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I don’t know what might be correct or incorrect on the underlying question. But here’s an observation: In situations in which a recordkeeper seeks to impose its rule despite the plan administrator’s readiness, after it considers a lawyer’s or other practitioner’s advice, to deliver a written instruction (one within the service agreement) and even expressly indemnify the recordkeeper for following the instruction, we sometimes remind the recordkeeper that: they say they do not give tax or other legal advice, and they say they lack discretion to administer the plan. In my experience, the recordkeeper’s reluctance to process a proper instruction fades quickly.

The rule is that they may be excluded if: They terminated employment with less than 500 hours of service; They did not benefit in the plan; and The sole reason they did not benefit is because they terminated with less than 500 hours of service. In your case #2 is not satisfied, because they did benefit. Safe harbor non-elective is aggregated with profit sharing for 410(b) and 401(a)(4) purposes, so they are considered benefiting for PS because they received a safe harbor contribution. So they can not be excluded.

What do you mean the sponsor has "opted" for a loan offset? The plan has a written loan policy, the sponsor needs to follow those procedures which will dictate when a default and offset will occur. A distribution upon plan termination would apply to a participant's entire account, including their outstanding loan. So the loan offset should just be a matter of reporting correctly. If the participant elected a cash distribution (not a rollover) don't forget to take the amount of the outstanding loan into account when calculating the amount of withholding.

If possible - the request should be in writing, even if just a quick fax to the agent asking for more time. I think there are a few different things that might be going on - is the audit notice just a request for information? Or does it have an appointment date (for either in-person or over the phone)? If it includes an appointment date, its possible the date is far enough in the future that the auditor isn't able to justify an extension? If just an audit notice / information request with no appointment date, then how far out is the date that the information is due? standard extension for the due date for an information request is only 10 days. More than that and a manager definitely has to be involved. At least that's been my experience the last few years. The last few years it seems auditors have come from all around the country to audit plans and they make several appointments for a single trip, so those ones have been less flexible when a change of date has been requested by the sponsor. Agents from the local office, if they are doing the audit, are able to be more flexible for accommodating requests to change the appointment dates. Just my experience.

I would not assume the case is closed, the IRS is simply that far behind. It sounds snarky, but it hasn't even been a year.

I concur. The IRS procedure essentially is allowing the participant to self-certify with the condition participant must preserve the documentation in the form of the physician's certification. The only circumstance where the employer would(should?) ask for documentation is if participant wishes to repay the distribution. The employer may decide if a copy of the 5329 filing suffices as adequate documentation (which would preserve some level of privacy for the participant), or the employer may ask for a copy of the physician's certification. Either way, it would be prudent for the participant to keep both the 5329 and the physician's certification if they are contemplating possibly making a repayment.

Tax-exempt entities do no have deduction limits but individual 415 limits apply.

The Internal Revenue Service’s nonrule interpretation includes this: Q. F-15: If a qualified retirement plan does not permit terminally ill individual distributions, may an employee treat an otherwise permissible in-service distribution as a terminally ill individual distribution? A. F-15: Yes. If a qualified retirement plan does not permit terminally ill individual distributions and an employee receives an otherwise permissible in-service distribution that meets the requirements of both the permissible in-service distribution and a terminally ill individual distribution [see Q&A F-1], the employee may treat the distribution as a terminally ill individual distribution on the employee’s federal income tax return. As part of the employee’s tax return, the employee will claim on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, that the distribution is a terminally ill individual distribution, in accordance with form’s instructions. The employee must retain the physician’s certification that meets the requirements of Q&A F-6 and F-13 of this notice in the employee’s tax files (as required by [I.R.C. §] 6001) in case the IRS later requests the certification. The terminally ill individual distribution, while includible in gross income, is not subject to the 10 percent additional tax under section 72(t)(1). If the employee decides to recontribute the amount to a qualified retirement plan, the employee may recontribute the amount to an IRA. For example, on May 15, 2024, Participant B, age 50, goes to the doctor and gets a certification of terminal illness that meets the requirements of Q&A F-6 of this notice. Participant B’s plan, a section 401(k) plan, does not permit terminally ill individual distributions but does permit hardship distributions. On June 10, 2024, Participant B applies for a hardship distribution in the amount of $15,000. When Participant B files his tax return, Participant B indicates on Form 5329 that the distribution is excepted from the 10 percent additional tax as a terminally ill individual distribution under section 72(t)(2)(L). Participant B retains the physician’s certification, dated May 15, 2024, with Participant B’s files as part of Participant B’s tax returns for tax year 2024. Participant B does not owe the additional $1,500 (representing the 10 percent additional tax of the amount includible in gross income). Unlike a hardship distribution, Participant B may also recontribute the $15,000 to an IRA following rules similar to qualified birth or adoption distributions. Miscellaneous Changes Under the SECURE 2.0 Act of 2022, Notice 2024-2, 2024-2 I.R.B. 316, 327 (Jan. 8, 2024), https://www.irs.gov/pub/irs-irbs/irb24-02.pdf. I read Q&A F-15, including its example, as allowing a distributee the exception from the too-early extra tax (and a limited recontribution opportunity) even if the claim for the distribution did not furnish the physician’s certification. BenefitsLink neighbors, do you concur? If the plan’s claims procedure for a hardship distribution normally does not receive any evidence beyond the participant’s self-certifying statement on the electronic or paper claim form, am I right in thinking a plan’s administrator need not receive a physician’s certification? If a plan’s administrator need not receive a physician’s certification, might an administrator deliberately not receive it, to avoid privacy and security risks about the individual’s information?

Probably not a bad idea to reiterate the unfunded nature of the benefit and the fact that the employee doesn't own any money or investments in the plan, nor does the employer even have to actually make any elected investments.

I could be wrong but I think the limitations are using the Form 5305 does not have coordinating language with a qualified plan, mostly on top-heavy which is I believe the #1 reason why the IRS does not allow any other plan I think but there could be others. So you are allowed to use a proto-type SEP which then gets treated like a "quasi-profit sharing plan". Most of the ramifications I believe all revolve around deduction of the combined employer contribution to SEP and DB plan or discrimination testing which isn't an issue if it is 1 man shop. So if you have no SEP contribution for the year, you are fine even if SEP account still exists holding the IRA assets. At least that's my understanding. As to Q4, I don't know the legal answer. That is if your DB funding is $0 for 2023 (say by deducting the MRC in 2024) but the plan is in existence, does that cause a problem with the 2023 SEP deduction or its qualification if it is on Form 5305?

Yes. From a reporting perspective it works just like a 60-day rollover.

You can't have a loan in an IRA, so they would not be allowed to roll over the loan itself to the IRA and continue paying it back in installments. However, a loan offset due to plan termination is a qualified plan loan offset (QPLO) so they could do a roll over by repaying the amount of the offset to the IRA before their tax filing deadline. Of course, this requires them to have enough cash on hand to contribute the amount of the offset. Which would be functionally the same as repaying the loan, just with an extended deadline. So if they don't want to/can't repay the loan in full, then the option to roll over the QPLO probably may not interest them either.

See the rules for Qualified Plan Loan Offset (QPLO). Plan Termination generally qualifies. Summary version - participant would then have until the extended due date of their tax return for the year in which the QPLO happened to rollover some or all of the QPLO to an IRA to avoid current year taxation. So for example if the Plan was terminating today and Joe has an outstanding loan balance of $10,000 for which the plan will issue a 2024, 1099-R for the QPLO, see instructions to Form 1099-R for proper distribution coding, then Joe would have until October 15, 2025 to come up with $10,000 from other sources to deposit to his IRA as a Rollover contribution.

OK, I posted some thoughts on that thread!!

The red text is my anaylysis. From SECURE 2.0 “(11) REPLACEMENT OF SIMPLE RETIREMENT ACCOUNTS WITH SAFE HARBOR PLANS DURING PLAN YEAR.— “(A) IN GENERAL.—Subject to the requirements of this paragraph, an employer may elect (in such form and manner as the Secretary may prescribe) at any time during a year to terminate the qualified salary reduction arrangement under paragraph (2), but only if the employer establishes and maintains (as of the day after the termination date) a safe harbor plan to replace the terminated arrangement. It seems to me this is accomplished without regard to the effective date of the new Plan. The only stipulation is that there be a safe harbor plan in place the day after the termination of the SIMPLE. Nothing here precludes the Plan itself being effective 1/1/2024 (and thus the profit sharing component). We have met the requirements necessary to terminate the SIMPLE IRA and there are no other restrictions. From 408(p)(2)(D)(i): An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made. In my opinion, you can only read the text above to be completely obsoleted if the new provisions of SECURE 2.0 are met. That requirement simply must be considered as waived in the year a replacement plan is implemented. This reminds of me of something I learned a while ago – the law says ONLY what the law says and nothing else. There just isn’t anything in SECURE 2.0 regaridng when the replacement plan can be effective – ONLY that it be in place on the day after the term date of the SIMPLE. OK now everyone tell me what I’m missing!

Never going to happen. Trustee or custodian MUST issue 1099-R if a distribution (serious penalties for not filing and another for not furnishing**). There was/is no employer and there is no SEP (because employer was ineligible). The distribution s being made from an IRA. His or her argument (basis) is with the IRS. The basis in an IRA is "[g]enerally...zero."" [See Conference Committee General Explanation,* ERISA Sec. 2002, see "Taxation of distributions--in general"] But what about the 6% tax on excess contributions (on amounts over his allowable limits)? The amount contributed over the amount "allowable" as a deduction ($0) may also be subject to the tax on nondeductible contributions (IRC 4972). But see 4972(C)(6) exception "[i}ndetermining the amount of nondeductible contributions for any taxable year, there shall not be taken into account—...so much of the contributions to a ... simplified employee pension (within the meaning of section 408(k)) which are not deductible when contributed solely because such contributions are not made in connection with a trade or business of the employer." Under the EPCRS VCP there could be sanctions. The defect (ineligible employer) is not eligible for SCP. Hope this helps. ~~Gary * See CCH, Pension Reform Act of 1974--Law and Explanation, p. 368. ** See IRC 6721 and 6722.

While the governing law might be a State’s law, don’t assume that it’s the law of a State in which the IRA holder is or was a domiciliary or resident. Many IRA trust or custody agreements include a choice-of-law provision. Putnam’s chooses Massachusetts law. Another reason to read the agreement: Many allow the trustee or custodian to delay a payment until potentially interfering claims are resolved. Some allow the trustee or custodian to honor a transfer incident to a divorce or separation. If seeking a court’s order becomes necessary or helpful, consider whether the court will have or lack personal jurisdiction regarding the custodian. Some trust companies carefully avoid contacts with any more than one or two States. Putnam Fiduciary Trust Company, LLC, is a New Hampshire limited-liability company, with its office in Boston, Massachusetts. A trustee or custodian might follow a court’s order made with enough jurisdiction to bind all the competing claimants. But a court’s order is stronger if binds the trustee or custodian.

Yes that can work. But since you'll need to get the plan in place by 4/15 anyway for the retro plan since there is no extension, why not fund by 4/15 and amend the 2023 tax return with the contribution?

You are correct. As long as the shares remain in the ESOP (are recycled amongst participant accounts and are not redeemed via distribution then re-contributed), they carry the same cost basis as the original acquisition.

There is far less peace of mind in assuming the IRS closed a case as compared to confirming that the IRS has closed a case. The client should have in hand a copy of the IRS notice and of the response, and then call the contact number on the letter. The agent likely will ask for information on the IRS notice including the EIN, plan number, plan name, notice number, notice date... and then search for it in their system. If the response is not associated with the IRS notice, then the client may need to provide information from the response to see if it can be located. This may include the address where the response was sent, date mailed, delivery service (USPS or overnight)... to see if it can be located. Since the client has not receive a follow up notice, more than likely the case is closed.

As Paul I suggests: Beyond whatever ERISA and the Internal Revenue Code call for, labor-relations law might require that this be done under collective bargaining or some other labor-relations process. During a collective-bargaining agreement’s term, an employer doesn’t change terms or conditions of employment without the union’s assent. And this might need three parties’ assent or accord. A retirement plan is a person separate from the employer or employee organization that establishes or maintains the plan. While there often is some overlap between a labor union’s executives or other employees and a retirement plan’s trustees, it is not necessarily the same people. And even if is, the roles and responsibilities differ. Further, if the union-oriented plan is a multiemployer plan, it might have some trustees elected or appointed by employers. It would do little for an employer and a labor union to agree on a spin-off if the transferee plan might not accept the transfer. Some union-oriented retirement plans evaluate not only that the transfer would be proper, but also that it would be practical in the circumstances. (I’ve seen a union’s retirement plan reject a plan-to-plan transfer when that transferee’s recordkeeper disliked the data feeds that would come from the transferor’s recordkeeper.) I don’t say that any of this is difficult to do. (In my experience, it’s easy—except for getting the recordkeepers to play nice.) Rather, everyone should seek to follow the processes to do it right.

Exactly. It is possible if the CBP document says rollovers are accepted, but it must be tracked as a segregated account (RK-wise, assets do not need to be physically segregated). It doesn't affect the benefit obligation of the CBP, so in the word of Effen:

Why?

Thanks to you both for the responses and apologies for mydelayed response. I thought I set up to track but just checked back and realized I wasn't following and missed these posts. As additional information, we've reviewed the VEBA Trust documents, MEWA plan provisions, Form 1024 application and a ton of IRS PLRs regarding distributions from terminating VEBAs, etc. For better or worse, the terms in the trust / plan documents are fairly generic and basically require that the remaining funds be distributed / allocated as required by the VEBA rules. Not surprising at all or anything counter to what we hope to do but we are still struggling with the best options. Based on a review of the PLRs, we have considered a variety of alternatives, including possibly a combination of different alternatives if we thought we could get by with that. We understand from the IRS that they are not currently providing PLRs regarding distributions from terminating VEBAs so the possibility of seeking a PLR on this matter (if time and cost made that a possibility) are currently unavailable. Some of the alternatives under possible consideration include: 1. Dividing up the remaining amounts based on typical objective formula of a participant's contribution to the trust over the last several years relative to the overall trust contributions and using that pro rata amount to pre-pay current group health insurance benefits for a couple of larger participating employers still in close contact and for whom premium holidays or premium payments could be fairly easily arranged. (One problem here is some original employees have left so, per some of the PLR approaches, we might try to simply reallocate their portion among new current employees of the same employer group--i.e., among basically their replacement rather than trying to track down the departed employees and figure out where they are, if they are participating in a current plan, can we pay some of their benefits, should we just make a payment to them? 2. Along the lines of Vebaguru's suggestion, purchasing some additional supplemental / fringe welfare insurance benefits for the remaining group of former participants not covered by alternative 1 (or maybe for the entire group of former participants if we did no combination) and handling the remaining amounts that way. I guess we could negotiate with an insurer over how to use all or mostly all of the amount and line that up to an appropriate coverage period, etc. While that seems to have the benefit of being most consistent with the terms of the trust and how terminating VEBAs looking to handle by the book in prior years have approached things (and so maybe the safest legally and from a fiduciary standpoint), It also seems to basically result in the purchase of benefits that most are unlikely to appreciate really and also to carry some significant administrative time and expense to track everybody down and arrange for some new benefit coverages when the whole idea of the trust was to get out of that business. I think it also raises questions around how to allocate the funds among those paying different amounts, etc. Could we just see what the total amount buys in terms of extended coverage for everyone and give everyone the same term of coverage or would we arguably need to allocate based on their contributions? Under the rules, seems a reasonable argument might be made that we don't have to allocate that remainder pro rata if we are using to buy additional benefits for all but I suspect participants might question that. 3. Something of a different alternative to 2, we have bounced around the idea of trying to use the funds to possibly provide some sort of health education / prevention / wellness / screening campaign focused generally among the former participants and others in their industry and geographic locale so it wouldn't necessarily be limited just to former participants but would generally be available to all of them and there could be targeted notices / information used to advertise availability and highlight particular concerns, etc. The idea would be that we are generally providing health and welfare benefits of the type for which the trust / plan was established and focusing on the former participants but also providing something of a broader, charitable sort of benefit to others in their same industry to address some key selected health issues or concerns. It should also allow the former participating employers to get some public benefit from use of the funds and to deploy them most efficiently without having to closely parse individual contributions / benefits amounts and ongoing benefit coverages. 4. As also suggested by Vebaguru, there is some thought of donating the remaining amount to a charity the trustees select--hopefully one providing possible health benefits and/or social welfare benefits generally to those participating in the general industry in which the participating employers participate. This would likely be the preferred choice by the trustees and I think the most efficient use of the funds generally but it also seems arguably the least defensible under the VEBA regulations and fiduciary requirements. On the plus side, rather than just using the amounts for some general charitable organization or broad relief effort, the amounts might be steered to an organization providing general types of health care benefits intended (or similar social welfare benefits) but this would be for the general public and not specifically aimed at or limited to former participants. Looking at some of the prior PLRs where this alternative was permitted (not a lot of them, really), it is difficult to get a full sense of all of the facts and circumstances but one aspect that appears to have been a key consideration in those is the length of time since the former participants participated and the degree of difficulty in tracking down participants, etc. While we would have some difficulty and expense around that, it is not like the trust here has operated for many years or we have many years to go back. It's more that the amount of money is so small, relatively speaking, that any need to dig in and track down and administer sort of exhausts the benefits. Sorry this is so long. I am not really expecting anybody to be able to weigh in definitively on any of the above alternatives but would be delighted for any general reactions or suggestions or thoughts on other avenues to consider. Also, wanted to add to the topic in case others face a similar issue in the future.