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The label "section 125 plan" or "cafeteria plan" is really confusing, because it isn't a plan in the sense of an "employee benefit plan," as that term is defined in ERISA Section 3(3), at all. It's a form of employer-provided fringe benefit, which, if all the requirements are satisfied, allows the employee to claim an exclusion from gross income under Code Sec. 125(a), equal to the amount of cash or taxable benefits that the employee agreed to forego in exchange for "qualified [nontaxable] benefits." "Qualified Benefits" are the component ERISA welfare benefit plans with respect to which the employee may elect coverage. A VEBA is a form of ERISA employee welfare benefit plan. While coverage under a VEBA that provides "qualified benefits" may be among the component welfare benefit plans with respect to which the Code Section 125(a) exclusion is applicable, the "cafeteria plan" itself is not a VEBA, regardless of whether the employer establishes a "cafeteria plan" trust, because the "cafeteria Plan" is not the plan, fund or arrangments that provides any welfare benefits. It's merely a fringe benefit, the sole "benefit" of which is a tax benefit, i.e. the avoidance of the "constructive receipt" doctrine as set forth in Code Sec. 451 and the regulations, in other words, the pre-tax treatment of any cash or other taxable benefits that the employee elected to forego in exchange for such VEBA participation, or any other "qualified benefit" coverage.[Edited by PJK on 08-17-2000 at 07:18 PM]

I would agree its eligible compensation, but we're well past the time-frame for it to be counted as 2018 income for 415 purposes. I would treat the deferrals, under the election in place for 2018, as 2021 deferrals, and the applicable 2018 match or ER discretionary(with lost earnings) as a 2021 QNEC. Still terminated and with zero hours of service so can be excludable.

and you thought the post-office and IRS moved at glacial speed....

I agree with comments above, but would add that you haven't provided their termination dates. If it's a small company, odds are pretty good that they didn't sell the company and step out the door, never to return. It's not hard to make a case that they did something thru the end of the year and term'd Dec 31 or later. As noted, it is important to know whether it is an asset sale or stock sale. If it was an asset sale, then the old company might have existed for some time after the sale (and that is where it is easy to justify employment thru the last day of the year). If it was a stock sale, well, then the new owners would be footing the contribution bill so you want to be darn sure that everyone knows the implications of the termination dates.

See instructions for Form 1099-R. On the 2022 instructions it's on page 7 under the heading "Failing the ADP or ACP Test after a Total Distribution" but it's been the same for quite some time, though it may be on different pages of the instructions in earlier years. https://www.irs.gov/pub/irs-pdf/i1099r.pdf

agreed. Good luck gtting the custodian to do it. The refund (that didn't happen) should be withdrawn as an excess contribution. Shouldn't be too difficult at that end.

My understanding is yes and yes, but I am long removed from administration of these. Probably needs to provide some documentation to IRA custodian as well.

Thay appear to be capital contributions, not values. What do you think?

I would be very careful about using short service employees to generate testing results which are otherwise unavailable. The IRS doesn't like it. I think the prudent course of action would be to use full year compensation.

Just to be sure that this is clear: there is no circumstance under EPCRS in which the employer will make an after-tax corrective contribution. The calculated ADP is a combined ADP for all deferrals (pre-tax and Roth). In your fact pattern, the participant gets one corrective contribution of .5625%, all it pre-tax. Not .5625% for pre-tax, and another .5625% for the Roth. It does not matter if the participant would have elected to make his deferrals as all Roth or all pre-tax, or a combination - there is one corrective QNEC and it is all pre-tax.

Testing elections are typically independent of plan document provisions. You can allocate a profit sharing contribution based on current year post-entry compensation and then test it using average compensation, for example, if you really wanted to.

EBAR is a term that only applies to testing, specifically to cross-testing contributions on a benefits basis. It is the "equivalent benefit accrual rate." Pay credits in a cash balance plan don't have an EBAR - the accrual rate is determined by the interest crediting rate and the plan's definition of actuarial equivalence. Can you exclude pre-entry compensation when determining the amount of a pay credit in a cash balance plan? Yes - you can make any exclusion you want to compensation for this purpose, as long as your document (assuming you are using a pre-approved document) can accommodate it. Accruals don't have to be based on a 414(s) definition of compensation unless you are using a safe harbor plan design. Can you exclude pre-entry compensation for testing purposes? If you are testing using current plan year compensation (as opposed to average compensation) then yes. This is true even if you do not exclude pre-entry compensation for purposes of determining pay credits. This is not usually something that has to be spelled out in the plan document; it is something you can elect year to year.

Just to be clear (i) this individual bought 100% of an operating business with his IRA, (ii) he is not involved at all in managing the business, (iii) the IRA's value is "well" over $100 million, (iv) the relevant facts are unknown, and (v) advice on a PT that could disqualify the entire IRA is being solicited on an anonymous message board? I would strongly suggest a different approach.

I guess we can forgive you for being a relative newbie - but the DOL's insistence on a VFCP filing - as known by for those with more experience - goes back a good decade or more. If that was meant as a political statement, then you clearly are in the wrong place....

What does this have to do with anything?

Or make someone at the employer a co-trustee just of the assets occasionally transferred to it, with the trust addendum describing the arrangement, the scope of the trustee's responsibilities, the segregation of assets in an account in the trustee's name, etc.?

While I’ve advised regarding a VEBA, I haven’t faced a situation of the kind you describe. In other situations, I’ve seen reasoning that a trustee may act through an agent. But a good agent segregates her principal’s assets from her personal assets. Before using the workaround, the VEBA trustees might consider how they would prove: that the employer/agent could not use the VEBA trust’s money for anything beyond the VEBA’s purpose; or that there were prudent controls for the trustees to detect the employer/agent’s bad act, and fidelity-bond insurance or other ready means to recover what’s stolen or misused. Might it be quicker for the VEBA trustees to select a bank with the needed wire-transfer services? Or to select a TPA that accepts the trustees’ check?

I am not familiar with this "three-state safe harbor standard". Note that they are merely "Proposed Regs" which, not only because they are old, but by their very title, raises the question of their effectiveness/ usability. As far a i know a VEBA determination letter only addresses the tax exempt status of the VEBA and does not address the marketing or operation of the VEBA and so would not grant the right to expand. From what you have described, i think that you would be creating a MEWA. I suggest that you contact EBSA and BOTH state Depts of Insurance (home state and expansion state). It might only need an M-1 filing, but, better safe than very sorry.