ECSmith

Does the “once in, always in” concept applicable to eligibility for elective deferrals also apply to eligibility for employer contributions, and if so, what is the legal authority requiring such treatment? By way of background, we have a client that is a school (the “School”) that sponsors a 403(b) plan (the “Plan”). To comply with the universal availability and LTPT rules, the Plan provides that all employees are eligible to participate in the Plan for purposes of elective deferrals upon hire. The Plan also provides for (1) mandatory employee contributions and (2) nonelective employer contributions to all participants who make mandatory employee contributions. From a cultural and employee relations standpoint, it is important for the School to continue to offer mandatory employee contributions and to provide nonelective contributions to all participants who make mandatory employee contributions. However, the School would like to impose an annual service requirement on mandatory employee contributions and associated nonelective contributions so that only participants who work 1,000+ hours in a year receive such contributions for that year. This annual service requirement on employer contributions is important for the School because the School employs many individuals on a temporary/seasonal basis (coaches, summer camp counselors, substitute teachers, tutors, etc.), has many former full-time employees return to work with the School in temporary/seasonal positions, and has high rates of employee turnover. It would be extremely administratively burdensome for the School to make employer contributions every year to all employees who once worked 1,000+ hours in a plan year and who now work less than 1,000 hours/year. Because we cannot use an allocation condition to impose an annual service requirement on mandatory employee contributions, we’re trying to find a way to impose an annual service requirement on these employer contributions through eligibility. However, we’ve received pushback from the School’s consultant and recordkeeper that the “once in, always in” concept applicable to elective deferrals also applies to employer contributions. While it’s clear that the “once in, always in” requirement of the universal availability and LTPT rules do not apply to employer contributions, we cannot find conclusive guidance as to whether or not Code section 410(a) imposes a “once in, always in” requirement on employer contributions.

We have a client looking to purchase 100% of the equity interests of an LLC that is currently disregarded for tax purposes. In the course of diligence, we discovered that the LLC is party to two agreements under which it provides deferred compensation to each of two employees. The agreements were not drafted with 409A in mind and so are neither structured to be exempt from or clearly compliant with 409A. We are currently evaluating the extent to which we can argue that the agreements are operationally compliant with 409A. Based on the language of the agreements, we cannot take advantage of any 409A exemption. The agreements include a change in control as a payment trigger. We understand that, even though the 409A change in control rules (payment trigger and permissible termination rules) are only explicitly written to apply to corporations, the IRS has indicated that these rules apply by analogy to entities taxed as partnerships. See, e.g., Notice 2005-1, Q/A 7; 70 Fed. Reg. 57,930, 57,948, Proposed Preamble VI(E). Is it permissible to apply these rules by analogy to a disregarded entity as well? That is, is it permissible to take the position that a 409A-compliant change in control is triggered when 100% of the equity interests of a disregarded entity are sold (to a non-related entity)? Or, to be compliant with 409A change in control rules, must the change in control be triggered with respect to an entity that is taxed as a corporation or partnership? Any thoughts are appreciated - thanks!

I have clients seeking to simplify the administration of the SECURE 2.0 Roth requirement for catch-up contributions made by participants earning more than $145,000. One potential way to do this is to require all participants (regardless of compensation) to make catch-up contributions on a Roth basis, but it's not clear to me whether that would be permissible. May plan sponsors require all catch-up contributions to be made on a Roth basis? More generally, how have you advised clients who are concerned about the complexity of administering the new Roth catch-up requirement, but who don't want to eliminate catch-up contributions from their plans?

Paul - How have you advised your clients who have asked if they can require all participants to make catch-up contributions on a Roth basis? I have clients asking the same question and it's not clear to me whether this would be permissible.

Has anyone applied for or engaged in a pre-submission conference with the IRS before filing a correction under VCP? If so, what was your experience like? We are considering applying for a pre-submission conference on behalf of a client and are looking for any and all insights and suggestions about application strategy, likelihood that the IRS will approve a request for a pre-submission conference, how the conference is conducted, etc. Thanks!