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Luke: I have seen this exact issue in the past. A non-safe harbor plan was established late in the year and the owners max deferred. They failed the ADP test and got most of their money back, plus the plan was top-heavy so the employer made a 3% top-heavy to the non-keys.

Likely SOL means something different for the client in this scenario.

The LTPT rules only allow for them to defer. has nothing to do with eligibility for match,

No. Yes.

Filed Complaint in District Court with Executor as Plaintiff and Plan as Defendant. Filed under ERISA 29 USC 1001 to obtain relief under Section 502, 29 USC 1132 seeking equitable relief. Subject matter jurisdiction 29 USC 1132 (e)(1) and venue 29 USC 1132(e)(2). Defendant did not answer. Got default judgment appointing the Executor as Plan Administrator and Trustee. Then adopted resolutions terminating the Plan and distributing to Estate, the beneficiary.

Dear Trisports, It is not uncommon for a sole proprietor who maintains a tax-qualified defined contribution plans, such as 401(k) plans to act as the plan administrator and trustee and fail to make provision for successors if the proprietor is unable to perform the tasks associated with those positions. The plan administrator is generally responsible for plan beneficiary determinations, notifying plan beneficiaries of such determinations and authorizing plan distributions to beneficiaries who request benefit distributions. Plan trustees other than those who act essentially as custodians are generally responsible for the investment of plan assets, although they may delegate such authority in part. It is also not unusual for financial institutions and advisors with control of the plan assets to be reluctant to relinquish control of the plan assets in those situations. It is prudent to verify the agreements those parties have with the plan. The agreements usually require them to follow the instructions of the duly appointed plan administrator and plan trustee. The institutions and advisors often lack good procedures for accepting successor trustees and administrators, but tend to accept such instructions from the sole proprietors with little question, particularly if the proprietor is willing and able to confirm the instructions. Tax-qualified plan documents usually have provisions for choosing successor plan administrators. The plan sponsor is usually given the authority to make such choices. The estate generally steps into the shoes of the sole proprietor sponsoring the plan on the death of the proprietor. Thus, the estate’s personal representative may nominate a successor plan administrator and plan trustee, and if the nominees accept the offices, they will be duly authorized to exercise the powers of those offices. In practice, it often takes considerable time after the proprietor’s death before a personal representative of the estate is appointed and recognizes the need to appoint these plan fiduciaries. One would expect an opinion of plan counsel that the successor plan administrator and trustee have been duly appointed to be accepted by the financial institution or advisor, which will then defer to those fiduciary’s instructions. Unfortunately, this does not always occur, in which case the plan will have to seek a court order, generally from a state court, directing the financial institution and advisor to show cause why they should not be compelled to follow the instructions of the duly appointed plan administrator and duly appointed trustee and to pay the plan’s attorney fees for having to pursue this matter.

On the first question quoted above, Chapter 7, Section IV, Part E.2 of The ERISA Outline Book, citing Treas. Reg. Section 1.402A-1, Q&A-1 says that a qualified plan may only accept Roth rollover contributions if it accepts Roth contributions more generally. That's the consensus view, although reading the regulation leaves me less than fully convinced. On the second question quoted above, it is a clear "no." IRS Notice 2010-84, Q&A-19, a portion of the notice that was not modified by Notice 2013-74.

Agree with EBEC on the issues of different tax years. I think that's important if relevant here. Also, how is the money going to be "paid back" and in what amount? Reduced final check? Actually writing a check back? and is that amount the gross amount of the bonus or the after tax amount?

This feels like "negative 401k" like when a payroll adjustment of any sort has to be processed.

Here’s the statute: ERISA § 413 [unofficial compilation 29 U.S.C § 1113] Limitation of actions No action may be commenced under this title [I] with respect to a fiduciary’s breach of any responsibility, duty, or obligation under this part [4], or with respect to a violation of this part [ERISA §§ 401-414], after the earlier of— (1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation{;} except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation. http://uscode.house.gov/view.xhtml?req=(title:29%20section:1113%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1113)&f=treesort&edition=prelim&num=0&jumpTo=true For subsection (1)’s statute of repose, an action based on a fiduciary’s decision initially made more than six years ago is not completely barred if a fiduciary breached a duty to review earlier decisions. For subsection (2)’s statute of limitations, court decisions split on whether “actual knowledge” is just actual knowledge of the facts that constitute a breach, or actual knowledge that the facts constitute a breach. For either interpretation, the Supreme Court held “actual knowledge” means the plaintiff actually knew the information. Section 413’s last phrase refers to “fraud or concealment”. At least one appeals court opinion interprets “concealment” not to require evidence of a fraudulent intent. That opinion did so by looking to the common law of equitable remedies. Further, the idea of preferring an interpretation that doesn’t treat any word of a text as meaningless or irrelevant supports such an interpretation. Also, the Secretary of Labor’s ERISA § 504 investigation powers are not limited by ERISA § 413. First, one would not know when a statute-of-limitations period ends until one had completed the investigation of the facts. Further, even if the facts found do not support a timely action grounded on a fiduciary’s breach of its responsibility to the plan, there are several other kinds of legal and equitable relief the Secretary might pursue that would not be constrained by the six-year statute of repose.

If the decedent always was the only participant and he was not the employer’s employee (rather than a deemed employee), the plan might not be ERISA-governed and the Labor department might lack enforcement powers. If the decedent’s daughter has been appointed as the decedent’s estate’s personal representative, one imagines the daughter has at least one lawyer available. The daughter’s lawyer might ask Morgan Stanley what court order would satisfy them, and could petition an appropriate court for such an order.

Karl, the receiving plan DID accept the funds when the plan's custodian cashed the check and the receiving plan has not established a procedure for reasonably concluding that the rollover is valid (per 1.401(a)(31)-1, A-14). Under A-14, if they had a reasonable rollover acceptance procedure, the plan administrator that accepted the rollover in error could distribute the amount of the invalid rollover with earnings to the EMPLOYEE. Under this rule, (1) the receiving plan administrator could send a letter to the unhelpful distributing plan to let them know the direct rollover failed and that they need to update their 1099-R reporting the rollover appropriately (to a distribution using distribution code B for a regular distribution from a Designated Roth Account, I believe), (2) then issue the check for the invalid rollover contribution plus earnings to the employee. This lets the employee decide how/whether to roll over the check amount to a Roth IRA (within 60 days). This reg. doesn't say how to handle it when the receiving plan does not have a procedure for reasonably concluding the rollover is valid - which may be something that can be fixed under EPCRS. (I think the 1099-R for the distributing plan under EPCRS would show the original invalid rollover contribution amount in box 5 - since the distributing plan should already be showing it as taxable after you notified them of the correction above, and the earnings amount if any - which hasn't been reported by anyone as taxable yet as taxable in 2a).

We might be dealing with the same custodian. We frequently deal with issues like this due the custodian accepting rollover money before it can be confirmed the rollover is acceptable. We have been unsuccessful in getting them to change their procedures. The receiving plan has been holding the assets ever since the check proceeds were placed in the plan's cash account. If it has been determined by the Plan Administrator to be an invalid rollover due to terms of the document, the correction is to distribute it from the plan as soon as possible. See https://www.irs.gov/retirement-plans/verifying-rollover-contributions-to-plans We have the participant complete a distribution form instructing us where to send the money. We issue a new 1099R as it is a new distribution. As Bri stated, this participant just needs to setup a Roth IRA.

Has the 1099R been issued by the previous custodian? If one has been issued, then I'm assuming the tax code used would be "G", which is incorrect (because the funds are not in a designate Roth money type). I would see if they would do a corrected 1099R with a tax code "H" and then have the employee open a Roth IRA and have the current custodian send the funds into the Roth IRA. If a 1099R has not been issued, see if they would be willing to code the transactions as a "H" and do the same act.

100% agree - if exclusion was a reasonable job classification then permissible provided such resulting "plan" satisfies coverage. However, any hours-based classification, specific or "veiled", is not considered reasonable per IRS.

You can exclude reasonable classifications of employees provided you pass IRS nondiscrimination testing. Typically 410(b) coverage in this situation. I believe an exclusion of "less than 30 hours per week" is not considered a reasonable classification by the IRS and is not allowed.

Interesting question. Others may be able to provide some more nuance, but my recollection is that a repayment in a later tax year is treated as a separate "transaction" such that the first year would be unaffected, i.e., they are repaying with entirely "different" money. If a repayment is made during the same tax year, I believe it's not reported on the employee's W-2 at all, i.e., it's as if the payment never happened. In the later-year scenario, I would think the deferral pretty clearly stays in the plan. It was compensation paid, withheld from, deferred from, taxed, and reported in one year. The employee just happened to pay the employer 50% of the bonus amount from their other assets in the next year. (The individual income tax treatment of that scenario is complicated.) In the same-year scenario, my initial reaction would also be to keep the deferral in the plan. The payment was "compensation" when paid to the employee at the time of deferral; it's not as if it initially came from ineligible compensation, e.g., if the plan stated that participants could not defer from bonuses at all. Could depend on the plan's definition of compensation as well (3401(a) may be an easier argument than W-2).

The participant has not reach RBD so no RMD is due for 2022 under any set of rules that I'm aware of, if the product insists, have them produce a citation for their position that is more than "because we said so". What the plan allows on death and what elections the spouse makes will determine when RMDs must start for the spouse. My memory matches up with Belgarath with pretty much the same caveats about SECURE Act changes possibly clouding the issue. I "think" to extend the RMDs as long as possible the spouse could roll the funds to an Inherited IRA and delay RMDs until the participant would have reached age 72. I believe this part of SECURE changes is the same as pre-SECURE for spousal beneficiaries. If she elects to treat the IRA as her own, then RMDs would begin the first year following when she has a balance on 12/31 of the preceding year. So if she roll it to an IRA in 2022 in her name, then RMDs would start in 2023. If the money is left in the Plan, RTD on options available and payout timelines for beneficiaries.

That would probably be acceptable under EPCRS self correction, but it would require adding ROTH for all purposes and the client may or may not want to do that.

Can a “corrective” amendment put in ROTH so that the ROTH rollover in certain circumstances like this one be allowed?

The first question(s) would be "why" (and "what")? To avoid commissions? Not worth the risk. Because it is a hard-to-sell asset, such as real estate? No way. And doing it from a personal account is a definite no.

The Labor department’s nonrule Interpretative Bulletin (cited above) arguably tolerates a contribution of property made with no obligation: “For example, where a profit sharing or stock bonus plan, by its terms, is funded solely at the discretion of the sponsoring employer, and the employer is not otherwise obligated to make a contribution measured in terms of cash amounts, a contribution of unencumbered real property would not be a prohibited sale or exchange between the plan and the employer. If, however, the same employer had made an enforceable promise to make a contribution [even a profit-sharing contribution] measured in terms of cash amounts to the plan, a subsequent contribution of unencumbered real property made to offset such an obligation would be a prohibited sale or exchange.” Under that view, a contribution of property other than money might not be a prohibited transaction if treated as a discretionary nonelective contribution about which no written or oral promise had been made. I express no view about whether that Interpretive Bulletin is a correct, or even permissible, interpretation of the statute. A contribution of property other than money that purports to meet a funding obligation to a pension or money-purchase plan, or an obligation (however made) to a profit-sharing plan, is a prohibited transaction (and so does not satisfy the obligation).

In Commissioner v. Keystone Consol. Industries, Inc., 508 U.S. 152, 159-162, 16 Empl. Benefits Cas. (BL) 2121 (May 24, 1993), the Supreme Court construed ERISA title II’s parallel text, Internal Revenue Code § 4975(f)(3), as extending, but not limiting, the reach of § 4975(c)(1)(A) [ERISA § 406(a)(1)(A)] to include as such a prohibited sale or exchange a contribution of encumbered property, even if that contribution is not used to meet a funding obligation. The Court held a contribution of property—even assuming the property was unencumbered, and the contribution was valued at the property’s fair market value—is a prohibited transaction. See also Interpretive Bulletin [94-3] Relating to In-kind Contributions to Employee Benefit Plans, 59 Fed. Reg. 66,736 (Dec. 28, 1994) https://archives.federalregister.gov/issue_slice/1994/12/28/66734-66737.pdf#page=3, reprinted in 29 C.F.R. § 2509.94-3 https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.94-3. Also, an inquirer likely has mistaken assumptions about why one might want to contribute securities or other property that is anything other than money.

Have her set up a Roth IRA for the funds, new custodian sends funds there?