David Schultz

I want to confirm on behalf of FIS that Relius Administration is designed and developed (and this has been confirmed in testing) to LTPT count service for individuals < age 21. If set as an eligibility condition, a participant will have to complete the 2 (or 3) LTPT YOS and attain age 21 to be eligible to enter the plan as a LTPT employee, but the employee does receive LTPT service credit for the years < age 21. Based on this, there should be a different explanation (based on census info or plan specs) for why the participant addressed in this question did not receive credit.

Whenever we use the term "deemed", we are referring to a legal fiction - we are calling something a thing because the law says we can. A deemed distribution is just such a fiction. A deemed distribution is just a taxable event, but it does not end the loan, which continues to exist on the plan's books and continues to accrue interest, impact vesting, outstanding loan balances, etc. That would prevent a participant from taking a second loan until the first loan is paid off (assuming the plan limits participants to no more than one loan at time). As Bird notes above, a loan offset distribution terminates the loan. Once the loan offset occurs, the participant does not have an outstanding participant loan and should be able to take a new loan pursuant to the plan's terms. The framework for this is found in Treas. Reg. §1.72(p)-1, Q&A 13(a)(2), which provides:

If they are late, see Rev. Proc. 2015-32 and Form 14704 for the IRS's Form 5500-EZ late filing corrections program. $500 per year/return with a maximum of $1,500. This may be your client's best penalty mitigation option.

Anytime we use the word "deemed," we are discussing a legal fiction. A participant has a loan and they default on the loan, but the loan came out of 401(k) deferrals and the participant is only 40 years old and still employed by the plan sponsor. The participant is subject to the 401(k) distribution restrictions, so they can't actually have a distribution. But the IRS wants to collect the taxes due on what was, for all other intents and purposes, a distribution from the plan. Thus, the participant experiences a deemed distribution which removes the loan from the plan assets and triggers taxation of the balance at the time of default. But it is not really a distribution, so the loan continues to exist on the plan's books unless and until it is paid off (at which point, the participant would receive basis on the repayment as they have already been taxed). As Bird notes above, the phantom loan balance can impact future borrowing limits (or even the ability to borrow again, if the plan limits participants to only one outstanding loan at a time), but it also impacts top heavy (as it counts as part of the participant's balance), vested balance calculation, etc. Keep in mind that in nearly all "modern" 401(k) plans, the participant is paying interest to themself. In your example, who would get the $2,000 being retained from the participant? Because the participant is not repaying the loan, the phantom interest accrued equates to a phantom distribution (i.e., there is nothing so they get nothing), but it is not deducted from their other plan assets.

The unnamed and esteemed attorney was, of course, correct. Under Treas. Reg. §1.411(d)-4, Q&A-2(b)(2)(v), involuntary distributions (or the absence of such) is a protected-benefits that may be reduced or eliminated, by consent of the IRS. "A plan may be amended to provide for the involuntary distribution of an employee's benefit to the extent such involuntary distribution is permitted under sections 411(a)(11) and 417(e). Thus, for example, an involuntary distribution provision may be amended to require that an employee who terminates from employment with the employer receive a single sum distribution in the event that the present value of the employee's benefit is not more than $[5,000/$7,000]..."

Just to be clear, the Form 8955-SSA is not under the jurisdiction of the DOL and the failure to file the 8955-SSA does not impact whether or not you have filed a complete Form 5500/-SF. Therefore, DFVCP could not be an option. The 8955-SSA is an IRS form and late filing penalties are governed by Code §6652(d)(1) - $10 per participant per day, up to a maximum of $50,000. It is to the IRS that you would plead your case if needed (but this isn't governed under EPCRS either). The actual statutory language is "... unless it is shown that such failure is due to reasonable cause, there shall be paid (on notice and demand by the Secretary and in the same manner as tax) by the person failing so to file, an amount equal to $10 for each participant with respect to whom there is a failure to file, multiplied by the number of days during which such failure continues, but the total amount imposed under this paragraph on any person for any failure to file with respect to any plan year shall not exceed $50,000." (emphasis added) To RatherBeGolfing's point, Treasury doesn't appear to be demanding the penalty often. Bird is right, put them on the 2022 form.

I do not believe that correct. While I won't claim to be of the "pension elite", I think I am on solid ground here: SECURE 2.0 §125 modifies IRC §416(g)(4)(H) (which provides that a plan that consists solely of contributions under 401(k)(12) (safe harbor match or NEC) shall not be top heavy). The SECURE 2.0 change adds the following language to this subsection: "Such term shall not include a plan solely because such plan does not provide nonelective or matching contributions to employees described in section 401(k)(15)(B)(i)." §401(k)(15)(B)(i) makes reference to employees who are solely eligible to participate because they are LTPTs. Separate from the above, 401(k)(15)(B)(ii) provides that an employer may exclude all EEs who are solely eligible to participate because they are LTPTs from the vesting and top-heavy minimum contribution requirements. Put these together and (1) there is no top-heavy contribution requirement for LTPT EEs and (2) the exclusion of LTPT EEs from receiving a safe harbor contribution does not eliminate the top-heavy exemption for plans that would otherwise be exempt. There may be a myriad of reasons to expand "traditional" eligibility to include the employees who would otherwise be LTPTs; however, doing it to prevent a safe-harbor (match or NEC) plan from losing the top-heavy exemption due to LTPTs not receiving a safe harbor contribution is (thankfully) not one.

For small balances associated with missing participants (where someone has documented the steps undertaken to locate the individual), forfeiture (if permitted under the plan terms) is a very pragmatic option - subject to restoration should the participant resurface prior to plan termination.

I do not agree with this premise. A sole prop doesn't receive a salary or payroll for employee compensation tracking purposes. The net SE income is intended as an analogue for employee compensation. An employee would never have compensation of less than $0. If the employer incorporated both businesses, the employers could not issue a negative W-2 - the loss in one business would not offset the income in the other. The incorporated/unincorporated status of the business should not change that outcome in this context. I think you have $22,000 of plan compensation. The IRS (unofficially) supported this point of view at an ASAPA Annual Conference Q&A in the mid 2000s. (I sure miss those IRS Q&As!) I know that Derrin Watson speaks directly on this point in his tome, Who's The Employer, and takes the position that there cannot be negative earned income.

This is covered by Code §402. §402(c)(1) says the distribution of property paid in an eligible rollover distribution (ERD) is not taxable if the property is transferred to "an eligible retirement plan" - and (c)(3) provides 60 days to do so. Treas. Reg. §1.402(c)-2 fills in many of the gaps (in a convenient Q&A format) and provides in Q&A-1: I don't see any wording regarding "another" eligible retirement plan. The cited sections above, Code §402(c)(4) and (c)(8)(B), simply refer to "a qualified trust". See also §1.402(c)-2, Q&A-2 and Q&A-11. I don't know that I saw any actual suggestion above that the distribution itself is not an ERD, but assuming it is and the distribution is bona fide, then I don't see any prohibition against rolling back into the plan from which it was initially distributed. (Indeed, this also seems good policy - let them change their mind and keep their plan balance intact.) Rolled over or not, he should get a 1099-R and have 20% withheld. Note: The language used for Roth accounts is different. Per Code §402(c)(8)(B):

No. Form 5500-SF Line 10e is effectively the Schedule A disclosure of insurance-related fees or commissions. Line 8f is the disclosure of administrative service provider fees and commissions and would include non-insurance related investment management fees. For a great many plans, the figures in lines 8f and 10e should be different.

I would note that in IRS Notice 2021-40, the IRS said: The comment period is closed and while it appears only 13 comments were received, both pro and con perspectives are well-represented. The IRS has not yet acted.

Just to be sure that this is clear: there is no circumstance under EPCRS in which the employer will make an after-tax corrective contribution. The calculated ADP is a combined ADP for all deferrals (pre-tax and Roth). In your fact pattern, the participant gets one corrective contribution of .5625%, all it pre-tax. Not .5625% for pre-tax, and another .5625% for the Roth. It does not matter if the participant would have elected to make his deferrals as all Roth or all pre-tax, or a combination - there is one corrective QNEC and it is all pre-tax.

C.B., could you expand on your thoughts on this topic (why is Title I invoked with 1 direct owner and 1 owner-via-attribution)?

The plan document can limit the maximum amount of (or the reasons for obtaining) a hardship distribution. Assuming the document imposes no unexpected limitations, there is no limit on the percentage of the participant's vested account balance that can be distributed on account of a hardship.

A participant loan in a participant-directed account is a fully-secured loan for which no one but the participant bears the financial risk of default. I think prime + 1% or 2% is fully supportable as a reasonable rate under those circumstances.

I can also get close. My calculation using the DOL's assumptions gets me to $640 (not the DOL's $645) based on a balance of $125,000, an interest rate of 1.83%, and a life expectancy of 19.4 years (which I calculated to be 232 monthly payments, rounding down). Trying to figure out where I am off...

I am also formerly of a CPA firm that had a TPA and while I cannot cite any authority (I am an attorney not a CPA and didn't research), I know that my firm had determined that it was a violation of the independence standards (under AICPA guidelines and SOX, I believe) for the CPA firm to audit plans for which we were recordkeeper or TPA. At a very minimum, I would consider this to be a bad signal/red flag regarding the ethical standards maintained by the firm that would agree to do both.

Another thing to consider: This would be a provision subject to the anticutback rule. Once you accelerate the timing of the distribution process, you cannot take that away for accrued benefits. The business owner's heart might in the right place in this instance, but this is an area in which any change should be made after full consideration of the potential long-term consequences to the plan.

Just some food for thought on this topic: If the market had gone up (rather than down) by 11% YTD in a pooled plan, would you do an interim valuation before the distribution to give the participant the benefit of the gains? Does the plan have any standards in place about what level of market movement will mandate a special valuation? My point is that I believe consistency is key here - don't make the EE suffer the loss if you wouldn't make them suffer the gain, and "discretion" is a 4-letter word in this context. Moreover, just be clear, this is generally the a decision for the Plan Administrator, not a TPA/recordkeeper decision (unless the service provider is a fiduciary or wants to be one). I am not sure whether the OP's plan is daily or balance forward, but the other thing to consider is that the participant can generally take the proceeds and buy back into the down market. They probably won't, I know, but it is an option they have. Lastly, as a former investment professional I can tell you that, IMHO, market timing is a fool's game.

FWIW, as one of those frequent speakers, it is very unlikely to me that the ACP safe harbor would be able to be retroactively applicable. There is too much potential for abuse. Moreover, the statutory language doesn't modify IRC §401(m), so it would be a rather aggressive stretch for the IRS to apply the new rules to the ACP test as well.

They not only can, they must. All service counts (unless the foreign employer is "unrelated" to the plan sponsor).

I'd like to highlight that in most plans, separation from service is a distributable event, and default results in a loan offset distribution vs. a deemed distribution. If the loan has been offset, it may not be paid back (as the loan no longer exists).

Robert Richter, formerly of FIS (Relius), assumed responsibility for the EOB from Sal starting the beginning of the year. He has big shoes to fill, and the feet to fill them.

Austin: A similar provision is in the current and recently-submitted documents for both FIS (Relius) produced document series: Corbel and PPD. They are worded a little differently but have the same effect.