401 Chaos

Just curious if you anyone had further thoughts / experience on this issue. There seem to be a lot of conflicting terms for the corrective match amounts made but the guidance seems clear that the IRS characterizes these as nonelective contributions. Guidance also seems clear that these amounts do not require re-calculation of ACP testing for year at issue. Question, if you generally treat these as a match, I assume that the corrective amounts get factored in for purposes of tracking maximum match for the year of correction? If so but the plan has a nonelective contribution category and the corrective match gets placed in the nonelective contribution category, how do you go about ensuring payroll, etc. accurately tracks maximum match for the year?

This is very helpful but I'm still confused on the proper treatment of the corrective match amounts. I understand 2016-51 and Tripodi to say corrective matches (in a non-safe harbor plan) are characterized by IRS as "nonelective contributions." They seem careful to distinguish this from qualified nonelective contributions or QNECs and thus note that the corrective match can be subject to vesting schedule, etc. However, this also seems to suggest the amount should not be viewed as simply a "corrective match" or added to a Plan's matching contribution account but instead labeled a nonelective contribution. (There appear to be some prior posts that question how this is handled administratively in plans that don't otherwise provide nonelective contributions--that's not my current case but still seems maybe an open question?) These corrective amounts seem to also be called "corrective matching contributions" or "make-up contributions for missed matching contributions," and other similar terms but EPCRS seems clear they should be regarded as "nonelective contributions" for IRS purposes. That characterization seems helpful in that it excludes the corrective amount from ACP testing thus ensuring that the correction does not require the recalculation of prior ACP test that would have normally included the match had it been made correctly. That said, this doesn't seem to be treated as a true nonelective contribution because the calculation of the missed match takes into account caps on matching contributions and factors in other matching contributions during the year. (I understand that because the correction should really be based on whatever match the participant actually missed out on which would factor in the applicable cap on matches.) But here is the confusion / debate. In our current case, there was elective deferral failure in early 2018. The error was corrected very quickly so no QNEC required on missed deferral opportunity but we have to correct missed match. The failure in one case meant employee receiving large bonus during the period of the missed deferral missed out on deferral and match that would go a long way toward maxing out total deferral and match amounts for 2018. At time of missed deferral, there were no other matches so full missed match needs to be counted. Question is what to do about matches for the rest of the year. Does the corrective nonelective contribution get treated as a match for purposes of tracking and capping total allowable match for 2018 (such that participant will not get much more in match for 2018) or is participant able to not count the corrective nonelective contribution. We have conflicting opinions internally. Thanks

I've not yet found guidance that says this expressly but am assuming if you have a plan with a service-based exclusion for seasonal employees (including the 1 year of service fail safe provisions) but let regular employees in after 6 months of service, a seasonal employee who has been working there for 6 or 7 months and is "hired on" or continues as a regular employee rather than leaving at the end of the season would be eligible to come into the plan right away--i.e., that you count all service with the employer even if it is during a period when they are not generally in an eligible class.

FWIW, the 409A prohibition on extensions for NSOs and disqualifying amendment rules for ISOs would seem to me to make this a nonstarter. Seems to me the option has expired / terminated based on the clear terms of the grant notice as described above. From that description, it sounds like there was good reason / clear intent for including the earlier expiration date. I'm guessing the date just snuck up on the optionee? If that is not the case and there is some support or basis for thinking the original terms were intended to have the option expire 12/31 in all cases instead of the earlier date and you can show some clear support (e.g., board resolutions / minutes, etc.), then maybe you have an argument that this was a scriveners' error / typo and the option is still exercisable? That seems a difficult and thus aggressive argument to make though. Was this an ISO such that there would be no taxes triggered on the exercise? If so, hard to replicate that treatment but if this was an NSO (and/or the company wanted to try to provide some similar benefit to the optionee) then maybe you provide them with a restricted stock award now (fully vested) with the right to purchase the same number of shares for a purchase price equal to the option exercise price through December 31st. That should put the optionee in the same general position as exercising an NSO. Company could grant the optionee more shares and/or lower the purchase price and/or provide a bonus, etc. to the optionee to help offset immediate taxes if it was an ISO and company feels responsible or sympathetic, etc.. (Without knowing the facts though seems the onus should be on the optionee to know the terms of the award and its expiration date.)

ETA, Thanks very much. This is very helpful. Are you aware of any EPCRS examples that show a correction assuming the deferral limit is the combined regular plus catch-up amount to provide the plan some documentation of the fix?

I fear that I may be overthinking this issue but have not found this expressly discussed on the boards here and would appreciate some guidance from the experts. Plan discovered that a few participants who had made elective deferrals for the year (including some that had also elected to make catch-up contributions given that their regular elective deferral elections would max out) were not implemented for the plan year. The participants have now missed several months of deferrals and the employer plans to correct under EPCRS by making QNECs for missed elective deferrals and matching contributions and earnings per Revenue Procedure 2016-51. Question is whether the missed catch-up contributions can also get corrected / included in the QNEC calculations. (Here, there is no doubt that the individuals would have qualified for the catch-ups had their deferral elections been properly implemented yet, in actuality, they will now end up with actual elective deferrals not reaching the max for the year.) I see that the EPCRS has a separate section / correction protocol for missed catch-ups under Appendix A .05(4); however, it appears to be limited to employees excluded from "catch-up contributions only." The example provided shows that a participant was permitted to make their maximum regular elective deferral but simply denied the ability to make a catch-up contribution. Unfortunately, I do not see anywhere else in Rev. Proc. 2016-51 where somebody that was eligible for making maximum regular elective deferrals plus maximum catch-up contributions for the year gets corrected by having a QNEC made on the catch-up portion as well as the regular elective deferral amount. Perhaps the potential for covering the missed catch-up is generally assumed but the narrow phrasing of the .05(4) section and careful limiting of the QNEC correction there to catch-up only mistakes leaves me thinking otherwise. Also, when looking at the IRS presentation on Correction Methods for 401(k) Failures linked below (from 2012), page 28 notes: "If an employee has been excluded from making any deferrals then ordinarily no additional correction with respect to catch-up contributions is required because the deemed elective deferral is below the threshold for being eligible to make a catch-up contribution." Just wondering if that should be read to basically mean you never make a QNEC correction for missed catch-up amounts unless they are the only missed deferral amounts? (I'm all for eliminating windfalls for participants for inadvertent errors but that seems a bit much where you know somebody was on track to max out both regular and catch-up contributions.) Thanks for any guidance you might provide. www.irs.gov/file_source/pub/irs-tege/epcrs_401k_phoneforum_presentation.pdf

Not really a 409A question per se but was not sure where else to post. Have a client that is interested in providing an executive with an old-fashioned walk-away right upon a change in control. They might approach that as a very broad / watered-down "Good Reason" trigger but I think the current desire is to just give the executive a straight unilateral choice of quitting and getting existing severance benefit if he quits within two months of a change in control. Obviously that wouldn't fit within a good "good reason" definition and so wouldn't seem to qualify for an involuntary separation exemption from 409A but I think they are willing to provide for a lump sum payment within 2 1/2 months of the CIC so arguably we could exempt it from 409A (or arrange for it to comply with 409A schedule if exercised). I see these so rarely these days though that I'm questioning other aspects here. For example, is there any constructive receipt concern if the executive elects not to leave following a CIC--e.g., that the IRS could argue that he should be deemed in receipt of the severance amount because he could have elected to receive it. (We would draft so that the right vests upon a CIC but would be forfeited if he didn't exercise and separate from service within 2 months.) I don't recall constructive receipt issues being a real concern when these provisions used to be more common but wanted to check. Also, along the same lines, I'm assuming this would operate the same way for 409A purposes as an executive having a valid good reason trigger or right and not exercising it--i.e., 409A doesn't seem to have a problem if a service provided passes up a good reason right. On a related note, how does 280G generally deal with these sorts of provisions, particularly in a private company cleansing votes? Presumably the benefit would need to be factored into the potential parachute payments subject to shareholder approval since it could be exercised simply upon the CIC? Any thoughts would be appreciated. Thanks

Thanks. Again, I don't disagree that an amendment may be the most "appropriate" approach or that the guidance does not say an amendment is not required but if the IRS really expects all plans that take advantage of this expanded relief to have formal plan amendments the announcement should have made clear that all plans desiring to take advantage of the expanded relief are required to adopt conforming amendments. I don't think it does that Specifically, the Announcement provides that "To make a loan or hardship distribution pursuant to the relief provided in this announcement, a qualified employer plan that does not provide for them must be amended to provide for loans or hardship distributions no later than the end of the first plan year beginning after December 31, 2017." Since no plan can have previously been drafted to provide for hardship distributions in accordance with 2017-11, why wouldn't the announcement have omitted the "that does not provide for them" phrase if the IRS's intent was for all plans taking advantage of the relief to adopt amendments? Doubt we will resolve this here of course. Just looking at the current weather forecast, I'd also suggest that it might be more efficient for all involved if the IRS could come up with some form of blanket relief in these cases rather than going storm by storm.

Got it. Thanks.

Thanks much MoJo. I dont disagree that a plan amendment is the preferred way to address but I've been asked by a client specifically whether a plan amendment is legally required or if they cannot simply adjust their administrative procedures as needed to track the relief provided. Apart from some particular sensitivities around having to get their Board to adopt such an amendment (which is an unusually big deal for them due to some corporate structure idiosyncrasies), they are also suspect of having to pay us to assist with that. Of course, just doing the amendment may be cheaper than going back and forth over whether it is absolutely required. . . .

Thanks very much to all. Even though the existing agreement was imprecise about timing of delivery of the release, etc., seems like we are fine here given the time of year and the company's immediate delivery of the release and deadline for executing since there is no way the period to consider the release could stretch into 2018. Also, all of the amounts to be paid in 2017 will qualify for separation pay plan exemption so that seems to further bolster any lack of a problem here. Jpod: Thanks for your comments. Just to be sure I am following, our you saying even if there were a violation of the release timing requirements (say if the period did span two years and was not exempt and we were too late to amend) that the violation would never result in excise taxes? Thanks

Interested in thoughts on the following as there seems to be some difference of opinion in the benefits community regarding when plan amendments are required to take advantage of the expanded relief offered under IRS Announcement 2017-11. If you have a 401(k) Plan that currently permits safe harbor hardship distributions along with the regular 6-month suspension of elective deferrals following a hardship distribution and the plan wants to permit broader hardship distributions per 2017-11 (including distributions for non-safe harbor purposes, for affected relatives of a plan participant, and also to waive the 6-month suspension), is the plan required to adopt conforming amendments or can it instead simply modify its usual procedures for those cases falling within the 2017-11 parameters? My general interpretation of 2017-11 is that it only requires plan amendments if a plan does not currently permit loans or hardships and desires to make these per 2017-11. However, if the plan already permits these, it seems to me a formal amendment is not required provided the plan sponsor complies with 2017-11. (Seems to me if the IRS's intent was to require conforming amendments in all cases, it would say that in 2017-11 rather than simply noting that amendments are required if the plan does not otherwise permit loans or hardships.) Others, however, think a plan must be amended to specifically track 2017-11 (e.g., to permit waiver of the 6-month delay requirement if the plan desires to waive that in connection with 2017-11). Thoughts?

I have a situation involving a 2005 employment agreement that makes severance payments (to be paid in installments over 18 months) contingent upon a release of claims being signed no later than 45 days following delivery of the required release by the Company but without any other of the necessary release timing provisions in 2010-6 / 2010-80. (A copy of the form of release required was provided as an exhibit to the employment agreement so I think an argument could be made that the executive was generally provided the required release as of termination; however, that form was not personalized.) The individual has already been terminated so we do not appear to have the ability to correct the provisions without penalty per 2010-6. A large portion of the severance (but not all) is exempt from Section 409A. If we cannot find a basis for claiming the release timing provisions satisfactory and must pay an excise tax, can we exclude the severance amount exempt from 409A from the excise tax calculations or is there any concern that the entire severance benefits may potentially be subject to the excise taxes since the entire employment agreement / severance payments are not exempt. Thanks

Thanks for everyone's comments on this. Just as a bit of an update, after discussing further with the PEO involved, their counsel indicated that under one of their 401(k) documents the CO's termination of participation in the PEO Plan immediately prior to the transaction might be treated as the target's termination of a 401(k) plan and thus a distributable event much like we would expect in a stock sale involving a non-PEO target terminating a single-employer plan. (This suggestion that the answer may depend on the terms of the PEO plan used seems consistent with some other benefitslink posts on this topic.) For better or worse, the target in our case was apparently not on the form of the PEO's plan that considers a participating employer's termination of participation in the PEO plan to essentially be tantamount to a plan termination. As a result, I think we are clearly headed for a plan-to-plan transfer. A couple of things struck me about that: (1) why would a PEO not have such provisions in all of their 401(k) Plans such that the consequences of a client's termination of participation in the 401(k) depends on which form of plan they signed up under and (2) does it really make sense that the outcome here and the ability to treat a client's termination of participation as a plan termination turns on the express plan provisions? I may be reading too much into this but I get the sense that the PEO, etc. agrees that classification of a participating employer's termination in a PEO's multiple employer plan is a bit of a gray area and so decided to try and address by working in some deemed termination provision in a plan document they received a favorable determination letter for. I get the dance plan sponsors sometimes do in situations like this but I'm not sure that prevents this from still being a gray area. I always feel like these PEO plans involve situations where the industry / practice has gotten out ahead of the law to some degree. Question for TPAJake and others that have done plan-to-plan transfers in these situations: I assume you are generally required to transfer all plan accounts tied to the CO from the PEO plan to the other plan, including accounts for participants who have long ago terminated employment with the PO but elected to keep their accounts in the PEO 401(k) Plan? Unfortunately, we have a very large number of termed participants in this case so are looking at potentially having to put a large number of individuals into the buyer's plan that never worked for the buyer unless there is some way to leave them at the PEO Plan or force them out.

Thanks very much for the replies. This is very helpful and seems consistent with what I've generally understood--i.e., that in most of these cases the target's portion of the PEO plan needs to be spun off and merged. I'm confused about why the PEO seems to be suggesting that they permit distributions here. A couple of questions: 1. ETA, your note regarding the 12-month period seems to suggest this operates differently from how we would anticipate in a non-PEO merger situation. For example, if we had regular, non-PEO target company that took action to terminate its 401(k) plan immediately prior to closing, we would anticipate the target having the ability to make distributions to participants and participants being able to roll over their distributions into Buyer's plan and target participating in Buyer's plan after the transaction since it is part of Buyer post-closing. Does this work differently when there is a spinoff and immediate termination of the spun-off target plan prior to closing because of the PEO involvement? 2. If there is this 12-month requirement in the PEO situation, seems like it is probably very rare that there would ever be distributions from the target's portion of a PEO plan? 3. I'm assuming the PEOs are generally of very little or no help with the spin-off and termination process in most cases? Thanks

Have looked on the M&A forum but did not find much on PEOs there. Know there has been a good bit of discussion on exiting PEOs in this forum in the past but haven't seen much recent or much addressing situation involving departure from a PEO plan due to corporate acquisition and am wondering what others are seeing as the most typical scenario of dealing with departures from a PEO. Situation is this. Small company grew to mid-size company. Has used one of the leading national PEO groups for many years for payroll, welfare benefits and as participant in the PEO's 401(k) Plan. Company is being acquired in a stock deal by large conglomerate with its own 401(k) plan. Company will become a wholly owned subsidiary of conglomerate and participating employer in the conglomerate's 401(k) plan (and other benefit plans) so is terminating its contract with PEO and seeking to leave 401(k) Plan. Employees will continue on doing same jobs with company as before but will just become part of the conglomerate's controlled group and will sever co-employment or whatever relationship they had with PEO. PEO group has been inconsistent in advising on the options for addressing participants' accounts in the PEO 401(k) Plan. At first said they would need to basically spin off or do plan to plan transfer to conglomerate's 401(k) plan. Now are saying they can make distributions to participants and participants can roll over. Conglomerate would generally prefer the later but mainly wants to do what is right with respect to potential distributable event and successor plan rules, etc. We are still waiting to see plan provisions for PEO plan on the distribution terms there, etc. I am curious though why the internal confusion at the PEO and also curious what others are seeing done in these situations which seem to be increasing with proliferation of PEOs. I understand lack of regulatory guidance here makes some of this difficult but given the number of companies using PEOs these days it seems these are issues that should have pretty basic industry-standard options / approaches even if there is some gray area there. PEO though seems to be looking to conglomerate for advice on how to handle which seems very backwards to me. Appreciate any thoughts or insight from recent experience.

HR for Me, Thanks very much for your helpful response. Glad to know I do not appear to have missed any obvious legal mandate.

If an individual has exhausted FMLA leave but remains out on an unpaid leave of absence as a reasonable accommodation under the ADA, is the individual legally entitled to continued coverage under the employer's group health plan? I know that under the FMLA an employee is entitled to continued group health plan coverage for the FMLA period under the FMLA / COBRA rules. I have not found clear guidance, however, whether a similar legal requirement exists for those out on leave as a reasonable accommodation under the ADA. I see discussions suggesting that once FMLA has been exhausted, the right to guaranteed or protected health coverage generally ends suggesting that ADA leave is not necessarily protected. There are, however, other references to EEOC guidance that say health coverage should continue to be provided during ADA leave if the employer normally provides continued health coverage in other similar leave situations. In this case the employer does not have other similar leaves or generally provide continued health plan coverage but it's unclear to me whether the EEOC thinks the ADA requires continued plan coverage or not. I understand that group health plans might provide for continued coverage for individuals out on ADA leave or on STD or LTD following exhaustion of FMLA but our question is whether there is a strict legal obligation / requirement for providing such coverage beyond the FMLA (rather than merely whether an employer might negotiate and arrange for such continued coverage as a policy matter).

Mike, Many thanks. In your experience, is that the most common way of handling these issues? In this particular case, I think there is probably some reluctance / inability in getting a specific amendment timely approved by the buyer's Board (i.e., they did the deal and are trying to close today without thinking about the 401(k) plan issues or involving benefits counsel on the front end).

Buyer in an asset deal has agreed to credit prior service with target for various benefit plan purposes including general eligibility / vesting requirements for the 401(k) Plan. The Buyer's 401(k) Plan does not have a minimum service requirement per se (new employees are eligible right away); however, the Buyer's 401(k) does generally limit entry into the plan to the first day of the month following commencement of employment. How should a plan address this issue when crediting prior service with an acquired company. Administratively, the buyer would prefer to have the acquired / transferred employees just start in the 401(k) as of the first of the following month but transferring employees want to come in immediately upon commencing employment arguing that with credit for prior service their "first day of the month" should be construed as having already been satisfied.

Anyone gone through an IRS audit around PCORI fees? If so, any idea what sparked it and how broad of a review of other issues the IRS generally covers with these?

Are there legal reasons why a Buyer may request a Seller to transfer its health and welfare benefit plans immediately prior to a stock deal? (Similar to typical provisions in stock purchase agreements where buyers may request a seller to terminate their 401(k) plans just before closing because of the 401(k) plan rules?) That is a new twist on me but I can imagine there might be particular types of health and welfare plan offerings (e.g., some HDHP, HSA arrangements, etc.) that could potentially cause conflicts or issues for Buyer's general plans if the Buyer has those within its controlled group for a particular plan year (even if momentarily and the Buyer otherwise intends to terminate those plans). If that is the case, can anyone provide a brief explanation of the issues and types of plans impacted? Thanks

Rocknrolls, Thanks for your post. I am with you on the HCI test under 105. Regarding your last sentence, I read that to suggest that if the company had arranged to have the coverage paid for by the HCIs with after-tax amounts (rather than say imputing the value of that coverage into the HCIs' income) that we think there is an argument for avoiding the 105(h) discrimination issue. I'm assuming, however, that you are not necessarily saying you've seen support where having the HCIs pay for the amounts on an after-tax basis several years after the close of a particular plan year helps solve the problem (i.e., I think we are in agreement that there may be a way to avoid creating these issues going forward but not necessarily a way to fix prior violations)?

Bill, Many thanks. I understand your point. Just to be sure we're on the same page though, as I understand the definition of "Highly Compensated Individuals" for 105(h) purposes, especially the top 25% of employees based on compensation category, the rules are not all that clear but do not seem to suggest a look back year and I think arguably could be read to apply generally at any point in time during the plan year such that a newly hired / entering employee that was clearly within the top 25% of pay at entry may need to be counted as an HCI right away. Does that make sense or are you thinking of another way to possibly exclude from the HCI category. Similarly, inclusion of top 5 officers (rather than top 25%) seems even clearer that may should be assessed / applied immediately upon entry. I have not found any direct discussion of the specific imputation issue but the EBIA manuals and other sources seem to generally suggest that the nondiscrimination tests cannot be satisfied by correction made after the plan year has ended in encouraging frequent testing and possible adjustments throughout the year. I suppose they may typically be thinking of other types of corrections / adjustments to benefits than going back and imputing income to HCIs, i'm concerned that those sorts of "corrections" might be prohibited as well. Code Section 105(h)(1) indicates that a self-insured plan must satisfy the tests for "the plan year" suggesting that the plan should pass the tests at all times during the plan year. I think that is how they get to the general thought that corrections after the plan year are not possible. I think that could probably rule out any effort to retroactively impute amounts into income as a fix. Although I suppose if the employer were willing to make an employee whole on that and/or the amounts were relatively small it might be worth trying as a fix anyway.

Thanks. It does seem relying on a potential technical exemption there would basically swallow the rule in nearly all cases--i.e., you are mostly only going to have a waiting period applicable to new hires.