Carol V. Calhoun

Alas, apparently even the ASPPA conference couldn't get the IRS to disgorge the new limits!

Thanks for the insight, MPSLAW!

Thanks for letting me know about your experience. It seems weird to say "that the regs (1.401(k)-1(a)(5)) do provide clearly for what happens in this case, and no VCP is required." The regs clearly say what happens if your plan is disqualified, too, but people go into VCP precisely in order to avoid that result. In this case, the situation was not abusive. After all, if the employer had known the rules, they could have gotten the same result with a 457(b) plan. The only tax effect is on the employees, who were not responsible for the error, not on the employer or on the plan trust. And it seems comparable to an ineligible employer adopting a 403(b) plan, so one would think the correction could be the same. But it sounds like they are not willing to bend at all.

Yeah, my concern here is that we pay the fee, and get a boilerplate IRS letter back saying that the plan is now qualified. Of course, we already know it is qualified. What we need reassurance on is that the contributions are tax-deferred. It's different from the SARSEP or 403(b) situation, because there is nothing that prohibits a governmental entity from adopting a purported 401(k) plan and having it qualified. The only thing that happens is that contributions intended to be elective deferrals would be after-tax. And it's that "declining quality of the agents" that bothers me. We need to get the agent both to understand the problem, and to be willing to grant relief (allowing contributions to be tax-deferred, not just allowing the plan to be qualified) that is beyond the usual scope of VCP relief.

Has anyone dealt with correcting a situation in which a governmental employer impermissibly adopted a 401(k) plan, in spite of not being eligible for the grandfather? It appears that this situation is not one contemplated by EPCRS, inasmuch as the plan as a whole is qualified, but the purported elective deferrals would not be a cash or deferred arrangement (and thus would be after-tax). The client would like to follow the procedure for an employer that adopts a 403(b) plan, even though it is not eligible to do so—i.e., stop all contributions to the plan, pay the VCP fee, and make distributions only when otherwise permitted to do so. Has anyone gone to the IRS to negotiate a VCP-like solution to such an issue—one that would protect the pretax status of the employees’ contributions? What was the outcome?

The part that gets to me is that if your filing is more than 15 MB, you can only upload the first 15 MB, and then have to fax the rest. First off, 1990 is calling, and wants its fax back. And second, just how is the IRS going to associate the 15 MB file with the faxed remainder?

Has anyone heard anything about when the formal IRS notice might come out? They used to happen the same day the Social Security notice came out, but that hasn't happened the past couple of years. But it seems to be awfully late this year.

Thanks, Tom! Your charts this time of year are always so helpful. And the Social Security Administration just confirmed your estimate of the wage base.

Thanks--good to know!

No. One of those single employer plan offset by multiple employer plan things.

Does anyone have any thoughts on the meaning of "offset arrangement" on the Form 5300? We've got a defined benefit plan that offsets benefits by the benefits under another defined benefit plan. (There are complicated reasons for this structure.) I'm seeing lots of discussion that a "floor offset" plan involves only a DB plan that is offset by a DC plan, not by another DB plan. But I can't find a specific definition of "offset arrangement," without the "floor" part.

There are really only two restrictions I have encountered. First, if the employer is legally required to pay a particular amount of wages (by minimum wage laws, employment contract, or collective bargaining agreement), it may not be able to raise mandatory picked up contributions to a level that would result in wages, after reduction for the pickups, being below the required level. The second constraint is that the group subject to the pickup cannot be so small as to give rise to an implication that the employees in fact had individual discretion. For example, if the "group" consisted of a single employee, and that employee's contributions went up or down from one year to another, the IRS would likely take the position that the changes were made because the employee asked for them. It is not clear how large the group has to be to avoid this issue, but it is a consideration for very small groups.

Unfortunately, it appears that the IRS will no longer issue rulings on whether a governmental entity is part of the same "employer" as another part of the state or local government. The best we've got is Private Letter Ruling 200028042, which allowed the state of Idaho and all of its localities to be treated as part of a single employer, and thus to adopt a 401(k) plan based on the State Department of Health and Welfare having a grandfathered 401(k) plan. However, I have heard rumors that at least some IRS personnel think that ruling went too far, although it has never been revoked.

Remember that grandfathering is based on whether the employer had any 401(k) plan as of the relevant date, not on whether the particular 401(k) plan existed on that date. So, for example, if the state had a 401(k) plan on the relevant date, and the board could be treated as part of the same "employer" as the state (even though the board never participated in the state plan), the board would be entitled to set up a new 401(k) plan now. (Idaho, for example, managed to set up a plan for the state and all its localities, based on a single agency having had a plan by the grandfather date.) Given the vagaries of what constitutes the employer at the governmental level, some boards may simply be taking the position that they are part of the same employer as the state, and thus entitled to set up new 401(k) plans if the state has a grandfathered plan.

No. There are provisions for individual participants to roll distributions they receive from a 403(b) plan to a 401(k) plan. However, there is no legal basis for a merger of plans, or any kind of transfers between 403(b) and 401(a) plans other than rollovers.

A 403(b) is permitted, but not required, to allow employee deferrals. The only real limitation is that if it allows deferrals for one, it must allow them for all, except for certain specified exclusions.

I always advise clients against using the <20 hours a week exclusion. There are just so many situations in which it's easy to screw up. Substitute teachers are an obvious example. To exclude them, you have to be able to say that they are expected to work less than 20 hours a week. But how would you determine that? By looking at the average substitute teacher in the district? By looking at substitute teachers at that grade level? In that subject area? With that amount of experience? A lot of people who work less than 20 hours a week aren't even going to be interested in making deferrals. The cost of letting in those who want to is minimal. Why would you bother to exclude them?

The IRS has always required that a plan be updated for the latest statute and regulations before termination, even if the deadline for other plans has not arrived. The idea is that other plans can be amended retroactively, but there is no opportunity to amend a plan after termination.

I would talk to him about this. If it is for religious reasons, perhaps one of the sharia-compliant investment funds would work for him? Or you could just amend the plan to let anyone with a religious objection waive participation. After all, it saves the employer money to keep him out of the plan. Why force the issue, if he isn't demanding higher wages in exchange for the waiver?

But in the case described at that link, the doctor does not own the employer that maintains the 403(b) plan. And the 403(b) and 401(a) are maintained by separate employers (the first by the tax-exempt, the second by the doctor's wholly owned company. As the OP and I have been discussing, a 403(b) and a 401(a) of the same employer are never aggregated, although a 403(b) of one employer is aggregated with the 401(a) of a different employer that is controlled by the employee.

Yep. One of the first issues I dealt with as a young associate (back before dirt was invented) involved this. I think I spent a month figuring out the question, then another month figuring out the answer, then a third month saying "OMG!!"

How could this ever happen? The only employers that can maintain a 403(b) are employers tax-exempt under 501(c)(3) and public schools. And no one can "own" either of those.

How do you get an owner for a 501(c)(3) organization?

Yes, the DRO is enforceable against the employer or the plan. The QDRO provisions do not provide any additional rights to a domestic relations court; rather, they are a limitation on what a domestic relations court can otherwise divide with respect to the division of an ERISA plan. To make this clearer, you can't object to an order dividing a bank account because it does not comply with the requirements for a QDRO. And the bank (as well as the parties) must comply with that order. Similarly, while a non-ERISA plan is not subject to QDRO requirements, it also does not get the ERISA preemption that would allow it to refuse compliance with a domestic relations order.

403(b) and 401(a) of the same employer are not aggregated for 415 purposes, because the employee is not in control of the employer, and a 403(b) is considered a plan of an employer controlled by the employee. https://www.irs.gov/retirement-plans/403b-plan-plan-aggregation-in-determining-compliance-with-irc-section-415c