EBECatty

I would certainly hope so; it makes sense to me. No different than needing a good address, correct account number for a rollover, etc. Just curious if others had experience with being forced into the issue. Hopefully it won't come to that in any event.

Thank you both. Of course, our preference would also be to have a valid TIN before the distribution. It sounds like the Form W-7 is the right avenue. If they refuse, does anyone have an opinion on whether the plan could rightfully postpone the distribution until being provided with a valid TIN to allow it to fulfill its legal reporting obligations?

The claimant is a former employee who is personally known to the employer, so they are confident that the individual requesting the distribution is the same individual who was employed under (and who accrued the account balance under) the name and SSN previously given. (I think this is what you're asking.) They have, however, admitted that both the name and SSN used were not theirs, and that they are not in the U.S. legally, and have not provided any other taxpayer ID number or country of citizenship.

I know the issue has been discussed before, but I'm curious how others are handling 1099-R reporting where you know you have an invalid SSN. Assume the participant has unequivocally confirmed they have been using both a name and SSN that was not properly assigned to them. They have a vested balance in the plan and are now requesting a distribution. The participant is still in the U.S. Assume the plan administrator cannot ascertain the participant's country of origin or legal citizenship. No question that payment is due under the terms of the plan, etc. I would assume most would not continue using an SSN on a 1099-R they know to be invalid as to the participant. It seems the participant could apply for a taxpayer ID using a Form W-7. I'm not familiar with the process, but I assume the plan administrator could not force the participant to do so. Is there another mechanism to report while somehow flagging that the SSN is invalid? Is there an argument to be made that a distribution cannot be processed until the participant has provided accurate information allowing the plan administrator to report the distribution? If not, how would you report? Thanks in advance.

Without doing a deep dive, a few thoughts, for what they are worth: Could the supplemental amount be analyzed similarly to a forfeiture for violating a non-compete (e.g., an agreement that says "you will not receive your annual payment for any year in which you violate your post-termination non-compete")? I think phrasing the benefit as the combined amount, then forfeiting the supplemental portion, frames the issue better. For example, "you will receive $200 as of December 31 of each year, but you will forfeit $100 per year if you work too much elsewhere during the year." As long as the forfeited amount is not deferred or otherwise paid later, and the basic benefit (the remaining $100) is unaffected, it seems like it's simply a forfeiture and not a change in form of payment or subsequent election. One potential sticking point may be the rules governing the determination of objectively determinable amounts paid pursuant to a fixed schedule in 1.409A-3(i), which won't comply if they are based on the occurrence of an "event" during the year. I'm not sure that performing services for another employer would be an "event" but there's not much guidance.

If the facts are there, and it was important to the sponsor, I would still try to make a case it's not a partial termination. If the only variable is one person, I think by definition it depends on the individual facts and circumstances. If you have an owner, a spouse, and one employee, and fire the employee just short of becoming vested and reallocate the forfeitures to the owner and spouse, then the argument would be harder to make whether you replace them or not. Changing the facts slightly, what if you had 5 participants in total (an owner and four unrelated, similarly paid, non-HCE employees all with similar employer-source account balances). Of the four unrelated employees, two are 80% vested and two are 100% vested. One of the employees who is 80% vested is terminated for poor performance, and the owner realizes the other three employees can handle the workload so doesn't replace the terminated employee. Whatever theory you subscribe to regarding the underlying purpose of the partial termination rules, I would have no problem taking the position (again, if it was important to the client) that a partial termination has not occurred even though the numerical turnover rate was 20% or higher.

I haven't had any occasion to do so, but probably would under the right circumstances. Even if you agree the 20% presumption is an appropriate starting point, the very small participant count should, I think, at least make the presumption easier to rebut absent some other bad factors.

Even under the most recent EPCRS, an operational failure still can only be corrected by a retroactive amendment to conform to prior plan operations if it results in an increase of a benefit, right, or feature. See 4.05(2)(a)(i). The update removed the requirement that the amendment provide an increase in BRF to all participants in the plan, which was the challenging part, but still requires an increase in BRF for those affected by the operational failure. So if the definition of compensation actually used was less than the definition of compensation in the plan document, I still think you would need to correct with additional contributions or use VCP to amend retroactively.

May just be me, but the facts aren't very clear. Is it as follows: The individual own 25% of a medical practice that provides medical services to people other than the hospital. The hospital wanted the individual (and only the individual) to provide medical services to the hospital. The hospital contracted with the medical practice for the individual (and only the individual) to provide medical services to the hospital. Then, because the individual was the only person at the medical practice providing services to the hospital, the individual formed a single member LLC to provide those services directly to the hospital without any involvement by the medical practice. So now the individual (1) owns 25% of the medical practice; (2) the medical practice continues to provide medical services to people other than the hospital; (3) the individual still performs medical services through the medical practice for people other than the hospital; and (4) the individual also provides medical services to the hospital through his/her single member LLC completely unrelated to the medical practice?

The statute and Notice 2020-50 suggest that recontributions should be permitted to the extent the same participant would otherwise be eligible to make an inbound rollover into the plan. I think you can apply the same rule here, i.e., if this participant wanted to roll in a balance from a previous employer's 401(k) plan at this point, would you let them?

Thanks--appreciate it.

In a profit-sharing only plan, is anyone aware of a problem with paying a terminated participant an amount equal to any account forfeitures upon termination? For example, a company hires a "turnaround" CEO with all parties planning on, say, a three-year employment period with immediate eligibility in a PS-only plan with a six-year graded vesting schedule. As an incentive, the company offers to pay the employee a bonus upon termination of an amount equal to the unvested portion of the employee's PS account that is forfeited upon termination. The payment would be taxable and entirely outside the plan. The forfeitures would stay in the plan and be used according to its terms. There are no deferrals (or elections not to defer) so the contingent benefit rule would not come into play. I don't think the BRF rules would apply as the payment would take place entirely outside the plan. All contributions, vesting schedules, etc. are applied according to the plan's nondiscriminatory terms. The bonus payment itself would become nonqualified deferred compensation subject to 409A, but one payment upon termination is straightforward. On a quick pass, the linked plan rules seem manageable. Am I missing anything that would make this problematic?

Interesting. So do you file an amended 5500 marking DFVCP when you complete the rest of the DFVCP process?

Although I don't see it as an explicit requirement in the DFVCP guidance, my recollection too was that once you filed you could not use DFVCP (but could only amend). Would be interested to hear if others have done this successfully.

Without having the 6th edition to compare, the 8th edition (2020) of Who's the Employer? seems to favor a broader interpretation regarding "non-M&A" transactions still getting the benefit of the transition rule. No concrete authority is cited beyond the statutory text.

I think there's a strong case for the transition rule applying, even though the transaction isn't a typical "merger or acquisition." The intent of the rule is to provide a coverage transition when different businesses with employees move into or out of a controlled group as a result of corporate transactions. Although not necessarily an acquisition or disposition of an entire business by a third party, the two entities here are nonetheless moving from standalone entities (each a separate "employer") into a controlled group (now combined as one single "employer"). So on its face it doesn't seem to be a clear violation of the spirit of the rule. As a more stark example, if X was instead owned 99% by Individual C and 1% by an unrelated company, and X redeemed all 99% of C's stock to become a wholly owned subsidiary of the unrelated company, I think you would be hard-pressed to argue that's not a "similar transaction" to C's sale of stock to the unrelated company. Arguably Corporation X's redemption of C's stock is an "acquisition" of C's stock by X (and C's sale is a "disposition" of the same stock). Arguably A and B have "acquired" C's stock in the sense that their proportionate ownership of all outstanding shares has increased from 66% to 100%. Even if not, I think it can be fairly characterized as a "similar transaction" based on the circumstances. If, instead of having X redeem C's stock, C sold his/her shares equally to A and B, that would have the same effect as the redemption and would fit more squarely into the "disposition" and "acquisition" terminology. I don't have any inside line on the IRS's interpretation, but I read the "similar transaction" provision to mean that, as long as the end result is the same as an acquisition or disposition, the procedural form of the transaction shouldn't change the analysis.

I agree that a report like this probably is not subject to disclosure, but you may want to review any available case law in the relevant jurisdiction. There has been a fair amount of litigation on the extent of required disclosures of "other instruments" under Section 104(b)(4) of ERISA, with some differing opinions on its scope in different circuits. Just saying I wouldn't automatically assume that anything of this sort is exempt from disclosure upon request.

You can have a transfer of 100% of the excess assets to the QRP without any money reverting to the employer. See, e.g., PLR 201626003 and 201626005.

I agree with this 100%. I have never seen a spreadsheet, flowchart, etc. that can adequately account for the ownership attribution rules. There are just too many variables. My gut is these rules get overlooked more often than not, especially once you get beyond the easy ones like spouses and wholly owned entities.

Not in a VCP non-amender, but have in a 5310 determination letter application.

I'm fairly certain this is the case, but don't see any specific example or rule on point. Small employer (always under 20 employees) has a group health plan. It's subject to state continuation requirements, but state law does not mandate any coverage after the group policy itself is terminated and there is no rule regarding M&A or successor liability. Large employer (always over 20) has a group health plan. Large employer is acquiring small employer in an asset purchase. The seller's employees and its group health plan will be terminated in connection with closing. If an employee of the small seller chooses not to accept the employment offer at closing from the large buyer, does the large buyer have an obligation to offer them COBRA under the large buyer's plan? I don't think so based on the small employer exception and the fact that even an employer that "grows" into a large employer under COBRA still does not have to offer COBRA to anyone who incurred (what otherwise would be) a triggering event during the time the employer was excepted under the small employer rules. Rev. Rul. 2003-70 doesn't address this fact pattern, presumably because it's already answered by the regs. The only thing giving me pause is the definition of employer, which includes a successor, but I don't read that as requiring the (pre-sale) small seller to count the (post-sale) large buyer's employees as the seller's own employees prior to the asset sale. Instead, the rules seem more clear that, even if an employer becomes large via an asset sale, it still does not have to offer COBRA to any individual for any event that occurred while the employer was small. Appreciate any thoughts or confirmation.

Isn't this similar to the relationship between a university and its foundation, which usually exists solely to raise funds for and financially support the university? Foundations will often provide supplemental pay or benefits to university leadership for various reasons, but generally not to avoid 410(b) failures. If that's the sole reason, I think there's a better chance of the IRS applying the anti-abuse rule, although the standard remains vague.

If the plan design/document will support it, maybe (1) start the distributions of all accrued amounts as of age 65 in their normal ten-year installments, and (2) for each year in which he defers after age 65, add that to his account balance and factor into his ongoing ten-year distribution? For example, he has a $100,000 balance at age 65. Start ten annual distributions. In the beginning of year 1, distribute 1/10 of account balance ($10,000). He defers $5,000 more during year 1, bringing his balance back to $95,000 at the end of year 1. In the beginning of year 2, distribute 1/9 of account balance ($10,555). He defers $5,000 more during year 2, bringing his balance back to $89,445. And so on. I'm not sure how you would square a deferral election that sets a fixed payment date starting in a prior year, but given the seemingly difficult plan drafting this may be enough to get him to age 75.

Wouldn't the 401(k) plan sponsored by the other controlled group member be a successor plan to begin with, making the first plan termination problematic?

Excellent point on vesting. I have seen this one missed too many times.