Luke Bailey

jmbaughm, I agree with justanotheradmin. You seem to have a good grasp of detail, so get a copy of the Summary Plan Description and see if you can show them that what they are doing is inconsistent with what is stated there. Look specifically for the definition of compensation that is included in the SPD and whether anything specifically addresses tips. Note that the 401(k) deduction usually is taken from gross W-2 wages, but plans can differ so you need to find out.

JM, yes. I believe that this footnote was cited in and a significant part of the rationale for the case(s) I was describing. Thanks. It makes complete sense because while the state law-governed agreements among the family members are preempted by ERISA as respects the plan, and it would be inconsistent with the goals of ERISA to burden the plan administrator with having to deal with them (including becoming knowledgeable about them), the state-law governed agreements are not nullified and can take effect once the money is out of the plan. In a previous exchange on a similar topic someone mentioned doing a "zero QDRO." I have no personal experience with that technique, but I suppose it could eliminate the problem.

Definitely the right move, AlbanyConsultant. Note that there is case law dealing with situations where, as part of a divorce settlement, one spouse says he or she will have no interest in the other's benefit, and where no QDRO is served precisely because the nonparticipant spouse is not claiming an interest in the participant's benefit. In at least one such case, the spouse who had previously renounced any right to the deceased participant's benefit was still named as beneficiary in an old beneficiary designation and claimed the benefit after the participant's death, contrary to the agreement that had been reached as part of the divorce. The court held that the plan could pay to the ex-spouse under Egelhoff Supreme Court case interpreting ERISA, but allowed kids to sue former spouse in state court to impose a constructive trust on the funds after she had received them from the plan, enforcing the former spouse's agreement in state court at the time of the dissolution proceeding to not claim an portion of the decedent's benefit.

Under the Federal Bankruptcy Code, rollovers to an IRA from an ERISA plan are protected 100%. Contributory IRA's up to $1 million. Absent unusual circumstances, if the IRA is not in bankruptcy, the account's anti-alienation provisions will prevail.

Belgarath, I used CheckPoint, which is a commercial product we license, otherwise I would have posted a link.😒

Belgarath, I looked it up. Announcement 94-101 was the finalization of some exam guidelines, including one for qualified and nonqualified CODAs. One of the guidelines, citing Treas. reg. 1.401(k)-1(a)(6) state that any arrangement whereby an individual partner can vary his or her own contribution is automatically a CODA, and that the rule is not automatic for a corporation. So your memory was absolutely correct, and the analysis seems similar to what we described above.

SSRRS, I cannot comment on individual language, but it probably would be. The question is whether the employer's election in the plan document is tantamount to a cash or deferred election by the listed employees. That could be what happened, e.g. in a very closely held setting, but the facts are much more complicated where it is the employer making the decision for a group. As long as the plan provision was not modified frequently in a targeted manner, the facts would look better, for sure.

I don't recall any more guidance on this, Belgarath, other than the regs themselves, and I believe that in both partnerships and corporations its facts and circumstances. But why would anyone ask for less in the company's plan contribution if they're not getting reciprocity in terms of more current comp. I think what you may be thinking of with partnerships is that because most partnerships specially allocate the retirement contribution for the partner to him or her on the K-1, the reciprocity is automatic and transparent. In the case of a corporation, where the reciprocity would be through a raise or bonus, it could be harder to demonstrate the linkage. With a sole proprietor, well, it's impossible that the plan contribution is not linked to the sole proprietor's current comp, so I think the IRS just accepts that, and you really can't apply the nonqualified CODA rule to a sole proprietorship. The nonqualified CODA rules are, on the whole, a little wonky. Congress should have simplified this years ago.

401 Chaos, this is what I thought also many years ago the first time I came across it. Seems inconsistent that they say they are the employer for purpose of plan coverage and COBRA, but only if they are paid. If your the employer, then you have the COBRA obligation. I could be missing something. Surprised this does not come up more frequently or dramatically.

Joel, how do you feel about carried interest?

So say I make $400k. Plan has mandatory contribution of 4% of pay, so mine is $16,000, not $11,600. By the pan provision, they are capping at $290,000 for 415(b) or (c), and their argument may be, "Hey, IRS, what difference does it make. We are using the $295,000 for Code rules, and this guy (or gal) could have got $16,000 if we had raised his/her contribution rate to 5.517%." Clearly in terms of "plain meaning" of "taking into account," they've done that, but if the provision has a DL, I could see them running with it.

I realize that Rev. Proc. 2019-19 only includes QNECs as examples of correction, but in this case it sounds like the ADP test was actually correctly run and the distribution was set in motion by the plan administrator, but not made because of administrative error, which I think arguably makes this situation different. You're not correcting an ADP test failure, but rather the custodian's failure to follow the plan administrator's direction. Was supposed to be done March, 2020, so apply SCP and distribute now and pay the 4979 10% excess tax on the excess amount. You asked for creative and brilliant. This is at least creative. 🙂

SSRRS, even restricted to HCEs, you have the nonqualified CODA issue. If you have a nonqualified CODA, it will disqualify the plan. The irrevocable one-time election rule exception to nonqualified CODA treatment is primarily at Treas. Reg. 1.401(k)-1(a)(3)(v); it requires that the election apply to all plans of the employer currently in existence or formed in the future, so is quite restrictive. It's a CODA if the arrangement results in the 0-ed out participant getting additional current pay. If that is not the case (i.e., if it is entirely the employer's decision to give them $0 and there is no corresponding increase in the pay of the person getting $0), then it might not be a CODA, but given that here it appears to be an individual election, I would be concerned that it is.

If this is really a somewhat widespread issue (and I'll take your word for that, WCC), and if the IRS really is willing to give relief, i.e., to treat a 2021 distribution as an 2020 because it SHOULD have been made in 2020, which seems pretty bold to me, then I think they will have to put out a notice or something else on it, set forth standards, etc. That would be the only way to uphold uniformity and fairness in application of the law (and would lighten the VCP group's workload!).

I vote A as well.

401 Chase, I had a similar situation 10 years ago and was similarly taken aback. The documents said that the PEO was the employer and had he plan, etc., was the employer...How could they not provide COBRA? How has this not come up in a more pointed way in last 10 years?

Very helpful whitepaper, CarolC. Thankyou.

Belgarath, it does increase, and I'm sure that is what CuseFan is saying. IRC sec. 414(b) includes IRC sec. 411 in the list of provisions for which the CG is treated as the "employer." IRC sec. 411(a)(4) says for vesting in plan of employer you count all YOS with the "employer," with exceptions not relevant here.

Thank you, rockenrolls2. My post referred to a nonexistent 4975(m). Note to self: Always doublecheck the Code reference when doing from memory.:) Having said that, I would definitely check whether the client would be satisfied with ETFs indirectly investing in precious metals and BTC.

IMHO, that's overthinking it. Think you had it right the first time, CuseFan. Completely agree. A written memorandum regarding interpretation, that applies going forward, is the way to handle it.

Pammie57, under ERISA a "mistake of fact" contribution can be withdrawn within one year of the date of contribution, and IRS must live with that. It is understood by practitioners that IRS has a very narrow view of "mistake of fact," like, "I didn't have my glasses on that day and it looked like there was a 0 after the 1," not "We misread the plan and did not know how this worked," which the IRS would call a "mistake in procedure."

Good point, BG5150, but a brokerage window, or ETFs, are going to be qualifying assets, right? So nonqualifying assets would only be a problem if they were not going to use a brokerage window and wanted to hold actual gold and/or bitcoin. And in that case for the gold you'd have to steer clear of IRC sec. 4975(m) also.

AJC, C.B. Zeller is correct, but maybe not providing the complete picture. It would be possible, but as C.B. Zeller implies, the main plan would have to permit similar investments. If the partner who wants to invest in bitcoin and gold would be consent with ETF's that invested in those assets (and there are some), then it might be possible to achieve just by adding a brokerage window to the existing plan.

Agreed, but in this case you have a majority of practitioners going one way and an IRS pub going the other, year after year. And you have CPAs involved as well.

ratherbereading, we had a very long exchange of opinions on this two about years ago. An IRS Pub would seem to say individual, and you can get there under the statute and regs, although they are ambiguous. The majority of folks posting thought combined. I am surprised this has never been nailed down by IRS.