Luke Bailey

EBECatty, I think this or a related issue may have come up earlier on BL, because I remember making the 108(b) point that I make below maybe a year or so ago. As paraphrased in Rev. Proc. 2021-48, the legislation states: Section 276(b) of the COVID Tax Relief Act provides substantially similar guidance with regard to PPP Second Draw Loans, as do §§ 278(a)(1) and (2) with regard to Section 1109 Loans. Specifically, § 7A(i) of the Small Business Act and §§ 276(b) and 278(a) of the COVID Tax Relief Act provide that, for purposes of the Code, no amount is included in the gross income of an eligible recipient or an eligible entity, as appropriate, by reason of the forgiveness of a PPP Loan, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. On the one hand, one could argue that reducing earned income by the amount of wages arguably "allocable to" the forgiveness of indebtedness income is either indirectly denying the higher deduction amount under 404 (somewhat confusingly by requiring an exclusion in a preliminary calculation) or reducing a tax "attribute;" arguably, earned income is a tax attribute. On the other hand, one could argue that disregarding the wages is not denying a deduction, but only appropriately reducing it, and that the "tax attribute[s]" being referred to in the Covid Tax Relief Act are the tax attributes listed in Section 108(b) of the Code that would otherwise get reduced if you are allowed to avoid current tax on forgiven debt by burying the income in your balance sheet. Supporting the latter argument would also be the notion that in 404(c)(2) the Code is trying to give the taxpayer a break by not in effect double counting the expenses incurred to produce excludable income, and now the taxpayer is trying to instead double dip by both taking the exclusion from income but then also taking a larger deductible plan contribution by including the allocable expenses for purposes of the contribution limit. However, the strength of this logic is undercut by the fact that the whole point of the provisions in question of the Covid Tax Relief Act was to require the IRS to stop making the argument that the wages could not be deducted because of a "double dipping" principle. One could even argue, I suppose, that the wages are not really "allocable to" or "chargeable against" the debt forgiveness in the conventional accounting sense that Congress likely had in mind when it enacted 401(c)(2), which I believe was as part of the 1954 Code; rather, one could argue, the wages are only "related" to the loan and its forgiveness, in the way that a dog's stretching out its paw is related to its getting a treat, even the "cause" of getting the treat, but not "allocable to" or "chargeable against" the treat. But on the other other hand, if this were a closely held corporation, the amounts would just be compensation for 415 and wages for 404, and maybe self-employeds should have parity? Without specific IRS guidance, just seems confusing.

PS, generally, yes, but for the fine points check out here https://www.irs.gov/pub/irs-tege/rollover_chart.pdf and here https://www.irs.gov/retirement-plans/simple-ira-withdrawal-and-transfer-rules#:~:text=After the 2-year period,rolled over in your income.

Depends on costs and risks, right QDROphile? On the surface of it, it would seem contrary to ERISA and case law in other areas concerning the authority of the administrator that a plan could even interplead, arguably shirking its duty to make all determinations under the plan, as I think your comment implies. But case law is consistent that plans can interplead (although I will admit my experience is in area of beneficiary designations, not QDROs), so if the risk is sufficient to justify the cost of hiring a lawyer to file the interpleader, why not? Just economics, I think.

If you have any doubts whatsoever regarding whether to honor the QDRO, based on whatever the participant is arguing (e.g., collusion of alternate payee's and his/her counsel constituting fraud), you should consider interpleading the benefit in court and let the court sort it out.

Tom, the IRS's position is full year, based on the reference in 408(p)(6)(A) to, essentially, W-2 comp. Also, see the use of term "year" in 408(p)(2)(A). I believe the purpose of the October 1 deadline is merely to give folks a chance to budget whatever contributions they can make over the remainder of year.

TPApril, nless the worked together for clients, there may not have previously been an ASG either. Just sharing office space and staffs, without any ownership or working together on client matters, would not ordinarily create an ASG.

Strictly speaking, this is the account balance as of 1/1/2022 times 12? I'm sure that is not what you meant, Jakyasar, but I'm confused. Right. The pre-2022 RMDs, if calculated properly, satisfied the pre-2022 RMD rules, and that's over and done. You don't get a credit for the fact that the new life expectancies would produce smaller RMDs. The new tables don't apply before 2022. Yes. The new tables are effective for calculating RMDs in 2022 and later.

Related enough to be a controlled group or affiliated service group under 414(b), (c), or (m), Laura23? Would really make a difference.

Why will they need ADP test? If they satisfy the safe harbor, seems like the elective deferrals are still covered by safe harbor and the employee contributions just need to pass ACP, which of course they won't, as you point out, if there are no NHCE employee contributions. Maybe I'm misunderstanding the question, thepensionmaven.

Has anyone seen a 403(b) contract or annuity that is designed as a post-termination annuity or account, and says that if the contributions to the account are attributable to a terminated plan then the owner can ask for distributions whenever he or she wants at any age? In any event, if the contracts that were the subject of the OP do not contain such a provision, I don't see how you can get the insurer to base distributions on legal reasoning and not the terms of the contract. I suppose if the annuity contract has less specific language in it saying that distribution can be made in a lump sum upon plan termination, maybe you could convince the insurer that this meant any time after the plan termination had occurred, indefinitely. One would need to study the contract language. Could depend on whether it says "at the time of termination" (bad), "in connection with the termination" (arguable), or "after termination" (good). But I do think the insurer or custodial account vendor will want to stay within the language of its contract.

I have always found the guidance on 403(b) plan terminations confusing, even after the Secure Act. It seems to me that the following statements excerpted from page 5 of Rev. Rul. 2011-7 may explain the insurer's position: "Since the employer took action to fully vest any participants with respect to amounts not otherwise fully vested at the date of plan termination, all contracts under the plan will be § 403(b) contracts upon plan termination. See §§ 1.403(b)-3(d)(2) and 1.403(b)-10(a)(1). Such contracts may permit benefits to begin immediately upon plan termination, or may permit the participant to begin benefits at a later date to the extent provided in the plan document and the termination resolution, subject to applicable Code (and ERISA rules where applicable.).... "Following termination of the plan, participants and beneficiaries who hold fully paid insurance annuity contracts are entitled to payments in accordance with the terms of the contracts (which may permit single-sum payments in connection with plan termination)." Rev. Rul. 2020-23 has similar language for individual custodial contracts. In either case, the gist seems to be that while 403(b) plans can permit participants to elect lump sum distributions upon plan termination, which are eligible rollover distributions, if the plan did not provide for lump sums at termination, or if it does but the participant does not choose to take a lump sum, if offered, then post-termination you are stuck with the terms of the annuity contract regarding distributable events. I think an employer's explicit or implicit obligation to inform the issuing insurance company regarding the date of the contractor's termination of employment would be an obligation, not a right. I agree that this does not make sense, given, again, that the participant could have taken a lump sum and rolled it over to an IRA.

Good point, Bill. Whenever I have written a memorandum or letter to a client reaching a conclusion about CG or ASG status, I include a paragraph stating that it is based on a "snapshot" as you describe and that any change in ownership percentages, family relationships, or business relationships, even if seemingly small, could change the outcome.

rocknrolls2, 1563(f)(5) takes you back to the old 80/50 test for brother sister controlled groups under 414(b) and (c), but what CNB Consulting was pointing out is that 414(m)(5)(B) says that for "related person" under 414(m) you use 144(a)(3), which is at just 50% for both parent-sub and brother-sister. The "related to" concept in 414(m)(5) is not just the straight-up 414(b) and (c)/1563(f)(5) "controlled group" rule.

CNB Consulting, your point regarding 144(a)(3) is a good one. I would also note that the rolling 2-year 50% test mentioned above in a few comments was in regs that were proposed 35 years ago and withdrawn 29 years ago. The statute just says "principal business," so that (whatever it means) is the law, although it's possible the withdrawn proposed regs would be persuasive with IRS. Also, what is still only proposed (from 35 years ago), but not withdrawn, and with a stated retroactive effective date, is the "leased owner" rule in proposed 1.414(o)-1. If the individual who works for the potential management organization is, directly or indirectly, a five-percent owner of any of the recipients, then you would need to at least consider the leased owner issue. However, since leased owner would be under regs authorized under 414(o), but is not itself spelled out in 414(o), the rule is not in effect, although again in theory the regs could be adopted with retroactive effect. The statutory 414(m)(5) rule (which has no regs, even proposed) is in effect without them.

Gotcha. Thanks, Peter.

Peter, I agree that the TPA should review this issue, but in the normal course of things, i.e. assuming typical TPA agreement and actual functions and powers, it is going to be unusual for a TPA to be a fiduciary, right?

I would definitely check out rocknrolls2's approach. If fraud was involved (which of course would need to be determined based on a careful examination of the facts), this seems like a very unique situation where arguably ordinary correction principles (which usually assume employer negligence) may not apply.

You'd really need to review the plan language and the wording of the beneficiary designation as well. It might say something like, "Marriage will be treated as a revocation of any existing beneficiary designation," or alternatively, "A beneficiary designation will be treated as suspended if the participant marries...." If she only had the one son, he would almost certainly get it all anyway, which would make things easy. If there are multiple children, I would be REALLY cautious.

You mean, "disqualified, right?" Probably. Obligations under the plan under ERISA do not depend on plan qualification. You said they were owed $20k apiece? Trustee's obligation is to act with prudence, diligence, and loyalty to the plan's participants.

Good to highlight that point, Appleby.

Brian Gilmore hits hits the nail on the head. Many law firms with incorporated partners (414(m)(2)(A) ASG's) have this issue, maybe less so today given that there are fewer incorporated partners. None that I am aware of have were able to resolve the issue favorably, and those that stayed worried about it and were large enough to be self-insured looked at the MEWA issue as just one more reason to be fully insured.

gc@chimentowebb.com, there are of course proposed 457(f) regulations that are fairly clear and reasonable on this point, and that can be relied on until withdrawn or changed in the final. Given that it is a "facts and circumstances" determination, there is no bright line certainty, but my guess would be that what you describe is probably not outside the boundaries, assuming the amount of vacation per year is reasonable and designed to actually have employees take vacation, i.e. the employee could reasonably be expected to take it and would be unlikely to use it as a "piggy bank." I would probably be concerned if the frequency of "extra staffing needs" led to a situation where the 25% limit on cashouts was seldom applicable in practice. But again, it's facts and circumstances and I'm sure your brief description leaves out some of those. Here is the language from the proposed regulations on this point: Factors used in determining whether a plan is a bona fide sick or vacation leave plan include whether the amount of leave provided could reasonably be expected to be used in the normal course by an employee (before the employee ceases to provide services to the eligible employer) absent unusual circumstances, the ability to exchange unused accumulated leave for cash or other benefits (including nontaxable benefits and the use of leave to postpone the date of termination of employment), the applicable restraints (if any) on the ability to accumulate unused leave and carry it forward to subsequent years in circumstances in which the accumulated leave may be exchanged for cash or other benefits, the amount and frequency of any in-service distributions of cash or other benefits offered in exchange for accumulated and unused leave, whether any payment of unused leave is made promptly upon severance from employment (or instead is paid over a period after severance from employment), and whether the program (or a particular feature of the program) is available only to a limited number of employees.

Belgarath, I'm sympathetic, but the statutory language quoted by Lou S. (which I don't think is elaborated on in the regs) says "has not performed services," not "not employed." It seems to me that "has not performed services" is a more objective, less metaphysical determination than "not employed."

And Basically, it has to be on account of the death. Meaning if the money comes to the beneficiary directly from the decedent's qualified employer plan account or from the decedent's IRA, fine, no 10% tax at any age. But if the beneficiary rolls it over, even without commingling with any other assets, and then later takes a distribution from the rollover account, it may, in fact, still be the money left to the beneficiary by the decedent, plus a little earnings, but it does not enjoy the death benefit exception from the 10% tax.

TPApril, it is so unconventional that I will reiterate QDROphile's comment. You can't rename a qualified plan into an IRA. You are presumably terminating the 401(a) and distributing the property from it. The custodian (obviously, line up a willing custodian in advance if you have not already done that) will then take a trustee-to-trustee transfer of the property. The distributing plan will issue a 1099-R, the IRA a 5498.