Luke Bailey

Gilmore, you've answered your own question, I think.

Yes, Plan Doc, that is what I was implying. I don't think that it satisfies the ACP safe harbor, but as C. B. Zeller points out, it should satisfy the ACP test. It still seems weird, I'll grant you that, so further review might be advisable.

Plan Doc, this is a tough one. They're trying to pass ADP as safe harbor, and then running ACP for match, right?

No, Lou S. is right, it's a distribution. See Code sec. 408(m)(1). Note that, depending on how much money was at issue and what the taxpayer's income is, if the investment was more than 3 or 6 years ago, you can have some interesting statute of limitations issues.

If the plan permits, you can change from the default method of distribution to something else, but only at the time you become eligible for distribution, not 3 years into the payments.

Vlad401(k), I think the entire distribution will be taxable, not just earnings. See Treas. reg. 1.402(g)-1(e)(8)(iv). I don't see anything in 2019-19 that says the rule is different where you have to do it under EPCRS because same employer plan(s).

tmalik, we had quite a bit of discussion about this. While RBG is correct that there is no guidance saying that you can do it, there is also none that says you cannot, and as RBG says, the statute does not prohibit it. You might want to look for the prior posts on this.

Buckoosier, the spouse would probably (would need more facts to know for sure) not be a disqualified person, but if the1/3rd owner has any role in the decision to hire the spouse (and seems difficult to imagine would not), it could be a prohibited transaction under the conflict of interest provisions. Whether would not be a PT, and whether in any event makes sense, would require a very sensitive analysis of facts and circumstances.

kmhaab, was this the only individual who had NQDC benefits, or are there other folks who have not been paid yet? It sounds like (but of course, I have very little to go on) your issue may fall under Section VII of Notice 2010-6. It would be very important to know if one of the faulty definitions was the provision under which the participant commenced receiving the distribution (e.g., a bad definition of separation from service, even though the participant's facts were good), or a provision that was not triggered, such as only a CIC. Also, if the problem is prohibited discretion, even though not exercised, that may not be correctable for a participant for whom distributions have commenced, but could be removed, generally without a tax cost, for participants for whom distribution does not commence within a year.

See IRC sec. 3508(b)(3). Treat them as self-employed's, who of course can have 401(k), although the rules apply a little differently, but you'd probably end up with a multiple employer plan. I would definitely check out whatever Derrin Watson's "Who's the Employer" says about how to handle.

MoJo, I should have said "clearly protected." It is neither the safe harbor, nor the one example of another reasonable method included in 2020-50, but I agree that does not foreclose the possibility that it would be viewed as reasonable. Agreed. Say again? The suspended payments were the ones in 2020. The January, 2021 payment is not suspended by the statute. Again, if the IRS permits the further deferral, which they probably will, then it will be fine. I'm just saying it is hard to get that interp out of the statute and the guidance to date.

MoJo, that's pretty academic!

I agree with you, austin3515, that the method you describe is not consistent with the statute and does not seem to be one of the methods protected by 2020-50. In the current regulatory climate, however, you may be safe if you stick with the herd, or at least a large enough sub-herd.

So assume a completely asleep at the wheel $50,000 loan from a $100k account that the participant pulls his or her withholding authorization for within a month and the loan is deemed. What is the loss to the plan? And assuming it is a loss in the amount of $50,000 and the employer says, OK, i will make that loss good to the plan, where do you put the money? Back in the account of the participant, who had no loss? In the rest of the plan, which was not impacted by the loan in any way? I've been down these rabbit trails before, and just don't see it.

Thank you, C.B. Zeller!

MoJo, I do not see fiduciary risk. First, there is the 404(c) argument as mentioned by Peter. Second, how would the participant ever be injured? One way or the other, they get their benefit (the plan asset), so there is never a loss. A fiduciary's responsibility to plan participants is with respect to the assets of the plan, not their life course.

MoJo, I'm just saying that unless the employer is colluding, there is no risk to the plan's qualification, and the participant gets the (deemed) distribution soon enough anyway.

I think that a lot of HR departments communicated quickly in documents less formal than an SMM. Also, media did a pretty good job. I think if back in April and May someone had an urgent need for funds, they probably had resources to figure it out.

Had a case involving large DB plan. Participant's spouse had terminal cancer and participant had been cheating on her for years. Not high income family, facing foreclosure, medical bills, etc. Participant had moved out and was living with girlfriend who had somewhat higher income. Got a divorce and plan was amended to allow immediate distribution to alternate payee. Enabled AP to live out last couple of years of life not facing eviction for her and kids. Just saying there is another side to this.

Puffinator, I think eventually you would have to do a plan amendment (that could be in the form of a resolution) to back that up, but I think it is within the employer's power to do that under the statute, i.e. you don't have to do CARES distributions at all, you can limit in amount, etc. Having said that, I don't see what the concern is. The bar is very low. Will the person certify that one of the conditions occurred? Your hypothetical facts say "yes." It does not need to be a fresh concurrence, so if they qualified once, they qualify through December 30. And they could have just taken out a larger amount originally. Putting the best face on it, the participant was trying to limit how much they borrowed from their future, and unfortunately they need more money than they would have hoped.

RBG, Thanks. No way! Maybe in collusive circumstances, but absent that, I don't see it.

I have advised that in the past. If you read your plan docs and beneficiary designation forms, they will almost certainly say, basically, that everything in the account upon the death of the participant belongs to and is paid to the beneficiary

I vote "no," Peter.

I found this discussion and the authorities referenced very helpful, but I want to make sure I understand one point correctly. If, either because your loan documents are written in such a way that they don't appear to attempt to overcome state wage withholding law, or because you take the position that ERISA does not preempt those laws, your conclusion is that the employee can revoke his or her withholding consent, why is that a big deal? You just deem the loan and move on, right? Then offset whenever he or she terms.

JAS76, if the loan documentation (plan or loan policy provisions, promissory note, security agreement, whatever) states that after acceleration and failure to pay by a certain deadline the plan may foreclose on its security interest, then yes, that can occur in the case of a separated participant and is a distribution for federal income tax purposes.