Luke Bailey

Do you mean a safe harbor notice for 2023? Wouldn't that be somewhat misleading (or short)?

david rigby, good chance, but I don't know. If there is, it might be old. I did an article on this topic 25 or so years ago. It lost some of its currency when the world went from profit sharing plans to 401(k), because now there's a much lower probability of a plan going without any contributions for a long srretch.

CuseFan, if you're referring to the reg, it's 1.401-6, which is pre-ERISA. I think it's anyone with a balance, just like you have with a termination. The complexity that comes up is, if you have, say, 5 years with no contributions, and the employer says it had an intent to contribute in the early part of that period, but just didn't have the money, and in year 5 wants to freeze the plan, and reports that it had not had an intent to contribute for the last 3 years, really, when do you declare full vesting? 5 years ago because there were no contributions? 3 years ago because that's when they should have frozen the plan? Now, because that's the most practical? It's a facts and circumstances determination and I don't recall there being any clear guidance.

Below ground, pretty much yes, although I think there could be a way of including even the cash tips picked off the table, although per Peter the IRS, at least at one point, would not agree. I guess the issue there is that in the mind of the IRS folks Peter was working with, the cash had been received as compensation, and so was no longer eligible for "deferral," whereas I think there might be a way of characterizing the waiter or waitress as the employer's agent for purposes of taking the tips off the table. It would seem that an employer could take the position that taking deferrals from cash tips under any scenario is not practical, and that could be right. I'm just speculating on what could be done. If an employer that takes such a position makes it part of its plan document and/or plan policies that deferrals won't be taken from cash tips, it could probably do that, i.e., not take 401(k) from cash tips. But unless I'm missing something, such a policy, even if effectively implemented, is not going to change the fact that the employees in question are eligible or potentially eligible for the plan and have to be counted for 410(b) if they meet the plan's service and age requirements, and would have to be counted for ADP and ACP if they are actually eligible under the plan's terms. Furthermore, the cash tips, to the extent reported to the employer and on the employee's W-2, would be 415(c) comp and would also be includable in testing comp unless excluded under a 414(s)-compliant non-safe harbor definition of plan comp.

Yeah, you're probably right, chc93. I think I was distracted by the specific inclusion of 401(k) eligible. If you're right (and again, you probably are), they wouldn't have needed to say that. Thanks.

Peter, does this apply only to the tips that the employee him- or herself picks up from the table and is allowed to keep, without the cash ever physically coming into the possession of any other employee of the employer, or also to tips that the employees in general are required to pool if there is a rule that all tips for the shift are pooled and shared? It would seem to me that in the latter case the employee has not received the income but is acting as the employer's agent. And even in the former case, in addition to the policy argument, did you make the case that the waiter or waitress or other tipped individual, to the extent of his or her deferral amount, was, just the employer's agent to the extent of his or her deferral? Also, if the patron pays the entire bill in cash, the waiter or waitress may need to have a non-tipped employee of the employer break large bills in order to received the tipped portion, and in such a case it would seem to me that the employer is receiving the tips and then paying them to the employee. Obviously, the facts of any particular workplace could be very complicated. Also, we're agreed that in any case it's good 415(c) compensation, right, if reported on W-2? So the only problem would be where everything is taken by the employee off the table in cash, so there is literally not enough cash in the employer's hands to cover the deferral amount over some period, e.g. monthly? And we're also clear that the fact that they are tipped is no basis for an exclusion for purposes of 410(b) or 401(k) ADP or matching, right? So all these folks would go into the various tests as eligible but no- or low-deferrers? I don't see how an employer could cash out credit card tips (e.g., that evening) and collect the info to put the amount on the W-2, but then say it didn't go through payroll. I get the issue, I think, for tips that the employee picks up off the table and keeps, i.e., arguably it's too late to defer those, even though they are 415(c) comp, because it is compensation that has been paid to the employee in cash. But cashing out the credit card tips, even if done the evening of the work and at the local level still means the money moves from the customer to the employer and then from the employer to the employee, which seems to me like "payroll." Maybe 20 years ago it would have been impossible to accomplish withholding in such a situation, but today the same systems that allow the waiter or waitress to tap pictures of the food and beverages you're ordering on a tablet and have that instantly sent wirelessly to the kitchen staff should make it possible for the employer to know how much to hold back from tips for the employee's 401(k) on a shift-by-shift basis.

I will be interested if anyone else sees this differently, but if this is not a 401(k) plan, just a profit sharing plan, and the employee never received a contribution (and this conformed with the plan document and law, e.g. top-heavy rules), I don't think that individual is a participant. I think the rule that you are a "participant" for 5500 purposes merely based on eligibility is only for K plans.

IRS could have been clearer, but I've always thought that in this sentence they are just saying that you can't NOT amend for law changes that are in effect at the date of termination and use as an excuse that those changes are not yet on the LRM.

If you honor it as a QDRO make sure to get a hold harmless from the participant.

I've thought of this from time to time myself. Surprised there is not guidance on it, but to the best of my knowledge, there is not. My guess at what the rule should be is that if the account is under the applicable threshold at a point in time, you can distribute even if above the amount is over the threshold at the date of distribution, as long as the distribution occurs as soon as administratively feasible (probably within a few days, right?) of the date when the decision to distribute is made. IOW, if it's under the threshold and you initiate distribution, the fact that the amount transferred, or the check, is slightly higher is probably not a problem, as long as the increase occurs after the employer or its agent has taken the appropriate action to initiate the distribution, such that it will occur thereafter without any further action on the part of the plan administrator. That's my guess at the right rule. I have no doubt that even a somewhat longer, but reasonable, delay, as in the case that chc93 recounts, will typically work in an exam reviewing an individual situation.

Obviously, you communicate with the PEP. The mechanics are, your prospect's portion of the PEP will be spun off into a single employer plan. It's definitely doable.

Tom, if you could elaborate on what a "community plan" is, that might be of interest.

justatester, do you mean that the employees will make a decision in 2022 about whether they want 16% or 10%, and then the 10% or 16% ps, according to their decision, would be contributed in 2023, presumably before the employer's tax return due date for 2022 so as to be deductible for 2022? If so, for those who elected 10%, when do they get the 6% in cash?

Not clear what you mean by this statement, justatester. I think the key is when the cash portion would be available for employees that elect to take it in cash. If It's 2023, then I agree with Bri.

This applies only to a governmental employer that doesn't have a 218 agreement with SSA to pay and withhold FICA. Should not have applied to employment by a Tax Exempt.

If the money is going to come out of the plan, I think there would have to be a plausible argument that the claimant would prevail. Otherwise, the plan sponsor could amend the plan, but there would be complications of doing that, especially if the deceased participant was an HCE.

EBECatty, I agree that that it's tough to fit these sorts of payments into the the post-severance comp rules in the 415 regs. But if the payments are from the seller and we are somewhat comfortable that the seller is served by them enough that it can provide the W-2 and take the ordinary deduction (and not be required to simply take a reduction in the amount of capital gain realized), has there been a severance from service for purposes of these payments? As we know, severance is not defined under the Code except under 409A. I think it's a gray area. The safer route is probably the temporary employee leasing arrangement.

HCE, there is certainly no specific section of the Code or ERISA that is going to cover this explicitly. There is case law that would tend to support a mechanical interpretation of the plan, but depending on the wording of the plan and other facts and circumstances there might be some room for interpretation of the provisions and the application of common sense and a sense of fairness.

If the plan document, even after a careful reading, does not address this either way, then the plan administrator probably has a choice of interpretation to make, and many factors would be involved. Note that I would definitely review the language for the death benefit to see whether the "if" clause says something like, "If the participant dies before his or her annuity starting date,..." or something else. But even if (as is likely) the "if" clause does refer to the ASD, you need to check for whether the provision for payment of a lump sum indicates that it will be paid on the day that would have otherwise been the ASD if taken in the form of the default annuity, vs. saying it will be paid "on the date as soon as administratively feasible after the election," which would be ambiguous. I have not seen a DB plan that directly and consciously addresses the issue (e.g., "If the participant elected a lump sum, but dies before the ASD, then..."), although I hope they exist, but I have seen plans with a provision that if the participant elected a 100% J&S but died before the ASD the plan sticks with the 100% J&S. If your plan has such a provision it could also guide the analysis on the lump sum issue, since the administrative issue is similar.

EBECatty, if one assumes that the parties are acting at arm's-length, presumably the post-close retention bonus facilitates the seller's deal, and is in effect service promised by the seller to the buyer. So one could argue that the retention bonus is for service performed for the seller. If it's not, then there may be bigger problems with the payments, e.g. who should actually report and withhold. I have worked on many deals where the buyer is not yet set up to handle the seller's employees and so they remain on seller's payroll under a temporary leasing arrangement. That is not exactly the same, but seems similar.

I had a somewhat similar case a couple of years ago, which settled. A couple of things that I found interesting were: It appears to be settled law, at least in most circuits, that in this sort of situation (which will often involve a deficiency in the administration of the plan), the plan administrator can throw up its hands and implead. I think that is the right answer, but I would also have thought that the federal courts might say that the plan administrator had to reach a conclusion, and then the court would just review it under its usual ERISA standard of review. That has been argued in several cases, but appears to have been rejected by most courts. It would be a simpler approach and lead to lower legal costs, but would, I think, often produce an unfair outcome, so would be the wrong approach where a large amount of money is involved, as it was in the case I worked on. Once it goes from the plan administrator to the court, the standard to be applied by the judge seems to be open to interpretation. The judge, as it did here, could attempt to figure out how the plan's rules apply, but then see point 1 above. An alternative approach is for the court to figure out what the participant intended and apply that unless it clearly breaches some plan rule. In the case I worked on, which, again, settled, a wooden application of the plan's rules would have invalidated the participant's last beneficiary designation, but would also have clearly been counter to her intent. Sometimes reality is not black and white, which is why the law permits parties to enter into settlements.

These are defined contribution plans, right? Does each partner have a professional corporation?

I would follow the reg (1.401(k)-1(b)(4)(v)(C) if it applies.

Nate S, you allude to a really important constraint. State wage laws will only permit a fairly short delay in payment, as you note.

Sure. The complexity is going to be in the Federal income tax area, Santo Gold.