Luke Bailey

Tracy Fedele, if all you have is a common law autoenrollment arrangement (ACA), then I think what you describe would not violate any rule of the Code or regs. Whether the plan document allows it is subject to the usual analysis, and I would not hazard a guess without reading it. If you have an EACA (basically, an ACA that allows a nonconsenting participant to get a distribution of autodeferred amounts within 90 days of first auto deferral under 414(w)) or a QACA under 401(k)(13), giving you a pass on ADP if you make certain employer contributions in conjunction with the auto deferrals, then I think what you described would probably be viewed as violating the uniformity rules of those provisions, which don't seem to permit a participant to set a limit order, so to speak, on his/her default contribution percentage as set by the plan for participants generally. You can read those uniformity requirements in those code sections and the regs under them. Of course, the participant could always just replace the default election with an affirmative election and get to the same place.

Completely agree with Pam Shoup's comment. The TPA got what they contracted for during the period of the contract. The accumulated amount is a plan asset. Negotiation of a new agreement with higher fees going forward may be OK, but the decision to raise fees will need to have justification (e.g., bigger plan = more work) independent of the fact that the plan has grown bigger and can now generate more revenue sharing.

Mike, that's the nonqualified CODA issue I mentioned in my post. For it to be a problem, the employer would have to have an agreement with the employee to make up some or all of the foregone plan contribution as current W-2 cash.

52626, assuming that the plan provides that a distribution may occur following termination of employment, this will be a loan offset distribution, not a deemed distribution. Under the reg (1.72(p)-1, Q&A-13(a)(2)), a loan offset distribution is not necessarily tied to the deemed distribution cure period, but rather is determined by the terms of the loan. For example, many plans provide that the loan is offset sooner than the "quarter after the quarter" rule, e.g. giving the terminated employee 30 days after termination, or requiring the offset at the date of distribution of the rest of the account, if sooner. Also, note that the "quarter after the quarter" rule is not mandatory, but just the longest cure period you can have. See Treas. reg. 1.72(p)-1, Q&A-10(a) ("may allow...."). If you can't find a different rule in the loan agreement or loan policy, it wouldn't hurt to use the "quarter after the quarter" rule, but you would want to offset before that if the participant takes a distribution of rest of account, so you could withhold the 20% tax on the loan offset from the cash portion of the distribution.

K2, really need more information. For starters, are these calendar year plans, and will the new plan be effective only 1/1/2020? Assuming yes and yes, will the old plan pass 410(b) on its own after 2019? Note that because the determination date (dd) for 2020 will be 12/31/2019, the old/continuing and new plans will be a required aggregation group for 2020, even if the old/continuing plan doesn't need new plan for 410(b). See IRC sec. 416(g). After 2020, on the face of the statute you would think that there would be required aggregation only if the old/continuing plan needs the new for 410(b), but Treas. reg. 1.416-1, Q&A T-6 says RAG goes back 5 years. It is based on a prior (either pre-2006 or -2001, I'd have to look up) version of statute, but IRS never changed reg and for some reason thinks it does not need to.

Peter, I think for definitely determinable an algorithm is as good as a formula, and you've got one. If no investment election, then not employer contribution. Maybe the most salient point with the employer, who is presumably rational, would be that this is really unusual. My clients often ask me what is "market." Not this.

Actually, you don't really need an ESOP. All you need is an "eligible individual account plan," which 401(k) is. Check cites in my OP, but disregard part of my OP that implied had to be an ESOP.

Peter, if the employer compensates those who self-exclude by refusing to provide investment direction with a cash bonus, you could have nonqualified CODA. Otherwise, as long as the allocation passes 401(a)(4) without these folks, would not seem to violate the Code. Also, since part of plan document would not appear to be an ERISA 510 problem.

nancy, only the amounts distributed after 3/15. See IRC sec. 4979(f)(1) and Treas. reg. 54.4979-1(c), especially Example (4).

Sure, jashendorf, I assume it is a C corp, since the typical ROBS employer would not work as an S because of 409(p). In the typical ROBS the corporation capitalized with the rollover money is the plan sponsor. The individual who wants to start the business takes all or a portion of his/her 401(k) account from prior employer and rolls it over (directly or through conduit IRA) into a rollover account in a k-plan sponsored by the company that the individual wants to capitalize. He or she then directs the rollover account to buy securities of plan sponsor. Initially the individual starting the business and doing the rollover (one and the same) may be the plan sponsor's only employee and the k-plan's only participant, and the rollover assets (now invested in employer stock) the plan's only assets. The plan document typically provides that a portion of the plan is an ESOP and can invest in employer securities.

Second Lou S.'s response, in case you want added support.

shERPA, there is an exception to PT if certain requirements are met. See IRC sec. 4975(d)(13) and follow cites. Good luck, Seattle260.

This takes me back 30 years. If plan document permits and your valuations are sound, it should be fine. But make sure you have thought through valuation issues. You mention only CDs and bonds. With any luck, the bonds have daily quotes. The CD's just need to find comparable short-term instruments.

Stash026, what Lou S. is referring to, I think, is Treas. reg. sec. 1.72(p)-1, Q&A-20. On your facts, you should not have a problem because the sum of the new loan and old loans is < $50,000.

Alex16, you asked for the Code section, so here it is: IRC sec. 409(o). Of course, this is a requirement of the Code, and the plan could be more liberal, although most just follow the Code, as ESOP Guy indicates. You would need to review your plan document and SPD.

njkotz28, IRC sec. 408(d)(5)(B) was written by Congress just for you! (And others similarly situated). It protects you from any tax or penalties on the clawed back amount, assuming you return it.

pjb1835, in the unlikely event that the plan document really does exclude nonowners, I think you would not satisfy the requirements for self-correction by plan amendment. First, your failure is a demographic, not operational failure. Second, the amendment would not apply to all eligible employees. See Section 4.05(2) of Rev. Proc. 2019-19. In the more likely case that the plan document does not exclude these otherwise eligible employees, then simply apply the plan document as written, as explained in all the other posts.

There's definitely a potentially large fiduciary liability exposure if a TPA is a 3(16) administrator, for both the client and the TPA. The TPA needs to be compensated. I advise clients it's not a lot of protection for them unless they know that the TPA has adequate coverage.

Would agree with all of above. In my experience, doctors generally stand by other doctors, TPAs by other TPAs, lawyers by lawyers, government workers.... Well, you get the idea. But as with TPAS, doctors, etc., there are limits.

Most likely the sum of the highest outstanding balances in last 12 months was < $16,500, so as Larry indicated above, do a new loan for that amount. Can be for any period up to 5 years. Arguably, because this would be a fourth loan outstanding for a nanosecond, would need to change plan rule that can only have 3 loans, although you might be able to interpret you way out of that problem.

Ok, Larry. We'll see what happens.

PowerCPA, there are not enough details in your description to really evaluate it, but I have reviewed proposals with similar bottom lines. Not saying that the one you are looking at does this, but the most aggressive I have reviewed typically rely on an assumption that eventually the stock can be bought back from the ESOP (or the assets of the ESOP-owned company looted, or whatever), based on a very aggressive valuation in favor of the purchaser by an "independent" valuation form, as well as on the docility and/or ignorance of the rank and file employees, as you call them. That eventual purchaser is the person who will be performing his or her valuable services for the service corporation (and being underpaid for them while the ESOP is in existence, so that the ESOP will get the K-1); he or she is also the person who is performing those services now in another structure, and paying, in his or her view, too much income tax on his or W-2 and/or K-1. And that person is probably also going to be the ESOP "committee." It's likely that the scheme you are evaluating has been structured carefully enough to avoid any obvious synthetic equity, but if you are responsible for advising your client on this transaction and have not read the 409(p) regs, you may want to do so. Unfortunately (or, fortunately, depending on your point of view, I guess), the IRS has not published much under its authority in Section 1.409(p)-1T(c)(3)(ii).

Larry, what do you mean? Do you think they are going to amend the final reg? As jim241 states in question, the reg says that the participant must take all non-hardship distributions available under employer's qualified and nonqualified plans before taking a hardship.

formeractuary, why do you think they have to fit into the c-in-c termination rule (1.409A-3(j)(xi)(B)) and can't use the general termination rule (1.409A-3(j)(xi)(C))?

I will repeat here my suggestion that as long as the current DL system (Rev. Proc. 2016-37) is in force, never restate. Just keep adding amendments. That way you at least have a base document that has a determination letter, and all for qualification issues are (absent really strange facts) confined to the amendments. For ease of administration, you can do an unsigned "working copy" that cuts and pastes the effective portions of the amendments into the last restatement (that got DL). I think this will save you time with government and private auditors, and also with due diligence reviews in transactions.