justanotheradmin

"Mega Back Door Roth" is a marketing term. An after-tax contribution is done, then converted to Roth. A better phrase would be "after-tax contribution with a Roth conversion". Sometimes we see plans with after-tax contributions but no one remembered to do the Roth conversion part (which is pretty important) so the participant finds out later that there is tax due on the earnings on the after-tax money. And I agree with JackS, the news / marketing cycle churns this up periodically and it's nothing new.

I guess I missed that the loan was already defaulted. Plans track defaulted loans every day. The fact that it might turn into after-tax basis if payments are ever made isn't a new thing. For me, its not a big enough pain to consider a very unorthodox approach to loan management. If you are looking for agreement/ validation or a blessing to your approach - I don't see much here. But the boards have been wrong before, and the IRS does sometimes surprise the industry in how it chooses to interpret things. So who knows. I'd love for someone to pose your question to an IRS panel at a conference and see what they say. I would take this as a lesson to design plan loan policies more carefully, including which sources are used for loan proceeds from the outset. One TPA I know of encourages a hierarchy where loan proceeds are taken first from employer money sources for this very reason. It is often easier to offset than if the loan was taken from deferral.

So if match is a distributable source why not take a distribution from Match - and then use the proceeds to pay off the loan? Mandatory withholding would make the distribution larger, but if the ER is willing to front the 20% to go towards repaying the loan, it doesn't have to be. For example $5,000 distribution, $4,000 to participant after withholding. ER gives Participant $1,000, participant uses the $4,000 + $1,000 to repay the loan. It would avoid the rebalance question entirely.

So - Here's a question - is this really necessary? Does the plan allow for more than one loan? Based on your fact pattern Deferrals $10,000 real money, $5,000 Loan = Total $15,000 Match $7,000 real money = Total $7,000. I'm going to assume 100% vested. Analysis would obviously be different if not. Total Account balance $22,000 Maximum Loan 50% = $11,000 Current outstanding loan balance $5,000 If the plan allows for a new loan - New loan maximum amount $6,000 (assuming there isn't an issue with the high loan balance within the 12 month lookback period). Take a NEW loan from Match - repay the old loan into deferrals, problem solved. I'm sure the actual numbers are different, but if the total account balance is large enough, it might be doable.

Well, maybe I'm pointing out the obvious - but plenty of plans/sponsors/participants have extenuating circumstances. I think we've likely all lived through a recession or two, seen companies go bankrupt, lay off workers, walk away from unfunded plans, seen business owners lose their homes etc. Just because there are extenuating circumstances doesn't mean the action is allowed. Also - what does the loan note say? Was there any other loan paperwork (such as payout instructions) that specified the sources and repayment process? The one we use references a security interest in the vested interest of the Participant's benefit in the plan. If the participant is not fully vested in the match source you propose using - or vested enough to cover the loan balance - the other arguments against notwithstanding, I don't see how the loan could be shown as being part of non-vested money. Also you'd have to make sure the plan even allows for different investments by source. I've seen participant requests to invest Roth money differently than pre-tax money for example, and not all recordkeepers are able to accommodate that, even if the plan wants to allow it. If you are using balance forward brokerage accounts that wouldn't be an issue. I'm still of the mind it's not permitted, but even if permitted there would be numerous issues.

Correct - You have to fall into one of the categories in order to be an authorized person on the Form 2848. If I recall, there are 10 or 11 categories, things like CPA, employee of the employer, attorney, actuary, Enrolled Agent, ERPA, etc. Applying for a PTIN is not sufficient.

Are you making this option available for a short time only to a specific employee? Cause that seems like something that would need BRF testing....and could easily be discriminatory (assuming it's even allowed - which I'm of the mind it's not - but I open to being convinced otherwise).

Our documents typically specific which sources are available for loan. Some say pro-rate across available sources, others restrict it to 100% vested sources, others restrict it to deferral (pre-tax and or Roth), and other still restrict to Non-deferral sources. Other have a hierarchy for loan proceeds sources. I've never heard of the participant getting to choose which sources the loan is taken from - or in this case repaid to. Which is what you seem to be asking, if I'm understanding it correctly. For example: If the loan is from an employer source and the loan is defaulted and the plan allows distributions from ER sources the loan can be offset and the plan does not have to track it. If the loan had been taken from deferrals, depending on the participant's age, offset might not be an option. Then the defaulted loan would have to be tracked until an offset event occurred. Similarly, if a participant is allowed to take a loan from a non-vested source, and then defaults on it - how would you propose the plan account for it? If your scenario is allowed, a person could take a loan from their deferral $, transfer the loan to an unvested match source, then quit. All sorts of problems would ensue.

Thank you RatherBeGolfing, I appreciate the information.

They can't just sit on them. There are other threads on this topic - money deposited to the trust by the end of the plan year MUST be allocated and cannot be carried forward. True forfeiture (non-vested money) is an exception to this rule. So if an employer deposits more than they intended - it has to be allocated as SOMETHING unless all participants are at their 415 maximum.

I would probably view those amounts as incorrect deposits. Not necessarily match, or non-elective or anything specific, until the terms of the plan are used. So the plan has extra deposits (that might be coded as match at a recordkeeper- but they might not be match) - what does the employer want to use them for? Does the plan allow for an additional discretionary match on top of whatever fixed match you say they exceeded? Does the plan allow for nonelective / profit sharing? Once the plan decides what the extra money is - and the amounts are calculated and allocated - then you run the ACP test using whatever amounts are accrued (not necessarily what is actually in people's accounts - since adjustments between participants might be necessary). And I would not refer to them as forfeitures. They aren't.

There's no chance of QSLOB status? I would do testing (maybe pick a few years as a starting sample) and see if it passes. If it passes - then there isn't anything to correct. If it fails - then look at VCP, cause most likely yes, it would be hard to categorize this as a insignificant failure.

I think you've got it right. Only to the extent applicable is doable. I suppose from a practical purpose it means if a participant dies without a beneficiary designation the domestic partner would be first in line for the benefit (before any children, parents etc.). I would wonder if there are step-children if they would need to treated the same as regular children under the terms of the document. That might get hairy. If one dies with both children and step children and some how the benefit has to be split equally among them. Hmm. I'm sure there are a number of permutations that would be tough to parse out. I feel like this ordinance and it's intersection with Federal law would be a good topic for a law review article. Maybe there is one out there. If someone knows of one or writes one, please let me know. Ratherbegolfing - does the document for your client just reference Domestic Partners (to be treated the same as Spouses to the extent possible)? Does it make similar claims for the treatment of Step Children (to be treated the same as Children to the extent possible)?

This is an old thread on the topic - does anyone have any more current insight? A plan sponsor is trying to get a contract with San Francisco - and would be subject to their equal benefits requirements. Considering that a domestic partner cannot rollover money to their own IRA the way a spouse would be able to, I don't know how the plan sponsor can affirm that the distribution options are the same. They are not under current Federal tax law. As far as I can tell preemption applies, but is there something else I'm missing? And certainly step-children are not treated the same as regular children in retirement plans. Also the RMD upon participant death options are usually different depending on the type of beneficiary. Here is an except from the contract info page from the city / county:

Below Ground - good point, but not one that happens to apply here. I should have mentioned the one HCE happens to be the owner, and the only Key, and they would not receive the Top Heavy minimum under the current terms of the plan or the proposed revised terms (the plan actually isn't top heavy at the moment, but that could change). She doesn't want to do anything but deferrals for herself, and deferrals + Safe Harbor and occasional additional discretionary ER for a core group of NHCE.

Yes, to be effective with the start of the next plan year. No changes this year. Thanks for the confirmation, not sure why I was second guessing myself.

I believe this has been addressed before - if so, please feel free to link to the other discussions / posts and I'll read through them. Small employer has a a fairly vanilla 401(k) plan with deferrals, safe harbor, and profit sharing. They would like to reduce the contribution to the NHCE by adding an excluded class. The one HCE would also be excluded from everything except deferrals. A number of the eligible NHCE would be excluded from the plan. Assuming coverage testing passes, this feels like a cut-back, or a violation of BRF, but I know the ability to defer is not protected, nor is right to receive an employer contribution. Usually if initially setting up a plan we are proactive in class exclusions as part of the design process, so I don't see requests for exclusions after the fact and just feel like I am missing something. What say all of you smart people? Is there something I'm missing that would prohibit or make this type of amendment problematic?

I don't see why not, but why? Is the Safe Harbor NEC being used towards some other testing? combined with a discretionary employer contribution? Is there a pension plan it is being tested with?

The 30 day notice requirement is only if the plan is continuing, but suspending the safe harbor. If the plan is completely terminating, usually 30 day notice is not required, immediate notice is sufficient.

You will need to consult with an attorney. There are lots of questions - is this your personal advisor? An advisor for the whole plan? An advisor the school hired? Not all plan advisors have the authority from the plan to actually move money. Some will help participants pick investments, fill out investment change forms etc, but in those cases it's the participant actually making the change, or instructing the financial institution to move the money from one fund to another. Also, there were 6 years from 2009 - 2015, and 4 years from 2015 to 2019, one of the first questions asked will be why didn't you notice the issue sooner?

Why does the turnover affect it? There is no one eligible for it? If a participant receives an allocation, but then quits a short time later, and not vested, so the money is forfeited, you have a new forfeiture, and a new year. It's not the old money again. Sounds like you will have newly forfeited money each year to allocate, for quite a few years, until everyone is either 100% vested, or paid out / forfeited. That scenario is pretty common in small plans that discontinue regular employer contributions. The forfeiture money usually takes 6 years of being allocated and forfeited each year to be used up.

I think you will have to be a bit more specific. Are you looking for a sample service agreement? Between a TPA and Plan / Plan Sponsor? Is there a specific issue with a TPA and you are writing a legal opinion to address the issue? There are quite a few well known law firms that provide legal services to TPA, and I think at one time or another most TPAs have either encountered their work product (when onboarding an existing plan they might have access to existing contracts), or used them directly. I can think of Hall Benefits Group, Ferenczy Law, Trucker Huss, etc there are lots more those are just three off the top of my head.

I think most non-producing, non-fiduciary TPAs are similar to yours. For that type of TPA, often the TPA service agreement will often address the client's responsibilities, including who communicates what to the participants, who determines eligibility etc. I do these types of corrections regularly - but usually it is because someone other than me has spotted it. A new advisor, or CPA, etc might notice that the plan is out of compliance, and this will often be one of several things that need fixing, so they find a TPA that can help. Internally, we occasionally notice it when an employer turns in a census and only the HCE or principals are making deferrals. In which case we try to confirm that really is accurate. The converse can also raise the question. If everyone on the census is deferring, that might be unusual, so we would try to confirm that the employer actually reported ALL employees to us. If they didn't, sometimes it is because they don't think certain people are eligible, and they don't have to be included. If that's the case and the employees were eligible, you would have a missed opportunity to defer. I would say a TPA that is providing additional services (enrollment meetings, 3(16), etc) would have a different process for catching these kinds of failures.

I suggest starting by reviewing the parent - subsidiary control group rules. If the U.S. entities are wholly owned by a parent entity, there seems a high likelyhood some sort of control group exists (absent something like a QSLOB).

What is the plan's definition of compensation in the document? If compensation is on a W-2 basis, it should be easy to explain since compensation for W-2 purposes is based on when PAID, not when earned. So partial year compensation would similarly be based on the period in which it was paid, not when the hours were actually worked.