Luke Bailey

Brian, that's a great analysis, but I would take the contrary position. Current law (until IRS publishes regs) permits employers to discriminate in favor of HCPs for medical benefits if plan is fully insured. And Sections 105 and 106 tell us that neither highly compensated nor non-highly compensated will have income based on medical plan contributions or benefits. The only thing that 125 does is allow employees to get around constructive receipt if they are given a choice between cash and benefits. If the employer covers all of its HCPs, or a subset chosen by the employer in its sole discretion, mandatorily for insured medical , then constructive receipt is not an issue, and the benefit is provided separately from the cafeteria plan. If the employer only covers some highly compensated and lets others decline and take more cash, outside the cafeteria plan, then all of the HCEs would potentially be in constructive receipt, even those who took benefits. That's at least the way I've always viewed it.

Thanks very much, Centerstage. I hear you as well. It's just unclear.

I get where you're coming from on this, Nate S., but in the absence of guidance I am not confident that if we cut a check to the court there has been no distribution from the 401(a) plan. I'm hoping it will turn out we won't have to cut the check until the court has reached its determination. The 60-day rollover window would also be a problem. The IRS does not seem to have covered this in the self-certification Rev. Proc. (2016-47), although they probably would have included this situation had they thought of it. Although I think the ultimate recipient could get the IRS to rule in a PLR to extend the period, that costs $10k. david rigby, it is just the account. Interesting angle, though. Thanks to both of you.

Peter, thanks!

This is related to a question I asked a few days ago about interpleader, but let's put the interpleader issue aside. Treas. Reg. 1.401(a)(9)-5, Q&A-4 is pretty clear that the year of death RMD for an individual who was past his or her RBD must be paid to the decedent's beneficiary in the year of death. But suppose that the plan really can't determine who the beneficiary is, because there are competing possible beneficiaries each of whom raises significant fact issues against the other. These fact issues cannot be resolved by the end of 2022 and it would be imprudent to pay the 2022 RMD (which is a significant amount) to either party by the end of the year. So the plan probably won't pay it to anyone until 2023. I'm confident that the plan's failure to pay the RMD as required under the regs will be corrected under SCP next year when it pays the amount to one of the parties. I'm also confident that the recipient can easily get the 50% excise tax waived following the normal procedure. If anyone thinks I'm wrong about either of those judgments, please let me know, but otherwise my question is whether anyone is aware of any formal or informal guidance on this subject from IRS (I have not been able to find any) or faced the situation themselves and discussed with someone at IRS. If so, inquiring minds want to know what they said. Thanks.

david, my suspicion is that essentially that is how it should be handled. But I think we'll need to fit that within the court's rules, which may or may not be difficult.

Interesting. Hmmh....

Per the regulation (See 29 C.F.R. 2560.502c-2(b)(3)), you've got 45 days from the date of the notice, and penalties will begin accruing as of the day following the end of the 45-day period if you don't file the IQPA by the end of the 45-day period. I doubt the DOL will not follow that rule. My guess is they should have told you that in the letter, but maybe they have decided to be more generous than their reg. Seems very unlikely. Does the letter cite the reg? If so, that may be their way of informing you of the deadline.

My plan was to issue two 1099-R's, each showing a distribution of half the amount to reflect the actuarial probability of eventual receipt. Sorry. Feeble attempt at humor. Thanks for all of your responses. They have confirmed my suspicion that (a) issuing 1099-R before the court has made its determination is impossible and not consistent with basic Federal income tax rules on when an individual has income and (b) there is surprisingly no guidance on this issue from IRS. Which makes me think that maybe you don't actually have to deposit the funds with the court to interplead. Peter, your suggestion to check Wright & Miller’ is very helpful and I will do that.

WR_Smith, regardless of what type of plan this is, there are strong protections in the law for what is called your "accrued benefit," which is basically the amount you already had earned as of the date of the freeze and that you would have received at some point even if you had terminated employment on the same day as the freeze is effective. But assuming you are an employee of a business (public or private) or charity, and not a state or local government employee, the law does not protect your right to continue to earn the benefits you had an expectation of earning in the future if you had continued to work for this employer and it had not frozen your plan. So you will need to think about saving more in the company's 401(k) going forward or taking some other action, such as finding an employer that has a pension plan for which you would be eligible for the remainder of your working life, although depending on a variety of factors that may not be practical. The only protection for future, expected benefit accruals under U.S. pension law for nongovernmental employers are procedural, i.e. something called a "204(h) notice" that is supposed to describe the freeze. Sometimes employers don't fully meet their procedural obligations, but that is not usually the case. Some employers make higher matching or other contributions to employees' 401(k) accounts when they freeze their pensions.

Pixie, I do not know about the limitations of your software, but it's really not retroactive. You don't have to do it by changing the vesting requirement, you can just amend the plan to say that a certain group of employees, or named individuals, has/have a higher vested percentage, as long as they are non-HCEs. If some are HCEs (which seems unlikely on your facts), then you need to be concerned that the amendment is nondiscriminatory.

Yes, the plan corrects by requesting the repayment and informing the participant that the excess amount did not qualify for rollover. Can be done in same letter. You don't have to actually get the funds back, just request and take other reasonable measures to get the funds returned, which depends on the amount involved and other factors. Of course, if you don't get the funds back and the money would have been allocated to other participants, the employer needs to recontribute that amount, but that may not be your case. Maybe someone else knows the answer, but I'm not sure I recall this being addressed in the EPCRS Rev. Proc. I would think you could still exclude from testing, but would need to check. Again, maybe someone else knows. If the distribution was in 2022 and the money is repaid in 2022, I guess you would issue a corrected 1099-R without the amount. But if the repayment is in 2023 or a later year, I don't think you would. This subject has been covered many times in other BenefitsLink posts. Take a look at Rev. Rul. 2002-84, 52626, which you can Google.

Good point, david rigby, but I'm not looking to muddy the waters at this point.

The question is, suppose that A dies and it's not clear whether B or C is entitled to A's 401(k) account. The plan administrator decides to interplead the benefit into Federal court. Assume also (which may not be the case) that the interpleader rules require that the funds be deposited into the court. Finally, assume it takes a couple of years before the court reaches its decision. Does this mean that a distribution has occurred for 1099-R and withholding purposes when the transfer of funds is made to the court? It seems to me that the only practical answer (although it is also not without complication, especially where RMDs may be involved) is that the court is the plan's agent and that reportable distributions for 1099-R and withholding purposes do not occur until the court cuts a check to B or C, but I cannot find any guidance on this. It certainly would be hard to tell B and C that either of them have income for Federal income tax purposes if neither of them has received any portion of A's account yet, and one of them will probably not ever receive any portion of it. I'm hoping it turns out that we don't have to pay the funds into court in order to interplead, but that has not yet been ascertained, and so am posting this to see whether any of the BenefitsLink experts have had any hands-on experience with the issue. I found the following discussion on BenefitsLink from 15 years ago: Not a lot of analysis in the above post or, apparently, in the following 15 years, and I have not been able to find anything else on the topic.

austin3515, I had a similar experience a few years ago. The 45 days is statutory and also in the regs. DOL has to give it to you for purposes of its penalties. I think the 45 days runs from the date of their letter, not the date the 5500 should have been filed. Does the letter make this clear one way or the other?

The following is a prior BenefitsLink exchange that only had two posts: I completely agree with Roxie99's summation of the issue. A reader could draw from Section 4.07 of Rev. Proc. 2021-30 the negative inference that SCP is not available for a terminated plan. However, it's not really clear from the text that the IRS intended this inference. I don't see why the IRS would want to foreclose the use of SCP for a terminated plan. For example, suppose that a few months after a plan was terminated the plan sponsor discovers that a few participants were overpaid a few hundred dollars and also that some participants were underpaid a small amount because the employer had not made some contributions it was committed to making. These were inadvertent administrative errors and the employer would like to self-correct in the prescribed fashion for these errors, but the ability to do so is being questioned because the plan has been terminated. Has anyone had any hands-on experience with this issue with IRS, or possibly heard someone from IRS at a conference expand on this issue either way? Have some practitioners just assumed that IRS did not intend the negative inference and used self-correction for terminated 401(a) and 403(b) plans, without this having been called into question by IRS or anyone else?

Bird is totally correct, Danny CPA, but make sure the paperwork and/or deposit to the account reflects that.

EBECatty, obviously there are always more facts and circumstances, but based on what you have described I would consider trying to come up with what I considered a reasonable interpretation (including filling in any gaps if the document is flawed, as seems to be the case), and then getting the participant to agree that's all she or he is owed. Not ideal, of course. There is, in essence, a latent "bona fide dispute" about what is owed, of the type described in Treas. Reg. 1.409A-3(j)(4)(xiv).

Coleboy, my recollection from the last time I was involved in a case like that is that yes, the DOL did send a letter. Your mileage may vary.

JHalligan, there is no controlled group if it's only one company (e.g., corporation or LLC). Controlled group applies where there are commonly controlled separate legal entities. Why the heck would you have a 401(k) that no one can participate in? Anyway, in theory it should be possible to amend the plan that does have participants to cover the one nonunion employee of the unionized division. But you really need to review your facts and the documents to make sure.

I don't think it's too late. Check out https://www.irs.gov/retirement-plans/irs-penalty-relief-for-dol-dfvc-filers-of-late-annual-reports and the referenced authority (Notice 2014-35). As long as you satisfy the DOL's requirements for DFVCP the IRS should waive penalties. It may require some correspondence and/or phone calls to IRS since the client is this late into the process with IRS.

I've never done that, but my guess is that it is certainly possible and will probably work. The only thing you have to lose is the filing fee, right? Calculate your penalty exposure to DOL and IRS and then make a decision.

Plan Doc, per 1.457-4(c)(1)(i)(B) and 1.457-2(g) you're looking at 100% of the individual's 415 comp for the taxable year, so you should be OK for nonelective at least.

I agree with EBECatty. You've got a formula. As long as the employer does not have effective control over the valuation I don't see a problem. See 1.409A-3(i)(1)(vi), Example 6.

Next time draft it to say the plans are merged as of the stated date and the trustees shall transfer the assets as soon as administratively feasible. That's what we always do. Very important to keep it general, especially if the merger involves liquidation and reinvestment of cash.