Kevin C

The IRS did address the situation where both deceased participant and the beneficiary are in the same plan. The last sentence of Example 2 in T-12 (defining key employee) that I quoted above says "The conclusions are not affected by whether the beneficiary of the individual is a non-key employee or a key employee of the employer. " I see your interpretation as contrary to the language of the regs because it bases the treatment of the death benefit on the non-key/key status of the beneficiary. What you are overlooking is the definition of "employee" under 416. The "employee" doing the rollover is the "employee" made up of the deceased participant and the beneficiary. In this case, it doesn't matter if the rollover is related or unrelated, because under 416(g)(4), this "employee" is excluded from the top heavy calculation for 2016 and later years. And, yes, I would reach the same determination regardless of the effect it has on the test.

Luke, I think you missed my point. I'm reading the rules as saying that for the top heavy determination, the death benefit is always treated as belonging to the deceased "employee" and is never treated as part of the account balance of the participant who receives it as the beneficiary. Basically, the beneficiary has two hats, a beneficiary hat and a participant hat and the benefits he has under the respective hats are kept separate for the top heavy determination. Example 2 also tells what happens for determination years after the distributions are no longer added back in and says the determination is not affected by the beneficiary's key/non-key status under the plan. Under the rules in effect when the regs were written, a distribution paid in the calendar year 1987 plan year would be added back in for the 1987-1991 plan years. With the distribution in the example no longer being added back after 1991, why do you think the example says what happens in 1992 and subsequent years? The only situation I can think of where the death benefit in the example might be relevant to the top heavy determination beyond 1991 is if the distribution had been rolled into the plan. This is also consistent with the language in T-30 that refers you to T-32 for determining whether a rollover is counted. "Certain distributions that are rolled over by the employee are not included as distributions. See Question and Answer T-32." Remember that the term "employee" includes the beneficiary, so the "employee" who is rolling over the death benefit is not the surviving participant, it is the "employee" that is made up of the deceased participant and the beneficiary. T-32 tells you when a rollover is considered a related rollover for the "employee" who rolled over the distribution.

Am I reading this right that the plan document was timely adopted and effective on October 1, but deferrals won't be allowed until the first pay date in November? If so, you have an operational failure because participants eligible to defer effective October 1 were improperly excluded from the plan from October 1 through the paydate prior to the one where they will first be allowed to defer. First, sorry to be blunt, but I suggest the plan sponsor reconsider their choice of service providers who created a qualification issue for the plan before it even gets up and running. They also need to decide if they can trust those service providers to correct it properly. Then, the operational failure needs to be corrected under EPCRS. With the operational failure lasting less than 3 months, they may be able to qualify for the brief exclusion correction in Rev. Proc. 2016-51 Appendix A.05 (9). At the very least, it will cost the employer the safe harbor contribution that would have been made for the period based on the missed deferrals. The amount of missed deferrals will depend on when deferral elections were made, since the missed deferral rate is different for an improper exclusion than it is for a failure to implement a deferral election. Also note that for improper exclusion from a safe harbor plan, there is a deemed rate of missed deferrals that depends on the safe harbor provisions being used. After proper correction, the plan will no longer have qualification issues from the failure and will still be safe harbor.

I think you will find that 411(d)(6) prevents you from using a retroactive termination date. We've done the same as Bird a few times when the plan sponsor continues to exist after an asset sale. There is usually some residual income to the sponsor from receivables at the time of the sale. I think being safe harbor actually makes the situation better. With the timing of the sale in this case, I don't think I would feel comfortable with a PS or match allocation to the owner if the plan has a last day (or 1,000 hour) allocation requirement when all of the employees were terminated with less than 500 hours due to the asset sale. A safe harbor contribution doesn't have that issue.

This is going to seem strange at first. I think it is excluded from the top heavy calculation, but for a different reason. I think the regs are saying that for purposes of the top heavy calculation, the death benefit doesn't become part of the also employed beneficiary's own account balance. Instead, it remains treated as belonging to the deceased participant, even after distribution. I tried searching for a PLR, but didn't find anything even remotely on topic. The terms employee and key employee are defined in It's addressed further in example 2 in 1.416-1 Q&A T-12 (emphasis added) I'm reading this is saying that for the top heavy determination, the death benefit, even after distribution, is always treated as belonging to the deceased employee. Under 416(g)(4), when the deceased employee has not performed services for at least 1 year as of the determination date, he/she would be excluded from the top heavy calculation. I don't see why a rollover to the beneficiary, even inside the same plan, would change how the distribution is treated. If it did, this would have been a really good place for the IRS to say it. If it's in the beneficiary's rollover account in the valuation system, you would need to tell the system it is an unrelated rollover to get it excluded from the top heavy calculation.

So, does that mean if the loan program is amended and the loan agreement is modified in compliance with the new loan program, that the revised loan will then qualify for the PT exemption and no longer be a PT? Would the excise tax on the PT be less than the VCP filing fee?

Are you sure this loan violates 72(p)? The conditions that must be satisfied to not have the loan be considered a distribution are in 1.72(p)-1 Q&A 3. Surprisingly, there is no requirement that the loan be in compliance with the plan terms. There is an operational failure because the terms of the plan/loan program were not followed. While a literal interpretation of Appendix B 2.07 would be that correction by amendment would not be allowed in your situation, Section 6.02(2) says "If a plan has a different but analogous failure to one set forth in Appendix A or B (such as the failure to provide a matching contribution by a governmental plan that is not subject to § 401(m)), then the analogous correction method under Appendix A or B is generally available to correct any failure. " I think that gives you at least a strong argument that you should be able to self correct via a retroactive amendment to the loan program. There IS a requirement under 2550.408b-1(a)(1)(iii) that the loan must be in accordance with the plan provisions regarding loans to qualify for the PT exemption for participant loans. The DOL website lists "Participant Loans Failing to Comply with Plan Provisions for Amount, Duration, or Level Amortization" as one of the failures eligible for correction under VFCP.

I would also suggest you get with whoever is doing your payroll and make sure they figure out how to get the loan payments to stop on time. Depending on your state's payroll laws, there may be potential problems with withholding amounts from paychecks that were not authorized by the employee.

Is it a Church plan?

First of all, what the union employees get is determined by the CBA. The definition of collectively bargained includes a requirement that retirement benefits were subject to good faith bargaining. For testing, start with the definition of Plan in 1.410(b)-7. Under 1.410(b)-7(c)(4), if a plan covers more than one disaggregation population, you are required to treat the portion of the plan covering each disaggregation population as a separate plan. Under -7(c)(4)(ii)(B), if the plan has both non-collectively bargained and collectively bargained employees, the collectively bargained employees are a disaggregation population. If there are multiple CBAs, the employees under each one are separate disaggregation populations. So, the union group is treated as a separate plan, or plans. 1.410(b)-2(b)(7) says that a plan covering only collectively bargained employees satisfies 410(b). It also says the mandatorily disaggregated portion covering collectively bargained employees satisfies 410(b). Then, go to 1.401(a)(4)-1(c)(5), where it says a collectively bargained plan that automatically satisfies 410(b) under 1.410(b)-2(b)(7) is treated as satisfying 401(a)(4). So, collectively bargained employees are disaggregated and their portion of the plan automatically satisfies 410(b) and 401(a)(4).

I would have treated the $375 as late and moved on. Why make the client's problem become your problem? The lost income would be a small amount and the excise tax very small. We don't do a 5330 if the amount is very small, we just have the client deposit the excise tax along with the lost income. In this case, I'm guessing the excise tax would only be a couple of $.

I'm going to assume that the 1/1/18 amendment was done timely, before 1/1/18. Correcting under SCP using a plan amendment is addressed in Rev. Proc. 2016-51 4.05 (2). It refers you to Appendix B 2.07 for the only situations that can be self corrected by an amendment. Fortunately, your situation is in 2.07 (3), so it can be self corrected using an amendment as described there. The amendment wouldn't cause any 411(d)(6) problems and it isn't listed in Notice 2016-16 as a prohibited mid-year amendment to a safe harbor plan, so I don't see any problem with amending to retroactively make the old immediate eligibility requirements apply for 2018. I suggest you make sure the amendment is clear about whether those included early for 2018 will remain participants in 2019 and future years, or if they will have to meet the new requirements starting in 2019. The change back to the intended requirements for 1/1/2019 will need to be adopted before 1/1/2019. If the corrective amendment is signed during 2018, I think you can do both in the same amendment. Another option is that, as long as the listed conditions are met, 2.07 (3) allows the corrective amendment to apply to only those who were improperly allowed to participate. You can list them by name. That would correct the failures, but still have the new eligibility requirements apply to those hired later in 2018.

If the amount distributed incorrectly was paid from the participant's vested balance, the employer is not required to repay the distribution as part of the correction. The other discussion linked above has more details.

The requirement you are referring to was changed by Rev. Proc. 2015-27. There is a current discussion on the same topic here: For a correction where there is a required deposit amount, "another person" would be anyone willing to make the deposit. I would normally expect that to be the firm that caused the failure. I don't think the IRS cares who writes the check as long as the correction is done.

tyler172, you are describing an impermissible in-service distribution, which is the case given as an example in the sentence I put in bold in the quoted 6.06(4)(b) in my first post above. So, yes, what I posted applies. You also asked about the consequences to the employee if he/she doesn't repay the impermissible distribution. 6.06(4)(e) says the employer must notify the participant that the distribution was not eligible for rollover treatment. Looking at 6.09 (6) and 11.03(8), it appears the 10% early withdrawal penalty would apply even though it becomes ineligible for rollover, unless relief from 72(t) is requested as part of a VCP filing. If you open the pdf for Rev. Proc. 2016-51 and search for "overpayment" and search for "72(t)", it will make it easier to find the applicable sections. https://www.irs.gov/pub/irs-drop/rp-16-51.pdf

(c) applies if a deposit is made to correct the overpayment. The last sentence of (b) that I put in bold says the employer is not required to deposit if the amount incorrectly distributed was part of the participant's vested balance. If the distributed amount exceeds the participant's vested balance, the employer or someone else would be required to make a deposit.

I think we have a client that uses the same payroll system. While I agree it's a lousy way to do things and they both need a new payroll system (or better training), that's not something we can force them to do. If they are going to only apply 401(k) deferrals to 24 out of the 26 paychecks, the plan document needs to reflect that. In our client's case we ended up having to amend the plan to exclude amounts received as the third paycheck in a month from the definition of compensation for deferral purposes. Are there any payroll systems that really do what they are supposed to do? We are seeing a lot of problems with the 402(g) limit not being tracked correctly when there are catch-ups and/or Roth.

That was modified by Rev. Proc. 2015-27. The version in 2016-51 says: I haven't looked at the new EPCRS Rev. Proc, to see if the wording is any different.

Deferrals in a 403(b) are subject to a Universal Availability requirement [see 1.403(b)-5(b)] that includes an effective opportunity requirement. If excluding bonuses and commissions from deferral compensation makes it where someone doesn't have the opportunity to defer the maximum amount, you have a problem. If the excluded amounts are significant, I would expect it to be a problem at some point. The regs specifically say it applies to part-time employees. It could also be a problem with someone who terms early in the year.

If #1 and #2 are separate 501(c)(3) organizations, whether a controlled group exists is only relevant for the employer contribution portions of the plan. Under 1.403(b)-5(a), employer contributions are subject to the same coverage and nondiscrimination rules as they would be in a 401(k). As quoted above, deferrals in a 403(b) are not. For deferrals, what matters is which organization(s) adopted the plan. As quoted above, the universal availability requirement for deferrals applies separately to each 501(c)(3) organization. If the correction allows the ineligible person from #2 to keep his/her deferrals in the plan, then #2 violated the universal availability requirement for salary deferrals for that time period. Under EPCRS, if your correction causes the plan to fail some other requirement, the other failure must be corrected, too. See Rev. Proc. 2016-51 6.02(d). Unless they are prepared to make QNECs for the other #2 employees, the correction needs to be refunding the ineligible person's deferrals, with earnings. The rules for deferrals in a 403(b) are different than the rules for deferrals in a 401(k) and those differences will affect how you do the correction.

If they are separate 501(c)(3) organizations, trying to do a corrective amendment like you would normally do for a 401(k) plan will create a bigger mess. By that, I mean amending the plan to allow the ineligible person from #2 to participate. Under 1.403(b)-5(b)(3), when a 403(b) plan covers the employees of more than one 501(c)(3), Universal Availability for salary deferrals applies separately to each 501(c)(3) organization. So, if the plan allows one employee of #2 to defer, it means that all employees of #2 must be allowed to defer, unless they fit under one of the allowable exceptions in 1.403(b)-5(b)(4). But, note that some of those allowable exclusions have an all or nothing rule attached. I'm thinking the best option is going to be refunding deferrals to the person incorrectly allowed to defer. Otherwise, #2 would likely not be satisfying the Universal Availability requirement for deferrals. Going forward, they may want to look at including both #1 and #2, but I doubt they would want to do it retroactively. It's also interesting to note that CG and ASG rules apply under 1.403(b)-5(a) "Nondiscrimination rules for contributions other than section 403(b) elective deferrals", [see 1.403(b)-5(a)(4)], but not to 501(c)(3)s under 1.403(b)-5(b) "Universal availability required for section 403(b) elective deferrals".

No earned income also means a zero 415 limit, which applies to a SEP under 415(a)(2).

The rules for refinanced loans are in 1.72(p)-1, Q&A 20. Depending on the exact situation, it can get interesting. I find it helps to have the reg in front of me when looking at it.

We had a 403(b) plan audit where the agent applied the current regulations <20 hour per week rule to their 2007 and 2008 plan years. Yes, I know the regs were effective 1/1/09 and I pointed that out to him, but he insisted the same rules applied prior to 2009. There was one employee who was full time in previous years and dropped to less than 20 hours per week. He insisted that she should not have be allowed to defer and since they allowed her to defer, they were not allowed to use the <20 hours per week exclusion for years that she was allowed to defer. He was the training agent on 403(b)s for our region, so I would expect the same opinion from other agents in our region. If you listen to Once In, Always In Q3 and Q4 from CJs link, the conflict with ERISA still exists even with the IRS' current interpretation. Their example is someone who was full time, terminates and then rehires as <20 hours per week. Under two different scenarios, they say this person would not be allowed to defer after rehire if the reasonable expectation on rehire is that they would work <20 hours per week. So, using the <20 hours per week exclusion is still a train wreck waiting to happen.

If the only thing changing is the entry date from quarterly to semi-annual, I don't see how any participants are affected. Anyone who entered 7/1/18 or earlier would still be in the plan with semi-annual entry dates. The ones affected are those who would enter 10/1/18 if the plan were not amended. If the amendment is adopted before 10/1/18, the plan can be amended to make them wait until the next semi-annual entry date (1/1/19) to participate. The employer might have an employee relations problem if they do it, but they can do it. I do wonder what they intend to accomplish with the change.