David Schultz

This is a missed deferral opportunity and there are stated self-correction procedures under EPCRS (generally requiring an employer QNEC contribution for part of the missed deferral). See Rev. Proc. 2018-52 Appendix A.05(4), (5), and (9)(b). Based on the facts provided, this likely falls under (9)(b).

There is a special Roth conversion "recapture" provision that would prevent the tax windfall. See Treas. Reg. §1.408A-6 Q&A-5(b) and (c). Effectively, it applies the 5-year rule separately to each Roth rollover/transfer.

At the risk of being a bit too "geeky" here, it is worth noting that a loan must be "bona fide" to be treated as a loan under IRC §72 (see Treas. Reg. §1-72(p)-1 Q&A 17). If the business owner took the funds with the intent to not pay them back, then there was no bona fide loan and the plan has an operational failure and a failure to withhold taxes on a distribution. Given that a HCE/Key EE was the party that took a distribution in violation of the plan's terms (and probably in violation of the 401(k) distribution restrictions), this could be a qualification issue.

Just to highlight: Tom's recommendation is to use an -11(g) amendment, which falls outside of EPCRS. For the reason that the ESOP Guy highlighted I think Tom is talking a bit of a conservative stance in taking the position that the small QNECs have no "substance" under the -11(g) rules since the benefit will be consumed by the fee - the participant can always choose to make contributions and consequently receive a benefit. But Tom's position isn't unreasonable. It isn't black and white. That said, this is not an EPCRS correction and the Delivery of Small Benefits provision does not apply. In any event, that provision is only applicable to the extent that the participant has a distributable event. If there is no distributable event under the terms of the plan, the money stays in the plan. Maybe over time investment returns will increase the value.

This is addressed in Treas. Reg §1.401(k)-3(e)(4)(ii). Since the plan is terminating due to a merger, it does not have to provide the employees with the Supplemental Notice. However, the plan sponsor is required to fund the accrued benefits through the date of termination, and the plan must satisfy ADP/ACP and top-heavy testing for the year. Did the liability for funding the accrued benefits remain with the seller under the purchase agreement? In any event, the legally responsible party must fund the accrued benefits. Failure to do so could disqualify the plan, and bring legal action by participants and the DOL to recover the liabilities.