Belgarath

But, are you as good as Ned Ryerson?

So, 401(k) plan with a recordkeeper (XYZ) charges a fund fee/Advisory fee/charge/whatever you want to call it - of (x basis points - already determined by the Plan Fiduciary to be "reasonable"). This fee is billed to the EMPLOYER, who pays it, so that participants' accounts are not charged this fee. Employer now wants this fee to be charged directly to the accounts of terminated participants only. Assuming this fee is "reasonable" - and some procedure can be worked out between the recordkeeper and the Employer as to the mechanics of how it is processed - I'm not sure it is necessarily a problem, but it certainly makes me squeamish. Would probably pass BRF testing - I'm more concerned about possible PT problems. Do any of you have plans utilizing such an arrangement? We have a few plans that charge a nominal administrative fee to terminated participants only, but nothing like the above arrangement.

Without knowing all the facts, # of years of non-compliance, plan assets and premium amounts, etc., I'd be a little surprised if the IRS would allow a normal VCP fix on this. This is what I'd call an "egregious" failure. But, if you do submit, I'd try the anonymous procedure first - might at least give you some indication if/how it might be corrected. Edit - I'd like to soften this stance a bit - for some reason, I had it in my head that this was a 1 person plan, and re-reading it, I can't imagine how I got THAT idea stuck in my head. So there may be a lot more room for fixes here.

I couldn't agree more - I was careful to note that incidental limits must be satisfied!

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Maybe I'm misunderstanding your question, but the only situation where the retroactive deferral is allowed is for a sole prop with no other employees - so nondiscrimination wouldn't be an issue.

Does the participant's existing account have sufficient assets and "aged money" that the future premium could be paid from existing account, (if the plan allows for it, and you can stay within the incidental limits) and thus no actual employer PS contribution is made? Might help in the future...

Yes, I had read this, and I completely understand your point. Without question, a reasonable interpretation, which may well be the correct interpretation. I'm including the text below, for anyone reading this string. Thanks for your observations. SEC. 112. QUALIFIED CASH OR DEFERRED ARRANGEMENTS MUST ALLOW LONG-TERM EMPLOYEES WORKING MORE THAN 500 BUT LESS THAN 1,000 HOURS PER YEAR TO PARTICIPATE. (a) Participation Requirement.— (1) IN GENERAL.—Section 401(k)(2)(D) of the Internal Revenue Code of 1986 is amended to read as follows: “(D) which does not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the close of the earlier of— “(i) the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof), or “(ii) subject to the provisions of paragraph (15), the first period of 3 consecutive 12-month periods during each of which the employee has at least 500 hours of service.”. (2) SPECIAL RULES.—Section 401(k) of such Code is amended by adding at the end the following new paragraph: “(15) SPECIAL RULES FOR PARTICIPATION REQUIREMENT FOR LONG-TERM, PART-TIME WORKERS.—For purposes of paragraph (2)(D)(ii)— “(A) AGE REQUIREMENT MUST BE MET.—Paragraph (2)(D)(ii) shall not apply to an employee unless the employee has met the requirement of section 410(a)(1)(A)(i) by the close of the last of the 12-month periods described in such paragraph. “(B) NONDISCRIMINATION AND TOP-HEAVY RULES NOT TO APPLY.— “(i) NONDISCRIMINATION RULES.—In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii)— “(I) notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and “(II) an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), subsection (m)(2), and section 410(b). “(ii) TOP-HEAVY RULES.—An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416. “(iii) VESTING.—For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the arrangement, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting ‘at least 500 hours of service’ for ‘more than 500 hours of service’ in subparagraph (A) thereof. “(iv) EMPLOYEES WHO BECOME FULL-TIME EMPLOYEES.—This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of section 410(a)(1)(A)(ii) without regard to paragraph (2)(D)(ii). “(C) EXCEPTION FOR EMPLOYEES UNDER COLLECTIVELY BARGAINED PLANS, ETC.—Paragraph (2)(D)(ii) shall not apply to employees described in section 410(b)(3). “(D) SPECIAL RULES.— “(i) TIME OF PARTICIPATION.—The rules of section 410(a)(4) shall apply to an employee eligible to participate in an arrangement solely by reason of paragraph (2)(D)(ii). “(ii) 12-MONTH PERIODS.—12-month periods shall be determined in the same manner as under the last sentence of section 410(a)(3)(A).”. (b) Effective Date.—The amendments made by this section shall apply to plan years beginning after December 31, 2020, except that, for purposes of section 401(k)(2)(D)(ii) of the Internal Revenue Code of 1986 (as added by such amendments), 12-month periods beginning before January 1, 2021, shall not be taken into account.

MoJo - I'm neither disagreeing nor agreeing - just discussing/blathering, since I'm uncertain on all of this - as many of us are! Ultimately, I hopefully expect that the IRS will issue some sort of guidance, but WHEN (and if) is certainly up in the air. In the meantime, the 403(b) change is an hours-based issue, which seems to agree with the (to me) reasonable interpretation as mentioned by CUSE above. The needle on my compass wavers a lot more on the issue of whether a valid exclusion category that is NOT based on hours, is valid for the LTPT deferral only. Right now, I lean toward such an exclusion as being valid for continuing to exclude LTPT's for deferrals, but I surely wouldn't want to bet the farm on it. Frankly, if the IRS comes down on the side of covering the LTPT's based solely on hours, and overriding other exclusion categories, seems to me it'll be easier (or at least more consistent) to administer - and to explain to clients. Anyone with IRS contacts had any conversations to even get a HINT of where IRS might be leaning at this point? If I were forced to make a call at this point, I'd say the non-hours based class exclusions would also apply to LTPT deferrals, but I'm sure a lot of people would disagree.

Now what if we change this situation. Plan has 21/1 eligibility requirement for all purposes. Suppose the Plan excludes truck drivers as a class, for all purposes, regardless of how many years of service. If they have a year of service, still currently excluded for all purposes. Does the LTPT now require the truck drivers with 500/3 years (or 500/2 under SECURE 2.0) to be allowed to defer? I'd love some IRS clarification on this.

Ditto! Although at this point, we have no actual situations for plans under contract where this would apply... Y'know, I'm still not quite certain I fully understand the example. I'm probably reading things incorrectly, but 317 of SECURE 2.0 seems to me to require the deferrals themselves to be made no later than the tax return date NOT including extensions. The IRS seems to be saying (and it's fine with me) that as long as the deferrals themselves were made in February (i.e. prior to the unextended due date for tax filing) that the CODA can be adopted retroactively by the due date INCLUDING extensions. Is that how you read this? Example 5 Eagle is a self-employed individual's sole proprietorship trade name. Eagle reports its income on Schedule C of the individual's Form 1040. Eagle decides it wants to add a 401(k) feature to its pre-existing profit-sharing plan on February 21, 2023, by executing a new adoption agreement with a CODA election box checked. Eagle's owner can designate a portion of her 2022 self-employed income as an elective deferral into the plan because, under amendments to IRC section 401(b)(2) made by the SECURE 2.0 Act, the CODA can be adopted retroactively as long as it is executed before the due date of the employer's tax return, including extensions.

Interesting. My understanding was that this would only be allowed for a plan adopted in 2024, retroactive to 2023, and do a retroactive deferral election for 2023. I didn't think you could adopt the retroactive deferral election retroactive to 2022. I think it may be wrong, but I hesitate to say that with any certainty without some research.

Hi Peter - off the top of my head (with no other active thought about the subject) I'd say that the thrust of this provision was mostly to keep employers from being forced into the state-run systems which are being implemented by an increasing number of states. I have a hard time seeing other useful purposes, although there likely are some that I haven't considered. Like you, I'll be interested to see what people come up with for situations where it might be the preferred option.

The terms of the plan govern what is possible! Plus generally things that are operationally allowable under legislation/regulation where you are in a remedial amendment period, and the plan hasn't yet been amended. For example, beginning in 2024 you could have domestic abuse withdrawals, if the plan sponsor allows, even though the document hasn't been formally amended yet.

With the new 2023 forms, this number will be required. The IRS has informally indicated that this will be available as part of the 5500 data sets. So, anyone can look up the opinion letter serial number for a given TPA, and essentially obtain your client list for 5500 filings under each pre-approved plan you sponsor. Is the ARA raising any hell on this? Seems pretty serious to me!

1.416-1, M-7.

Thanks CB. A no longer sponsors the plan - B is the sponsor of the plan, adopted on the date of the sale. I very much appreciate your response!

Suffering from Friday brain cramp. John Doe owns 100% of corporation A, Sponsors Plan (X) - calendar year plan. During 2021 calendar year, John sells ASSETS of corporation A to Edward Doe. Edward has corporation B - keeps the same corporate name, but now under new employer id# (he's 100% owner) and assumes the assets and liabilities of plan X and sponsors the plan. The former owner John Doe continues as a non-owner employee in corporation B. For 2022, John would appear to be a Key employee, since for part of the PLAN year containing the determination date (2021), he owned 100% of the corporation sponsoring the plan, which was subsequently taken over by corporation B. Have I got that right? Then in 2023, he's a former key, and his balance is excluded from the top heavy test. Have I got that right? Thjis is probably one of those things where I'll come in on Monday, look at it and say, "Duh, the answer is simple" but I'm chasing my tail at the moment. Thanks!

Wow, what a bizarre set of circumstances. Based on the info re provisions that you have provided, it seems to me that it would technically be a prohibited cutback if you don't make the "required" contribution to these key employees. The IRS fix-it program explanation, while very helpful in general, clearly does not contemplate this highly unusual situation. So, IMHO, you would have an operational violation of the plan terms if this contribution is not made, and I don't believe compounding it with a prohibited cutback is a wise course of action. Bit the bullet and make the contribution. You could file under VCP, and perhaps the IRS would approve it, but the time and expense may not be worth it, particularly if it is rejected by the IRS. If it is a cash flow issue, perhaps they could take a loan to make the contribution, and then as Bri suggests, cut back their deferrals to repay the loan. If the loan is repaid fairly quickly, the interest cost will be small.

Some pre-approved plans have the 414(v) limit hard coded to be incorporated by reference, and no option in the adoption agreement to provide a lower limit. So, I think in this situation, the higher limit is mandatory.

Without knowing all the intricate details of plan language, investments, procedures, etc., etc... In general terms, based on what you've said, I would allow the distributions. VCP approval could take a long time, and it isn't fair to these participants to suffer for an employer error. If you assume the IRS approves, and again, based on what you've said, I assume they will, then you are good anyway. If they don't approve, either you will have overpaid them what I assume will be an insignificant amount, or if the IRS says you have to deposit more for some reason, then you make an additional payment.

I look at a calendar, and go out 183 days...

Without considering what additional correction methods might possibly be available under SECURE 2.0, take a look at Revenue Procedure 2021-30, Section 6 (.07)(3)(d). Edited for typo - too many thumbs!

I once (MANY years ago, back in the days when I was young, and still sometimes tried to make sense of things, rather than just accepting them) looked into this a little bit - not in-depth, but the original CG rules pre-date even ERISA - it was an income tax thing to prevent manipulation of corporate income taxes. Then ERISA pulled it into coverage/nondiscrimination, and as MOJO says, clever people found other ways to try to manipulate the rules, and we eventually got to where we are today.

One of today's items in the Benefits Link newsletter had a write-up on hardship distribution self-certification. The following is an excerpt. I don't read Section 312 of SECURE 2.0 as containing any such restriction. What am I missing, if anything? Employers may now rely on an employee self-certification that they have experienced a hardship and that the employee has no other funds available to satisfy the hardship. Self-certification is only available for the first hardship request during a plan year. If the participant requests more than two hardship distributions in one year then the employer is required to have physical proof of the hardship.