Luke Bailey

ErnieG and John Feldt, I agree with you both. I just think that in the last sentence of 1.72-16(b)(4) the regs should refer to amounts not deductible under 404(e) and 1.404(e)-1A(b)(1) (last sentence) and (g), not to amounts required to be included in income under 1.72-16(b)(2), as they seem to do. You get to the same result.

For anyone wondering what is the source of the rule that "a sole proprietor, or an owner of a pass-through entity, is not entitled to a deduction for that portion of the premium representing the economic benefit under IRC Section 404," it's in 1.404(e)-1A(b)(1) (last sentence) and (g). ErnieG, this makes sense to me. Certainly if both the deduction were disallowed and the amount had to be reported on a 1099-R, the self-employed person would be double-taxed on the amount of the premium allocable to current life insurance protection, but how do you explain the last sentence of 1.72-16(b)(4), denying basis? Is it really referring to the rule denying deductibility, not the rule of 1.72-16(b)(2) that has the same result? I'll buy that it is, just wondering.

BG5150, the issue seems not to be addressed in either the 414(w) regulations or the preamble to the regulations. I think you could interpret both the statute and the regulations either way, in effect interpreting "employee" as including someone who was, obviously, an employee when the auto contributions were made. Neither the statute nor the regulations appear to preclude that interpretation. Belgarath's take certainly is closer to the literal language of both the statute and the regs. On the other hand, treating this as a permissible withdrawal under 414(w) would seem more in keeping with the purpose of the statute to protect new employees from the consequences of having unelected elective contributions made. I take it there is no vested match here that would, in effect, counterbalance the effect of the 10% premature distribution tax?

BTG, I think this depends on what the backpay settlement or award says. If it says that the employee or employee class is to receive the employer contributions or accrued plan benefit that they would have received, if they had been paid the right amount in earlier years, then you treat it as paid in the prior years and this would override a literal application of the plan's W-2 definition of compensation. If the settlement agreement or award is silent on this and just requires a cash payment of an amount to the plaintiff or plaintiff class, then I think you should probably just treat it as regular current W-2 comp.

Obviously, the amounts that violated the 415 limit, as CBZeller points out, did not qualify for rollover. This is probably everything following the date of the participant's death, although depending on payroll practices and where the participant's date of death fell during the pay period there might be a tiny bit around the time of death that qualified. Reporting as taxable to the 401(k) account beneficiary, as suggested by Nate S, may be all that's required for compliance, but if the 401(k) beneficiary is not the same, or 100% the same, as the individual(s) who would have received a bonus payment due the participant at the time of participant's death, there may be some dispute as to whom the money belongs. I would probably put in a letter to the 401(k) beneficiary that they may want to consult with the decedent's executor or administrator. There's actually an interesting question here as to who should get the 1099-MISC, depending on who actually winds up with the funds, but you probably want to stay out of that. And actually, this may be the rare case where taking back the money as an erroneous contribution (if the beneficiary will part with it) might actually be the simplest solution.

Swimmingetc., I wouldn't place any reliance on an IRS compliance program for ROBS, one way or the other. As far as I can tell they never really figured out what they thought of these, at least those that were executed properly. What I mean by that is that even if the ROBS investments are made in the right sequence with the right documents and parties, there is a basic "conflict of interest" prohibited transaction issue that remains under IRC sec. 4975(c)(1)(E). But it seems like the IRS just decided not to go after that issue. You note that new employees are becoming eligible. Some ROBS companies take the position that if the company is not offering any more stock to sell to the plan, the new employees do not have to be able to have stock in their account, and that this is a corporate decision having nothing to do with the plan. IOW, the plan can't force the employer to sell it stock. The IRS notice that placed ROBS plans under scrutiny mentioned this issue but never took a stand on it, and as far as I know the IRS still has not. Just a guess, but I doubt they've been successful enough yet to take Peter's otherwise very sound advice. An alternative approach would be to make clear in your agreement that you are not advising on any aspect of a participant account's investment in employer stock, but only on investments in other publicly available assets.

Peter, wouldn't the addition of a fund be "An identification of any designated investment alternatives offered under the plan" under 29 CFR sec. 2550.404a-5(c)(1)(i)(D)?

I think that's all we really can be sure of at this point.

cobraparticipant, based on your description (which could be incomplete) it seems like the plan would need to continue COBRA. Unless you have a very expensive illness, there is no reason for the plan not to want to continue to take your premium and provide coverage. I think you need to keep communicating, i.e. letters and phone calls to make them understand this is a snafu. If you want to elevate, then get legal counsel.

A lot of good suggestions above, Peter. In addition, I would probably try talking to the employee to at least get the story of why the decedent wanted to leave the account to him or her. If it is plausible that the employee knew the deceased, it seems quite possible that the deceased, having no one else to leave his or her account to, left it to this individual. Perhaps the employee visited the deceased in the hospital? You might also see whether the hospital or hospice where the individual died (most likely; some people die in their homes) has a signature on a consent/admission form. If the ages and work histories indicate that the deceased is unlikely to have known the employee, and especially if the employee would have known of the death (e.g., working in HR), and if the employee has not been with the employer long so has no history of trust, I would question more deeply.

fmsinc, as I'm sure you know, it is possible for ERISA plans, both DC and DB, to permit an AP's interest to pass on to a beneficiary if the AP dies. I think you may be asking whether, if a plan specifically addresses this in plan language and says it will not permit it, or if the plan language is not specific and the plan administrator interprets the plan as not permitting, that violates ERISA. I'm not sure, but I have wondered about this myself and am unaware of any case that addresses it. Probably based on the Supreme Court QDRO and beneficiary cases the plan can have either rule. Certainly, state property law would not compel a different answer, given ERISA preemption. On the other hand, if the QDRO says the plan must provide a benefit for the AP's beneficiary, arguably it violates the QDRO rules to not accept the QDRO. The plan, on the other hand, could argue that the death benefit for the AP's beneficiary requires it to provide a benefit it doesn't offer.

I think it just slipped through, because I think that if somehow internally in the IRS reviewer group they had decided one year was OK, they would have required language explicitly addressing earnings, termination, and partial termination. It also seems like this would be hard to administer. You're showing the person in their statement as, e.g., 40% vested, then after a year they forfeit and you show them as 100% vested in larger amount, then if they come back within 5 years you have to have an administrative scheme to put the $ back and now show them as 40% vested again. Are you sure the plans in question were set up to do that?

EBECatty, the plans with one-year suspense account provide that if the person comes back within 5 years their account will be restored, with earnings? Do they say that this will also occur on a plan term or partial term if the individual is affected by the partial term?

arthurkagan, you have not provided a full fact set (are the employees shared employees between the two corporations, for example), but assuming by "pension plan" you mean a DB plan, the plans would likely fail 401(a)(26). Again, you have not provided full facts.

EBECatty, I thought there was a clear rule going back to the late 80's after the 1984 Retirement Equity Act lengthened the rule for disregarding service from 1 year (which was the original ERISA rule, I think) to 5 that in the absence of a voluntary cash-out and buyback you had to maintain a 5-year suspense account. I looked and could not easily find the source of that, but I thought the IRS had issued definitive guidance. Maybe a GCM? I could be misremembering.

Peter, there are definitely a lot of open questions. Section 305 does seem crystal clear on removing the three-year limit for significant errors. I.e., if a plan administrator discovered a significant error going back 10 years for which the correction is clear under the IRS's current guidance, then the employer can self-correct now. I think Congress also tells the IRS in Section 305 (although this is not as clear) that it wants IRS to publish principles-based correction guidance, perhaps so that if an error is not precisely included in any of the prefabricated corrections, an employer could proceed anyway with SCP by applying the newly articulatyed general principles. Whether the IRS will give this part of Section 305 an expansive interpretation, e.g. providing general guidance regarding what to do about missing data or documents, for example, is uncertain. Regarding the requirement of having established procedures, as well as the issue of whether having a VCP compliance letter is important for deal work, I think this may make attorney involvement in correction even more attractive than it has been in the past. An attorney can advise, or even give an opinion, in some cases, that self-correction "should" be available, and that a particular correction "should" fix the error. And that advice will be protected by attorney-client privilege. And unless in such a case the accountants (in the case of a large plan) can require the plan administrator to inform them of counsel's opinion (and I don't think they can) and the fact that they applied SCP, the advice and correction could remain secret. Moreover, unless the acquirer in a deal specifically asks whether the plan has used SCP in, say, the preceding 5 years (as opposed to what I typically see, which is just that the plan sponsor has no reason to think that the plan has failed a document or operational qualification requirement), maybe the employer is good to go. I'm not saying this is the most conservative course or that it is what all, or even most, employers will want to do, but it does seem to me to be a possible course of action under Section 305. But to go down this route the employer would definitely need a lawyer to be in charge and have all the experts working for the lawyer, as often do now anyway. Finally, regarding your point, AKowalski, I totally agree that a broad interpretation of Section 305 really puts the ball over in the DOL's court, if they devote the resources to dealing with it. I have always thought that EPCRS should work the way Section 305 now seems to require, for two reasons. First, the penalty of disqualification is inappropriate in many ways (that I will not go into here) for the types of errors that can be corrected under SCP as broadened by Section 305, even if one gives Section 305 its broadest possible effect. Second, in difficult cases, VCP's can involve a lot of practical compromise between the plan sponsor and the IRS, and because the VCP compliance agreement is confidential, neither the DOL nor the participants are informed of what the compromises were. And the IRS works solely from correspondence, and may not have seen all of the employer's cards, even though the employer may have been able to provide the penalties of perjury representation without risk.

Austin3515, I think you generally can accelerate employee's vesting, either plan-wide or for an individual. That will typically make the benefit faxable, of course. The outcome is going to depend on your plan design. If, for example, the plan is a simple "lump sum taxable and all paid at vesting" plan, then it's actually a short-term deferral under 409A, not really 457(f), and generally it is not a problem to accelerate vesting and tax on an STD. If you're plan had a hardwired payment date, instead of saying simply that the employee was taxable at vesting, that could present issues.

Belgarath, you might check (unless you have already) whether, although withholding is not mandatory, NY requires that the employee be provided a withholding election.

Given that age 75 becomes effective 10 years from now, that's probably a safe bet. I'll be willing to take bets it won't happen in the next two years, though.

I think it's 75. Clearly the intent. They don't reach 74 until 2033, so they're over the wire. This is one that flew right by me reading the bill. There are many more obvious problems with much of the language that I did catch.

Bri, this may be as good a time as any to start what will likely be a long-running debate on whether VCP will be the rare exception going forward, replaced almost entirely by SCP, in light of SECURE 2.0 Sec. 305, which seems to be effective on enactment.

metsfan026, Is there enough to warrant creating IRAs for the participants you can't locate?

Agree. There's also the problem of having the appropriate person (e.g., the plan committee) designate the individuals who can represent the plan administrator for signature witnessing, and keep the list updated. Could work for some plan sponsors, but not for most, I think.

Peter, I have always assumed you could require notarization and eliminate the option for plan administrator. Most of the plans that I have drafted (all of which received favorable DLs, of course) provided for notarization only. Never had a problem. I don't see why you couldn't restrict further as long as there was no substantial restriction on the ability to get a distribution. Obviously, that issue only arises only with notarization, because the PA is free to determine who can represent it for purposes of witnessing signatures.

Peter, I was only suggesting that if DOL wanted to, they might be able to exclude ESAs from QDROs, but your explanation above is probably the right take on how this should play out. I just heard it for the first time a few days ago on a podcast. I think it captures the economic moment we had and possible effects on future policy. It does seem to me that the stimulus checks to some extent paved the way for the way the savings credit will work going forward.