Luke Bailey

SoCalActuary's recommendation is probably better. I would turn to mine if SoCalActuary's doesn't work.

Almost any ERISA lawyer with substantial VCP experience could handle this. I would seek out someone in your area and vet them among your acquaintances who do not offer competitive services.

So ldr, just to be clear, the $70 is charged against the remaining, nondistributed portion of her account, and reduces the balance immediately by $70, but the $70 is not reported (ever) as a distribution on 1099-R.

First, if you pass coverage without them (assuming they are NHCEs), then you can exclude them with plan language, or even by name if you're passing ratio percentage. I agree with most of the other comments as well, i.e. the first individual is receiving deferred comp that would not count for 415. The second individual you need to exclude as described in first paragraph to avoid top-heavy.

leevena, we seem to be like two ships passing in the night. You're correct that the original question does not contain a lot of facts, but I think what it's positing is a situation in which, to simplify, for the first 6 months "everyone" (presumably, a nondiscriminatory group) gets the COBRA premium paid, pre-tax, and then after first six months only the HCIs get their premiums reimbursed, say for 12 months, but it's after-tax, i.e. the premiums after first 6 mos. will be on their W-2's. Because of the way 105 is written, this means that the plan passes on the first six months part, and then 105(h) ceases to be an issue as to remaining 12 months for HCIs. The reason is because 105(a) does not sate, "the contributions and benefits under a plan that meets the requirements of this section are nontaxable to all of its participants," but rather states that an employee must include benefits in income if the contributions under plan were excluded, subject to the exclusion under (b), which is in turn conditioned on compliance with (h). The contributions here for the discriminatory phase of the plan are not going to be excluded from income, hence 105(a) and the rest of 105 dos not apply to those at all.

leevena, my comment is that the 105(h) nondiscrimination rules do not apply to a taxable reimbursement of premiums, i.e. a reimbursement that is included on the exec's W-2 in Box 1. The way I read ERISA-Bubs question, a nondiscriminatory group gets pre-tax reimbursement for first 6 months, then only the execs keep getting reimbursement after first 6 months, but the former employer will include the premiums on the execs' W-2's as taxable. In that case, 105(h) is not a problem.

105(h) is an exclusion from income, so the nondiscrimination rules apply only where you exclude the reimbursement from participant's income.

As Tom Poje points out, matching rate is an "other right or feature" under 1.401(a)(4)-4(e)(3)(G), so might need to run 401(a)(4) BRF. But if all you are doing is reducing the match rate for some HCEs below the general match rate, which is the highest and which highest rate applies to all NHCEs as well as some HCEs, should not be a problem, except as pointed out above in terms of plan language and record-keeping systems. Also, if (and in my experience this is often the case), the desire for lower level of match is because some of the NHCEs want more current cash (e.g., they want a smaller match but a bigger bonus for 2017 paid in early 2018), you have to worry about the nonqualified CODA issue under the 1.401(k)-1 regs.

I believe about the only thing IRS won't let you correct in VCP is deferrals before a plan is adopted. However, here there was a plan and deferral elections under it, just failure of new employer to adopt. I think they would probably allow you to fix that in VCP, although you might want to call a contact in VCP first. BTW, not disagreeing with jpod's advice, but there is no certainty that way. And if the plan is > 100 so requires an independent audit for 5500, I don't think the CPA would cut you slack if he/she found the error, so you would need to go to VCP then anyway.

There are no regs. I have also searched for other guidance sources (e.g., in the 1099-R instructions, the IRM, etc.) and come up empty . Section 72(t)(2)(A)(iii) is all we have, and it is the solemn command of the U.S. Congress, after all. It says the distribution has to be "attributable" to the employee's "being" disabled under 72(m)(7). So I'd say you are fine, here, ESOP Guy.

What is or is not a substitution is based on facts and circumstances, so always somewhat murky and subject to argument.

If the plan is terminated and the shares are worth something in 6 months, you will have a lawsuit (probably under state law, not ERISA, depending on the plan's terms), most likely. You will, of course, want releases. Even with releases, outcome unclear, for a number of reasons. As for the 409A issue, seems like the regs don't provide a clear answer. It would seem to me that there is an argument that without a payout the termination regs don't apply, i.e. because it is a forfeiture, not plan termination. The regs don't deal clearly with forfeiture issues. And hey, if you don't actually have a payout of any sort for 3 years, and don't start a new NQDC plan, you've complied anyway. (I'm assuming the employer does not currently have an NQDC plan of the same type that it is not terminating.) If, however, any benefit were provided within 3 years of the termination that arguably looked like compensation or a "substitute" for the lost stock plan benefit, the IRS (if it discovered the facts) should argue that 409A is violated.

I have not worked with this much, but a few years ago this came up for me and I was surprised I couldn't find guidance saying it was the net benefit. Maybe I missed something. But then when I thought more about it, I thought maybe it made sense. You'd have to have a lot of drafting to make it work, right? And absent a statutory provision specifying how this would work, would be pretty hard to know what the rules ought to be.

Assuming there is any significant amount of money involved for you, you need to get the fullest version of the facts you can, in writing and with documents attached, and try to connect with a lawyer in your area that knows something about ERISA litigation and let that firm evaluate your case. You might get a referral from the Pension Rights Center in DC.

There may have been guidance on this, or not, but I remember years ago that there used to be an M&A market between companies with overfunded/underfunded DB plans. Seemed like the threat from IRS was that if economically part of the acquisition price was payment for the overfunded DB that would be a PT and/or constructive reversion, but I don't recall if any definitive guidance ever came out on this. Seemed like there might have been a reported case, forgot how it went.

I don't think it's the opposite. Either way, if you want $10,000 and the recordkeeper is going to withhold $50, you need to ask for $10,050. (Actually, I think in the original example the total charges on $10,000 distribution were $170.) The question is, does your 1099-R show a distribution of $10,000 or $10,050, and is the 20% withholding $2,000, or $2,010? The consensus seems to be $10,000 and $2,000, respectively.

ldr, while the underlying issue seems clear, the outcome is not. I can see reasonable minds coming down either way. I don't think it's a "but for" test, but rather, a "whose expense is it" test. I think the way most people would look at this particular expense is, the guy or gal asked for his/her money, and then the plan incurred an expense to the recordkeeper to pay it to him or her, so it comes out of the plan, not the after-tax amount. These issues of what is a plan expense vs. someone else's are tough and very facts and circumstances-based. The DOL has tackled this a number of times in the area of plan vs. employer ("settlor") expenses and has not been able to lay down a bright line test for deciding which is which, but has provided a number of examples. The DOL's thoughts are collected at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/guidance-on-settlor-v-plan-expenses.

The Code support for John Feldt's statement is the negative implication from IRC sec. 413(c), i.e. 416 (as well as 410(b) and 401(a)(4)) are not listed as sections that are tested in a plan-wide basis for multiple-employer plans.

It seems like a terrible idea, but in theory could be done with the right plan language, probably a plan amendment. The contribution would fail 401(a)(4) unless one or more NHCEs got a similar (but potentially lower) contribution as a percentage of pay and you satisfied the general test.

There are no regs under 410(b)(6)(C) (the "transition rule"). Read literally, you have several problems, although the transaction would appear to be within the "spirit" of the provision. The biggest problem (admittedly, only if you take the provision fairly literally) is that the new plan you want to create, while a "clone" of the target's plan with (presumably) identical eligibility, and therefore a "successor" plan as that term is used for other code sections, will probably be put in place after the acquisition and therefore will not satisfy 410(b) before the transaction, as it literally is required to do under 410(b)(6)(C). If instead of creating a new plan you simply have the newly formed partnership assume the seller's plan, you would be closer to the statutory language of the exception.

Good point, jashendorf.

Putting aside the ethical issues and assuming the arrangement has bona fide substance and would be respected by IRS outside of the qualified plan area: (a) Whether you have an affiliated service group would depend on whether the sole proprietorship is "regularly associated" with the LLC in the performance of services. See IRC sec. 414(m)(2)(A) and withdrawn proposed regs for whatever they're worth. Presumably not, since the position will be that the sole proprietorship's services are completely separate from what the LLC does for "client," billing and revenue is separate, etc. Also, you could have a 414(m)(2)(B) issue if the sole proprietorship uses the LLC's support staff in servicing the client, but again probably not your facts. (a) Unlike for affiliated service group purposes (see IRC sec. 414(m)(6)(B)), the IRC sec. 318(a)(3)(C) principle that would attribute the individuals 50% ownership of the LLC to his sole proprietorship does not seem to be operative for controlled group purposes. See Treas. reg. sec. 1.414(c)-4(b). Nevertheless, the IRS could argue that because the individual and his sole proprietorship are the same legal person, the sole proprietorship is a 50% owner of the LLC (parent) and you test 415 controlled group under the 50% parent-subsidiary rule, not 80%. See IRC sec. 415(h). Stand ready to be corrected on that if anyone has evidence to contrary.

I also think that as long as there is a question about whether her contribution amounts are correct based on comp issue, you could probably delay distribution as not "administratively feasible," but might depend to some extent on plan doc verbiage.

I believe that to get the restitution remedy that ESOP guy is talking about you have to have involvement of feds because it is done under a federal restitution statute. There is an earlier series of posts on this that I participated in. Where a bank is involved, embezzlement usually a federal crime. I'm trying to be creative, but maybe you could go back and redo her comp and W-2's to show the embezzled amounts were not actually compensation eligible for 401(k)? Then under VCP you could withdraw the excess contributions and earnings.

Under Treas. reg. sec. 1.409A-1(b)(5)(v)(C)(1) the spread over the exercise price (I.e., grant date value on December 31, 2007) becomes 409A deferred comp if you extend to a date that is either more than 10 years after date of grant or, if earlier, the latest date when the option could have expired by its terms. The provision contains this sentence: "It is not an extension if the exercise period of a stock right is extended to a date no later than the earlier of the latest date upon which the stock right could have expired by its original terms under any circumstances or the 10th anniversary of the original date of grant of the stock right." Without seeing your plan and agreement, it's hard to say for sure, but I would think that if the option had a hard expiration date of October 1, 2017, that would be the "earlier" date. Also, the regs don't seem to address the revival of an expired option, so I would be leery that that would work also.