Luke Bailey

You should be able to correct a clerical error, but I would need a much more detailed explanation of the facts to conclude that that is what happened and what the appropriate correction would be.

I think because the IRS has no consistent definition of "fringe benefits," as pointed out by JRN and others above, it's up to the plan administrator to interpret the plan in a consistent manner as to what items are or are not "fringe benefits" for purposes of a plan definition of compensation that excludes them.

EBECatty, I agree completely with Peter's comments. I would also point out that the Mark O'Donnell IRS memorandum giving guidance to DL request reviewers for governmental plans (which is, of course, only soft guidance), set forth (somewhat arbitrarily) certain safe harbor vesting schedules for governmental plans, and therefore had to, at least obliquely, address what years of service needed to be counted. Although not the subject of the memo, the formulation chosen implies that pre-eligibility service would not need to be counted for purposes of compliance with the Internal Revenue Code's requirement that a governmental qualified retirement plan satisfy the pre-ERISA vesting rules. For example: "(service can be based on years of employment, years of participation, or other creditable years of service)." The full memo can be found here: https://www.irs.gov/pub/irs-tege/directive_vesting_043012.pdf. Of course, the plan document or state law could differ, as Peter points out, and it might or might not be possible under state law to impose a change on employees hired before the date of the change.

Note that in the case I worked on we interpleaded the benefit into court, and we felt that was as closing as we could come to distributing the benefit for purposes of the plan's obligation to make an RMD. Note that in addition to addressing this in the final regulations, as Peter suggests, the IRS might want to change the 1099-R Form and instructions to include interpleader.

I recently had a situation like this with a qualified plan. I could not find any guidance that would indicate that in this circumstance the IRS would waive the RMD requirement until the situation was resolved. I would think that the person who ultimately is awarded the amount could get the penalty waived under the circumstances, but that's just speculation on my part.

I was told by someone who is an expert in this area of the law and whom I trust that it is against the ethical rules that apply to lawyers to counsel a client on the odds of getting caught. That may be in Circular 230. I have not had a lot of experience with this issue's being audited, but I tend to agree with CuseFan and I think a couple of key facts are (a) did the small employer that terminated the plan need the cash for some personal reason, e.g. to pay a debt or buy a house, and (b) did they start a new plan soon thereafter when their financial position improved? Those two facts would tend to cast doubt on the bona fides of what otherwise might seem a decent termination excuse.

MoJo is correct that the terms of the plan could cause a problem, but my guess is that the lawyers may have done the right thing here and made sure that Plan A's coverage was not extended to B's historical employees, given that Company A adopted Plan B and based on your OP, KJJ-TPA, there does not appear to be an immediate intent to merge Plan B into Plan A. Thinking back on this after I posted yesterday, I think the case that the 410(b)(6)(C) protection was not lost (assuming that MoJo's suspicion that Plan A's coverage was extended, intentionally or unintentionally through boilerplate tucked away in the Plan A plan document is incorrect) is even stronger than I stated yesterday. The 410(b)(6)(C) regs are very short and incomplete, but they do state clearly that 410(b)(6)(C) protection should not depend on the form of the transaction (i.e., stock sale, asset sale, or merger). Assuming that Plan B's coverage has remained the historical Company B employees, and same for Plan A, then the effect of A's adopting Plan B and putting the B employees on its payroll (but having them continue to defer and otherwise be covered by Plan B) is the same effect you would have if the transaction had been an asset acquisition or merger.

KJJ-TPA, this might be amenable to research or a call to IRS, but I'm not sure there's a clear answer. It would seem to me that the 410(b)(6)(C) transition rule probably was not lost because the coverage of neither plan was changed in substance. There was just a change in the sponsor and in the person paying payroll. The B plan still covers the folks who work B jobs, and same for the A plan. The 410(b)(6)(C) rule specifically disregards coverage changes "by reason of the change in members of the group." The above is an example of why it was so nice in the old days to be able to get a determination letter on a plan amendment.

Totally agree with QDROphile, but generally to withdraw funds from a 457(b) you must either terminate employment or have an unforeseen financial emergency that meets certain requirements, if the plan permits unforeseen financial emergency withdrawals.

austin3515, I'm not sure what you mean by "Total Compensation." Note that, for example, nonqualified deferred compensation that is not currently subject to income tax (because properly deferred) is generally subject to FICA under IRC sec. 3121(v).

A true "excess benefit plan" (i.e., one that only pays benefits that would otherwise exceed the 415 limit and that does not pay any other benefit (e.g., does not pay a benefit that cannot be provided under the qualified plan because of the 401(a)(17) compensation limit, or the 402(g) limit on deferrals) is defined in Section 3(36) of ERISA and is not subject to ERISA. See ERISA Section 4(a)(5). However, a lot of plans are called "excess benefit plans" even when they do more than top-up for 415 limits, and generally such plans would be covered by ERISA. Obviously, without seeing your detailed facts I have no idea what you're dealing with, not sure.

And to get reelected you have to raise lots of money.

Appleby, the rollover to spouse's own IRS will start a new 5-year holding period, right?

Very complicated and an area of law (banking) I don't really know much about, Peter.

Austin 3515, maybe there's a DOL reg, but certainly that's what Treas. Reg. 1.414(l)-1(b) says.

Peter, I don't think there's anything in your description of the facts that would indicate that the bank should have known that the incoming amounts should have been stopped. Even if the data accompanying the funds could have led them to conclude the money was coming from a retirement plan, did the bank have a duty to do anything with that information? And if they did, could the bank have not assumed there was a survivor benefit? The plan administrator (presumably deceased's former employer) should certainly demand a return of funds from surviving spouse, but I'm not sure at all about the bank that has the account the money went into. Maybe I've misunderstood.

solo401kperson, off the top of my head I can't think of a case or IRS guidance that addresses this little detail. The regulation that establishes the rule you're trying to comply with, Treas. Reg. 1.401(k)-1(d)(4), uses the term "exists" to state what the new plan cannot do within the 12-month period following the complete distribution of the old, terminated plan's assets. Most people would say that your new plan didn't "exist" before you signed the adoption agreement. On the other hand, some of the limits that will apply to your plan will be higher (although you may not need them to be higher) based on the 1/1/2023 effective date, so arguably the plan existed as of 1/1/2023 retroactively. The first argument (i.e., that the plan did not exist until you adopted it) seems much stronger, because no direct transfer vehicle for the distributed balance(s) from the old plan existed until the new plan's trust was actually established. But absent specific guidance, it might be possible for an IRS EP agent to take the other view, or for another service provider to question this. I would review the specifics (e.g., whether you are getting any benefit from the retro effective date) with my adviser based on the specific facts of your plan and the situation of your business and workforce before 1/1/2024.

Kent Allard, in addition to what CuseFan has stated above, I would point out that most employers that freeze their DB plans do so to lower cost/limit risk. So they choose to freeze everything, including comp for benefits and 415(b).

Don't we all, CuseFan.

A VEBA is an ERISA trust (assuming this is not a governmental employer) that would contain funds and have an exemption letter. A pay as you go plan funded on an as-need basis from employer general assets would not indicate a VEBA.

Jack Stevenson, fmsinc may have nailed it, but I don't know Maryland law. Generally speaking, you will need to look at applicable state law to determine what the "marital share" and "Bangs Formula" are in order to determine what the alternate payee will receive. Then a DRO will need to be drafted and submitted to the plan administrator to determine whether a QDRO or needs further changes.

JProehl, I will elaborate a little on what CuseFan means by "original vested total from year 1 AND the applicable portion of earnings attributable thereto" means, In other words, for the second year, the earnings on the entire $22,166.66 that vested at end of Year 1 is not subject to FICA. Similar concept for third year.

mal, your facts seem to indicated that the plan administrator is familiar with the terms of the divorce decree, but has not yet received a DRO. I think it is the estate's responsibility to understand the implications of the decedent's divorce decree to the decedent's estate, since the divorce decree and related property settlement is an asset of the estate. As I understand your question, the participant and his or her now deceased ex-spouse had a divorce action, and a court approved a property settlement that may contemplate a QDRO for the ex-spouse, but the plan has not yet received a DRO. Until the plan receives a DRO, you're just speculating. Perhaps the originally contemplated DRO contemplated a contingent alternate payee, e.g. a child or children of the couple. In that case, If the deceased putative alternate payee's attorney pursues a DRO, presumably that attorney would now simply make the person or persons who would have been the participant's ex-spouse's contingent alternate payee(s) the alternate payee(s). If a contingent alternate payee would not have made sense given the family's situation, then perhaps you will never get a DRO. This will be subject to state law and the demographics of the former couple's marriage. If the participant wants to oppose the issuance of a DRO now for a reason linked to his or her ex-spouse's death, it will be up to the participant's attorney to make a case that the DRO requested by the deceased alternate payee's attorney, or by an attorney for the ex-spouse's child or children, should not be approved by the court. If a DRO approved by the state court does ultimately come the plan's way, the plan will need to analyze it for ERISA compliance. Generally, if the alternate payee is a permitted person (e.g., a child, but there could be others) for a QDRO, you should be able to apply your normal QDRO process. There could be difficult issues if this is a DC plan and a separate interest QDRO was contemplated, since generally in that situation, had the alternate payee survived, he or she might have had the ability to name anyone he or she wanted as the beneficiary for her segregated account. I don't think there is much in the way of guidance or precedent for some of the potential situations, so again, I would let the parties first hash things out in state court.

I agree with Peter on the involuntary distribution part, although Lou S. you may well be right that the involuntary rollover isn't practically available. I've never seen this actually happen because neither the plan nor the participant is typically this stubborn, but if the participant has separated and is past NRA, the plan could just send the participant a check and withhold 20%, if the participant refused to submit distribution paperwork, assuming that's what the plan document provided.

HCE, this IRS web page https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-werent-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees summarizes the permissible corrections. The only time you don't have to create an account and allocate a make-up contribution is when the error is corrected within 3 months: "If the period of failure is less than three months, no corrective QNEC for the missed deferral opportunity is required. The excluded employee must begin to participate and if the plan provided for auto-enrollment, the commencement of deferrals occurs within the three-month period beginning from the start of the failure and the issuance of the special notice occurs within the 45-day timeframe." There are some other details and nuances, so make sure to have a professional involved in figuring out what is appropriate for your plan.