Carol V. Calhoun

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.

Unfortunately, there simply is not a way to modify that irrevocable election. The irrevocable one-time requirement comes from section 402(g) and related regulations, which limit the amount of a revocable election. In order to avoid the 402(g) limit, the election must be truly irrevocable. If an employee were permitted to change their mind and increase the “mandatory” contribution, the contributions of all employees would then be considered to be elective deferrals subject to the 402(g) limit.

There really isn't a way to alter the one-time irrevocable election. An election that is revocable is subject to a dollar limit. Employers sometimes allow for irrevocable elections in order to allow employees to choose much higher contribution levels. However, the down side of this is that the IRS has strict guidelines for when an election will be considered irrevocable. If the employer were to make an exception for your son-in-law, it could potentially mean that every other employee who had made an irrevocable election would lose the tax benefits of doing so. Given that, the employer is unlikely to make such an exception. Your son-in-law's choices are likely to be either to deal with the reduction in take-home pay from this hospital, or to find a job with a different hospital. Given that you describe the position as "lucrative," can he really not afford to put aside 5% toward his retirement?

It would be perfectly fine (so long as there are no reasonable compensation issues) to have a fixed formula that takes into account past years of service, and/or to have contributions made to a rabbi trust to fund that benefit. The benefits do not have to be discretionary. The only things you cannot do for the period of deferral are a) to have the benefit become vested or b) to contribute to a trust or annuity that is not subject to the claims of the employer's creditors.

So long as the contributions are after-tax and the plan language allows them, they are permitted. According to the IRS, in a defined benefit plan: Trying to make them pre-tax would violate the rules regarding CODAs. However, a CODA is defined in Code section 401(k) as an arrangement: In this case, the employee is not electing to have the employer make contributions; the employee is electing to make contributions themselves.

The individual should continue to have a balance -- you can't simply take that away. But as to future participation, I agree with @CuseFan.

If the participant vests on a separation from service for any reason, then the benefit is already vested. While a noncompete can prevent vesting, that happens only if the person has to avoid competing for some defined period of time. If the person can get out of the noncompete by separating from service, it would be just like any other situation in which someone gets the benefit regardless of when they terminate.

A person is considered vested when the substantial risk of forfeiture lapses. The fact that the document says that they are 0% vested is not relevant if in fact they are vested (because they'd be entitled to the money even if they performed no more service).

Under Code section 162 (incorporated by reference into 404), a corporation cannot deduct expenses of another corporation, even if the two are part of the same controlled group. So for example, a parent company cannot take deductions for contributions it makes to its 401(k) plan on behalf of employees of a subsidiary. There is an exception in 404(g)(2) in the case of termination liability that permits a corporation to deduct termination liability paid on behalf of another member of the controlled group. I have what I think is a simple question, but am going around and around on how it should be resolved. Assume in all cases the the party wanting to take a deduction actually will actually pay the expense. Corporation A wants to sell Corporation B to Corporation C, which is unrelated. Corporation B has both a 401(k) plan and a defined benefit plan. Corporation C does not want to take over either plan. So before the transaction, Corporation A takes over both plans, assuming all the liabilities. The 401(k) plan is terminated immediately before the transaction, but not all liabilities have been paid at the time of the transaction. Rather than holding up the transaction for the 60 days until the DB plan can be terminated, a resolution is adopted to terminate the DB plan before the transaction, but it is terminated shortly after the transaction. It takes a little while to work out all the liabilities under either plan. (E.g., there is a liability for employer matching contributions under the 401(k) plan.) So contributions must be made after the transaction to cover liabilities from before the transaction. In the case of the defined benefit plan, can Corporation A take a deduction if it pays the termination liability, because at the time the liability was incurred, Corporations A and B were part of the same controlled group? Or because at the time of the termination Corporation A was the sponsor of the plan and thus liable for the termination liability? Or is it barred from doing so because the employees covered by the plan were all Corporation B employees and the termination (and thus the liability) occurred only after Corporation B ceased to be part of the controlled group? Conversely, is Corporation B barred from taking a deduction if it pays the liability because it is no longer a sponsor of the plan at the time of the contribution? Who, if anyone, can take a tax deduction for the contribution to the 401(k)? Is Corporation A barred from taking a tax deduction if it makes the contribution because the liability for it relates to employees of a different corporation? Conversely, is Corporation B barred from taking a tax deduction if it makes the contribution because it is no longer a sponsor of the plan in question? And does the answer as to the 401(k) change if Corporation A terminates it only after the transaction? This has to come up all the time, but for some reason I've never been asked the question before.

Chart showing limits back to 1996 has been updated.

Chart showing limits back to 1996 has been updated.

The major issue is that they then have a plan subject to 409A, and need to make sure it complies. The investment earnings are not taxed until distribution.

Seller in an asset sale will have multiemployer plan withdrawal liability triggered by the asset sale. As part of the deal, seller wants to have buyer pay the liability. However, buyer is questioning whether it can obtain a tax deduction for payment of the liability, or whether that would simply be treated as part of the purchase price of the assets and therefore recovered only via depreciation or sale of the assets. 26 CFR § 1.404(g)-1 provides that a tax deduction is available for withdrawal liability only if the payment satisfies the conditions of section 162 or section 212. This suggests to me that the deduction is not available if the buyer is paying the seller's liability in order to acquire the assets, because this is not an ordinary and necessary business expense of the buyer. But I'm having a hard time finding any specific support for this view. Also, does this mean no one gets a tax deduction for the payment? The buyer doesn't get one because it's not ordinary and necessary, and the seller doesn't get one because it didn't make the payment? Or could this be recharacterized as the seller having received the payment from the buyer and then paying the liability, so that the seller could receive a deduction? (Of course, this would mean that the seller would be deemed to have received more money on the asset sale, but that might be capital gains rather than ordinary income.)