Client sold assets of his business earlier this year.

As part of asset sale, all employees were terminated and were hired by asset purchaser.  

Client wants to use the installment payment he will receive in 2020 as part of the asset sale to provide a bonus to his former employees based on performance criteria (i.e. their services to their new employer).

I am having trouble wrapping my head around how Client can do this in the form of a nonqualified deferred comp plan. Any ideas?

A participant who is transferred to a country with which the US has a tax treaty (the Netherlands in this case) wants to continue to participate in the 401(k) plan.  He would remain employed by the US employer but would pay taxes in the Netherlands under the US/Dutch tax treaty.  I am struggling with 415.  If the wages have to be includible in gross income for purposes of 415, does the fact that the tax treaty treats the wages as Dutch taxable mean there are no wages for purposes of 415?  I know that the wages excluded under 911 are added back in for 415, but that's not my concern. These wages would be excluded under the treaty not 911.  There is a savings clause in the treaty providing that the US can double tax, does that  make the wages includible for purposes of 415?  I know this is done all the time and that I must be missing something obvious, but I don't know what it is.

A recordkeeper has me so confused over the calculation of the maximum loan amount.  I do not agree with their methodology and would like some clarification.

1.  Does the $50,000 loan limit only apply in the case where the participant has a vested account balance over $100,000?

2.  What is considered the highest outstanding balance of loans during the last 1 year period?  Would that be the one day in a 365 period in which the participant had their highest loan balance or if they had 3 loans in a one year period are you looking at the highest balance of each loan in that 1 year period?

Participant has 2 outstanding loans as of 11-05-17, say loan 1 and 2.  The balance of both at that point in time was $32,000.  In April 2018, participant pays off loan 1 and take another loan (3) for $14,000.  Current vested account balance including the loans is $72,000.  Current outstanding loan balance of loan 1 and 3 is $29,000.

The recordkeeper is saying that all 3 loans should be taken into consideration in determining the highest outstanding balance by adding the balance of loans 1 and 2 from a year ago and the loan from April, so $32,000+$14,000 = $46,000

Participant wants to refinance loan 3 as the plan only permits the participant to have 2 loans outstanding at a time.  We are arguing over what is available, if any, for the participant to get as additional loan funds.

I have a participant applying for a 10 year loan, but mentions her name will only be on the deed.  She is going to gift the loan proceeds to her fiancé and the debt to acquire the home is only in his name.  The ERISA books are a little light on the documentation required.  I looked through similar threads on this.  But, doesn't the documentation need to show that she also incurred the debt to acquire the home?

We recently corrected for coverage testing failure by making QNECs to the plan (401(k)).  Many of the QNECs went to people who otherwise had no account balance, so their accounts are now very small.  Our plan administrator suggested we erase these accounts pursuant to this section of EPCRS:

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a participant with an account under the plan.

This doesn't really make sense to me, since the correction involves making corrective contributions (QNECs) and the above is for corrective distributions.  

That said, our plan has a $75 fee for distributions.  So for people with less than $75 in the plan, they won't be able to get their money out anyway, since the entirety will be used to pay the distribution fee.

What are our options?  Should we inform these people that they have an account balance but will never see the money?  Should we just erase the accounts worth $75 or less?  Is that an appropriate way to correct coverage testing failures?  How should are decisions be affected by those who are still employed versus those who are not?  

A frozen DB Plan (hard freeze) that is not covering enough active employees to pass 401(a)(26) can add a new participant (if all that is needed is one more participant to satisfy 40%) and give a .5% accrual for the current year as is suggested above. I have seen this solution being advised on numerous occasions. Can someone please help me understand this method, as if the plan is frozen how is this (minimal) accrual being given to a new participant (and all current participants are not given an accrual for the current year)? Is it allowed as a special corrective measure? If yes, is an amendment required stating that " an accrual of .5 will be given to a new participant to comply with 401(a)26)"? Thank you in advance for shedding light on this topic.

Assume a DB plan's NRD is age 65. It provides for early retirement at age 55 with 10 years of service, where the benefit is reduced at 3% per year. Also assumes the plan allows a participant to take a distribution from the plan at any time after termination. They can take a lump sum, or they can take an immediate annuity. If a participant takes an immediate annuity prior to their early retirement age, then they won't get the subsidized reduction. Their benefit is reduced based on the plan's definition of actuarial equivalence.

Further assume that the only death benefit provided under the plan is the required QPSA. An active participant dies at age 48 (with 15 years of service). The regulations in §1.401(a)-20 say to calculate the QPSA as of the "earliest retirement age", and A-17 in the regulations defines the earliest retirement age. It says that if the plan provides for voluntary distributions that commence upon termination of employment, then the earliest retirement age is "the earliest age at which the participant could separate form service and receive a distribution". 

If that's the case, then the QPSA is calculated at age 48, in the example above. It sounds like you would take the member's NRD benefit and reduce it to age 48 based on the plan's definition of actuarial equivalent. If the spouse chooses to defer the benefit - the regulations say that "the plan must make reasonable actuarial adjustments to reflect payment earlier or later than the earliest retirement age". So if the spouse defers the benefit, then it sounds like you take the QPSA (again, calculated at the member's age 48 with a reduction based on the plan's definition of actuarial equivalent) and then increase it actuarially to the date of commencement.

Whereas, if you calculate the benefit at the member's age 55 (with a subsidized reduction) and then further reduce it to age 48 based on the definition of actuarial equivalent, you'll get a much larger QPSA benefit because it includes the early retirement subsidy. You can make the argument that age 55 is the earliest "retirement" age - but then again that doesn't appear to be what the regulations state.

Any comments on how you've seen this calculated for plans that allow benefits at termination? Seems like the spouse could get a much smaller benefit if you treat age 48 as the earliest retirement age in which case they are not getting the advantage of the subsidized early retirement reduction.

Documents have had an option to have an annuity contract be purchased.  These plans do not elect otherwise to have an annuity form of distribution.  Is this election option protected under §411(d)(6)?  I suspect it is, however, in the final analysis, it seems the same as a lump sum with the Participant buying an annuity.  The only difference is that with the option, the Plan would choose the annuity.

I know it can be removed for new Participants.  What is the risk for current Participants?  Ultimately, IMHO, it's a dumb option.

So my questions are :  1.  Is it protected under §411(d)(6)?
                                         2.  Does the election serve a positive purpose?

We had a call from a self-employed pastor who does not draw a regular salary for his services, and does ministerial services for multiple congregations. He received a 1099, but one church would like to contribute  $100 per month to a 403b(7) custodial account. Would that be acceptable or must it be a 403b(9)?????  

Right now 12b-1 fees are returned to participants by the institutional trustee.

 After a plan is terminated and liquidated what can the trustee do with 12b-1 fees it receives in arrears? This is further complicated when a plan sponsor has dissolved and there is no entity to which 12b-1 fees in arrears can be returned.

Can the trustee/former trustee feel comfortable that this is no longer a prohibited transaction because the plan and/or the plan sponsor no longer exist?

We have a participant who lives abroad but is a U.S. citizen. The participant filled out the required W-9 form for the distribution. How would this distribution be taxed? Would it be subject to 20% federal tax withholding and no state tax (even if the participant previously lived in a state that had state tax)?

Thank you.

I see there was a question somewhat like this recently posted. However, it is not completely the same.

Suppose you have an employer who sponsors a cash balance plan and a safe harbor 401(k) Plan. The plans are top heavy and the 401(k) plan provides a safe harbor match. Both plans would pass 401(a)4 and 410(b) combined testing.

The top heavy minimum is 5% and provided in the 401(k) plan.

The non-elective employer contribution in the 401(k) plan requires 1,000 hours and last day. The CB plan only requires 100 hours to accrue a benefit.

There is a non-key NHCE who terminated employment in 2018 with 400 hours of service. She is covered under both the 401(k) plan and Cash balance plan.

Must she receive a 5% top heavy minimum in the 401(k) plan since she did accrue a benefit in the CB plan? Then must she receive the 7.5% gateway as well?

Thanks.

Sponsor of large plan uses a temp agency to "test drive" potential employees for 3-6 months.  After the trial period a worker may be hired to become a regular employee of the plan sponsor.  We have advised the sponsor that the time while the worker was working through the temp agency must be counted toward eligibility for plan participation.  Does anyone have a citation or code section that supports that position?

Thanks.

Happy Friday!

A minister's housing allowance is excludable from gross income for income tax purposes.  Considering Treas. Reg. 1.401(a)(9) Q&A9 below, would a distribution made for a housing allowance count toward satisfying the RMD for a participant? 

Thoughts? 

https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-5

Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?

A-9. (a)General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.

(b)Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year:

(1) Elective deferrals (as defined in section 402(g)(3)) and employee contributions that, pursuant to rules prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), are returned to the employee (together with the income allocable thereto) in order to comply with the section 415 limitations.

(2) Corrective distributions of excess deferrals as described in § 1.402(g)-1(e)(3), together with the income allocable to these distributions.

(3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions.

(4) Loans that are treated as deemed distributions pursuant to section 72(p).

(5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.)

(6) The costs of life insurance coverage (P.S. 58 costs).

(7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2)(ii)(b) of this chapter.

Any feedback would be greatly appreciated!

E

At what point in my life did the end of Daylight Saving Time go from "Hurray!  I get an extra hour of sleep!" to "Ugh! Now I'm up an hour earlier!"?

A Plan went through a transition, and there was some miscommunication about whether the Plan or the recordkeeper would distribute the 404(a)(5) annual participant fee disclosures. As a result the notices went out 3 month late. I know failure to meet disclosure obligations could result in the plan administrator’s breach of fiduciary duty, but there doesn't seem to be a way to remedy this through VCP. What can the client do besides document the issue and get the notices out asap?

This is a new one to me.  Participant is retired, had commenced his benefit and was in pay status, but then went missing and cannot be located - his payments are suspended. Then, a shared interest QDRO awarding a portion of his payment to an alternate payee. He's not currently being paid, but when he is located he will be paid back pay of his benefits that have been due. 

If his benefit were suspended by the plan for returning to work or something of that nature, then of course payments to an alternate payee would be suspended, too. But, technically his benefit isn't suspended by the plan here, the plan just doesn't know where to send it. 

To pay the alternate payee or not? If not, then the alternate payee would get a lump sum of back pay representing its share, as well, once he is located - but I don't see why the plan could not pay the alternate payee in the meantime, instead. 

Does anyone know if there is any rule or guidance on something like this? 

Employer wants to offer a MEC/skinny plan to get out of the "A" penalty, and make HSA contributions through a cafeteria plan to employees who get individual HDHP coverage on the exchange.  Questions:

1. Does a skinny plan disqualify the individual from making HSA contributions (assume it's the minimum MEC to get out of the "A" penalty)?

2. If not, can the employer make HSA contributions through a cafeteria plan for employees who have HDHP coverage through the exchange?  Would this violate any EPP rule (Notice 2013-54 et al) or other rule?

We have a couple of clients that are going to add safe harbor to their existing 401(k) plan for 2019, and at the same time remove auto enrollment provisions.

Question is, what do we do with the current default enrolled participants.  Just continue to provide an annual notice each year until they either elect in, elect out, or terminate?

Or does eliminating the auto enroll provisions mean that their default deferrals should stop as of 1/1/19?

Thanks very much.

BITD I remember attending a conference session where the presenter stated that an owner-only plan with no non-key employees did not need to include 416 provisions.  The reason would be to set up a plan with a 5 year cliff vesting schedule to delay RMDs as long as possible.

But I can't find any authority for this.  410(a)(10) and the 416 regs flatly state that all plans except those mentioned in Q&A T-38 must have such provisions.  And the vesting language applies to all employer-derived benefits, not just those of non-keys.

We just took over an owner only DB and the prior firm had used a 5 year cliff vesting and in the TH section it states that the TH schedule is the plan schedule. As luck would have it, a 3 year cliff would have required 2016 and 2017 RMDs.  

Anyone know of any authority for using a non-top heavy vesting schedule in an plan with  just a single key ee/owner participant?