401(k)athryn

I've got two questions relative to non-governmental 457(b) Plans. As a TPA firm, we have historically only assisted with plan documents for a few top hat plans, but I find myself needing to get more involved in reviewing assets and generally have more oversight on what is actually transpiring within one or two of the plans. 1) Two clients have all of the 457(b) assets in brokerage accounts that in the name of plan and FBO the participant. There are 4 or 5 participants. This seems to completely negate the requirement that these plans be "unfunded". There is a rabbi trust, but that does not change the fact that these should not be SDBAs in the participant name, correct? 2) A participant took a distribution earlier this year after terminating employment. The timing was in accordance with the document. The employer understands that they need to have the distribution reported on the 2023 W-2. That participant took the entire account balance as a cash distribution and had no taxes withheld. Since payroll taxes apply, I take it this is wrong, but how can we fix? Do we have the client run the distribution of deferred compensation through payroll to determine how much in taxes is due and ask for the money back from the participant? It seems like it would be cleaner to never have a distribution paid directly from an account to a participant and have the account balance instead paid to the employer (since it company assets until paid anyway) and then have them run through payroll and issue the distribution in the same manner as a paycheck (aside from applying FICA if already withheld). Is that what you all are doing? Thank you!!!

A distribution will be paid 10/1/2023 from a non-governmental 457(b) Plan. The total amount of distribution will need to be reported as taxable wages on the W-2. The distribution will be paid directly from 457(b) account to participant. 1) If this is eligible compensation under the document, how can an employee defer from this as it is not actual compensation being paid via a paycheck? 2) Is there any ability to have taxes withheld from the payout or not? I expect not, since no 1099-R, unless I am completely confused. 3) Do I understand the process correctly, which I believe is to pay from the account, but report on a W-2? Or should the distribution not be paid from the account and instead paid in ta paycheck with tax withholding (aside from previously withheld FICA)? If the latter is the case, does the amount in the 457b account get paid directly to the employer? Thanks!

In 2022, a 401(k)/PSP client transferred from a pooled account to individual accounts as Vanguard. During the first part of the year, they funded deferrals and also made additional deposits to the account which were used to fund the employer safe harbor match at year-end. The safe harbor match amounts were not calculated based upon a specific time period or earmarked for any specific participant, This is how they had always done it and I see no harm in it. Those employer deposits throughout the year earned money while in the pooled account. After the transfer to Vanguard, these funds were placed in a suspense account and continued to have earnings. The total suspense account, which was comprised of actual money deposited + earnings, was used to fund the annual safe harbor match once it had been calculated based upon full year data. Is it ok that they use the earnings to fund the required safe harbor match contribution? I assume they definitely cannot deduct the earnings portion because they did not deposit it, but am now questioning the use of the earnings altogether to fund the contribution. If we were talking about forfeitures, I know those earnings are used to fund contributions all the time, but is this different? Thanks!

Thanks, Lou. I was not thinking clearly on that part of the question. The document is pretty clear, so as long as no exemption to top heavy rules applies for plans not subject to ERISA, I guess they have to do it. I would like to retroactively amend to exclude keys from the top heavy under loosened SCP rules for Eligible Inadvertent Failures but it reduces their benefit so I think this is not an option. Is it permissible to retroactively amend (back to 1/1/2022) to reduce a benefit if it is only impacting key employees?

Plan is owner and spouse only. They have 100% of assets (obviously). Is the plan top heavy? I know this question sounds dumb, but I thought maybe top heavy was an ERISA requirement to which they are EXEMPT, but I don't see owner-only plans listed as a plan type not subject to top heavy. I also considered that there would be no non-key employee balances giving us a denominator in our top heavy ratio of 0, making the plan not top heavy. But I can't find what I thought would be an easy answer! Here is why I ask - the plan was NOT written to exclude keys from the top heavy minimum and both the owner and spouse deferred the max, but they were not wanting to do an ER contribution. Do they have to put in a top heavy contribution for themselves? Thanks!

Thanks you both. We are happy to provide a notice and will do so, but we can get this transfer process started rather quickly and were unsure if we needed to comply with the 30 day advance notice requirement for the blackout. It sounds like we DO since distributions could potentially be held up. I now understand that the "individual account plan" does not relate at all to participant vs. trustee-direction. Key point. Thanks! Distribution timing in the plan document is as soon as administratively feasible. It could easily take 10-14 days normally, but if a request comes in a week before liquidation and the transfer takes a week or two to get where it is going and be allocated, then it is likely that a distribution would take longer than it would if the transfer was not happening, therefore, my conclusion is to do the blackout notice and then schedule the transfer to occur with the allowable timeframe, which will be at least 30 days after notice is provided. All 5 participants are actively employed and there is almost 0% chance of someone requesting a withdrawal, but that is not relevant.

Thanks, Peter. It also specifically says with respect to "an individual account plan". The money is coming from pooled accounts and going to individual accounts so the feedback I have received is that it is not necessary. Do you disagree?

A plan has a trustee-directed profit sharing brokerage account and individually directed 401(k) accounts at a recordkeeper. They allow for hardship withdrawals and immediate distributions upon termination of employment. They are transferring the pooled PS into the individually directed accounts. Do they need a blackout notice to make employees aware of period of time that they cannot take a distribution from pooled funds? Or are pooled accounts entirely exempt from blackout notice requirements? Thank you!

Thanks, all!

This is a plan document question and also relates to 404(c). The plan allows participants to self-direct investments in individual brokerage accounts. This is NOT an investment platform, but the total asset balance in each participant's account can be obtained each day online or with a phone call as the funds are publicly traded. I believe this makes it a daily valued plan (must be indicated in plan doc) and it can be 404(c) compliant if meeting other requirements. A plan that is not daily valued cannot be 404(c) compliant. Question - The money type balances are only determined on annual basis by yours truly (TPA). Does this change it from being a daily val plan to an annual valuation plan that cannot be 404(c) compliant? I see nothing about source/money type balances in the regs, but want to be sure we are drafted documents to reflect a correct valuation date (daily vs. annual). Thank you in advance for your feedback!

Hello. Now the investment provider is saying that the ERISA budget account is NOT plan assets, which is why it was never included on the trust reports. Do you typically report this type of account as part of plan assets on the Form 5500? Is an ERISA account always plan assets, never plan assets (until allocated) or does it depend? Please not the latter!

Thanks, C.B. What you are suggesting is in line with correction of unused forfeiture balances. So, it sounds like your opinion is that the correction for these expense account balances is basically the same. Correct?

We have discovered that a plan has been accruing funds in an ERISA Plan Expense Account since 2016 and none has been used to pay expenses or reallocated back to participants. The amount is over $25,000. I'm not exactly sure when this type of account would NOT be considered a plan asset, but, in this case, it seems to be plan assets (although not included in prior year 5500 reporting) and the amounts should have been allocated to participants each year. Does this need to be corrected similarly to improperly carried over forfeitures, where the extra revenue each year has to be allocated to those who would share in each of those years, meaning we must go back to 2016, 2017, 2018, etc. to do a separate allocation for each year? Obviously, I would love to allocate only based upon current participant balances. Any option here without submitting through VCP? There are no fees that can be paid with this because advisor and TPA are already paid in full through asset-based payments from the Plan. Thank you!

Thank you, Belgarath. Would the Participant Fee Disclosure that goes to all participants need to include fund information and fees relative to all investment providers and advisors? In this case, I believe there will only be one provider, but will have a different advisor on each of the two participant accounts. Is this an issue if the advisors are charging different fees or including different fund options?

Like many of you, I work mostly with 401(k) Plans, but have a few 403(b)s. I have a very small ERISA 403(b) Plan that currently has one participant. They are hiring a new employee who will be eligible (of course) and the plan sponsor thought she could use the advisor of her choice because, apparently, the advisor on the existing account was the participant's choice. I know that the 403(b) plan can offer different investment providers (all options offered to all participants), but can they also have multiple investment advisors? Seems problematic.