401 Chaos

Yes indeed, stuff like that.

Can I vary the facts a bit to see what this group says about this situation. Small (under 15) mom and pop company with fully-insured group health plan and a POP to cover employee's share of health and dental pre-tax. The Mom and Pop are both HCEs but everyone else is an NHCE. The cafeteria plan is amended to exclude participation by HCEs. Company pays 100% of HCEs premiums outside of the cafeteria plan and does not count the amount as income to the HCEs. The company pays 70% of everyone else's premiums. (That satisfies the state employer contribution requirement.) Is there any discrimination issue under the cafeteria plan with the company paying different percentages of different employees' costs (e.g., 100% for HCEs and 70% for NHCEs) when the HCEs are excluded from the cafeteria plan altogether? Thanks

Thanks, Luke. It is comforting to hear that I'm not completely off-track although I'm always uneasy when things are arguably discriminatory on their face. I feel sure similar things happen a lot though without much clear guidance. Guess I can understand folks reluctance to endorse or bless these sorts of arrangements but it would be nice to see more discussion of how varying the employer's share (but not the underlying benefits or eligibility) plays out in different situations.

Probably not a material concern but one thing to factor in if this is just a desire to terminate and pay out the amounts in the normal course rather than in connection with a dissolution of the company or some other significant corporate event (e.g., Austin's scenario A vs. scenario B) is the decision to terminate this 457(f) plan arguably could impact the entity's ability to safely maintain future 457(f) plans. A lot of the SRF issues with 457(f) plans historically seem to include IRS skepticism that tax-exempt really would subject amounts to forfeiture if the vesting requirements aren't fully satisfied. I can see that if the entity has a history of still paying out 457(f) amounts as severance or in some other fashion even though participants failed to satisfy vesting. That sort of skepticism seems out of place though if the organization is shutting down. On the other hand, if the entity just decides to terminate and accelerate vesting without some transformative reason (perhaps under the guidance of the executive who participates in the 457), I'd be concerned the IRS could question the SRF in future plans. Seems like a stretch (particularly if just happens once) and I've never seen it come up but the IRS doesn't need much encouragement to look askance at these arrangements. If there are independent business reasons for the termination, I'd certainly be sure to set them out in the board action.

This is one of those issues that comes up periodically and I never think I have a full grasp on it--likely because I don't but also in part because I've never found what I thought to be a clear, authoritative, and fulsome discussion of the issues. Can you help? Situation this time involves a true Mom and Pop employer with husband and wife owners (both highly compensated) and a handful of other employees--3 or 4 full-time working more than 30 hours a week and a couple part-time working 15-20 hours per week. The company offers a fully-insured group health plan for full-time employees. Of those, only the owners and a couple of the full-time employees have elected to participate. The company has always "covered" 100% of the owners' group health premiums but historically only 60% of the others' premiums with the employees required to contribute the remaining 40%. Mom and Pop seem confused about the existence of an actual cafeteria plan but it appears they have been deducting the 40% of employees' premiums from pay on a pre-tax basis so seems they likely have a POP whether they realize or not. (Our understanding is the company has just paid 100% of the total premiums over to the insurer, including 100% of the premiums on behalf of the owners, plus the combined 60/40 contributions for employees without considering the premiums paid on behalf of the owners to be salary to them or a deferral from their pay in some way. In other words, it's just been employer-paid fully insured group health insurance coverage. As I understand the current rules, it does not seem like there is a per se problem with charging varying rates for the fully insured coverage from a group health insurance, HIPAA, ERISA, or other perspective. (The 60% contribution satisfies the 50% minimum employer contribution amount required by the insurer / underwriting so insurer is fine with arrangement.) Cafeteria Plan discrimination testing would appear to be a potential issue here, however. Even though they presumably only have a POP, my understanding is POPs are still subject to Section 125's "Eligibility Test" as part of the streamlined safe harbor testing. And based on some less than clear 125 examples and discussion in EBIA, the Eligibility Test arguably includes something of a "benefits" component that could be construed to prohibit an employer paying a greater percentage of benefits for HCs than NHCs. So that's potentially an issue here. However, in this situation, the HCs are not actually participating in the Section 125 plan--because the company is paying their full cost and they have no need of the 125 Plan. In essence, the NHCs are arguably getting more benefit from the Section 125 plan than the HCs because the NHCs are actually getting a benefit. I'm not wild about that argument for obvious reasons. However, what if we took this one step further and actually amended the Section 125 Plan to exclude all HCs from participation. There's no practical impact on the owners (the only HCs now and likely forever) because they are not participating in the Section 125 Plan. Under that approach, it seems impossible for the Section 125 plan to have a discrimination issue since no HCs could participate? But it also seems the company should still be able to pay 100% of the owners' premiums for the fully insured health coverage and not treat that as taxable compensation. I understand that could all change if and when the new Section 105(h) rules are extended to fully-insured group health coverage but, in the interim, are there nondiscrimination or tax issues with this sort of approach to having the company pay 100% of HCs' premiums and a significantly lower percentage of NHCs' premiums? Thank you.

Thanks, Luke. That is what I was generally thinking as well but the plan's recordkeeper and advisor seem at a loss and resisting the notion of issuing any W-2. I don't see how that isn't the case though. As you note, the employer is returning wages to the [former] employee so seems like that should be reported. Is anyone aware of any EPCRS guidance / examples that discuss this that I could show to back this up? I've not found anything expressly discussing the W-2 requirement. Surely this is not all that uncommon of an issue? Thanks.

So, basic story is plan permitted deferrals from some types of bonuses but not others. Due to admin / payroll error, all bonuses were considered eligible comp and some deferrals were made from ineligible bonuses. The amounts were not great and the company caught after a couple of years but a few of the participants have since terminated and taken distributions. The distributions included the erroneous deferrals tied to the ineligible bonus amounts (that would have been treated as regular wages had the plan been properly administered) plus corresponding matching contributions and earnings. Some of the terminated participants rolled the amounts over to IRAs or other plans and some just took a taxable distribution when they left. Employer is self-correcting and wrote letter informing former participants of the errors, that the excess amount distributed was not eligible for rollover etc., and asked the former participants to return the full excess amount to the plan. Interestingly, one former participant who rolled to an IRA has indicated he is wiling to return but asking about process. I'm trying to understand how the deferral portion of the excess amount gets handled here? The deferral portion should have been taxable wages subject to withholding generally. Here, the plan will presumably get the full amount back and will put the match amounts back in a suspense account but how does it get the deferral portion to the participant. Will the IRA return and issue a 1099-R noting distributions per EPCRS (Code E)? If the 1099-R is issued, it seems that just reflects the removal of the amounts from the IRA. How should the employer return the erroneous deferral amounts to the former employee--report on a 1099-R, a 1099, a corrected W-2 for the year deferred? As a twist, how would this get handled for somebody that had received a taxable distribution and returned the amount? Can they just get the matching contributions and earnings back and let the deferrals go then since they were already taxed? Am I making this more complicated than it is? The guidance I've seen just seems potentially incomplete with respect to addressing all the possible tax issues. Thanks.

If it's the practice that is imposing the 30-hour requirement, they might also consider scaling that back for everybody and say setting it at say 20 hours? Obviously I don't know your particular facts and number of part-time employees but we had a similar case and were able to convince the practice that expanding coverage for all wasn't likely to increase costs significantly and avoided some expense and questionable creative classifcations while giving them ability to play up more generous HR policy.

Based on some prior (but pretty dated) posts here and other items, it seems separate Form W-2 reporting of regular, after-tax 401(k) contributions (i.e., non-Roth contributions) is more of an optional than a mandatory item that may be reported in Box 14 of Form W-2? Does that seem a fair statement? The employer will include the after-tax amounts as part of wages subject to tax and withholding getting reported but the question is do they also need to separately break out and report the after-tax 401(k) amounts elsewhere on the W-2? They prefer not to do so which I suppose is understandable from an administrative perspective although I can see some benefit to including this information for transparency and confirmatory purposes. (Seems like that may also prove useful if questions ever arise as to what a participant's basis is in the after-tax account under the plan (e.g., if the record keeper loses track of that information going forward)). Thanks.

Thanks. So here the participant requested the correction be made in the second plan (is leaving account in the former employer's plan as-is). While this was caught relatively quickly in that it was caught in the same plan year, there are still 2 to 2 1/2 months of excess deferrals in the account (really almost all of the account is over) so it's not like they just messed up on the last payroll run and are adjusting, etc.

Thanks. I was surprised too. They say this way the W-2 will be correct, etc. and won't have to worry with additional reporting. Huh? These guys are a LARGE rk and made me feel like I'd missed the boat to be questioning any of this.

I feel like I must be overlooking a prior discussion around this topic but was not able to locate one in my search. Plan has highly comped individual that switched jobs earlier this year. He made significant 401(k) elective deferrals at last job before coming to new job. He enrolled in new plan and has been deferring to new plan for several months now. Last week, he realized he is well over the elective deferral limit for 2018 and is seeking correction from the plan. Since this has been discovered in 2018, the record keeper is proposing to correct through negative contributions within the next payroll runs. Sounds like that is fairly routine (been awhile since I've had one discovered in the same year as the deferral) but am curious as to what sort of paperwork / documentation all this generates. Also, still trying to get our arms around potential earnings in the account but assume if he has earnings on the excess that will have to come out too? How does that happen with negative contributions?

Perhaps. There were a number of veterans of the big public company so they admittedly had a bias I think. While the independent fiduciary would help insulate them a bit, I think you still have the concern that the stock / investment option may be an expected investment for participants though (not saying they would have ever looked at that but I worry about the perception) and also the possibility of sending a negative message with its removal. I guess my broader thought too probably colors this and I tend to believe if anybody is making an election to invest in individual stocks, they should have the means to do so with amounts other than 401(k) amounts and they could make that investment directly outside the plan. That may be a jaded or inappropriate perspective in some ways but I have a difficult time getting past it.

Not exactly a spin-off but somewhat similar situation where private company retailer of a national brand wanted to include the publicly traded stock of the national brand as separate investment option in the plan. Ultimately, we convinced them to drop it. I understood the desire to include and the affinity for the brand and seeming loyalty and esprit d' corps of including but, to quote others above, it just seems like a really bad idea for a variety of reasons. At the very least, I believe there is a duty to monitor and make fiduciary decisions with respect to whether that stock remains an appropriate stock to have in the plan. Perhaps there is an argument that may mean never concluding they need to remove the stock--after all there is a ton of information available around the investment option and plenty of alternatives available--but that seems like a very risky and losing argument to me. If you assume that are situations where you may conclude you have to remove the stock, I think that just sets the fiduciaries up for potentially having to remove the stock, including potentially at a time when the company is hitting hard times or embroiled in negative issues, etc. Not exactly as bad as with employer securities I suppose but it puts the fiduciaries in bad position of arguably turning on their loyal brethren and very reason for being at the worst possible time. It also may raise other questions or concerns--i.e., the most know something either about the public company or the employer or both and where things are headed, etc. I'm not sure why somebody would subject themselves to those issues when there is little to be gained. Beyond that, I think it also creates the potential for other employment law type questions or concerns--i.e., do participants feel compelled to invest in the stock because it is offered; are they concerned management will know who invests in and thus "supports" the company? We suggested to the sponsor that if they really wanted to permit investment in that stock they could add a brokerage window. They said they didn't want to do that because it was too risky. While I get where they were coming from with that, it doesn't really square with offering a single stock.

Thanks very much. Yes, we routinely see plans with that same sort of language and plans that take advantage of that to sort of "drag out" use of the forfeitures to late the following year. Just trying to understand what "appropriate situations" means in the IRS guidance here and whether anybody has ever had the IRS raise questions or concerns with the delay. While I realize #3 is intended as an exception where forfeitures are used to reduce contributions or expenses rather than re-allocated, I find it difficult to square items 1 and 2 in the guidance with item 3 and it's similar directive to use forfeitures promptly in the year they occur. Given the prevalence of using forfeitures to offset contributions or expenses, it seems this is sort of the exception that swallows the rule. That said, I don't recall ever hearing or seeing the IRS take action. Curious if anyone has had a different experience. Thanks.

Would welcome thoughts on this: Large 401(k) Plan with significant assets and forfeitures throughout the year has elected to use forfeitures to reduce employer matching contributions and expenses. Although significant, all the forfeitures can generally be exhausted by covering employer matching contributions except for late in the year forfeitures that administratively aren't fully captured until early in the following year. Plan uses Relius volume submitter form which provides that all forfeitures should be allocated no later than the end of the plan year following the year in which forfeitures occur. I'm looking at the ERISA Outline Book and it's references to the Spring 2010 edition of the IRS's Retirement News for Employers. In that, the IRS says the following: 1. No forfeitures in a suspense account should remain unallocated beyond the end of the plan year in which they occurred. 2. No forfeitures should be carried into a subsequent plan year. 3. For those plans that use forfeitures to reduce plan expenses or employer contributions, there should be plan language and administrative procedures to ensure that current year forfeitures will be used up promptly in the year in which they occurred or in appropriate situations no later than the immediately succeeding plan year. So, I generally interpret that to mean you need to use up the forfeitures quickly and apply them to the extent you can by the end of the plan year in which they occur; however, if the plan docs say it is ok, it is generally permissible for some amount of forfeitures to spill over to the next plan year where not administratively feasible to allocate and use to offset matches 100% by end of the plan year in which they occurred (e.g., forfeitures happening in November or December). Does that seem generally acceptable / correct? Plan sponsor is asking if it can break with prior tradition and not use any of the 2018 forfeitures to cover matches and expenses in November and December and instead carry full amount (so 11 months of forfeitures) over to 2019 then use in Q1 or Q2 in 2019. I think some plans do that routinely and not sure the IRS would have huge issue but it seems counter to the general guidance here. Am I off base? (Assume that the lagging forfeitures from late 2017 carried over into 2018 were applied to expenses so have been used.) Thanks

Thanks. I'm not sure if the fact they aren't ruling is good or bad--while that doesn't permit receiving a definite ruling, I suppose it also means we could reasonably tell whomever that we are unable to get a ruling on the issue from the IRS and so save the time and expense (and potential adverse outcome) associated with a request. I guess as a practical matter I wonder how much risk there is of a governmental Board maintaining its own 401(k) plan on the extended grandfather position. The record keeper asking for support doesn't seem too concerned so long as they have some reasoned basis from the group or its outside counsel that they can put in their file as supporting the Board's ability to sponsor....

Carol, Thanks very much. That is a helpful distinction to know. It would seem unfair to me to swoop these plans up in the state / governmental classification then expressly deny them broad grandfathering protection. Do you know if the IRS would provide a ruling on whether a board or agency is covered by prior grandfathering in a case like this? (My loose understanding is the IRS stopped ruling on governmental agency / instrumentality determinations with the release of the proposed regulations but maybe the grandfathering issue is slightly different--although it seems to necessarily pull in the agency / instrumentality question.) I'm not sure the Board would necessarily want to go to the time and expense of seeking a ruling but think it would be helpful to know whether that is even possible. Part of our problem, especially given the vagaries you note, is that we have record keepers and providers who rightfully need clarification but there doesn't seem to be anybody in a clear position to rule on this issue.

Thanks. In this particular case, the authorizing statute is silent on the ability to establish a retirement plan--doesn't say they can or they cannot. Other similarly situated boards with similarly silent authorizing statutes have established 401(k) plans as well. Our client is reluctant to press them on what their advisors have told them (if anything) in connection with establishing those as they don't want to open up can of worms although that may be most helpful or illuminating. In our case, the plan has already been created so the audit thing is not really a driver at this stage. Nobody from the state has undertaken an audit or suggested that is required apart from what might be required if it were to have over 100 participants. I agree what our particular state says or does with respect to this particular entity and others like it may be pretty determinative but would still be interested in knowing if other states' boards typically are treated as governmental or not for such purposes if others have experience with this just to have that perspective. Thanks.

Thanks. In this particular case, the establishment of their 401(k) plan is pretty recent and so does not qualify for grandfathering. Our state has a grandfathered 401(k) plan (which the Board has been told it is not eligible to participate in) and a few of the other similar occupational licensing boards do have grandfathered 401(k) plans. There are other boards though that have set up 401(k)s well after grandfathering expired. None, however, seem to have a clear basis for having done so--at least as best we can tell without digging in so much that it may cause problems for other plans. The new record keeper says they basically just need a letter or other support documenting that the client has investigated and determined it qualifies. While we can somewhat selectively go through the list of relevant factors based on prior guidance and make a reasoned argument for their eligibility, I'm not sure the greater weight really supports that. Not sure how likely it is that the IRS would challenge this but . . . . Am just thinking similar boards must exist in many states.

I am curious how others generally regard state occupational licensing boards. In our state, we have several such boards that are creatures of statute--basically established and set up by specific state law without any other official organizing or corporate documents (i.e., they do not have any articles of incorporation or other formal tax-exempt or non-profit status). Most of the time, they are operated by an appointed Board (appointed by a mix of state legislators and the governor) but the appointed Board and entity really act fairly autonomously on day-to-day operations. While their budget / funds are sort of run through the state, they are all derived by (and thus limited by) the fees raised from the licensed profession / group. Current client has previously-established 401(k) plan but is moving to a new record keeper who is questioning whether the entity is eligible to establish a 401(k) plan as they are arguably an agency or instrumentality of state government. On the other hand, we are aware of other similarly-situated licensing Boards with 401(k) plans who, like our client, apparently were able to set up 401(k) plans without anybody questioning. It's unclear whether others believe they had some basis for claiming they were not an agency or instrumentality. While there are a few items that may weigh in favor of non-agency or non-instrumentality status, taken as a whole the facts and circumstances would seem to point toward such boards being barred from sponsoring 401(k) plans. How are such boards generally classified / addressed in various states. If the Board cannot establish a 401(k) and also seemingly cannot qualify for a 403(b) plan and has been told it is ineligible to participate in the state's grandfathered 401(k) plan, is there some other cash or deferred arrangement typically available?

JCJD Curious what you concluded on this issue as well as your or others' thoughts with respect to the interplay with COBRA rules. We have case where ineligible individual was erroneously offered group health plan coverage. Mistake discovered after about 6 months of ineligible coverage. No indication of fraud by individual other than arguably should have known his status had not changed from prior exclusion from plan. Seems we cannot rescind or retroactively terminate prior coverage but can terminate prospectively. Assume doing that would not permit individual to elect COBRA since he was never technically eligible for coverage in first place so fine to provide notice of unavailability as part of prospective termination of coverage?

Thanks, Tom. I thought the Appendix B terms made the answer pretty clear but have been struggling to convince a colleague differently given the nonelective contribution language.

Just wanted to bump this up in hopes there is an easy answer to my long post. Main question is whether the corrective match / nonelective contributions count as matching contributions for purposes of maximum match amounts for a particular year. In this case, error and correction are all in 2018 so we are trying to determine what to do with remaining matching contributions. Thanks

Just wanted to bump this up in hopes someone may have a thought on what I assume is a fairly common correction issue. Main question really is whether the corrective "nonelective contributions" count toward match for a given year. It seems to me they should but the characterization as "nonelective contributions" seems to throw things administratively. Thanks.