Carol V. Calhoun

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.)

However, an excluded class in a 401(k) plan cannot be defined with reference to age or service. So for example a part-time employee who moves to full-time and then back to part-time, but accumulates a year of service in between, remains eligible for the 401(k) plan. This is pretty much the same as the rule for a 403(b) plan. This contrasts with a situation in which someone moves into a different class of employee. For example, if a plan covers only salaried employees, an hourly employee who becomes salaried and then reverts to being hourly would lose eligibility.

They must be permitted to continue in the plan under the "once-in-always-in" rule of Notice 2018-95.

I would indeed expect it to be a 401(a)(2) problem. It would mean that if the board members were just negligent (not grossly so), then any liability would end up being paid by the very plan that suffered from the negligence.

Another alternative to look at is simply to leave the money in the plan, but determine that the employee is not entitled to it. The money could then be offset against the employer's next contribution obligation. So long as there are other employees entitled to receive contributions, this would have the same financial effect as giving the money back to the employer, without the problematic issues that come up when you actually take money out of the plan.

Yeah, that's what I was thinking. It doesn't make any sense to me as a policy matter. (The match is the same under both plans, so it is far more likely that employees would want to continue their existing elections than that they would want to start at either zero or whatever we use for automatic enrollment.) But there doesn't seem to be any guidance that would let them continue the existing elections.

The issue with a merger is that the ongoing plan is then considered a successor to the acquired company's plan, and thus subject to any problems in either documentation or administration experienced by the acquired company before the transaction. For that reason, a lot of buyers want to acquired company's plan terminated before the transaction. That way, participants can take distributions and potentially roll them over to the acquiring company's plan, but the acquiring company's plan doesn't take on any liability for past mistakes by the acquired company. Oh, and just to be clear, it was not a plan of "another employer." It was a plan of the acquired company, and the acquired company remains in existence (as a subsidiary of the acquiring employer) after the transaction. So the employer is the same; it's just part of a different controlled group.

My only concern with that is that it might lead to a discrimination problem. There is some leeway under the ADP test for HCEs contributing more than NHCEs. But if you start treating it as an employer-generated default, I would think it might be an issue if the deferral rates of the HCEs were at all above those of the NHCEs.

We have a situation in which a company is acquiring a new subsidiary in a stock transaction. The acquiring company has a 401(k) plan. The acquired company had a 401(k) plan before the transaction, but it was terminated immediately before the transaction to avoid the rule that you can't terminate a 401(k) plan if the employer maintains another 401(k) plan. Acquiring company would like to provide that an individual's election regarding deferrals in the acquired company's plan would carry over to the acquiring company's plan. (Obviously, employees can change their elections at any time, but that would at least be the starting point.) That seems to me like a perfectly reasonable thing to do, so that you don't have to get new elections from all the employees at once (and risk having some of them offended that they have to make new elections when in their mind they already made elections). But everything I can see refers to employees making elections under a plan--not employees making elections under one plan and having them carry over to a different plan. Has anyone experienced this situation? And has the IRS ever approved or disapproved of it that you know of?

It will be added to your annual income for tax purposes.

Alas, the plan has no normal form. It merely states that the participant has a choice of various forms, and assumes they will select one. And it will not surprise you to know that international treaties have been signed with less effort than getting the plan document amended. So I think the best we can probably do is to pick a form of benefits to be the normal one, send out the checks, and use state unclaimed property law if the checks are not cashed. And I'm inclined to favor an annuity form as the "normal" one, inasmuch as we don't really want to get into having to set up IRAs for these people.

Any thoughts on what to do if a plan participant who should be receiving RMDs does not apply for benefits in a defined benefit plan, even after numerous reminders? The application would include an election of a specific form of benefits and providing bank account information for the deposits. I'm assuming that one should then start providing benefits in the form of a joint and survivor annuity, or a life annuity if the person is not married, using paper checks. (It's actually a governmental plan, so a joint and survivor annuity does not have to be the default form, but that would at least satisfy the RMD requirements.) But if the person later wants to select a lump sum form, can they be permitted to do so if the plan otherwise does not permit a change of elections after beginning to receive benefits? Alternatively, can they be forbidden from making the election (because obviously there is the potential for adverse selection if participants can elect a lump sum after starting a J&S)? Also, what happens if checks are sent but never cashed? There are procedures for dealing with missing participants, but I have not located any for dealing with participants whose whereabouts are known but who simply ignore checks.

Any thoughts on whether individual annuity contracts distributed when a 403(b) plan terminates must limit distributions to one of the events that would permit a distribution from a 403(b) plan (e.g., termination of employment)? On the one hand, Rev. Rul. 2020-23 indicates that "The distributed ICA is maintained by the custodian as a § 403(b)(7) custodial account that adheres to the requirements of § 403(b) in effect at the time of the distribution of the ICA until amounts are actually paid to the participant or beneficiary." (While this ruling relates only to a plan funded with custodial accounts, not one funded exclusively by annuities, presumably similar rules would apply under Rev. Rul. 2011-7 relating to plans funded by annuities.) This might be interpreted to suggest that the individual contract must adhere to the distribution requirements of a 403(b) plan, e.g., distributions are available only upon certain events including termination of employment. However, I see two arguments against this interpretation. First, the participant is entitled to take a cash distribution upon termination of a 403(b) plan. Thus, allowing a participant to take a cash distribution from the annuity contract after termination of the plan would appear to adhere to the requirements of § 403(b). Second, the revenue ruling provides that "the employer has no material retained rights under the distributed ICA after it has been distributed." If the participant's right to a distribution is contingent on the employer certifying that the participant has terminated employment, that would seem to be a material retained right. We are currently dealing with an annuity provider that claims the employer must continue to provide it with notices of when employees terminate employment, and that distributions will not be made under the individual annuity contracts until termination of employment occurs unless there is another basis (e.g., age) for allowing a distribution. Are other providers taking this position? And has anyone ever encountered the IRS taking this position?

The later of a) December 31, 2021 or b) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date of issuance of the Required Amendments List in which the change in qualification requirements appears. The RAL in this case was issued at the end of 2019, so you'd count from there.