EBECatty

If Corp B will not have a plan, I think you are left with the spinoff and termination provisions (hopefully with Corp B's cooperation, but involuntarily by Corp A if not). Or, I guess, continue administering the accounts of Corp B employees, but there is not a distributable event by the corporate transaction itself.

Interesting. The only distinction I see is that 403(b)(10) and 457(d)(2) separately and affirmatively impose the 401(a)(9) rules on those plan types by reference, whereas 402A does not contain a separate provision affirmatively imposing the 401(a)(9) rules on designated Roth accounts. To the extent that 401(a)(9) applies to 402A Roth accounts, it's only because the "qualified Roth contribution program" rules apply to all "applicable retirements plans," which includes a 401(a)-qualified plan (and 403(b) and 457(b) plan) under 402A(e)(1). In other words, if 402A itself had a provision like 403(b)(10) and 457(d)(2) that separately and affirmatively imposed the 401(a)(9) rules, perhaps the SECURE 2.0 provision would have also included a "notwithstanding" for that subsection too. As it reads now, though, the new provision exempts "any designated Roth account," which I think by definition should be read to include a Roth 401(k) subaccount.

This is very common in private-company ESOPs. As Paul notes, typically the shares are replaced with cash. Once replaced, the participant generally is offered various investments (other than employer securities). There's IRS guidance on common issues that arise in the arrangement: Response to Technical Assistance Request (#4) (irs.gov)

My experience is the same as Paul's. If you only have the SPD, I would suggest asking for the full plan document to see if the employer stock fund is considered an ESOP.

Interesting issue that I have never seen arise, but it looks like it's covered in Treasury Regulation 1.402A-1, Q&A 11 below. Reinvesting the dividends in employer stock that continues to be held in the participant's Roth account would allow a qualified distribution of that account balance later. Q-11. Can an amount described in A-4 of § 1.402(c)-2 [note: subsection (e) of this cite is 404(k) dividends] with respect to a designated Roth account be a qualified distribution? A-11. No. An amount described in A-4 of § 1.402(c)-2 with respect to a designated Roth account cannot be a qualified distribution. Such an amount is taxable under the rules of §§ 1.72-16(b), 1.72(p)-1, A-11 through A-13, 1.402(g)-1(e)(8), 1.401(k)-2(b)(2)(vi), 1.401(m)-2(b)(2)(vi), or 1.404(k)-1T. Thus, for example, loans that are treated as deemed distributions pursuant to section 72(p), or dividends paid on employer securities as described in section 404(k) are not qualified distributions even if the deemed distributions occur or the dividends are paid after the employee attains age 59 1/2 and the 5-taxable-year period of participation defined in A-4 of this section has been satisfied. However, if a dividend is reinvested in accordance with section 404(k)(2)(A)(iii)(II), the amount of such a dividend is not precluded from being a qualified distribution if later distributed. Further, an amount is not precluded from being a qualified distribution merely because it is described in section 402(c)(4) as an amount not eligible for rollover. Thus, a hardship distribution is not precluded from being a qualified distribution.

I agree the administration would be challenging. Knowing the parties involved, my guess is the issue has never arisen, but that's not to say it couldn't. In any event, appreciate your thoughts.

The reinstatement provision only references the forfeited amount, with no mention of earnings. There is no specific mention of this group in the plan termination provisions. Presumably a termination would vest them by law as well, but it's not explicit in the document itself. If it's categorically impermissible, one plan may be an oversight on the part of the IRS in reviewing the DL application, but multiple plans with identical language, in addition to others who mention similar provisions above, seems more intentional. I just can't seem to find any basis for it in any published guidance or commentary. It's purely academic at this point, but still would be curious if anyone is aware of a reason for the seeming disconnect.

Luke, that's what I'm seeing as well. There was a GCM (39310) and some Field Service Advices a few years later that appear to me to allow a forfeiture only after five years, unless a cashout occurs sooner. This rule is also stated without any other apparent exceptions in IRS Pub. 6389 as recently as June 2021. A few other commentaries state the five-year or cashout rule without exception. The regulations don't seem to affirmatively require waiting five years, but the above guidance suggests that the IRS's interpretation of the rule requires it. Anecdotally, several people have mentioned plans getting DLs with a one-year forfeiture provision without a cashout. After the above thread, I was able to find a few plans on file with our firm that use a one-year forfeiture provision (even without a cashout) with reinstatement if the participant is rehired before five years. Those plans received DLs as recently as the mid-2010s, virtually right up to the elimination of the ongoing DL program. I'm not sure what to make of that, so would welcome any other thoughts on the apparent discrepancy.

I would strongly recommend getting in touch with a vendor, lawyer, CPA, or consultant with experience in setting up these types of plans. All of what you describe is more or less standard, but it will be challenging to coordinate, draft, and implement without professional advice. Broadly, "what you know so far" is right, except that I would label this an account balance plan (fixed amounts go in; there is investment gain or loss; the employee gets paid the amount in the account). For "what you're confused about," triggering, in my experience, can refer to either an event triggering vesting or an event triggering payment. There is not an independent concept of triggering. Vesting and payment do not have to occur at the same time. Generally, once money becomes vested, even if not yet paid out, FICA is due under the special timing rule. For an account balance plan, generally FICA is the amount of money in the plan that becomes vested on a given date. But, again, someone with experience in the process is your best bet.

For merged plans, I think it will depend on when the surviving plan of the merger was established. We have had scenarios where a new plan was established, then an existing plan was merged into it, and the surviving plan received a DL on the basis of the plan's original establishment (after the elimination of the regular DL cycles, so only a newly adopted plan would qualify). For two plans that are older, not sure that line of reasoning is feasible.

Thank you all. Is anyone aware of any guidance that explicitly would allow this possibility? As mentioned in my original post, the existing guidance I can find seems fairly concrete (five years or cash-out distribution) and the ability to accelerate forfeiture seems mostly anecdotal.

I seem to recall there being open questions about the impact of fixed-amount (as opposed to percentage) subsidies for age-banded plans under the ADEA, although I haven't followed the issue closely. Do most agree this is not a concern?

For a partially vested participant who has terminated employment, but has not taken a distribution, is it permissible for the plan to forfeit the unvested portion of the balance before five breaks in service (subject to any restoration and continuation of vesting on rehire)? I don't see any rule affirmatively stating that the forfeiture cannot occur. The guidance seems to say that, by implication, a forfeiture can't (shouldn't?) occur before five years because the participant may still advance on the vesting schedule if rehired. The pre-approved plan documents I can locate from several vendors all require five breaks in service. IRS Pub. 6389 (review of vesting provisions under 2020 RA list) also states the rule explicitly by saying a forfeiture before five years can only occur by a cash-out distribution. Appreciate any insight.

That seems to be the case. The concept seems similar to the special catch-up contribution limits for 457(b) plans where you get certain catch-up opportunities only for the three years before normal retirement age.

Scott, thanks, and I agree that's a simple solution for tax purposes. Sometimes I will have clients push back on that approach as it means they are offering one person (and not others) a higher base salary, which can cause some HR heartburn for various internal business reasons.

Thanks so much, Brian. Very helpful.

Forgive the very basic question, but is it permissible for an employer to pay, on a tax-free basis, all or a portion of one employee's fully insured group health premiums outside of the employer's cafeteria plan? Assume the one person is highly compensated. No nondiscrimination rules would be directly applicable because the group health plan is fully insured. Would the cafeteria plan nondiscrimination rules cover this type of payment? In other words, does the existence of the cafeteria plan (and the other non-HCEs' requirement to pay a larger premium under the cafeteria plan) eliminate the ability for the employer to make tax-free premium payments under section 106?

Thank you both for your thoughts; appreciate it.

Thanks CuseFan. Unfortunately, the plan doesn't provide any specific guidance on how to handle, only a provision that no vested benefits will be reduced (although it does not affirmatively vest anyone who is unvested) upon termination of the plan. I suppose the upside of the lack of a clear rule is that leaves some flexibility in the formula used on plan termination. The 409A termination and timing rules are not an issue, just the formula.

In the context of terminating and liquidating a deferred compensation plan, does anyone have advice or a good rule of thumb for valuing the liquidation payments to participants in non-account balance plans where the ultimate benefit (had the plan continued) would be uncertain? For example, a 45-year-old participant who must work until age 60 to vest, at which point she would receive fixed installment payments for, say, five years? Would you discount the liquidation value not only for time, but also likelihood of reaching vesting? Appreciate any insights.

Interested to hear others' thoughts, but I would think the "objective, nondiscretionary formula" would be satisfied by the "10% of" piece of the calculation, not necessarily a concrete valuation method of the entire company. In contrast to a payment calculation of, for example, "a percentage, to be determined by the board in its discretion, of the total valuation of the company as established by an independent appraiser as of the date of the employee's termination from employment." You could make a similar argument about any unknown future amount. For example, if the formula was 50% of the employee's final base salary, you wouldn't necessarily have to spell out in the plan exactly how, from present date until retirement, the company would adjust the employee's base salary. It's also not an event-based payment, is not dependent on payments made to the employer, etc. so you get out of some of the more specific rules.

I received a DL not long ago on an individually designed 401(k) plan with the same provision. The 401(k) excludes every employee who is, or who has ever been, an HCE. The nonqualified plan covers everyone who is, or who has ever been, an HCE. Basically, once you become an HCE in one year, you are forever excluded from the 401(k) plan and covered by the nonqualified plan. While that could cause an issue with the requirement to cover only a top-hat group for some employers, here the demographics were such that it wouldn't be a problem.

Thanks Peter. I agree the text of the regulations draws clear distinctions between the two. But it seems like an odd result, particularly in light of Section 414(c)'s requirement that the implementing regulations "shall be based on principles similar to" those under Section 1563 that apply to corporations. While of course "similar to" leaves room for differences, this distinction creates a pretty large gap between corporations and partnerships that, as far as I can tell, doesn't have any justification as a partnership can have voting and non-voting interests in the same way a corporation can. Interesting nonetheless.

Under 1563 and 414, brother-sister common control for corporations can be based on value or voting power. So five people owning all the voting stock of two corporations would create a brother-sister group regardless of the value of their shares relative to the overall value of either corporation. Under 1.414(c)-2(c)(2)(iii), effective control for a brother-sister group of partnerships is based solely on ownership of capital or profits interests. There is no separate reference to value or voting power, just ownership. Does this mean one individual could own the sole voting interests in two partnerships (but not sufficient economic ownership) yet not form a brother-sister group? This seems inconsistent. Or is there some implication that the ownership of capital/profits interests would be determined in part by reference to voting power? Or am I missing something altogether? Appreciate any insights.

I have not encountered a controlled group with several entities all participating in a MEP, so I would be interested to hear from others, but in that case generally wouldn't each separate entity have to sign on to the MEP as a participating employer? Or is there some concept of a participating employer in the MEP (parent company) with "sub-participating" employers (subsidiaries or affiliates of the parent)?