Leaderboard

I question whether it is possible for a plan to fail coverage the way you have described. Show the numbers for the test.

They failing even when testing otherwise excludable separately? That's without getting into the question of whether or not "part-time" is a reasonable classification for exclusion.

For 2026, Internal Revenue Code § 414(v)(7) burdens only a participant who: had, from the employer that maintains the plan, 2025 Social Security wages (not counting self-employment income as a partner or member) more than $150,000 [$145,000 inflation-adjusted]; and is (or by the end of 2026 will be) 50 or older; and might need an age-based catch-up to support her deferrals. For your typical client plan, how many people is this?

I just did an analysis on our largest plan in terms of employee count using 2024 census data to determine who might be potentially affected. For this plan it ended up being about 8% of the employees (like Artie heard). It seems that what the hard part and sticking point for the employers are that there is another "type" of employee in addition to HCEs, Keys and NHCEs with a completely different compensation determination than regular plan compensation or statutory compensation.

For delinquent payments to a Plan trust, we only look to actual earnings if the delinquent payments constitute an operational failure as well as a prohibited transaction. Delinquent payments do not always constitute both. For example, if a plan is an individually designed plan that we prepare, the delinquent payments will not constitute an operational failure as we do not include the DOL timing requirements in our documents (i.e., it would not in operation violate a term of the plan). Also, many prototype plan basic plan documents do not include the DOL timing requirements so there would be no operational failure in those. If, however, there is an operational failure because there is a violation of the plan's terms, we advise providing participants with lost earnings in the amount of the greater of (i) the actual lost earnings computed as @Peter Gulia is suggesting and (ii) the lost earnings as computed on the DOL online calculator. The greater of amount is used to ensure that the correction meets both EPCRS and VFCP. However, this is extremely burdensome because when doing this the calculations have to be done on a per participant basis (while some affected participants may have had investment gains during the correction period others may have had losses so using lost earnings based on the DOL calculator for those with losses ensures that they receive some payment for the employer's use of the funds). Where the actual earnings are used for a participant's lost earnings, the VFCP submission would include a statement that the third-party recordkeeper has calculated actual lost earnings based on the participant's actual investments under the Plan from the loss date to the recovery date (or full payment date, if later, for earnings on earnings). This type of statement has never been rejected by the EBSA in a VFCP submission we have made involving corrections where there were both operational failures and prohibited transactions (this is not saying the EBSA wouldn't reject this type of statement on the next such filing we might submit). Note though that if the delinquent payments only constitute a prohibited transaction and not an operational failure, the VFCP guidance does not provide for the use of the participant's actual investment earnings as a methodology for calculating lost earnings (actual earnings would be required if restored profits is required but that would be based on the amount the employer earned by using those funds in a specific investment, etc.). The VFCP guidance requires lost earnings to be based on the Code's underpayment rates. A colleague noted to me that I put the link for the 2006 notice when I should have linked the 2025 notice. Sorry for that but note the substance is the same. Different subsection though §5(b)(6) instead of (5). See Federal Register :: Voluntary Fiduciary Correction Program As alluded to above, what one agent will agree to may not be the same as what another agent will require.... depends on if they spilled their coffee going into work that morning or some other arbitrary happenstance....

Austin - don't be ashamed think it was Kelsey Mayo (ARA) who mentioned in an article.

We all have our war stories of skirmishes with the IRS and EBSA. We had a plan that went from a one-participant only plan with assets under $250,000 and no EZ filing to a plan that required a 5500. The 5500-SF showed it was an initial filing and had a beginning balance, and the client received a love letter from the IRS. We called the IRS and spoke with an agent who took down the information, submitted it for review, and the issue was closed. All in, we spent more time on hold waiting for an available agent when making the initial call than the time we spent speaking with the agent.

However, we went from 2022 with no filing, under $250k for owner only; in 2023, employees eligible. Filed 2023 as first year with beginning balance and IRS sent the standard "where is prior year." Took 2 months to straighten out.

I meant burdened only in the sense of § 414(v)(7) depriving an individual of what otherwise might be her choice between Roth and non-Roth deferrals. (While I might share your view that many participants ought to prefer Roth for all or some of one’s deferrals, there are situations in which choosing non-Roth can be reasoned financial planning.) Anyhow, I wasn’t thinking about any individual’s preference, only whether § 414(v)(7) restrains a participant’s choice for the catch-up portion of a deferral. And “affected” is the language I advised for communications about the soon-to-be-applied tax law.

We haven't done (nor will we) any formal quantitative analysis of this question. I CAN say that it is darned few, in general. An administrative PIA all out of proportion to the end results. Somewhat typical of many of the SECURE/2.0 changes...