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I don't believe this would be a prohibited transaction (requiring deposit of lost earnings and payment of excise tax under sec. 4975) since the employer is not getting any use of the plan assets, like they would if they had held on to the actual contributions. Instead it sounds like the participants' investment selections are not being honored. What happens in that case is I think you have an ERISA 404(c) failure, the consequence of which is that the fiduciary is no longer insulated from the participants' investment choices. Potentially the participants could sue the trustee if they had a loss caused by failing to follow their investment instructions.

The plan asset regulations depend on whether the money is held in the trust, not whether it has been invested according to a participant's investment direction. If you have not violated the plan document, then you don't have a compliance problem. Note that the trustee repeatedly investing money in cash for a few days each payroll period will not comply with ERISA 404(c), so it may lead to employer liability.

It seems to me that this is asking for trouble. The employer above apparently wants to do something akin to payroll withholding for the contractors. For example, if contractor M elects a 5% contribution, and for a given week the employer pays them $1,000 in non-employee compensation, the employer wants to instead pay them $950 and contribute $50 to the plan, plus maybe another $40 as a match - seems simple, right? Even if M did join the employer's MEP as a participating employer, this would still not be correct, since $1,000 is not M's plan compensation - if M is unincorporated, then it is just the starting point for calculating M's net earned income; if M is incorporated then their comp is their W-2 which may have no relation to the $1,000 at all. It gets even messier when you consider that the contractors probably have other work besides this particular employer. Assuming the contractor is operating as a sole prop, is all of their income from all of their other work now subject to the contribution election and match? I would think it would have to be, unless you could write up a very specific definition of comp to somehow exclude it. Who is going to make sure it is calculated correctly? Do the contractors know they will have to submit their schedules C? And what if they end up having a net loss (and consequently $0 comp and $0 415 limit) after the employer made contributions on their behalf? The administration on this would be cumbersome to put it mildly. And what if the contractor hires employees? I applaud the employer's desire to offer retirement savings via payroll deduction to his people - studies have shown this is one of the most effective ways for workers to save for retirement. It really does say a lot about this employer that he wants to provide this benefit. Unfortunately the current tax law is not set up to help him do it easily.

PS - yes to last day requirement (subject to discrimination testing) SHNEC - no to last day requirement

In my opinion, you need to have more to go on than "the market was down." Have the client or investment institution provide you with the rate of interest those participants would have received had the matching contributions been invested in their accounts (assuming participants give investment direction, those rates would likely be different for each participant). It's possible (although maybe not likely) that one participant was invested in a very conservative investment vehicle and had a small positive return. If all of those accounts had investment losses, the safest thing to do may be to not allocate interest on the late matching contributions (rather than reducing the matching contributions for the loss, although there may be validity to that argument). There's no requirement to allocate interest if there is none. We have done a few corrections where we did not include interest because of negative returns during the period of failure. We always document an EPCRS correction with a memo to the file that describes the failure; gives a detailed description of what we did to correct the failure, including the process, calculations, and other considerations, if any; and recites which sections of EPCRS we relied on in making the correction. And we attach any pertinent calculations or documentation (such as something showing what the interest rates were for each person). This is very helpful for the client to have in case of audit so they can show that they appropriately fixed an operational failure. It's also helpful in cases where there are personnel changes in a company and the new people are trying to figure out what their predecessors did.

In order to be a qualified plan, the plan must be maintained for the exclusive benefit of the employees of the employer and their beneficiaries. A contractor, by definition, is not an employee, and they can not participate in a plan maintained by the employer.

Nope. Just have the 1099-R reflect the appropriate amount of 50k.

You asked this same question yesterday. But yes, the 3% nonelective safe harbor contribution can be used toward satisfying gateway. Mind you, it only counts TOWARDS gateway, it doesn't necessarily eliminate it. For example, if gateway for the plan in question is 5%, then you'd still need an additional 2% contribution on top of the 3% safe harbor.

Your client needs to decide whether these individuals are employees or contractors, review the factors under federal and applicable state law, and make sure that the business arrangement is structured in a way that reflects the factors favoring the classification chosen. If they would otherwise be considered contractors except that they are being treated as employees for purposes of eligibility to participate in an employee benefit plan, then a state regulator or class action lawsuit might pop through the door and challenge their treatment as contractors for other labor law purposes. As others have mentioned, there are options to cover non-employees through a MEP. Or you might be able to come up with a structure whereby they are treated as leased employees, co-employees, etc. But it can get very complicated very quickly when your client is trying to have their cake and eat it too on an issue like this. You have several interacting legal regimes from different jurisdictions that you need to sort through to make sure there is no issue.

I agree. The only time I would forfeit a "deferral" would be when the correct amount was withheld but too much was deposited. In that case it is simply employer money that ended up in the participants account.

Agree - and assume this was a DBP, otherwise where did extra amount that was overpaid come from?

I would not forfeit and correct through payroll. It is not the correct method and a forfeiture from a salary deferral account throws up a red flag. Also, the excess is required to be adjusted for investment experience as Lou noted.

ARA actually asked for clarification on this question (re-hire prior to RBD) in their comment letter on the recently-proposed RMD regulations. It remains to be seen if it will be addressed in the final regulations. The safest thing to do would be to make the distribution anyway, since the penalty is so steep.

While I advise no one, a fiduciary might want his, her, or its lawyer’s advice to consider these and related points: If the only tension were that an investment adviser gets compensation for its services, ERISA § 408(b)(2) might exempt that prohibited transaction. But if a service arrangement involves a fiduciary’s self-dealing, the self-dealing act is a separate prohibited transaction. 29 C.F.R. § 2550.408b-2(e)(1); accord 29 C.F.R. § 2550.408b-2(f) example 6 (about father and son). “Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service.” 29 C.F.R. § 2550.408b-2(e)(1) (emphasis added). A fiduciary’s recusal might not get rid of the conflict unless none of the remaining fiduciaries has any personal interest in pleasing the father or otherwise to select the son. https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.408b-2 If the plan’s fiduciaries (preferably those other than the father) sincerely believe that the son might be the investment adviser that would be selected on the merits, those fiduciaries might engage an independent fiduciary to evaluate investment-adviser candidates and select the plan’s investment adviser. Yet, a fiduciary would do so only if the plan’s expense for the independent fiduciary’s service would be no more than a prudently incurred expense needed to serve the plan’s exclusive purpose.

I have never seen a transfer like you are talking about happening as shares vs they are sold at one fund on day 1 and the cash is invested on day 2. Nothing they did was unreasonable and is industry norm so I can't imagine a path to legal recourse. But I am a CPA not a lawyer.

Generally, the answer is yes (and I agree with the preceding post). You still would want to be cautious about excluding temporary employees or anything similar that makes it look as if the plan is imposing an eligibility service condition greater than that allowed by Code Section 410(a).

Unlike a single-employer plan, a multiple-employer plan might get no Securities Act of 1933 § 3(a)(2) exemption. Years ago, I lost an engagement because I mentioned a securities-law issue. Although I said that responding to the issue was not a condition to my availability and explained that enforcement was unlikely, the organizer disliked being told even that there was any issue. There’s a meaningful difference between an “open” multiple-employer plan with unrelated employers and a “closed” MEP involving business relationships. For a multiple-employer plan about which the employers have business ties, the staff of the US Securities and Exchange Commission have delivered no-action letters.

I'm merely speculating that this is a safe harbor plan, and that you are referring to what is commonly called the "30 day notice" requirement. IF that is the case, the law does not necessarily require a notice at least 30 days in advance. The statute requires that the notice be given within a "reasonable" time prior to the beginning of the plan year. For the normal annual notice, the IRS "deems" it to be reasonable if given between 30 and 90 days prior to the beginning of the plan year, but facts and circumstances can override this. For a newly eligible employee, the requirement is satisfied if the notice is given by the employee's date of eligibility. You might want to spend some time reading through 401(k)(12) and (13), as well as 1.401(k)-3(d)(3) if your situation is in fact what I'm guessing, as well as IRS Notice 98-52. If your safe harbor is a QACA, see also see 1.401(k)-3(k)(4).

Have the securities law issues been resolved for multiple employer 401(k) plans (not that anyone seemed to care much, ever)?

What notice are you referring to in particular? Retirement plan participants are required to receive a number of notices at various times and each of those notices has slightly different timing requirements. While most notices have a latest date on which they may be provided, not all have an earliest date—meaning that you can sometimes just provide the notice when the employee is hired and call it good. The service requirement is 175 hours over what period of time? A month? 3 months? A year? And what is the entry date once they satisfy the service requirement? You said the plan is using the counting-hours method, does it have an hours equivalency provision? What happens if the participant does not meet the hours requirement during their initial eligibility computation period?

Might your inquirer consider a multiple-employer plan under which a contractor might be a participating employer?

The correct way would be for the participant to request a 402(g) refund and process from the Plan along with earnings with the Plan issuing the associated 1099-R. I suppose it is possible to "correct through" payroll but I don't think it is an IRS approved method. So make sure you are comfortable defending this course of action if you propose it. I'm sure that would "easier" for everyone involved, I'm just not sure it's the correct method even if it produces essentially the same result with less paperwork.

No idea... maybe the subs can be employed by the owner for the time that they work for the owner? So "part-time" or "on-call" employees that are allowed to participate in the owner's 401k plan?

From the IRS Form 5304 model SIMPLE: V. Duration of Election This salary reduction agreement replaces any earlier agreement and will remain in effect as long as I remain an eligible employee under the SIMPLE IRA plan or until I provide my Employer with a request to end my salary reduction contributions or provide a new salary reduction agreement as permitted under this SIMPLE IRA plan. As long as the employee remains eligible, his/her latest election should continue and there is no need to re-enroll unless the employee is making a change.

Yes. In fact, you could set up a plan to just cover a single NHCE and have no testing. We have done things like this quite often for fast food operations, etc. The owners aren't worried about participating, so we exclude them (and all other HCEs if they have any) and cover only the managers and assistant managers at each location. Generally those people are paid pretty well, but don't qualify as HCEs.

End of the year is best, as advised by both of the gentlemen above. No reason that make sense to contribute a Non-Elective on a payroll basis.

RBG, not counting the service would seem contrary to the policy of the provision not to permit avoidance of the coverage requirements through the use of employee leasing. On the other hand, one could argue that the phrase "such services" in 414(n)(2)(B) is in parallel with the same term in (n)(2)(A) and therefore must have been performed pursuant to the leasing agreement in order to count. However, one could also argue that in all of (n)(2)(A) through (C), "such services" is referring to the actual thing being done, e.g. bookkeeping or dental assisting, or whatever. Personally, I would go with the latter interpretation of the phrase as a matter of legislative interpretation. The IRS apparently thinks the service should count. See https://www.irs.gov/pub/irs-pdf/p7003.pdf, citing IRS Notice 84-11.