401 Chaos

I think I have a similar situation and would welcome any thoughts. Parent corporation with a safe harbor 401(k) plan acquired another company in a stock deal earlier this year. The acquired company remains a separate, wholly owned subsidiary of parent and sponsors a safe harbor 401(k) plan. Companies plan to move the subsidiary employees over to parent company and parent company payroll effective July 1, 2016. (The transfer cannot be done 1/1/16 for a variety of reasons.) At the point the employees move over to parent, the subsidiary will be defunct and will likely be merged into the Parent but could remain as a shell if that would be helpful. In any event, the sub will no longer have employees participating in the safe harbor 401(k) and all the former employees will become employees of Parent and begin participating in parent's regular 401(k) plan. Is this a situation where the safe harbor plan might effectively be terminated with the merger / transfer of the company and so permit a short plan year that would not jeopardize the safe harbor status from 1/1/16 through 6/30/16? Could the safe harbor plan be merged into the parent's regular 401(k) as of 7/1/16 without causing safe harbor issues? Alternatively, could they simply keep the safe harbor plan in place through the end of 2016 and merge it into the parent 401(k) then. Seems there would not need to be any mid-year amendments to the safe harbor plan or any mid-year termination of the safe harbor plan with that approach to raise potential safe harbor concerns. While the safe harbor plan accounts could not be distributed until the plans were merged, that may be okay. I guess I just worry though that having the subsidiary merged away and/or all the active employees leave the company would be a deemed mid-year termination of the safe harbor plan or create other issues that could call safe harbor status into question for 2016.

Thanks. Aware of that one. For better or worse, that's not close to our particular facts and so have not really tried to factor that in..

Thanks very much to both of you. I had started with the statute itself and thought that pretty clear but hadn't found the reg discussion. I will pass along to their benefits advisor from their Big 4 accounting firm that seems to think it might somehow be possible to get the for-profit in the 403(b). I think part of their thinking might have been that under the controlled group rules they might somehow extend the tax-exempt status to the affiliate but the regulatory provision seems to address that and the IRS seemed to also reject that sort of logic in the JCEB. Just glad to know we hadn't seemed to miss some loophole. Thanks.

I thought this was likely to be relatively straightforward but I am unfortunately not finding much guidance. Large, long-standing tax-exempt with 403(b) establishes a for-profit subsidiary and controls 100% of the for-profit's board so clearly part of the tax exempt's controlled group. All of the for-profit employees are initially coming by way of transfer from the tax-exempt entity and all were participants in 403(b) plan. I have generally assumed that the for-profit would not be eligible to participate in the 403(b) plan because it is not tax-exempt. General plan was for employees changing employers to take a distribution from 403(b) and roll those into 401(k) plan to be set up by the for-profit. Now accountant is saying they don't think that should be necessary because the for profit is part of the controlled group and employees should be able to stay in and continuing making deferrals to 403(b). I have found a couple of threads suggesting general consensus that for-profits are not eligible employers for 403(b) even if part of the controlled group but I really haven't found anything squarely addressing the situation. I did find an informal IRS response to a 2010 JCEB Q&A where the IRS seemed to clearly say all employers within a 403(b) needed to be tax-exempt to participate in the 403(b) but that was fairly informal and I'm just surprised there isn't anything more direct addressing what must be a fairly common situation. Appreciate any assistance or referrals to useful guidance.

Thanks. Agree with that. We're still trying to rule out the lack of a convincing answer based on authority. So far not finding very much which seems strange as we see options getting cashed out more frequently than getting exercised (at least with private companies). Don't see the 415 definition used that much though so maybe it doesn't come up as frequently as one might think. But still . . . . cannot be all that novel a questions. One might think that the selection of a 415 defiinition would indicate clear desire not to include anything option related but apparently in past cashout situation they included all option income. Mixed views among the company (as plan administrator) over whether that was right or wrong or which approach is most desired. Would definitely be nice to have some convincing or at least relevant guidance. . . .

401(k) Plan has elected Section 415 definition of Compensation for plan purposes. Definition (unlike others) expressly excludes "amounts realized from the exercise of a non-qualified stock option" and "amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option." Company undergoes change in control and outstanding stock options (both NSOs and ISOs) are "cashed out" in the transaction. So technically there is no exercise of any NSOs and no stock ever acquired under an ISO. The cash is getting paid to optionees in two installments--the first at closing and will be a straight cash payment reflected in W-2 income and the second a year later pursuant to an escrow arrangement. Are these cash payments in or out of the 415 definition of Compensation. While the cash payments do not arise from an actual exercise of any options, they are all related to the disposition (without exercise) of the options. Does the 415 definition distinguish between these situaitons? Thanks

Thanks for this. My sense of the latest guidance has always been that it is intended to note added flexibility with respect to recoupment of overpayments but I guess I've not really read it to squarely address the notion of a parital repayment in the premature distribution of a 401(k) plan account. For example, it seems to me to be aimed mainly at permitting a plan sponsor to make a plan whole for erroneous payments rather than trying to recoup directly from the recipient which certainly makes sense to me when the plan administrator made the error and the participant has been taking and using the funds. In our current situation, seems like the plan doesn't really need to be made whole. The premature distribution amounts all came out of the participant's own account and would go back in there upon correction. It just seems strange though that there wouldn't be more discussion of partial returns of overpayments in this context. Again, I don't see any real harm with a partial return as it seems a partial correction should be better than no correction. Just puzzled of the lack of discussion around those and/or some express discussion of perhaps how the plan sponsor is not required to request full returns if this is acceptable--i.e., in attempting to recoup can we say we understand you may have spent some of the money and/or not be in a position to make up the full amount? I'm also intrigued by the 3.02-4(d) which notes the following as an area for comment: "whether any other changes or additional guidance is needed relating to the recoupment of Overpayments, including guidance on any unusual circumstances in which full corrective payments to a plan should not be required for Overpayments" Not sure that is really meant to get at this paritcular situation but I suppse it could reach that.

Have a similar issue and am curious if you ever received any guidance on this or how you addressed. We have indiividual that was transferred to another controlled group entity and erroneously classified as terminated by old plan and received a distribution which was not rolled over. He had taxes withheld and has also spent some of the money and so is not in a position to repay the full amount or add any additional amount on for earnings, etc. If the plan sponsor requests repayment and the participant agrees to repay as much as he has, is it possible to partially correct a premature distribution. The guidance seems to suggest that a plan sponsor has an obligation to pursue return of a premature distribution / overpayment but not push further if the individual refuses. I have not found any guidance, however, where the participant agrees to make a partial repayment. A partial repayment would seem better to me than making no repayment (although a partial repayment would presumably require some adjustment to the 1099 reporting, etc.) Just interesting that there seems no discussion around partial repayment--everything seems to assume all or nothing.

A thread on this issue was posted in another forum but I wanted to post here as well. I'm curious how others are interpreting / complying with the SBC's 60-day advance notice requirement when required to terminate a health plan with limited lead time. In looking at the general SBC rules and particularly the requirements for notices of material modification, it would sure seem a termination of a plan altogether should clearly constitute a material modification of the SBC (and the plan / coverages) within the scope of the regulation thus requiring 60 days advance notice to participants in order to terminate. We have seen similar advance notice requirements in other contexts (state laws) and they can sometimes create real problems in sale situations because the target does not generally have a clear timeline in place until a deal is signed and announced and either cannot provide notice or doesn't want to provide any advance notice prior to that out of fear of disclosing that the company is in play. We also see this come up in cases where a company is insolvent or otherwise forced to shut down without significant lead time. In those cases the company is often working right up until the end to save the company / right the ship, etc. so doesn't know when / if the plan will actually shut down until just before it does. The employers there are, of course, generally willing to give participants as much notice of the temination as they can--it's just not usually any where close to 60 days. Curious what position the regulators have taken (may take) in these situations. I know there is a "willful" component here but I'm not sure that is likely to get anyone much quarter.

Curious if anybody had seen any guidance on this issue? In looking at the general SBC rules and particularly the requirements for notice of material modification, it would sure seem like a termination of the plan altogether would constitute a material modification thus requiring 60 days advance notice to terminate. We see such advance notice requirements in other contexts (state law) and they can create real problems in sale situations because the target does not generally have a clear timeline in place until deal is signed and announced and doesn't want to provide any advance notice prior to that out of fear of disclosing the company is in play. We also see this come up in cases where a company is insolvent or otherwise forced to shut down without significant lead time. In those cases the company is often working right up until the end to save the company / right the ship, etc. so doesn't know when / if the plan will shut down until just before it does. They are willing to give participants as much notice as they can--it's just not usually 60 days. Curious what position the regulators have taken (may take) in these situations. I know there is a "willful" component here but I'm not sure that is likely to get anyone much quarter.

Any problems or particular concerns with a 401(k) Plan amending the plan to increase the cash-out threshold from $1,000 to $5,000 (along with adopting appropriate automatic IRA rollover procedures) and then cashing out all the former employees with balances between $1k and $5k? We've been told that it is fine to apply the new limit prospectively to all accounts (including those accounts below $5k that have been in the plan for a number of years because of the old threshold). Just wanted to be sure there is no protected benefit or rights associated with the old limit. Thanks.

Thanks. As noted, that is the plan. Of course, the participant with this investment might have an opinion about that as he has opinions about a lot of things at his company.

Well, to be honest, the frustration of dealing with this kind of stuff arising from blasted self-directed accounts is about to bring me around to Bird's thinking . . . although I might be convinced to put them in the recycling bin.

Thanks. In our current case the UBTI so far is limited to one participant and is very small and this is the first year we've received K-1s at all so I think we should be able to hopefully tighten up on the self directed brokerage investments going forward. With any luck, we'll be able to switch before we exceed the $1,000 threshold. I have not researched whether it is possible to allocate UBIT among participants--was really just basing that off of jpod's comments as he's usually an invaluably correct source of advice on these boards. Thanks again.

Thanks very much. So, just to be sure I'm understanding IRS Pub 598 and the 990-T instructions correctly, it appears the $1,000 threshold is on unrelated taxable income in the aggregate so a plan would need to gather / track all the individual K-1s it receives and determine whether the total takes the plan over the threshold? In other words, it doesn't have to be $1,000 or more from the same investment fund or $1,000 or more in one participant's account? Interestingly, the 2014 Instructions to Form 990-T seem to leave out trustees of trusts for 401(a) plans in the list of trustees subject to the rule; however, other portions of the instructions as well as Pub 598 seem to make clear that such trustees are subject to the 990-T filing requirements if the threshold is met.

I'm in a similar boat as Sycamore Fan and so hoping Bird or others might elaborate or respond further on this issue. I'd like to throw the K-1 in the trash in our case but it relates to a publicly traded partnership held in a self-directed brokerage account. I think we'll revise our restrictions to prohibit such investments in self-directed accounts going forward but for now I'm concerned about what needs to be done in the case of significant UBTI. Is there some basis for being able to toss the K-1s in the trash? Thanks.

Thanks very much for the responses. Agree on the lack of logic on counting earnings on unrelated rollovers. I'm not sure whether the TPA here counts earnings just on the key employees from a conservative perspective or counts earnings for both key and non-key employees. (I'm not sure the plan in question even has any non-key rollovers). Unfortunately, I have not found any formal guidance expressly addressing but based on these discussions it seems it may be fair to go back and ask if they have some basis or authority for thinking they need to count earnings on unrelated rollovers and to note that we understand that is not common practice among major national providers? (In this case, the plan is just a couple of percentage points over for the past couple of years with just about all of that attributable to inclusion of the rollover earnings.)

Sorry to dredge up such an old topic but this is on point and I did not see a more recent discussion of this issue. I'm just trying to confirm that David Dye is correct here. While I follow the logic, the regulations do not appear to expressly provide that earnings on excluded rollovers are also excluded for top heavy testing purposes. If the above is correct, can anyone point me to any guidance from the IRS that addresses? We have TPA that has run top heavy testing that says earnings on excluded rollovers are counted. Thanks.

Thanks. I'm not sure I understand the questions exactly but will try to respond. The New Plan has been presented copies of the ADP testing results for the Old Plan and Old Plan's 1099-Rs issued to participant, including the separate 1099-R issued to the participant for the excess amount. While the New Plan did not re-run the testing or really put the screws to the Old Plan's determination of the excess amount, I don't think any party involved (including the participant) really questions that there was an ADP failure and thus the general conclusion that the excess amount was an ineligible rollover. Does that help? Are you thinking there might be some basis for the New Plan to retain the amounts if the evidence of invalid rollover is not that strong? I think the New Plan is fairly well convinced of the need to kick the amounts out--it would just like to do so in a way that doesn't put the paricipant in a bind.

I wanted to follow up on JWB19's post / question as I have a similar question. In my case, an executive rolled his entire account balance from Old Plan to New Plan in early 2014. After rolling over, Old Plan determined that it failed testing in 2013 and executive had excess contribution. Old Plan issued 2 1099s to executive for 2014--one for the excess contribution amount reflecting it as taxable distribution and the second for the remaining portion of the rollover amount. Executive informed New Plan that excess portion was an ineligible rollover and had been reported as taxable distribution. New Plan said it would transfer excess portion back to Old Plan "f/b/o participant" and report on 1099 as a nontaxable rollover distribution. However, Old Plan has since been terminated and all assets distributed. Old Plan recordkeeper has advised that it cannot except the excess contributions back since plan has been terminated. Old Plan says New Plan should distribute to employee. New Plan says if it does that, it will have to report distribution as taxable distribution. I can certainly understand the position of both plans / recordkeepers here but it seems this leaves executive with potentially getting double-taxed on the excess contribution or, at best, left with a mess trying to explain to the IRS why this should not be the case. JWB19, if you are still out there, did you find an answer / solution to your situation? Would be most appreciative for any thoughts / experience anyone has with similar issues.

Tom, Many thanks for your post. Although the rollover in our case was actually made in the year after the excess contribution arose and so should not technically need to rely on the exception permitted in the regulations cited here (i.e., as I understand the regulation, this basically provides an exception that allows a plan to treat the excess portion of a rollover as an excess distribution even though not made after the close of the plan year in which the excess arose as is typically the case), I believe the Old Plan is following the same rationale and similar guidance suggested by splitting the rollover amount and reporting on two separate 1099s--one for the excess portion and the second for the permitted rollover amount. In short, I think the Old Plan has done just what it probably should do here in terms of reporting the excess contributions that got included as part of the rollover. By the same token, I think the New Plan is acting appropriately as well. I don't think there is any way it can simply distribute the excess without reporting it on a 1099 even though it knows the excess amount was reported previously by the Old Plan. (Plus, at this stage, there are probably additional earnings on the excess to be reported that weren't reported by the Old Plan.) While the New Plan might code a distribution on the 1099 to show it as a nontaxable rollover back to the Old Plan as a typical remedy to the receipt of an invalid rollover, the Old Plan refuses to accept the amounts because the Old Plan has since been terminated. In looking at the Form 1099 instructions, I don't see any codes or guidance that might permit the New Plan to distribute the excess directly to the participant but somehow report or code the distribution in such a way that the participant gets credit for the amount already reported as a taxable distribution by the Old Plan. I also don't think there is any way the Old Plan can (or really should) amend its 1099 filings to show the entire rollover amount and just let the New Plan report the full excess amount kicked back. The participant here is just sort of stuck facing double reporting through no fault of his own. If there is no way to address as part of the 1099 reporting here, wonder if there is any way to really advise the participant on explaining the situation to the IRS so that it doesn't become an audit risk or extended hassle.

May I add another possible layer of interest? Does anybody have experience with a similar situation but where the plan failing the ADP test is terminated and has all assets distributed before corrections are made? As best I understand the facts, Employer 1 was bought in late 2013 and Old 401(k) was terminated in connection with transaction. Executive went over to buyer, Employer 2, and rolled his entire account balance from Employer 1's Plan into Employer 2's Plan in January 2014. In February 2014, Old Plan informs Executive that Old Plan failed ADP testing for 2013 thus requiring a return of $X to Executive. However, because Executive rolled her entire account balance out of the Old Plan to the New Plan, the Old Plan must recharacterize $X as an excess contribution for 2014 and thus will be issuing Executive two separate 1099-Rs in 2014--one for the entire amount rolled over (less the $X recharacterized as excess contribution) and a second 1099-R reflecting the $X recharacterized as an excess contribution for 2014. Fast forward to January 2015 when Old Plan does as promised and issues 2 separate 1099-Rs to Executive. Executive tells New Plan that $X in excess contributions were rolled into New Plan and need to be removed. New Plan says it can simply kick out $X by sending payment to Old Plan / Trustee to be paid "for benefit of Executive" and code this as "18/ G (rollover) on a 1099 to avoid showing as taxable distribution. Old Plan's record keeper, however, refuses to accept a return and says it cannot accept any funds from New Plan as Old Plan was terminated and all Old Plan assets were distributed in late 2014. Record keeper helpfully advises best to have New Plan distribute $X to Executive, report the distribution on a 1099-R, and have Executive explain to the IRS what happened. (Maybe they should just add a note in the bottom margin?) Executive is stuck between two large bureaucratic record keepers and left trying to find simplest way to avoid potentially getting taxed twice on the $x distribution. Any thoughts?

Thanks Flyboy. That would be my hope / reading as well but I don't recall seeing anything formally or informally from the regulators on that. Was hoping others may have. I have seen some discussions that suggest it might be a problem. Most reasoned discussion I've seen has come from EBIA which agrees that the prohibition arguably does not apply to an employer's payment of COBRA premiums but they conclude noting further clarification of this issue is needed.

I have seen some secondary / informal guidance and discussion suggesting that the prohibitions on reimbursing individual premium expenses under IRS Notice 2013-54 (and related DOL guidance, etc.) extend to prohibit tax-free reimbursement of premiums of COBRA coverage under the former employer's group health plan for a departing employee. That makes sense to me and I can see why requiring that these reimbursements be treated as taxable under 2013-54. Given the guidance, it is unclear to me whether merely treating the reimbursements as taxable amounts is sufficient for compliance. It seems that the evolving interpretation of the guidance is that in order for payment of the premiums to be permitted the amounts must not only be taxable but not provided on a strict reimbursement basis or with restrictions on the use of the amounts. Again, while I can understand the rationale for that under the rules, the reimbursement of COBRA premiums under an employer's existing group health plan seems a bit distinguishable from reimbursement of individual coverage, etc. where the employer does not provide regular group coverage. I was wondering if anybody had seen any formal or direct guidance from the regulators on this specific issue. My concern is that many many employment agreements are drafted to provide for actual reimbursement of COBRA premiums as part of a departing employee's severance package. Although having such reimbursements treated as taxable may not be inconsistent with existing employment agreements, having to pay the amounts out regardless of whether the departing employee elects COBRA is very different from how such provisions are typically interpreted / administered. Furthermore, providing for such amounts on a non-reimbursement basis would seem to destroy the potential 409A exemption for reimbursement of health coverage amounts for the COBRA period. Would welcome any thoughts on this as I haven't found much discussion or guidance on this specific area. Thanks

Am thinking I had previously found a good discussion on this issue either here or elsewhere but I cannot seem to locate now. I am trying to come up with guidance to employer on how they are required to handle the final paycheck / compensation amounts being paid in connection with a merger. Here seller has monthly payroll, deal is expected to close Nov. 21st. Buyer is requiring Seller to terminate 401(k) Plan immediately prior to closing. Seller will continue post-closing as a subsidiary of Buyer and will continue to employ existing employees but they will be eligible to participate in Buyer's 401(k) post-closing. The paycheck for November will not be delivered until end of the month and so after closing. They care concerned about having any additional contributions hit the terminated plan after the closing date, even if the amounts are pro rated so that only 401(k) contributions on comp earned up through the termination date is used for plan purposes. Payroll provider is saying they cannot pay early or pro rate deferrals, etc. to help out. Am curious as to what folks see as the usual and customary procedure here and whether there is any flexibility. We seem to see and hear different things from different recordkeepers, prototype plan sponsors and payroll administrators. Thanks