Luke Bailey

cdavis25, why does this seem too easy? It's no easier than making Roth elective deferrals or in-plan Roth rollovers, or Roth conversions of pre-tax rollover accounts, right? The anomaly is that the Roth rules are much more liberal for amounts that start out in 401(a) plans than IRAs. That is the wisdom of Congress, which is above my pay grade for sure.

Better check 401(a)(26) compliance also.

BenefitJack, I agree that the IRS's position is that in theory it could look at a poorly administered Section 125 plan, say in 2020, determine that systematic errors in administration had occurred for all open years of the employees (e.g., 2017 - 2018) and assert that all of the employees had taxable wage income to the extent of their elected "nontaxable benefits" for those open years, even those whose transactions with the plan had not been affected by the noncompliance. But (a) unlike in the qualified plan area, I am unaware of any judicial confirmation of the validity of such an IRS position, and (b) I don't think there would be any law, regulation, or legal principle, even in theory, pursuant to which, if the employer then started operating the plan correctly, e.g. as of 1/1/2021, its employees would continue to be taxed on their elections of nontaxable benefits. They would be in a compliant cafeteria plan for that year, and so would get the benefit of 125. That is substantially different from a qualified plan. If the above example were a qualified plan, it could never be requalified without satisfying some prong of EPCRS. I took that to be Griswold's point. Of course, the IRS would never go after the employees in the above example, but would take a payment from the employer.

I agree with Larry, generally not a problem, but there are some issues that need to be sorted out. You say, the pensionmaven, that they each have a PLLC. Are they taking the position that the three of them together are not a partnership? Note that assuming they did not own so much of the partnership that they left to cause it to be in a controlled group with them for a portion of the year, they may have two 415 limits for the year. Also, make sure that the partnership they left does not make nonelective contributions for partners, even if they leave during the year. Some do not have a last day of year rule.

Doc Ument, I think that if the "as soon as administratively feasible" slips beyond a year and the sponsor is making anywhere close to a reasonable effort to wind the plan up, the only consequence of not having all assets out within the year is that you have to file 5500's and also amend for law changes. I think it would take bad faith/willful disregard on the part of the taxpayer before IRS would say that prior distributions of the bulk of plan's assets (i.e., those that did not have special valuation or liquidity issues) were not "on account" of termination.

I agree with Peter, but as for your second question, austin3515, I have (a) never seen that, and (b) would be hard-pressed to imagine a situation in which the IRS would not, if it were aware of the situation, take the position that the individual had to include the amount in gross income, under the doctrine of constructive receipt or some other theory.

Griswold, I think a big part of the answer is the wording of the statutory provisions, not just the fact that a retirement plan has a trust and is a taxable entity, unless it meets exemption requirements. The curse of qualified plans is that 401(a) says a plan is qualified "if" and then starts listing pages and pages of requirements that have expanded over the years, but never specifies the time period during which the various conditions must be satisfied. In the absence of Congressional guidance regarding the timing of all those "ifs," the IRS has interpreted as meaning "if [at all times and forever]." From whence, the necessity for EPCRS and its predecessors. 125(a), by contrast, just tells you that a participant doesn't have to include nontaxable benefits in his/her income on account of constructive receipt, if the requirements of 125 are met. That is by definition a time-limited requirement, since the only tax "person" with skin in the game is the employee, who has a 3-year statute of limitations.

mromney, my recollection is that this fairly obvious issue is actually not addressed by Code or regs, and the only discussion of it that you will find in a formal writing is by Derrin Watson in his "Who's the Employer" tome. I think he may discuss only overlapping CGs, but the same principle would seem to me to apply for an overlap of a CG with an ASG. My recollection is that he concludes there is no clear answer under the law (i.e., you may have a CG of A and B, and an ASG of B and C, but no single group of anything among A, B, and C, or, arguably, a single group). I think he may refer in his discussion to oral comments made at a conference by someone at IRS when question was posed to the effect that taxpayer should use a rule of reason in this situation, which may mean that taxpayers who want to call it a single group for simplicity, where doing so produces no discrimination, should be able to do that, but that taxpayers who attempt to exploit the ambiguity to promote discrimination could be in trouble. However, assuming my memory is correct that there is no reg or other guidance on point, probably the better answer if you are a strict constructionist is that you have two separate groups, so each must pass 410(b) and 401(a)(4) separately (iow, B has to pass twice). Usually our clients have wanted a single group, for simplicity. We have gotten DLs after full disclosure of "overlapping separate groups" issue that we had a single group, but the fravorable letters did not specifically address the overlapping group issue. Never tried asking for a letter the other way. If you have a chance to review the issue in the latest edition of Derrin's book, or come up with any other "guidance," please let everyone know. Good luck.

C.B. Zeller's suggestion seems right to me (in addition to being very clever). I think it also demonstrates why, if you did things the way you suggested in your OP, Belgarath, B's "new" plan should be a treated as a successor.

LAHartline, the SPD is the place to start. It should have a section that says whether it is also the official "plan document," or whether the "plan document" is separate. Most likely, for LTD, the benefit is fully insured, so that the "plan document" will be entirely or mostly the underlying group LTD policy. If that is the case, you should be able to get a copy from your employer, but they will likely get it from the insurance company.

Agree pretty much, Larry. My answer is good assuming that the "provider" Snicky is referring to is the TPA or trustee, and that the "freeze" is a blanket rule imposed on plan that all further distributions will be made at same time, based on termination. That rule may be just an edict of TPA, or may have been inserted into resolutions prepared for plan sponsor. Will be interesting if Snicky has any further facts to add.

Under ERISA, the plan document, including the TH rules, are essentially a contract with the participants, so whether plan is qualified or not you have DOL and participant claim exposure. Although it's complicated, I think that is where the client's real exposure would be if you don't make the contribution, not IRS. IRS can only disqualify the plan, not enforce its terms. Disqualification would be very costly in the case of a mature plan, but here, for a plan that apparently has no assets, maybe not that big a deal in terms of tax consequences. If the client then starts a new plan, well...maybe it's a successor and that has some consequences. Again, perhaps complicated, although if there is no transfer of assets from the first plan to the second, the IRS might have difficulty claiming it was a successor. I am unaware of any regulation or case on that particular point, though have obviously not researched and one may exist. I had what sounds like a very similar case 25 or so years ago. A large insurance company had provided the funding vehicle and one of its advisers had designed/sold the plan. Company had only one owner, plan was put in place very late in year, and owner was only participant who deferred. ADP failed and 100% of owner's elective deferrals returned to him. We wrote a long letter to the insurance company explaining the problem in detail, proposing that the insurance company indemnify our client for the TH cost and also proposing that it pay us to ask IRS for a PLR that the returned elective contributions didn't count for 416. (Atcually, looking at 1.401(k)-2(b)(2)(vi)(C), specifically the absence of 416 from the list of code sections that includes 404 and 415, isn't that argument still possible, assuming 100% of elective deferrals were returned as excess contributions? I thought it was worth trying at the time.) Anyway, I never got to submit the PLR, because the insurance promptly conceded and wrote the client a check for $60,000, which was the entire top-heavy contribution.

Snicky, I am not sure, but my guess is that we have enough info. During a termination, employees who have experienced a termination of employment and are entitled to distribution should still have their distributions processed in the normal course, as if there were no plan termination. Assuming that each plan account is invested in publicly traded, liquid, daily valued assets, and there are no jointly held assets, it should not be a problem to make the distribution here. My guess is that the "provider" you are referring to is the TPA and they are either unaware of the rule here, or find it troublesome for some reason. Certainly, back in the day of pooled accounts and quarterly valuations, there was a concern about letting some participants in a terminating plan out earlier than the others, because of the valuation and liquidation of asset issues. There might also be issues with unallocated forfeitures or similar accounting issues, even in this plan, and the TPA may have a good faith desire to clean those up before distributing. Also, if the costs of the administrative costs of termination (e.g., TPA fees) are going to come out of the trust, there may be a desire to make the separated participant wait so that his/her share of the costs is properly allocated before distribution. But there is no real that freezes distributions to terminating participants during a termination.

I agree with C.B. Zeller. You want IRS to allow you to amend plan retroactively. If it does nothing to reduce benefits of rank and file, they will probably give it to you. Obviously insufficient facts given to know.

MGOAdmin, since no one else has suggested an answer for you, I will tell you that I don't know for sure, but suspect you can. The plan would need to be set up with U.S. trustee. Note that whether UK will give you a deduction from your UK tax liability, and how the U.S. deduction would interact with foreign earned income exclusion, foreign tax credit, etc., needs to be thought through.

Good luck, LAHartline.

Flyboyjohn, under IRC sec. 7121 the IRS has the ability to enter into a closing agreement for any tax liability. Even though 408 (other than 408(k) and (p)) do not appear to be in the non-EPCRS Employee Plans Voluntary Closing Agreement group's wheelhouse, it wouldn't hurt to start with them and see whether they can give you some guidance or steer you in right direction. Of course, the EPVCA corrections usually require complete payment of tax liability, but practicalities may be taken into account, and you can submit anonymously: "Call Paul Hogan at 206-946-3472 or Thelma Diaz at 626-927-1415 with questions about submitting a voluntary closing agreement request."

OK. I was looking for that in 1.401(k)-3, but 401(k)-1(b)(4)(iii)(A) clearly says that it applies for 1.401(k)-1 through -6, so that ties it up. Thanks.

LAHartline, you need to review carefully the portion of the plan and SPD that deals with benefit claims and follow all of the rules there re the claim, appeals, statute of limitations if denied, ability to go to federal court if denied, arbitration, etc. You need a lawyer where you live who can help you.

OK, this stuff is complicated, to be sure. I don't find any equivalent in 401(k)(12) or 1.401(k)-3 to the indented "flush language" at the end of 401(k)(3)(A), which clearly does require aggregation for ADP if you aggregated for 410(b).

John Feldt, are you sure that, assuming A and B adopt separate plans, they could not have different SH provisions?

You may want to read the policy again, word for word, to make sure you think that what they are doing is inconsistent with the policy language, but other than that, hire a lawyer.

Beneuser, while I completely agree with david rigby and fmsinc that you have provided insufficient information to give you a complete answer, I can say this: The law generally permits plans to correct overpayments (i.e., payments in the past that were in excess of what a participant or alternate payee was actually entitled to receive), generally in the manner you describe (reduction of future payments). However, if you have any reason to believe that the plan's evaluation of the error is incorrect, or that, e.g., the plan is penalizing you for an overpayment it actually made to the alternate payee, you should definitely look into it. If you think the plan's evaluation of the error may be correct, but your point is that you relied on the error for many years and you should not now be penalized for the plan administrator's error, then you may still have reason to fight the administrator about this, but the law to date has not been shown to be strongly supportive of such reliance claims.

AlbanyConsultant, if there is much money involved, I would be cautious. Rev. Rul. 2019-19 does not deal with the situation of the payee participant's death. Arguably it should stand for the proposition that for federal income tax purposes the amount will be on you deceased participant's final return. However, it is just a revenue ruling, i.e. the semi-authoritative opinion of the IRS, and the example it uses is a small amount forced cashout, so it was really trying to provide a practical accommodation to plan administrators more than being a deep statement or analysis of the rules of constructive receipt. Bottom line, if there is a significant amount involved, I think there is plenty of room for the son and mom to fight in court.

Does the sponsor have the same year for its tax return and is also changing?