EBECatty

You don't state your role, but I would strongly recommend getting connected with advisors who can guide your organization or your client on all of these issues (and preferably administer them). Most of your conclusions are based on the premise that a for-cause termination forfeiture provision will delay a substantial risk of forfeiture, when it generally will not. The plan design you describe will, in my opinion, be difficult to administer, tax, and report correctly without professional advice. There is a lot of nuance involved in getting these types of plans running smoothly (timing and amount of original income inclusion upon vesting; potential accelerated distributions to pay income taxes upon vesting; effect of earnings during vesting period; FICA reporting and taxation upon vesting; taxation of post-vesting earnings and eventual distributions; non-duplication of FICA; aligning payroll and W-2 reporting; etc.).

Completely agree - my particular situation doesn't square exactly. My takeaway was they were very clear that the increase in benefits must be for every single participant, not just bring a subset of "disadvantaged" participants up to the same level as a subset of "advantaged" participants. Personally, I would probably recommend SCP, document the reasoning, and move on, but others may be more conservative based on the size of plan, client preferences, etc.

For what it's worth, shortly after this version of EPCRS was issued, I had conversations with several senior IRS folks at a conference on this issue. Their opinion, which I assume still holds, is that this language requires an increase in benefits for every participant in the plan, not just those affected by the correction. I was dealing with a situation in which a plan allowed loans on terms more generous than permitted by the loan policy. I proposed a retroactive amendment to the loan policy to confirm the more generous terms that were being applied in practice. I was told this would not work because it did not increase the benefits for every participant in the plan, only those people who took loans and, of those, only people with loans whose terms were more generous than allowed by the existing policy. (All were non-HCEs, so it would not have been discriminatory.)

To be clear, Relius does provide the notice, but it simply directs the participant to the plan administrator to get help with the other language.

Thanks. We tried our document provider, FIS/Relius. They didn't have any full-document translations, but recommended us to a few outside services.

Does anyone have recommendations for getting plan materials (SPD in particular) translated into Spanish? A quick search doesn't seem to turn up any firms focused on translating or providing ERISA documents in particular, but I thought familiarity with plan concepts would probably help provide a more accurate substantive translation.

I think the idea is the ESOP is the ATEO by virtue of being an exempt trust under section 501(a), and the company would be a taxable related organization controlled by the ATEO (the ESOP).

Others may have given this more thought, and I have not reviewed in any depth, but I would think in most ESOP-owned companies you would meet one or more of the exceptions in determining the five highest-compensated employees under 53.4960-1(d)(2) such that the company's employees would not become covered employees with respect to the ESOP as an ATEO. Would be interested to hear other opinions.

Thank you both for your thoughts. They seem to confirm there's more than one way to approach. I see both the position that the time and form arguably remain the same, so the amount does not matter, but also that the same fact pattern could be considered an impermissible acceleration/deferral from year to year. The definition of installment payment in 1.409A-2 specifically contemplates fluctuations for earnings and losses that would not cause each payment to be "substantially equal" but I'm not sure that directly addresses the issue of changing the formula mid-stream. The definition of a fixed payment schedule in 1.409A-3(i)(1)(i) also requires an objective formula to be in place when the compensation is deferred, but again doesn't speak to the analysis if it's changed (maybe because it shouldn't be?). My secondary thought was to accrue gains and losses over the course of the five-year period based on the employer's informal funding account's rate of return. If the funding account's losses cause it to run out of money before paying all benefits, the employee would forfeit the remaining unpaid amounts, which on its own should be fine. If the gains cause an excess over the promised benefits, the excess would be paid on the date of the last payment, which is fixed. This keeps the time, form, and amount constant, with the only difference being an eventual forfeiture or an additional non-elective right to one new payment on a fixed date, which for earnings may be a different time/form than the underlying deferral. Sounds like there will be uncertainty either way.

Say an employer has a deferred comp agreement in place that provides a retired employee a fixed amount per year for a defined period. Call it $100,000 per years for the next five years. The employer wants to add an earnings component by basically converting the payments to a $500,000 "account balance" and allowing the retired employee to select investments. The amounts would be paid out in five installments over the next five years (same time and form as the original terms) but instead of being a fixed $100,000 per year, it would be 1/5 of the account balance in the first year, 1/4 in the second year, and so on. Would this be simply a change of "amount" (and not a change in time or form) such that they could amend during the payment period without violating 409A? If not, could they add a new earnings component that says on the date of the last fixed payment, the employer will pay the employee an additional amount equal to the (positive) earnings accruing on the total remaining benefit amount as if it were invested in, say, the S&P 500 over that period (and that the employee would forfeit any negative earnings)? It seems like adding only an earnings component would generally be acceptable, but I'm having a hard time squaring it with the existing nonaccount balance status. Would appreciate any thoughts.

Appreciate the nuance, and I will make sure to check for those items. Do you (or does anyone else) have thoughts on how this may be reported to the IRS where there is not an identifiable beneficiary to whom the 1099-R would be issued? I would be hesitant to distribute the death benefit from the plan in a taxable distribution without the means to report.

Thank you, Peter. I appreciate your thoughtful response. I think I am more or less starting at your step 5, i.e., no one can be located with enough precision to make a distribution. I agree there is no particular reason to separately account for a forfeiture, and that the sponsor could simply wait until a claim is made. This has become the issue; they want to find some way to bring an end to the process to avoid trying to determine claims from many years ago. The state-law abandonment period does not specifically depend on the claimant's knowledge. It begins to run when the amount is distributable from the plan. It also appears to allow a remittance without a federal tax ID number of the property's owner, but presumably you would need some identifying information. However, in either case, my understanding is a remittance to the state's unclaimed property program is considered a taxable distribution subject to withholding and 1099-R reporting. I would think this would need to be reported to the beneficiary, whose information the sponsor does not have. If the sponsor does not have valid beneficiary information, even if the amount is accepted by the state unclaimed property program, is there any way to report the distribution to the IRS?

Would appreciate any thoughts on the following. An ongoing governmental defined benefit plan provides a small death benefit (under $5,000) upon the participant's death in various scenarios. There is an order of payment (spouse; named beneficiary; children; estate). However, in some cases, the sponsor is (1) unable to contact a beneficiary, but believes they have the beneficiary's correct information, (2) is unable to identify the correct beneficiary at all, or (3) is unable to obtain a name, address, valid SSN, etc. for someone they believe may the correct beneficiary. Assume no relevant state law, no representative has qualified on the estate, and that the sponsor has conducted a diligent and reasonable search under the circumstances. Under scenario (1), I believe they could forfeit the death benefit subject to reinstatement, force an IRA rollover, or possibly escheat. What are valid options under scenarios (2) and (3)? My understanding is a forced IRA rollover would require establishing an IRA in the beneficiary's name, which may not be known (or may be suspected but an SSN not known). Same with escheating, which would require withholding and 1099-R reporting. Does this leave forfeiture and reinstatement as the only alternative as it requires no taxation, withholding, or reporting?

I completely agree that when DFVCP is available it should absolutely be used. Aside from that, a few anecdotal observations. In prior years where clients missed timely filing 5500s or audits and the DOL proposed to assess a penalty, we were able to reduce the proposed penalty by about 90% in each case, which I think is (was?) fairly common. There were some decent (but not great) reasons in each case, e.g., mail went to a rarely used office, service providers were slow, etc. At the rate the penalties accrue, a 90% reduction generally ends up higher than DFVCP, so I would not have opted to argue about reasonable cause if DFVCP was available. Plus attorneys' fees. I have a few clients this year whose 5500s were filed on time (10/15/20), but without an audit. Most were due to delays caused by COVID tax-filing deadline extensions that set back the plan audit process. I have spoken to DOL several times and they appear to be more lenient this year if you keep them updated on the status and offer a decent reason. So far, I have not received any notices of intent to assess a penalty.

I have come across a similar issue, but in that case the distribution election form (albeit in fine print in an attachment to the election form itself) had a list of states where no income tax would be withheld. The logic was the same - if the state did not have mandatory withholding from DC plan distributions, even if the state taxed the distribution itself, nothing would be withheld. You may want to ensure you have all the distribution forms, tax notices, etc.

I'm not aware of one either as a matter of qualification. Other than for QACAs, our pre-approved plan documents do not have any stated maximum or notes in the blanks indicating an upper limit on either auto-enrollment or auto-escalation. I would think at some point you would run up against a practical (or possibly fiduciary?) limit if you tried to auto-enroll everyone at, say, 75% of compensation and then had to take affirmative elections from everyone anyway (and/or field irate phone calls from people who weren't paying attention and had their entire paycheck deferred).

They cannot roll over the 401(k) loan itself as IRAs cannot extend loans, but they may be able to roll over (by contributing their own cash to the IRA) the loan "offset" amount to an IRA along with the rest of their 401(k) distribution. If you Google "plan loan offset rollover" there's plenty of good information.

Not weighing in on the merits of the idea, but would be interested to hear opinions on whether this is permissible in a governmental plan (assuming no relevant state law). A pre-approved governmental 401(a) plan I used recently allows the employer to select a custom allocation method for earnings, so long as it is predetermined and objective. The normal rules that would prohibit this in an ERISA-covered, non-governmental plan would not apply, so no 401(a)(4), BRF testing, anti-cutback, 411 rules (including detriment by removing earnings for terminees who do not consent to a distribution), fiduciary responsibilities, etc. There is still the exclusive benefit requirement, but I don't think that would capture this type of earnings allocation. Perhaps there is some IRS guidance addressing the issue?

I may not be following the right trail of breadcrumbs, but is there an obligation to offer COBRA in the following situation. Foreign company employs several hundred employees. Say the wholly owned US subsidiary only has 5 US employees who are offered a group health plan. The COBRA regulations seem clear that the foreign parent and US subsidiary will be aggregated to determine whether the US subsidiary has 20 employees for COBRA purposes (it does). Say the US subsidiary terminates its group health plan altogether, but the foreign parent continues to offer whatever the comparable health insurance is in the foreign parent's country. Are the 5 US employees entitled to COBRA coverage? Or has the "employer" (which includes the foreign parent) stopped offering any "group health plan" to "any employee" such that COBRA coverage ends? In other words, does something exclude the foreign coverage from being a "group health plan" for COBRA purposes? I have to assume so - the foreign plan couldn't offer continuation coverage to the US employees - but am not seeing where that result comes from.

Employers with a lot of short-term, low-wage, high-turnover positions where employees often do not work a full year, paired with auto-enrollment, could quickly lead to a lot of "missing" participants with small balances.

I think you need to include the interest accrued throughout the year. See Example 2 in Treasury Reg. 31.3121(v)(2)-1(c)(4), which seems to be close to your fact pattern.

The following is the full paragraph in which the "substantial and recurring contributions" requirement is found. That sentence (the second-to-last) applies only to PS plans, but I read the remainder as applying to all forms of "plans" under 401(a). Although the fact pattern doesn't fit neatly into the permanency or other explicit rules in this paragraph, this would give me some concern, especially with no intent to ever have eligible compensation paid, 0% fixed contributions, and no other employees or employee contributions aside from the owner's rollover. In other words, can something ever be a permanent plan intended to receive contributions and benefit employees if it's explicitly set up to ensure neither of those things ever happens? 1.401-1(b)(2): The term “plan” implies a permanent as distinguished from a temporary program. Thus, although the employer may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Especially will this be true if, for example, a pension plan is abandoned soon after pensions have been fully funded for persons in favor of whom discrimination is prohibited under section 401(a). The permanency of the plan will be indicated by all of the surrounding facts and circumstances, including the likelihood of the employer's ability to continue contributions as provided under the plan. In the case of a profit-sharing plan, other than a profit-sharing plan which covers employees and owner- employees (see section 401(d)(2)(B)), it is not necessary that the employer contribute every year or that he contribute the same amount or contribute in accordance with the same ratio every year. However, merely making a single or occasional contribution out of profits for employees does not establish a plan of profit-sharing. To be a profit-sharing plan, there must be recurring and substantial contributions out of profits for the employees. In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.

As long as the doctor's prior employer isn't affiliated with his/her new employer under 414, you would not take the prior employer's compensation into account for determining HCE status in the first year of the new employer's plan. See 1.414(q)-1T, Q&A 3: For purposes of the year for which the determination is being made (the determination year), a highly compensated active employee is any employee who, with respect to the employer, performs services during the determination year and is described in any one or more of the following groups [owner/comp over limit in prior year] applicable with respect to the look-back year calculation and/or determination year calculation for such determination year. If the prior/new employers are affiliated under 414, the doctor's prior compensation would count under 414(q)(7) and 1.414(q)-1T, Q&A 6.

I haven't personally, but I know others who have received DLs on individually designed ESOPs with a diversification timeframe outside the statutory 90-day window. I believe in one case explicitly tied to 90-day period following the company's receipt of the valuation. But it's been a few years as these were DLs for ongoing plans.

Read literally, the relief would apply to the 2021 plan year, assuming the seller meets the March 31, 2021, 80% threshold. I have questioned previously whether the relief would ultimately cover a situation like this one (e.g., the seller here meeting the March 31 threshold but laying off a significant portion of its employees in December 2021). That clearly wasn't the intent of the statute, so perhaps the IRS will limit its reach somehow. But if you count the 2021-2022 layoffs together, I'm not sure it would give you any cover beyond December 31, 2021. The partial termination relief only applies to "plan years" that include March 13, 2020, through March 31, 2021. It doesn't change any other calculations or exclude 2021 terminations for any other purpose. So if you're looking at any time after December 31, 2021, it's not clear to me that the relief would change the calculation if the 2021-2022 layoffs are combined to form one non-plan year "applicable period" for partial termination purposes.