Carol V. Calhoun

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.

They are treated separately for purposes of the 415(c) limits. Of course, deferrals under 401(k) and 403(b) plans of separate employers are aggregated for purposes of the 402(g) limits. 457(b) plans are subject to separate limits, regardless of whether it is one employer or more than one. (And of course, a state or local government can't have a 401(k) at all unless it is a grandfathered 401(k).)

You wouldn't necessarily even need a new plan for this. It is common to have more than one annuity carrier in the same plan, and to cut off new contributions to an annuity without requiring people to move the old money. Using just one plan avoids the need for two Forms 5500, etc.

No. Under Code section 408(c)(3)(B)(i), "adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that any amount included in gross income under subsection (d)(3) shall not be taken into account." Under 408(d)(3)(C), "The conversion of an individual retirement plan (other than a Roth IRA) to a Roth IRA shall be treated for purposes of this paragraph as a distribution to which this paragraph applies." Thus, a Roth conversion is not treated as part of modified adjusted gross income for purposes of the $129K income limit for contributing to a Roth IRA.

Yes. 415 limit is separate for different employers (so long as they aren't part of the same control group). 402(g) is measured at the employee level.

The employees can't be considered to have terminated employment. However, their 401(k) plan can be terminated. At that point, they will need to take a distribution which they can roll over to the 403(b) plan if they want to. There is no rule that prohibits a rollover of an amount obtained on a plan termination to another plan of the same employer. Code section 401(k)(10)(A) and Treas. Reg. § 1.401(k)-1(d)(4)(i) provide the rule that you can't terminate a 401(k) plan and distribute assets if you have an alternative plan. However, Treas. Reg. § 1.401(k)-1(d)(4)(i) specifically provides that a 403(b) plan is not an alternative plan for this purpose.

Thanks, @John Feldt ERPA CPC QPA! My chart of limits (which goes back to 1996, if you play with it enough!) has now been updated with the projections.

Title has now been changed. Thanks to you and @Tom Poje for all your work on this!

You are correct on both counts. From Notice 2003-20: Treas. Reg § 1.457-10(b)(5) provides that a beneficiary may transfer the money to a 457(b) plan of a nongovernmental employer if both the transferring plan and the receiving plan allow for this. Of course, this would require that the beneficiary actually work for a nongovernmental tax-exempt which maintains a 457(b) plan that allows for such transfers.

I have a governmental client (not state or local, so 457 doesn't apply) that wants to implement a nonqualified plan for an official. Without getting too far into the details, the plan would provide that the basic benefit is $X per year, but that a supplemental benefit of another $X a year is payable if the official doesn't engage in a paid activity (employment or self-employment) for as much as six months of the year. Note that any paid activity (not just employment with the original employer) for six months would eliminate the supplemental benefit for that year. Leaving aside for the moment the question of interpretation (e.g., how do you measure the number of months in the case of self-employment?), does this violate 409A? In theory, the "form" of benefit could be modified by the participant's decision whether or not to accept paid activity. (E.g., it would be a life annuity if the participant retired completely, but would be some sort of popup benefit if they continued to be employed elsewhere for several years.) And the supplemental benefit would be payable on something other than one of the events named in 409A (the cessation of all paid activity, not separation from service with the original employer). On the other hand, this doesn't seem to be what 409A was intended to get at, since the benefit would be forfeited entirely, not just deferred to some later date, if the individual engaged in paid activity.

Probably not. There is a forfeiture provision relating to the New York State and Local Retirement Systems. It relates to members convicted of a felony related to their public service. However, it applies only to those who joined the New York State and Local Retirement Systems after November 13, 2011. Cuomo would have been a member long before that.

You are correct, they are ineligible. Only a 501(c)(3) or a public school can have a 403(b}.

Since the contracts can't be moved and the investments can't be changed, the client's only power is to approve or not approve a distribution. I suppose they would have to exercise that power in a prudent manner (i.e., not permitting a distribution that would violate the terms of the plan). But the current fiduciaries wouldn't be liable if the plan was just invested in bad investments, because they would have no power to change that. I do wonder about the potential liability of those who set up those old contracts, though. I'm old enough to remember a time when the way a 403(b) got set up was often that an insurance agent came through town and said, "I've got this great new plan that gives your employees a tax advantage and doesn't cost you anything. Just sign here and send us the money from your employees' paychecks every month." So the employer signed up for a plan that allowed only for investment in that company's annuities, without ever thinking at all about whether there were better products out there. And those annuities often had surrender charges that effectively prevented the employee from moving money out of them. Is the fiduciary from 1980 going to be held liable if someone turns up today and says, "I have a pitiful retirement account, which could have been much larger if you had stopped for one minute to figure out what a good investment would be"?