cathyw

I would analyze this situation differently. Under Rev Proc 2021-30 (EPCRS) the correction for a plan sponsor not applying the employee's deferral election correctly (that is, underwithholding) is for the plan sponsor to make a corrective contribution equal to 50% of the missed deferral. (In some cases that corrective contribution is 25% or 0% but it doesn't matter for this purpose.) In your case, the plan sponsor instead made a corrective contribution equal to 100% of the missed deferral. There's nothing more to correct.

That was my original question, whether the key employee's deferral can be used to satisfy the top heavy minimum. But I subsequently posted the plan document provision that clearly states that the key employee's deferral is not counted towards satisfying the top heavy minimum. "Notwithstanding anything in the Plan to the contrary, in determining whether a Non-Key Employee (and Key Employee if elected in the Adoption Agreement) has received the required minimum allocation pursuant to Section 4.3(f) such Non-Key Employee's (and Key Employee's) Elective Deferrals shall not be taken into account." So now the only hanging issue is whether once this top heavy allocation is made to the key employee whether that key employee's contribution percentage is recalculated which would result in additional allocations...on and on until they hit 3%. Clearly the fix going forward is to amend the plan to only allocate top heavy contributions to non-key employees. As for the past years, the plan sponsor is contemplating a VCP proposing no allocation to the 3 key employees who are the stockholders and one daughter.

Thanks. That's what I was concerned about. I'm going to suggest that the plan sponsor amend the plan to limit TH to non-key employees, but that doesn't help them for the missed contributions since 2020.

Update to this message -- I requested a copy of the plan document which is a FIS pre-approved document. The following language is included: "Notwithstanding anything in the Plan to the contrary, in determining whether a Non-Key Employee (and Key Employee if elected in the Adoption Agreement) has received the required minimum allocation pursuant to Section 4.3(f) such Non-Key Employee's (and Key Employee's) Elective Deferrals shall not be taken into account." This language seems to run counter to our discussion above. The plan would not count the deferral of the key employee towards the satisfaction of the top heavy minimum (even though the plan counts it for the determination of the minimum rate of allocation). In that case, going back to my example, if the key employee deferred 1.6% and also received an additional allocation of 1.6%, does that now mean that the top heavy rate of allocation has to increase to 3%? What a strained result!!

Thank you. As I said, I really needed this sanity check. I know that the key employee deferral counts for purposes of determining the level of any key employee allocation and I thought it also counted for purposes of satisfying the allocation, but this TPA's report made me question my memory. (Age has a way of doing that to me!)

I think I need a sanity check on this one. I was referred a plan to review for a possible vcp or self-correction due to missed top heavy contributions going back for several years. One out of 3 key employees made a small deferral contribution of 1.6%. There are no employer non-elective or match contributions. The plan document states that all participants (key and non-key) receive top heavy contributions. The TPA has calculated a top heavy contribution amount of 1.6% for all participants including the key employee who had a deferral contribution of 1.6%. Should this key employee receive the additional 1.6% top heavy allocation, or is this key employee's deferral contribution deemed to satisfy the minimum required allocation of 1.6%? If the additional allocation is required, does that then mean that there is one key employee with at least a combined 3% allocation and now all other participants must be increased to 3%? Also, what is your opinion on whether this can be self-corrected pursuant to Notice 2023-43 or a vcp application should be filed? Thanks for any and all input.

Thanks. I couldn't find anything definitive either.

When transferring an account between non-governmental 457(b) plans the recipient plan must treat the elections made under the transferor plan as if made under the recipient plan. What if the election made under the transferor plan includes a method of distribution that is not offered under the recipient plan? Must the recipient plan recognize that method of distribution? Thanks for any and all insight.

Thanks for the comprehensive response. I discussed with the client and since the additional RMD will be small we agreed to calculate on the actual account balance as of 12/31/24.

Another question related to an earlier post -- the employer made an excess contribution to an employee's SEP-IRA in December 2024. Per EPCRS, the financial institution returned the excess funds plus earnings to the employer in January 2025. This employee is due an RMD for 2025. For purposes of the RMD calculation, do you deem his SEP account balance to be exclusive of the erroneous allocation that was subsequently withdrawn (which I would do if this was a profit sharing account that received an incorrect deposit from the employer) or do you treat it strictly as a cash basis IRA balance as of 12/31/24? To me it's logical to adjust the balance to reflect the correct accrued benefit, but I haven't found any supporting guidance for this position. Thanks.

Yes. That's why a correction is needed. But do they increase the contribution to the HCE as an operational error, or do they treat this as an excess amount/excess allocation to the NHCE and pursuant to RP 2021-30 make a distribution to the NHCE as allowed for SEPs? Does the plan sponsor have a choice under EPCRS?

The contract is specific that the contribution will be $40,000 annually. If the additional funds are deposited now into her IRA, I will suggest that either her salary or SEP contribution be adjusted downward for 2025 and that she address this with the board. Thanks.

A small employer (non-profit) has two employees...the executive director (an HCE) and the president (a NHCE because he only works part-time). The HCE'a employment contract stipulates that she will receive a $40,000 annual contribution to the SEP in addition to her salary. The NHCE's employment contract stipulates that his annual compensation amount is inclusive of any contribution required to be made to the SEP. While the NHCE's salary and SEP contribution total the annual 2024 compensation package, because of miscalculations the NHCE's contribution is a larger percentage of his salary than the HCE's. The usual self-correction under EPCRS would be for an additional contribution to be made to the participant receiving the lower percentage contribution. That would mean giving the HCE a larger contribution, which is in contravention of her employment contract. The NHCE (president) is okay with withdrawing the excess percentage contribution from his IRA by 4/15 and taking it into income. I'm hesitant to go that route as it seems to be against EPCRS. Since the operational error is in favor of the NHCE (i.e., receiving a larger contribution than the HCE) can it be left alone? Or does the simple violation of a nonuniform allocation dictate that a correction is necessary? And if a correction is needed, must the HCE receive an additional contribution (and perhaps adjust compensation or contribution in 2025)? Thanks for all comments.

We already checked about including them in testing, and coverage will be satisfied. It's a small plan and only 2 employees would be affected. One of them terminated with less than 500 hours so he's excluded from coverage. We'll probably bring him in on 1/1/23 but he won't accrue anything in the db plan, and he won't need gateway in the ps plan. The other employee terminated with more than 1,000 hours. I'll probably just exclude him by name since I'm uncomfortable using a 12/31/23 employment date requirement. Thanks for all input.

If a new cash balance pension plan is being implemented now effective January 1, 2023, can the plan exclude employees who terminated during 2023 even though they would have satisfied the eligibility requirements as of 1/1/23? Can there be an exclusion for any employee who wasn't employed on 12/1/23 for example? Or would that be considered an impermissible service exclusion? Alternatively, we can provide an accrual for 2023 with a 3 year cliff vesting schedule and exclude all vesting service prior to 1/1/23. There is an existing 401(k) profit sharing plan that will continue. Per EOB, if there is a second plan of the employer that doesn't terminate within 5 years before or after the effective date of the new plan, that is not considered a predecessor plan for purposes of excluding vesting service prior to plan establishment. Any other options? Thanks.

Have a new take-over client with a PPA pre-approved VS document effective 1/1/21. The plan sponsor says the prior TPA was very difficult to work with, never available, never responsive, etc., etc. The plan sponsor also indicates that he never received a Cycle 3 restatement from the prior TPA. I'm not surprised since I don't know why the TPA would have used a PPA document for the initial adoption back in December 2021. Anyway, we are to provide a Cycle 3 document to correct. The IRS guidance for late amenders is to treat the plan as individually designed and adopt an amendment for the missing provisions; then restate onto a Cycle 3 document. Does anyone know of an amendment template that would pick up the required provisions since PPA to the present? The document provider I use did publish an amendment for the final Hardship Distribution regulations, as well as CARES/SECURE. What more would have to be added? Thanks.

I may be oversimplifying this but didn't SECURE ease the (a)(26) requirements for a frozen (either hard or soft) plan? My understanding is that the minimum participation requirements are deemed satisfied if: (1) the plan was amended to either cease all benefit accruals or close the class for benefit accruals, (2) the plan satisfied (a)(26) at the time of the freeze, and (3) there was not a substantial increase in coverage or benefits for the 5-year period preceding the freeze. If that's the case, then why do you need to provide any accrual for any new participants? If I have this wrong, please correct me. Thanks.

I may be conservative on this, but I always advised clients that if a business owner took a loan from the plan with the intention of loaning those funds back to the plan sponsor, and then immediately did loan the money to the company, the IRS would have a very strong case to claim that this was an indirect loan to the plan sponsor which is a prohibited transaction. At a minimum, the business owner (after taking the loan from the plan) should loan a different amount at a different time and under different repayment terms if trying to establish that these two transactions were independent and totally separate.

If a pre-enactment (grandfathered) plan without automatic enrollment now chooses to add automatic enrollment, does it have to be an EACA and comply with the SECURE 2.0 rules? Or can the plan add a plain vanilla ACA without any problem? Thanks.

Thanks for the quick response.

A DB plan excludes HCEs (other than the two owners) and requires one year of service for NHCEs. For 2023 all eligible NHCEs are participating, but the plan needs to include one more participant to satisfy the 40% requirement of (a)(26) minimum participation. There are several HCEs who would have the one YOS in 2023, and there are several NHCEs who were first hired in 2023 and do not have the one YOS. If an amendment brings in one HCE retroactively for 2023, would that be a discriminatory amendment under 11(g) standards? Since the newly hired NHCEs are statutory excludables for 2023, we can ignore them for coverage. But an amendment granting a meaningful benefit just to one HCE is concerning to me. We discussed that they can alternatively bring in one NHCE early and grant the benefit (of course, testing under 410(b) would now have to include everyone with that reduced eligibility), but the plan sponsor would like to grant the benefit to this one HCE. Is this a problem or am I just overthinking this? Thanks.

These 3 NHCEs are being provided meaningful benefits so that the CBP will satisfy (a)(26). There were more HCEs and NHCEs at the related company. The amendment will only name these employees as eligible, without extending participation to all employees of the related group, to the extent needed for 410(b) and (a)(26). This is a multiple year situation, going back to 2019. With the interim IRS guidance on broadening self-correction options, I believe that if we correct through a retroactive amendment that would have satisfied the 11(g) rules, then the plan can self-correct.

The only participants previously covered in a 401(k) plan were owner and spouse, neither of whom make a deferral contribution for the year in question. The plan is not safe harbor. It turns out that because of a recently discovered ASG situation, 3 NHCEs of a member of the ASG have to be covered for 410(b) purposes. Under the 11(g) regs, coverage should be corrected by retroactive amendment and a QNEC equal to the ADR of the NHCE group. How do you determine the QNEC when there's no ADR for either HCEs or NHCEs for the year? There's also a cash balance plan affected. These NHCEs will be retroactively covered, provided with a meaningful benefit under (a)(26) and receive profit sharing contributions in order to satisfy (a)(4) on a combined basis. But how to correct the 401(k) component?

Can we take this scenario in a slightly different direction? What if the only participants previously were owner and spouse, neither of whom make a deferral contribution for the year. The plan is not safe harbor. It turns out that because of a recently discovered ASG situation, 3 NHCEs of a member of the ASG have to be covered for 410(b) purposes. Under the 11(g) regs, coverage should be corrected by retroactive amendment and a QNEC equal to the ADR of the NHCE group. How do you determine the QNEC when there's no ADR for either HCEs or NHCEs for the year? There's also a cash balance plan affected. These NHCEs will be retroactively covered, provided with a meaningful benefit under (a)(26) and receive profit sharing contributions in order to satisfy (a)(4) on a combined basis. But how to correct the 401(k) component?

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