LANDO

Sounds like what you want/have is a service based contribution, i.e. the employer contribution level is tied to the number of years the participant has worked for your company. This type of allocation can be achieved with a "cross-tested allocation formula" using a participant by participant allocation formula, which allows you to contribute a different rate to each participant. Someone, perhaps your company, would need to tell the PEO administrator how much you wish to contribute for each participant...based on your old formula. Then those allocations would be subject to special non-discrimination testing and the minimum gateway requirements mentioned above. Generally, the minimum gateway is the lesser of 1/3rd the highest allocation rate received by any HCE or 5%. Depending on whether your plan has allocation conditions (last day and/or 1000 hours requirements to get the employer contribution) and what the lowest and highest allocation rates are, this may work for you. The only way to know if this might work for your situation is to have someone run some sample illustrations/testing for you.

No one? Really?

That is awesome! And you're right...perfectly on point! Thank you so much EBECatty.

Question about mergers/acquisitions and successor plan rules. Company A and Company B are a parent subsidiary controlled group and both participate in A's 401(k) plan. Company C buys the stock of Company B. Company B immediately ceases participation in the A's plan and becomes a participating employer in C's 401(k) plan. Company C refuses to accept a trustee to trustee transfer of assets and liabilities for B's employees from A's 401(k) plan, nor will C agree to a spinoff and merger on behalf of B's employees. I wouldn't think B's employees would be eligible for termination distributions from A's plan until they terminate from Company B, right? Can Company A spin off the portion of the plan that holds B's employee's balances, terminate it, and pay out the balances even though B is now a participating employer in another 401(k) plan (C's plan)?

The 2020 Department of Labor "Notice and Access" safe harbor may be used to deliver ERISA notices electronically to plan participants. The Notice and Access safe harbor very generally requires an initial paper notice, followed by a notice of internet availability, and then notices may be posted to a website. This method is not overtly a safe harbor for delivering notices required under the IRS Code, like 401(k) safe harbor notices. IRS electronic delivery safe harbors are outlined in Treas. Reg. § 1.401(a)-21. The two methods outlined are: Consumer consent - basically similar to the "Affirmative Consent" DOL safe harbor, or Effective availability - participants must have effective ability to access the notice My questions are: Are other providers who are using the DOL Notice and Access approach to delivering ERISA notices assuming this approach also satisfies the IRS Effective Availability safe harbor for delivery of IRS notices? More specifically, are you using the DOL Notice and Access delivery method to deliver your 401(k) safe harbor notices? Does anyone feel like the DOL Notice and Access safe harbor might not satisfy the IRS electronic delivery requirements?

The sponsor will certainly need to engage their own external counsel, and that is a terrific point about seller's potential liability here Peter. Thank you. The purpose of my post was to understand if any of the experts that use this forum have experience with using VFCP where less than a full correction has been approved by the DOL. I probably could have asked this more simple question, but generally the contributors to this forum like more facts surrounding the questions posed. 🙂

Right?

We were recently made aware of a late contribution issue with one of our clients when the company was purchased and the new owner started submitting their 401(k) deposits. Due to a payroll software issue, deferral and loan payments have been consistently submitted 2 weeks late since 2006. This is a small plan and the deposits have not met the 7-business day safe harbor. After interviewing the sponsor, we have determined it would be very difficult to make the argument that deposits were made as soon as administratively feasible. With a little extra work, the new owner is using the same payroll system and is now submitting deposits timely. No late contributions have been reported on the plan’s 5500s, nor has the sponsor filed 5330s. The new owner wants to correct the late deposit issue and we are trying to provide some guidance/assistance. Obviously, this situation is a candidate for VFCP, but neither we nor the plan sponsor have data prior to 2014. The sponsor may be able to produce individual payroll data for the last couple of years, but we would need to propose some simplifying assumptions given individual payroll data is not available for more than a few years. This would seem reasonable given that deposits have consistently been 2 weeks late for the entire period. The IRS has been open to less than full corrections where data was unavailable in VCP filings we’ve done. We haven’t had to do any VFCPs where a full correction was not possible. We are wondering if the DOL is open to less than full corrections and some simplifying assumptions with VFCP filings. Given these facts, we have a couple of questions for the group: Has anyone used the VFCP when a full correction is not possible because the data no longer exist? Since we don’t have individual payroll information for all years, is the DOL open to using annual deposit information and assumed annual interest rates for calculating interest due on the late deposits? Other insights? Thanks in advance for any insights.

It's still tax fraud, which is a serious matter. The participant accepted the tax benefits associated with a tax favored retirement plan and then lied to receive additional tax benefits. I suspect it was to receive a distribution she was not otherwise entitled to and a waiver of the pre-retirement distribution penalty. I could imagine an IRS agent during an income tax audit wanting to dig deeper into a large increase in income during a tax year and discovering such a fraud. It's one of those low probability high consequence things. Would someone go to jail over it, probably not, but I'll bet the IRS would make it painful.

I'd have gotten this one wrong! I have always thought true "severance pay" is never included in plan comp/allocation pay. Your question made me pull open our ASC mass submitter document. Here's what it says in discussing "post-severance comp": " Other post-severance payments (such as severance pay, parachute payments within the meaning of Code §280G(b)(2), or post-severance payments under a nonqualified unfunded deferred compensation plan that would not have been paid if the Employee had continued in employment) are not included as Total Compensation, even if such amounts are paid within the time period described in this subsection (b)." The implication is that "severance pay" paid prior to severance IS included in allocation pay...unless specifically excluded. I would follow the terms of our plan document. If I had to come up with a rule for severance payments made on a participant's actual severance/term date, I'd probably include a severance payment if the participant worked on the severance date. If the employment relationship didn't end with the last day of work, I would ask the sponsor if the employment relationship ended on the severance date or the day before. I've never thought it was necessary to specifically exclude true severance pay from plan comp. I may have to reconsider that position.

I have a sponsor that changed payroll systems in 2021. As a result of that change , overtime was not calculated correctly in 2021 through 2023 for a group of participants. Sponsor self-discovered the error in late 2023 and paid this group of employees back pay on a separate 10/20/2023 payroll. The plan is a 401(k) deferral only plan covering only collectively bargained employees. The plan does not include an automatic contribution arrangement. According to their plan document, the back pay is eligible compensation/allocation pay. The sponsor did not take elective deferrals for this separate payroll. We didn't learn about this issue until after 1/20/2024. No notice has been provided to the affected participants. I'm trying to figure out if there is a way to turn this into a notice only or zero QNEC correction. My conservative view is that correct deferrals began with the payroll following 10/20/2023, which would have started the 45 day clock for a notice only correction. Thoughts?

FWIW...our document vendor's opinion was that the participant in my example above would have/should have entered the plan on 10/1/2023. Our default election for LTPT eligibility in our SECURE/CARES interim amendments is/was, switching ECPS. That is consistent with how we set up plans for normal eligibility and allows us to better assist sponsors with eligibility tracking. Absent some formal guidance saying no LTPT employees enter before 1/1/2024, we are going to have our off-calendar year clients execute SECURE/CARES interim amendments calling for ECPs based on anniversary years for LTPT purposes for at least the period 2021 - 2023. Given the extended deadline for SECURE/CARES interim amendments, this should be a reasonable solution to address potential 2023 entry dates for LTPT participants in off-calendar year plans.

For off-calendar year plans that use anniversary year for the first eligibility computation period (ECP) and plan year thereafter, when is the first date an employee could become eligible as a LTPT employee? Example: · 9/30 plan year end, ECP switches to PY after the first ECP, semi-annual entry for LTPT EEs · Participant hired 7/1/2021. · ECP 1 = 7/1/2021 – 6/30/2022 · ECP 2 = 10/1/2021 – 9/30/2022 · ECP 3 = 10/1/2022 – 9/30/2023 · Assuming Participant had at least 500 HOS in each ECP above, should this participant have entered on 10/1/2023? Do off-calendar year plans need to use anniversary year for 2021 - 2023 to avoid this result? Just thinking about SECURE 1 interim amendments, which many have already done! SECURE says: (b) EFFECTIVE DATE.—The amendments made by this section [112] 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. Presumably, that means 12-month periods (ECPs) after 12/31/2020 DO count for LTPT purposes.

The section by section legislative summary of SECURE 2.0 says "Section 125 also provides that pre-2021 service is disregarded for vesting purposes..." https://www.finance.senate.gov/imo/media/doc/Secure 2.0_Section by Section Summary 12-19-22 FINAL.pdf

An otherwise LTPT EE turns 21 after 1/1 and before 7/1.

I'll give an AMEN to that!

I'm having trouble getting my head around the rules in EPCRS about when a sponsor doesn't have to make a corrective distribution of small benefits. EPCRS Section 6.02(5)(b) says: Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions. Corrective contributions are required to be made with respect to a current or former participant, without regard to the amount of the corrective contributions. My questions are: What may be considered a "corrective distribution"? Like are corrective distributions limited to 415 excess, 402(g) excess, and ADP/ACP refunds? When it says "This section 6.02(5)(b) does not apply to corrective contributions.", does that mean corrective contributions for former participants with no balance still have to made if the amount is < $75 or the actual cost of making a distribution, even if the TPA's cost for making a distribution will wipe out the benefit? Can corrective contributions for former participants with no balance be forfeited if they are less than $75 or the cost of making the distribution? Essentially, how liberally can this section be used to avoid having to fund small corrections to terminated participants with no balance?

What are the conditions that trigger the requirement to surrender or distribute an individual life insurance policy held on behalf of a participant from a qualified plan after a participant terminates? How does terminating before or after NRA impact whether a life insurance policy held in a participant’s account needs to be surrendered or distributed? Our ASC BPD Section 10.08(d) says, “Life insurance policies under the Plan, which are held on behalf of a Participant, must be distributed to the Participant or converted to cash upon the later of the Participant’s Annuity Starting Date (as defined in Section 1.12) or termination of employment.” And then Section 1.12 says in part, “Annuity Starting Date. The date an Employee commences distribution from the Plan.” Do partial lumps, installments or RMDs trigger this requirement? I’m also looking at the ERISA Outline Book which says, “Life insurance can't continue beyond retirement. Rev. Rul. 54-51 includes a requirement that for life insurance to be incidental, the policy must be converted to retirement income or distributed to the participant no later than the normal retirement date under the plan. Rev. Rul. 57-213 clarifies that the life insurance policy may be continued beyond retirement age, if the participant does not elect to retire. The IRS’ Listing of Required Modifications published for prototype plans provides that conversion or distribution of the policy is not required until the “annuity starting date” (i.e., the date distributions commence). Although not addressed by the IRS, it should be reasonable to allow insurance coverage to continue beyond the required beginning date under IRC §401(a)(9), if the participant has not terminated employment.” Any guidance on this would be appreciated.

Thanks Bill. That is helpful. Most of our plans do not offer an annuity option, but would a participant reaching their RBD trigger the requirement to distribute or surrender a life insurance policy held on their behalf assuming the participant only takes annual required minimum distributions? And then maybe this is too far in the weeds, but I would think that if the participant requestes that the policy be put on "reduced paid up" status (no premiums due), the policy could stay in the plan without violating the incidental death benefit rule given the original premiums that funded the policy theoretically would not have violated the incidental death benefit rule?

I'm struggling to figure out if a defined contribution plan can maintain a life insurance policies for terminated participants. The EOB basically reiterates what's in Revenue Rulings 54-51 and 57-213, which essentially says a plan may not maintain "ordinary life insurance" {read "whole life"} after a participant "retires". I'm not sure what "retires" means in this context. The IRS preapproved document we use includes the standard IRS language, which is as follows: BPD Section 10.08(d) says, “Life insurance policies under the Plan, which are held on behalf of a Participant, must be distributed to the Participant or converted to cash upon the later of the Participant’s Annuity Starting Date (as defined in Section 1.12) or termination of employment.” And then Section 1.12 says in part, “Annuity Starting Date. The date an Employee commences distribution from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Annuity Starting Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Annuity Starting Date is the first day of the first period for which annuity payments are made.” Any insights would be greatly appreciated!

We have run into the situation where we receive a document that was electronically signed by an individual using their own software, but as a trustee and service provider we have no way of verifying the authenticity of the "electronic signature". To us, it just looks like a stamp on a pdf. When we send documents out for electronic signature, the process/software we use authenticates the signer. Therefore, we know the person that electronically signed the document is the person we authenticated. These are two very different situations. Could this be the issue Nationwide is having with electronic signatures? I am certainly not an expert with electronic signatures, but I cannot agree to accept a stamp on a pdf with no way to authenticate the electronic signature. Certainly you could make the argument that we can't really authenticate a wet signature, but we can require notarization on important documents.

There are still tax benefits associated with a Church plan, deferral of income for the participants for instance. Are church plans allowed to ignore the terms of their plan documents and allocate benefits as they see fit?

I'm not sure it's true that filing an incomplete 5500 precludes DFVCP. The IRS Website below certainly makes it sound like Incomplete = Late. "Late" can be fixed with DFVCP until DOL sends a Notice of Intent to Assess a Penalty (See DOL DFVCP Fact Sheet.) https://www.irs.gov/retirement-plans/irs-filing-notices-for-form-5500-5558-or-5500ez

That's a good point WCC. So assuming the filing isn't "late" if filed before the 45 days expires, the risk must be that penalties can be assessed for filing an "incomplete" return? Sounds like everyone agrees there is a risk that DOL/IRS will assess penalties for filing without the audit attached, particularly in an abusive situation, like using this approach multiple times. Anyone know what the potential penalties are for filing and "incomplete" return assuming the IRS/DOL decides to pursue that?

So if the 5500 is filed on time without the audit attached, AND an amended return is filed within the 45 days WITH the audit attached...no DFVCP is required?