Luke Bailey

Belgarath, 86-142 only addresses brokerage commissions, and says they are intrinsic investment expenses that must be paid by the plan or trust, and if paid by employer or IRA owner are deemed to be contributions. I am not aware (although there may be some) of guidance directly dealing with investment management expenses. Under 1.404(a)(3)(d) and 86-142 we know that the employer or IRA owner can separately pay plan or IRA trustee's fees, actuarial fees, and administrative fees. Opposite for brokerage commissions. Investment management fees would seem to fall more on the trustee/administrative fee side of the ledger, and that conclusion is clearly implied by the wrap fee rulings discussed in the Groom article that you provide the link for. And note that this issue (whether investment management fees can be paid and deducted separate from plan contributions in the first place) is even more basic than David's original question, which assumed that they could if the investments were in a 401(a) plan trust as opposed to being spread across to IRAs ion a SEP arrangement.

Dave, although I have not undertaken extensive research on this, I suspect there is not a clear answer, but there is probably a pretty good argument you can do it. The ability of an employer to pay and deduct investment management fees under Section 162 rather than have them be subject to 404 or 415 limits is not in the Code, as far as I know, but under Treas. reg. 1.404(a)(3)(d) and rulings, such as PLR 9252029. You could argue, strongly I think, that IRC sec. 404(h) makes 1.404(a)(3)(d) applicable to the SEP "plan" just as much as it would be applicable to a qualified trust. The IRS could for its part, I guess, argue that the personal control exerted by the employee over his or her individual IRA makes the payment of these expenses so personal to the employee that payment of them by the employer should be considered a fringe benefit, still deductible under 162, but includable on the employee's W-2 under Section 61(a)(1). If the employer were a C corp, it could probably defend strongly against that assertion by arguing that the fees were for "qualified retirement planning services" under 132(m), for which there are not yet any regulations, but it does not appear that 2% S corp shareholders would qualify as "employees" for purposes of 132(m). However, the 61(a)(1) argument might be a stretch for the Service to begin with.

How would this help? It's not within the remedial amendment period and outside the zone where you can self-correct through plan amendment under EPCRS, so seems to me to only highlight/compound IRS problem. And the real problem (to the extent there is one, and there may not be one) is (a) employee becomes disgruntled and is terminated and (b) claims his own investment choices would have been better than what plan did. Probably better to just fix going forward, clarify employee communications, and move on.

I think it depends on when he went negative. If he has earned income for the current year he should be able to get the contribution. The plan document almost certainly requires it, although the partnership agreement may treat it as an allocation of compensation and require that he make up his capital account deficit before any further compensation is allocated to him, so they may be in conflict.

Belgarath is correct, bzorc. It is a simple fix (did you catch that) , and I have used it and it was as advertised. I'm not sure (others should be able to confirm or deny), but I don't think a "compliance check" means you're under exam, so I guess if you submit the VCP app before you respond and the IRS indicates you are under exam, you may be able to use VCP rather than Audit CAP. But tread carefully. And of course the outcome depends on the individual facts and circumstances of your situation and I am just addressing the issues you have posed in the abstract, without any examination of the facts, just to point you in the possible right direction.

I agree.

I agree it probably says that, but for it to work 100% you will have to take position that the NHCE was aware and declined in accordance with plan provision. In any event, if the plan is not amended the owners should certainly reach out to the employee and document his/her decision not to self-direct now. That would be especially the case if the owners have invested the funds idiosyncratically, which they probably didn't, but I would want to know that. Who knows what will happen down the road.

alexa, not all severance plans are subject to ERISA. It depends on a somewhat (but not wholly) nebulous test based on the U.S. Supreme Court Fort Halifax Packing case, which you might want to Google. If the plan is not subject to ERISA, it would of course not be required to file a 5500, but would be required to comply with the requirements of applicable state law. If 5500's were required but not filed, the DFVCP is open to severance plans as welfare benefit plans.

thepensionmaven, as C.B. Zeller explains clearly, it lets you stop making SH for rest of year, with 30-day delay of were doing safe harbor match, no delay if SHN. This gives all the relief possible with respect to employer's cash flow. Your implied complaint seems to be that ADP and ACP might not be passed for 2020, but that is not a cash outflow for the employer, so the relief is real. Also, IRS cannot rewrite the Code, only interpret it, so that was all the relief possible. A couple of months ago several BenefitsLink participants were posting about whether you could stop SH match or nonelective just for HCEs, and lamenting that it did not make sense that you couldn't, but that appeared to be the rule. Others thought you could, now the IRS has said that it's interpretation of the law is that you always could amend to stop SH just for HCEs. It's good.

Jared, an important consideration in your decision will be whether the company also has a 401(k) or other type of retirement plan in addition to the ESOP. Obviously, if there is another type of plan and you have, or are accumulating, substantial funds in it, that already gives you a measure of diversification before you even get to the ESOP. If the ESOP is all you have, then you would have to think longer and harder about not diversifying.

CarolC, if these amounts have been forfeited and are in a forfeiture suspense account, then they (both the original amount forfeited, which will already be a mixture of allocated contributions and nonvested earnings on the nonvested portion of the allocated contributions earned while in the participant's account) can be used either as additional (or offsets to) employer contributions or to pay plan expenses, assuming that the plan document says so. There is no distinction between original contributions, forfeitures, or earnings on forfeitures.

I completely agree, Belgarath! Maybe a miracle will happen, but if it doesn't, at some point Congress will be unable to throw more of the federal government's money (or, really, credit) at the problem and the private sector, and even state and local government DC and 457(b) plans, will be nudged to make sure CRDs are communicated and made available to participants.

Purplemandinga, I think that's a good question. The issue does not seem to have been addressed one way or the other in the CARES Act. Safest thing to do, of course, would be to just leave it in through the end of the year, if you decide to put it in. Why take it out once it's in?

It occurs to me that we may be talking about a distinction almost without a difference, and that I may have misunderstood something about this conversation. The original topic is whether a CRD can be rolled over "directly" to a Roth. It's not clear, I guess, what the questioner meant by "directly?" CARES Act says that the direct rollover rules don't apply to CRDs, but I guess that if the distributee requested a direct transfer, the plan could do it. Or maybe the questioner just meant roll the CRD over, at some point, to a Roth without having run it through a pre-tax IRA first. But for the latter, what difference would it make to the end result? Can't I achieve any result I want regarding having a CRD, or a part of it, end up in a Roth, at some point in time, by just rolling it to a traditional IRA, and then converting to a Roth IRA a day later? So what exactly is the loophole that the IRS may be concerned with stopping?

CarolC, are you talking about an aggregate account that temporarily pools all funds that have been actually forfeited fair and square under the plan's rules (e.g., cash-out and buy-back and employee cashed out, or suspense account and 5 years have elapsed), or are these funds in individual suspense accounts because the plan uses the suspense account rule and the 5 years are not up yet?

Ash M, you don't say what triggered COBRA, e.g. have you been terminated by the company, and your returns to U.S. for work are going to be as an independent contractor?

You probably have a plan document violation so need VCP, but it's a slam dunk. The fix is to retroactively amend to say that plan document incorporates provisions of CB regarding compensation eligible for deferrals. I could be wrong, but I think they'll give you that easily. I don't think you're violating universal coverage. Everyone's covered, except maybe employees who work > 20 hrs per week during the summer, and only work during the summer (assuming they're in the union). But I think you could treat them as < 20 hrs per week under 1.403(b)-5(b)(3)(iii)(B).

RBG, I think that is what I said, with a little bit different emphasis. Right, and agreed, sort of. So someone who wants to do it or thinks possibly they might want to can, assuming the have been affected by C-19 to the required extent, take the money out and wait until it is (or is not) clear. You have the rest of the year to take the money out, and then three years from the date you take it out to put it back in something, after all. Worst that can happen is that if the IRS somehow nixes it, they have to roll back in to a pre-tax vehicle instead of Roth. Meanwhile, you have a tax-deferred loan.

Denise, I'm unconvinced. I don't think anyone knows at this point. The IRS certainly has not blessed it, and yes, the current 8915 reads as if the IRS hadn't really thought folks would do it, but would rather do nontaxable rollovers. But assuming the IRS really thinks converting a CRD to a Roth is not permitted under the CARES Act language, I think they would need to address that, i.e., explain what it is about the CARES Act and interacted-with Code language that doesn't allow it. And then they would need to tell us their conclusion, explicitly. Until they do that in a way that convinces me on the statutory language side of things, I will continue to think it is probably OK to do it. I also think that you need to deal with the scenario that I have posited a couple of times above of someone who maybe isn't even thinking now of doing a CRD Roth conversion, but rather takes the CRD in 2020, dutifully pays 1/3rd of the tax in 2020 and files a 2020 8915, does not roll over, dutifully pays another 1/3rd in 2021, etc., and same in 2022. Then, in 2023, within 3 years of the date of distribution, he or she is doing well and thinks, "Hey, I already paid all the tax on this. I will put it in a Roth," and then simply does that. I'd have to check (maybe you will do it for me, hint hint), but in that scenario would I even need to file a 2023 8915? Not sure.

So as Larry points out, because a loan offset distribution may occur in connection with the plan's termination and distribution of all accounts, it works out here. But suppose that were not the case here and the employer just amended the plan to permit in-service CRD distributions. Assuming the employee meet the CRD conditions, an in-service loan offset distribution of any loan that had not yet reached the point where it was required to be deemed would be permissible, right?

Thanks for that, C.B. And actually my answer to Mike was technically incorrect, because, kidding aside, sort of, I'm sure there are niche tax collection situations where it could be an issue, and they might need a guy like that. But I don't see it coming up in connection with a discussion about alternative loan amortization schedules.

Right, MWeddell. They bought the argument we both made above that a careful reading of statute and regs shows that contributions for HCEs defined/structured in the same was as SH contribs for NHCEs were not actually SH contribs.

Mike, in my experience the IRS stops short of physical violence.

Reason prevails! https://www.irs.gov/pub/irs-drop/n-20-52.pdf

-5 is facts and circumstances. If the group that benefits here has some NHCEs (arguably, more than a "token" number, whatever that is), and the amendment makes sense/seems fair (e.g., COVID or transaction-related), my guess is that you would be OK on facts and circumstances for the amendment under -5. It's sort of like a partial termination, e.g. if all the HCEs and only a few of the non-HCEs were only partially vested, and you called a PT, the benefit would fall primarily on the HCEs, but it would be OK. It's interesting that if instead of removing the last day requirement you were imputing service (which in a way is very similar, i.e., imputing that they work through 12/31), you would be under the -11(d)(3) regs, and those are VERY liberal and have more examples than the -5 regs.