Luke Bailey

Right. Probably insignificant in any event, I agree.

And as long as the return of the money occurs no later than the end of the second plan year after it went it, should qualify as self-correction of operational error under EPCRS.

The loan is "deemed distributed" and therefore required to be reported no later than the end of the cure period under the regulations, which is the last day of the calendar quarter following the first missed payment. At that time, it is "deemed distributed" and subject to 1099-R reporting. See Treas. reg. 1.72(p)-1, Q&A-13(a)(2). I think you can probably wait until up to January 31 of the taxable year following the taxable year in which the deemed distribution occurs to deliver the 1099-R, although you can also do it at any time after the deemed distribution has occurred.

I agree with all the answers, which are uniform, but will try to support with some legal theory. The issue is whether this is a plan expense, so "off the top," or a personal expense of the individual that is borne by him on the amount distributed when it has left the plan. Seems like it is the former on the facts you've described.

I think those saying there is no violation are correct. You're comparing the annual rate of accrual in year 2 to the annual rate of accrual in year 1. See IRC sec. 411(b)(1)(B) and Treas. reg. 1.411(b)-1(b)(2). Here these are equal. You are not comparing the accrued benefit at the end of year 1 with the accrued benefit at the end of year 2, which here is 100% greater.

Maybe others have researched this. One question that I have is that if you can't run it through the trust (and maybe you can, e.g. if the trust has not yet been formally terminated), how is it a qualified plan distribution? Also, obviously if >$5,000 you need to get partcipant's consent to distribute as lump sum.

I guess the heart of the question is, assuming the "error" in making the SEP contribution was just that they had set up a 401(k) and wanted to contribute to that instead, but didn't, why was that an EPCRS issue and why was the return of funds appropriate? Seems like using the SEP for 2017 would be much safer.

Right, but whether this is an annual election or one-time irrevocable when first eligible not stated in facts. Would still like to know from original questioner whether this is DB or DC plan, because cannot give clear answer without knowing.

How can the employee elect different contribution percentages without this being a prohibited CODA? (Maybe this is one of the old ones with a PLR and they're still relying on it? Or a grandfathered DC plan?) Anyway, this is a DB plan, right?

Right. So any trustee-to-trustee transfer of a converted amount from a Roth IRA to a traditional IRA that actually takes place in 2018 (e.g., the request to transfer is made after 12/31/2017, the custodian actually makes the transfer after 12/31/2017) will not be good.

OK. Makes sense that way. I wish the regs just said that. Thanks, XTitan.

Right. Here's the final language in the just-released Conference Report, on page 304: (b) EFFECTIVE DATE.—The amendments made by 13 this section shall apply to taxable years beginning after 14 December 31, 2017. However, the Conference bill applies the new anti-recharacterization rule only to Roth conversions (i.e., converting a traditional IRA to a Roth), not to a Roth rollover from an employer plan.

Right. Frankly, the purpose and exact scope of the contingent benefit rule have never been clear to me.

jpod, I see your point regarding the contingent benefit rule, i.e. that it encompasses benefits outside plan, but the cash payment here is contingent on making or not making an elective contribution only in a remote way. The payment from the employer is contingent on whether, and if so by how much, the elective contribution exceeds the amount permitted by ADP. Maybe would depend on facts and circumstances. At one extreme, if the make whole payment is a little-publicized afterthought and was not taken into account by the HCEs in making their deferral decisions, it would be hard to say that the benefit was linked in the sense contemplated by 1.401(k)-1(e)(6). On the other hand, if the HCEs knew that the plan was not going to pass ADP and all they had to do to trigger the payment was elect to defer an amount they knew would not stick in the plan, it would look like the payment is factually "contingent" on the deferral and amount, although that is not likely to be consistent with the rule's purpose.

Agree with Mike. Once the plans merge, they are one and the surviving plan inherits all of the attributes of each constituent.

Flyboyjohn's description of situation is correct, but let me sound a note of caution. As far as I know there is no DOL guidance that "forgives" requirement for 5500 just because employer in bankruptcy. DOL could take the position that the Plan Administrator is the bankruptcy trustee or a principal of the company, or even the owner, if this is a Chapter 11 and someone at company, or the owner, is personally making decisions regarding what to do about the plan's admin. That could lead to personal liability for such individual as de fact plan administrator, and he/she might be well-served by paying the costs of preparation out of his/her own pocket, if necessary. Just saying. Will be interested to know if anyone has "hands on" experience of this issue with DOL.

Agree with prior commenters. Need more facts, especially what plan says. If there are vesting choices, presumably one is not always better depending on how long employee stays (e.g., do you want to elect 2-year cliff or 3-year? would not be much of a choice). If the plan doc says participant has choice and employer doesn't actually give the participant a choice and the participant is later harmed because other schedule would have been better, then the participant could bring an action under ERISA to enforce plan document. Since ERISA says very little about top-hat plans (assuming this is a good top-hat), the outcome of such an action is always uncertain and dependent on facts and circumstances. If the employer is consistently making the same choices in given sets of circumstances, just remove the choice and hard wire it into the plan document.

It's probably OK. The argument is that it is not a "benefit, right or feature" for purposes of 1.401(a)(4)-4 because it is outside the plan, not "under" it, as would be required for the BRF reg to apply. I know of no written guidance on point, and I understand this could sound shaky to some, but a similar practice of long standing exists at every large professional firm that I am aware of of reimbursing partners (typically lateral hires) who have paid for their own matching and nonelective contributions through a reduction of their K-1 earnings and who leave with insufficient service to be fully vested in those amounts. The firm will typically make up the forfeited amount (including earnings at the time of departure) from firm assets, as a taxable special allocation of firm earnings in the year the partner departs, or in the next year. The firm then pays itself back by using the forfeitures to offset future required matching or nonelective contributions. Similar separation bonuses may be negotiated for executive departures from corporations, although in my experience that does not seem to occur as much. Years ago I received informal advice from someone at IRS that they were aware of these practices and thought they were not a qualified plan issue because done outside and apart from plan, albeit in connection with plan. Obviously nothing you can take to the bank. Just saying it's done, is not unknown to many at IRS, and to best of my knowledge has not been objected to by IRS.

Right. Disregarded entity was pretty clearly implied.

Charlie's question implied that this was a single member LLC and therefore disregarded entity, because it said the shareholder was taxed as a sole proprietor, but did not explicitly say that and did not refer to the shareholder as "sole shareholder," so I did not want to assume disregarded, although I agree that is very likely the case. I agree that the election is very fictional, but from IRS's perspective if there is no written election that says it was made on 12/31, the individual could wait until deep into the next tax year to decide whether he/she wanted to defer, which would be even more problematic for them I think.

duckthing, I stand corrected. ATRA 2012 changed the rules to allow amounts that are not otherwise distributable, including elective deferrals of a participant who had not attained age 59-1/2, to be rolled over in-plan. Explained in Notice 2013-74. Thanks.

Right, Bird. My luck on this has varied greatly.

You can only have an in-plan Roth conversion if the amount was eligible for distribution. Here it wasn't, so no go. Of course, the individual can make Roth deferrals for new money.

The LLC shareholder must make an irrevocable written election by 12/31. See 1.401(k)-1(a)(6)(iii). Then the amount elected is taken later from the LLC owner's share of the LLC's earned income, assuming the plan document provides for participation by self-employed persons and that the individual has earned income from the LLC for the year.

The plan could do this in a way that would result in a lump sum for tax purposes (e.g., distribute a surrenderable or transferrable annuity), but that would violate the terms of the plan and therefore disqualify it if the plan provides that the participant can take an annuity form of distribution.