HTO

Thank you for your response. It sounds like you're agreeing with me that correcting the operational failure of not making the correct matching contribution should be all that needs to be done, or am I misinterpreting you? Regarding SCP, in light of Section 305 of SECURE 2.0 and Notice 2023-43, wouldn't SCP be available as long as the IRS hasn't identified the failure and the failure was just recently discovered by the employer?

An employer maintains a safe harbor 401(k) plan that provides for a safe harbor matching contribution of 100% of elective deferrals that do not exceed 4% of compensation. Since the plan's inception several years ago, the employer has inadvertently provided a match of 100% of elective deferrals up to only 3% of compensation. So, each year, anyone deferring more than 3% has missed out on a matching contribution on 1% of compensation. EPCRS doesn't specifically address this failure, but it seems that the logical way to correct is to make a contribution of the 1% match, plus earnings, to all affected participants for all affected years. In describing the allowable correction methods, Appendix A of Rev. Proc. 2021-30 provides that, if in addition to a failure to make a contribution, a 401(k) plan also failed the ADP test or ACP test, the correction methods under Appendix A cannot be used until after correction of the ADP or ACP test failures. In this case, although this is intended to be a safe harbor plan, the employer failed to make the required safe harbor contribution for some participants. So, technically, the plan was not operated as a safe harbor plan in those years. Does this mean that the employer is required to run the ADP/ACP tests for all of those years, correct any failures of ADP/ACP, and then correct the failure to make the matching contribution? It seems to me that by simply making the corrective contribution of the missing 1% match (plus earnings) to all affected participants, the plan will be restored to safe harbor status for all years, making the ADP/ACP tests inapplicable, so it shouldn't be necessary to run the ADP/ACP tests for all affected years. I would appreciate all input!

Thanks for the response. Here are some additional facts that may or may not affect your answer. A participant can elect to defer or not to defer each year, but the election regarding the form of distribution (lump sum or installments) is made with the initial deferral election and, once made, is permanent and applies to all amounts deferred (i.e., a participant can't elect a lump sum distribution with respect to one year's deferrals and installments with respect to another year's deferrals). Each installment is NOT designated as a separate payment under the plan terms. I agree that there can be different times and forms of payments for separately identifiable amounts, but in this case I don't see how the amounts are separately identifiable, and I don't see much difference between this and the example of a violation in the regulations, where there is one payment schedule if a separation from service occurs on a Monday and a different payment schedule if a separation occurs on any other day of the week. In both cases, the service provider and service recipient have the ability to manipulate the time of payment by determining when the separation will occur.

A deferred compensation plan allows a company's directors to elect to defer a portion of their director fees. The deferred amounts are distributed upon the earlier of a 409A change of control or a director's separation from service. At the time of an election to defer, the director can elect to receive payments upon a separation from service either in a lump sum or in annual installments. The plan provides that if installments are elected, the number of annual installments will equal the number of full calendar years the director was a participant in the plan, up to 10 installments. So, for example, if a director has a separation from service after 6 years in the plan, he or she will receive 6 annual installments, and if the director has a separation from service after 12 years in the plan, he or she will receive 10 annual installments. This seems like a violation of the toggle rule because it provides for different times and forms of payment for the same 409A payment event, and I don't believe that any of the exceptions apply, but I'd love to entertain an argument that it's permissible.

Thank you. For your answer to (ii), are you considering the payments to be made upon disability not to constitute "lifetime benefits"?

A bit of a brain teaser here. A proposed arrangement would provide installment payments to an employee (or beneficiary) over a period up to 3 years only upon the employee's disability or death that occurs while employed and prior to a change in control of the employer. The 409A regs provide that 409A does not apply to a plan to the extent that it provides disability pay or death benefits. For this purpose, "disability pay" and "death benefits" are defined under the FICA regs. The FICA regs (31.3121(v)(2)-1(b)(3)(iv)) provide that payments under a plan in the event of disability are disability pay to the extent that the disability benefits payable under the plan exceed the lifetime benefits payable under the plan. The regs define "lifetime benefits" as the present value of the benefits that could be payable to the employee under the plan during the employee's lifetime. Because the only other benefits payable under the plan would be after the employee's death, it appears that the payments upon disability are "disability pay" not subject to 409A. Similarly, the FICA regs provide that payments under a plan in the event of death are death benefits to the extent that the total benefits payable under the plan exceed the lifetime benefits payable under the plan. Using the same definition of "lifetime benefits" as above, it appears that the disability payments (which could be payable during the employee's lifetime) would prevent the death payments from qualifying as "death benefits," thus subjecting the arrangement to 409A. But this seems like an odd result, considering the similarity of the provisions for disability pay and death benefits, so is there an argument that benefits that constitute "disability pay" are disregarded in determining "lifetime benefits" so that the death payments constitute "death benefits" and the entire arrangement is not covered by 409A?