ErisaGooroo

May seem like a dumb question, but I'll risk it. Do you have a specific reference for this? Where in the DOL VFCP does it state that the DOL calculator can only be used to calculate the lost earnings under VFCP. This is a rule I've always followed but I am having a hard time pointing to the reference under VFCP.

Thank you for your reply.

Per Rev. Proc. 2021-30, pg 31/140, there is a consistency requirement based on like failures: "(3) Consistency requirement. Generally, if more than one correction method is available to correct a type of failure for a plan year (or if there are alternative ways to apply a correction method), the correction method (or one of the alternative ways to apply the correction method) should be applied consistently in correcting all failures of that type for that plan year. Similarly, Earnings adjustment methods generally should be applied consistently with respect to corrective contributions or allocations for a particular type of failure for a plan year. In the case of a group submission, the consistency requirement applies on a plan-by-plan basis."

Hello all - Wondering if you have an opinion on whether the $250 or less de minimis rule applicable to excess amounts also applies to excess allocations? As you know, an excess allocation is a subset of an excess amount. Pg 21/140 of Rev. Proc. 2021-30: Excess amount: "A Qualification Failure due to a contribution, allocation, or similar credit that is made on behalf of a participant or beneficiary to a plan in excess of the maximum amount permitted to be contributed, allocated, or credited on behalf of the participant or beneficiary under the terms of the plan or that exceeds a limitation on contributions or allocations provided in the Code or regulations. Excess Amounts include: (i) an elective deferral or after-tax employee contribution that is in excess of the maximum contribution under the plan; (ii) an elective deferral or after-tax employee contribution made in excess of the limitation under § 415; (iii) an elective deferral in excess of the limitation of § 402(g); (iv) an excess contribution or excess aggregate contribution under § 401(k) or (m); (v) an elective deferral or aftertax employee contribution that is made with respect to compensation in excess of the limitation of § 401(a)(17); and (vi) any other employer contribution that exceeds a limitation under § 401(m) (but only with respect to the forfeiture of nonvested matching contributions that are excess aggregate contributions), 411(a)(3)(G), or 415, or that is made with respect to compensation in excess of the limitation under § 401(a)(17)." Excess allocation: "The term “Excess Allocation” means an Excess Amount for which the Code or regulations do not provide any corrective mechanism. Excess Allocations include Excess Amounts as defined in section 5.01(3)(a)(i), (ii), (v), and (vi) (except with respect to § 401(m) or 411(a)(3)(G) violations). Excess Allocations must be corrected in accordance with section 6.06(2)." Pg 34/140 of Rev. Proc. 2021-30: "(e) Small Excess Amounts. Generally, if the total amount of an Excess Amount with respect to the benefit of a participant or beneficiary is $250 or less, the Plan Sponsor is not required to distribute or forfeit such Excess Amount. However, if the Excess Amount exceeds a statutory limit, the participant or beneficiary must be notified that the Excess Amount, including any investment gains, is not eligible for favorable tax treatment accorded to distributions from the plan (and, specifically, is not eligible for tax-free rollover). See section 6.06(1) for such notice requirements. There are differing opinions on whether the $250 de minimis rule applies to an excess amount that is also an excess allocation. An example, employee elects to defer 5%, but the plan sponsor withholds 7% in error. The 2% would be considered an excess allocation. Could the plan sponsor elect to use the $250 de minimis rule here? According to the ERISApedia.com webinar presenters, the answer is no. I even challenged this statement during the webinar and the presenter said the $250 de minimis rule doesn't apply. I cannot find anything on the web except one article from Newfront that says the de minimis rule doesn't apply to excess allocations. And, the Rev. Proc. doesn't really make it clear enough to be certain. Any feedback is greatly appreciated! Thanks.

Thank you all for taking the time to reply to my question. Greatly appreciated!

It means that the missed match is funded as a non-elective contribution and may be subject to vesting or may be contributed as a Q-NEC. The "missed match" shouldn't be sourced as a match, it should be sourced as a non-elective contribution. This is the reason the ACP test doesn't need to be redone after a missed match is corrected.

Plan makes a corrective allocation under EPCRS for a missed deferral and missed match in the form of a QNEC to the plan, plus attributable earnings. The RK is partly responsible for the error and offers to cover the cost of earnings on the QNECs involved. Question - Can the RK fund the earnings directly to the Plan or should the RK reimburse the Plan Sponsor/Employer for the earnings amount by other means outside the Plan? Clearly, a corrective allocation must come from employer non-elective contributions (including forfeiture account if the plan allows "use to reduce" method) but unclear part is whether the earnings attributable to the corrective allocation should also be required to be funded from ONLY employer non-elective contributions (including forfeitures). Any help is greatly appreciated. Thank you! From Rev. Proc. 2021-30, page 31/140: (4) Principles regarding corrective allocations and corrective distributions. The following principles apply where an appropriate correction method includes the use of corrective allocations or corrective distributions: (a) Corrective allocations under a defined contribution plan should be based upon the terms of the plan and other applicable information at the time of the failure (including the compensation that would have been used under the plan for the period with respect to which a corrective allocation is being made) and should be adjusted for Earnings and forfeitures that would have been allocated to the participant's account if the failure had not occurred. However, a corrective allocation is not required to be adjusted for losses. Accordingly, corrective allocations must include gains and may be adjusted for losses. For additional information, see Appendix B, section 3, Earnings Adjustment Methods and Examples. (b) A corrective allocation to a participant's account because of a failure to make a required allocation in a prior limitation year is not considered an annual addition with respect to the participant for the limitation year in which the correction is made, but is considered an annual addition for the limitation year to which the corrective allocation relates. However, the normal rules of § 404, regarding deductions, apply. (c) Corrective allocations should come only from employer nonelective contributions (including forfeitures if the plan permits their use to reduce employer contributions). For purpose of correcting a failed ADP, actual contribution percentage (“ACP”), or multiple use test, any amounts used to fund qualified nonelective contributions (“QNECs”) must satisfy the definition of QNEC in §1.401(k)-6. Page 26/140: .04 Earnings. The term “Earnings” refers to the adjustment of a principal amount to reflect subsequent investment gains and losses, unless otherwise provided in a specific section of this revenue procedure.

I would suggest that the plan administrator remove the expense account funds from the the employer's account (including attributable earnings) and place it back in the expense account. Reallocate it as earnings to the participants in the 2021 plan year. Refer to the plan document for the allocation method of those funds.

Participant A is actively employed and receives an in-service distribution in an amount that he/she was not entitled to receive due to a vesting error. The funds received were rightfully allocated to the participant's account but the amount distributed exceeded the accrued vested percentage at the time of distribution. All other terms of the plan were followed in processing the distribution. The bold text states that if a payment was made to a participant in the absence of a distributable event but was otherwise entitled to receive the funds - then the make whole requirement doesn't apply. Would an overpayment made to a participant which exceeded the portion of the account to which he/she was vested be considered an overpayment that qualifies for the exception to the make whole requirement? The participant was entitled to receive the funds distributed, but received the funds too early due to a vesting error.

I think the Notice being discussed here is Notice 2005-92 (not Notice 2005-98).

Thank you all very much for your help. I appreciate it.

Hello, Everyone: Thanks for the replies. It is a distribution from a church plan (nothing to do with an IRA). My concern was whether or not the housing allowance (for the most part, a non-taxable distribution) would satisfy at least a portion of the RMD requirement (a taxable distribution). The participant takes a distribution for a housing allowance and is also now required to take RMDs.

Happy Friday! A minister's housing allowance is excludable from gross income for income tax purposes. Considering Treas. Reg. 1.401(a)(9) Q&A9 below, would a distribution made for a housing allowance count toward satisfying the RMD for a participant? Thoughts? https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-5 Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied? A-9. (a)General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied. (b)Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year: (1) Elective deferrals (as defined in section 402(g)(3)) and employee contributions that, pursuant to rules prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), are returned to the employee (together with the income allocable thereto) in order to comply with the section 415 limitations. (2) Corrective distributions of excess deferrals as described in § 1.402(g)-1(e)(3), together with the income allocable to these distributions. (3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions. (4) Loans that are treated as deemed distributions pursuant to section 72(p). (5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.) (6) The costs of life insurance coverage (P.S. 58 costs). (7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2)(ii)(b) of this chapter. Any feedback would be greatly appreciated! E

Thanks for the reply. That's what I think, also. Now to see if there have been any permissive withdrawals processed so I can discuss EPCRS SCP.

Plan uses prior year testing method for ADP. Yes, they make a reasonable match (100% up to 3%). Most HCES receive slight refunds each year which they hate. They do not want to do QACA - I've mentioned SH ad nauseam - and it's always a NO. Most HCES have made an affirmative election to defer at least 5%. My concern is the off chance that one HCE has not made an affirmative election, is considered a "covered employee" and per the special rule in the AA is not subject to the auto increase. I am thinking this violates the uniformity requirement which negates the EACA. The reason I'm concerned about that is that they've processed 90 day w/d for some participants who were at the time a part of the auto enroll provision. Thoughts on this?

They want to exclude the HCEs from the automatic escalator of 1% each year because they already have issues with failed ADP test and there are many HCEs who take advantage of the plan. HCEs usually make an election well above the 2% default rate, (usually around 5% or so to avoid ADP failure). They don't want to include the HCEs in the auto escalation of 1% up to 8% due to increased potential for ADP failure. If the HCE makes an affirmative election, that means he/she is not a covered employee, and would not be included in the EACA feature. But, there are some that haven't made an affirmative election, so I'm concerned with EACA status because plan uses that 90 day permissive w/d feature.

401(k) Plan with EACA provision Plan has default percentage at 2%, with auto escalation of 1% up to 8%. Auto escalation feature does not apply to HCEs (this special provision is written in the plan document). The plan sponsor has used the 90 day permissible withdrawal provision (elected in the AA) afforded to EACA but NOT the 6 month extension to cure ADP/ACP failures. All other requirements of EACA have been satisfied except for what is mentioned here. Ultimately, the Plan Sponsor wants to have the ability to use the 6 month extension without auto escalating the HCES due to ADP testing issues. With the uniformity requirement, I don't think that is possible because they exclude the HCEs from the auto escalator. BUT - then I started to wonder about the use of the 90 day permissible withdrawal feature (which the plan sponsor has used in the past) in a plan that may not be EACA at all (uniformity requirement). Question - 1. Does the exclusion of HCEs from the auto escalation feature prevent the arrangement from being considered an EACA and therefore no 90 day w/d provision allowed? 2. Would excluding the HCEs from the automatic enrollment provision altogether allow the plan to be an EACA with use of 90 day w/d provision and 6 month extension on ADP/ACP? My thought here is that the HCES would no longer be considered a "covered employee" and there no issue with uniformity requirement. Any guidance you can provide here would be greatly appreciated. E

VFCP filing will be prepared for overcharged participant fees to participants and overcharged fees to plan sponsor as a result of systematic error. Once the principal amount and lost earnings are restored to the plan, does the plan sponsor also have to amend the Form 5500 for prior years? Overcharged fees are approximately $50,000 and the error goes back to 2014.

Participant in a 401(k) Plan takes a participant loan and then goes on military leave. The participant subsequently has a termination of employment from the employer who sponsors the 401(k) plan from which the participant loan was taken. Per 414(u)(4), the plan may suspend the obligation to repay the loan during which the employee is performing service in the uniformed services. Loan policy does not permit terminated participants to make ACH payments, allows participants to suspend payments during military leave, and upon termination loan is due payable unless part of eligible rollover distribution. Question - What happens if this participant terminates employment while on military LOA with an outstanding loan? A. Participant may still suspend the obligation to repay for the period of the military service. Once military service ends, the participant would then fall under the normal rules for a terminated participant with an outstanding loan. (FYI loan policy states upon termination loan is due payable unless part of an eligible rollover to another plan), OR B. Participant is treated as a terminated employee and by the terms of the plan, the loan would be due payable unless part of an eligible rollover to another plan. “(b) Military service. In accordance with section 414(u)(4), if a plan suspends the obligation to repay a loan made to an employee from the plan for any part of a period during which the employee is performing service in the uniformed services (as defined in 38 U.S.C. chapter 43), whether or not qualified military service, such suspension shall not be taken into account for purposes of section 72(p) or this section. Thus, if a plan suspends loan repayments for any part of a period during which the employee is performing military service described in the preceding sentence, such suspension shall not cause the loan to be deemed distributed even if the suspension exceeds one year and even if the term of the loan is extended. However, the loan will not satisfy the repayment term requirement of section 72(p)(2)(B) and the level amortization requirement of section 72(p)(2)(C) unless loan repayments resume upon the completion of such period of military service and the loan is repaid thereafter by amortization in substantially level installments over a period that ends not later than the latest permissible term of the loan.”

Mike Preston, Do you happen to have a reference to support this statement? I am trying to find something I can use to support an approval for a hardship distribution for a funeral expense already paid for by credit card. Thank you!

My apologies in advice for the lengthy post - but the info below is relevant to the exceptions. In general, the acquisition of one organization by another unrelated organization through a stock acquisition is usually treated as a continuation of employment for all plan purposes. But as in all general rules, there are exceptions. I’ve been part of a few conversations with attorneys who felt the interpretation below (414(a)) is in line with the interpretation of Treas Reg 1.411(a)(5) where vesting is excluded for pre-affiliation, pre-effective date and if not a predecessor employer. Exception #1: Stock sale of a subsidiary or division of one company to another unrelated company/controlled group. This will be treated as a severance of employment if the “3 part test is satisfied.” (see green highlighted excerpt from the EOB below) Exception #2: immediate liquidation of the acquisition following the stock sale or termination of the target plan before the stock purchase. Per the EOB, this might be an aggressive approach but there are arguments presented that should be considered and the employer should make the final decision. (see yellow highlighted excerpt from the EOB below). IRC §414(a) is the IRC that I mentioned to you and it is discussed in yellow below. Exception #3: Successor Plan: If it’s not a subsidiary sale, the issue of plan termination prior to the stock acquisition date also affects whether the buyer’s plan is considered a successor plan for distribution purposes. (see blue highlights from the EOB below). As long as the buyer doesn’t assume sponsorship or accept a transfer/spinoff of assets from the pre-sale plan the buyer’s plan shouldn’t be treated as a successor plan for distribution purposes (401k distribution restrictions) even if it is a stock sale. 2.c.2) Stock acquisitions. Where the new employer has acquired all or part of the stock (or other equity interest, in the case of a noncorporate entity, such as a partnership), the “new” employer (i.e., the buyer of the stock) is really the continuation of the “prior” employer (i.e., the seller of the stock). The employees in reality work for the same employer, it’s just that the owner (or controlling owner) of the employer has changed. Thus, the employees of the seller (or of the company owned by the seller) do not incur a severance from employment merely by reason of the stock sale. If this concept is applied to the crediting of service for eligibility purposes, whether a pre-acquisition plan is being continued shouldn’t really be a relevant concern, and the principles stated in 2.a. and 2.b. above are also not relevant. Thus, service with the “prior” employer must be credited, even if the “prior” employer did not maintain a plan at the time of the acquisition that is being continued by the “new” employer. 2.c.2)a) Sale of interest in a subsidiary. The IRS recognizes a severance from employment in one type of stock/equity transaction - - where a subsidiary of a parent company is sold to an unrelated parent company. Under these circumstances, the asset sale principles are applied (as if the ownership in the subsidiary is an asset of the selling parent company), as described in 2.c.1) above, in determining whether a severance from employment has occurred. See Notice 2002-4. If this concept is applied to the crediting of pre-acquisition service, prior service with the subsidiary is required to be credited only if the new parent company (or the acquired subsidiary) continues the subsidiary’s plan after the acquisition, as discussed in 2.a. above, rather than applying the default rule described in 2.c.2) above. 2.d.5) Example - immediate liquidation of acquired related group member or transfer of that company's employees to payroll of acquiring company. Suppose in the example in 2.d.3) above that, following the acquisition of W's stock, W is liquidated (or W is maintained as a shell corporation) and the employees of W are transferred to Q's payroll. In this case Q is the successor employer of the W employees. Normally, since this is a stock acquisition, pre-acquisition service with W would be recognized after the acquisition. However, if no plan was maintained by W (or W's plan was terminated before the acquisition of stock that resulted in a controlled group relationship between W and Q), it is arguably a reasonable interpretation of IRC §414(a) for Q not to credit service with W that was earned before Q acquired W, unless Q's plan was amended to provide for such service credits pursuant to IRC §414(a)(2) (similar to the rules described in the example in 2.d.1) above, which involved an asset acquisition). The idea here is that although Q acquired W’s stock, resulting in a controlled group relationship between Q and W immediately following the acquisition, W was not continued as a separate legal entity, so the transaction is more analogous to the asset acquisition example. If, however, W maintained a plan for its employees, and that plan is merged into Q's plan, Q's plan would be required to credit the pre-acquisition service with W for eligibility purposes, pursuant to IRC §414(a)(1), similar to the situation in the example in 2.d.2) regarding an asset acquisition and the takeover of the prior employer's plan. 5.e. Change of related group because of stock acquisitions. Where a company terminates a 401(k) plan, and the company’s stock is later acquired, does a successor plan issue arise if the acquired company later adopts a plan? This issue has been more problematic than the asset acquisition described in 5.d. above, because the entity whose stock has been purchased continues to exist. At numerous employee benefits conferences, IRS officials have stated that the Treasury intends the successor plan rule to apply the same way to asset and stock acquisition, so that the form of the sale is not driven by the plan issues. If a company’s stock is acquired in a manner that shifts the company from one related group to a different related group, the IRS has informally stated that, so long as the termination date of the plan (as determined under Rev. Rul. 89-87) is established before the stock acquisition, the “employer” that maintained the terminated plan is not the same as the “employer” that maintains the new plan. Therefore, the company’s participation in the plan of the new related group will not create a successor plan and the employees of the acquired company may have their 401(k) balances distributed from the terminated plan, pursuant to IRC §401(k)(10). This is consistent with IRS’ view of when a severance from employment occurs with respect to employees of a subsidiary that is sold to a different controlled group. See Notice 2002-4 and the discussion in 3.b.3)a) above. At the Q&A session with the IRS at the 2012 ASPPA Annual Conference, the IRS representatives on the panel agreed that, in the absence of formal guidance to the contrary, it would be reasonable to assume that the “employer” is determined at the time of the plan termination, and the stock acquisition would result in a new employer for successor plan purposes.

Employer A and B are unrelated employers who both sponsor a 401(k) Plan. Employer A purchases 100% of the stock of Employer B on December 15, 2017. However, on December 14, 2017, Employer B establishes a termination date to terminate its plan as part of the M&A agreement because Employer A does not want to assume sponsorship of that plan. ISSUE: Employer A does not want to recognize prior service with Employer B (wishes to treat the newly acquired employees as new employees) requiring them to meet the age/service conditions in the plan to participate. The excerpts below are from the ERISA Outline. The first two seem to relate to an asset transaction (not stock transaction). The third seems to back up that interpretation especially with the highlighted text. IRC §414(a)(1) requires service for a "predecessor employer" to be treated as service for the current employer only if the current employer is maintaining the plan of the predecessor. IRC §414(a)(2) provides that where the employer does not maintain the plan of the predecessor employer, service with the predecessor employer does not have to be counted by the new employer, except to the extent provided in regulations. Since no regulations have been issued, the IRS has generally treated the granting of service under the circumstances described in IRC §414(a)(2) to be elective on the part of the employer, provided that the granting of service does not create prohibited discrimination. According to the IRS in GCM 39824, an employee generally does not have a severance from employment merely because all or a portion of the stock of the company is sold to another person. For example, if the shareholders of a corporation sell their stock to another business, or to other individuals, the change of ownership of the corporation does not cause the employees of that corporation to have a severance from employment. This is true regardless of whether the corporation maintains a plan and, if it does, whether it continues to maintain that plan after the sale. The IRS is simply recognizing here that in a stock sale, the entity itself continues. Only the owners of that entity have changed. Thus, there is no “former” employer from which the employees of the entity can have a severance from employment. When the employee is treated as having a severance from employment from the seller, the buyer does not have to give the employee credit for service with the prior employer. If there is no severance from employment, then the employees are treated as continuing to work for the same employer. QUESTION: Does the termination of Employer B's 401(k) plan prior to the acquisition date (12/15/2017) allow Employer A to treat the newly acquired employees as having a severance from employment and therefore no mandatory recognition of prior service is required? I have always thought the answer was YES but I am beginning to second guess this answer. Any feedback is greatly appreciated! Thank you.

Thank you for the feedback. I appreciate it.

Jpod, just so I'm clear. This account is not the forfeiture account. It is the plan expense account resulting from excess revenue and it is held within the plan's trust. Does that change your answer?

Thanks, jpod. I read IRC Section 401(a)(2) and ERISA Section 404. The exclusive benefit rule applies.