Luke Bailey

The match in such a situation is clearly a disguised CODA. They're trying to get the benefit of 402(g)(8) without making the individual a K-1 partner. 402(g)(8) does not apply to W-2 employees. Nonelective is OK, if truly uniform/nonelective, because then the employee has no choice between contribution vs. taxable cash. However, would need to be disclosed up front so as to be part of employment contract, otherwise employee can complain underpaid.

Agree with CuseFan and ETA Consulting. I talked several years ago with an EP Agent who reviewed many ROBS bankruptcies during the timeframe of the "Great Recession," as part of a compliance project, and as I understand it, where IRS concluded that the ROBS participant had made a good faith effort to run a real business, they let it go. In an egregious case (e.g., no revenue and lots of salary and bonus, or worse, employee loans), the IRS would likely go after it, e.g., if the ROBS funds had gone through an IRA, which they typically do, they could make the IRC sec. 4975(c)(1)(E) argument footnoted in the Tax Court's Ellis decision and allege that the IRA had engaged in a PT in doing the rollover, triggering income at the time of the rollover. Given the amount of the rollover, you'd likely be looking at the 6-year, not 3-year, statute on the individual's 1040.

It seems like all these distributions were ok. The key sentences of the section that you point to in Notice 2002-4 are: "Thus, for example, if all employees of a controlled group of corporations (within the meaning of § 414(b)) are covered by a section 401(k) plan and a transaction occurs such that one subsidiary corporation in the group is no longer aggregated with other members in the group under § 414(b), (c), (m), or (o) [emphasis supplied], and in connection with the transaction no assets are transferred from the section 401(k) plan to a plan maintained by the former subsidiary corporation, then, participants in the section 401(k) plan who continue employment with the subsidiary corporation will have a severance from employment with the employer maintaining the section 401(k) plan and may receive a distribution of amounts attributable to elective contributions from that plan." This would seem to directly cover the dentist--she was an employee of a constituent member of the affiliated service group (ASG) that left the ASG, and continues to be such, and she is no longer eligible for or covered by the ASG plan that formerly covered her. Given that distribution to the dentist, who has really not had any change in W-2 employer, is permissible under Notice 2002-4, distributions should be all the more permissible to the staff employees who have actually changed employers in connection with the PC's or PLLC's withdrawal from the ASG.

Thanks. So you're saying that getting an LOD is no problem, but they may hit you with minimum funding excise tax, is that it?

So your experience, Mike, is that IRS will issue a favorable LOD on termination, even though it does not recognize the waiver? What is the effect of nonrecognition of waiver by IRS, then, if they don't raise the cutback and assignment issues? I mean, I'm not saying they should from a policy perspective, just want to make sure I'm understanding you that even though IRS does not recognize the waiver, it's safe to submit the plan with the amendment as you describe for a DL. Thanks.

On the technical issue of whether the amendment is valid, RatherBeGolfing makes a good point that you should check the amendment procedure language in the document. Assuming that, as RatherBeGolfing suggests will likely be the case, the verbiage in the plan doc does not preclude the employer's amending the plan by, essentially, any valid process, the language of both the plan provision regarding amendment and the amendment itself should be reviewed by an experienced corporate lawyer with knowledge of the state law goverining the employer entity. Depending on whether the employer is a corporation (and in many states, whether it qualifies as a small corporation entitled to relaxed corporate formalities) and if so its bylaws, or whether it is a partnership or LLC and, in those cases, the partnership or LLC agreement, a corporate lawyer should be able to tell you whether the amendment was effective under state law. If the amendment is valid under state law, it's valid, and the employer and TPA are stuck with it, although the TPA might be able to resign without breaching its contract if it has the right to insist on its procedures, given pricing model, etc., as written into its service provider agreement.

In my experience, PBGC permits only for 50% or greater owner, and IRS position is that it does not follow PBGC on allowing waiver and any waiver of benefit, even by 100% owner, is 411(d)(6) violation and/or assignment of benefit. Where we have needed to use the PBGC majority owner waiver we have not submitted the termination for a DL. Would be interested in knowing whether others have experience with IRS permitting where part of facts in DL submission.

If you really have a merger of the two nonprofits, the surviving company would inherit the 125 plan, so the employees of the nonprofit that had it would just continue to participate. It seems to me that Rev. Rul. 2002-32 is in fact very on point, because it says that even in an asset sale, where it is harder to get to that conclusion based on the Code and regs, the purchaser can assume the seller's 125 plan (situation 2), and the employees continue to have the same rights and obligations as if there had been no sale. There is no reg on point, but what is described in Rev. Rul. 2002-32, situation 2, is what happens in acquisitions all the time, and frankly was happening even before Rev. Rul. 2002-32. Really, from a tax standpoint all Section 125 does anyway is provide an exception from constructive receipt, and it seems to me that Rev. Rul. 2002-32 is correct that in both hypotheticals the employees are not provided with a new choice between cash and benefits.

"On a payroll basis" is really loose. I would argue that all that means is that if the person contributed and was there for that payroll period, they get the match. There is nothing in the language that says precisely when or requires deposit on a payroll basis. The requirement to deposit by end of next quarter is just for safe harbor. 1.401(k)-3(c)(5)(ii). You're fine.

Agree wotj MoJo and ESOP Guy. This is consistent with both the EPCRS Rev. Procs. as they have evolved over the years and experience in doing VCPs with IRS involving retro plan document correction.

I don't think there are any regulations on point and don't know how much supporting infrastructure (e.g., Internal Revenue Manual or IRS training materials) there are dealing with consequences of SEP violations, but it seems similar principles as with 401(a) violations would apply. If you fail the coverage requirement, then your SEP fails 408(k)(2), with the consequence that, the IRS's view, you don't actually have a SEP, which means that you don't get the benefit of 402(h), which means inclusion under 83 when contributions are made (since SEP immediately vested), nor do you get the benefit of 404(h), although 83(h) should give you the deduction anyway. The other issue is the DOL issue. The boilerplate SEP document flat-out said the employees in question would be covered and get allocations. If the employees in question found out and made a claim, difficult to think of any possible defense other than statute of limitations.

Presumably the "last known" was left out of the statute for the AP on the assumption that employer would have address for employee/plan participant, not for alternate payee. Ultimately, whether mailing to last known AP address vs. AP address in QDRO was a breach of duty of care would be for judge to decide. It looks pretty incompetent to me on the PA's part to have ignored the address on the QDRO. But the AP would have to show that the breach led to damages (i.e., I think, show that he or she intended to liquidate immediately, vs. just speculating that would have done so based on hindsight), and if the amount is small, he or she might have a tough time litigating this.

I agree with the conclusion that a class excluded from match by the plan doc would not be counted in ACP. This seems to be the clear result under Treas. reg. 1.401(m)-5, "Eligible Employee," paragraph 1. Not sure about last day of year requirement. Tom is probably right about that, but the language in Treas. reg. 1.401(m)-5, "Eligible Employee," paragraph 2, which seems to be the applicable rule, seems a little ambiguous on this point, mentioning only a minimum hours condition.

I don't think the AP is making a benefit claim, but rather a claim of fiduciary breach, i.e. that the plan administrator, by mailing to wrong address, breached its duty of care. The plan's claims procedures should not apply, unless the AP voluntarily chooses to submit to them. But certainly the plan should not get the usual benefits of doing full admin procedure, i.e. any later judicial review of an adverse decision by the plan should not be limited to the admin record and the "arbitrary or capricious" standard of review should not apply. In a somewhat similar situation that I was involved in regarding a vendor change that was delayed by one day as the result of a trustee error and resulted in a large loss, the argument that the market could have just as easily gone up over the 24-hr period was of no avail. The trust law rule is clear that once a breach of the duty of care has been shown, the responsible fiduciary is liable for all damages that are a direct result of the breach. In that case, the order to liquidate the assets had clearly been given. Here, presumably there's no proof that the AP would have promptly sold the assets subject to the QDRO, so maybe the fiduciary would be able to defend on that basis. I would probably ask the AP for any sort of evidence that indicates he/she would have sold immediately upon being informed of QDRO. Certainly the AP should have know of the approval of the QDRO by the court through the AP's own counsel. If the AP did not inquire about the delay to the plan, would seem to show that the AP did not have an intent to sell until after the market declined.

I'm not sure the EP agent is not correct. If the plan said they would get the small cashouts, then those cashouts should have occurred and not paying at the time they were due was a failure to operate the plan in accordance with its terms. Since the payouts would have occurred in the past, and would have eliminated any mortality risk after the payment date, seems like the amounts should be brought forward with interest only and then distributed.

What Doghouse has suggested was what I was guessing might be the only option. Should work if relatively small number of participants.

I agree that the likely best strategy is to resurrect the plan using DOL and IRS programs mentioned, and would note that whatever the shortcomings of the insurance company in this case, it will never pay anyone anything without reporting it on a 1099-something. For example, if you convince it to treat the plan as nonqualified (which I have seen happen in a somewhat similar situation), payments to the surviving spouse are reportable on 1099-MISC. Requalification through EPCRS, on the other hand, would allow the surviving spouse to roll over. If there were no other plan participants, just the decedent, you can probably skip DOL and just do a VCP app, get approval of your new plan doc, and be done with it. Since the plan will be terminating, you can even get a DL, so that should satisfy the insurance co.

MoJo's response is the only solution I can think of, but I have no idea how the recordkeeping/admin would be done on this asset if AF refuses to do it. Will be interested if others have a solution.

I have not had to deal with this in practice, but the post does raise an interesting question. I would think that the plan would need to set some objective test for what was phased retirement, e.g. dropping below some threshold work requirement as certified by the employer, or perhaps just a certification by the employer that the employee had been permitted to go on a reduced schedule indefinitely, and the discretion would be exercised by the employer as such, e.g. determining whether it met the employer's needs to allow the employee to go on a reduced schedule. Of course, the employee would need to have attained the plan's NRA or age 62.

In case you want additional support, I will pile on. Have had this situation many times. The referenced reg (1.409A-3(j)(1)) is absolutely on point. The exec does not have to forfeit, but does need to wait 3 years.

I have not read all of the posts on this topic word for word, but isn't the distribution an operational 401(a) violation that can be self-corrected by requesting that the employee repay the amount distributed? If that is the case, then any damage to the participant can be avoided by his/her repaying the amount to the plan.

Section 4.05(2) of Rev. Proc. 2016-51 is the operative provision, and it provides for correction by plan amendment under SCP in this situation, as "set forth in section 2.07 of Appendix B." My recollection is that the prior EPCRS Rev. Proc., 2013-12, which of course pre-dated the new limitations on the issuances of DL's under Rev. Proc. 2016-37, set forth generally in the rules of the Rev. Proc., not just Appendix F, specifically, in Section 6.05(1) of Rev. Proc. 2013-12, that in the limited situations where SCP by plan amendment was permitted, the plan was required to be submitted for a DL, whether it was pre-approved or not. It seems that all that verbiage was removed from the main part of the Rev. Proc. when 2016-51 was written, but the reference to submission of the amendment for a DL was left in in the example in section 2.07 of Appendix B. I wonder if that might have been an oversight by IRS, since requiring DL submissions in the limited situations where you can correct by amendment under SCP seems inconsistent with the IRS's general policy decision to drastically limit the situations in which DLs will be issued. You might want to check this point by calling someone in the voluntary compliance group at IRS.

EPCRS (Rev. Proc. 2016-51) lays down the law in Section 4.01(1) that self-correction is not available for plan document failures, which is what this is. So you must do a VCP submission.

It would seem that this would be one of the rare instances where you could take the money back under ERISA's mistake of fact rule, but it will be SOOOOO much easier and cheaper to just suspense it and short the next employer check into the plan by that amount.

I agree, but if that's the case it seems to make it discretionary with the trustee, who has already said he doesn't want to pay. I am not a bankruptcy lawyer but think it may be within the bankruptcy judge's authority (which I am given to understand is pretty broad) to help the aggrieved actuary here.