EBECatty

I'm not sure you're going to find any court rulings on that narrow issue. A quick search of potentially relevant terms on a few legal research tools brings up none. There was some informal DOL guidance soon after PPA, but I'm afraid you may be out of luck on published judicial opinions.

The plan contains the regular rule that a participant will not re-enter the plan until they complete one "year of service" after being rehired following a break in service (year with <500 hours). The AA defines "year of service" for eligibility purposes as 1,000 hours. But the actual eligibility rule for plan entry is only three continuous months of service. It seems odd that a rehired holdout would require 1,000 hours to rejoin the plan when the actual eligibility condition for all other participants is only three months. So, for example, if a rehire is brought back part-time following a break in service, they could work three months in a row, but never work 1,000 hours in a year. Do they ever come back in?

I'm probably missing something obvious. A PS plan defines a year of service for eligibility as 1,000 hours. Actual eligibility for PS contributions is three months of continuous service. For purposes of applying the one year holdout rule, does a rehired employee have to complete 1,000 hours or three months to rejoin the plan?

Would appreciate a sanity check here. Employer has a long-term bonus plan. Company and individual performance from, say, 1/1/21 - 12/31/23 determine the amount of bonus paid after 12/31/23. Generally participants must be employed on the last day of the performance period to be eligible. Participants who die, become disabled, retire (at a fixed age/service), or are involuntarily terminated during the performance period will receive pro rata payments at the same time as all other participants. Employer does not calculate the final amounts until after March 15 of the year following the end of the performance period, so all payments are subject to 409A. What practical impact does this have if the plan uses the year following the end of the performance period as a fixed payment date (as opposed to trying to pay before 3/15/24)? It would not allow payments to be made earlier than, or later than, 2024, which is fine. There are no opportunities to further defer the payment. The substitution rules would apply, which can be managed. The six-month delay would apply, but no payments are triggered by a separation from service, only a fixed date. The plan could be aggregated with other plans for plan termination rules. It also seems that these rules would apply to participants terminating prior to 2023, even if the payments were made by 3/15/24 in the ordinary course (e.g., a participant who retired in 2022 would not meet the short-term deferral timeline in any event if payment was 3/15/24). None of these strike me as particularly difficult as long as the employer is aware they are constraining themselves in some ways. Am I missing something that would make this impractical?

No, not specifically, but every recordkeeper I've dealt with will only allow loan rollovers if the remaining account balance is directly rolled over with it. There may well be a nuance requiring this that I'm not aware of, but I've always taken it as a given, if for no other reason than it's a practical requirement (even if not a legal one).

I think David Rigby meant the agreement should not say the seller's employees "will" roll over their balances, but that they "may" roll over their balances (although he can correct me if I'm misinterpreting). And, as he mentions, plans can allow immediate rollovers in even if the employee has not yet reached the regular eligibility requirements. Terminating the plan now or 60 days from now generally won't make a difference.

Thanks, and appreciate you flagging the SECURE 2.0 proposal.

A plan sponsor wants to make profit-sharing contributions for the 2021 plan year to employees who did not meet the plan's eligibility criteria in 2021. There is no testing failure if they remain excluded. Is it possible to amend the plan now to make the eligibility terms less restrictive? It seems like an -11(g) amendment would not work because it wouldn't be correcting a failure. Likewise, we're beyond the timeline for adopting a discretionary amendment. If they received allocations anyway, despite the plan terms, how would everyone view a retroactive corrective amendment under SCP to conform to the plan's actual operations (i.e., retroactively loosen the eligibility terms for the profit-sharing component only)? Only non-HCEs are in the potentially expanded group. The expansion would not cover the deferral components so there wouldn't be an issue with their inability to defer in 2021. Is there any other way to accomplish? Appreciate any insights.

Yes, although the current balance would have to be rolled over with the loan, so this would require two separate distributions/rollovers if the same participant is getting another contribution. Check with the recordkeeper as well. Each participant would need to elect a rollover (including their account balance with the loan) individually.

As Bri mentions, it's pretty common to allow loan rollovers in this situation. It's simple in theory, but the logistics can be challenging (for example, rolling over the loans before the cure period expires, especially if the recordkeeper requires 45-60 days to terminate the plan and will not allow individual distributions before then; catching up any missed payments during the transition; re-amortizing if the seller's and buyer's payroll periods differ (every two weeks vs. twice a month); setting up loan repayment deductions with the buyer; etc.).

The second-to-last sentence in 1.409A-3(b): "A plan may provide for payment upon the earliest or latest of more than one event or time, provided that each event or time is described in paragraphs (a)(1) through (6) of this section."

It may help to break out the two entities involved as well. The corporation itself still exists; it simply has a new owner. The ESOP is not the plan sponsor; the corporation is. The corporation is created under state law, which as Peter notes generally requires that a corporation have at least one officer. (For example, one state I do work in specifies two different offices that must be filled, but they can be filled by the same person.) The corporation is still the entity employing employees, conducting business, etc. The corporation has a board of directors; the ESOP does not. Even after being sold to an ESOP, the corporation is under the control of the corporation's board of directors (who generally are appointed by the ESOP trustee in the trustee's capacity as the sole shareholder). The people you are looking for will be at this level. The ESOP is a retirement plan sponsored by the corporation. The ESOP is the corporation's sole shareholder. It has a trustee, administrator, etc., but generally would not have officers, employees, or a board of directors. From there, I think Peter's comment will help you figure out which individuals are officers for this particular issue.

The final regulations and the 409A Handbook confirm that a permissible payment event can be the earlier of, or later of, one or more permissible payment events. I don't see a problem with the later of separation from service or a fixed date. From the original post, there doesn't appear to be any suggestion of subsequent deferrals, addition of a payment event, different forms of payment, etc. Am I missing something?

Sure, the particular one I asked about is the Insperity 401(k) Plan. The large pdf is giving me a hard time, but it's easily accessible on EFAST. It's marked as a single-employer plan in Part I of the 5500 (page 1) and describes its status on the last page. Compare that with, for example, the ADP TotalSource PEO 401(k) plan that reports as a multiple-employer plan and lists every participating organization and their relative contributions.

I am not heavily involved in the PEO, MEP, PEP, etc. field, so would appreciate any input here. I've come across a few large PEO plans that treat their 401(k) plans as multiple-employer plans on their 5500s. They generally report as a multiple-employer plan and file the schedule of contribution allocations for participating employers. I recently came across one that, on its 5500, says it is a "single employer plan which is operated consistently with the requirements for a multiple employer plan...". The 5500 is marked as a single-employer plan and there is no list of contribution allocations for participating client organizations. Plan design elections and compliance testing is done on a client organization/participating employer basis. Am I missing a nuance between a multiple-employer PEO plan and a single-employer PEO plan that is treated as a multiple-employer plan? Appreciate any clarification.

FIS Relius' governmental 401(a) document has the following: Elective deferrals taken into account. For purposes of applying the matching contribution provisions below, elective deferrals include elective deferral (pre-tax and Roth) contributions to the following Employer plan(s) (insert name of Plan(s) to which the elective deferral contributions being matched will be made): a. [ ] 457 plan(s). Enter Plan name: b. [ ] 403(b) plan(s). Enter Plan name:

The suspense account belongs to the plan unless and until the money in it actually reverts to the employer. The outcome will depend on the structure of the company sale and the benefits structure. If it's a stock sale, and the plan continues to be maintained after closing, the existing plan sponsor will continue to be the plan sponsor. If it's an asset sale, and the buyer assumes the plan, the suspense account remains with the plan. If the plan is terminated, the remaining suspense account must be allocated up to the 415 limits, with any excess reverting to the plan sponsor. The statute imposes the tax on a reversion on "the employer maintaining the plan" so if terminated pre-closing any reversion would seem to belong to the seller. A lot of variables.

You might also look into how these issues are addressed in private company ESOP sale transactions. The dynamics are very similar - a qualified plan owns all or a large portion of the company's stock - and the same issues arise frequently.

Similar thread here:

My understanding is that 415(h) applies only to parent-sub groups by reference to 1563(a)(1) (leaving out (a)(2), which covers brother-sister groups). Under 1563, I also don't think person 1's 75% ownership interest of company 2 will be attributed to company 1, so I don't think you have a 415(h) parent-sub group either.

Don't forget to check the excluded stock rules, especially if person 2 is an employee of company 2 and person 1 has a non-reciprocal right such as a right of first refusal on person 2's stock.

Maybe the recordkeeper has a $25 distribution fee?

This happens fairly often in asset sales. While you could probably argue either way regarding who the common-law employer is during the transition period, generally the employees are treated as employees of the seller during the transition period and often can continue to contribute to the seller's 401(k) plan. The seller's 401(k) is then terminated when the employees are terminated from employment with the seller and hired by the buyer (i.e., the end of the transition period).

That's a pretty specific fact pattern, and a proposed solution with no real basis in the law, so in my opinion it's hard to come to a clear answer. If the IRS approves the proposed correction, then it should be fine. If the IRS doesn't approve, then they would have to find a different way to handle, maybe by treating the old plan as being terminated post-closing and merging it into the new plan, or maintaining it as the go-forward plan, or maybe try to distribute all post-closing contributions as ineligible. In any event, I don't think there's a clear-cut answer to whether it's okay given the pending VCP submission.

Appreciate it, Nate. That's what I was afraid of.