Leaderboard

It's the government and they're here to help you.

One might reread the governing documents’ definitions of, and provisions about, a severance from covered employment. Even if a worker was severed from a former employer that no longer participates under the multiemployer plan, might the worker now be employer by another participating employer? Under many multiemployer plans, covered employment often refers to employment with any participating employer. Likewise, many multiemployer plans treat a participant as not retired or severed until one is severed from all participating employers. But this is merely a surmise. The answers are in the documents governing the plan asked about.

Unfortunately, I think that ship has sailed... One client sent us the 5558 denial letter this morning. Our files show that certified mail with return receipt was mailed on 07/25/2022. The green return receipt card showed the IRS "Received" stamp as 09/22/2022. USPS tracking shows the envelope was received at the local USPS Regional Facility on 07/25/2022 (agrees with our files), then received at the next USPS Regional Facility on 07/29/2022 but didn't leave that facility until 09/07/2022. Then, delivered to Ogden UT on 09/10/2022... to be finally stamped by the IRS on 09/22/2022. So maybe the USPS is as much a problem as the IRS?

That is important as you don't want plan and IRA issuing 1099R for same taxable distribution. The Plan Administrator should write letter to IRA custodian explaining the error. The IRA custodian may not be able to distribute out to the individual w/o tax reporting, in which case the request should be to return to the plan which can then make the proper RMD distribution. Agree with bito too that this was indeed a plan/administrator/trustee/custodian mistake/problem/issue because the plan is required to split the distribution and properly satisfy its RMD requirements under the terms of the plan. Therefore, whichever entities/functions made this ill-advised lateral should fix it before the IRS recovers and runs back for a game winning TD against the Patriots, I mean the participant.

I agree - all those provisions that sound great for enhancing overall retirement plan coverage just make things more complicated and error-prone for the small and unsophisticated (from an HR perspective) employer that they serve as a detriment. Fewer employers will want to adopt these plans, fewer providers will want or be able to serve these plans, and administrative costs will increase, wiping out the short term tax credit savings. I've been in this business for nearly 40 years, have done both DC and DB in terms of administration, plan documents and compliance, and remember when DBPs were the complex animals no one wanted any more. Now, DBPs and CBPs look pretty simple compared to the modern and continually evolving 401(k) plan environment. Maybe all the heads of the states' with those new mandatory retirement plans met in a NYC pizza parlor and conspired with the Federal government to make 401(k) plans so damn complicated that no small employer would dare set one up and thereby drive all their employees into the mandatory state plans, just saying.

Perhaps it invites additional cyber-crime?

Yes. I am semi-retired and moving more and more towards retired. I don't want to deal with the part-time/permanent stuff and this auto contribution stuff, and I'm thinking that my typical micro clients don't want to either. I get it, and if I had not been in business but just worked in government I would think it's all great. I forget the description for this - behavioral economics? - and I guess it works, but not all companies have 10,000 employees. I might sound like a neo-con but I'm pretty far from it, but being in the trenches does give one a different perspective.

Wow, so what was the point of the amendment? I suppose to allow 401(k) contributions?

I don't think it requires a filing. IMO if you issue a 1099-R showing the RMD as a taxable distribution that "fixes" it (technically the plan did nothing wrong as the RMD was indeed distributed; it's the participant who rolled it over improperly).

As the Patriots found out on Sunday!

For the DB R/O - absolutely if current plan allows distribution of rollover balances at any time. This amount had already experienced a distributable event and all the conditions to distribute were satisfied. However, since the participant is not 59 1/2 this would be subject to 10% premature distribution tax if not rolled over to an IRA. Rollover to a Roth IRA would be taxable, obviously, but not subject to the penalty tax. I think the SEP rollover is treated similarly.

My two cents and to quote some famous people on the boards..."what does the plan say"? I would think if the DB and or SEP balances are effectively "rollover" balances in the 401(k), then unless the Plan Doc states something different for the origin of the rollover source funds, the rollover assets can be rolled out according to the plan in-service provisions for that money type.

An employee is out on some sort of unpaid leave. No compensation, but not "officially" terminated. I would agree that they are not part of testing. Assume no balance in the plan. Would you include or not include in the 5500 counts if they have otherwise met the plan's eligibility requirements?

I don’t know whether any Treasury rule or Internal Revenue Service guidance provides for or against what you ask. Absent that knowledge, here’s my guess at a practical path. If an old W-4P election properly set withholding for a periodic distribution, continue that election until the distributee changes it. If an old W-4P election properly set withholding for a series of standing-instruction minimum distributions, continue that election until the distributee changes it. If an old W-4P election properly set withholding for a nonperiodic single-sum distribution for 100% of the account and the plan’s procedures and forms carefully provide for a cleanup payment to get rid of after-flow contributions, dividends, and restoration credits, apply the preceding withholding election to the cleanup payment. If a distribution is newly requested (such that a distributee is filling-out a new electronic or paper form), use the new withholding-certificate form or an IRS-recognized substitute. Perhaps BenefitsLink mavens who know more than I do might add more information.

They're great to include in the testing with an allocation/accrual rate of infinity. Hard to fail with that kind of math!

There is an old thread from February 26th, 2003. I don't know how to insert the connection to the thread but if you search in the following board you'll find it. Originally referring to the ADP/ACP tests but I think may be relevant to the discussion: Retirement Plans 401(k) Plans ADP test and HCE w/ $0 comp I'm in the small plan/client market and have some industries where this happens all the time, mostly because the employee doesn't get terminated timely for a variety of reasons. FWIW - I've been doing this for 32 years and was originally "taught to" and have always excluded them from everything (whether NHCE or HCE), and never had issues on audit.

In my experience, most Recordkept platforms will process the RMD, with Plan Sponsor consent only, if the participant is unresponsive.

Some plans furnish participants a § 402(f) notice in the summary plan description or with every quarter-year’s account statement (or both). A rule allows speaking an oral summary of a § 402(f) notice, referring to the previously furnished notice, and offering to furnish again the whole notice. See 26 C.F.R. § 1.402(f)-1, Q&A-2, Q&A-5 example 3 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(f)-1. My description above about what might be possible assumes that many steps might require furnishing writings (often in paper form, if electronic delivery was not assented to) and waiting a reasonable and prudent time before proceeding with the requested distribution.

A cite for what part? That the alternate form has to include the marginal rate tables? https://www.irs.gov/forms-pubs/additional-guidance-for-substitute-and-telephonic-submissions-of-forms-w-4p-and-w-4r

My understanding is that, starting in 2023, the IRS will not consider a withholding election to be valid unless the participant was provided with the information contained in the Form W-4R, including the marginal rate tables. The election can be made on a different form, but the alternate form has to meet the IRS's requirements. I have heard that some service providers are taking the approach of providing IRS Form W-4R along with their own distribution forms, and telling participants that they can make an alternative withholding election by returning a completed Form W-4R, otherwise the default withholding will apply. This seems like a reasonable approach to me.

Do you also advise them that withholding is optional? The W-4R may be optional, but I don't think you can just go ahead and do RMDs without informing the participant her rights at some time. The W-4P/R are good elections in perpetuity until they are changed, so once is good enough. So, once someone fills out a form they should be good to go withholding-wise. Unless the form doesn't say the election stands for any future RMDs. However, I find way too many RMDs just go out with the 10% penalty tax defaulted without any input from the participant. I for one am not comfortable making personal tax decisions for participants.

Yes. Combined plan testing is done under the "permissive aggregation" rules which allow plans to be tested together under certain circumstances if they would not otherwise pass testing. If the plans pass coverage and nondiscrimination on their own, they do not have to be tested together. If you aggregate for coverage or nondiscrimination, though, you have to aggregate for both. This is different from top heavy, which has a "required aggregation group" that includes all plans which cover a key employee. So it would be possible for the two plans to be tested separately for coverage and nondiscrimination but still be part of the same top heavy aggregation group.

I do not believe that a distribution process could be done entirely over the phone, because IRC sec. 402(f) explicitly requires a written notice of the participant's rollover rights. Assuming that the participant can be adequately supplied with the written notice, the rest of the election could feasibly be done over the phone. Earlier this year, the IRS released a draft of Pub. 15-A for 2023. The draft publication includes a script for accepting telephonic submission of Form W-4R. While Form W-4R is not a complete distribution election, it is an integral part of a distribution election, and I do not think the IRS would have provided scripts for accepting W-4R over the phone unless they expect distribution elections to be done over the phone.

If you were going to treat them as non-excludable, how would you even correct a testing failure? It seems to me that 415 prevents them from receiving a contribution.

Having a zero compensation employee has been pretty rare in my experience. I've seen it where an owner just doesn't take compensation because of the business economics or when an employee is on some kind of leave of absence. But in that case it would be 12+ months and that's unusual. What other employees aren't getting paid, especially a "substantial number?"

Have you asked them for their justification of including them? Maybe they have the cite.

It will depend on the allocation formulas in the cash balance plan. If they're a "safe harbor" methodology (as opposed to different groups getting different amounts) in each plan then a straightforward 410(b) test should suffice. Of course they might WANT separate CB formulas, which could then lead to preferring to making employer contributions to the 401(k) after all.

ERISA § 408(e)’s statutory prohibited-transaction exemption can apply only regarding a plan’s acquisition or sale of qualifying employer securities, as defined in ERISA § 407(d)(5). ERISA § 407(d)(5)’s definition of “qualifying employer security” includes the specially defined term employer security. ERISA § 407(d)(1) defines an “employer security” as “a security issued by an employer of employees covered by the plan, or by an affiliate of such employer.” ERISA § 407(d)(7) provides: “A corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in [I.R.C. §] 1563(a), except that ‘applicable percentage’ shall be substituted for ‘80 percent’ wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term ‘applicable percentage’ means 50 percent, or such lower percentage as the Secretary [of Labor] may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary [of Labor]. An employer [that] is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary [of Labor]. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury.” There is a Labor department rule that interprets ERISA § 407(d)(5). 29 C.F.R. § 2550.407d-5(a) https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-F/part-2550/section-2550.407d-5#p-2550.407d-5(a). There is no Labor department rule that implements ERISA § 407(d)(7)’s delegation. All four rules interpreting ERISA § 407 were published in 1977, and not revised after. If there is a doubt on any question L.S. asks, one would want an employee-benefit lawyer’s advice. And even if one finds that an affiliate’s participant’s account’s investment in the parent corporation’s common shares could be permitted, one would Read The Fabulous Document to discern whether the investment is provided for.

Because a qualified birth or adoption distribution is treated as not an eligible rollover distribution for tax-reporting and tax-withholding purposes, could a distributee properly complete Form W-R to request zero withholding for Federal income tax? https://www.irs.gov/pub/irs-prior/fw4r--2022.pdf If the distributee’s address is in the USA, is there any reason by which a plan’s administrator or its payer would reject such a withholding election?

A plan should limit the plan’s qualified birth or adoption distribution to one participant for one birth or adoption to no more than $5,000. For tax-reporting and tax-withholding purposes, a qualified birth or adoption distribution is treated as not an eligible rollover distribution. Internal Revenue Code of 1986 (26 U.S.C.) § 72(t)(2)(H)(vi)(II). But get the distributee’s withholding certificate.

If the balances are even partially vested, no. If you happen to have a terminee with only an unvested balance that has not been forfeited yet, you can get to the magical 120 count.... Assuming you as a small filer last year of course.

The ERISA Plan Administrator (who is probably the Plan Sponsor in a small plan) is responsible for making the RMDs. While the potential excise tax is on the Plan Participant, failure to comply with §401(a)(9) is a Plan Qualification issue so get the checks issued and sent. Last time I checked the R sands for Required and participant consent is not required. If she just retired or turned 72 and this is her first RMD you have until 4/1/2023 to get it done. If it's an on going thing you have until 12/31/2022.