401 Chaos

Masteff, Am I reading your post correctly in concluding that the post-death amounts (bonus, last paycheck, accrued leave payout, etc.) would not be counted for 401(k) plan compensation purposes regardless of whether the plan defines compensation as W-2 wages or 3401 amounts because the post-death payments are subject to FICA under 3121 rather than 3401? Thanks.

Anyone have an update or recent experience with the DOL and IRS regarding their positions (formal or informal) on adoption of retroactive wrap plan documents as part of DFVCP.

Thanks to both of you. Definitely not holding our breath or waiting on the guidance to fix. Guess my real question may be since there is no remedial amendment period, is there an actual violation for failing to have adopted HEART by December 31, 2010 such that they might want to carry that along and voluntarily fix / seek approval if and when additional EPCRS guidance is released to cover 403(b) document issues or can they just adopt the amendment now and forget about it? Thanks.

I want to be sure I understand the current position and have not missed any later guidance or better approaches. Client has 403(b) plan for which they adopted an updated prototype document in December 2008. The client, however, failed to adopt the applicable HEART amendments by the December 31, 2010 deadline. Is the best course of action (only real course of action) at this point to adopt the missed amendment without other corrective actions. From this and other posts it doesn't sound as if EPCRS / VCP is a possibility for 403(b) nonamenders at this point. In the absence of such corrective procedures, is there anything else a late amender should do to protect themselves?

Can I revive this thread to raise a question touched on above but I'm not sure fully addressed or answered? Would like to know if there is any later or better guidance. Assume employer with NQ plan in State T (which imposes a state income tax) has employee who moves to State NT (where there is no personal income tax) before receiving distributions from the NQ Plan over a period of 15 years. It appears very likely that the former employee has clearly set up legal residence in State NT and is no longer a resident of State T. As such, the distributions from the NQ Plan would appear to be "protected" from State T taxes by the federal law. The employer has no connections with State NT other than the fact this one individual has moved there--it doesn't have an office there, it doesn't have employees there, it doesn't have other retirees or NQ plan participants there--in fact the states are on opposite sides of the country. What legal obligation, if any, does the employer have with respect to withholding on the distributions. Could the employer report and withhold State T taxes on amounts earned in State T but distributed later and put the burden on the employee for seeking refunds from State T as a result of the federal law. Alternatively, could the employer simply not withhold State T taxes on the distributions based on the federal law and also not take any action in State NT. This is a small employer with small NQ Plan and it does not wish to learn anything about State NT, its tax reporting rules, its residency requirements / determinations, etc.

Am wondering if anybody has some practical advice for administering plans in light of the State Taxation of Pension Income Act (STPIA) or Pension Source Act, etc. Specifically, small deferred comp plan administrator has distributions that stretch over 10 years and thus are arguably "retirement income" for STPIA purposes. Plan has historically only had a few participants retire and none have relocated. Plan is now facing situation where participant has retired and relocated to a new state that has no income tax. Does the company have to examine the factual situation (e.g., residency, time of move, new state's income tax requirements, etc.) and make a call as to whether or not to withhold and report state income taxes or can the company simply have a policy of withholding and remitting applicable state income taxes to the original source state (and home state of the company) and put burden on participant to seek a refund of those amounts if applicable?

Thanks. Some stretch back to 2008 and 2009 with a couple done in 2011. I think the participants involved would have a hard time covering the amounts by reamortizing in this situation. I ran across an article (I've tried to attach) from the July-August 2008 Journal of Retirement Planning by Susan Szafranski entitled EPCRS--The Eraser for Employee Benefit Plans. In discussing possible retroactive amendments under SCP to correct plans that permitted loans when the plan provisions did not expressly permit loans Szafranski notes the following on page 47: "This permissive retroactive amendment for loans only applies in situations where the plan document did not include a loan provision. The plan cannot be retroactively amended under VCP to allow a loan repayment period of more than five years for loans for the purchase of a primary residence." I have not been able to find the source or other support for that statement as yet. I can understand not allowing retroactive amendment under SCP but seems strange that VCP would not permit that. Of the two failures--permitting loans where the plan does not allow any loans at all versus permitting principal residence loans for more than 5 years when the plan permits loans by limits all to 5 years--the later arguably seems more sympathetic, particularly where there is no practice of having those benefit HCEs, etc. JORP_07_08_Szafranski.pdf

Thanks, ToolKit. I agree and think we're stuck with having to do a VCP submission but just wanted to be sure I wasn't missing anything (or any reason why VCP wouldn't work for this particular error). Thanks again.

I posted this in the plan loan section originally but wanted to post here as well as I think this is more a plan correction issue. Issue involves a 401(k) Plan document that expressly limits all plan loans to a maximum term of 5 years with no exception or separate discussion of principal residence loans. The Plan Administrator and TPA permitted a participant to take out a principal residence loan for a term of 10 years. That period is generally reasonable, in keeping with how TPA handles other principal residence loans under other plans without a five-year term limits on principal residence loans, etc. and would otherwise comply with applicable plan loan rules, etc. except for the plan's express 5-year term limit. (The Plan has since been amended by moving to a different prototype plan document which permits longer terms for principal residence loans.) Is this an error that can be corrected by adoption of a retroactive plan amendment to permit longer plan loans per Section 2.07(2)(a) of Appendix B of Rev. Proc. 2008-50 by filing under VCP? Anything that would prevent that from working in this situation? Not opposed to doing a VCP filing but am wondering if there is any easier way to correct the error given the fact that the Plan now already permits longer plan loans, etc. Since the loan in question was made prior to the new plan being adopted and at a time when the old plan with the express 5-year term was in place, I don't see a way around VCP.

Just wanted to bump this to see if anybody else had thoughts or experience with self-correcting this type of error through a retroactive amendment with a VCP filing to change the plan terms to permit longer loans for principal residence loans. Not opposed to doing a VCP filing if that will take care of the issue but just trying to be sure we are not missing any obstacles on that front. Thanks.

This is an interesting and helpful discussion. On this last point regarding DFVCP filings, I would just note that part of the top hat filing requirement is to provide information on how many other plans are sponsored by the employer, etc. such that an argument could be made that a single filing under DFVCP should, in essence, put the DOL on notice of all the top hat plans sponsored by that employer at that point in time. In short, I think a single filing under the DFVCP arguably provides just the sort of notice of the other plans in existence in a way that would make additional DFVCP filings unnecessary. Contrast that, however, with an employer that makes one top hat plan filing at a time when they sponsor only one plan. If they later go on to adopt additional plans in the future, there would be no real notice of that or updating of the original information for the DOL. Whether a new filing is required each time a plan is adopted may depend on what one thinks the purpose of the filing is--simply to provide the DOL a list of all employers having ever adopted a Top Hat plan without any requirement to update or notify of additional plans or to provide more of a record of the number of top hat plans adopted. I do not have the answer to that but tend to agree with QDROPhile that it's best to file for new plans as that seems the common practice and the general recommendation we have received from the DOL. On a related DFVCP top hat plan filing note, I spoke with the DOL recently regarding how the single filing worked in a large company / controlled group setting. Although the DOL confirmed that a single employer could make just one submission and pay just one $750 fee no matter how many top hat plans of that employer were being filed / covered, the DOL viewed the definition of "employer" for such purposes to be limited to each employer entity / employer identification number (EIN) such that companies with multiple top hat plans at the parent and subsidiary levels and/or scattered across multiple subs with different EINs should file a separate submission for each entity with a separate EIN. I suppose that may be obvious but just wanted to pass along in case helpful for anyone that has a parent that hopes to avoid multiple filings and/or tries to do just one DFVCP filing at the parent level.

Agreed.

Thanks Chaz. I'm familiar with the guidance and we do have benefits counsel involved. Unfortunately, nobody on our end though has recent enforcement experience here and were just wondering if anybody out there might have recently confronted a similar situation and have recent experience with the penalties assessed.

Thanks. They say they can handle but I share your concerns generally. Not really my idea of how to go about this but have basically just been asked if there is any reason it absolutely cannot be done. Seems if they are free to recognize prior service credit or not then recognizing for only certain purposes might be allowed but I'm concerned that may require additional testing. In this case it appears the new group will resemble the overall group demographically so reasonable mix of HCEs and NHCEs. Wonder if you kick up more concerns if the group were largely HCEs. For example, could you be required to perform BRF testing on the particular group getting service credit?

Thanks. In this case it is an individually designed plan and it also does not generally provide what is being considered. In the past, they have acquired groups and either amended the plan to expressly provide credit for prior service with the target company for all purposes (e.g., anybody with a year of service with the target was eligible for both match and profit sharing at year-end) or did not recognize prior service at all (e.g., they picked up employees of an acquired group or division but just treated them as new hires such that they had to be employed with the buyer for at least a year to become eligible for the profit sharing and match regardless of their length of service with their old company). What they want to do here is something in the middle--recognize prior service just for the match but not for the profit sharing portion of the plan.

Not sure where best to post this question but wanted to try here first. 401(k) Plan document expressly limits plan loan terms to a maximum of 5 years. Plan Administrator and TPA permitted a participant to take out a principal residence loan for 10 years. That period is generally reasonable, in keeping with how TPA handles other principal residence loans under other plans without a five-year limit, and would otherwise comply with applicable plan loan rules, etc. except for the plan's express 5-year term limit. Plan has since been amended to permit longer terms for principal residence loans. Is this an error that can be corrected by adoption of a retroactive plan amendment to permit longer plan loans per Section 2.07(2)(a) of Appendix B of Rev. Proc. 2008-50 and filing under VCP? If so, is there any easier way to correct the error given that the Plan now already permits longer plan loans, etc.? Thanks.

Appears we have a plan where the employer (more than 20 employees) has been reimbursing active employees for Medigap policy after they switched to Medicare coverage in lieu of group health coverage under the employer plan. Employer didn't realize there was any problem with this until recently. It has been going on for a few employees for a few years. Employer wants to come clean / correct this situation but I'm not aware of any possible self-correction procedures, or at least any sort of amnesty-type program that would provide a break on the penalties involved. Does anyone have experience with this and/or recent experience with the typical penalties that would actually be assessed if the employer just stops doing this but doesn't take any corrective action and Medicare later discovers the issue on audit. I assume there could be a $5,000 civil penalty per violation (not sure what constitutes a violation), Medicare could deny prior claims and seek employer to reimburse, reimbursements paid to employee would be taxable if not previously taxed, etc. Welcome any thoughts or experience dealing with these issues. Thanks.

Any problem with the Buyer in a deal providing credit for prior service with the seller under the 401(k) Plan but limiting that to only selective benefits. For example, if new hires under Buyer's 401(k) must attain a Year of Service to get matching contributions and profit sharing contributions, could the Buyer provide credit for prior service just for matching contribution purposes so that all or nearly all received matching contributions right away but were required to have a year of service with Buyer to get profit sharing contributions?

Thanks. Yes, I ran across that and understand it to basically say you don't have to prepare a whole new chart of all options, etc. I guess what I was really wondering is whether there is specific guidance on the fund notice piece that goes out and how detailed of info it needs to provide. Where I ended up was basically providing a short chart that compares the key expense and performance info of the old and new funds side by side so that there is comparative information for 404©, etc purposes of comparing the options but also fee disclosure info on the new fund. That seems consistent with what we see others doing but not what everyone is doing and I wasn't sure if there was a minimum level of info or particular format that was required. Thanks.

Mike, Thanks very much for the additional information. I've been reviewing a number of prior posts from you and others on these issues and have a follow up question. Given that the Plan is not subject to PBGC rules, does the majority owner actually need to execute an "agreement to forgo benefits not funded" or whatever we are going to call the "waiver" document if the plan provides for the non-discriminatory allocation of funds upon termination. Plan apparently is sufficiently funded to cover all other participants' benefits if a significant portion of the majority owner's benefits are forgone. I see nothing wrong with (and likely some valuable benefits to) preparing such an agreement and having the plan file for a LOD noting the execution of the agreement but have been asked specifically if such an agreement really needs to be executed by the majority owner here. Seems if PBGC rules are not applicable and IRS does not generally care about / recognize such "waivers" and/or the agreement is not required to be filed with anyone then there is arguably no need for preparing and having the majority owner execute such an agreement / waiver? Welcome any further thoughts on this. Thanks.

Mike, Many thanks for your response. In our case, the plan is not subject to the PBGC rules so we don't have to file with them. Any reason to think that would weaken the ability of the majority owner's waiver since not technically part of a PBGC termination? Should we just prepare and execute the waiver per the PBGC rule as if they applied and then note the waiver in the cover letter to the IRS with the determination letter submission? On a related topic, plan sponsor is curious whether they really need to go through the determination letter process in this case. I've seen some other posts where people indicate they have routinely noted the use of such waivers in their cover letters to the IRS without much if any comment or inquiry by the IRS. Do you feel their is greater security in going through the determination letter process where the use of the waiver is noted in the cover letter or do others feel the use of such waivers is sufficiently common place that the owner could sign and hold in the file even if there is no PBGC or IRS DL filing? Many thanks for any thoughts or suggestions.

Anyone have any recent experience with this and/or experience to the contrary with respect to the IRS not objecting. I have heard reference to situations where at least one IRS agent may have taken the position that the majority owner constructively received his full benefit and was deemed to have contributed the waiver portion back to the corporation as a contribution to capital. The corporation was presumably allowed a deduction up to applicable limits for a constructive contribution to the plan but was an overall mess due to the phantom income, etc. Not aware of any widespread application of that approach but seems to have possibly surfaced in some situations. My general sense is the IRS knows this is done and generally allows / looks the other way but does not expressly approve. Would welcome any insight or advice from those with experience with this. On a related note, current plan has significant funding obligation for the 2011 plan year and plan sponsor is considering terminating long-term. Majority of the plan benefits are for majority owner who would be willing to waive significant portion of benefits to be able to terminate the plan with minimal additional contribution (if any--still trying to figure that out). In the interim, there is need to satisfy the funding obligation for the prior year (due Sept 15th). Can a majority owner waiver be used to reduce / eliminate funding obligation for the prior year or is that only possible in a termination context. In short, majority owner would likely be willing to waive as much as is necessary to avoid both pending funding obligation and any termination funding if that were possible. Thanks

Thanks, Benji. This is very helpful and is consistent with what I've seen many others doing with respect to fund changes but I've recently run into one that has bare bones info and a suggestion that they can link to the fund's website for a prospectus and more information. The providers have suggested they think that is sufficient but that doesn't seem correct to me. Just trying to nail down exact guidance on what is and is not required given the new rules. At a minimum, seems a chart of the new expense and performance info should be included even if that is limited just to the new fund and/or doesn't provide a comparison to the fees of the replaced fund, etc. Welcome any additional thoughts or suggestions as to regulatory standards on this.

I have been searching and have been unable to find specific guidance regarding what level of disclosure is required for a fund change in a 401(k) plan in light of the new participant fee disclosure rules. It seems clear that general changes within the same fund after the plan has sent it's initial / annual disclosure out do not necessitate republishing the full disclosure with the new information although that information is to be published on the website (if applicable) as soon as possible. In the case where the fees are changing, however, as a result of swapping of one fund for another, it would seem that more detailed interim fee information should be provided. Is it appropriate / sufficient to provide a comparative chart comparing the old and new fund as part of the fund change notice but not redo the complete disclosure for the plan until the next annual statement? Is it arguably possible to do less and not provide fee information on the new fund in some comparative format? Thanks.

We have been dealing with a similar issue for a trust set up many years ago that thought it was tax-exempt but apparently never applied for a determination from the IRS. In addition, it has filed no trust tax returns of any kind. Based on our additional research, I wanted to post back and post a cite to an excellent (albeit a bit dated) article I found on the subject of the illusory nature of tax exempt status. The article is entitled "The Unimportance of Being a VEBA: Tax Attributes of Nonexempt Welfare Benefit Plans" by Andrew W. Stumpff. It can be found at 47 Tax Law 113 (1993-94). The article basically notes as did VEBAGuru above, that in many cases if the trust involved is covering benefits for active employees and so paying out a lot more in benefits than the trust is making in investment income, there is a good argument that the trust should be treated as a taxable nongrantor trust and the contributions treated as additions to principal. I think what that generally means is that in typical arrangements there should be no regular taxable income for the trust even though it is not tax exempt as a VEBA under 501©(9). The disadvantages of that approach, however, seem to be somewhat less certainty about the tax treatment of the arrangement although I have found nothing so far to suggest the IRS disagrees with the nongrantor trust classification and different / additional compliance concerns. In particular, as noted above the taxable trust would be required to file a Form 1041 each year and it also appears provide each participant in the plan a Form K-1 reflecting the amount of benefits paid out each year. The penalties for the missed Form 1041 in a case where there was no taxable income seem to be manageable but the penalties for missed K-1s could add up if you are dealing with a large number of participants over many years is the case in our matter. Guess you could try for a waiver of those penalties on some reasonable cause ground but not sure of the likelihood of success of that. As a general matter, having to give K-1s seems a bit strange to me in this context and a bit difficult to communicate to participants. That seems especially strange though Alternatively, it is possible to attempt to seek a VEBA determination on a retroactive basis beyond the initial VEBA application deadline if you can make a "reasonable action and good faith" argument pursuant to Treas. Reg. Section 301.9100-3. I've never tried that before in a VEBA context so not sure the likelihood of receiving a retroactive exemption but would welcome any thoughts others may have. Even if they do get retroactive approval, however, the trust should have still presumably been filing Form 990s for each year it thought it was tax-exempt. The penalties for failure to timely file a Form 990 appear very expensive--$20 per day not to exceed the lesser of $10,000 or 5% of gross receipts. In our case, I think we are looking at the $10,000 cap for a number of years. Suppose we could also try for a waiver of those penalties as well but just preparing the application and retroactive exemption request plus also preparing the Form 990s is going to be pretty expensive. Bottom line seems to be that there are some possible alternatives available for those with trusts that thought they were or maybe tried to be VEBAs but did not have an exemption letter. Both alternatives, however, seem to carry some risks and uncertainties and are potentially very costly if there are a large number of years involved. Glad for any additional thoughts or suggestions.