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It's facts and circumstances. Document why it took longer then one year so you can address it with the IRS if they bring it up on audit but what actions are they likely to take? Unwind the termination and make you re-terminate? Where it might be an issue is where you drag out the term past some new required amendment dates but typically I've never seen the IRS challenge a term if it took "a little longer than a year" but if you terminated in 2023 and pay everyone out by the end of 2024 I can't see where the IRS would ever be likely to challenge unless there were other issues with the Plan. That's not to say they couldn't be sticklers, I just think you'd have to have an auditor having a very bad day try to impose that rule which is a guideline as I understand it an not in the code. If they did do that you could always kick it up to a supervisor.

@Benefits Plan you commented the employee was improperly excluded from participation. Some additional details would be helpful. When did the employee receive EACA Notice informing them of the terms of the EACA, and notifying them that they were eligible to make deferrals under the plan? What was communicated to the employee about the timing of notifying the plan of an election not to participate, and procedure to opt out? Are there other auto-enrollment features in the plan (e.g. QACA) and, if so, what are they? How much time has passed between the date the employee should have been included and the date it was discovered that the employee was improperly excluded? Is there a match under the plan, and if so what are the provisions related to the match? Plans with automatic enrollment features have some very liberal rules for correcting a missed deferral opportunity that could allow a plan to avoid a QNEC for an MDO up to 9-1/2 months after the close of the plan year in which the employee could have started deferrals. It is possible that there is a path forward that not only satisfies the participant's desire not to have any balance in the plan, and that also could save the employer some of all the cost of the QNEC. Consider the correction methods available under IRS Notice 2024-02 section I. The opening paragraph of this section reads: "Section 350(a) of the SECURE 2.0 Act adds new section 414(cc) to the Code. Section 414(cc) provides that, if certain conditions are satisfied, a plan or arrangement will not fail to be treated as described in section 401(a), 403(b), 408, or 457(b) solely by reason of a corrected reasonable administrative error made (1) in implementing an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee covered by such a feature), or (2) by failing to afford an eligible employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan (implementation error). " The concept of an "implementation error" should now be considered when addressing MDOs in plans with automatic enrollment.

What rule/mechanism can you cite for a retroactive opt-out? I honestly don't care about what the participant wants. This is a plan issue, you correct and move on. Do not make the situation worse by trying to do what they "want" instead of just doing what is right.

@Mark G if you follow your proposed strategy, and the proceeds from the sale of the old car are less than the price pay for the new car, then the net result of the strategy is a taxable withdrawal from the IRA. For example, assume you have $500,000 in your IRA and take a distribution of $50,000 to buy the new car. You now have $450,000 left in the IRA. You sell the old car for $20,000 and deposit the $20,000 in cash into the IRA within 60 days as a rollover. You now have $470,000 in the IRA and a net taxable distribution of $30,000. Do you happen to be taking Social Security payments and not have other taxable income that triggers paying taxes on the Social Security payments? If so, then the taxable distribution could trigger needing to pay taxes on the Social Security payments. You do not mention what your rate of return is within the IRA. If your rate of return within the IRA (adjusted for your marginal tax rate you would pay on a withdrawal) is greater than the interest rate you will pay on a car loan, then you are better off taking out the car loan and making the payments over time from your IRA distributions. If you or your spouse are still working, you have the option to contribute funds received from the sale of the old car. If you do this, then consider making the contributions to a Roth IRA to keep the contribution and future income from being taxable later (after 5 years) and from being included in the calculation of your required minimum distributions when you reach age 73. There a lot of variables and assumptions that go into comparing the different strategies. There are no guarantees that all of your assumptions will accurate, and some strategies will carry a higher risk of unintentionally creating unwanted tax consequences. If you are adamant about taking the DIY approach, get the best information you can about the price you will pay for the new car, the proceeds you can reasonably expect from the sale of the old car, the likely terms of taking a car loan, any of your and your spouse's expected earnings from employment, a reasonable estimate of the investment performance of your IRA over the next 5 to 7 years, your marginal tax rates, start dates and amounts of any Social Security payments to you and your spouse, and any other factors. Write them all down, and do the math. If you think you are good to go, then ask someone you know and trust or ask a professional who is financially savvy to review your work and help you assess the risks. May you find a clear path forward.

You can withdrawal funds from your IRA and roll them back tax free if you do it within 60 days of the withdrawal, but there is a limit of 1 rollover like this per year. And I forget it if it is once per calendar year, once in any 12 month period, or if both apply. I also don't recall if this rule aggregates all of the IRAs you many have or if each one is separate if you have multiple IRAs. I can't comment on whether or not this is a good strategy, just one that is available.

Consider whether the settlement agreement might be wholly or partly void, voidable (by one or more of its parties), legally enforceable, or unenforceable. Consider whether the settlement agreement might be effective or ineffective regarding the retirement plan. Consider whether the settlement agreement might be a plan amendment. (As one aspect of this, consider whether the settlement agreement’s signer also might have had authority under the plan’s governing documents to amend the plan.) Consider whether, if a safe-harbor contribution is not allocated to the participant’s account, a consequence might be that the plan loses whichever safe-harbor relief relates to that contribution. If you’re a service provider, consider how to get the plan administrator’s proper instruction that protects the service provider. This is not advice to anyone.

This does not address Peter's questions, but an employer's possible mindset. When I started in this business, my area had a heavy concentration in the tool and die industry. Most tool and die business owners sponsored profit sharing plans with a paired money purchase plan and made healthy annual contributions. The owners started getting annoyed with their 20-year employees, who were generally only in their early 40's, quitting and taking their retirement plan account balance, and starting a competing tool and die business. They knew the customers, they knew the pricing, and they would buy one machine with their distribution and try to take business from the employer where they had just quit. The tool and die owners got together, and they all decided to amend their plans to only allow for all distributions at age 65.

of course they could roll the proceeds to an IRA, avoid the 20% withholding, and then turn around and raid the IRA without mandatory withholding.

If the distributee is employed and perceives that Federal income tax withholding on the eligible rollover distribution might result in too much paid-in toward the year’s Federal income tax, the individual might evaluate whether to lower withholding from wages for the remainder of the year. While the plan’s administrator and its service providers might not present such a suggestion, the certified public accountant might consider it.

I am curious to hear how the sponsor will manage automatic enrollment. Automatic enrollment thrives on inertia/inaction. Is someone going to sit down with each person as they become eligible and have them fill out a zero election form? Seems like a lot of work, but maybe the trade off is worth it to them.

WDIK has the correct code cite. In addition, the instructions to Form W-4R state (emphasis added): Of course, this assumes that the distribution in question is an eligible rollover distribution. Is it? If this is a 401(k) hardship distribution, for example, that would not be an eligible rollover distribution and the 10% (not 20%) automatic withholding could be waived.

26 U.S. Code § 3405 - Special rules for pensions, annuities, and certain other deferred income (c)Eligible rollover distributions (1)In general In the case of any designated distribution which is an eligible rollover distribution— (A)subsections (a) and (b) shall not apply, and (B)the payor of such distribution shall withhold from such distribution an amount equal to 20 percent of such distribution. (2)Exception Paragraph (1)(B) shall not apply to any distribution if the distributee elects under section 401(a)(31)(A) to have such distribution paid directly to an eligible retirement plan. (3)Eligible rollover distribution For purposes of this subsection, the term “eligible rollover distribution” has the meaning given such term by section 402(f)(2)(A).

I agree that this plan design is permissible. The safe harbor rules do not impact and are not impacted by the normal retirement date. If the State has a requirement that the employer must maintain a retirement or acceptable alternative, this plan design is a retirement plan. While we are at it, why not add auto-enrollment and auto-escalation and no EACA withdrawals? You also could add in rollover in and keep those to NRD. Over time, the plan proportion of terminated vested participants very likely will accumulate to be greater than the proportion of active participants. The plan will have the burden of providing all of the required disclosure to these terminated participants (SH notice, SPD, SAR, QDIA notice, 404(a)(5) notice...). The accumulation of participants with account balances very likely will push the count of participants with account balances beyond the threshold for requiring an audit (keeping in mind that the deferrals and safe harbor are both 100% vested). There likely will still be payments other than retirement benefits for QDROs and death benefits. Autoportability is off the table since it now pretty much relies on the benefits being distributable. If the plan is going to hold the account balances until NRD, then it should at least allow for the contributions to be made as Roth contributions. I expect that our BenefitsLink colleagues who have read this far are cringing at the thought of such a plan.

A plan can allow for no distribution prior to normal retirement age. Though I believe that's much more common in a DB plan with annuity only options. I don't see why you couldn't do it in a safe harbor 401(k) Plan, but I'm not sure you should do it.