Luke Bailey

MJR, ESOP Guy is giving you very good practical advice here. But note that the Internal Revenue Code also has you covered , i.e., supports what ESOP guy is saying. IRC sec. 408(d)(4) if the distribution and return are in the same taxable year or by due date of return, and 408(d)(5) if the rollover and return of overpayment are in different years. So if you get pushback from the IRA custodian, you can point it to those rules.

Mojo, good point, but I think that would be a problem for the estate and its beneficiaries to work out, not a problem for the plan.

So Jakyasar, you're talking here about a non-401(k) plan (no employee deferrals), and presumably the employer was on extension for its return, so they/you are using the ability under SECURE Act change to adopt a plan retroactively, right? I assume a noninstitutional trustee (e.g., the company owners), because most likely a bank or other institution would not have allowed opening the account in name of trust without document. I would say: (1) To some extent the issues posed are novel, since the SECURE Act change is new. (2) Once they signed the plan documents, you certainly have a trust and I think you'd potentially run into more trouble if the trustee tried to take the money out now, and then put it back in. (3) I guess the IRS could argue that the trustee owes taxes for the period from 5/23/2022 to 6/3/2022 (a little over a week), since the money was not in a qualified trust. But as long as the total allocations for 2021 don't exceed the 415 limit, don't see how you would have a qualification issue. (4) In the small corporation setting, when issues like this have been dealt with on audit or determination letter process, sometimes lawyers will argue successfully to the IRS that since the individual who made the deposit was a 100% shareholder, or if all the directors were aware of and had approved the deposit in some way, the plan had been adopted. In theory the success of this approach depends on what the plan documents say. If you're lucky, (a) the plan document won't say that it is not adopted until signed, but rather will just say it needs to be "adopted," and (b) the corporate resolution that was provided will authorize the officers to "sign such documents as are deemed appropriate to carry out the purposes of these resolutions, etc." (5) You could always put a memo in the file saying that you had talked to the employer and the appropriate body (board, sole proprietor/boss, partners) had considered the plan's adoption and decided to do it before the deposit was made, assuming those are the facts. Not saying that would be bullet-proof if this was $1 million and someone had it in for this employer (e.g., the business is about to go bankrupt and the employer is trying to put money our of a creditor's reach), but it could help, e.g. in an exam. The issue could certainly be spotted in an exam, because the IRS always checks dates of documents. But absent unusual circumstances this does not seem like the sort of thing an agent should be upset about, especially given that the SECURE Act provision is so new. Sure, would have been better to sign the documents first.

EBECatty, completely agree with you on your first sentence. As to the second, it would be an interesting case. Presumably governed by ERISA, but ERISA's vesting rules wouldn't apply if a proper top-hat plan. I can think of some arguments that the participant could use, however, even if the employer/plan had good facts. And my guess is in a lot of cases the facts would be bad for the employer/plan.

EBECatty, you can take this statement at least two different ways. The first is as a legal prohibition against making deferred salary subject to forfeiture, at least "generally." The second way is as a statement that it's so unlikely for a variety of reasons that salary would be subject to a substantial risk of forfeiture that it won't pass muster under 409A. I would question the IRS's legal authority for the rule if the first interpretation is what they had in mind.. Seems like vesting outside the qualified plan realm is up to ERISA and DOL, and the absence of a requirement to vest elective deferrals 100% is a glaring omission from ERISA (not surprising since 401(k) plans weren't really a thing in 1974). Too bad ERISA probably preempts state wage and hour laws here. I had a case 30 years ago in which a fairly substantial privately held company had a nonqualified plan with elective deferrals and did have a vesting schedule. We represented an aggrieved former employee and in the end they vested him, probably as part of a settlement involving other issues as well. But I think they had successfully applied the provision against other participants.

Right. Would affect the legal analysis/arguments.

Jakyasar, where was the money deposited? Bank, mutual fund....Is the account in the plan's name or some other entity? Who is the trustee?

No. See Treas. Reg. 1.401(k)-1(b)(4)(iv)(B). No. Can't restructure with safe harbor, either. Need to adopt separate plans.

Santo Gold, the theory is that IRS in VCP will require correction all they way back to the dawn of time, or at least the founding of the republic. Having said that, if you can show that you have no records that would enable you to determine the magnitude of the violation or the identities of the participants who were affected in the distant past (say 10 years ago) and you really don't have records for one reason or another and are otherwise reasonable in your approach, they will probably work with you. They don't generally require perfect correction where it is not reasonably attainable.

HCE, I really don't know if there is any guidance directly on this, but I think the key thing is it was not an error, but a clawback. At the time the amount was deferred from the bonus, the employee had a "claim of right" to the bonus. As others have pointed out in the other post, I think, if the bonus and clawback are in 2022, you can probably treat the deferral as an error in the deferral amount. But if in different years, no, because you can't even amend the individual's W-2 for a prior year.

Well, maybe. It's possible they just wanted to make a contribution, without having any obligation to do so, and thought that the property was a great asset for the plan. Who knows.

I think it would, Peter. And the deduction would be at fair market value. Contribution treated as disposition.

Trisports, along the lines of what Peter Gulia and Albert F explained above, I think I recall someone from IRS saying, like 30 years ago, that, e.g. for filing for a determination letter on termination (which was common then even for a small plan) that they would view the deceased sole proprietor's executor as succeeding to the responsibilities of the employer to wind up business, and so on that model Morgan Stanley should accept the daughter as plan sponsor. Centerstage's ploy seems very clever and worked for Centerstage, so you might consider that as well if all else fails.

if all of the conditions that Peter outlined were met (e.g., this is not fulfilling an obligation to contribute, but totally discretionary) and the individual account owner owned 100% of the employer, you could treat it as a transfer first to the employer entity (contribution to capital) and then contribution by employer to plan, and do the necessary paperwork to document it. But the harder part is making sure that all of the conditions Peter described have been met. You'd need to check every detail.

Joe L, yes, me too. It's special. It's clear the way the regs are written that the allocations for HCE(s) count for top-heavy at end of first year even if they are all distributed because of ADP test failure. The case I had with this issue was 25 years ago, and nothing's been changed, except I hope that the financial advisers that sell plans to small business owners late in the year are more aware of the problem.

You could be top-heavy for first year as well.

What year did the deemed default occur. Was a 1099-R not issued for that amount? After a 1099-R is issued, the additional accumulated interest is there just to block future loans under the $50,000 rule, or under a plan rule limiting number of loans, the participant would not be taxed on it.

At most they need to send participant a letter saying the amount didn't qualify for rollover.

These are great questions and like the others I'm not sure there is an answer to most, but I believe that if you can find your way to making the distribution (a) the amount is includible in the participant's income, whether they cash the check or not, and (b) you can withhold the default amount if they have not made a withholding election. See Rev. Rul. 2019-19. Since the plan is required to comply with 401(a)(9), in the absence of more specific language, I would probably advise distributing the smallest amount that could be distributed under any of the benefit options and then periodically sending the participant a letter that they can elect a different election and the actuarial value of the distributions already made will reduce the amount available for distribution after the election.

Most employers self-fund short-term disability, but I think the post here is probably regarding LTD. I wouldn't suggest self-funding LTD. Someone could become severely disabled early in their career and be on LTD for rest of life. Things happen to employers over such long periods.

I think what Bri is pointing out is that you don't have to use the W-2 or FITW safe harbor. If you use the general definition of comp it should include, because foreign pay generally counts. See Treas. Reg. 1.415(c)-2(g)(5).

Everyone has to have a visa. There are several different types. You mean a tourist visa? If so, I don't think you can even put them on the payroll without violating Federal law.

I assume this means the later of the two events. Because the later event could have been separation from service, the later of age + 5 years or separation from service + 5 years would typically be the only permitted further deferral. Of course I have not reviewed the documents or specific facts so am just addressing a hypothetical. Please consult your own tax adviser based on your specific facts.

But Lou S., you didn't find a definition of "plan," right, just a lot of references to lower-case p "plans" like you're supposed to know what that means? One could well interpret that as being a reference to the "plans" that are described in the first part of the regs as being subject to 416, but I didn't find where the regs actually spell that out definitively.

Belgarath, I'll be interested in seeing whether anyone is aware of specific guidance on point. I could not find any. I can see the argument, in that you can aggregate 401(a) and 403(b) for 410(b) and 401(a)(4), and you can read 416 and the regs as saying you can aggregate for top-heavy any plan that you can aggregate for 410(b) and 401(a)(4). On the other hand, I don't see in the statute or 416 regs where "plan" is defined, so one could also argue that the only "plan" being referred to in 416 and the regs is a plan that is subject to 416, which of course 403(b)'s are not. On the policy side, it is arguably unfair to not let you aggregate just because the plan that you are aggregating with could not itself be top-heavy, since the point of the top-heavy rules is to make sure that non-control folks get significant benefits and the 403(b) balances are benefits. But as you know the IRS generally prefer technicalities over policy, and the courts will use policy at best as a tie-breaker, and arguably this doesn't rise to the level of a tie on the technicalities.