Luke Bailey

MWeddell, I don't think anyone is disagreeing with your points, but remember there is the exception that if in order to get the additional amount (only in the NQDC plan, not as cash) the participant must contribute the 402(g) limit (or any lesser plan limit, which would be rare), then it's not a violation of contingent benefit. I think you are correct in perceiving that some of the earlier posts in this string not have taken the contingent benefit rule at full face value, perhaps because some of its applications don't seem to make sense and perhaps also because it is misunderstood in practice and perhaps more often violated than one might want to think. But that is only speculation on my part.

You make a good point, C. B. Zeller. My guess is that when Dalai Pookah said, "Generally, when this happens," he meant when it happens to other plans, usually under circumstances where there is more evidence of error, and less of willfulness. But even if my inference is correct, It's possible that even within 2 years, not eligible for SCP because insufficient practices and procedures. Have to have full review of facts to know.

I'm not sure pregnancy would qualify as an "illness." These cases are few and far between, and I think a lot of employers end up just shrugging their shoulders and allowing coverage of the pregnancy, perhaps in part figuring that the costs of a normal pregnancy and birth pale beside the possible cost if the pregnancy has complications and the plan becomes involved in litigation with the employee. You also have to be concerned about the federal "Pregnancy Discrimination Act." My suggestion years ago to a client faced with this situation was to add a plan provision that did not deny coverage, but that subrogated the plan to any compensation received by the participant. I believe that recently a case (not mine) upheld that approach.

Dalai Pookah, a "diversion" of plan assets is not eligible for any voluntary correction. See Section 4.11 of Rev. Proc. 2019-19. So as a threshold matter you need to determine whetherwhat occurred is a "diversion" of plan assets. If you conclude that it did, then I would probably call the non-EPCRS EPCU corrections group and discuss with them anonymously. There is no definition in Rev. Proc. 2019-19 of what a "diversion" is, and I can only speculate as to why it is not covered by EPCRS. My guess would be that in some cases the IRS would not consider it a plan defect at all, but just a crime suffered by the plan (e.g., a bookkeeper steals from all participant accounts). Perhaps in other cases where a fiduciary is involved, e.g. a business owner, the IRS just thinks that you need to go to EBSA. If you conclude that this was not a diversion of assets, but rather just an overpayment, then to correct under Rev. Proc. 2019-19 the plan administrator must demand repayment to the plan and notify the participant that the distribution did not qualify for rollover, possibly causing her to be taxable in an earlier year than she was based on the IRA distributions. See Section 6.06(4) of Rev. Proc. 2019-19. No "make whole" contribution would be required in this case, since the overpayment was from the account of the participant who received it. However, presumably a major part of correction in this case would be a thorough review and reform of the plan's internal controls. If you are within the 2-year SCP period, you could self-correct, even though this is probably a significant defect. If it is outside the 2-year period, or you want the comfort of getting a compliance statement from IRS, you could submit it as a VCP. There would be some risk that the IRS would reject it because they thought it was a diversion of assets, but the risk is probably manageable. Would need to know a lot more about the case to judge that. You could always do an anonymous submission.

Shark, the above from GBurns is really good advice.

Eric, luckily (sort of) FICA and FUTA is taken out of elective deferrals when they are made. So if the participant did not roll over, he or she will be fully paid on his or her tax liabilities, as will be the employer, whether the income is reported on 1099-R or W-2. I think a lot of folks would just let it go at that and not bother with a W-2 in such a situation. If the employee returns the match, including the amount of taxes paid on the match (which I think is the minority of cases), then if it is in the same year as the distribution, you should be able to treat this as a rescission and the employer would either not report the distributed amount on a 1099-R, or would issue a revised 1099-R, so that the employee would not be taxed on the portion of the distribution attributable to the match. Of course, if the employee returns to the plan the gross amount of the distribution attributable to employer contributions, he or she will have to go out of pocket for the amount withheld at the time of distribution (e.g., 20%), but he or she gets it back when files 1040, since that amount will be a refundable credit against his or her tax liability, and so in the end is made whole. If the return of funds is in a later tax year than the distribution, you are into the wonderful world of claim of right and Section 1341. The employer's reporting (i.e., whether it issues a corrected 1099-R) will of course be of great practical importance to the employee's tax issues.

The deferrals should never have been withheld by the employer, put into the plan by the employer, or distributed from the plan. An amount equal to the portion of what is returned to the plan that consists of the erroneous deferrals should be paid back by the employer to the employee as taxable wages, reportable on W-2 for year when paid. Would have to check whether there is any FICA or FUTA. Once the employer has done that, it has "bought" any amount returned to the plan as the deferrals and can allocate that as a contribution or use to pay plan expenses, depending on what plan document says. The timing of the deduction(s) gets complicated, and you've also got potential application of tax benefit rule, plus practical considerations, but bottom line the employer paid twice (once into the plan originally, once to employee as correction), and so should get a net of two deductions.

NJ Mike, what reason are they giving for saying "no?" Maybe they are confused regarding the rule that in order for the 5-year rule not to apply, the life expectancy method must be commenced by the end of the year following death, or the direct transfer to IRA (misleadingly aka, "nonspouse rollover") must be done by end of year following death. But I think that if the life expectancy rule was properly commenced within the plan by end of year following death, then you could transfer later to IRA and be OK.

bveinger, I think you must send them a check, but I'll be interested to see if anyone has a better solution.

Terrasan, this is complicated and messy, but maybe the theoretical inquiry is whether these are good expenses for the FSA, which is supposed to be for "unreimbursed" medical expenses. Maybe they are not under your agreement. Just a thought. You and she need to work this out with your CPAs.

Belgarath, in similar situations we have figured that since there is no trust that needs to be "qualified" and no language and history such as under 401(a) that says that a qualified plan is a (and is only) a plan that meets all the requirements of 401(a), the only reasonable response to this situation under 125 is to adopt a new, current document to replace the old (which, frankly, sometimes cannot even be found), and move on. I have never had the IRS ask for old documents in an exam (honestly, I have never had a client examined for 125, or if this was included in the document request by the agent, it was just checked off for existing), but in the context of corporate acquisitions where we have represented target company usually sophisticate buyer's counsel will accept the replacement document, albeit that they get indemnification, either specifically or generally. So I think the standard of practice is to replace with new and move on.

Some leased employees are covered by the required 10% money purchase plan by the lessor in order to be able to work in a particular market, or for a particular employer. An employer that has a lot of leased employees that it does not cover in its plan can be concerned about minimum coverage and so, beyond a certain point, will ask that additional leased employees that it take on be covered by a safe harbor money purchase, so that they don't have to worry about them. Think, for example, a large company, say a utility, with a rich legacy DB where the employer responds to changing market requirements by freezing participation in the DB (but not benefit accruals) and hiring lots of leased employees. Over time, participation and coverage become a problem, but the DB is sufficiently rich that it is worth protecting by providing decent benefits to the leased workforce. Note that the 20% limit (i.e., the safe harbor works for the lessee only if leased employees do not exceed 20% of its workforce) is determined without counting the individuals covered by the 10% MPPP as leased employees. Note also that the language quoted is from the LRM. It has read that way for over 20 years, but the actual statutory requirement in 414(n)(5)(B)(iii) says that ALL of the lessor's leasable workforce must be covered by the 10% MPPP, and I have never understood why the IRS has ignored that requirement, but it seems to do so both in the LRM and in enforcement.

So Lando, I'm going to assume calendar year plan for simplicity. As I understand it the idea would be to, say, keep the suspension for everyone else through the end of 2019, or at least through 10/31/2019, but to have the plan say it didn't apply to this one individual, who is an NHCE. Maybe you could include that amendment later, when you do your remedial amendment by the extended deadline, on the basis that this is integral. I'd have to study. Probably safer to adopt the rifle-shot amendment for this one guy now. I'd have to give this more time to reach a decision on that. Was just trying to help out Carike on the basic approach.

Of course, you can always create accounts for them, although if you're using individual annuity contracts or custodial accounts that might be difficult. Done all the time in 401(k) plans. Ask in your VCP for IRS permission to send the former participants checks (or at the participant's request, direct transfers to other 403(b)'s or IRAs) the funds that you would otherwise have to deposit for them, and get the IRS to state explicitly that these amounts will be eligible rollover distributions, even though they may not have ever actually hit an annuity or custodial account. I'm sure the IRS will give you that. Of course, if some of the folks you reach out to do not respond, you may eventually need to open accounts of some sort for them. For these, ask IRS to be able to deposit into IRAs. There are IRA custodians of course who will open IRAs even if the individual does not establish the account and sign his/her own paperwork.

Assuming the individual is not an HCE (or that the plan sponsor is a governmental entity and therefore exempt from nondiscrimination rules), how about adopting a discretionary amendment before end of plan year stating that this named individual does not have the 6-month suspension in 2019?

I have dealt with similar issues in Texas and California (admittedly both community property states) and am inclined to agree with jpod. My impression is that every state's law is unique and has subtleties when it comes to marital and family property issues. If it's that clear cut, then presumably Saddaughter won't be exposing herself to excessive legal fees by finding a very experience NJ marital property lawyer and paying for an hour of his or her time.

Thanks, FPGuy.

EBECatty, there is an excess plan exception, which applies only where the amount is limited by 415(c), of course. What I was pointing out is that an NQDC contribution that is contingent on a participant's making the maximum permissible deferral also gets a pass. So if your plan says, "We will put the portion of the match that would otherwise be made, but for 401(a)(17), in an NQDC plan," that would seem to be OK as long as you also say, "but only if you have made the maximum deferral permissible under the plan." Otherwise, it would not be OK.

You should give them a W-4P or provide electronic equivalent and they can choose whether to have 10% or some other amount withheld. As some of the responses above point out, under Section 3405(a)(1) the plan administrator is required to withhold 10% unless the participant elects no withholding or a different amount.

Lou S. and QDROphile, maybe what we're getting at is that theoretically employers could put some bad provisions in their loans and the participant's remedy under the law for dealing with that may not be completely clear. Hopefully no employer would want to do that, but the OP implied that the acquirer of target wanted to terminate the loans of the target employees, most likely in violation of the loans' provisions, and it started me down the path of "what if." In the case of the OP, if in fact accelerating the loans was in violation of their provisions, that should take care of it, of course.

QDROphile, I'm just trying to figure out the legal boundaries. I think the restraint on the lender side of the loan is probably that they are an ERISA fiduciary.

FPGuy, you're probably right on the table, but that would require that the executive's are covered by group, not individual term, right?

I guess if your NQDC plan says that you only get the match percentage on the amount over the 401(a)(17) if you defer the 402(g) limit (or lower amount permitted by k plan), then you are safely within 1.401(k)-1(e)(6)(iii). E.g., in the example the individual contributes $12,000 and the k plan match would be limited to $11,200, and they would not get the extra $800 in the NQDC plan, assuming that the individual could have deferred the full $19,000, or in any event more than $12,000. But if the person contributed $19,000, then they would get the additional $4,800 in the NQDC plan. But if the person who contributed $12,000 got the additional $800 in the NQDC plan, would seem like you would be out of 1.401(k)-1(e)(6)(iii) and in 1.401(k)-1(e)(6)(iv), and would violate the contingent benefit rule.

Roger that, Bill. But my point was that in the OP, Parent owns 100% of Sub (cg there), and then, if the manager's stock is excluded, Sub owns 100% of Sub 1. So even if the attribution rules only give Parent 50% of Sub 1, you have a chain of 100% from Parent to Sub, and Sub to Sub 1.

QDROphile, your commercially reasonable point is a good one, but there is such a thing as a demand loan. Maybe since the lender is the plan, a decision to call is a fiduciary decision. Probably is.