently but my understanding is the DOL maintains that paying penalties from plan assets is not a reasonable expense and is strictly prohibited. DOL has stated that penalties under ERISA 502(i) must be paid by the party in interest involved in the transaction not the plan, and using plan assets to pay penalties is likely a breach of fiduciary duty. Also, regarding restoration or disgorgement as @Peter Gulia brings up, I have colleagues who distinguish between restoration/disgorgement, which are remedial in nature, as opposed to penalties, which are punitive in nature. They seem to imply that plan assets could be used for restoration or disgorgement but I must be thick-headed because I don't see it. How can you use plan assets to restore something to the plan? disgorge from plan? There may be circumstances that I am just not thinking of but it seems like a zero sum game.

Where did he make the deposits? What type of an account? Any other employees? Based on your prior answers, I don't see any reasonable path forward. When you run into stuff like that, do you really want to get involved with a potential client with such a low business acumen? I means seriously, how could he think they would be deductible?

HR standpoint - not HRA

Plan sponsor wanted a plan that provided a 1% match to HCEs and a higher match to NHCEs. The match is calculated each pay period with the plan sponsor setting the match in with their payroll service provider at the beginning of the year. This provision is obviously problematic as employees might move from HCE back to NHCE and vice versa and from an HRA standpoint is not very employee-friendly. I should add they have many well paid employees who however over and under the HCE threshold each year and are not owners. So for 2025 we see a couple HCEs who received more match than they should have. The match is discretionary but rigid and so the notice goes out. Seems we would transfer the excess match along with earnings from the participant's account to the plan's unallocated cash account. So there would e no distribution to the participant nor 1099-R. Thank you, Tom

Agree but wanted to check anyway. Thank you for the reference.

Agree but the CPA is a friend of mine and would like to help out, if I can and with an attorney involved. They know my requirements if they want me involved.

No nothing, zilch, nada was prepared as far as the documents go. No 5500 was filed (yes, required), no actuarial certifications were done (no actuary was involved). They just made the deposits and took the deductions.

I would think twice (thrice) before taking this assignment. The facts presented do not bode well for a good consultant/client relationship.

W-2 Comp has different meanings depending on whether you are looking at this from a qualified plan perspective or from a payroll perspective. If looking at it for payroll purposes, what is included as wages for purposes of reporting on a Form W-2 is determined under § 3401 (income tax withholding), i.e., wages, tips and other compensation reported in Box 1, which do not include Section 125 deductions. Because Section 125 plans allow employees to pay for certain benefits—such as health insurance premiums—with pre-tax dollars, these amounts are subtracted from their gross pay before their taxable wages are calculated. Since these deductions are taken out pre-tax, they are not subject to federal income tax, Social Security tax or Medicare tax (§§ 3101-3128). Note that some employers report Section 125 contributions in Box 14. However for qualified plan purposes the definition of W-2 Wages is defined under § 415. Under § 415, elective deferrals—including pre-tax contributions to a § 125 plan—are included as compensation. Though these amounts are excluded from taxable wages reported in Box 1 of Form W-2, they are specifically required to be added back when calculating compensation for § 415 purposes. When a qualified plan uses a "W-2 wages" for its definition of compensation, it must explicitly include § 125 deferrals to satisfy § 415 requirements. If the plan uses the "415 Safe Harbor" definition directly, these amounts are already included by definition. The reasoning behind this is because § 415 provides the limits for the total annual additions to a participant's account in a defined contribution plan, and including § 125 deferrals ensures that employees are not penalized for participating in pre-tax benefit programs (it is view as a more accurate reflection of total compensation for qualified plan limit testing).

Was a plan document ever prepared? If so, maybe they have a signed copy in their drawer? Did they create a trust? Where have the contributions been deposited? Generally you shouldn't be able to create a trust without a plan document. Are 5500's required? What is value of the assets? Any other plan participants? We need more information to give you better ideas. I agree with C.B. that if he never opened a trust, it would be difficult to justify that he has a qualified plan. However, if he has a trust and a plan doc, then you could go back and prepare 5 years of valuations and 5500's under DFVC.

Moreover, with unfreeze you can change the benefit formula to target precisely what your client wants to accomplish.

No, you can't self-correct the initial failure to adopt a written plan. See Rev. Proc. 2021-30 4.01(b) and Notice 2023-43 A-2(1).

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