Carol V. Calhoun

Thanks, @Mike Preston. That seemed to be the result based on what I could find, but proving a negative is always tough. @Effen, that is what I was finding so odd. This plan clearly allows the subsidized benefit even to terminated vesteds, but only if they apply for it on time. So it puts a premium on someone who has perhaps been gone for years remembering that the subsidized benefit exists and applying for it during a fairly narrow window. Anyway, thanks, all!

Plan provides that normal retirement age is 65. However, early retirees and vested terminated participants can elect to receive unreduced benefits as early as age 60. Is there any requirement that benefits be actuarially increased if a terminated vested participant does not apply for benefits until, for example, age 65? The only authority I can find on this is Code section 411(b)(1)(G) and Treas. Reg. section 1.411(b)-1(d)(3), which say that an accrued benefit cannot be decreased on account of increasing age or service. From an intuitive standpoint, it would seem obvious that if you can get a particular monthly benefit at age 60, providing only that same monthly benefit at age 65 constitutes a reduction in the benefit (because the same amount will be received for fewer years). However, Code section 411(a)(7) defines the accrued benefit as "in the case of a defined benefit plan, the employee’s accrued benefit determined under the plan and, except as provided in subsection (c)(3), expressed in the form of an annual benefit commencing at normal retirement age." (Subsection (c)(3) deals with the portion of the accrued benefit attributable to employee contributions, and is not relevant here.) So since the plan is not decreasing the amount payable at normal retirement age (age 65), is it free simply to tell the participant who applies late, "Sorry, we know you could have started receiving full benefits at age 60 if you had applied on time, but because you didn't, you won't receive either a make-up for the missed payments or an actuarial increase"?

The old account balances would cause the plan to be an ERISA plan. The only exception dealt with certain pre-2009 403(b) plans that ceased to have employer contributions after that. Field Assistance Bulletin No. 2009-02.

We have a client with a lot of employees who elect additional income tax withholding. The forms provide that employees are to specify the amount of additional withholding per pay period. However, some employees instead put down a figure that they intend to be their entire year's withholding. The result is that so little is left in each paycheck that 401(k) deferrals are limited by the absence of any paycheck to defer from. And surprisingly, this occurs often enough that it's impractical to manually check and fix the issue, and employees sometimes don't notice and correct the error right away. Does anyone have any experience with whether it will be treated as a plan qualification error if the client does not withhold and defer the percentage of compensation elected by the employee because there is not enough money left after taxes from which to deduct the funds? I've heard rumors that this was a JCEB question (never answered) some time back, but have been unable to find it in the online JCEB materials.

I think this should work. 26 CFR § 1.401(m)-1(a)(2)(ii) provides that The clear implication is that an employer contribution made to a defined contribution plan on account of contributions made by an employee in a plan that is intended to be a qualified plan or other arrangement described in § 1.402(g)-1(b) is a matching contribution, even if the plan to which the employer contribution is made is separate from the plan to which the employee deferral is made. In the context of governmental plans, it is common to have a 457(b) plan with matching contributions made to a 401(a) plan. Obviously, this doesn't work in the private sector, because a private sector 457(b) plan can cover only highly compensated employees. But it does reinforce the idea that matching contributions can be made to a plan other than the plan under which the employee made deferrals.

I know there is a 10% limit for the first year, and a 15% limit for all subsequent years, on automatic contributions under a QACA. However, if you have just a straight auto enrollment/auto escalation (not an EACA or QACA), are there any legal limits on how high the level of contributions can be? I'm not finding any, but proving a negative is always hard.

We do the same as @RatherBeGolfing and @Alan Kandel. Client sends us a check for the filing fee. We deposit the check, then use a POA and the firm credit card to make the submission. The thing that's a pain is that you want to have all the information for the 8950/8951 ready before you start the process, but you can no longer just fill the forms out in advance and submit them. I actually saved copies of the old Forms 8950 and 8951, converted them to fillable forms, and fill them out (in order to have a reminder for myself, not to submit to the IRS) before each VCP submission. And of course, this process will be even more cumbersome if they ever change what you have to submit online from what was required by the old forms.

Employer has a health plan, and a VEBA. The VEBA permits use of VEBA assets to fund health benefits. However, the health plan is not insured. Rather, a vendor requires that a reserve fund be set up. That fund is used for health benefits, and must be replenished as it is used for that purpose. The vendor will only accept amounts sent by wire transfer. However, the bank that holds the VEBA account will only send money by checks. (This strikes me as odd, but that's the facts we have.) Employer would like to have the VEBA write a check to the employer, and the employer would immediately contribute the funds to the reserve fund by wire transfer. However, for some brief period of time, the money would be in the employer's hands. Has anyone seen the IRS argue that this is an impermissible inurement?

As long as the 403(b) is completely terminated and all assets distributed, there are no legal issues. There are, however, two ways in which employers get tripped up on this. Some 403(b) providers (particularly annuity issuers) have restrictions on the investments which may prohibit distributions except at the participant's direction. This can in some instances make it impossible to distribute assets, and thus to get the plan completely terminated. In some instances but not all, you can get around this by distributing the annuity contracts rather than cash, but you really have to look at the contracts. Some employers want to just move all the existing money to the 401(k) plan. You can't do that, because there is no provision for plan to plan transfers from a 403(b) to a 401(k). You can give participants a choice of taking the money in cash or rolling it over to a vehicle of their choice (which could include the new 401(k) plan), but you can't restrict their choices. There is no required 12 month wait. The rules that prevent distributions from a 401(k) if you set up a new 401(k) too soon do not apply if the old plan is a 403(b).

Yep. Chart at https://benefitsattorney.com/charts/maximums/, showing limits from 1996 through 2021, has been updated.

Thanks, John! All now posted at https://benefitsattorney.com/charts/maximums/

Thanks for that information! The IRS always takes weeks after the CPI-U is issued, and I expect it will be even worse this year with the pandemic.

That would be wonderful! As usual, I'm happy to give credit (in this case, to you, your firm, and him). I just like to keep my site as useful as possible, and having the projected numbers helps a lot.

I update mine immediately when the IRS numbers come out. But I always like to have the projected numbers when they are available, because the IRS has gotten later and later in releasing its numbers. And with the pandemic, I expect it to be even later than usual this year.

I know that the IRS won't announce the new 415, etc., limits until at least late October. However, in past years, @Tom Poje used to project the limits about now. Given his retirement, is anyone else doing this?

You are correct. The required updates are announced each year (although in some years, there are no required amendments). But required amendments merely have to be adopted by the end of the remedial amendment period. In the case of a governmental plan, there are extensions to the normal remedial amendment period depending on the timing of the legislative sessions of the legislature with the authority to amend the plan. (Details can be found in Rev. Proc. 2016-37.) In the case of a legislature which meets only every other year, this could result in the amendments to comply with two different required amendments lists in the same year, followed by a year of not having to adopt plan amendment requirements.

Yes, the VCP submission was successful. The basis for allowing a rollover to the new 457(b) would be a complete termination of the 401(k) plan. A 457(b) plan is not considered a successor plan for purposes of the successor plan rules. However, in the end, the client decided not to go this route, because it wanted to maintain a 401(a) plan for employer contributions. It therefore just left the existing money in the 401(k) plan, but barred future contributions. Practical note: The client had hoped simply to bar future deferrals under the 401(k) plan, but use it as the 401(a) plan for future employer contributions, in order to avoid the need to maintain three different plans. This proved impossible to do, not for legal reasons but because of vendor issues. The vendor had a pre-approved 401(k) plan, but it was not intended for governmental entities. It had a pre-approved 401(a) plan for governmental entities, but that did not contain the restrictions on distributions required for 401(k) deferrals. And it had a 457(b) plan. So rather than adopt an individually designed plan, the client ultimately went with having three different plans.

The six-year restatement period applies only to pre-approved plans. Thus, it would apply equally to a governmental pre-approved plan as to a nongovernmental one, and the relevant dates would be the same. Individually designed plans are required to be updated each year, but are not entitled to receive determination letters at all except upon adoption, termination, or certain corporate transactions. However, for a variety of reasons, governmental defined contribution plans are far less likely than private plans to be pre-approved plans: Many governmental plans are adopted on a statewide basis, and cover all employees in a particular job category (e.g., teachers, judges, legislators) within that state. Because they are larger than most private plans, they often have access to the kind of legal expertise that enables them to have individually designed plans. State and local governments, other than certain grandfathered ones, cannot legally adopt 401(k) plans, which are the most common type of pre-approved plans. The same pre-approved plan document cannot be used by both governmental and nongovernmental plans. Rev. Proc. 2017-41, Section 9.06. Thus, many pre-approved plan sponsors simply don't offer pre-approved plans to governmental employers. Governmental plans are subject to state law, and of course there are 50 different state laws, so it is harder to have documents that will work for all of them than it is to have documents that will work for ERISA-covered plans. To the extent that a governmental plan is not a pre-approved plan, the six-year cycle does not apply to it.

Are you having success in getting pre-approved plan sponsors to let clients use their plans? We've had issues in the past with some of them saying they won't let you use their documents if your plan is already out of compliance.

A lot of the problem arises because the treatment of 403(b) plans as non-ERISA plans was based on an extremely old type of 403(b) arrangement. As 403(b)s morphed into being something more like qualified plans, the DOL was faced with a situation in which it either had to impose unforeseen burdens on often struggling nonprofits that had done what seemed right at the time, or come up with a strained interpretation to save such plans. In the years since the guidance was issued, the guidance has become even more obsolete, but the nonenforcement has meant that a lot of plans are just plain ignoring it. I'm old enough to remember the early 403(b)s, having been around before the dawn of time. They weren't really "plans" as we would think of them today. Rather, what would happen is that an insurance agent would come through town and say to an employer, "Hey, you can give your employees a tax benefit that is not only cost-free to you, but actually provides you with a tax benefit. Just allow your employees to buy these annuity contracts through payroll deduction. Not only will your employees save on income and Social Security taxes, but you will save on the employer's share of Social Security taxes. And we'll do all the work, while you just send us the money out of employees' paychecks." Typically, these weren't even group annuity contracts, just an individual contract for each employee. So in 1979, when the DOL adopted 29 C.F.R. § 2510.3-2(f), you already had a bunch of these contracts. The employers had always thought of them sort of like an arrangement in which employees got a group discount on baseball tickets if the employer collected the money from them and paid it all at once. If the DOL had suddenly declared these to be ERISA plans, there would have been a whole lot of questions about those existing contracts. Suddenly imposing a slew of new requirements on employers which were often underfunded nonprofit organizations was seen as a huge burden, and the DOL wanted to avoid doing that. So it came up with guidance to preserve the status quo as much as possible. Of course, in the intervening years, 403(b)s have changed radically. Employee deferrals no longer provide a Social Security tax advantage. They have to have formal plan documents. The contracts are more likely to be custodial accounts than annuities. They are likely to be group contracts rather than individual. Hardship distributions and loans have been added. All in all, today's 403(b) plans look almost like 401(k) plans. But meanwhile, the 1979 guidance remains in effect. It is no wonder that it is hard to apply to today's plans, which look nothing like the arrangements to which it was originally intended to apply.

Yes, unless it's a governmental or church plan, we advise the employer to keep its hands off to the maximum amount consistent with meeting its legal obligations. For example, it has to adopt a plan document, and determine what providers will be permitted to offer their products. However, distributions and loans should be left up to the providers (although of course the plan document would govern when they would be available).

Employer has two plans. HCEs are supposed to participate in the 403(b) plan. NHCEs are supposed to participate in the 401(k) plan. Each year, HCE or NHCE status is determined for the following year, and the person is supposed to be put into the correct plan accordingly. However, errors have been made in some instances, in both directions. Thus, for example, HCEs have contributed to the 401(k) plan, and NHCEs have contributed to the 403(b) plan. Obviously, this violates the terms of both plans. Does anyone have any experience as to the corrections IRS might be willing to accept in these circumstances? What we'd like to do is to treat this as a mistake of fact, withdraw the incorrectly contributed amounts from each plan and contribute it to the other plan. However, by the literal terms of the IRS Fix It Guides, the HCEs have been impermissibly denied the right to make contributions to the 403(b), and the NHCEs have been impermissibly denied the right to make contributions to the 401(k), which would require QNECs in both cases. And then the HCEs have made impermissible contributions to the 401(k) and the NHCEs have made impermissible contributions to the 403(b), all of which would have to be disgorged. All of that just seems to be excessive, given that no one has been denied the right to make contributions. And the investments of the two plans are the same, so no one has lost out in that area, either. What has been your experience? Will the IRS allow for a reasonable correction, or does it insist on following the technical terms of the Fix It Guides in this situation?

If not corrected, this could lead to employees being taxed on all contributions to the plan when they become vested, and rollover treatment being unavailable on distributions. In the case of a 403(b) custodial account (as opposed to a 403(b) annuity), it could lead to the custodial account becoming tax-exempt. To avoid this, the failure can be corrected under VCP (but not SCP). Rev. Proc. 2019-19.

There isn't one. For governmental plans, section 457(b)(6) permits them to correct at any time before the first day of the first plan year beginning more than 180 days after the date of notification by the IRS that there is a problem. There is limited ability to use VCP-like procedures for nongovernmental plans. See Rev. Proc. 2019-19. However, aside from that, there is no formal statement of when deadlines might be, or procedure for retroactive amendment.

Salary deferrals in a 401(a) plan can be provided only pursuant to Internal Revenue Code section 401(k), and governmental entities are not permitted to have 401(k) plans unless they had one back in 1986. And even if they had one back then, it would have to be a profit-sharing plan unless it was a pre-ERISA money purchase plan. So for the vast majority of governmental entities, salary deferrals would not be permitted in the kind of plan you describe. However, matching contributions are permitted. For example, in a 457(b) plan, any employer contributions directly to the plan would count against the maximum limit on contributions to a 457(b) plan ($19,500 in 2020). What many governmental entities do is to have employee deferrals made to the 457(b) plan, but to have contributions matching those 457(b) deferrals made to a money purchase or profit sharing 401(a) plan.