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A number of years ago we had a plan where the workforce unionized, making most of the employees an excludible class. Subject to attorney review, all impacted employees were deemed to no longer be eligible to share in contributions under the Plan. Interestingly, they were also deemed to NOT have a distributable events, so the monies had to remain under the trust until the person satisfied a condition that allowed distribution. (I also note that vesting continued to accrue provided that a vesting year was completed to allow for the credit.) In summary, the effected participant received no further contributions, and their accounts remained under the trust until a distribution could be made. Regarding the OP, the question appears to be can the person be paid now since a termination of employment was realized. I would suggest no since the person is no longer terminated. A distributable event must be realized, but until then the person's account just accrues investment return and vesting credits. That was my experience with a similar situation.

Agree with @Lou S.. When you have 2 people, the greater of (40% or 2) is 2.

No, the DB won't be OK if you have 2 and excluded one of them, even if one of them is an HCE.

Off the top of my head, I would think so. C presumably was employed by Company B at some point (giving C a balance in the Company B 401(k) plan) and terminated from employment with Company B and transferred to Company A. C had a separation from service with Company B, but not from the "Employer" that included Company B and Company A. When Company B is no longer in a controlled group with Company A, C has had a separation from service from Company B and all members of its new controlled group, which should be a distributable event. I think this would hold true even if Company B continued to sponsor its plan after closing because C is still separated from service with Company B (whereas this fact pattern would not give ongoing Company B employees a distributable event from the Company B plan).

Internal Revenue Code § 403(b)(7)(i) provides as a condition to § 403(b) Federal income tax treatment that “under the custodial account—(i) no such amounts may be paid or made available to any distributee . . . before— . . . (III) the employee has a severance from employment[.]” Internal Revenue Code § 403(b)(11)(A) provides: “This subsection [§ 403(b)] shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement . . . may be paid only—(A) when the employee . . . has a severance from employment[.]” Although either condition refers to “has a severance from employment”, these differ in how one looks to a measuring or other relevant time. A rule interpreting the statute is 26 C.F.R. § 1.403(b)-6 https://www.ecfr.gov/current/title-26/section-1.403(b)-6. About a situation in which a participant had a severance from employment with the charitable organization that paid contributions into the annuity contract or custodial account and later becomes an employee of the same charitable organization, several interpretations are possible. Among them: Some suggest a participant may be allowed a distribution only while she “has a severance from employment”, and so no longer gets a severance-from-employment distribution if reemployed by the same charitable organization. Some suggest a participant might be allowed a distribution to the extent of a separate subaccount of contributions made before the severance from employment, adjusted for gain or loss allocable to those contributions. That interpretation has some indirect support in nonrule guidance about allowing a distribution to the extent of a separate account for rolled-in amounts. See Revenue Ruling 2004-12, 2004-1 C.B. [2004-7 I.R.B.] 478. Even if the plan’s administration ordinarily does not record separate subaccounts for a rehire, some might suggest a separate-accounting condition (if relevant) is met if the annuity contract or custodial account has received no contribution after the participant was rehired. Allowing or refusing a distribution involves interpreting tax law, and how that law relates to an administrator’s fiduciary duties in administering the plan. The plan’s administrator should get its lawyer’s advice.

My guess you are correct the plan document is the main thing. I am NOT much of a 403b expert but in a PSP, 401k, or ESOP my default answer would be no unless I find something very clear in the document that said otherwise. All plan documents I have read make it clear you pay a terminated participant which isn't the same as an ineligible participant. That is with the understanding you said there are no in-service distribution provisions.

Tax consequences and the whole repayment of these special payments aside, the victim of domestic abuse taking a payment may result in unintended consequences. Imagine the scenario where a person is the victim of domestic abuse but is still dependent upon the abuser or does not have protection from the abuser. The victim self-certifies and takes the distribution which is then reported to the address on record where the victim and/or the abuser resides. This sounds like a situation that could trigger further abuse. It also seems that the victim likely will wind up revealing the abuse to the plan administrator in the event the recordkeeper or IQPA auditor inquires about the payment. Where the plan administrator often is in a role within HR, might this trigger a need for the plan administrator to take steps to protect the victim?

I know a lot folks who aren't that keen on self certification in general. They may not feel comfortable with the self certification aspect or a possible "run on the bank" when employees know they just need to self certify. We saw similar issues with CARES distributions, some plans had just about every NHCE self certify and take money out.

Wait to make the decision to provide or omit until we have clear guidance on how to administer it?

Assuming that you have verified that the was a Missed Deferral Opportunity (MDO) that must be corrected by making a 50% QNEC, then the correction is made in accordance with Rev. Proc. 2021-30 Appendix A .05(2) and Appendix B Section 2.02(1)(a)(ii)(B)(1), and you will need to have the ADP that passes for 2023 (determined without the use of exclusions for otherwise excludable employees) to calculate the correction. There may be a correction other than the need to make a 50% QNEC assuming the employee is still active and depending upon the plan or other circumstances: Although unlikely given the question, does the plan use auto-enrollment? There may be not need for a correction but you have to provide a notice to the employee. Was the MDO found and deferrals began within 3 months from the employee's eligibility date? There is no QNEC and you have to provide a notice to the employee. Was the MDO found and deferrals began after 3 months from the employee's eligibility date? The QNEC is 25% and you have to provide a notice to the employee. The guidance for corrections is fairly detailed and prescriptive once you can confirm the circumstances of the employee's MDO.

Bill, Obviously LPTEs can come in w/o violating the safe harbor. The problem is that many excluded class Per Diems work schedules that are not LPTE. For a hospital with a safe harbor and Per Diems, they can't say that Per Diem LPTEs can defer but that full-time LPTEs cannot defer. The only solution I can think of is to have a deferral-only Plan for the Excluded Class.

On a related note, the dependent care FSA limit (sadly!) has also returned to normal levels. So the ARPA changes expired on both the tax credit and §129 side. In any case, I think it would be a very rare situation where the tax credit provides more bang for the buck than the dependent care FSA. Full details: https://www.newfront.com/blog/dependent-care-fsa-limit-challenges Slide summary: Newfront Office Hours Webinar: 2022 Year in Review

Looks like the credit was expanded by ARPA for 2021, but that expansion has expired. See https://www.irs.gov/publications/p503 (along with 2021 instructions and 2022 Instructions for Form 503) Draft of the 2023 Pub. 503 was recently issued; it also confirms the expansion has expired.

While none of us knows the facts, some of what’s in the situation FishOn describes suggests a possibility of facts that might set up some opportunity for a different analysis. A rule interpreting and implementing ERISA § 3(42)’s definition for "plan assets" states this “include[s] . . . amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(1) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1). But the rule does not specify a particular act that then must happen. Rather, the focus is on treating an amount as plan assets, distinct from the employer’s assets. An amount delivered to the plan’s trustee or its custodian, or either’s agent might be treated as the plan’s assets—even if not yet allocated to any participant’s or beneficiary’s account. As Lou S. guesses, some collaboration of the plan’s administrator, trustee, and service provider might have treated the amount that lacked instructions as the plan’s asset. Further, FishOn’s story suggests the employer/administrator or a service provider made good the balance allocated to the participant’s account as if the allocation had not been delayed. In this context, “back-dating” is an unfortunate word some recordkeeping people sometimes use to describe the operations that result in a participant’s account getting the balance the account would have if an amount had been invested on the trading day it ought to have been invested had all fiduciaries and service providers acted correctly. Perhaps there’s room for a fiduciary, after using diligence and prudence (including getting its prudently selected lawyer’s advice), to find that there was no prohibited transaction. Or a fiduciary might find the facts are not so crisp. Either way, a fiduciary might evaluate whether to use the Voluntary Fiduciary Correction Program. (An applicant may use VFCP without conceding that there was a breach.)

Paul while I generally agree, it sounds like the funds were sent to the record keeper and thus segregated from the assets of the employer, just not invested in the employee specific account, unless I'm missing something. I agree with Bill's comment by "back dating" I think they mean "invested as if it had been invested on the original receipt date".

I'm wondering if by "back dating" the op means crediting the deferrals "as of" the correct deposit date so that future earnings are correct.

Since the amounts were withheld from the employee's paycheck, they are late deposits. Assuming that this failure is limited to this employee (or a very small number of participants so the dollars are small), and assuming the client wants some assurance that the correction acceptable to the DOL and IRS, then consider making the correction under the DOL's VFCP under PTE 2002-51 and allocating the related excise tax to the affected participants (no 5330). Use the DOL calculator to determine the lost earnings, and make sure any associated match, if any, is fully funded along with earnings. In the real world, the primary focus is putting the participant in the position of not having been harmed by the operational error, and then giving the agencies their due. Any recordkeeper worth their salt can do this in their sleep. (Note: Back-dating anything generally is a bad idea.)

Doesn't sound correct. It sounds like the funds were segregated from the employer and held in suspense until an allocation could be made. At least if I understand it correctly.

First, i agree that an attorney is needed to assess whether someone has a case. Second, be aware that anyone providing services has a standard of care that is required and not fulfilling a contractual obligation is breach of contract. So, there may be a cause of action here. It depends on (a) what the TPA agreed to do; (b) what conditions needed to exist before the TPA had that duty (e.g., receiving data, being paid, etc.); (c) what limitations there are on liability in the TPA service contract; and (d) what limitations there are on how litigation can take place (e.g., statute of limitations, arbitration or mediation vs. litigation, etc. as stated in the TPA contract). Last but not least, the client should have an attorney send a demand letter to the TPA ... there is a lot of potential for results between the bad action and litigation .... Many TPAs are willing to stand behind their work. If nothing else, this is a good illustration of what I keep telling TPAs who do not think they need a service agreement! Stuff happens! Ilene

UPDATE: Found a number on the IRS website; 877-829-5500. Client called and advised us: "WOW, in my 30 years as an accountant that was the easiest call to a government agency that I have ever had. Wait time was less than 4 minutes (as opposed to hours) and the agent actually solved the issue and is sending us a refund check."

See Peter's answer in post #2. I think that is as clear as you are likely to get.