Belgarath

In the "old days" we used to call this a "waiver of compensation" and it was used a lot. As mentioned above, this largely went away with the CODA concern. I seem to recall, without further research, that this is a real problem - maybe even automatic - for unincorporated partners/sole props, but not necessarily a problem (facts and circumstances) for, say, a corporation. There was some sort of Revenue Ruling/Announcement/whatever back in the 90's on this issue.

Personally, I would never want to go down this rabbit hole. We do qualified plan administration, not investment counseling. Could you do something like this? I'm certain you could. I just wouldn't want to - at least up front, I can't see that it would add enough "value" to our services (by the time you have disclosed and CYA to the nth degree) to ever make it worth it. If you do, have fun!

Thank you. This is actually precisely what we decided on Friday as the "best" course of action, taking into account all factors.

Thanks for the responses.

Just had an interesting question presented to me - real life case. 401(k) plan with several hundred participants had an ADP failure. Small failure - between $1,000 and $1,500 had to be distributed to 1 HCE. This was done timely in March of 2020 - BUT, 3 days after the deadline, the custodian reversed the distribution - due to some BS paperwork question. They never notified anyone of this, and the distribution was never reprocessed. Fast forward to now, when it was just discovered. Of course it can be corrected by a QNEC (prohibitively expensive) or the "one to one" correction method. Problem with one-to-one is that the amounts are so small that it amounts to a QNEC of just a few cents for many eligible NHCE's. Anyone have brilliant creative thoughts? VCP is prohibitively expensive, and any solution under SCP, while possible, carries no guarantees. Many fixes, while "reasonable" by ordinary standards, might not stand up under audit. However, short of an "approved" fix, then some risk must be assumed. Thanks for any thoughts.

Tried to post this before, but I think I botched it. Spirit - you may find this post helpful:

Good for you! Your participation will be missed. Enjoy every minute! I'm reminded of a quote I read a LONG, LONG time ago - rather corny, but the point of the message has always stuck with me. Lost between sunrise and sunset. One golden hour, set with sixty diamond minutes. No reward is offered, for it is gone forever.

Great, thank you. As I said, I just wanted to make sure I wasn't missing anything.

I haven't really, but my inclination is that as long as they can elect to be covered under the 401(k), then not to worry about it. If there isn't a 401(k) and the CBA excludes them from the 403(b), I think there's a problem. Turns out that the 403(b) plan document allows the union employees to CHOOSE whether to participate in the employer's 403(b) plan, or the union 401(k) plan, so they aren't excluded under the 403(b) plan after all. But, if questionable, I'd tell them to get an opinion from their ERISA attorney.

Thanks. Haven't seen the wrap document, so I don't know what it says...

Suppose an employer has been filing several 5500 forms - one for each plan - Dental, Disability, whatever. Has not been filing for certain plans due to less than 100 participants - say, Vision plan has only 40 participants. Now they institute a "wrap" plan. Are they required to include the Vision participants, or can they still exclude them? Do they have the option to include or not include, and still file multiple 5500 forms, or must it be one form? I'd assume they want to file just one form, and must all sub-plans then be included?

Thanks, but I want to make sure I am properly understanding what you are saying. When I said he "terminates" employment with A, he does in fact terminate employment with corporation A. I was trying to show the chain of events. I do understand that for qualified plan/controlled group purposes, this isn't a termination from the employer group. So, are you saying that vesting in Plan A does continue to increase while he is employed by corporation B, or are you saying that it does not increase? Thanks again!

Corporation A and B are a controlled group. They have identical separate plans. Participant is partially vested in Corp A plan, then terminates employment with A and moves to B. Account balance remains in the A plan. Since all service with all members of the CG is counted for Years of Service, then as long as participant works for B with 1,000 hours each year, the vesting under the A plan will continue to increase, even though participant is no longer working there. Is there any dispensation that I'm missing that would allow vesting in A plan to remain frozen?

As an official Geezer, I'll give it a shot. However, one of the downsides to being a Geezer (unretired) is that one of the first things to go is memory. I kind of think this was a PLR, although of course there could be a subsequent Revenue Ruling that makes it official - I don't have time to check. Here's the PLR I was thinking of: Private Letter Ruling 8721083 Annuities: endowment and life insurance, Employee contributions, Letter Ruling 8721083, (Feb. 25, 1987),Internal Revenue Service, (Feb. 25, 1987) Letter Ruling 8721083, February 25, 1987 Uniform Issue List Information: UIL No. 0072.05-00 Annuities: endowment and life insurance - Employee contributions This is in response to a ruling request dated April 17, 1985, as supplemented by a letter dated December 16, 1985, and a telephone conversation on February 3, 1987, submitted on your behalf by your authorized representative concerning the federal income tax consequences of distributions from Plan X. The information submitted shows that Company M adopted Plan X, a defined benefit plan, on September 1, 1959. On May 5, 1977, the Internal Revenue Service issued a favorable determination letter as to Plan X’s qualification under section 401(a) of the Internal Revenue Code. A subsequent letter dated April 23, 1979, was issued, and an application for a new favorable determination letter is currently pending. Plan X’s trustee has maintained an investment fund to accumulate the funds necessary to provide the participants’ retirement benefits. Prior to September of 1978, Plan X’s trustee invested the trust funds in whole life insurance policies on the lives of the various participants as well as in an auxiliary investment fund. For each year prior to September, 1978, Company M reported to each participant an additional amount representing the P.S. 58 costs (those costs of the participant’s current life insurance under Plan X). This amount was includible in the participant’s taxable income. On September 12, 1978, Plan X was amended in its entirety and restated effective September 1, 1978. Two major changes caused by Plan X’s amendment were that death benefits for participants before age 65 were eliminated and the trust was to be funded entirely by employer contributions invested in various securities rather than partially, as before, in whole life insurance policies. On October 5, 1978, Plan X’s trustees unilaterally decided to redeem the individual whole life policies and invested the trust proceeds thereof in securities. None of the participants had any control or voice in the conversion or change in Plan X’s investment vehicle. However, prior to the funding conversion, the participants could have assumed their individual whole life insurance policies if they paid the cash surrender value of the policies. None of the participants did so. On February 11, 1980, Company M obtained a letter of approval from the Internal Revenue Service regarding the change in Plan X’s funding method. In part, the letter also approved the method by which the transition from the prior to the new funding method was to be made whereby Plan X’s unfunded accrued liability due to the change, plus the credit balance at the time of change, was to be amortized over thirty years. In accordance with the foregoing, you have requested the following rulings: 1. That the entire employee benefit arrangement between the employee/participant and Company M as the trustee and plan administrator embodied in Plan X consisting of the various programs and deductions, contributions, and payments pursuant to Plan X is a single contract for federal tax purposes. 2. That the portion of the employer contributions which was included in the gross income of the employee/participant as P.S. 58 costs constitutes consideration paid for the ‘contract‘ by the employee/participant for purposes of determining the employee/participant’s investment in the contract. 3. That upon a distribution from Plan X with respect to a particular participant, the portion of such distribution representing a return of that participant’s investment in the ‘contract‘ shall be received, tax free, by the distributee. 4. That in completing a Form 1099 for any year in which there was any distribution from Plan X with regard to a participant who was previously taxed on a portion of such distribution as P.S. 58 costs, the trustee of Plan X shall not include the portion attributable to such P.S. 58 costs in the amount of the distribution from Plan X taxable to the recipient but rather shall indicate that such portion is a tax-free return of investment in the contract. Section 402(a)(1) of the Code provides, in part, that the amount actually distributed to any distributee by any employee’s trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to such distributee in the year distributed under section 72 . Section 1.72-2(a)(3)(i) of the Income Tax Regulations provides that for the purposes of applying section 72 of the Code to distributions and payments from qualified plans, each separate program of the employer consisting of interrelated contributions and benefits shall be considered a single contract. Section 1.72 - 2(a)(3)(ii) of the regulations lists the following types of benefits and the contributions used to provide them, as examples of separate programs of interrelated contributions and benefits: (a) Definitely determinable retirement benefits. (b) Definitely determinable benefits payable prior to retirement in case of disability. © Life insurance. (d) Accident and health insurance. The regulation, however, states that retirement benefits and life insurance will be considered part of a single, separate program of interrelated contributions and benefits to the extent they are provided under retirement income, endowment or other contracts providing life insurance protection. Example (7) of section 1.72-2(a)(3) (iv) of the regulations describes a situation in which a plan provided both retirement and death benefits through the purchase of individual retirement income contracts from an insurance company. Any distribution received by an employee under such a plan, whether attributable to one or more retirement income contracts and whether made directly from an insurance company to the employee or made through the trustee shall be considered as received under a single contract for the purposes of section 72 of the Code. The facts of Example (8) of section 1.72-2(a)(3) (iv) of the regulations are similar to those with regard to Plan X prior to its 1978 amendment and change in funding method. In Example (8), the plan funded the death benefits and part of the retirement benefits by purchasing individual retirement contracts from an insurance company. The remaining part of the retirement benefits are to be paid out of a separate investment fund. Accordingly, the pension plan includes, with respect to each participant, two separate contracts for purposes of section 72 of the Code. The retirement income contract purchased by the trust for each participant is a separate program of interrelated contributions and benefits and all distributions attributable to such contact (whether made directly from the insurance company to the employee or made through the trustee) are considered as received under a single contract. The facts submitted show that prior to the cashing out of the whole life insurance policies, Plan X’s trust fund consisted of these policies and an auxiliary investment fund. However, after the redemption of the policies on October 5, 1978, and the investment of their proceeds in securities, the trust fund was composed only of securities. As the examples in the regulations indicate, the individual whole life insurance policies and the investment fund were two separate programs. But after the whole life insurance policies were redeemed and invested in securities, Plan X became a single program of interrelated contributions and benefits. Accordingly, with respect to your first ruling request, we conclude that the entire employee benefit arrangement of interrelated contributions and benefits between the employee/participant and Company M as the trustee and plan administrator embodied in Plan X after the redemption of the whole life policies is a single contract for purposes of section 72 of the Code. However, please note that in conformity with Example 8 of section 1.72-2(a)(3) (iv) of the regulations, all benefits and distributions attributable to the redeemed whole life policies are, for purposes of section 72 , considered as received under a single contract. Section 72(a) of the Code provides, as a general rule, that gross income includes any amount received as an annuity under an annuity, endowment, or life insurance contract. Section 72(b)(1) of the Code provides, in part, that gross income does not include that part of any amount received as an annuity which bears the same ratio to such amount as the investment in the contract bears to the expected return under the contract. Section 72(m)(3) of the Code provides, in part, that any deductible contribution to a trust described in section 401(a) and exempt from tax under section 501(a) , which has been used to purchase life insurance protection for a participant is includible in the gross income of the participant for the appropriate taxable year. Section 1.72-8(a)(1) of the regulations provides that an employee’s investment in an annuity contract includes those employer contributions to the benefit of an employee or his beneficiaries to the extent they were includible in the employee’s gross income under subtitle A of the Code or prior income tax laws. Section 1.72-16(b)(4) of the regulations, dealing with the treatment of the cost of life insurance protection, however, provides that the amount includible in the gross income of the employee under this paragraph shall be considered as premiums or other consideration paid or contributed by the employee only with respect to any benefits attributable to the contract (within the meaning of section 1.72 - 2(a)(3)) providing the life insurance protection. Thus, this provision is authority for treating an individual’s P.S. 58 costs under Plan X as consideration paid by the employee for the original life insurance contracts because these amounts were included in the employee’s gross income. In addition, section 1.72 - 16(b)(1)(ii) of the regulations provides that the rules of that paragraph (relating to whether employee contributions constitute consideration for benefits received) apply whether the proceeds of the contract are payable directly or indirectly to the participant. Proceeds are considered indirectly payable to a participant, for this purpose, if they are paid to the plan’s trustee, who then disburses them. Since, in the instant case, the proceeds of the redeemed policies were payable to Plan X’s trustees to invest in securities so as to fund the plan benefits, they are thus paid indirectly to participants and the rules in the regulations apply as well as if Plan X distributions consisted of the life insurance contracts and the participants personally cashed in the contracts. Accordingly, in response to your second, third and fourth ruling requests, we conclude as follows: 2. The portion of the employer contributions which was included in the gross income of Plan X’s participants as P.S. 58 costs constitutes consideration paid for the ‘contract‘ by the participant for purposes of determining a participant’s investment in the ‘contract.‘ 3. Upon a distribution from Plan X with respect to a particular participant, the portion of such distribution representing a return of that participant’s investment in the ‘contract‘ shall be received, tax free, by the distributee. 4. In completing Form 1099 for any year in which there is any distribution from Plan X with regard to a participant who was previously taxed on such portion of the distribution as P.S. 58 costs, the trustee shall indicate that such portion is a tax-free return of investment in the contract. Please note that for purposes of the conclusions reached in ruling requests 3 and 4, section 1122© of the Tax Reform Act of 1986 has amended section 72(b) of the Code so that an individual whose annuity starting date is before January 1, 1987, must exclude the same percentage of each distribution from taxation no matter for how long annuity payments are received. An individual with a later annuity starting date, however, must stop excluding a portion of the distribution from taxation when the individual has recovered tax-free the actual amount of employee contributions. This ruling is based upon the assumption that Plan X was and will be qualified under section 401(a) of the Code and its related trust was and will be exempt from tax under section 501 (a) at all time relevant to this ruling request. A copy of this ruling has been sent to your authorized representative in accordance with the power of attorney on file with this office. Allen Katz Chief, Employee Plans Rulings Branch

Interesting that you steadfastly refuse to identify the source. At any rate, I'm all done with this foolishness. Good luck with whatever you are trying to accomplish.

"1. The two examples apply to the personal income tax returns of residents of the State of New York." I doubt it. It's a little too convenient for both of these to have precisely the same numbers if they are actual returns. These are almost certainly hypothetical examples, which is fine to illustrate a point, but I still want to know the source of the "Tax scandal that will not quit" that you posted. Who wrote it? And when? Blog, newspaper article, whatever? Someone obviously has an axe to grind - maybe legitimate, maybe not. I have no opinion on that. Anyway, what Bill said!

Deleted. I originally didn't look at the title of the forum here, and mistakenly assumed it was 401(k) deferrals, so my comment was inapplicable!

Could you please give a citation for the source of your examples? Assuming it isn't official guidance from the governing tax authority with jurisdiction over NY state income taxation, (and it sure doesn't sound like it is!) I don't see how it is applicable to anything. Could be a completely worthless opinion - just like mine! And FWIW, (nothing) I agree with QDRO and CB's comments. For anyone who is interested, I have copied in below the language from the publication cited in the OP. Sorry, but I couldn't get the formatting to transfer properly. Pensions of New York State, local governments, and the federal government Qualified pension benefits or distributions received by officers and employees of the United States, New York State, and local governments within New York State, are exempt from New York State, New York City, and Yonkers income taxes. This subtraction modification is allowed regardless of the age of the taxpayer or of the form the payment(s) take. 11 Publication 36 (3/15) This subtraction modification is allowed for a pension or distribution amount (to the extent the pension or other distribution was included in your federal adjusted gross income), including a distribution from a pension plan which represents a return of contribution in a year prior to retirement, as an officer, employee, or beneficiary of an officer or an employee of: • The United States, its territories, possessions (or political subdivisions thereof), or any agency, instrumentality of the United States (including the military), or the District of Columbia. • New York State including, the State and City Universities of New York and the New York State Education Department, who belongs to the Optional Retirement Program. (Note: Optional Retirement Program members may only subtract that portion attributable to employment with the State or City University of New York or the New York State Education Department.) • Certain public authorities, including: the Metropolitan Transportation Authority (MTA) Police 20-Year Retirement Program; the Manhattan and Bronx Surface Transit Operating Authority (MABSTOA); and the Long Island Railroad Company (LIRR). • Local governments within the state, including, but not limited to: • New York State (NYS) Teachers’ Retirement System; • New York City (NYC) Teachers’ Retirement System; • NYC Teachers’ Retirement IRC 403(b) plan; • International Union of Operating Engineers Local 891 Annuity Fund (Department of Education of the NYC School District); • NYC Superior Officers’ Council Annuity Trust Fund; • NYC Correction Captains’ Association Annuity Fund; • NYC Detectives’ Endowment Association Annuity Fund; • City University of New York (CUNY) Civil Service Forum Annuity Fund; • Sergeants Benevolent Association of the City of New York Annuity Fund; and • NYC variable supplemental funds (VSF), including: • Transit Police Officers’ VSF, • Transit Police Superior Officers’ VSF, • Housing Police Officers’ VSF, • Housing Police Superior Officers’ VSF, • Police Officers’ VSF, • Police Superior Officers’ VSF, • Firefighters’ VSF, • Fire Officers’ VSF, • Corrections Officers’ VSF, • Corrections Captain and Above VSF.

Thanks John - that's what I was getting out of 2020-86, but I was afraid I was missing something...

I agree with Mojo. In my simplistic viewpoint on this, it is just an overpayment due to an incorrect calculation of vesting percentages. No different from a situation where someone should have been (x)% vested, and instead was incorrectly paid 100%. Same correction. Good luck getting the money repaid from people who weren't rehired. (And even some who were.) Some may, but my experience is that for most employers, the hassle (unless the amounts are really large) is such that after the initial communication, they quickly determine that the amounts cannot be collected without excessive expense or aggravation, and they just pony it up themselves.

I'm not entirely clear on this. Say in 2020, a SH Nonelective plan was amended to remove the SH. Now in 2021, the employer wants to reinstate the SH for 2020. This is ok. But, is the SH now required to be 4% (since it is retroactive to the prior year) or can it be 3%, since it is reinstating the 3% nonelective that already existed but for the prior amendment? edited to remove an inconsistency in original post

Thanks all. Helpful comments.

Thanks Luke.

Kind of a convoluted question, and I don't have full information available. 1.403(b)-5(b)(4)(ii)(B) provides that you can exclude employees who are eligible under a 401(k) plan of the employer. (my emphasis) The Employer sponsors a 403(b) plan which excludes union employees. Now, the union employees can defer into a 401(k) plan. I don't yet have information here, but I don't have much contact with union plans. I'm not sure if the employer is technically the plan sponsor, or if the union is the plan sponsor. Does it really even matter? If the employees are eligible to defer into the 401(k) plan, doesn't the employer have to be a "participating employer" in the union plan in order to even submit deferrals on behalf of the employees? Also, what happens if a collective bargaining agreement excludes union employees, but there ISN'T a 401(k) Plan? This would seem to require e change in the CBA, or the 403(b) plan is in violation of the universal availability requirements. Anyone ever seen such a situation? This question is theoretical, as thankfully I haven't (yet) encountered this.

Seems ok, but smells funny. Medical practice hires a new Doctor, NOT as an owner or partner. Plan has 1-year eligibility for everything but they want to let this Doctor in immediately. Amends plan to credit service with prior employer so that Doctor enters immediately. This Doctor will not be a HCE for 2021, as there is no lookback year comp, so it doesn't technically seem discriminatory. Thoughts?