Please indicate if the years of service of which defined benefit minimum serve as a function must also occur as years of participation.

URL https://www.ecfr.gov/current/title-26/section-1.416-1 

Citation 26 CFR § 1.416-1

M-2 Q. What is the defined benefit minimum?

A. (a) The defined benefit minimum requires that the accrued benefit at any point in time must equal at least the product of (i) an employee's average annual compensation for the period of consecutive years (not exceeding five) when the employee had the highest aggregate compensation from the employer and (ii) the lesser of 2% per year of service with the employer or 20%.

(b) For purposes of the defined benefit minimum, years of service with the employer are generally determined under the rules of section 411(a) (4), (5) and (6). However, a plan may disregard any year of service if the plan was not top-heavy for any plan year ending during such year of service, or if the year of service was completed in a plan year beginning before January 1, 1984.

(c) In determining the average annual compensation for a period of consecutive years during which the employee had the largest aggregate compensation, years for which the employee did not earn a year of service under the rules of section 411(a) (4), (5), and (6) are to be disregarded. Thus, if an employee has received compensation from the employer during years one two, and three, and for each of these years the employee earned a year of service, then the employee's average annual compensation is determined by dividing the employee's aggregate compensation for these three years by three. If the employee fails to earn a year of service in the next year, but does earn a year of service in the fifth year, the employee's average annual compensation is calculated by dividing the employee's aggregate compensation for years one, two, three, and five by four. The compensation required to be taken into account is the compensation described in Question and Answer T-21. In addition, compensation received for years ending in plan years beginning before January 1, 1984, and compensation received for years beginning after the close of the last plan year in which the plan is top-heavy may be disregarded.

M-2 seems to allow the reckoning of average compensation to remain vague, though usually § 415 amounts apply for this situation. If so, please indicate if the amendment of 415 as described affected 416 defined benefit minimums.

26 USC 415: Limitations on benefits and contribution under qualified plans

(3) Average compensation for high 3 years
For purposes of paragraph (1), a participant's high 3 years shall be the period of consecutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer. In the case of an employee within the meaning of section 401(c)(1), the preceding sentence shall be applied by substituting for "compensation from the employer" the following: "the participant's earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)".

https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section415&num=0&edition=prelim

Subsec. (b)(3). Pub. L. 109–280, §832(a), struck out "both was an active participant in the plan and" before "had the greatest".

 

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If an employer adopts a NQDC Plan with a built in expiration date int he plan document, does the employer have to wait 36 months after the plan expires to adopt a new plan? Or can it do so immediately upon expiration of the old plan?

Employer (bank) has limited amount of company stock (bancshares) in a 401k plan.   About half the outstanding share are attributable to term vested participants.  They have a written procedure for the handling of bancshares that allows terminated or active employees to sell shares, active employees are notified of the shares for sale and shares are sold on a first come first serve basis.   Term vested participants also have the option of an in-kind transfer to a self directed IRA where they would have the option to sell to other non-401k individuals through the bank's trust department.   Another wrinkle in the written procedures, If there are no active 401k plan buyers of the company stock at the time an active or terminated participant offers up the shares for sale, the active employees also have the option of rolling out the company shares to a self directed IRA where they can either hold it and roll it back into the 401k at a later time or they can sell to an outside individual within that SD IRA.   Active employees are offered a 1 week period to buy any shares offered up for sale.   Per the CEO, they have always let all other employees have the first opportunity to buy shares and if they shares or portion of shares remains unpurchased at the end of the 1 week offering period, the CEO or other officers have stepped in an bought the outstanding shares available.  

Disclaimer:  This is a plan I am reviewing for possible takeover.   I do not know yet if they have discussed with an ERISA attorney and I intend to address that with them.      The written procedure on bancshares noted above is just a separate document of procedures, none of that is written into the plan document (at least the current document that I have, I have requested the prior document to see if current TPA forgot to include those provisions).   There are concerns with the current TPA, hence, my possible takeover and I have already pointed out that the current document does not address any of the requirements for the bancshares nor does it allow for in-service distributions of said bancshares.   I have also reviewed many of the other discussions out here on benefitslink before posting this discussion. 

These bancshares were a relic from years past before they established an ESOP.   Prior to the ESOP, the 401k plan offered a match that allowed employer securities to be purchased through those matching dollars.    I have concerns that the exchange of bancshares currently are being acquired by participants that have only ever had employee deferrals and no matching dollars (i.e. security law issues as noted in other benefitslink posts).   Thoughts on this?

The employer wants to find a way to get the bancshares out of the 401k plan but currently isn't in a position to raise the capital necessary to buy out all the shares in the 401k plan.  Assuming we address the document issue that does not allow for in-service distributions of these bancshares or more specifically matching contributions, the employer asked the following question:   "If they offer a free (no service fees) lifetime SD IRA to all employees (active or term vested) to roll their bancshares out of the 401k plan, if majority of the employees took them up on that offer, they could probably raise the capital to buy out the remaining (if any).  Is that a possible solution?"     This would only impact about 40 of the roughly 100 participants in the plan.  My first concern is the incentive to rollout the bancshares, does the incentive being offered by the bank for the free SD IRA become a benefits, right and feature they would need to offer to all employees of the 401k plan?      

FYI:  using chatgpt to search benefitslink.com on a specific topic is extremely helpful - highly recommend it.  

The Treasury department’s notice of proposed rulemaking about qualified tips is scheduled to be published Monday, September 22. The prepublication text is available at https://public-inspection.federalregister.gov/2025-18278.pdf.

For my law practice, this is only an academic curiosity.

Does anything in this proposed rule change how a retirement plan’s administrator counts an employee’s compensation?

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?

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I haven’t filed a Form 5330 in decades and now need to file one for the 2024 year. From what I understand, paper filing is still allowed for 2024, but e-filing will be required beginning in 2025. Is this correct?

A couple of related questions:

1. Since the IRS will no longer accept paper checks after 9/30 (or will they?), what’s the best method to make an electronic payment, and under what “tax form” should it be submitted (I don’t see Form 5330 specifically listed)?

2. If paper checks are still allowed for now, what is the correct mailing address? The Form 5330 instructions list Ogden, UT, but I’ve also seen a North Carolina address.

I also understand there will be penalties since the payment wasn’t submitted by 7/31.

Thanks in advance for any guidance!

In a package of documents accompanying an adoption agreement to use a set of IRS-preapproved documents, a service provider furnished a “Discretionary Matching Contribution Notice” with this description: “This form describes the formula used if any discretionary matching contributions are made to the plan. This notice must be provided to each participant who received a discretionary matching contribution no later than 60 days following the date the last contribution is made to the plan for the plan year.”

The plan’s sponsor/administrator does not use the service provider’s assembled summary plan description. Also, it does not use a summary of material modifications.

Instead, we write and deliver an updated summary plan description before each year, and more often than yearly if there is a change.

Rather than a distinct “notice”, the plan’s sponsor/administrator would prefer to include the content about discretionary matching contributions in the SPD (and omit anything separate).

Does anything about reliance on the IRS’s opinion letter preclude delivering the information that way?

Does anything about in a basic plan document preclude delivering the information that way?

Is there another reason it would be unwise to deliver the information that way?

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An audited plan just told me today that there are 13 employees that did not have the correct amount of Roth withheld based on their elections.  The amount withheld was based on the after-tax net pay, not gross pay. 

From what I'm reading since it is just past 9-15 the missed Roth needs to be contributed AND QNEC equal to 50% of the missed Roth plus earnings.

Any ideas as to best way to credit lost earnings - so it is probably 26 pays, 13 employees.  SO I will find a way to estimate plan earnings - perhaps look at the entire plan earnings for the year reduce 50% since missed evenly through the year.

Thank you for any assitance.

Tom

title

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Hello All - wanted your thoughts on this issue. Effective 1/1/25 new 401k plan becomes subject to the EACA mandate rules - the plan applied auto enrollment at 3%. A provision in the EACA proposed regulations (pasted below) states that if a participant makes an affirmative election (opts out to 0% or elects 1 or 2%) and remains eligible,  then he cannot be re-enrolled unless his affirmative election has been in effect for a period of at least one plan year. This is my understanding. The plan has decided to become a QACA on 1/1/26 and they want to use the initial period (years 1-2) for increases rather than annually each 1/1. So my question is - can the QACA re-enroll these participants with affirmative elections in effect for less than one plan year on 1/1/26 at 3% with the first increase to occur on 1/1/28 the end of the QACA initial period? Can the QACA expiration of election rule override the EACA mandate rules? Thank you!

Section 1.414A-1 (iv) (C) Redetermination for employee 
who remained eligible and made an 
affirmative election. If, for an entire plan 
year, no default elective contributions 
were made solely because the employee 
made an affirmative election to have 
contributions made on the employee’s 
behalf under a cash or deferred election 
or salary reduction agreement in a 
different amount (including an election 
not to have contributions made), then 
the plan is permitted to provide that the 
initial period is redetermined so that it 
begins on any date specified under the 
plan that is later than the date specified 
in paragraph (c)(3)(ii)(A)(3) of this 
section.

ERISApedia Example -

Example 14.4.10 Assume the same facts as the prior example, except Dave was rehired in 2029. Because he was not ineligible for an entire plan year, the special rule does not apply. When he returns, his default deferrals are at 6% unless he files an affirmative election.

A different rule applies if a participant has been under an affirmative deferral election (including an election to defer 0%). The plan can sweep the participant into automatic deferrals starting at the initial period, effectively cancelling their affirmative election. Explaining this rule, the preamble observes:

For example, a plan is permitted to be amended to provide that, as of a specific date, the default election will apply to all employees who previously made an affirmative election that has been in effect for a period of at least one plan year to have contributions made on behalf of the employees under the plan at a rate that is below the uniform percentage that applies during an initial period (so that the uniform percentage that applies during the initial period will apply unless the employee makes a new affirmative election). An employer might adopt such an amendment to facilitate an increase in the rate of contributions made on behalf of its employees.

Have a 401(k) plan that is a safe harbor plan with salary deferrals, non-elective safe harbor and profit sharing.

Would there be any problems or additional testing requirements if the plan had the following eligibility requirements:

Salary Deferrals - immediate entry after working 100 hours.

Safe Harbor Nonelective - immediate entry after working 1,000 hours.

Profit Sharing - immediate entry after working 1,000 hours.

In other words, they want almost all employees to be able to fund salary deferrals soon after being hired but only want to provide employer contributions to those who who are full time and almost full time.

Thanks.

New client has solo-k for 15 years, didn't realize he needed to be filing returns once his assets exceeded $250K.  He thought all was well, until he tried to transfer his plan to a new custodian. He has hired employees and wanted to allow the employees to participate in the plan and thought the new bundled provider would be a better fit for that. Provider says whoa.. wait a minute...we cant take your plan (at least not like this). You need a TPA. So here we are...another solo-k gone wild.     Unbeknownst to the client, his employees current and past are already eligible for the plan because the solo-k has immediate eligibility (and immediate vesting).  So he's looking at some missed deferral opportunities, some top heavy failures, some failed ADP issues.  Not to mention his plan document has not been amended or restated since it was initially adopted with that cute little account application/adoption agreement...and he needs 15 years of 5500 filings to be completed.   

So my question for today is:  part of his filings should have been EZ filings and part of his filings (after adding employees) should have been SF filings.  Would you file all the late filings as SF filings under the DFVCP because he now meets title I of ERISA.  Or, should the years where he was truly a solo-k be filed on an EZ through the IRS's penalty relief program? 

Hi, we have a client with a Simple plan that is considering replacing with a safe harbor 401(k) plan.  We *think* that's not possible for 2025, because we would've needed to terminate and replace by 10/1 - and it's too late for a 30 day notice.  Are we thinking correctly?

Alternate option we were thinking is to open a profit sharing only for 2025.  We are getting conflicting information on whether you can have a PS only at the same time as the simple.  We searched online and came up with this, but aren't sure of the accuracy: Yes — allowed, but operationally awkward. Carefully decide whether to (A) keep the SIMPLE and add a separate profit‑sharing plan (two plans to administer) or (B) terminate the SIMPLE mid‑year and adopt a consolidated 401(k)+profit‑sharing plan (requires 30‑day SIMPLE termination notice and adherence to SECURE 2.0/IRS Notice 2024‑02 procedures).   

thanks!

If someone has an outstanding loan but has now incurred a hardship (notice of eviction), can they take the Hardship Distribution?  I'm probably overthinking this, I just wanted to be sure.

Thanks!