EBECatty

Interesting question. Others may be able to provide some more nuance, but my recollection is that a repayment in a later tax year is treated as a separate "transaction" such that the first year would be unaffected, i.e., they are repaying with entirely "different" money. If a repayment is made during the same tax year, I believe it's not reported on the employee's W-2 at all, i.e., it's as if the payment never happened. In the later-year scenario, I would think the deferral pretty clearly stays in the plan. It was compensation paid, withheld from, deferred from, taxed, and reported in one year. The employee just happened to pay the employer 50% of the bonus amount from their other assets in the next year. (The individual income tax treatment of that scenario is complicated.) In the same-year scenario, my initial reaction would also be to keep the deferral in the plan. The payment was "compensation" when paid to the employee at the time of deferral; it's not as if it initially came from ineligible compensation, e.g., if the plan stated that participants could not defer from bonuses at all. Could depend on the plan's definition of compensation as well (3401(a) may be an easier argument than W-2).

The modified attribution rule is set out in section 409(p) of the code itself. See 409(p)(3)(B) and 409(p)(4)(D) (and some other references throughout).

1. Yes. 2. Yes, but note that the employer has 90 days into the performance period to establish performance-based comp criteria, so your example could still be performance-based compensation. The 409A rules around performance-based compensation generally deal only with the timing of an initial deferral election.

Interestingly, it's almost the exact opposite. The amendment deadline in the SECURE Act allows the Secretary of the Treasury to prescribe a later date (for all sections of the SECURE Act). The amendment deadline in the CARES Act section addressing CRDs and loans allows the Secretary to prescribe a later date (which it isn't doing). The amendment deadline in the CARES Act for the 2020 RMD waiver is the only one of those three that fixes 2022 as the amendment deadline and does not allow Treasury to prescribe a later date. The notice relies on the general discretionary authority under 1.401(b)-1(f) (and not the CARES Act itself) to extend the RMD waiver deadline.

I'm not sure I follow the logic on the split timing of the CARES Act either. Unless I'm missing something, I believe we have all the information/decisions/guidance on the 2020 RMD waiver that will be needed to amend the plan. In other words, I don't know what other information we would get between 2023-2025 that would alter the plan document amendment for the CARES Act's 2020 waiver. In my mind, it makes the most sense to amend for CARES (all provisions) at once, especially for pre-approved plans where the amendments will likely be packaged as separate documents from the provider. Maybe the reasoning was that--given all the SECURE and possibly other upcoming RMD amendments--plans may find it easier to amend all the RMD provisions at the same time, but again I'm not sure that makes much sense given the standalone nature of the 2020 RMD waiver that doesn't really interact with the other RMD revisions. Or maybe there is further guidance pending (but not yet published) that would impact the 2020 RMD waiver or its later consequences, but not the other provisions of CARES?

Peter, all good points. The remaining plan terms have never given us any difficulty in application. Most of our governmental plans are on individually designed documents, so this is the first time I've come across this particular issue, but it does raise some questions. Luke, it's not in our state's law either, and there is no CBA involved. I checked another blank governmental DC plan template sent to me by a recordkeeper that uses Relius documents, and it has the same provision built into the adoption agreement itself, so I'm thinking it must be in a default in the Relius document.

A different document might be a solution; I don't know whether other providers include a similar provision. The handful of other pre-approved governmental documents I've worked with, including those from other vendors, have all been based on the same Relius document. More fundamentally, I guess I want to make sure this provision doesn't indicate that there is some other rule (aside from section 410(a) of the code) I'm missing that would require it to be included in a governmental 401(a) plan (pre-approved or otherwise).

The FIS Relius pre-approved governmental 401(a) DC plan document includes the standard override when excluding temporary and part-time employees such that, if an employee in this group actually works 1,000 hours in a year, they become eligible despite being in a category of temporary or part-time employee. The only source of this rule that I'm aware of is found in 410(a). Under 410(c), governmental plans are exempt from "this section," i.e., all of section 410, including section 410(a), not just 410(b) minimum coverage requirements. Is there some other rule that would require including this override in a governmental plan? Or might this have been just a design choice by the document provider? Or perhaps a provision the IRS required as a condition to pre-approval?

Thanks for your thoughts, Luke.

Thanks for the replies. Some points I may have needed to expand on initially. The partnership and K-1 SE income account for all deductions. So from an income tax perspective, all deductions are being taken and the starting point for determining earned income for plan allocation purposes is the actual K-1 amount provided by the CPA, including all deductions. The issue arises when calculating "earned income" for plan allocation purposes, which is defined under section 401(c). That section says to start with the SE income amount from the K-1, then make certain adjustments (1/2 of SECA; employer deductions for plan contributions; etc.). One of those adjustments in section 401(c) says to calculate earned income "without regard to" deductions that are allocable to items of tax-exempt income. In other words, when calculating plan "earned income" you should disregard any deductions allocable to items of tax-exempt income. The IRS's original position was that eligible expenses paid with PPP loan proceeds were not deductible under section 265 because the eligible expenses were allocable to an item of tax-exempt income (tax-free PPP loan forgiveness). Later legislation specifically overturned that outcome, but in a way specific only to PPP loan eligible expenses, not section 265 or any other general income tax principle. So the question is, if the eligible expenses are still deductions allocable to tax-exempt loan forgiveness income, should those deductions be added back to the earned income amount for plan purposes?

We run into this a fair amount with ESOPs, especially those making large contributions to pay down loans early. The ESOP and 401(k) plan documents may not align on this point, particularly if the two plans are handled by different vendors/document providers. It happens a lot. If the two documents don't conflict with one another, follow the coordinated rules. If the two documents conflict, my approach generally is to follow the EPCRS ordering, which reduces unmatched elective deferrals first. As Lou notes, this ensures participants get the full benefit of employer contributions (i.e., they get their own money back).

I don't see any particular problem with it. If the loan payments didn't come directly from the severance pay, presumably the former employee would get a direct deposit of the severance pay and use it to make the loan payment. Severance pay shouldn't delay the employee's termination date under the loan default provisions. So if there's a default within, e.g., 30 days of termination, I don't think that should be extended during the severance period, even if loan payments are being made from severance.

Agreed on the elective deferrals going into the 457(b) plan, and corresponding matching contributions going into the 401(a) plan, but I'm not sure I follow the rest. Employer and employee amounts deferred under a governmental 457(b) plan are taxed when paid to the participant. See Section 457(a)(1)(A). Separating the match into the 401(a) plan allows the employee to defer the maximum amount under 457(b) without the employer match eating into the limit.

In my experience, yes, it's largely a way to refer to a specific plan type (governmental defined contribution plan qualified under Section 401(a) that holds non-elective contributions, matching contributions, after-tax contributions) even though many other types of plans are qualified under Section 401(a). For reference, the document provider we generally use calls this type of plan a "Governmental Defined Contribution Plan" but it's what you would typically see called a "governmental 401(a) plan."

Interested to hear whether others have encountered this question and how they resolved it. Under Section 401(c)(2)(iv), for 401(k) earned income purposes, net earnings from self-employment is calculated “without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items.” The plan sponsor, which is a partnership, had a PPP loan that was used for deductible payroll expenses. The loan was fully forgiven. The forgiven PPP loan amount was (properly) excluded from gross income. The “deductions properly allocable to” the non-taxable PPP loan forgiveness amount arguably would be the payroll expenses covered by the PPP loan proceeds during the loan period. The CARES Act and later COVID tax-relief laws clarified that no deduction would be denied (i.e., the original payroll expenses could still be deducted on the partnership's tax return) solely by reason of a non-taxable PPP loan forgiveness, but I'm not sure that alone would override the relevant portion of 401(c) that says the deductions associated with a tax-exempt item of income should be disregarded for purposes of calculating 401(k) earned income. Disregarding the deductions would increase 401(k) earned income by the amount of deductible payroll expenses paid with the non-taxable PPP loan proceeds (and increase each partner’s earned income on which contributions are allocated). Would appreciate everyone's thoughts.

The rules on this are unclear at best in my opinion. You may have already read these, but a few helpful articles discussing the lack of clarity in whether/how to link from the employer's public website. (Note that the final regulations place the obligation on the plan, not the employer as plan sponsor.) https://aleragroup.com/news/legal-alert-deadline-to-publish-certain-machine-readable-files-pursuant-to-final-cms-transparency-fast-approaching-03242022/ https://www.newfront.com/blog/where-will-employers-post-links-to-tic-machine-readable-files The second is from Brian Gilmore, who I know is active on here, so maybe he will weigh in. From my reading, and as noted in the first article, the commonly quoted public-website link language is found only in a specific section of the regulations dealing with an aggregated out-of-network "allowed amount" file. I don't read it as a general requirement for every plan (or every employer). The communications from carriers to plan sponsors that I've seen generally have requested links on employer websites under all circumstances, even for fully insured plans, which I think is overbroad. Not sure you're going to find a perfectly clear answer.

I agree that you would look for any affiliation among the three recipient organizations first. Note that this determination is based on a separate set of affiliation/attribution rules (under Sections 267 and 707(b)) not used elsewhere in the controlled group/ASG rules. If any recipient organizations are affiliated, you would look at the combined management services performed for all the affiliated organizations. If, as the original post notes, there is no affiliation among the three recipient organizations, and the services to each are split roughly evenly, there should be no problem. Also, the two-year 50% test Nate mentions was part of the proposed regulations, which I don't believe ever offered reliance and were withdrawn entirely in 1993. It's probably still a good rule of thumb, but I don't think you're necessarily bound by the two-year 50% average. That said, in the end, Bill Presson's advice is the best you'll get.

Not in the M&A context. Treasury Reg. 1.401(k)-3(e)(4) allows the sponsor to terminate a safe harbor plan during a plan year. Within that subsection, (i) describes the normal, non-M&A termination rule, which does require 30 days' notice (by reference to the requirements of subsection (g)) but (ii) allows the plan to be terminated in connection with an M&A transaction without imposing any notice requirement (either directly or by reference to (g)).

Certainly. And in my experience plan sponsors always notify participants ahead of, or at the same time as, the termination date as part of the process. The discussion above (or at least my response) simply confirms that there is no fixed participant-notice period required by law.

As a practical matter, contemporaneous participant notice is a good idea, but there is no advance notice requirement in the law (either for safe harbor or non-safe harbor plans) in the M&A context. I have heard several recordkeepers tell plan sponsors in this situation that a 30-day notice is required, but in my opinion there is no legal basis for that or any other advance participant notice (although I understand many recordkeepers require a minimum notice to begin processing the plan termination on their end, which is different from terminating the plan as a legal matter).

Yes, happens all the time.

There's a very thorough treatment of some of the issues you raise here: https://www.nixonpeabody.com/en/ideas/articles/2013/09/06/ememleave-and-learn-paid-time-off-challenges My sense is that most PTO plans probably will be bona fide vacation/sick pay plans under 409A and 457(f), especially under the circumstances you describe, and that avoiding constructive receipt is the main design challenge. There is also a discussion in the same piece about the continued use of haircut provisions in PTO cashouts after 409A.

Similar thread here:

Someone can correct me if I'm wrong as it's been a few years, but my recollection is that any current participant with an accrued benefit would need to have the existing (more favorable) NRA rule apply to their accrued benefit as of the date of the amendment. Any new contributions could be subject to the new NRA. Like a vesting change, this would require tracking pre- and post-amendment balances. In the small handful of times I've done this, the plan sponsor has always applied the new NRA only to participants newly eligible on or after the effective date of the amendment. And it will likely only affect a small handful of people. Anyone who has already met the six-year (or less) vesting schedule will not be affected at all, regardless of age, unless there is some other right tied to NRA (e.g., in-service distributions). So a 58-year-old participant with 20 years of service will not be adversely affected, even if their "new" NRA is 65.

Agreed, CuseFan, as written it makes no sense. I think that's what caused my initial confusion. Will take it back to the document provider to see if they can clarify what was intended by this particular combination.