401 Chaos

Thanks, Brian. That is helpful guidance for LSA design points. I hope all LSAs will follow suit.

I'm just coming to this issue for a client as well. I'm with ESOP Guy. Every sample list of approved benefits I've seen includes things like yoga and meditation classes. I've not seen any that reimburse wood for the fire pit or fishing lures. Some people meditate in different ways. I get that employers may want to promote particular wellness benefits for a healthier (and thus more productive and otherwise cheaper) workforce but we have wellness programs with different regulations to do that. The more these accounts encourage those expenses (which, frankly, seems to me the most defensible use of these) the closer I see them to ERISA plans that should be closely regulated. Sheila, I'm curious if you are still providing legal support to the LSA vendor or if they decided they didn't like your advice. So far, I have been unimpressed with the general guidance and analysis provided by the LSA vendors I've seen.

Luke, Thanks very much for this post. Very helpful.

Thanks very much to all. This is a great discussion. Bird, for what it is worth, the partner agrees with you and its certainly significant to him from a contribution perspective because the contributions he can make under the terms of the law firm 2 plan are minimal. Would this somehow be significant to the IRS agent that wonders why the partner should get to do this when the receptionist that worked through Thanksgiving and quit didn't get any profit sharing contribution for 2021? I do not know. I get that the partner is funding the amounts and the partner's ability to contribute isn't resulting in some harm to others but there is still a deferral opportunity available to him (as the formerly highest compensated ""employee") that was not available to common law employees. I don't mean to suggest that has to be the result or that there is some huge risk but can see arguments either way as noted. C.B., I agree the earned income distinction and definition is important here. Sort of difficult for me to decide how to analyze though as the run-out income being received / collected does reflect income from fees that were derived from the prior rendering of personal legal services. Although the partner is no longer providing personal legal services through that firm, his prior services were what generated the fees. Plus, as I understand it, "earned income" for such purposes is determined as of the last day of the year so maybe that makes it more likely all gets categorized as earned income? Especially when you layer in the rule Peter notes as sometimes being viewed as deeming a partner for part of a year as being an employee for the whole year--if you do that and determine earned income on 12/31, it would seem good arguments could be made for inclusion. Looking at Sal, I don't see much guidance and I still don't have the basic plan document to review yet but am not expecting it to have anything helpful really. (If this is a gray area under the rules, I guess a plan could always try and address specifically? If so, I am sort of surprised not to have ever seen that but may just have limited perspective.) Ultimately, it's seeming like there is probably enough here to conclude this is not clearly prohibited and so may depend on overall risk tolerance for the old firm.

Thanks very much. Apologies, I should clarify my facts a bit. The individual here (a lawyer) left law firm partnership 1 mid-year and became a partner in a new law firm partnership for the second half of the year. I think both partnerships would view him as only being a "partner" in one firm at a time--indeed I think there are probably state bar concerns and partnership agreement concerns if he tried to claim he was still technically a partner in law firm 1 as of December 31st. That said, it seems he arguably is receiving "earned income" from law firm (1) through December 31st. And he was (albeit on a "volunteer" basis) trying to collect on fees outstanding from the first half of the year on behalf of law firm 1 but was not getting paid to do that directly or doing so pursuant to any formal employment relationship--just doing it in order to get the benefit of hopefully collecting more accounts receivable of law firm 1 that existed when he left mid-year. Maybe its just me and my lack of understanding of partnership tax but it does not seem right that he should be considered "employed" on the last day when I think a former common law employee in a similar situation (e.g., if a commissioned employee with trailing commissions left employment but continued to follow up with old clients to collect on outstanding amounts or assist with other transition items on behalf of the former employer but without any formal employment relationship) would not be considered employed on the last day.

Welcome any thoughts or experience on this. Still waiting to see exactly what the specific plan document provisions say here but situation involves a partner in a partnership who leaves the partnership mid-year. Partner continues to be entitled to a portion of revenues collected during the second half of the year, is assisting generally with collecting receivables and other transition issues, reflected as a partner in the partnership for the year, etc. but is not performing new services / generating new fees for the second half of the year. Can the partner be considered "employed" on the last day of the plan year for purposes of profit sharing?

Quick question: Is my understanding that the annual additions limit is a "per employer" limit such that an individual may receive contributions up to the annual additions limits in two different plans of two different, unrelated employers in the same year? If so, does that change at all if the individual is a partner in two partnerships and so is self-employed? Situation involves a lawyer who was a partner in one law firm for 3/4 of 2021 and had enough income there to receive a profit sharing contribution and 401(k) deferrals equal to the 2021 annual addition limit under the terms of Law Firm 1's plan. Lawyer then moved to a second, unrelated law firm and had significant compensation there--not enough comp to receive full profit sharing under Law Firm 2's profit sharing plan but still a significant profit sharing contribution--and wants to receive profit sharing contributions across both plans. Lawyer realizes the 401(k) elective deferral limit is per individual and so is capped across both plans (did not participate in 401(k) at Law Firm 2) but is there any similar concern with the profit sharing contributions being capped or can she receive all the Law Firm 2 profit sharing to which she is entitled even though already hit the annual additions limit at Law Firm 1? Thanks.

Thanks for the additional information. We heard back from DOL with similar guidance. Kudos to them for doing this I think but seems they might clear up some confusion by adding a note to the email indicating this "reminder" does not preclude filing under DFVCP. I suppose that's sort of obvious given their invitation to use that but would just be good to clear up any confusion. Thanks again.

Thanks to you both for the additional information. In our case, there is no Hurricane Ida issue. Small nonprofit lost their founder / executive director to cancer mid-year and the filing just got missed with that, COVID, other staff changes. I think they have as good of a reasonable cause request as exists but they may be inclined to just file under DFVCP and pay the $750 since DFVCP appears to still be possible. Thanks again.

Client recently received an email from DOL--Office of the Chief Accountant, Division of Reporting Compliance--indicating that their 5500 for 2020 is missing. The email includes an invitation to consider participating in DFVCP to pay reduced penalties for failure to file in a timely manner. Email also provides links to DFVCP FAQs, one of which notes plans are eligible to file under DFVCP so long as they have not received written notice from the Department of a failure to file their 5500. Huh? We've seen situations where folks received notice from the IRS and then filed under DFVCP before any DOL notice but this DOL notice appears to be the first notice the plan has received. Is the email they received sufficient to prevent them from using DFVCP or is this short of the disqualifying notice indicated in the FAQs. Is this a new process or have we just not been privy to this before? Thanks for any insight you can provide.

I feel like I should know the answer to this but not sure I've ever seen discussed. Am curious for thoughts or any insight from actual experiences with similar situations. Employer established non-qualified deferred compensation plan to permit deferrals of substantial bonus amounts for a wide range of employees. All amounts in the plan were fully vested at all times and generally designed to provide for distribution upon separation from service. No employee salary deferrals ever went into the plan. Of course, there was no trust for the plan. After several years in existence, former executive with various axes to grind surfaces and says the Top Hat Plan is not really a Top Hat Plan because it includes non-management and non-HCEs. (Let's assume for this thread that the plan clearly would not qualify as top hat plan and company readily admits this after looking at general guidance.) Former executive threatens to report the company / plan to the regulators if he doesn't get his way on severance and other points. The Plan has had a few participants retire and get benefits under the plan after termination but not a lot. Most of the participants in the plan are still working and have large accrued balances. While there are definitely some non-Top Hat participants in the Plan, there are not a lot of those and their balances relatively small. The company feels it could kick them out and deal with them and their accrued benefits outside the plan easily enough if possible. Does the company have any corrective options? Could it somehow kick out the non-top hat folks and deal with them outside the plan and continue on even though it was presumably operating without complying with all applicable ERISA retirement plan protections in place? Does the employer face potential exposure for the fact it was operating such a plan for years without any general attention to minimum coverage and participation rules--i.e, do non-participants have any potential claim they should have been covered by plan? Thanks

EBECatty, Thanks very much. Those were my thoughts as well when asked off the cuff and trying to dissuade them generally from doing all of this--apparently somebody provided them some "verbiage" that they could include in an EA to make this work. Bizarre but we'll dig into the regs and the old plan if they really are going through with this.

May I add an additional question--I've seen a number of situations where a top exec was to get some significant 457(f) benefit and the provisions for that have been included in an employment agreement. In this current case, one new hire is to get a 457(b) benefit--the tax exempt employer does not currently have an existing 457(b) plan--primarily in order to permit the desired transfer of the new hire's old 457(b) at his former tax exempt employer but to also allow continued 457(b) contributions going forward. Given that the employer will only be offering the 457(b) benefit to the one employee (at least for now), is that something that could be built into the new individual's employment agreement (like they did with another exec's 457(f) arrangement) or should there be a separate 457(b) plan document in place. I would think the later but I thought I'd check here before trying to research at all. Thanks.

Can somebody with non-gov 403(b) transfer experience shed light on what, if any requirements are imposed on the transfer amount in the new employer's 457(b) plan. Do the transferred amounts simply become a separate sub-account or is it ok to combine with new 457(b) amounts? Do the transferred amounts then just become subject to the new plan's distribution rules? Thanks.

I would like to revive this thread to check back for any additional thoughts and also to change / slightly expand the question. This advice has always matched my understanding of the general rules and potential areas of concern but I was curious if anyone was aware of other potential concerns or had other thoughts or suggestions to keep in mind. Also, we are considering accelerated vesting in the case of a sale of a subsidiary / division of a company rather than a RIF situation. We anticipate most employees will be picked up by the buyer--either by law or transfer of employment--although a few may be let go in connection with the transaction. (Unclear whether this will be a stock or an asset deal yet.) The parent 401(k) plan will remain and there will not be a spin-out or transfer of affected participants' accounts under the parent 401(k) plan in connection with the sale apart from participants' ability to roll over their 401(k) accounts once separated. In connection with the sale, parent wants to accelerate vesting and make all of the affected division's participants 100% vested so they forfeit nothing as a result. Parent does not anticipate the transaction resulting in a partial termination if vesting is not accelerated but assumes an added benefit of providing full vesting will be that they avoid having to worry about partial termination issues. Assuming that is all ok generally, here are my additional questions: 1. What if the sub / division has a higher HCE concentration than the controlled group / plan as a whole? Does that potentially give rise to arguments that the amendment here discriminates in favor of HCEs? Does what they've done in other transactions possibly impact that analysis? Who, as a particular matter, investigates this? (We are not talking a huge difference and there has been no effort to game the rules by moving or concentrating HCEs in this sub--just this particular line of business has more HCEs than other divisions within the company. The sale here also is motivated by clear and objective business / economic reasons without any attempt to game the vesting rules. The plan only requires a couple of years for full vesting generally so the acceleration is not all that great in any case.) 2. If they provide full vesting here but then experience other significant departures in connection with other transactions / RIFs in the near future, my understanding is they would still need to count these vested participants as having an involuntary termination and thus counting toward future partial termination counts even though they are 100% vested. Thanks

I think the general correction for maintaining the SIMPLE as an ineligible employer would permit it to be stopped / terminated mid-year under EPCRS. It's been unclear to me that the correction for that would permit an employer to start up a new 401(k) Plan mid-year after terminating an invalid SIMPLE but here where the 401(k) already exists maybe that's not a concern or question. As to the OP's actual question, it is not clear to me that a termination notice is legally required in this instance and the EPCRS / fix-it guide information linked here do not indicate that one is required. That said, why wouldn't the employer provide some sort of notice to the employees that will no longer have amounts contributed to the SIMPLE. And presumably if the 401(k) continues, work to get them to participate in the 401(k)--assuming that's intended / feasible. https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-your-business-sponsors-another-qualified-plan

Can I revive this thread just to ask if anybody has any new or additional war stories, especially around current position on approving VCP submission where all years are not covered? We have client with plan that erroneously applied a 1 month waiting period that was not part of the plan. I think it was really just done out of ignorance and administrative convenience or necessity and not really to deliberately exclude. I mean they could have permissibly done that if they had just designed the plan that way. This has gone on for almost 20 years and there are a lot of employees over that period. The employer is a light manufacturing / warehouse operation and turnover is HIGH. There are a number of people in last couple of years that appear to have only received one or two paychecks. The problem is the employer has no real ability to generate records much beyond the last few years. The don't really want to pay for a full fix either but I'm not sure there is any way they could even if they devoted unlimited resources.

I posted this originally in the plan corrections board but have not received any response there yet so thought I might post here as well. I have a client who started a SIMPLE with less than 100 employees. They have grown over the years and have exceeded the 100-employee threshold for a few years (beyond grace period). I see the IRS permits "correction" of this ineligible employer issue via EPCRS VCP -- https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-you-have-more-than-100-employees-who-earned-5000-or-more-in-compensation-for-the-prior-year by stopping all contributions to the SIMPLE and making the required VCP filing and sinning no more. Question: If we make this correction now per VCP, can the client start a new 401(k) Plan to permit contributions for the remainder of 2021? There does not seem to be any discussion in the EPCRS corrections literature regarding possible establishment of new plan going forward. I'm concerned because of the general prohibition on making contributions under a SIMPLE for a calendar year if it maintains a qualified plan during the same year. For a bit of a wrinkle on this, what if the company is being acquired and buyer sponsors an existing 401(k) Plan and demands the SIMPLE be terminated prior to closing. Can seller's employees participate in buyer's 401(k) post-closing in 2021? Maybe special transition rules would permit this even if the seller couldn't start their own new 401(k) in the same year? Thanks for any thoughts.

I have client who started SIMPLE with less than 100 employees. They have grown over the years and have exceeded the 100-employee threshold for a few years (beyond grace period). I see the IRS permits "correction" of this issue via EPCRS VCP -- https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide-you-have-more-than-100-employees-who-earned-5000-or-more-in-compensation-for-the-prior-year by stopping all contributions to the SIMPLE and making the required VCP filing and sinning no more. Question: If we make this correction now per VCP, can the client start a new 401(k) Plan to permit contributions for the remainder of 2021? There does not seem to be any discussion in the EPCRS corrections literature regarding possible establishment of new plan going forward. For a bit of a wrinkle on this, what if the company is being acquired and buyer sponsors an existing 401(k) Plan and demands the SIMPLE be terminated prior to closing. Can seller's employees participate in buyer's 401(k) post-closing in 2021? Thanks

I'm looking for helpful secondary analysis / discussion of the usual 4204 exceptions for asset sales and how to think about various possibilities in a deal setting but not finding much. Anybody have recommendations? Am I just missing it or does the ERISA Outline Book not address this topic at all? Thanks

Brian, Thanks very much for this. Do you have a sense of the current enforcement posture here? For example, regarding the penalty of "up to $5,000 for each violation," I think we would have a couple of violations but if the company has reversed the action, would CMS likely pursue action? If it did pursue, how does it decide on the amount to assess? (In my experience in other areas, it seems often they may not routinely pursue the maximum penalty but not sure about these issues.) Also, is there any sort of voluntary correction type program where one can "self-correct" or bring to the attention of CMS and expect to come out with a significantly lower penalty. In short, what do employers typically do that know they have a violation--obviously we've stopped it and are attempting to correct mostly but is there any duty / benefit to bringing this to the regulator's attention or should they just go forward and sin no more but realize their is some potential exposure? Many thanks.

Chaz, curious if you ever found a clear answer to this and also wanted to bump up in case there was additional insight or expertise from the Board. We have client that erroneously thought it could kick dependent spouses covered under the large group plan out at age 65 once they qualified for Medicare. Employer did not incent or encourage them to leave--just gave them the boot. Fortunately, this only happened for two people and has only been going on since the end of 2020. Their insurer is going to let them reinstate back to the beginning of the plan year (March 1) so they will correct going forward and presumably be able to cover prior claims going back a couple of months but I'm wondering what if anything else they need to do given the past violations. I assume without doing anything there is a chance CMS could come in and challenge and make the employer pay for any claims Medicare covered since the individuals were kicked off the plan in late 2020. Fortunately, I think those amounts / claims are pretty limited. Is there an affirmative obligation on the part of the employer to report this and/or make some corrected reimbursements? I cannot seem to find much useful guidance. Thanks.

Yes. Thanks. After some considerable back and forth, the plan administrator decided to just do a standard 45 day notice to eliminate risk with use of the 15 day notice. We never did find any guidance specifically on point.

Would appreciate any experience or guidance around the special 15-day 204(h) notice period rather than the usual 45-day notice period when an amendment reducing benefits is adopted in connection with certain qualifying business transactions. The "in connection with" language seems fairly broad and flexible but I cannot find any guidance on how broadly that is to be interpreted or applied. For example, is it possible to freeze a plan using the special 15-day rule before a pending deal is signed up? The deal is proceeding and expected to close soon and will expressly require that the seller freeze and terminate its cash balance plan but if the plan is not frozen using the 15-day rule (and thus in advance of closing) additional benefits will accrue for 2021. Thanks.

Thanks very much for the responses and the thought about possibly getting the advice of an ex agent. That's a great thought and will pursue but welcome any experience or advice from anyone else out there that has been through something similar. It seems one of the big challenges here is that the pending transaction likely means the issue must be dealt with to the satisfaction of the buyer of the company--either with a clear fix or maybe with some broad and long indemnity--which sort of makes some of the usual risk / reward analysis a bit tougher and makes the question of qualifying for excise tax relief cricitical. Wondering if anyone has experience in obtaining excise tax relief in this context or other thoughts? Thanks.