Luke Bailey

Agree with all the priors and will add that I don't think this is now accepted practice. Just something really weird that someone didn't think through that probably will be OK with IRS on exam, but probably not in any preapproved documents, so in absence of dl's for individually designed plans would be concerned. Also, again even if upheld, the litigation and HR risk is so huge it overwhelms any perceived advantage.

The reg says to use comp for the year preceding the year of termination, so you should have a full year and not have to adjust for raises or bonuses in current year. As to what "equivalent" means, I've always interpreted it as "equal" with maybe a tiny fudge factor. I think the DOL purposely avoided saying "equal" because it didn't want to have to explain exactly what they meant mathematically or suggest that absolute mathematical precision was required and even $1 over by some calculation would throw you out of the exception. But that is just a guess.

I think I'll advise the client not to do it, but I also think the reg cited is thin support at best for the position. 1.401(k)-1(a)(3)(iii)(C) deals with whether there is a good "cash or deferred" election. Certainly, from the employee's perspective, he or she has made a good cash or deferred election, and his or her contributions were not withheld, and no amount was allocated to his or her account, before the services were performed. This reg provision may be target at preventing employers from anticipating 401(k) contributions at end of year to accelerate deductions, but the opposite would be achieved here, since if anything using the forfeitures will defer the deduction. Thanks for your responses. I really appreciate them

If the shares are not otherwise synthetic equity, I think the only relevance of the voting rights is to the "facts and circumstances" analysis of whether the purpose of the arrangement is to avoid 409(p). See 1.409(p)-1T(g)(2). My guess is that if the ESOP got all of the shares' economics and shares are released from the "voting trust" as the loan is repaid that this would be viewed as a security mechanism and be OK. I have seen this in another deal but have not had to fight with IRS about it.

So, here again is the question, expressed more concretely. Suppose that during the first part of 2017 terminated employees who were partially vested and have taken lump sums have forfeited, in the aggregate, $100,000, and that under the plan's rules those forfeitures are available to be used to offset admin expenses and contributions that would otherwise need to be made by the employer. Let's assume that the employer prefers to pay the plan admin expenses itself, directly, so that none of the $100,000 in forfeitures will be used for admin expenses. Now suppose that for the payroll period that will end September 29, 2017, the employer will, pursuant to employees' elective deferral agreements, withhold $20,000 in employee elective deferrals, $5,000 in employee 401(k) loan repayments, and will need to make matching contributions of $4,000. So the employer will, without taking into account the forfeitures, have to transfer $29,000 to the plan on or very shortly after September 29, 2017. We know that the employer can, if it chooses, transfer only $25,000 to the plan and use $4,000 of the $100,000 in forfeitures to fund its match. But assuming that plan language is not a problem (which it probably would be for most plans, but let's assume it's not, or could be changed) and also that the employer could move the $25,000 in forfeitures into participants accounts immediately (e.g., the money would be in the accounts as of close of business on September 29, 2017), can the employer choose not to transfer any funds to the plan at all on September 29, 2017, and just use $29,000 out of the $100,000 in forfeitures to fund the required allocations to participants' accounts for elective deferrals and loan repayments, as well as muatching, reducing the forfeiture account to $71,000?

No. "Employee Contributions" means after-tax contributions. See Treas. reg 1.401(m)-1(a)(3) as referenced in the m-5 definitional reg.

The employer did make a match in a prior year, right, e.g. 2014, 2013, etc.? Otherwise could use first year rule of 1.401(m)-2(c)(2).

The original question noted that there is nothing specific in EPCRS about this and asked whether it would be reasonable to self-correct under EPCRS general principles by distributing the deferrals and earnings and forfeiting match. It seems reasonable to me.

Assume that a 401(k) plan with matching and/or profit sharing subject to vesting has a cash-out and buyback provision and language in the plan document that says that forfeiture of nonvested portion of account occurs immediately following the participant's taking a lump sum distribution of vested portion. Assume plan document also says that forfeitures can be used to pay admin expenses and that any amount not used to pay admin expenses may be used to offset "any payments that the employer would otherwise be required to make to the plan." Could the employer not transfer to the plan amounts withheld from employees' pay as elective 401(k) contributions and loan repayments and credit to the accounts of the affected employees instead amounts pulled from current forfeitures? Assume that the crediting of the previously forfeited amounts would be at least as rapid as if the withheld amounts were transferred to the plan and credited to the affected employees' accounts and that the time period would pass the DOL's requirements.

I agree with CuseFan. I would follow the regs (no controlled group) unless the "main" director (not really sure what that is; maybe board chairperson?) is in effect a straw person. Assuming the capital to purchase the for-profits or initially capitalize them came from the director's personal assets and he/she has the potential profit from them, they are related to each other, but not to the nonprofit. Of course, if the nonprofit promotes or subsidizes the for-profits, this could pose difficult federal income tax (outside of 414(b) and (c)) and state nonprofit corporation law issues, but I assume that is not happening here.

I think the answer could depend on facts and circumstances. If the plan is clean and the audit random and finds nothing, could probably pay from plan assets on theory that was defending qualification, like costs of DL. But if, e.g., the employer had not properly maintained plan document or operations, seems questionable whether expenses of audit could be charged to plan any more than costs of VCP or audit CAP could have been charged to plan.

100% immediate vesting is required only for part-time, seasonal, and temporary employees. Contrast 31.3121(b)(7)-2(d)(1)(ii) ("(other than vesting)") with 31.3121(b)(7)-2(d)(2)(i) (benefit must be "100% nonforfeitable" on any noncoverage day).

Agree (with everyone), 2016 amendment is corrective, 2017 timely/current, as per Rev. Proc. 2007-44 as Mike Preston points out.

To My 2 Cents: I don't know, but it was the question originally asked, so was trying to answer it. To jpod: Of course, if the DRO is qualified, the plan must comply, but my point is that this is NOT because ERISA or the Code says it must, but because the plan is the subject of a state court order and the QDRO provisions of ERISA give the state court jurisdiction over the plan with respect to a QDRO. The rest of my point is simply that the Code and ERISA tell you what will NOT disqualify a QDRO, but nothing more.

IRS permits incorporation by reference. Here's the IRM cite: https://www.irs.gov/irm/part7/irm_07-011-006.html#d0e293 But they require some detail to connect the CBAs to the plan doc. The below will give you a flavor for what IRS wants, but you should read the entire thing. At least as far as IRS is concerned, I don't think that the idea that the CBA is binding and "trumps" the plan for labor law purposes is going to cut it, so if there really is no incorporation of the CBA terms in the plan doc at all, yes, I think VCP would be the way to go, especially since you can no longer sneak the changes into a DL submission, unless the plan has never had a DL or is terminating (whole other set of issues then). I'm pretty sure there is at leas one case on this, maybe more, but I'm not sure they were qualification cases. I remember Joyce Khan discussing at least one case years ago in connection with the "scrivener's error" issue. In my experience, the CBAs are never specific enough to be administered as a plan doc anyway. Always have ambiguous provisions that may be interpreted differently by different payroll folks, so best to spell out in plan doc and SPD what you think the CBA was trying to say. 7.11.6.3 (08-22-2016) Incorporating Auxiliary Documents by Reference A plan sponsor is permitted to incorporate the terms of a CBA, participation agreement or reciprocity agreement by reference to inform employers and participants of the specific plan terms. However, this incorporation doesn’t always provide sufficient information for IRS to review a DL application. When plans incorporate provisions of auxiliary documents by reference, there are two separate issues. Make sure: You can review the plan to determine that it satisfies all of the qualification requirements necessary to receive a favorable DL. The plan language is sufficient for it to receive reliance on the letter for the specific sections incorporated by reference. Generally, if the sponsor wants reliance for parts of these auxiliary documents, then they must submit the exact language of the parts being incorporated as an appendix to the plan. We don’t accept CBAs, participation agreements and reciprocity agreements in their entirety for review. For DL applications with a control date after September 17, 2015, if any of the plan’s IRC 401(a) provisions (coverage, benefit formula, distribution options, class of covered employees, etc.) are incorporated by referencing an auxiliary document, then the plan sponsor must add the applicable parts of the auxiliary document to the plan, regardless of whether they want reliance for these parts of the auxiliary documents.

You can amend the plan to exclude these employees beginning with any date. No deferrals, no match from that date on. (I'm assuming this is not a safe harbor plan.) If the plan has a catch-up match or profit sharing, would need to see exactly how articulated in the document to know when/how to apply the termination to that, but generally should be able to cut off immediately. The employees' post-amendment service is still counted for vesting, if you have employer contributions subject to vesting, and of course these employees' service (e.g., for new hires in the division) continues to count for eligibility, e.g. if you amend the plan again to readmit the division or if an employee changes division. Because the employees still get vesting service, you don't have a partial termination. Of course, going forward you have the burden of passing eligibility without these folks. If they have a higher concentration of non-highs than the other division, this could be a problem.

So Jpod, although I realize that reasonable minds can differ on this, and I really don't know what the answer is and am not even sure this is not covered by guidance either way, I will stick to my guns on the statutory interpretation part of this. Remember, the QDRO rules were enacted primarily to overcome the antialienation provisions of the Code and ERISA. 414(p)(3) is, I think, most naturally interpreted as sayin, "Hey, as long as a DRO does not ask for a benefit form not available to the participant, it's OK for the plan to accept it." But that is not the same thing as saying that the plan cannot by its terms narrow the range of options available to APs as opposed to participants. Note that 414(p) doesn't say, "Here is what a QDRO is. You must do this and pay anything that qualifies as a QDRO." It just describes QDROs. The operative language is in 401(a)(13) which says, again, not the all QDROs must be obeyed, but rather that paying a QDRO does not disqualify the plan for violation of antialienation. Maybe there is case law to the contrary, or soft guidance from DOL. I am just telling you what the statute seems to require.

Thanks, Belgarath. I looked at the reg you cite. As I think you implied yesterday, the IRS is clearly saying in 1.411(a)-5(b)(3)(iv)(B) that for vesting purposes you only have to count service for the period during which the controlled group exists. It is of course arguable whether this can be extrapolated from vesting to eligibility. As I noted yesterday, it seems to me the DOL reg is ambiguous. I will stick for the moment with my view that plans are probably only required to give credit for service with controlled group members for the period during which the controlled group exists, for both eligibility and vesting. Again, this is not the case if you merge the plan of an acquired group member into the acquirer's plan, because there the regs require (under 414(l) if I recall correctly) that you credit the employees with all service they had under either merged plan. Surprised this is not settled by some definitive regulation, but apparently not.

Re the 5500, I would follow the cash, even if were larger amount. If the trustee restored the amount to the participant's plan account, then it's a plan asset, although maybe now (or maybe not) an after-tax amount. Constructive receipt is a question of fact, and the question as originally posed does not provide all necessary facts. The basic idea is, did the taxpayer "turn his/her back on income." If the individual received the check and, hard to imagine, said "Heck, I'm not going to cash this so the $150 will be taxable next year," then sure, constructive receipt in 2016. Or if carelessly left the unopened envelope on kitchen counter, knowing it was a small check, maybe constructive receipt. But if moved, never got the check, ex-wife hid it, whatever, no constructive receipt. In theory, whether a 2016 or 2017 1099-R is correct is determined by whether he did (2016) or did not (2017) have constructive receipt.

Derrin Watson could be correct, he usually is, but every plan I've drafted for going on 30 years has stated that you count eligibility service only for the period during which the controlled group exists. Of course, if you merge plans, then you have to count all service, but if you don't, I don't think you have to. Belgarath, I think your DOL reg cite is ambiguous, because it just says that you have to count all service with members of the controlled group. Well, before the acquisition, the company that joined the controlled group was not a controlled group member, so maybe you don't need to count the service. On the other hand, it is now, so maybe the reg is saying you do have to count. The DOL reg doesn't say one way or the other. The IRS cite is jumbled, so I could not find. Of course, most companies amend their plans as part of the acquisition to give the service, so it does not come up all that often in practice. In any event, clearly, the plan does not have to consider the Company B employees for 410(b) until 7/1/2017. Effective 7/1/2017, when B adopts the plan, if you don't amend it otherwise, you start applying the plan's one year of service/age 21 eligibility requirement and the B employees get in, or not. Those who were employed by B on 4/1/2016 and who are still around have a year of service by 7/1/2017, so they all get in on 4/1/2017. They will also get profit sharing for the 7/1/2017-6/30/2018 period based on the plan's provisions.

To answer Fiduciary Guidance Counsel's question, I haven't done any research and am not sure, but I don't yet see in anything that has been cited a prohibition on a plan's having different distribution provisions for an AP than for participant. ERISA section 206(d)(3)(E)(i)(III), for example, simply says that a plan WON'T fail the requirements if it offers the AP the same distribution forms as participant, other than J&S with AP primary. It doesn't say the plan HAS to provide those options in order to comply.

I'd want to research this before advising a client, but I do not see why a plan could not limit the forms of benefit available to an AP to a smaller set than is available to participants. After all, I can do the same thing with respect to different groups of participants, e.g. provide that group A gets a QJSA and 10-year certain and life, and group B only the QJSA. There are limits of course on changing the forms of payment available for benefits already accrued, and of course having different benefit forms available for different groups is subject to a nondiscrimination analysis under the 1.401(a)(4)-4 "benefits, rights, and features" reg, but I can limit benefit forms for different groups of participants. I don't see anything in 414(p) that requires me to make available to an AP all the forms of benefit available to the participant.

The employer's changing the recordkeeper for its 457(b) program, or adding a second recordkeeper with different options, is not the establishment of another plan. The 414(l) regs, which are the basis for identifying separate plans of a single employer, rely on pools of assets held in trust and just don't work for technically "unfunded" arrangements like nongovernmental 457(b)'s. A similar, but harder, issue arises in executive nonqualified deferred comp plans, e.g. when you have a spinoff of a division. The obligation to pay the deferred comp to the executives at that division is sometimes transferred to the new employer, and the purchase price for the division is correspondingly reduced by the present value of the deferred comp liability to compensate the acquirer for taking on the liability. Happens a lot and I've never seen it questioned or heard of IRS raising issues with this in an exam. Of course, if the executive has a choice to take cash instead, it won't work. But unless the executive can choose cash, he or she just has an unfunded, unsecured obligation to pay money in the future, both before and after the obligation is transferred, which under Section 83 is not "property." There can be no taxable "exchange" under Section 1001 without "property." In your case, it's even easier because the identity of the employer is not changing. This is similar to if you changed the vendor for your 401(k) from one company to another, and restated your plan document. You might have different investment options, better internet access, a phone app, and other plan improvements that would make it look like you had a new plan, and from an HR standpoint you might think of it that way, but you would still keep the same plan # for your 5500, because it's still the same plan.

Probably the plan refers to computing everything based on W-2 comp, which requires a circular calculation, but is otherwise a self-fulfilling prophecy. The numbers all work out, but in the end the doc had a choice with respect to the match of taking cash or contributions. Say the match is dollar for dollar on first 4% of comp and doc makes $200k. If he/she defers $10k, then he/she gets final W-2 taxable (and current cash) of around $182k ($200k - $10k deferral - $8k match) (I'm ignoring the circularity of the 4% of comp calc for simplicity's sake). If he she defers $5k, then he/she gets $190k current W-2 comp ($200k - $5k deferral -$5k match). So in Case A, current comp was $182k, in Case B, $190k, an $8k swing. $5k of the $8k is attributable to the different elective deferral contribution, so OK, but the other $3k is attributable to the disguised CODA that results from the employer's reducing the W-2 employee's current pay by the cost of the match.

If I understand PensionPro's question correctly, it appears to be governed by Treas. reg. sec. 1.401(k)-2(a)(1)(iii), which says that if the plan used 410(b)(4)(B) to pass coverage (which I think PensionPro is saying it did), then it needs to disaggregate the early eligibles for ADP as well. You have a choice as between either (A) disregarding (a form of disaggregation) only the NHCEs who were early eligible, but including the early eligible HCEs, or (B) running ADP separately for all regular eligibles (HCEs and NHCEs), on the one hand, and all early eligibles (HCEs and NHCEs), on the other.