Luke Bailey

Right. The PLR takes a substance over form approach and treats the surviving spouse as if he or she were the designated beneficiary if his or her interest in the estate is 100%. I believe there is at least one older ruling to same effect.

BG5150, I think fmsinc is quoting the reg, not any plan language. The reg just articulates the RMD rule for the A/P, i.e., what the deadline is to satisfy 401(a)(9). Absent unusual plan language, the A/P could also take earlier, e.g. immediately after the QDRO is approved.

C. B. Zeller and Peter Gulia, do you think you can get around the community property problem with a separate property agreement?

Brian, agree to disagree?

Brian, do you have a cite for that? Brian, you could not combine a DB with a DC. Breaks the rules under 414(l). You can merge DB's with other DB's (subject to certain funding protections for the participants in the better-funded plan) and DC's with DC's (where the account nature of the plan provides built-in protection), and where you do, e.g. with DC's, you do not have to restrict one merger constituent's forfeitures to use for the participants of that constituent.

BG5150, I will grant you that that may be what they person who wrote that was thinking, but the words are far more open-ended than that. I protest if to follow the law I have to read the IRS's mind. I hope they feel the same way.

Always complicated is totally correct on that. Assuming he owns 100% of the S corp, then his ownership interest in the real estate brokerage would be attributed to the S corp. See IRC secs. 414(m)(6)(B) and 318(a)(2)(3)(C). Note that if the real estate business was a corp and not a partnership, you wouldn't have a problem because for an entity to be an FSO for A-org ASG purposes it must be a professional corporation, and licensed real estate brokers were not listed in the proposed reg as a profession for purposes of being a "professional corporation." See. Prop. reg. 1.414(m)-1(c). If the S corp is getting payments from the real estate brokerage, then it would be viewed as performing services for it. But then you have other questions, e.g. are they both service orgs, and is the revenue significant.

Section 2, C. of IRS Notice 2020-50 says, "An employer is permitted to choose whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions...." (emphasis supplied). Also, you could view the employer's behavior in permitting CRD's when it did not intend to amend as an error that is correctable under the latest EPCRS (Rev. Proc. 2021-30) by amendment, as long as nondiscriminatory.

This is the first time I've ever disagreed with Brian Gilmore, but although it depends to some extent on the plan documents, I think the forfeitures can be used for admin expenses across the entire plan, except perhaps for the DCAP. ERISA applies to plans, not to benefits within a plan. Note that the last word in Brian Gilmore's quote from ERISA sec. 404(a) above refers to the expenses of the "plan." Where you have a proper wrap document, the plan is the entire wrapped plan, except, again, perhaps for the DCAP, since that is not an ERISA welfare benefit.

I don't think it would be a cutback to remove. The amendment to remove would have to pass discrimination test, which presumably here would not be a problem.

Thanks, EBECatty. So no real change, which makes sense because I don't think there has been any guidance in between the two editions.

Agreed, but how about this as a "stark" example, the other way: A and B own X 50-50 and A, B, C, D, and E own Y 35-35-10-10-10. E dies and without any disruption to Y's business, pursuant to an unfunded cross-purchase buy sell agreement, E's 10% is put up for sale by E's estate to A, B, C, and D. C and D decline to purchase any shares, but A and B purchase all of them, in any proportion. Does the transition rule apply, or not? It's a very sympathetic situation for application of the transition rule, but not because what occurred seems like, as per the regulation, what we would typically think of as "an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business," but because, at least without additional facts, the emergence of a controlled group in this example seems a trap for the unwary, making it sympathetic to allow the taxpayers a little time to catch wind of this tax ramification of their actions. If you just read the operative text of 410(b)(6)(C), and do not let yourself be influenced by the caption, legislative history, or, arguably, the reg, you would say that the transition rule applies in the above situation. But that changes the rule from what I at least thought it was, i.e., a rule for corporate acquisitions and dispositions, to a free pass for up to two years seemingly almost any time a controlled group is formed. Try this one: A and B own X 50-50 for years. Decide to form Y to pursue a new business, and own that 50-50 as well. Create and capitalize Y. That's an acquisition of shares, right? Does the resulting CG not count until the end of the following year? What if there is no A and B, just A, who owns X 100% and Y 100%? Absent some other BenefitsLink regular's having experience of interacting with IRS over these issues (if you're out there, I hope you'll chime in), perhaps the only other approach that may shed a little light on the subject is to ask: Did others, like me, perhaps mistakenly, understand 410(b)(6)(C) from the get-go as a rule for corporate M&A, whether by large or small companies, so that they are surprised by the potential reach of the rule if the text of the rule ("if a person becomes, or ceases to be") is all that is applied, or did you always see it as a rule that essentially delays the applicability of the controlled group rules to ANY new controlled group (except, perhaps, to simultaneously created entities)? I have to say, Peter and EBECatty, that it's surprising to me that 35 years after the rule's enactment the IRS has not clarified this any more than it has, apparently.

Ahah. BTW, not in the urban dictionary. P.S., your legal reasoning is nevertheless excellent, IMHO.

J Jakyasar, thanks. If I can treat Corp. B as in the plan for 2020 and give some it semployees an allocation, we'll be good. Not sure. I will need to check document. Good point. I'm sure it can be corrected in VCP, but trying to avoid.

shERPA, really appreciate the nuanced answer, and agree with it. But what is IANAA?

Right, great for the "testing nerds," but C.B. Zeller, what will all of the "correction nerds" do if correction becomes too easy? 😀

For many years, individuals A, B, and C own Corp. X 1/3, 1/3, 1/3, while A and B own Corp. Y 50-50. Also for many years, Corp. Y has a 401(a) plan that has not been adopted by Corp. A. Assume no affiliated service group has ever existed among X and Y. In 2020, C retires and Corp. X redeems C's stock. For remainder of 2020, through today, A and B each own 50% of both Corp. A and Corp. B, so Corp. A and Corp. B comprise a brother-sister controlled group of corporations under IRC sec. 414(b). The text of IRC sec. 410(b)(6)(C) says that the 1- to 2-year grace period rule applies when a company "becomes, or ceases to be" a member of a controlled or affiliated service group, which would literally cover the above fact situation, especially when one considers that in the redemption Corp. X acquired C's stock. However, the caption of IRC sec. 410(b)(6)(C), which could be used by a court in interpreting the provision, says that the rule applies to "CERTAIN DISPOSITIONS OR ACQUISITIONS," and Treas. Reg. 1.410(b)-2(f) says that for purposes of the rule, "the terms 'acquisition' and 'disposition' refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of the trade or business." Thus, at least arguably, the provision's caption and the reg narrow the application of the rule to only those situations in which an employer becomes or ceases to be a member of a controlled group as part of what we would otherwise refer to as a "merger or acquisition." Moreover, the legislative history (at least the TRA '86 Blue Book) of 410(b)(6)(C) would seem to support such a narrow(er) interpretation, because the first sentence of its discussion of the change to 410(b) is, "The Act contains a special transition rule for certain acquisitions or dispositions of a business." I reviewed Q 11:2 of the 6th Edition of Derrin Watson's "Who's the Employer," and I think it quite reasonably punts on this question, so I am looking to see whether others have had experience with this issue in the marketplace or have experience with arguing the issue with IRS.

Standardized preapproved plans are required to cover all controlled group members, but their adoption agreements usually provide for each controlled group member to execute the plan document, typically by using a page called a "Participating Employer Addendum." Having the "non-lead" employer sign an addendum to make clear its agreement to be included in the plan makes a lot of sense for collateral reasons (e.g., having a state law basis for requiring the controlled group member to pay its share of the plan's costs, including contributions other than elective deferrals; deductibility under Section 404 of contributions made by the controlled group member), but is it necessary to satisfy the Code? IRC secs. 414(b) and (c) state that the controlled group members are considered a single employer for purposes of Section "401" of the Code, thus seeming to forestall any argument that separate adoption by each controlled group member is necessary to satisfy the exclusive benefit rule. Derrin Watson in Q 10:2 of the 6th Edition of "Who's the Employer" states unequivocally, I think, his conviction that adoption of the plan by the controlled group member is not required, and I'm inclined to agree with him, but because he cites no direct authority for this conclusion, I'm trying to gauge whether others have experience in the marketplace with IRS or other practitioners that would push back on this conclusion. If separate adoption by the controlled group member is not required, then it would appear that an employer in a controlled group can potentially solve a 2020 410(b) problem created by a missed controlled group situation through the adoption in 2021 of a 1.401(a)(4)-11(g) amendment, I think.

Thanks, C.B. Zeller. The analysis in Ilene's and Derrin's posts confirms what I had feared regarding whether IRS might take the position that adoption of A's plan by B is an "amendment" not covered by 401(b)(2). Crazy result at the end of a logical chain of thought. Or maybe not so crazy if Congress's purpose in enacting 401(b)(2) was only to encourage new plans and not to help with corrections of plan defects. But does IRS end up sort of having it both ways in this situation? If Company A's amendment of its plan to cover employees of its controlled group member, B, and B's adoption of the plan, is not covered by 401(b)(2) because not a plan "adoption" for purposes of 401(b)(2), then the amendment should be covered by 1.401(a)(4)-11(g), right? Or perhaps IRS would say, yes, there is here an amendment by A of its plan, which might be covered by -11(g), but the required adoption of the plan by B is a separate step that is not covered by -11(g)? Maybe that's why, as stated by Ilene, IRS says you need to fix in VCP. I am going to post some offshoot questions to a couple of new threads. Thanks also shERPA. Your analysis of the issue is consistent with mine. I would way we're overthinking it, but more often than not that is how the law actually shakes out in these situations. FYI, it turns out that A and B in my post did not extend their returns, so 401(b)(2) is out anyway.

Mike, thanks. I left out of facts that the affiliation occurred because a roughly 1/3rd owner of B was redeemed out (other entity owned 50/50 by remaining two shareholders of B, who own A 50-50, basically). The caption to 410(b)(6)(C) says it applies in the case of "dispositions or acquisitions," and Reg. Sec. 1.410(b)-2(f) seems to define "dispositions or aquisitions" in a way that would exclude this sort of realignment from being one, although it's really not all that clear.

Right. So shERPA implicit in what you are saying perhaps is that you feel the 401(b)(2) adoption route is more "secure" than relying on 1.401(a)(4)-11(g) because technically the adoption of a plan is not an amendment?

Corporation A has a calendar year profit sharing plan (elective deferrals not permitted) using ftwilliam nonstandardized plan document, which does not automatically include controlled group members and says controlled group members "must adopt" plan with approval of plan sponsor in order to participate. A became a member of a controlled group with B in 2020. B has no plan and A's plan will fail 410(b) for 2020 without including some of B's employees. If A adopts resolutions approving B's adoption of A's plan, and then B adopts it and B's employees share in allocations with A's, is that a 1.401(a)(4)-11(g) amendment? I'm thinking yes, but wanted to poll others on the topic. I don't know whether B extended its 2020 return, but I guess if it did SECURE Act addition of 401(b)(2) would also apply.

Yes.

Makes sense, Bird, but this is not actually in the 1099-R instructions, right? I word-searched and it seemed like all the references to life insurance were to annyal reporting of term cost. That's where I'm comin' from.

RGriffin, while the participant is alive and applying contributions or other amounts to premiums, the term cost of the life insurance coverage is reported annually on Form 1099-R as taxable, but not subject to 72(t) 10% penalty. When the participant dies, the cash value of the policy immediately before death is treated as taxable (when distributed), and the excess payable by the insurer over the cash value before death is tax-free to the beneficiary under IRC sec. 101. I have never had to advise on this situation after death either, but I imagine the insurer pays the cash value amount to the plan, which distributes it and reports as a regular taxable distribution on Form 1099-R (unless was Roth), while the death proceeds are paid directly to the beneficiary and not reported on 1099-R.