Leaderboard

Notice 2020-50 Am I the first one to see this? Under this safe harbor, a qualified employer plan will be treated as satisfying the requirements of § 72(p) pursuant to section 2202(b)(2) of the CARES Act if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020 (suspension period). The loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to 1 year from the date the loan was originally due to be repaid. "I was wrong." They even said you can do the crazy thing of suspending through Dec 31, making the regular payments until the 1 year mark for the suspension, and then reamortize what is left. "I was totally wrong." At least we know what we have to do.

IAWMP. Just get the funds out, document how the stock was deposited and trace the proceeds of the sale and put all that info in the plan file. It is money that doesn't belong to the plan, it is more like a banking error than anything else. Sometimes stuff happens, just fix it.

I am convinced you have a situation that you can't just self-correct. There will be filings to the government involved. You need to talk to counsel. You can't solve this yourself. Your plan sponsor, for whatever reason, never took steps to fully correct the situation, raising additional red flags. You probably have prohibited transactions involving the pension and 401(k). These are subject to an excise tax and an excise tax filing. You have an additional factor with the stock only going to the owner in the 401k plan. Maybe that makes it easier to disgorge the assets without creating problems, but it raises plan qualification issues.

I had a similar situation a few years ago. The conclusions I reached from the regs and code were that the refund does get reclassified as catch-up as of the end of the plan year, but that does not reduce the amount the participant can defer for the calendar year. Our valuation system treated it the same way. Using your numbers: $6,500 of the refund is reclassified as catch-up as of 4/30/20. The plan's determination of catch-up does not affect the participant's maximum deferrals [see 402(g)(1)(C)]. So, the catch-up eligible participant can still defer $26,000 for calendar year 2020. If the catch-up eligible participant defers $26,000 from 5/1/20 - 12/31/20, all $26,000 of it counts in the 4/30/21 ADP test since the plan has already used the entire $6,500 of 2020 catch-up for that participant as of 4/30/2020.

The usual situation required when the sponsor of a retirement plan has to correct their mistake, is to make affected individuals "whole". That would include vesting schedules. The rub here though is the 25% penalty isn't a vesting schedule setup in the plan, it is an IRA excess tax for early withdrawal and it is based on when the funds were actually deposited in the IRA. Maybe someone will have a different take, but my advice would be to talk to a CPA or tax professional and see what they can tell you about options, if any, to get out of the 25% excess tax.

Also, take note that you don't have to split it. That is, following advice above, your attorney will help determine how to value the ESOP (and every other asset), which can then be used in "horse-trading". Do not assume each asset must be split, rather focus on splitting the total. Because there can be an administrative cost to each split, part of the negotiation can consider how to minimize those admin costs.

How it is split is up to you and your spouse to decide. it is just one asset out of many to look at and decide how you two want to divide them up. Once that decision is made you need to get a valid QDRO written. I would STRONGLY advise you get the help of an attorney who knows ESOPs. If they don't have a lot of experience with ESOPs I would strong advise people talk to the people who know the ESOP at the company. ESOPs are very different from 401(k)s. It is harder to be clear on how to compute the split since the stock tends to be only valued once a year, unless the stock is traded on a market. Also, there can be restrictions on how fast one can be paid from an ESOP. I have been in the position of having more then one Alternate Payee crying or yelling at me they need the money now to buy a house or some other huge need as I tell them it could take months to years to be fully paid from an ESOP. So I would recommend by starting by gathering information from the company about how they need the process to go to get the QDRO approved by them and idea of what the payment process will look like. Like I said however how you split the balance is subject to the negotiation between you and your spouse. QDROs are very technical and have to be written just right. The company that sponsors the plan has a lot of say in if it is valid or not. I can't say enough an attorney helping and talking to the company and their plan advisors helps a lot.

It applies to all types of plans. However it only applies to tax years beginning after 12/31/2019.