Carol V. Calhoun

Plan participant has requested direct deposit of a plan payout to a bank account. The bank account is a joint account with another individual (not the spouse), and the plan has reason to believe the other individual is sketchy. Any thoughts on a) whether it is acceptable to pay to a joint account at all (since it represents payment in part to a party other than a plan participant), and b) whether the plan has any duty of inquiry to make sure, for example, that this is not a situation in which the right to payments has been assigned to a creditor? My sense is that payment to a joint account is fairly common, and that so long as the payment is made pursuant to the request of the participant, the plan has no further duty of inquiry. After all, once a check was cut, the participant could transfer the money to another party herself. And I've seen in the past situations in which a creditor showed up with the participant, and the participant signed over the check to the creditor on the spot. However, I'm not finding specific authority on point.

It is clearly the employer's responsibility to refund, not the plan's. It was the employer that erroneously sent the contributions. The amounts contributed would have been wages if correctly paid at the time to the employee instead of the plan. Thus, to put her back in the position in which she should have been, they should be wages (not pension distributions) now. Moreover, depending on her age, distributing them them from the plan could result in the 10% additional tax. Unfortunately, I cannot think of any alternatives if the Payroll Mgr is not budging. All you can do is tell the employee that it is the employer which is responsible for the refund, and that she needs to pursue the issue there.

Even though legally, a 403(b) plan can provide for plan-to-plan transfers before one of these events, it is not required to do so. Apparently, there is a dispute between TSA Consulting Group, Inc. and your employer as to whether the plan terms provide for such a transfer. You'd need to request a copy of the actual plan document to figure out which one is correct.

Any public or private school would qualify. IRC section 402(g)(7)(A) limits the 15-year catch-up to "qualified employee of a qualified organization." IRC section 402(g)(7)(B) defines "qualified organization" as follows: So an "educational organization," public or private, would qualify.

I'd say it's reasonably common. In a 401(k) or 403(b) plan, matching contributions are normally made to the same plan as the employee deferrals, and the 402(g) limit does not apply to the matching contributions. However, in a 457(b) plan, all contributions (not just employee deferrals) count toward the maximum limits. Thus, if matching contributions are made to the 457(b) plan itself, they will reduce employee deferrals. The only way around that is to have a separate plan to which employer matching contributions are made.

I don't think individually designed plans can be required to restate periodically. If the documents as a whole (even if they consist of an original plan plus 35 amendments) are qualified, on what possible basis could the IRS require a restatement? It's only weapon would be plan disqualification, and I can't see how that applies. On the other hand, I would still advise a client to restate periodically. Clients have enough trouble figuring out what their plans say when it's all in one document. If they have to piece together bits of things from a bunch of documents, the probability of correct interpretation goes way down.

Yeah, I could understand if the make-up were equal only to the earnings on the missed contribution. But the earnings appear to be a whole separate computation. And ironically, the fact that the employer cannot make up the 2015 contribution until 2016 means that more earnings will be lost, that will then have to be made up.

So if the participant elects max deferrals, she ends up getting the entire 402(g) amount, plus the QNEC, even though that exceeds the amount she could have put aside for 2015 in the absence of the error? I agree this is a reasonable reading of the Rev. Proc., but it strikes me as nonsensical from a practical perspective. Then again, other interpretations also strike me a nonsensical. We could, for example, assume that the QNEC would count as part of the 402(g) amount (even though a QNEC is not normally counted toward 402(g)), on the theory that it replaces a contribution that would normally be subject to 402(g). But given that the contribution can't be made until after the end of 2015, that would mean that there would be no way to figure out during 2015 what the maximum amount she could contribute would be.

The notice requirement is "not later than 45 days after the date on which correct deferrals begin," not within 45 days after the error.

I've got a plan that erroneously excluded a total of three employees in 2014 and one in 2015. It looks like the employer can use the new corrections procedure in Rev. Proc. 2015-28 (requiring only a 25% QNEC instead of a 50% QNEC to make up for the lost deferral opportunity). For 2014, it's fairly clear how this is to be done. However, I've got questions with respect to 2015: Is there a missed deferral opportunity at all for 2015? The Rev. Proc. says you've got to give the employee a notice saying that he or she can make up the missed deferrals, subject to the 402(g) limits. Since we're only halfway through the year, the employee should be able to defer the full 402(g) amount in the second half of the year. At the same time, the procedures are different if the error is discovered within 3 months than if it is discovered thereafter, so presumably some correction is required if the error goes on for more than 3 months but still within the same year? If the employer has to make a QNEC for 2015, how is it calculated? The QNEC is based on the ADP of the HCE or NHCE group. But presumably, the ADP can't be calculated until after the end of 2015. Does the employer have to defer the contribution until after 2015 ends, or is there some way to determine the amount of the QNEC before that time? The notice to the employee must include "A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly)." What does this mean in the context of employee elective deferrals? Presumably, no amounts should be deducted from compensation until and unless the employee makes a deferral election.

I've got a plan that erroneously excluded a total of three employees in 2014 and one in 2015. It looks like the employer can use the new corrections procedure in Rev. Proc. 2015-28 (requiring only a 25% QNEC instead of a 50% QNEC to make up for the lost deferral opportunity). For 2014, it's fairly clear how this is to be done. However, I've got questions with respect to 2015: Is there a missed deferral opportunity at all for 2015? The Rev. Proc. says you've got to give the employee a notice saying that he or she can make up the missed deferrals, subject to the 402(g) limits. Since we're only halfway through the year, the employee should be able to defer the full 402(g) amount in the second half of the year. At the same time, the procedures are different if the error is discovered within 3 months than if it is discovered thereafter, so presumably some correction is required if the error goes on for more than 3 months but still within the same year? If the employer has to make a QNEC for 2015, how is it calculated? The QNEC is based on the ADP of the HCE or NHCE group. But presumably, the ADP can't be calculated until after the end of 2015. Does the employer have to defer the contribution until after 2015 ends, or is there some way to determine the amount of the QNEC before that time? The notice to the employee must include "A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly)." What does this mean in the context of employee elective deferrals? Presumably, no amounts should be deducted from compensation until and unless the employee makes a deferral election.

This is not one of the issues covered in the example corrections, so any corrections method would have to be cleared with the IRS on filing of the VCP submission. Thus, you are not going to get a definitive answer. However, I can think of a couple of possible corrections methods you could consider. The first method is based on the fact that in general, picked up contributions are treated as employer contributions. The pickup rules were originally adopted to reflect the fact that a private employer could simply make a nondiscretionary employer contribution to a plan (and calculate the wages it was willing to pay by taking into account the contributions made), and thereby cause the contribution to be pretax. However, a governmental employer was often subject to the terms of a statewide plan that called for a particular level of mandatory employee contributions, and had no ability to modify the plan to eliminate such contributions and substitute nondiscretionary employer contributions. The pick-up rules allowed a governmental employer by resolution to redefine mandatory employee contributions as nondiscretionary employer contributions, and thus to achieve the result a private employer could have obtained by amending the plan. (It is for this reason that pick-ups are limited to governmental employers.) If we treat a pick-up as a nondiscretionary employer contribution, it would seem that the appropriate correction method would be to treat the employees as having been improperly included in the plan, or as having received contributions in excess of those permitted by the terms of the plan. In either event, the picked up contributions to the plan would be treated as employer contributions, and would be forfeited by the employee. (The forfeitures could be used to reduce future employer contributions to the plan.) To the extent that employees' wages were erroneously reduced to reflect the erroneous contributions, the employer should be paying back wages to the employee equal to the erroneously made contributions plus interest thereon. Alternatively, the picked up contributions might be treated under the rules applicable to erroneous 401(k) contributions. In this case, the excess contributions would be returned directly to the employee, with earnings, and include a written notice explaining the refund is taxable and not eligible for rollover. As a theoretical matter, I think the first approach is better, because it reflects the fact that the contributions were not discretionary with the employee. However, I don't know that the IRS would care about the theory all that much so long as the result was equitable. The net effect of either of these methods is similar. The employee gets the same amount back. The difference is whether the amount comes from the plan or from the employer. But even if it comes from the employer, the employer can get a corresponding reduction in future contributions. And Social Security should not be owed on the back wages under the first approach, because you have said that Social Security was already paid when the contributions were made.

No. ERISA section 203 is part of Subchapter I of ERISA. ERISA section 4 states that The only vesting standards to which governmental plans are subject are those found in the Internal Revenue Code. See this link for the IRS position concerning what vesting standards would apply to a governmental 401(a) plan.

I suspect that you would have issues applying the rule to existing employees, even as to future accruals, if the "California rule" applies. The best you can probably get would be to have it apply to new hires.

When you say "prospectively," do you mean that the new rule would apply to this employee (because Participant X hasn't yet begun to receive benefits)? Or only to employees convicted in the future? Or only to benefits accrued in the future? Or only to employees hired after the date of the change? Having a provision that employees forfeit benefits on a conviction should not in itself be an issue, as such provisions are common in governmental plans. However, many courts have interpreted federal and state constitutional provisions concerning nonimpairment of contracts to prohibit modifying a public plan in a way that is unfavorable to current employees. CalPERS at one point did an analysis that suggested that imposing forfeitures on "existing members who have already acquired substantial rights to their pensions" could be an issue under this authority.

One thing to watch out for is that although a governmental plan isn't subject to ERISA, it is also not subject to ERISA preemption of applicable state law. If what they have adopted is not intended to be a governmental plan, it is unlikely to take account of applicable state law provisions. Some common examples are limitations on the investments of a governmental plan, and requirements that the existing benefit structure (not just the existing accrued benefits) not be changed in a way adverse to any existing participant without that participant's consent. There are a few consulting firms with existing approved prototype/VS plans intended for adoption by governmental plans, which may be your best option.

No. The issue there was whether is whether a claim based on the ERISA prudence rules is barred by the ERISA statute of limitations. A governmental plan is not subject to the ERISA provisions concerning either prudence or statute of limitations. While many state laws governing prudence are similar enough to the ERISA prudence rules that state courts look to ERISA precedence in applying them, the statutes of limitations that apply are totally unrelated.

I've deleted my comments above, because apparently the IRS has changed its position on reporting. The current instructions to the Form W-2 state as follows: The amounts are also subject to Social Security and Medicare withholding as of the later of when the services giving rise to the deferral are performed or when there is no substantial forfeiture risk of the rights to the deferred amount. However, under Technical Advice Memorandum 199903032 (October 2, 1998), amounts are still subject to income tax withholding only when paid or made available. So in your situation, the whole $200K would be subject to reporting and Social Security and Medicare withholding in 2014. However, it would not be subject to income tax withholding until 2015 and later years, when it was actually paid out. Our experience is that most employers modify their plans to provide a payout in the year of vesting at least equal to the income taxes owed, in order to prevent hardship on the employee. The employee can then elect additional withholding to have the entire amount of such payment withheld. Of course, the employee will still have overwithholding in 2015 and future years, but can recover that amount when the income tax return for each year is filed.

And the chart showing the numbers for 1996 to 2015 is now up.

Every year in my memory, the IRS has announced the COLAs for 415, HCE, etc., the same day as the Social Security Administration has announced the new wage base. But SSA issued its announcement this morning, and there has still been nothing from IRS. Anyone know what the hold-up is?

An employer can have a non-ERISA 403(b) plan even if it maintains another retirement plan (such as a SEP). Perhaps your impression that this is not possible arises because the DOL won't treat a 403(b) as non-ERISA if contributions to the other plan are contingent on contributions to the 403(b)?

Unless the participant has made his or her own agreement to the contrary with the IRS, the IRS has no authority to go beyond the statute of limitations. So the fact that the employer is required to report the distributions does not impose any corresponding duty on the part of the participant to report them for closed years.

Under Rev. Rul. 2006-43, a pick-up arrangement must "not permit a participating employee from and after the date of the 'pick-up' to have a cash or deferred election right (within the meaning of § 1.401(k)-1(a)(3)) with respect to designated employee contributions." Treas. Reg. 1.401(k)-1(a)(3)(v) excludes from the definition of cash or deferred election: Thus, although new employees can have a one-time election as to the level of contributions, existing employees are still subject to the prior election.

No. From a federal perspective, pick-up contributions are treated as employer contributions, even if there are corresponding wage reductions to finance them. And the federal laws governing the timing of employer contributions don't apply to governmental plans (which are the only kind of plans that can have pick-up contributions). If there are restrictions, they would have to come from state law, not federal.

I suspect that a lot of employers did not report spousal health insurance this past year, even when they should have. A lot of them just never realized the issue. Even for those that did, the issue is complicated. For example, you mention Pennsylvania. Pennsylvania will not allow same-sex married couples to file jointly, but does exclude from income health insurance coverage provided to a same-sex spouse. Three states that do not otherwise recognize same-sex marriage (Missouri, Colorado, and Utah(!)) nevertheless treat same-sex married couples as married for state tax purposes due to federal conformity. And even when an employer knows that health coverage should be taxable, there are also, as you say, issues in how health coverage is valued (particularly in the case of a self-insured plan). State tax withholding depends on the state of an employee's residence, not the location of the employer's business, so it's not even a question of just mastering one state's rules. And I suspect that enforcement will be difficult. Most states rely heavily on federal matching as an enforcement mechanism. And this is an area in which the states have in effect said that state reporting is not supposed to match federal reporting. So they are going to be on their own as far as how to find the underreported income. And if a state did decide to litigate the issue, presumably it could succeed only if its ban were upheld, which seems unlikely (see below). There are currently challenges going on in all but five of the states with bans on same-sex marriage. They are typically not just against the higher taxes, but against the ban as a whole. And every one of them in which a decision has so far been issued has resulted in the ban being struck down. In Oklahoma, Virginia, Michigan, and Texas, federal District Court judges have struck down the state Constitutional ban on same-sex marriages, but the decision in each case was stayed pending appeal. In Kentucky, a federal District Court judge has struck down the ban on recognition of out-of-state marriages of same-sex couples, but the decision has been stayed pending appeal. In Tennessee, a federal District Court judge has struck down the ban on recognition of out-of-state marriages of three named same-sex couples, although the decision does not by its terms apply to other couples. In Ohio, a District Court struck down the ban on recognition of same-sex marriages from other states, although the judge stayed the decision pending appeal with respect to all couples other than the named plaintiffs. In Indiana, a District Court has required the state to recognize one same-sex couple’s out-of-state marriage. We'll have to see what happens with these cases on appeal. But at this rate, it's going to be hard even to get a conflict in the circuits that would motivate the Supreme Court to act. My chart on the issue is being updated daily with new developments, in case anyone needs a reference source.