JRN

I'm dating myself here, but this reminds me of the Tax Reform Act of 1986 when Congress imposed an excise tax on DB plan termination reversions and then exempted "certain taxpayers", defined as follows: (i) a corporation incorporated on June 13, 1917 and which has a principal place of business in Bartlesville, Oklahoma, (ii) a corporation incorporated on January 17, 1917 and which has a principal place of business in Coatesville, Pennslyvania, etc. Like the old saying goes, "you don't really want to see how sausage is made".

I think what Coleboy is asking is whether the Employer can set up a plan and cover only the employees of the store/exclude production employees. If the store employees pass 410b coverage after taking into acccount all of the employees (i.e., both store and production employees), then the answer is yes (aside from the cannabis-related regulatory issues raised by others).

"No good deed goes unpunished." The employer is trying to do the right thing by allowing participants with less than one year of service to enroll and make 401(k) contributions. But, as noted, if the plan is top-heavy, the employer will have to make the 3% minimum top-heavy contribution for those participants.

FWIW, Fidelity and other large record-keepers are extending the loan due date not by one year, but by the period of loan suspension.

This is good news. Thanks.

Doesn't "disregarded" mean that the one year period is not counted in determining the permissible loan periods under IRC Section 72(p)(2)? Your reading of the Act's provisions seems to be that the term "disregarded" means that the one year period is counted. Maybe I don't understand what the word "disregarded" means. As I noted earlier, my understanding is that this provision applies in the same manner as leaves of absence. The plan may also suspend loan repayment during a leave of absence of up to one year ... However, upon return the participant must make up the missed payments either by increasing the amount of each monthly payment or by paying a lump sum at the end so that the term of the loan does not exceed the original five year term. I'd like to be wrong here.

I don't think you get an extra year to pay off the loan. The CARES Act Section 2202(b)(2)(C) states "In determining the 5-year period and the term of the loan under subpar (B) and (C) of Section 72(p)(2), the period descried in subpar (A) of this paragraph shall be disregarded." I read this to mean the one year delay is disregarded in determining the maximum permissible term of the loan. I think this means the participant still has to pay off the loan within 5 years of the loan's original date. This is the same treatment accorded loan payment suspension during a leave of absence.

Patricia, Were you ever able to get this issue resolved? I am now dealing with the same issue with small individual annuity contracts at TIAA. Employer has since moved to a group contract with Empower, but the Plan still has many small (less than $5K) post-2004 individual contracts with TIAA. The Employer directed TIAA to distribute contracts to the individuals, but TIAA said they would not do so. Thanks. John Nelson

Thanks Larry for the clarification.

Isn't paid sick leave a "welfare benefit"? Does your plan definition of compensation exclude welfare benefits? Welfare benefits can be excluded and still meet 414s safe harbor definition.

Thanks for reply. Yes, I know the proposed loan is permissible under IRC/ERISA. I’m questioning under banking regulations. It’s my understanding that the bank cannot make the exempt loan to the ESOP but that the bank holding company can. Hoping someone with more knowledge can confirm or correct my understanding. Thanks.

Can a bank holding company make an "exempt loan" (i.e., a loan that will be used by the ESOP to acquire newly issued stock from the bank holding company) to its own ESOP?

Luke Bailey: I don't think the failure can be corrected by SCP retroactive amendment under Rev Proc 2019-19. Were you implying that you think it can? I'm thinking it can't because the plan amendment -- presumably to retroactively exclude bonuses -- would not result in an increase of a BRF, but would rather result in a decrease. Thoughts?

Be careful with dual eligibility if the Plan is top-heavy. You'll have to make the top-heavy contribution for the employees who are eligible to make 401(k) deferrals,notwithstanding that they are not yet eligible for match.

FWIW, the rule that the rate of match is considered a BRF troubles me. Matching contributions of course have their own nondiscrimination test -- 401(m). It seems to me that if a plan with different rates of matching contribution passes 401(m). that should be enough. Just my 2 cents worth.

Seems to me that if the participant is still receiving a W-2 or K-1 from the Employer, the participant is not retired.

Note: If transaction is structured as a stock sale rather than an asset sale, DOL has opined that decision to sell is an investment decision that is to be made by trustee; not pass through participant voting.

Assume A and B are participants under ESOP and that A and B have combined $100K of cash in their ESOP accounts. A and B sell shares to the ESOP and they both elect 1042 tax treatment on all of the shares sold. Is there anyway that the ESOP can use the $100K cash in A's and B's accounts in this transaction? I'm thinking the answer is No. Reasoning that because A and B elected 1042 for all of their sold shares, there would be no shares to allocate to their individual accounts for the $100K. In other words, if we took the $100K out of their accounts to help fund the ESOP purchase, we'd have to be able to allocate something back to their accounts, presumably shares acquired by the ESOP in the transaction. But, there would be nothing we could allocate back to their accounts because all of the acquired shares are 1042 stock. So, it seems to me that the $100K just needs to stay earmarked in their accounts. The ESOP can use the cash in other ESOP participants' accounts to purchase the shares, but A and B stay in cash. Thoughts? Thank you.

I don't think Section 162(k) applies to interest deduction. See (b)(1), below. § 1.162(k)-1 Disallowance of deduction for reacquisition payments. (a)In general. Except as provided in paragraph (b) of this section, no deduction otherwise allowable is allowed under Chapter 1 of the Internal Revenue Code for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or the stock of any related person (as defined in section 465(b)(3)(C)). Amounts paid or incurred in connection with the reacquisition of stock include amounts paid by a corporation to reacquire its stock from an ESOP that are used in a manner described in section 404(k)(2)(A). See § 1.404(k)-3. (b)Exceptions. Paragraph (a) of this section does not apply to any - (1) Deduction allowable under section 163 (relating to interest);

The definition of Compensation under the 401(k) Plan is W-2 compensation. Employer has a non-qualified deferred compensation plan. Participant receives a distribution from the non-qualified plan. Can the participant elect to defer a portion of the non-qualified plan distribution to the 401(k) Plan? Seems to me that the answer is "yes" because distributions from a non-qualified deferred compensation plan are included in W-2 compensation. Thoughts???

Let's see if I can gently steer this discussion back to the original post. Seems to me that the main issue is whether the employer is able to open a bank account. I'd ask the employer "how do you pay your employees?" If the employer has a bank account and pays its employees with checks (not cash), then I think setting up a 401(k) plan should be pretty straight-forward. The 401(k) contributions can be remitted from that same bank account. But, if it's a "cash-only" business, I think there would be practical problems with setting up a 401(k) plan. Any other thoughts out there?

Generally, the plan document provides for the true up by changing that the contribution period for calculating the match to the "plan year", rather than the "payroll period". This provision changes the "contribution period" for the match, but it does not change the match formula. The match formula is still "$.50-on-the-$1 up to first 6%", or whatever. Seems to me that if you increase the match for lost earnings, you are no longer calculating the match contribution per the plan document match formula. I would not go down this road.

Why not just provide in your administrative policy that the participant is disabled if he/she is determined by SSA to be disabled? I think that should work to avoid being subject to new regs.

The starting point is always, “what does the Plan document say?” Does the Plan document define “Compensation” to mean the participant’s W-2 wages? Housing allowances are not included in W-2 wages. Therefore, you should not include in calculating the employer contribution. But, can the Plan simply amended to include housing allowances as compensation for Plan purposes. The answer here is “yes”, but with two very important caveats. You cannot include housing allowance if that would cause the Plan to fail either the general non-discrimination test or the Code Section 415(c) annual addition test. First, with respect to the general nondiscrimination test: This issue is only relevant if one or more of the employees who receive housing allowances are a “highly compensated employee” (HCE). Second, 415(c) is an issue if they are able to defer, i.e., make 403(b) contributions from housing allowance. This could be an issue if they were allowed to defer from housing allowance (but, this does not make sense because aren’t they supposed to use the housing allowance for housing?) Comp including housing allowance = $40,000. $18K is wages; $22K is housing allowance. Employer contribution - 5% - is $2,000. Suppose employee defers $18K. Annual addition is $20K, which is more than 415(c) compensation of $18K. But, in any event, should not be able to defer from housing allowance because this is supposed to be used for housing.

Definition of Compensation under the Plan includes Bonuses. Employer pays a bonus on Aug 15, 2017. Employer fails to correctly apply the participant's 401(k) election percentage to the bonus. Employer discovers the mistake on Oct 15, 2017. Does the missed deferral opportunity on the bonus qualify for the safe harbor correction method for Employee Elective Deferral Failures that do not exceed 3 months? 1. Correct deferrals have been made by the Employer on all payrolls subsequent to Aug 15, 2017. 2. The Employer will make a corrective contribution to make up for any missed matching contributions for the bonus. 3. The Employer will provide the required notice to affected employees on Oct 31, 2017 (within the 3-month period beginning on the date of the failure). One problem, of course, is that none of the payroll periods since Aug 15, 2017 have included bonuses. So, I'm not sure we can really say we've satisfied conditions #1 and #3, above. I'm especially hung up on the 45-day notice requirement. From a matter of policy however, it seems that the affected employees still have time to make up the missed deferral opportunity if they want to. So, maybe this error should qualify for the new safe harbor correction (i.e., no QNEC required). But, on the other hand, this might be better analyzed as simply an operational defect and, therefore, requiring a 50% QNEC. Thoughts? Thank you.