Carol V. Calhoun

Thank you, @John Feldt ERPA CPC QPA!

@Peter Gulia, oh, I know we won't have the official figures for a while. But in past years, people have been able to use @Tom Poje's spreadsheet to project the limits once the BLS came up with its numbers. @John Feldt ERPA CPC QPA, are you yet able to do that?

Any update on this, given that we're now into October?

Section 409A applies only if it is a deferred compensation arrangement. A short-term deferral is defined as not being a deferred compensation arrangement. And the short-term deferral rule applies so long as the amount under a 457(f) arrangement is paid within 2½ months following the year of vesting. So a normal 457(f) arrangement in which amounts are paid on vesting isn't a deferred compensation arrangement, and can follow just the 457(f) rules, not the 409A rules. The only time you have to worry about the 409A rules in the context of a 457(f) arrangement is if there is deferral beyond the year of vesting. I have seen this most commonly in situations in which the employer wants to provide an annuity payment. What you'd typically do in that situation is to provide that only an amount necessary to pay the 457(f) tax (which is the tax on the present value of the annuity) is paid in the year of vesting. Thereafter, the person receives the annuity payment each year. The annuity is taxable under section 72, meaning that most of each payment is nontaxable (the tax already having been paid in the year of vesting). In that situation, you have a deferred compensation arrangement. So if, for example, you wanted to delay the start of the annuity payments, you'd have to follow the 409A rules. But if you're just talking about delaying vesting (and still paying out in the year the amount finally vests), you don't need to worry about the 409A rules.

Yes, it can be. But the existing benefit forms must be preserved, at least with respect to the portions of people's accounts derived from contributions made prior to the change. So even though the plan is now a PSP, it will be paying life annuities/joint and survivor annuities.

You can't merge a 401(a) plan such as a money purchase plan with a 403(b) plan. You could leave the money purchase plan in place for the old money and just have the new money go into the 403(b) plan, but that would involve a lot of administrative hassles. Or you could terminate the money purchase plan and allow people to take their money, potentially with an option to roll it over into the 403(b) plan.

I'm trying to figure out the rules when a plan is terminated just before the employer is acquired, and its employees are thereafter covered by the acquirer's plan. Let's call the acquired company A and its plan, Plan A. The acquiring company's plan is Plan B. The IRS site says that the 415 limit is prorated for a terminating plan, but not in the case of an individual who joins a plan late in the year. And of course, plans of a single employer are combined. In this case, presumably Plan A must apply a prorated 415 limit to contributions made before its termination. But because the employees of A have been employed by the same entity all year, and Plan B did not have a short plan year, presumably Plan B must combine its benefits with those of Plan A in calculating the 415 limits for Plan B. But does the reverse apply? Must Plan A combine its benefits with those of Plan B in calculating the 415 limits for Plan A? Common sense would seem to say no. Plan A had a short plan year, and no contributions were made to Plan B on behalf of A employees during that short plan year. But I haven't found authority directly on point.

Absolutely! The money in a 457(b) plan is technically part of a "rabbi trust," which is treated for tax purposes as if it was owned by the employer. So if the money gets paid out of that trust, it's still the employer's obligation to report it on the W-2 at the end of the year. No need to have it make a pit stop in an account of the employer on the way out of the rabbi trust before going to the participant.

Thank you, @EBP! That is very helpful.

We represent a company that is about to acquire all the assets of a company that has been a pre-approved plan provider. Our client would like to continue that business. Obviously, our client is not so far on the list of entities with pre-approved plans. And waiting until they could their own opinion letter (presumably Cycle 4 at this point) would mean losing a lot of potential business. What do entities in this situation do? The existing plans shouldn't be any less qualified due to the change in provider. But a) is there any procedure under which an employer which adopted such a plan as provided by our client would have the protection of the opinion letter issued to the former provider, and b) as a business matter, what has people's experience been concerning the willingness of employers to adopt a plan from an entity not on the IRS list of approved pre-approved plan providers?

For some definition of "fun"... 🤣

Alas, I haven't looked at that issue. The governmental plans I represent tend to be larger ones, with different benefit structures for different job classifications, different benefit structures for people hired during certain time periods, sometimes different contribution options to be chosen at initial hire, different interrelationships with corresponding DC plans, etc., so they would not be amenable to a pre-approved structure.

Unfortunately, it has not. I have said for years that this is something that needs to be changed. It's one thing to push employers to use pre-approved plans for their standard 401(k) plans. But no one is developing pre-approved governmental defined benefit plans, if only because the plans have such differing terms and often Constitutional barriers to any changes. And I have seen governmental plans whose determination letters date from before the Internal Revenue Code of 1954. Obviously those letters can't exactly be relied upon now, but governmental entities really have no choice.

I would also say that most of our employers have simply decided to allow all employees, regardless of hours, to make their own contributions (although part-timers may not be eligible for a match or nonelective contributions). The cost of allowing employees to contribute their own money is typically less than the cost of keeping two or three years' worth of records of hours.

The employer uniformly did not take participant contributions from bonus pay. For the other participants, Rev. Proc. 2021-30 is clear that they are to be provided with QNECs plus earnings from the date the contribution should have been made. The uncertainty arises only with respect to those whose contributions are limited by 401(a)(17) or 415. That group presumably isn't owed QNECs because their contributions for the year were correct. But the question is whether they are still owed earnings.

It's not just the 402(g) limits. A municipality is not permitted to have 401(k) plan at all, unless it (or an entity considered part of its control group) had a 401(k) plan before May 6, 1986. So if the employee were given the option to take the amount in cash, the entire amount would be taxable to the employee even if they elected to contribute it to the plan, and the 402(g) limits would be irrelevant.

I am getting mired in what should be a very simple problem: Whether the employer has an obligation to contribute earnings in a situation in which an employee's entire after-tax contribution for the year is correct, but the timing of it is wrong. Example: Susie has regular compensation of $345,000, plus a $50,000 bonus she receives on January 15. She elects to make an after-tax contribution of 5% of compensation. The employer erroneously fails to treat the bonus as compensation for purposes of the plan. This has no effect on the total amount of her after-tax contribution for the year, because her compensation in excess of $345,000 would have been disregarded. However, if the bonus had been taken into consideration, a $2,500 after-tax contribution would have gone into the plan in January, and then contributions would have stopped in late October. Presumably, the employer has no obligation to make a QNEC, because total after-tax contributions for the year would have been correct. However, is it obligated to make up earnings for the period from January 15 through when contributions would otherwise have stopped? Rev. Proc. 2021-30 does provide that: So presumably we could treat the date on which contributions would have been made as July 1, even though we know that they would actually have been made on January 15. But we still have the issue of whether the sponsor is required to make up earnings for the period July 1 through end of October.

The usual way this is done is to provide that at retirement, all unused leave goes into the plan; employees have no election to take it in cash. However, you then provide that the retired employee can take a lump sum distribution of the amount at any time. This has pretty much the same effect as allowing them an election unless they are so young they would face the 10% penalty for early distributions.

You're right. They are included for coverage testing for both 403(b) and 401(a) plans. Mostly, we don't worry about the effect of this on nonprofits too much though, because the number of people treated as independent contractors is small enough that counting them for coverage purposes (even if all of them were recharacterized) would not throw off coverage testing. There aren't a lot of nonprofits that have Microsoft's situation. The bigger issue is the universal availability rule. That's a damned if you do and damned if you don't situation. If you include someone who really is an independent contractor, you have violated the rule that a 403(b) plan can cover only employees. If you fail to include someone later recharacterized as an employee, you have violated the universal availability rule. So there is no "safe" option other than avoiding having independent contractors at all.

We have two companies, A and B. A is the parent, but has no employees. B is the subsidiary that actually has employees. In the interest of time, we'd like to have A adopt a 401(k) plan that would cover B's employees, rather than having B sign a separate participation agreement. Does anyone have any authority as to whether this works?

The only change made by SECURE 2.0 is that you don't need to contact participants to get the return of overpayments, or to notify them that the overpayment is not eligible for rollover.

Sure. They had only asked about nondiscrimination testing.

You'd still need to worry about the universal availability test, but that's about it.

If the plan is a church plan, no nondiscrimination requirements apply. If it is a governmental plan, the only testing is the universal availability rule, which requires that with very limited exceptions, if any employee can contribute, all must be allowed to contribute. For other plans, all of the tests applicable to a 401(a) plan, other than the ADP test, apply.

You say the plan covered nuns. Was it a church plan? If so, it is not required to file Forms 5500 or 8955 unless it elected to be covered by ERISA, which very few church plans do.