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Im on the advisor side. The downsides I see aren't testing related they are process & communication related. Process - this likely wont happen very often, is the payroll team strong enough for the employer to make sure its handled correctly every time it does happen (they will have to be re-explained the rules every time it happens and I wouldn't be surprised if a payroll person told an employee it wasn't possible on accident. ) Communication - You need to let employees know its possible. Any complicating things like this muddies the water more than adds value to most employee conversations IMO. I'm trying to get participation & savings rates up, most times adding another layer of decisions brings confusion and decreases engagement. If a client came to me and said we have an NHCE who wants this, I would add it to make the client & employee happy. I would mention in employee meetings but very quickly and move on so I avoid creating a confusing discussion. I would be on the payroll calls initially and I would tell everyone to call me if any other employee wants to do this. The participant election of after-tax on the recordkeeper site would have to be managed well too.

Hi - I usually can keep all the SEP & SIMPLE rules straight but this one is flummoxing me for some reason. Our client started a SEP in 2023 with one year of service as an eligibility rule. Employee was hired October 2024. In May of 2025 they updated the SEP to 3 years of service before eligible for the plan. If they do a SEP contribution for tax year 2025 is the employee required to receive a SEP contribution because they were hired under the 1 year eligibility? or does the employee fall under the 3 year eligibility?

I assume that if the former employee does not elect COBRA, they would not get paid or provided any type of subsidy. If that is the case, then there would be no taxable income. Also, even if the COBRA subsidy is provided, the subsidy may not have to be included in income. Generally, when an employer pays COBRA premiums or subsidies directly to a terminated employee and does not control or verify that they actual use the payment for COBRA, the payment be includable as W2 wages. However, if the employer pays the premium or subsidy directly to the carrier or requires the employee to provide proof for reimbursement premiums or subsidies for COBRA coverage that has actually been elected, the payment generally would not need to be included in W2 wages.

Is there another reason why a plan’s sponsor might prefer not to allow nonhighly-compensated employees to make an employee (after-tax) contribution?

Yes absolutely. You can do anything for just NHCE's pretty much, such as profit sharing of varying rates.

If a plan provides that only nonhighly-compensated employees may make an employee (after-tax) contribution, does that meet coverage and nondiscrimination conditions? (Of the employer I’m thinking about, many nonhighly-compensated employees have modified adjusted gross income, or even one’s compensation alone, that precludes the individual from Roth IRA contributions.) Am I right that qualified-plan conditions don’t restrain discrimination against highly-compensated employees? If my guess is right, is there another reason (beyond § 401(a)(17)’s constraint and § 415(c) limits) why a plan’s sponsor might prefer not to allow employee contributions?

The facts stated that the shares would be repurchased by the company at the 12/31/2024 valuation and the money market investment fact doesn’t lead to the conclusion that the shares will be recycled. Confusing recycling within the plan (or whatever technical term is appropriate) with a distribution of shares from the ESOP to the participant allowing the employer to repurchase the shares based on the last valuation is not correct. Generally a distribution requires participant consent. Here the facts are that, if the participant does not consent to a distribution, his shares will be cashed out. This will happen either by the company purchasing the shares based on a stale valuation (per the facts) or, as ESOP Guy guesses, by using cash in the ESOP enabling the plan administrator to reallocate cash and stock between the accounts of active and inactive participants (those who have terminated employment). To do this before 12/31/2025, the plan administrator would need the discretion to declare a special plan valuation date a short time before then based on a stock valuation that is almost a year old. I wouldn’t hazard a guess about how the plan document is drafted here except to note that this may be key to the participant’s situation. Now if the employer was going to do this based on the 12/31/2025 valuation, then the participant would be stuck.

You're just muddying the water unnecessarily. Even you admit that all the plan has to do is distribute the shares if the company wants to buy them. Or more likely the original commentor is using nontechnical language for a very technical event. Since he mentioned the putting the money into a money market more likely the company isn't actually buying the shares but recycling them within the ESOP. To most people in the ESOP and not in the industry the ESOP and company are basically interchangeable when legally they are very different. This company would have to have the most incompetent advisors to have the company buying these shares directly from the plan when there are so many ways to avoid the issue. I stand my advice you would be wasting your money to go to an attorney. Answers to non-technical people should follow the KISS principle: Keep It Simple Stupid works well. Reality does bring up a good point you could ask if they think a money market is prudent to invest your money. Or better take your funds out of the ESOP and get a better set of investments of our choosing in an IRA if you want.

It may be productive to speak to an attorney on this. Generally, the employer may buy the stock from the ESOP based on a valuation as of the date of the transaction. Otherwise the purchase does not meet the requirements for an exemption from the prohibited transaction rules. So there may be a prohibited transaction violation if the purchase is in December, 2025 based on the 12/31/2024 valuation. In contrast, if the employer buys the stock from the participant after it has been distributed to him under the put option rules, the last valuation can be used (generally). Also, many are of the view that the money market as the only investment is not prudent. This is getting some attention in the ERISA litigation world.

From experience, if you have other attachment, like a letter of Reasonable Cause", DOL does NOT forward to IRS.

We work primarily with larger plans that are unlikely to be designed as safe harbor--but that in general, don't need safe harbor protection, because a generous match encourages participation and the ACP test is passed easily. We typically see approximately 10% of a large plan population using the mega backdoor Roth feature--perhaps a couple of hundred individuals in a 2,000 participant plan (typical for our clients). That's enough to slightly degrade the ACP test results (because most using mega backdoor Roth are HCEs) but not enough to cause the ACP to fail. The bigger issue that we see occasionally is 415 limit violations, if someone miscalculates benefits or compensation and the aggregate limit for deferrals, match and after tax exceeds the DC 415 limit. We see a handful of 415 limit violations annually on our larger plans with this feature--I'd approximate the number as about 5 per 10,000 eligible, or 1,000 using the feature. So 415 limit violations are not common, but they do happen.

Happy Holidays from Alabama everyone!!

Is it Adobe Sign? We use the version that comes with our Adobe Acrobat Pro so it is not as robust as the full Adobe Sign or DocuSign, but for us it works and it was a game changer.

I used to subcontract to an actuary who mentioned that Datair's BPD for (I think) EGTRRA had a disclaimer that the 110% rule would not apply in a "never had NHCEs" plan. After all, it is a nondiscrimination issue (and with no NHCEs, blah blah blah). Anyway, I believe she mentioned that the IRS had them take that language out for the PPA version, and I can only guess it's out of Cycle 3 as well.

Agree with Effen, this isn't new and it hasn't gone away and there never is or was an exception for plans without NHCEs. What is interesting is that you say this is an IDP and that provision has been in the plan all along unless I misunderstood and that was added with CB conversion. So presumably they have received an IRS determination letter, probably two, with that anomaly of a disqualifying provision.

As we all try to navigate the year-end craziness and balance life with family and friends, I just wanted to wish everyone a safe, relaxing and enjoyable holiday season!

Ease of administration. The Plan covers multiple employee groups, but only some of the employee groups are VEBA trust funded. The claims administrator intakes and pays all claims, regardless of the employee groups and invoices the employer. This allows the plan sponsor to promptly reimburse the claims administrator for claims paid without having to bifurcate the process into trust-payable and non-trust-payable amounts. They can determine the trust-payable amount on the back end and seek any applicable reimbursement. Claims administrators often do not want to deal with seeking payment from multiple sources, especially in cases where there are multiple different VEBAs and associated subaccounts that fund the plan. Prohibited Transaction Exemption 80-26 (PTE 80-26) allows for certain interest free loans to employee benefit plans. The plan sponsor has a reimbursement agreement between itself and the trust that allows the plan sponsor to pay trust-eligible claims and the trust to reimburse the plan sponsor. Under this structure, there are no assets revering to the employer and no prohibited transaction - the trust is simply repaying an interest-free obligation of the trust (which happens to be to the plan sponsor) incurred by the pre-payment of trust-eligible claims. We have had informal (non-binding) discussions with the IRS regarding this process, during which they agreed that such an arrangement would not constitute a reversion.

Corey, tx for your comments. No one worked 1000+ hours

 1.401(a)(4)–5(b)(3)(ii). What makes you think it might have been revoked? The Code says, "After taking into account payment to or on behalf of the restricted employee of all benefits payable to or on behalf of that restricted employee under the plan, the value of plan assets must equal or exceed 110 percent of the value of current liabilities, as defined in section 412(l)(7)." The "problem" is that Section 412 no longer exists and therefore the reference to "current liabilities" is undefined. Through dialogue between actuaries and the IRS (Gray Book), "any reasonable and consistent method may be used for determining the value of current liabilities and the value of plan assets.”

Not sure I follow your comment about top heavy. Are you saying that none of the XYZ employees have EVER worked 1000 hours in a year, meaning they are all otherwise excludable and therefore don't have to receive a top heavy minimum contribution under SECURE 2.0 rules? If so, then I agree. However if any of them ever do work 1000 hours then they will have to receive a top heavy minimum because the DC plan does not consist SOLELY of deferrals+safe harbor, and therefore doesn't qualify for the top heavy exemption. If this is a concern that there might be XYZ people who work 1000 hours in the future, I'd recommend separating the 401(k)+safe harbor and the profit sharing into separate plans so that you can maintain the top heavy exemption. Anyhow, use $500k for your deduction limit calc. None of the XYZ employees are benefiting in the plan so you can't count their comp.

Thank you for your thorough response, I appreciate the perspective. My question on “legacy” was more historical than operational, as older individually designed DB documents did include explicit NHCE carve outs tied to restricted payment provisions. I haven’t found post-PPA regs explicitly preserving or revoking those carve outs, and that is why I am questioning. If you’re aware of a specific Code section or regulation addressing that point directly, I’d really appreciate having that information. I also appreciate your comment that there may be different liability measurements that could be used in evaluating the 110% requirement. If you’re willing to elaborate on how those alternative measurements are applied in practice, that would be very helpful.

It’s not necessarily Internal Revenue Code § 403(b) that sets up unusual provisions; sometimes, it’s a TIAA, CREF, or other contract that sets up provisions many other insurance, investment, or service providers don’t typically use. Or an interaction between an employer’s plan and one or more TIAA-CREF contracts. Don’t rely on the summary plan description; there are many reasons an SPD might not accurately describe the plan. Don’t rely on what TIAA’s service people say about beneficiary defaults; there are many ways they might be mistaken (usually, innocently). But circumstances might it make it impractical for you to read the plan and contracts. If a beneficiary is the participant’s estate, some providers might help an estate’s personal representative arrange to treat that estate’s ultimate taker as if she were the plan’s beneficiary or at least a distributee. To do so, the plan’s administrator, each insurer or custodian, the recordkeeper, the paying agent, and other service providers get releases, satisfactions, and indemnities. To arrange this requires that the personal representative’s advocate have a practical ability to get the attention of the service providers’ lawyer who has enough legal knowledge, time and willingness to listen, and discretionary authority to commit the service providers, and to ask for the plan’s administrator’s approval (or make the service providers’ risk decision to proceed without the administrator’s approval). Also, the indemnitees might want their indemnities from people with enough money and other property to pay at least the indemnitees’ defense expenses. Do you have an in with TIAA? Is the difference between a rollover and receiving money from the decedent’s estate enough to support an effort? This is not advice to anyone.

1. Is it correct that the legacy top-25 restricted payment rule does not apply in an HCE-only plan? NO, Top 25 rule applies to all DB plans. There are no exemptions. Also, just for clarification, the rule is 110% funded AFTER the distribution. 2. How would you view the risk of allowing distributions in a less than (110%) funded HCE only DB plan. The plan sponsor is risking plan disqualification. If you are an actuary, you cannot recommend or condone that they do something illegal. Their attorney can explain the risks and the sponsor can make an informed decision. 3) More generally, is this just a known but acceptable feature? Not sure what you mean? The top 25 rule is a statutory rule required to be in all plan documents. It is not a left over "legacy" issue that was accidently left in the document. 4) Is it still legally required to not allow a top 25 paid employee to take his full lump sum? YES This is a really good example of where good actuarial consulting is required and sponsors need to understand what they are getting involved with. Cash balance plans, including market based cash balance plans, can still be underfunded and it can cause these types of problems. They can also be overfunded in which case you will be having the participants wanting their benefits increased to capture the excess, which is also problematic. There are other designs (variable plans) where these issues can be minimized, but the Top 25 rule can still be a problem even for those. One consideration is that there is no clear guidance related to what the 110% funded requirement is measured against. It isn't necessarily the sum of the benefits. There are other liability measurements that possibly could be used to satisfy the 110% rule. Another answer is to pay the lump sum over time or to pay it to an escrow account that the plan could attach if it terminated without sufficient assets. Not saying any of these are easy, but there are options in the regs.

Friday afternoon, no brain activity as usual. Combo CB/DC. CG with ABC corp and XYZ corp ABC sponsors both plans and XYZ is an adopting employer for DC plan only DC is 401k with SH match CB excludes all XYZ employees. All ABC employees participate in both plans and get PS allocation as well. None of the XYZ employees defer and none get any PS allocation either (401k/SH has 3 months and PS has 12 months+1000 hours). None of the XYZ employees work 1000 hours but all eligible for deferral+SH and since no one defers, no one get SH thus T/H is satisfied. ABC eligible compensation is 500k and XYZ eligible compensation is 100k Need to use 31% rule for deduction. Do I use 500k or 600k? Thanks

I'm looking for perspective on the issue of the Top-25 restricted payment rule in DB plans, or specifically in this Cash Balance Plan. We have a participant who is among the Top-25 highest paid employees and would be restricted from taking a lump sum under these rules under normal circumstances. The relevant facts are as follows: Individually designed DB Plan effective July 1, 2009, restated July 1, 2021. Plan has only ever covered HCEs (NHCEs have never been covered; professional medical group). There are approximately 60 participants, but about 70 employees total. Currently less than 100% funded, but still above 80% threshold. Benefits include interest credits tied to actual market returns, subject to anti-cutback rules (participants effectively "fund" their own benefit). Plan Document includes legacy restricted payment language referencing: Top-25 highest paid HCEs Current liabilities Escrow arrangements An explicit exception stating the restriction does not apply if the plan never benefited any NHCEs. Here are my two specific questions: 1. From a technical standpoint, is it correct that the legacy top-25 restricted payment rule does not apply in an HCE-only plan, consistent with the "never benefited NHCEs" carve-out found in older individually designed documents? 2. Setting aside funding level thresholds which are not currently triggered, how would you view the risk of allowing distributions in a less than fully funded HCE only DB plan, where early distributions could materially shift funding risk to remaining participants due to anti-cutback provisions? Particularly when the participant seeking the distribution is among the Top-25 highest paid? More generally, is this just a known but acceptable feature? Is it still legally required to not allow a top 25 paid employee to take his full lump sum? Is this a fiduciary concern requiring discretionary limits? Or if this is not a legal issue, is this something that should be voluntarily adopted to prevent funding issues? I appreciate any insight you can provide.