dcoderre

Does the answer change if a 401k Plan includes a merged MPP transfer balance? In other words, may a 401k plan distribute from the “MPP source” for CARES prior to age 59-1/2? The source includes normal MPP restrictions, but it seems like CARES Act allows because the plan is a 401k, not a MPP. Thank you for sharing your opinions.

The background in Sec 2.03 gives a bit of a hint as a policy matter to encourage auto-enrollment. The 3-month correction rule doesn't require a QNEC for missed deferrals. After three months, and before the end of SCP correction period for significant errors, the missed deferral QNEC is 25% assuming all the other requirements are met.

Rev Proc 2015-28 provides a "9-1/2 month rule" for Elective Deferral Failures associated with missed elective deferrals for eligible employees who are subject to automatic contribution features under a 401(k) or 403(b) -- including employees who made affirmative elections in lieu of automatic contributions but whose elections were not implemented correctly. Question: Does the affirmative election "in lieu of" automatic contributions include only a participant's initial affirmative election opting out of auto-enrollment, or would it include the initial election and any subsequent affirmative election a participant makes if that participant is in the class of participants covered by the automatic enrollment feature? Proposed Answer: It includes the initial affirmative election as well as any subsequent affirmative elections. This is true regardless of whether the plan contains an automatic escalation feature. (Assumes an EACA continues to cover participants who make an affirmative election -- i.e., annual notice continues to be provided to participants who make an affirmative election.) Rationale: Consistent with the objective of encouraging automatic contribution features, nothing in the new rule specifically limits application to a participant's initial affirmative election. Section 4 of Rev Proc 2015-28 adds new section .05(8) of Rev. Proc. 2013-12 Appendix A that says in part: "If the failure to implement an automatic contribution feature for an affected eligible employee or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature does not extend beyond the end of the 9-1/2 month period after the end of the plan year of the failure..." Further, a participant who makes an affirmative election is continued to be covered by an EACA (if the plan provides) so it does not make sense to limit the correction only to an initial election. Example: Calendar year plan with auto-enrollment at 3%. Participant becomes eligible at 1/1/2015 and immediately opts out by affirmative election. Participant subsequently elects to defer 5% as of 7/1/2015, but the election is not implemented. The Participant does not notify the Employer, and the Employer implements the correction no later than the first payroll made on or after 10/15/2016. The Employer gives appropriate 45-day notice after deferrals begin and makes up the match with earnings within the "SCP correction window" for significant operational failures. No QNEC is required for the missed deferrals because the correction is appropriate under the "9-1/2 month rule" of Rev. Proc. 2015-28. Agree? Disagree?

What about when the "shift" involves two tax years? If 2012 MLR is a refund of a 2011 pre-tax health insurance premium, then it seems to me the amount may be included in plan comp for both 2011 and 2012. Let's say plan comp is W-2 plus deferrals with no adjustment for fringe benefits. In 2011, the pre-tax premium is included in plan comp because we add back pre-tax Sec. 125. In 2012, it's in plan comp again because it's included in W-2 taxable wages. Agree? If plan comp were defined to exclude taxable fringe benefits, then I can see an argument to treat the rebate as a fringe benefit and thus exclude it from 2012 compensation. Other thoughts?

Here's my take on Kevin's example: 2/28/2010 PYE - $1600 of deferrals reclassified as 2010 catch-up (no other 2010 YTD deferrals at this point) July 2010 contributes $16,500 402g max, plus $3,900 remaining catch-up max, plus $1,600 which is in excess of 402g & max catch-up 2/28/2011 PYE - ADP test includes $16,500, plus $1,600 excess 402g (because he's an HCE) It would be interesting to know what the software would have included in the ADP if this person had been an NHCE for 2/28/2011. If my above analysis is correct, only $16,500 would have been included in the ADP test for an NHCE.

I suggest looking into the Delinquent Filer Voluntary Correction program described at http://www.dol.gov/ebsa/FAQs/faq_DFVC.html If the plan is small (threshold generally = 100 participants) then non-profits get a big break in cost for multiple years. Good luck!

It's true the 2-1/2 month rule for distribution of excess contributions for ADP failure no longer impacts withholding because PPA now requires the distribution to be taxed in the current year. In accordance with IRC 3405, distributions taxable in the current year are generally subject to 10% withholding if ineligible for rollover. The 2012 Form 1099-R instructions are silent about excess contribution & excess aggregate contribution withholding, but it's my understanding they are subject to withholding per IRC 3405. The 1099-R instructions do indicate correction of 415 excesses are subject to withholding; however, correction of 402g excess deferrals are not subject to withholding. See 2009 explanation from Relius at: http://www.relius.net/News/TechnicalUpdates.aspx?ID=434

For a 403b to be exempt from Title I of ERISA, it must either be a non-electing church plan, a governmental plan, or a plan with limited employer involvement. If the entity makes employer contributions, it fails the limited employer involvement test. Thus, if it's not a church or government sponsor, it most certainly should have filed 5500s. Some entities are both a 501©(3) and an instrumentality of a government (or a church organization), so you'll want to look into that possibility if you haven't already.

I agree. The distribution is not eligible for rollover, so the lump sum federal withholding rate is 10% unless the participant opts out. State withholding rules also apply, with some states allowing for opt out. I'd report the distribution on 1099-R with Code E to indicate it corrects an error, and hope the IRS is not aggressively using this code for targeted plan audits...

I agree. If the entire $7K was deferred in latter half of 2011, a $2K ADP failure nevertheless is applied to the 2012 catch-up for 6/30/2012 testing. Thus, for the remainder of the year 7/1/2012 - 12/31/2012, the participant could defer max of $17,000 (402g limit) plus the remaining catch-up of $3,500 for 2012 grand total of $20,500. When 6/30/2013 is tested, only the first $17K of this is included in the test (plus applicable 2013 amounts) and any ADP failure will be applied to the 2013 catch-up to the extent it is not already used. If the $7K was deferred ratably throughout the year for 6/30/2012 PYE, such that $3,500 was contributed 1/1/2012 - 6/30/2012, then participant still gets maximum use of the $17K 402(g) limit and $5,500 catch-up for 2012 as follows assuming a $2K ADP failure: $3,500 for first half of year of which $2k is 2012 catch-up, plus up to $15,500 for remaining 402(g) and up to $3,500 for remaining catch-up, for grand total of $22,500. Of this amount, the 6/30/2013 ADP test will include only $15,500 (plus applicable 2013 contribs), and any ADP failure is applied to 2013 catch-up even if the contributions were all made in 2012. HCEs can hinder or help their ADP results depending on how they bunch up or spread out contributions in a noncalendar plan, as well as potentially decreasing their ability to put in the full $22,500 as in the first part of this example.

If a plan is submitting Appendix F Schedule 2 within 1 year of RAP for EGTRRA VS nonamender, the fee is 50% of the normal fee based on the 5500 participant count. For 51 - 100 participants, 50% of the fee is $1,250. If only Schedule 1 applies for a more recent amendment such as PPA, the fee is only $375. If both of these schedules are submitted together within the same VCP application, what is the fee? Is it only $1250, or is it $1250 + $375 = $1625 if submitted by 4/30/2011 (1 year expiration of RAP)? Thanks in advance.

The IRS does not consider it part of 415 comp according to PLR 200135045.

A correction offered in the IRS "fix-it-guide" for an impermissible hardship is for the participant to repay the hardship amount plus earnings, consistent with SCP under Rev Proc 2008-50. For a hardship taken in 2010 and repaid in 2011, I am wondering how to tax report. The 2010 1099-R (already issued to participant) reflects the amount of the hardship withdrawal. Rev Rul 2002-84 (issue #3) leads me to conclude the amount is supposed to be taxed in 2010, and then the participant might be able to take a deduction for the repayment in 2011; the repayment would not create a tax basis in the 401k account. The participant is unhappy with this tax result. The participant wants to pay back the hardship in 2011, but wants the 2010 Form 1099-R amended to reflect a $0 distribution. The participant is under age 59-1/2, and does not want to pay the early withdrawal penalty nor 2010 income taxes on the withdrawal. The plan would like to correct under SCP assuming it is eligible, though I think if an early withdrawal penalty applies, the only way to request waiver of early withdrawal penalty would be under VCP. Can anyone point me to some guidance that would allow us to amend the 2010 Form 1099-R to $0 when the SCP repayment correction is done in a later tax year? Thank you in advance.

What a difference a day makes. Having term'd on 12/31/10, $70K (RMD) of her April 2010 rollover was ineligible for rollover, and then she took a $20K partial distribution in September which is on top of the RMD. So she has $90K taxable distribution in 2010. Had she termed 1/1/2011, she would have had only the $20K taxable distrib in 2010, as it appears she intended.

I have a similar situation with an active participant who took a partial rollover distribution during April 2010 when the RBD had not yet been established (due to active employment). But then on 12/31/2010 the participant terminated employment, so the RBD is now 4/1/2011. When you read through the code and regulations, especially Treas. Reg. §1.402©-2, Q&A-7, a strict interpretation of the rules requires that “any” distribution during the distribution calendar year must first meet the RMD requirements. Does this mean that we would need to code the 1099R to indicate that part of the rollover that occurred April 2010 was not actually eligible for rollover (about $70K of the $1M rollover) or can the participant merely take another $70K distribution from the plan prior to her RBD of 4/1/2011? She still has about $500K in the plan, more than enough to pay out the RMD. (As an aside, she also took a partial lump sum of about $20K in September 2010. So if the full rollover is okay, presumably the $20K is applied toward satisfying her minimum such that she need only take another $50K from the plan prior to 4/1/2011.) Thanks in advance for your thoughts.

What's the concensus on this under the final regulations? Would it make any difference if the pay wasn't required under WARN? For example, what if an ee gives 2 weeks notice, but the employer has them terminate immediately but pays them for the 2 weeks? Or what if the "in lieu of notice" pay is required by a collective bargaining agreement? For unemployment purposes, this pay is treated differently than pure severance pay, but it seems more likely it's treated as severance under the final 415 regulations. On the other hand, there is an argument that it's regular pay that would have been paid had the employee not severed employment before the notice period expired.

I'm trying to sort out the implications of including clergy's housing allowance in plan compensation per Rev Rul 73-258 in a safe harbor 410k non-electing church plan. This rev rul says you can treat it as plan comp; however, the IRS does not consider it part of 415 comp according to PLR 200135045. Since the plan is a safe harbor 401k, our definition of plan compensation must satisfy the requirements of 414(s). It appears we would not include housing allowance in 414(s) comp given the use of 415 comp as the starting definition for 414(s). Regardless, it seems it should always be ok to include housing allowance in plan comp if the participant is an NHCE. Further, the determination of HCE status is based on 415 comp, thus housing allowance must be excluded for the HCE determination. I appreciate any guidance on the 414(s) analysis in particular. Thanks!

There is only 1 prior year subgroup. Your "weighting" is 1/1, so you would use 4.5% in tests A & B in 2007. See example 4 in reg 1.401k)-2©(4)(iii).

I agree.

Thanks, Tom. I had seen that posting which said "it appears no." Appearances can be deceiving. ;-)

Some practitioners have interpreted the proposed regulations such that an EACA must automatically enroll all eligibles (who haven't made a deferral election) based on the uniformity requirement. In my opinion, the proposed regulations allow the EACA to be applied to new participants only. Most practitioners originally interpreted the plain language to allow application only to newly eligibles, and in my opinion, it is only through a strained reading that an alternative interpretation has been construed. If Congress wants to make a technical correction or if the IRS wants to clarify in future regulations, then we will have to live with it. But in the meantime, why make their conservative arguments for them? Keep in mind these are proposed regs, and there are arguments for a good faith interpretation to allow the EACA to be applied only to newly eligibles as most of us originally thought. I put forth the following arguments in the spirit of being advocates for our clients, and invite your additional arguments pro or con. 1) The proposed regs are quite clear for a QACA that it must apply to all, and the EACA does not have this same language. IRS knew how to make it clearly mandatory if they wanted to. Where they did not use the same language, we can presume they did not have the same intent absent other clear guidance. 2) The EACA makes reference to the ACA definition, and an ACA has never been required to apply to all eligibles. (An EACA is an ACA that meets 3 conditions: uniformity, notice & QDIA.) Pre-PPA, an ACA could clearly be applied only to those eligible on or after the start of the ACA if the plan wished. Nothing in PPA or the proposed regs add a requirement to clearly make it effective to all. This would be a big change, and I don't think the definition of ACA in 1.414(w)-1(e)(2) justifies such a conclusion. The language says "an eligible employee's affirmative election," which is different than saying "all eligible employees." 1.414(w)-1(e)(2) Automatic contribution arrangement. An automatic contribution arrangement means an arrangement that provides for a cash or deferred election that provides that in the absence of an eligible employee's affirmative election, a default election applies under which the employee is treated as having elected to have default elective contributions made on his or her behalf under the plan. This default election ceases to apply with respect to an employee if the employee makes an affirmative election (that remains in effect) to— (i) Not have any default elective contributions made on his or her behalf; or (ii) Have default elective contributions made in a different amount or percentage of compensation. 3) The history of ACA rulings started out applying only to newly eligibles, and was later expanded to make clear it could also be expanded to current participants who hadn't made an election. This was permissive to apply it to all eligibles, not mandatory. I think the definition from 1.414(w) is drafted in light of this history, to make it clear that it may apply to any eligible participant. (In 1998, Treasury and the Internal Revenue Service issued a ruling clarifying that automatic enrollment in 401(k) plans is permissible for newly hired employees (Rev. Rul. 98-30). Building on that beginning, Treasury and IRS issued a second ruling allowing automatic enrollment for current employees as well (Rev. Rul. 2000-8).) 4) The uniformity requirement is met, even with an application only to newly eligibles. It is uniformly applied to everyone the ACA applies to. Thus by applying the ACA to only newly eligibles, it can still meet the 3 requirements of uniformity, notice & QDIA and thus be a valid EACA.

1. For the exception from 20% mandatory withholding on distributions under $200, I believe we can consider the Roth & non-Roth portions separately. Do you agree? (See final regs under "modifications to final roth 401k regulations" on page 21108 of federal register.) 2. Does the $200 threshold for exception to withholding refer to only the taxable portion? For example, if the Roth distribution is $300, but only $100 is taxable because the basis is $200, is 20% withholding required on the taxable $100? I would think no withholding is required because the taxable portion is less than $200, but it's not clear to me when I look at treas reg 31.3405©–1, A-6 or the roth regs. Thanks in advance for any information on this.

It's clear that the key ee's beneficiary is also included as a key ee. What I'm not clear on is how long it's reasonable to include the QDRO distrib in the top heavy determination. Is it "forever & always til death do us part" i.e., until the actual key ee does not have an hour of service in the determination year; or is it treated like an in-service distrib for 5 years regardless of when the QDRO is actually paid from the plan?

We take the position that a fee cannot be deducted upon death, disability or retirement, but that for other terminations, a fee can be deducted. Our volume submitter plan is approved with this language.

How does an employee transfering from one unrelated employer to another affect top heavy testing in a multiple employer profit sharing plan? For example, unrelated Companies A & B maintain a calendar year multiple employer plan. Top heavy testing is performed separately for each employer. An employee worked for Company A and had an account balance of $10,000 on 12/1/02. The employee transfers to Company B on 12/1/02 and receives a $1,000 allocation from Company B during December 2002. Ignoring market gain/loss, on the determination date 12/31/02, what amount is included in the top heavy tests for this employee for Companies A and B respectively? Does 1.416-1 Q&A T-2 mean I have to recordkeep these contributions separately for the life of the plan?? Or would it be treated similar to a related rollover since the employee in essence has no choice but to "rollover" into Company B's plan? Thanks!