EBECatty

I haven't come across anything like this before, but I think it's (at a minimum) a very aggressive interpretation. The current and proposed 457(f) rules both at least implicitly contemplate post-employment restrictions in order to delay vesting. Under the proposed regulations, one of the factors in determining whether a non-compete constitutes a SROF is the employee's bona fide interest in, and ability to, engage in future competitive services. I'm not sure the IRS would consider an employee getting a second full-time job with a direct competitor to meet this standard (although I don't know the specific dynamics at issue with your situation).

As QDROphile says, 409A is touchy, so a small tweak to the circumstances, language, definitions, etc. in the agreement can make a big difference. In my very general and not-fact-specific view: Under 409A, the employee is not required to be employed when the sale happens if the "change in control" definition is 409A-compliant, but this is a common requirement in practice in any event. If the definition of "change in control" is not 409A-compliant, usually continued employment would be required to make the arrangement a short-term deferral as a corporate transaction that does not qualify as a "change in control" under the 409A definition is not an independent permissible payment event. If it's a single payment for one person that is triggered only on a change in control, usually it's not treated as an ERISA-covered top-hat plan. If you layer in things like a payment on "the earlier of a change in control or retirement at or after age 65" etc. it becomes more fact-specific. From a tax perspective, nothing happens until a change in control, then one taxable payment is made. From a compliance perspective, 409A exemption/compliance for sure. Make sure there is nothing in the agreement that could be construed as funding the plan. The application of FICA can depend on how the plan is structured as well.

A few thoughts: In large companies (public companies, etc.) with professionally managed nonqualified plans that are largely 401(k) equivalents, I think there is little reason to omit QDROs. There's usually an accessible pool of mostly vested and fully funded (often in a rabbi trust) money that is easily divided like a 401(k). Allowing QDROs in nonqualified plans can reduce burdens elsewhere. For example, if one spouse has a large NQDC plan balance but few other liquid assets, usually both spouses would prefer a simple transfer of money from the plan, as opposed to selling real estate, etc. to divide the proceeds. If the plan does not allow QDROs, this won't be an option, even if preferred by both spouses. The major exception, at least in my dealings with primarily private (and often small) companies, is the various types of nonqualified plans that don't neatly fit into the first category above. For example, a SAR plan or a phantom equity plan that pays out based on the growth in value of the company on a future date or upon a sale of the company. If no one can calculate or pay the benefit amount until the company is sold or the participant reaches retirement age, how would you divide the benefits and pay them to an ex-spouse? Also in the small-company context, the company is less likely to be fully funding future benefits on an ongoing basis (often preferring to deal with future payments, at least in part, out of future cash flow) so allowing early payment for a QDRO can cause liquidity problems as well.

JRN, that was the case prior to the SECURE Act. The plan itself needed to be adopted by 12/31, but contributions could be made until the employer's tax-filing deadline. The original SECURE Act allowed the plan to be adopted by the tax-filing deadline and still accept deductible contributions for the retroactive year. That said, I agree that backdating the sale of stock is problematic.

I don't think signing a participation agreement, on its own, would stop the doctor's practice from continuing to sponsor its own 401(k) plan; it would just participate in two plans, both within an ASG, with the corresponding compliance testing issues. With that said, there probably is some sort of contractual arrangement between the doctor's practice and the larger organization. It may have rights, obligations, restrictions, etc. (e.g., "during the term of this agreement, doctor's practice shall not maintain a qualified retirement plan other than through its participation in large org's plan") with contractual remedies if breached. This is obviously outside the scope of the 401(k) plan compliance alone, but could come into play if the doctor "disregards" the participation agreement. As Lou notes, "I didn't read or understand what I signed" usually is a poor defense, especially if counsel was involved at the time.

Luke, excellent point. Thanks for flagging.

Thanks so much.

Many thanks. As a follow up, does the annuity required to be offered along with the lump sum need to equal the greater of the plan's stated actuarial factors or 417(e) factors? Or can the plan's actuarial factors be used to calculate the required annuity option even if it produces a lower benefit than the 417(e) factors would produce?

Please forgive the very basic question, but in the case of a DB plan lump sum window, does the lump sum payment need to be the greater of the plan's actuarial equivalence factors and the 417(e) factors? If so, does this hold true in all circumstances and for all participants (i.e., after NRA, ER eligible, not ER eligible, etc.)? Thanks in advance.

A few additional thoughts: Merging plans is the best way to prevent leakage, and I understand why some advisors recommend it, but the reality is that it's often a major administrative hassle, particularly where the seller's plan has protected benefits that cannot be removed. Then the buyer is stuck with deciding whether to open up those protected benefits to all of its employees, or reserving them for a subset of legacy-seller employees, giving them rights beyond what the buyer's plan allows. In the best case, you're amending the buyer's plan document for most acquisitions. For acquisitive companies that do multiple transactions a year, this gets to be unmanageable over time, particularly on an individually designed plan where you are also chipping away at reliance on the last determination letter every time you amend. Short of merging plans, the only realistic option is terminating the seller's plan. There invariably is leakage. In my experience, acquisitive companies that have an established process for transitioning employees typically do a better job of getting assets rolled over. Several I work with present the rollover process as one package, asking participants only to sign and return the forms to roll over their balance, with the HR team handling the rest. A thoughtful and well-timed communication process can (again, in my experience) increase the rollover rate if it's the path of least resistance. Companies that terminate plans and leave it all up to the participant to request a distribution from the recordkeeper, I think, will lose many more assets in the transition. To Peter's question, I have not personally seen that, although I'm sure it happens. In my experience the final default distribution is almost always an IRA in the participant's name. Even if directly rolled over to the buyer's plan as a default, many (most?) plans allow a participant to take a full distribution of his or her rollover account at any time. This adds an extra step, but won't stop a person determined to get the money out. I do think there is a concern among some practitioners, whether warranted or not, that by merging a seller's plan into a buyer's plan the buyer's plan is more at risk for prior non-compliance in the seller's plan.

Peter, thanks, and I did consider those sources as well. Appreciate your input.

The latter.

Thanks Peter. A little more context may help. The plan is a matching and non-elective DC plan qualified under 401(a). The plan is for a state agency, so has adopted a single plan document containing (with amendments) all the plan's terms. There is no relevant state or local law, and there is no guidance internal to the agency. The issue revolves around a small number of seasonal employees who often return from year to year and are occasionally hired into full-time roles. This category of employees is excluded from eligibility under the terms of the plan, regardless of amount of service. The plan uses elapsed time to measure vesting credit and largely incorporates the 410(a) elapsed time rules, including its service-spanning rules. Because 410(a) does not apply to the plan (and assuming the pre-ERISA rules you note above are satisfied in any event), the question has arisen whether it's permissible to exclude, for vesting purposes, time spent in the ineligible seasonal category and only grant vesting service credit for time spent in an eligible category.

May a governmental defined contribution plan exclude from vesting service time in which the employee was ineligible to participate in the plan? More specifically, an employee is in a category of employees excluded from the plan, works for a year or two, then is transferred to an eligible class. May the plan count only the employee's service for vesting purposes from the date he or she became eligible to participate? Thanks in advance.

The OP says NRA in the plan document is age 65, while the participant will only be 52 on 1/1/26.

I think the "special forfeiture rules" were probably intended to capture events like a for-cause termination. Based on that snippet alone, I would say vesting does not occur until "Normal Retirement Age."

It sounds like the document may be drafted confusingly, but generally if there is more than one vesting condition (i.e., more than one condition that creates a substantial risk of forfeiture), you would need to satisfy all vesting conditions. The wrinkle here seems to be that both vesting conditions are different dates. The 1/1/26 date does not seem to do anything - for example, if you're employed on 1/1/26 when you're 52, but quit on 1/1/27 when you're 53, you would still forfeit the entire account because you didn't work until age 65. So working until 1/1/26 doesn't vest you in anything. If those are accurate plan terms, I'd go with the later of the two dates.

Off the top of my head, I would think so. C presumably was employed by Company B at some point (giving C a balance in the Company B 401(k) plan) and terminated from employment with Company B and transferred to Company A. C had a separation from service with Company B, but not from the "Employer" that included Company B and Company A. When Company B is no longer in a controlled group with Company A, C has had a separation from service from Company B and all members of its new controlled group, which should be a distributable event. I think this would hold true even if Company B continued to sponsor its plan after closing because C is still separated from service with Company B (whereas this fact pattern would not give ongoing Company B employees a distributable event from the Company B plan).

I think ESOP Guy is referring to this PLR: 1147038.pdf (irs.gov)

Per Bill's response, 1.401(k)-3(e)(4)(i) requires, among other things, advance notice when terminating a safe-harbor plan mid-year. Note that this is purely a safe-harbor rule that must be met in order to retain the safe harbor during the short plan year in which the plan terminates; it's not an across-the-board 401(k) rule. Conversely, 1.401(k)-3(e)(4)(ii) allows a safe-harbor plan to be terminated mid-year in connection with a corporate transaction without adding the notice rule. It doesn't say that notice doesn't have to be provided; it just says the plan can be terminated mid-year (keeping the safe harbor) in connection with a corporate transaction. The notice of intent to terminate rules copied above address DB plans, but the IRS website doesn't seem to get into that level of detail.

The IRS's guidance on rebalancing and reshuffling is helpful on the diversification piece. As far as buying back shares following a reshuffling or rebalancing, the plan sponsor can always redeem shares out of the ESOP trust. A current valuation would be required (as would trustee approval) as the plan sponsor is buying shares directly from the ESOP trust, but it's certainly possible. The trust just ends up with a larger proportion of cash compared to employer stock. If there are other non-ESOP shareholders, their ownership percentage would be increased; if not, there are simply fewer shares outstanding.

Excellent, thank you both!

Would appreciate any insight here. An employer provides an employee a vehicle for business and personal use. There is no substantiation, etc. The full value is taxable to the employee. As a taxable, non-cash fringe benefit, the employer normally would be required to withhold federal income tax based on the value of the non-cash fringe benefit provided to the employee. Say the value is $500 per month. However, Section 3402(s) and Announcement 85-113 say that an employer can choose not to withhold federal income tax from the value of a "vehicle fringe benefit" (a taxable, employer-provided vehicle). Even though withholding is optional, there is nothing in Section 3401(a) itself that exempts taxable vehicle fringe benefits from "wages" as defined in Section 3401(a). So is the $500 per month included in 3401(a) wages for plan purposes? My initial reaction is yes, but interested to hear what others think. For what it's worth, this differs from GTL over $50,000, which is specifically excluded from 3401(a) wages in Section 3401(a)(14) (whereas vehicle fringes are not excluded in Section 3401(a), but rather subject to optional withholding under Section 3402(s)).

Thanks Brian. That's where I settled as well. Will be interesting to see if it's addressed in the webinar.

I can't seem to find any guidance on filing the attestations where the carrier or method of funding has changed since 2020. For example, a plan was self-insured from 2020 through 2022, then became fully insured in 2023. The fully insured carrier's attestation would not cover (in reality, even if it does on paper) the plan's compliance for 2020, 2021, and 2022 when it was self-funded. In that case, if the self-funded TPA is not filing the attestation for the plan sponsor for years before 2023 (as some are not) would the plan sponsor file an additional attestation on its own? Presumably similar circumstances will continue to arise for non-calendar year plans that change carriers/funding methods. Would appreciate any insight.