EBECatty

Thank you all for the quick replies. Top-heavy is not a concern. The discretionary match historically has passed ACP testing very easily, it just doesn't meet the ACP safe harbor. Is this analysis (on the ADP safe harbor) from FT William wrong or outdated or am I missing some distinction: https://www.ftwilliam.com/articles/SafeHarbor.html

Would appreciate it if someone would confirm the rule here. Plan has a basic SH match to satisfy the ADP safe harbor requirements. It also has a discretionary match, which is not intended to satisfy the ACP safe harbor test. If the discretionary match imposes a 1,000 hour or last day requirement, does that blow the ADP safe harbor because it could cause an HCE who works all year to get a higher rate of match than a non-HCE who leaves during the year?

It's also worth bearing in mind that, if you don't make the 45-day window, not only do you lose the ability to use DFVCP, but the per-day penalty calculations start at July 31. You do not start the daily penalty clock at October 15, even if you timely filed for an extension.

The few "repeat offenders" I've seen all have been ESOPs, usually driven by the time lag from valuation to audit to filing. I've worked with a few where the DOL proposed penalties because the client filed the amended return with an audit after the 45-day window. Even in those cases, after explaining the timeline, the penalties were reduced substantially. I had one last year where the client filed without the audit, which still wasn't complete at the 45-day mark. I spoke with the DOL and they asked us to send in a letter explaining the situation, which we did before day 45. The audit was filed within a few more weeks, and we never heard anything else. (Fingers crossed!)

They could retroactively amend the plan to allow those ineligible employees to become eligible and keep the contributions. But, more specific to your question, isn't this similar to a correction of an "Excess Allocation" (employer contribution beyond what was permitted under the terms of the plan) under EPCRS that requires using the "Reduction of Account Balance Correction Method" in section 6.06(2)?

The plan can require mandatory distributions for terminated participants who have reached the later of age 62 or normal retirement age, regardless of account balance. Assuming some or all of the participants have reached such an age, this should help.

My initial reaction is to look at both fact patterns ("12 months following" and "within 12 months following") as two or more independent conditions that each constitute a substantial risk of forfeiture. Per the preamble to the 409A final regulations: A right to an amount deferred may be subject to the satisfaction of two or more different conditions that each independently would be a substantial risk of forfeiture. In that case, the substantial risk of forfeiture generally would continue until all of such conditions had been met. Remaining employed until the CIC is one condition. Remaining employed for 12 more months is a second condition. Both are required to receive payment, so the substantial risk of forfeiture does not lapse until 12 months following the CIC, provided the employee remains employed. Assuming payment is very soon after the 12-month anniversary, it would be a short-term deferral. I think payment "within 12 months following" a CIC, provided the employee remains employed until the date of payment, is a similar analysis. The payment is still subject to a substantial risk of forfeiture until 12 months following the CIC. Removing the CIC condition from the example, say the employer tells the employee "we'll pay you a bonus at some point within the next 12 months, but if you leave before payment you forfeit the bonus." I think, again, you have a substantial risk of forfeiture until the date payment is actually made.

Per 1.415(c)-2(g)(8): Back pay. Payments awarded by an administrative agency or court or pursuant to a bona fide agreement by an employer to compensate an employee for lost wages are compensation within the meaning of section 415(c)(3) for the limitation year to which the back pay relates, but only to the extent such payments represent wages and compensation that would otherwise be included in compensation under this section. Hours of service also includes hours for which employees are awarded back pay.

Following up here, any thoughts on whether the parent company could hire the subsidiary's employees directly then assign (lease, second, etc.) them to the subsidiary, similar to how one party to a joint venture may second its employees to the JV but retain them as employees for employment/benefits purposes? It seems the biggest hurdle would be ensuring the parent has enough control to remain a common-law employer of those employees, but I would think in a majority-owned subsidiary situation (say, 70-75%) it wouldn't be that much of a stretch as long as you had the right language, oversight, and control.

Not sure. I've never seen that as a requirement, but certainly do your own due diligence with your ESOP counsel.

This is fine as long as you keep the parent in place as the ESOP's plan sponsor. The ESOP can have only one employer security--the parent's stock--and any subsidiaries wholly owned by the parent would simply be incorporated into the parent's stock price.

Thank you both for your thoughts. I've encountered the issue in TSAs in M&A transactions as well, but those I've dealt with have been a few weeks/months at most, so everyone involved felt the risk was manageable. It also seems odd that you could have a single employer ASG for many ERISA purposes, but not for MEWAs. Interesting to know Texas takes a less aggressive approach; based on the seeming lack of any publicly available enforcement information, I have to assume many other state regulators aren't actively looking for these types of arrangements either. Many states require self-insured MEWAs to become fully licensed in the state as a health insurance company, which strikes me as wildly inefficient in the situations we're discussing. Aside from putting each unrelated entity into its own fully-insured plan, which also seems inefficient given the circumstances, I don't see another great option.

My understanding is that, for MEWA definition purposes, the DOL follows the common control rules, including an 80% ownership requirement for a subsidiary, although the Form M-1 filing exemptions apply down to 25% ownership. My further understanding is that the DOL will not consider an ASG to create a single-employer plan for MEWA definitional purposes unless they also meet the requisite ownership requirements. I also understand that several (or many?) states' laws follow this definition to determine when a MEWA exists that may be subject to state regulation. In other words, a subsidiary owned 70% by a parent would still give rise to a MEWA for DOL and state-law purposes (but would be excused from filing a Form M-1). I'm interested in others' practical experience with how employers address this issue, particularly as a matter of state law with self-insured group health plans: Whether intentionally or inadvertently, they ignore the arrangement's status as a MEWA. My guess is this occurs inadvertently somewhat regularly. Are state regulators more lenient on good-faith situations like this (as opposed to the problematic self-insured MEWAs that have made headlines)? They follow all state law rules governing self-insured MEWAs, including registration, filings, etc. and continue the self-insured MEWA as such. They don't cover the subsidiary and find another group health plan alternative (e.g., fully insured plan covering the subsidiary's employees). Would appreciate any insight.

I see a few alternatives: If the employer can truly do this unilaterally, even if the employee disagrees, there may not be a legally binding right to the payment and 409A is not implicated. My guess is this is not the case (i.e., there is probably a written agreement with the employee that would require the employee's consent to move the payment date). Assuming the above is not the case, the employee's consent would be required to delay vesting. In that case, I think you are stuck with the "addition or extension" of a substantial risk of forfeiture rules, which would require the later (2023) payment to be "materially greater" than existing (2022) payment. Usually 25% is a good rule of thumb. If the amount will not be materially greater, I think as mentioned above you will need to use the 1/5 year rules to make a deferral election of a short-term deferral. Accelerating the vesting (and therefore 30-day payment window) date is usually fine.

Perfect, thanks.

Thank you both - very much appreciated. If I can follow up with a few more specific questions: In a DC plan, does the calculation differ based on whether (1) the plan's normal form of distribution is a QJSA, or (2) if the normal form is not a QJSA, the participant voluntarily chooses to use his or her vested account balance to purchase an annuity in a complete distribution? In other words, in both scenarios, do you simply buy the best annuity you can with the participant's actual account balance? Or does a QJSA require a specific benefit level such that buying an annuity providing those benefits from a commercial provider might cost more than the participant's actual account balance? Similar question for a CB plan. Does the participant's hypothetical account balance produce a specific annuity benefit level requirement such that the plan has to buy an annuity (regardless of its cost) to support that participant's benefit entitlement? Or is it simply, again, buying the best annuity based on the participant's hypothetical account balance (regardless of the annuity's ultimate benefit level)? Again, thank you.

I hope someone patient will forgive my ignorance. I have never encountered a DC or cash balance plan participant who actually wanted an annuity form of payment. I'm not involved in day-to-day plan administration either. Here goes: What actually happens when someone wants an annuity payout? Is the obligation fundamentally for the plan to provide the participant's account balance in the form of an annuity (without a commercial annuity provider)? Does this differ when the plan is a DC plan vs. a cash balance plan? In other words, could the plan itself provide annuity payments on its own? If the plan will buy an annuity, is the annuity owned by the plan itself (and its payments used by the plan to pay the participant)? Does the cost of the annuity have to equal the account balance exactly? What happens if the annuity providers charge more for a similar benefit - is it just the best the plan can buy with the amount equal to the participant's account balance? If not, who pays the difference? Thanks in advance.

I think your plan document could foreclose it, but generally I'm of the opinion that it's fine as long as the contribution is made with respect to compensation earned before the date of termination. Otherwise, you would be required to calculate all contributions (including final payroll, match, SH nonelective, etc.) and actually deposit them before the proposed termination date. Unless the document explicitly says otherwise, I don't think you would be that constrained. This is the relevant language from the standard FIS Relius termination amendment: Cessation of contributions. No employees shall enter the Plan after the Effective Date of Plan Termination, and there will be no contributions for periods after such date. Furthermore, in determining any contributions prior to the Effective Date of Plan Termination, the Plan will not take into account Compensation paid after such Effective Date. I don't think depositing a payroll deduction (due solely to paycheck timing) for compensation earned prior to the termination date is a "contribution for periods after such date."

Thanks - appreciate it!

Thanks. Top heavy is not a concern with this plan, but I am interested to know how folks would divide the testing groups under the circumstances.

I'm not perfectly clear on how you would test this design, and would appreciate any insight. A 401(k) plan allows immediate eligibility for deferrals on date of hire; the only condition is age 21. The plan also provides a safe harbor nonelective (also age 21). Eligibility for this portion is the January 1 or July 1 after working 1000 hours (not January 1 or July 1 following a full 12-month period in which the employee completed 1000 hours). So, if a full-time employee was hired on July 1, 2021, they may work 1000 hours before the end of 2021 and enter the safe harbor portion on January 1, 2022. This does not seem (to me at least) to impose the maximum permissible minimum age and service conditions in 410(a), so it's not clear that dividing line for ADP/safe harbor would necessarily correspond to the participants actually getting those contributions when using the otherwise excludable employee rule (i.e., some participants who have not satisfied the maximum permissible age and service requirements would be getting safe harbor nonelectives). If that's the case, how would you test? Would it be everyone with less than the maximum permissible conditions subject to ADP (even if some are getting safe harbor nonelectives) and everyone with more than the maximum permissible conditions exempt from ADP testing due to the safe harbor? FWIW, this is what ERISApedia and Who's the Employer seem to suggest.

But isn't the right to the benefit "conditioned, directly or indirectly, upon the refraining from the performance of services"?

Maybe he was talking about the alpha variant?

Wouldn't you still need a substantial risk of forfeiture as defined under 409A to delay vesting and use the short-term deferral rule? I would think the only vesting condition present (not performing substantial services elsewhere) would fall under the SROF rules governing non-competes that provide "[a]n amount is not subject to a substantial risk of forfeiture merely because the right to the amount is conditioned, directly or indirectly, upon the refraining from the performance of services."

Peter, our Relius pre-approved documents don't appear to have any specific rules on the topic, but the broader administrative powers in the document I think could be read to give the administrator the authority to request similar information, particularly if it's required to comply with law. Some of our individually designed plans have more targeted language. C.B., maybe this could be analyzed like a missing participant? You're missing a piece of information needed to make the distribution (albeit not missing the person). If you try all reasonable methods to obtain the participant's taxpayer ID, but cannot, maybe treat it as a forfeiture at the time a distribution is required under those Code sections then reinstate when they provide the required information? Or maybe lean on similar IRS guidance directing agents not to penalize a plan for failing to make required distributions if the participant (or a piece of the participant's required information?) cannot be located after a diligent search. I would feel much better erring on the side of potentially violating 401(a)(9) or 401(a)(14) and explaining the situation, rather than knowingly reporting a timely distribution under a fraudulently obtained SSN.