Tom Veal

Your reading of the "one-to-one" correction method is right: QNECs can't be limited to NHCE's with account balances. As further bad news, the use of elective contributions to pass the ACP test is allowed only if the elective contributions are subject to the ADP test. Treas. Reg. §1.401(m)-2(a)(6)(ii). You could submit a VCP application requesting a different correction method. The IRS will consider other correction methods and might, under these circumstances, be amenable to allowing the plan to correct through qualified matching contributions, which would be allocable only to contributing NHCE's.

Before ERISA, forfeitures could be allocated only to employees of the specific employer that maintained the plan in which they arose. ERISA established the principle that all members of a controlled group are treated as a single employer for almost all purposes, including the exclusive benefit rule. Rev. Rul. 84-50 confirmed that the pre-ERISA ruling on the point (Rev. Rul. 69-570) is obsolete.

Yes, that is correct. The twelve month period is based on the payment date. The trigger date is irrelevant.

This would be an easy question for a nongovernmental plan, since IRC §401(b)(2) allows an employer to treat a plan as having been adopted on the last day of a taxable year if it is adopted by the due date, including extensions, of the employer's income tax return for that year. A plan adopted on the last day of a year may be effective as of the first day of the year; that is pretty routine. Your client, however, has no tax return filing obligation, so section 401(b)(2) isn't literally applicable. Still, it's hard to believe that the IRS wouldn't be equally indulgent toward governmental plans. It is probably safe to prepare the document and submit it for a determination letter. Also, there is very little downside. If the IRS insists that the plan can't be effective until July 1, 2023, there will be no dire consequences. Your client won't lose any tax deductions, and the plan, being an instrumentality of government, won't incur any tax liability.

A PBGC case officer isn't likely to know much about the nondiscrimination standards for floor-offset plans. As CuseFan says, the PBGC audit will concentrate on whether participants received the benefits to which they were entitled under the terms of the plan. On the other hand, distributions by a disqualified plan are ineligible for rollover, so that closing out the DB plan before the qualification problem is resolved could result in nasty tax surprises for participants. Note, too, that since the plans were aggregated for testing, both are at risk of disqualification.

Because the credits are intended to encourage employers to establish new plans, they are not available if the employer has maintained a qualified plan, simplified employee pension or Simple IRA plan for substantially the same group of employees in any of the three taxable years immediately preceding the first year for which the credit is allowable. IRC §45E(c)(2) and (f)(4).

Nonqualified distributions from Roth IRA's are treated as coming first from previously taxed contributions. Therefore, they are tax-free until the amount distributed exceeds the amount contributed. After that point, the distributions are taxable and, if the IRA owner is under age 59½, are subject to the ten percent excise tax on premature distributions. Starting in 2024, thanks to a SECURE Act 2.0 amendment, nonqualified distributions from Roth 401(k) accounts will be taxed just like Roth IRA distributions. Until the end of 2023, however, a Roth 401(k) nonqualified distribution must be allocated between contributions and earnings. The portion allocated to earnings is taxable (unless rolled over to a traditional IRA or other eligible retirement plan), and the taxable amount is subject to the ten percent excise tax if the participant is under age 59½, unless he terminated employment at or after age 55.

This situation seems analogous to one in which a member of a non-consolidated controlled group makes contributions for employees of other members of the group. That is construed as a contribution by the first company to the capital of the second, followed by the latter's contribution to the plan (for which it then takes a deduction). In your case, the buyer's payment of the withdrawal liability would, by analogy, be additional purchase price, and the withdrawing employer would then deduct the payment of withdrawal liability. Assuming that the negotiated purchase price remains the same, the buyer will acquire more assets than if the seller had paid the liability and will pay more for them. If the buyer the seller are in the same tax bracket, the buyer will end up in the same economic position as if the seller paid the liability and deducted it. Of course, their brackets may well differ.

He can adopt a profit sharing plan for 2022. Taking a distribution from the pension plan and rolling it over won't help. The distribution will carry out that portion of his accrued benefit, leaving the plan in the same overfunded condition as before.

Yes, all but $600 is an annual addition in excess of the section 415(c) limitation. Rev. Proc. 2021-30, Appendix A.08, provides that an excess annual addition caused by elective deferrals can be corrected by refunding the excess, adjusted for attributable income. There's no need for a "mistake of fact" argument.

Belgarath -- Section 317 deals only with when the election can be made. The first SECURE Act's version of section 401(b)(2) allows the retroactive adoption of a plan at any time up to the extended due date of the employer's tax return. Jakyasar -- Section 317's effective date provision reads, "The amendment made by this section shall apply to plan years beginning after the date of the enactment of this Act." Someone at the IRS reads that to mean that an election made in a plan year beginning after the date of enactment (December 29, 2022) can affect a plan year that began before the date of enactment. That doesn't strike me as completely irrational, even though I was telling people until yesterday that it was wrong.

You should be all right if the accountant files an amended 5500 with the "DFVC Program" box checked and you pay the DFVC penalty. Instructions are on the DOL web site.

Like Belgarath, I had thought that 2023 was the first plan year for which retroactive 401(k) elections were allowed. It appears, however, that the IRS interprets the effective date provision as requiring only that the election be made in a plan year beginning in 2023 or later. I'm certainly happen to accept the IRS's view in this instance.

But that doesn't mean that the failure to make it is a prohibited cutback. The employer may have an obligation to make it that can be enforced by a plan fiduciary, but the participants in this instance obviously have no desire to be "protected" in that fashion. In any event, for the reason that I pointed out, nothing that occurred was inconsistent with the terms of the plan, ill-thought-out though those terms might have been.

Section 411(d)(6) prohibits cutbacks of "accrued benefits". Section 411(a)(7)(A)(ii) defines "accrued benefit" in a defined contribution plan as the participant's account balance. A contribution that hasn't been made isn't part of the account balance, so not making it isn't a prohibited cutback. Furthermore, elective contributions are employer contributions. Treas. Reg. §1.401(k)-1(a)(4)(ii) and (f)(4)(i). It is only a special rule that excludes them from being counted toward satisfying the obligation to make top-heavy minimum contributions. Treas. Reg. §1.416-2, Q&A M-20. It follows that elective contributions for key employees may satisfy a plan-imposed obligation to make employer contributions for their benefit. In short, there's nothing wrong with the plan in form or operation, although it would be a good idea to amend it so as to avoid confusion in the future.

There's no requirement that ESOP loans be repaid ratably, but the tax regulations include this statement, which is probably the basis for the threat of disqualification: Caution against plan disqualification. Under an exempt loan, the number of securities released from encumbrance may vary from year to year. The release of securities depends upon certain employer contributions and earnings under the ESOP. Under § 54.4975-11(d)(2) actual allocations to participants’ accounts are based upon assets withdrawn from the suspense account. . . . At the same time, release from encumbrance in annual varying numbers may reflect a failure on the part of the employer to make substantial and recurring contributions to the ESOP which will lead to loss of qualification under section 401(a) The Internal Revenue Service will observe closely the operation of ESOP’s that release encumbered securities in varying annual amounts, particularly those that provide for the deferral of loan payments or for balloon payments. [Treas. Reg. §54.4975-7(b)(8)(iii)] "Substantial and recurring contributions" is a very low bar, but no contributions at all probably falls beneath it.

The IRS is referring to ERISA-covered plans (i. e., practically all SIMPLE IRA plans), for which the general rule is that elective deferrals must be remitted to the plan (to participants' IRA's in this case) as soon as they can be segregated from the employer's general assets. That will almost always be much sooner than 30 days after the end of the month of the contribution. Small plans have, as you note, a safe harbor exception to the general rule.

A contribution to a SIMPLE IRA doesn't count against what a participant may contribute to his personal traditional or Roth IRA. His deduction of traditional IRA contributions may, however, be limited, depending on his adjusted gross income. Nondeductible contributions are discussed on page 15 of Publication 590-A. Tom Veal ERISA Cavalry PLLC www.ERISACavalry.com

Let me just add that deductions under section 404 must also be "ordinary and necessary" business expenses that are deductible under section 162. It isn't likely that contributions for the benefit of INC's employees are ordinary and necessary for LLC or vice versa. Therefore, unless some unusual facts are present, each employer's return should claim a deduction only for the cost related to its own employees.

The IRS already thought of this ploy. See Treas. Reg. §1.401(m)-2(a)(6)(ii): "Elective contributions may be taken into account for the ACP test only if the cash or deferred arrangement under which the elective contributions are made is required to satisfy the ADP test in § 1.401(k)-2(a)(1). . . ." Tom Veal, ERISA Cavalry PLLC