EBECatty

If a 401(k) uses a nonelective safe harbor, and an employee who is employed all year moves from an eligible to ineligible class during the year, is it permissible to say their SHNEC will only be based on their compensation earned while in the eligible category? For example, the participant starts off the year in an eligible class (Division A). They can defer, etc. Then on September 30 they move to an ineligible class (Division B). They are no longer eligible to defer as of moving to Division B on September 30. The plan says the SHNEC will only use their compensation while in an eligible class (Division A). Participant earned $100,000 total, $75,000 through September 30 and $25,000 from October 1 through December 31. Can the SHNEC be based on $75,000?

One. The forms will let you take it all the way back (i.e., check that you missed both restatements) on one submission.

I agree that an outside timeframe is ideal (for the reason you mention and many others). On the other hand, I think you can probably get by without it depending on the circumstances. I work with many closely held/family owned companies, and we often carve out a CIC that transfers ownership to family members, related parties, estate planning trusts, etc. so it's only triggered when there is a true arm's-length sale to an unrelated third party for consideration. I don't think I've ever relied solely on that to delay a SROF, but I think you could take the position there is a substantial risk that such a transaction may never occur.

Wouldn't the requirement for a change in control preserve the substantial risk of forfeiture? It sounds to me like the change in control itself is a separate vesting condition.

1. Agree, unless the agreement is exempt from 409A and a 409A-compliant payment event is not needed. 2. Agree, and so does the 409A Handbook. Cannot do a two-year delay without a 25% increase. Could also follow the 1 year/5 year subsequent deferral rules without a 25% increase, but obviously not for a two-year deferral.

Are you sure there's not a holding company between the ESOP and the two companies you mention as being 80% ESOP-owned? In other words: (1) ESOP owns 100% of HoldCo, Inc.; (2) HoldCo, Inc. is the plan sponsor and its stock is used as the ESOP's employer securities; (3) HoldCo, Inc. in turn owns 80% of both Company A and Company B?

Thanks.

I'm fairly certain this is fine, but any input would be appreciated. Client had a SIMPLE IRA but exceeded 100 employees for several years beyond the grace period. Per EPCRS, the correction is to stop all contributions immediately and submit through VCP. Nothing requires (or permits) the SIMPLE to last throughout the rest of the year as would otherwise be required. The correction is simply to stop all contributions mid-year. Client also wants to start a 401(k) to replace the SIMPLE beginning 1/1/21. Generally we would be past the 60-day notice period to terminate the SIMPLE at 12/31/20, but presumably if VCP requires ceasing contributions before then, we would not have to follow the typical 60-day period. In that case, we can "terminate" (via VCP) the SIMPLE during December 2020 and start a new 401(k) on 1/1/21, correct?

I don't see why not. Sections I.B and II.B of Form 14568-B don't limit the correction to plans that failed to timely adopt a written document in 2009 per the final regulations. The final 403(b) regulations referenced in Section I.B require that 403(b) plans adopt a written plan document. Those regulations applied to new plans created in 2014, so if you "adopted" a 403(b) plan in 2014, but failed to sign a plan document, in my opinion you have failed to "timely adopt a written plan as required by the final IRC 403(b) regulations." Section II.B requires you to submit a plan document retroactive to the later of the effective date of the final regulations (2009) or the initial effective date of the plan (2014) so I don't see any conflict there either.

Are you certain the stock repurchase will generate W-2 income? Generally it's a capital transaction if the employee is selling stock he/she owns outright (unless the employer's repurchase is at a significant premium or is otherwise some form of disguised compensation).

I think you'll find people taking both sides on the more general question of overlapping groups, with some saying E's affiliation with B would require A/B/C's testing to include E and all of its related entities, and with others saying you test A/B/C/E as one group and D/E/F/B as another.

Assuming the compensation-ratio test is passed, can a plan exclude non-U.S. source income? For example, a U.S. citizen employed by (and getting paid by) a U.S. employer but who spends working time in and out of the US during a plan year. Can the plan allow deferrals from, and/or base allocations (including SHNEC) on, only U.S. source income?

Interesting. I agree there's nothing in the safe harbor regulation about changing controlled groups; it only refers to a "transaction described in section 410(b)(6)(C)." Section 410(b)(6)(C) never describes a stock or asset sale. The subsection heading is the only place that refers to an "acquisition or disposition." The text itself refers only to movement among controlled groups. The regulations define acquisitions and dispositions to include stock acquisitions, but I read the last sentence as requiring not just a stock acquisition but rather a "stock acquisition...involving a change in the employer of the employees of a trade or business." In other words, a "transaction described in section 410(b)(6)(C)" is a "stock acquisition...involving a change in the employer of the employees of a trade or business." I think that covers the vast majority of M&A situations where the employer would want to terminate a safe harbor plan so there is likely little daylight between the two interpretations. Although I can't get it unstuck from my mind that there's IRS guidance stating that a sale of stock between two individuals (neither of whom have any related entities) does not cause a change in employer, which would be one of the only times that the distinction would make a difference. I may be misremembering.

If memory serves, I believe one of the only times you don't have a 410(b)(6)(C) transaction is where stock is sold and there is no change in controlled group. For example, individual A owns 100% of the stock of Corporation A and there are no other affiliated entities under 414. Individual A sells 100% of the stock to individual B and, after the sale, there still are no affiliated entities. Maybe someone can opine if that is covered, but my recollection is there is no change of employer in that situation. Under code section 410(b)(6)(C)(i), the transition rule can be used "f a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414...." Under regulation 1.410(b)-2(f), "[f]or purposes of section 410(b)(6)(C) and this paragraph (f), the terms “acquisition” and “disposition” refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business." Since the buyer here is another entity, the employer being sold would at least "become" (and, perhaps, also "cease to be") a member of a different controlled group at closing.

The second attorney is correct.

I have seen sellers run short payrolls through the date of termination/closing if they want to allow deferrals for as long as possible. I have also seen some process deferrals out of the first post-closing paycheck but only for compensation earned through the date of termination/closing. Alternatively, if you intend not to take deferrals from the final (11/30) paycheck, you can (could have?) terminate the plan on 10/31 if you're confident enough the closing will occur.

This is slightly off the original topic, but I'm not very clear on a similar situation involving a governmental employer and a non-governmental "for-profit" entity. Along the same lines as ESOP Guy's example, say the hospital is a governmental entity that in turn owns 100% of the subsidiary. The subsidiary is not tax-exempt. State law allows the governmental entity to own all or part of a private, non-governmental corporation. Say the hospital has a 457(b) and the subsidiary has a 401(k). The governmental plan is exempt from most testing, but does the 401(k) coverage test have to consider all hospital employees? Relatedly, is there any argument to be made that the hospital can name the subsidiary as a participating employer even though the subsidiary is not a governmental entity (and therefore can't sponsor a governmental plan)?

Makes sense. Our clients are generally on the smaller end of the spectrum so that may be a factor as well.

Interesting, thanks. In pulling documents from EDGAR and other sources, there seem to be a few other alternatives, including several that explicitly state that the trustee will deliver all withholdings back to the employer for remittance and reporting. My overall reaction is that splitting up the reporting, remittance, local tax (if applicable), FICA, 941 info, and multiple W-2s is convoluted. It would seem easier to have the employer run payment through its payroll, show proof of payment to the trustee, and request reimbursement from the trust. The few examples I've found explicitly permitting that approach are from the early-to-mid 2000s so maybe preferences have changed? Alternatively, this article ran in Spring 2020 and suggests the reimbursement approach should be acceptable, even if not explicitly addressed in the IRS model document: https://www.thompsoncoburn.com/insights/publications/item/2020-04-27/rabbi-trusts-taxation-basics-and-drafting-beyond-the-model-language Either way, it sounds like the ultimate answer is that there's not one clear answer. Appreciate your input and time.

Luke, that may be the more accurate technical description. I was able to find some examples with the reimbursement language--see, e.g., section 4.2(c) here: https://www.sec.gov/Archives/edgar/data/859737/000119312506253369/dex1011.htm There were others I was able to pull from EDGAR from several different employers and trust companies with similar language, so there seems to be at least some comfort level with the process generally. Out of curiosity, and this is getting into the nuts and bolts, when the trust makes payment directly to the participant and remits withheld income taxes, does the trust(ee) file a 941 reporting the withholding? I assume all the wage reporting itself comes only from the employer's W-2.

Luke, thanks for your response. I may not have stated my question the right way. I see all of that flowing from a tax withholding standpoint, particularly under section 2(a), but generally when I have encountered this situation, the employer runs the entire gross benefit payment through their payroll, then requests reimbursement from the trust of entire gross amount. I don't see a provision in the model document allowing that (at least where the trust is irrevocable). Section 2(c) allows the employer to make payment directly by notifying the trustee before making the payment, but does not seem to contemplate the employer making the entire payment then requesting a distribution from the trust to reimburse the entire benefit payment. In that situation, the reporting, withholding, etc. is all very easy (and usually why the employer does it that way). Perhaps it's easy but wrong. As a matter of practice, to your last point, if the trust makes the benefit payment net of withholding and remits the withheld amounts to the employer, does the reporting all take place on the W-2 issued by the employer?

I know the general rabbi trust template (and many others based on it that I have seen from trust companies) says the trustee will make all distributions to participants and report/withhold. Others say (and in my experience this is what the sponsors often do, regardless of the trust terms) the sponsor may pay the benefits directly and request reimbursement from the trust. Sponsors paying directly and requesting reimbursement usually cite the inability for the payroll systems to accurately record a direct payment from the trustee for W-2 reporting. In the former case, where the trust makes the payment directly, what exactly do they report to the IRS and how does that information get reconciled with the sponsor's payroll system? Thanks in advance for any insight.

You may want to review the substitution rule under 1.409A-3(f). In my experience, there is very rarely a voluntary relinquishment of deferred compensation without something else contemplated, either explicitly or implicitly.

There are fairly extensive rules under 1.401(a)(4)-11(d)(3) regarding "imputed service" (i.e., service credit while not actually performing services for an employer maintaining the plan) that lay out when crediting imputed service is nondiscriminatory and in what situations it's permissible. As long as you meet those requirements, it should be fine.

I'm not aware of any such changes. The rules are set out by regulation in 26 CFR 31.3121(v)(2)-1. If you defer separate amounts every year (i.e., each year $50,000 is deferred into the plan) then FICA taxes would be due on the $50,000 deferred each year. If the $50,000 is fully vested when deferred, FICA is due immediately. If the $50,000 vests in a later year, FICA is due on vesting. Once FICA is paid on the amount deferred, it is not subject to FICA (nor are its earnings) when ultimately paid back out. However, if you defer only one amount (i.e., $500,000 is deferred in year one and there are no other deferrals) then FICA would be due on the $500,000 only once (in the year deferred or vested if later). The original $500,000 deferral would not be subject to FICA separately in every succeeding year. If memory serves, within the last few years the IRS did say they would no longer accept amended tax returns for closed years to pay FICA on amounts deferred. So, for example, if the $500,000 was originally deferred in 2010, but FICA was not paid, the IRS would not accept amended returns reporting/paying FICA because 2010 is closed. If FICA is not paid at its original due date, all amounts distributed (including earnings) are subject to FICA as and when paid. This primarily impacts defined benefit or installment payout structures, e.g., in the example above, if the original $500,000 deferred in 2010 has generated earnings and now results in 5 annual retirement payments of $200,000 each, then FICA would be due on $200,000 each year during the payment period. This both increases the amount subject to FICA ($1,000,000 of deferrals plus earnings vs. original $500,000 deferral) and causes repeated inclusion for social security (original $500,000 deferral would have been subject to wage base in year deferred and likely already exceeded when executive was working vs. 6.2% of $200,000 [edit: up to the wage base for the year in which payment is made] for all five years in retirement).