Below Ground

There is no plan termination in this situation. Remember, the plan will remain in effect, it just doesn't cover Employer B's employees. This means that the one employee of Employer B is no longer eligible since Employer B no longer is covered employer. As for a spin-off, Employer B is not adopting a new plan so there is no spin-off. You should definitely document that Employer B is no longer a participating employer, which is analogous to a termination but is not an actual termination. You would then need to process a distribution to the one employee given that Employer B's employees are no longer covered. Peter's comment is 100% correct including his comment about the box for MEP on the 5500.

Thank you for your comments. This was a situation where you know the correct answer, but the client's broker was so positive to the belief that rents could be contributions that it makes you stop and question what you believe is correct. I guess we all have those days where you just feel "shaky" and question yourself. (At least I do.) Regardless, I really do appreciate your feedback as it removed all doubts in my mind. As a side note I did address potential UBI and prohibited transactions with the client at the time our service for them began.

The Plan has a number of real estate properties held under the trust, including several that receive rent payments. I believe that rents received from assets under the trust a part of the investment return. My logic is that the properties are owned by the trust, and any rents received would be "investment earnings" and not contributions. Am I off base?

Thanks Artie M for the constructive comment. I was just trying to offer a suggestion of what I might use in this situation. I certainly was not trying to be "cold and harsh". If someone wants their version to use something like "went belly-up" in lieu of "has died" that is fine by me. Bottom line is if you are the author, feel free to use whatever verbiage that pleases you.

In a Board Resolution I would suggest you have as one of the "WHEREAS Clauses" something like whereas the Trustee named ???? has died the Plan Sponsor has determined that ???? be named to replace ?????. I am NOT providing legal advice, just a suggestion of what you might look for to address the situation, preferably by a competent ERISA attorney. I think anything else might be overkill.

I suggest that using 520 would cause problems on audit. Specifically, you might need to show that the impact of this provision would unfairly benefit the highly compensated employees, so testing might be needed. Regarding the "must be reasonable" aspects, I suspect you could have a problem here, but I also agree that the 1,000 Hour "fail safe language" may eliminate all problems.

You might be surprised by how easy it can be. The key is establish solid "information paths" before doing anything.

Lets say you have a real estate firm that employs a hundred "independent brokers" who are all paid via 1099 Forms. The real estate firm itself has several W-2 employees, primarily the owners and clerical people. My question is could the real estate firm adopt a plan that excludes the independent brokers, but does cover all of the W-2 Employees and the owners who are primarily paid via K1 under an LLC? Assuming that is possible, could the real estate firm then offer to the independent brokers the ability to adopt their plan, but under terms of a multiple employer firm. To clarify, each independent broker would be considered a separate firm that chooses to adopt the plan for the employees of the "independent broker's firm"? This would be similar to a MEP that covers several independent franchises where there is no common ownership, making this to not be a controlled group. I am guessing that problems might be due to Affiliated Service Group Rules and/or the independent broker being deemed employees of the real estate firm. I understand that the key to this topic is proving that the "1099 employee" is truly an independent contractor, including the ability to control work hours and work location; and that a Form SS-8 can be filed where the IRS determines if the person is truly independent, or if that person must be treated as a W-2 employee for issues like benefit coverage. Any and all comments are greatly appreciated. Thanks in advance!!!

If the only employer contributions are qualified under safe harbor rules, including the discretionary match, top heaviness does not apply.

Since nothing has changed would not you use timing for an amendment that does not change or reduce any benefits? Such as when plans must be restated? Many items are applicable retroactively. DB Plan all need to be redone by this March 31. Does the effective date of that restatement need to be 2025? While I am not saying that for what is hoped to be done here can be retroactive, I just point out that not all amendments and restatements must be within the plan year because they don't. In other words, the answer may not be as simple.

Back in 2021 we terminated our service to a Plan because (1) they were not paying our bills, and (2) they were not responding to our call, emails and letters. Apparently, in 2022 this client did something improper with participant accounts, and they also issue erroneous W-2 Forms for 2021 and 2022. Back in 2024 the DoL contacted us on behalf of several participants who were not properly paid benefits due. We sent the DoL our complete file on the last year (2021) that we serviced the Plan. We even included a copy of our service agreement with this client that in addition to services we provided, it also defined that provision of data was the client's responsibility. It further went on to define our role as not being a fiduciary since we are not the Sponsor, Administrator, Trustee, Custodian, etc... Our role was specifically defined to be purely ministerial in that we reconciled operations based upon data submitted. It was also stated that we have no authority on any issue of the Plan. After much discussion it was agreed that we are not responsible for items like W-2 Forms! Fast forward to the present, the DoL is contacting us again since they think we can do something about the Plan's operation. Again, after detailed discussion it was agreed that our role does not process the client's payroll (like duh). It was also stated that the only reason the DoL is calling us is because no one else will answer their phone calls! We, on the other hand, answer our phones. The agent assigned to the case actually stated that she agrees that we are not the party they should be calling! But they are calling us because WE ANSWER THE PHONE. Now they want to do a conference call to discuss how WE MIGHT BE ABLE TO CORRECT THE ERRORS THAT OCCURRED AFTER OUR SERVICE ENDED! The fact that we don't have any responsibility (per the agent), and we have no access to any data, are being ignored! Has anyone else been in a situation like this? Any words of wisdom are greatly appreciate. Unfortunately, they insisted I do a conference call with the agent and her supervisor tomorrow, even though as agreed to by the agent, we have no responsibility or even ability to address problem related to operations after our service ended. If there some "bill of rights" related to situations like this?

Thanks Peter. Always nice to confirm issues. Anyway, the Client in question is rather weak with issues like payroll. While they can code deferrals, dealing with escalations would be a disaster. It is one reason that for some clients automatic enrollment is not the best choice. And while I may confirm or dispute my opinion with replies such as you provide, it is never viewed as advice. It is just another practitioners opinion of a specific topic, that could be wrong or right. So no, it is not advice and setting the initial default deferral is clearly a design issue, hence my explanation of the client being weak on this topic. But rest assured, your comments are always greatly valued so thanks again.

Thanks to both G8Rs and Peter Guila for their replies. Another question, if I may? For the EACA used to satisfy the automatic enrollment requirement, does it make sense to set the initial rate at 10%. My thoughts are that since this is at the "required maximum" of 10% you would not need to deal with the automatic escalations. In addition, using 10% would be more likely to get the participant's attention versus a rate like 3%. I believe that a person is more likely to respond with the request to file an election when the failure to reply will haver 10% charged against the paycheck versus a lower rate like 3%. This will, if I am right, result in fewer permissive distributions to account for the "I didn't want anything taken from my check so give me my money back". This and the elimination of attending to automatic escalations will then make the client firm's job easier to deal with, which is rather important when they do payroll in-house and the person doing payroll is "less than good" with processing payroll.

Plan is a MEP that has been in effect since the 90's. Company that is established in 2023 decides to become a Participating Employer in 2024, and adopts the Plan in Summer of 2024. Since there is an exemption from the automatic deferrals for a firm that has been in business less than 3 years, I believe that Automatic Enrollment would not apply for 2025 since the business has not been in effect for at least 3 year on 1/1/2025. Does this exemption then end in 2026 since the firm will then have 3 years of business at that time? Basically, does the exemption end once the firm has been in business for 3 years?

I really appreciate your comments. Thanks! I am not a fan of using real estate under a pension trust. This is in part due to remarks in your comments, as well as the need to have an independent valuation every year, amongst other issue. However, there people have done very well with the investments they have so I can see why they do it. Lets just say it is not my favorite approach. Bottom line is that I recommended against the current cash out refinance as described, primarily due to the concern about using trust assets as collateral to borrow (potential anti-assignment wrinkle violation?). I also suggested that they may want to talk to an ERISA Attorney, noting that I am not one (repeatedly). Again, thanks!!!

Client firm is a Real Estate Broker. The Plan is a 401(k) Plan which covers ONLY the owner and wife, who are both active in the business and the only employees of the firm. Outside of the Plan they are involved in various real estate speculations, and do rather well with these investments; which is why they want to expand their use of real estate under the 401(k) plan. Currently they do have two real estate investment which are solely under the Plan (no involvement of business, or commissions to the firm, with annual independent valuation). I note that they do have other investments under the trust so it is diversified. Anyway, they now want to use the trust's real estate assets in a "cash out refinance" of the 2 real estate investments, to obtain funds which will be used to improve the properties, and possibly buy additional properties. To clarify, it seems that what they are intending to do is get mortgages against the 2 properties (currently owned 100% by trust fund), and use those funds to improve the 2 properties owned, and perhaps to purchase more real estate under the trust. It is expected that this will not involve any monies outside of the trust, and that all proceeds will remain in the trust. However, I suspect this is a prohibited transaction since they are using the two properties owned as collateral for the mortgage loans they take out against those two properties. I also suspect that this will be a PT for other reasons, but am not sure how or why. I greatly appreciate any and all comments and suggestions. Thank you in advance!

While I did not know Mike personally, I did benefit from exchanges with him. My prayers and condolences go out to his family.

I think it all depends upon what the broker is trying to represent themselves to be to a client. You have the "I am the one-stop solution to all your needs", or the "let's work with your other advisors" person. The former provides horrible service and should be avoided, while the latter makes sure that the client is properly advised. Unfortunately, this Mega Roth Fad is bring all of the one-stop disasters out as they try to sell whatever pops up on the shelf, regardless of whether it applies to a specific client. Just today, I fielded 3 call on Mega Roth for clients that could never use that type of provision. Does the broker care that what they are saying is wrong is a really telling question. One that I had today I had tried to call the broker last week, and got no return call. Of course, the client then calls us to find out how this great idea will apply and you have to tell them it won't work, so of course the broker calls you to complain that you contradicted there oh so wonderful advice. Of course, even after you point out that you tried to minimize the damage with your attempted call from a week ago, you are still at fault. How dare you tell the client the actual facts!

As suspected. I HATE when these new fad strategies start going around. Yes, I understand that for some people this is a good choice, but the niche is small. So far, just today, I had to explain to 2 clients that it won't work for them specific to their plans given the coverage of employees, the low participation rate of employees, and the impact of both ACP and Top Heavy being put back on the table. This is being done all the while that the investment advisor is saying how his manager says there is no such problems. Right.

Just as a follow-up to my above comment. Just this morning I had another client who is being advised to do Mega Roth, and guess what? They have 10 other employees under the Plan. It is a 401(k) Safe Harbor Plan, so the broker thinks that ACP Testing doesn't apply. As I understand, Voluntary Post Tax Contributions are NOT considered Safe Harbor Contributions, so the ACP testing would apply. Is this correct?

I find myself wasting too much time explaining to the owner of a firm with a 50 life plan why Mega Back Door Roth won't even work for that plan due to ACP Testing (among other issues), because the client's broker read some article that this is the ultimate way to save for retirement. Oh, and that owner often tends to be close to retirement already.

A number of years ago we had a plan where the workforce unionized, making most of the employees an excludible class. Subject to attorney review, all impacted employees were deemed to no longer be eligible to share in contributions under the Plan. Interestingly, they were also deemed to NOT have a distributable events, so the monies had to remain under the trust until the person satisfied a condition that allowed distribution. (I also note that vesting continued to accrue provided that a vesting year was completed to allow for the credit.) In summary, the effected participant received no further contributions, and their accounts remained under the trust until a distribution could be made. Regarding the OP, the question appears to be can the person be paid now since a termination of employment was realized. I would suggest no since the person is no longer terminated. A distributable event must be realized, but until then the person's account just accrues investment return and vesting credits. That was my experience with a similar situation.

To confirm Bri's comment, yes they are an Employer Contribution in all respects.

Thank you Paul. I will look into this since this is just wrong. And to top this off, the guy is rude and arrogant. Self impressed I would say! A bit scary though.

I must admit I was totally speechless when I saw what was done. Both the Client and FA (Financial Advisor) were like, did you approve this? I look at it and said no way, and pointed out several areas where we actually stated in earlier letters and the actual cover letter used to forward the documents, that the dates he tried to put in would be incorrect if used. While I can't talk for the Client, the FA has an incredible dislike for this attorney, which has been voiced on several occasions. I can't say whether the attorney claims to be an ERISA Attorney, but I can say from my experience this guy wouldn't even pass an intro course. He is that bad, IMHO. Also, thanks for the kind words. I am a big believer in full and open documentation, which has served me well over the past 39 years. But I must admit, the mere fact that the attorney made the changes and then forwarded to the Client using the actual letter I originally sent saying the dates he wanted to use could not be use, was pure foolishness. (He did use another brief letter over mine that just said use this version.) Like saying here are the documents from the TPA. Oh, and ignore his comments about the dates being used are wrong in his letter! Amazing!