Luke Bailey

Agree with all of the above, but would suggest that on a going forward basis you amend the plan so that distributions use the valuation for the last day of the quarter in which the individual terminated or submitted distribution request, whichever later, not the last quarter end before the quarter in which participant terminated. Even with that, you should also have a provision in the plan giving plan administrator (or trustee, if not an institution) the discretion to add discretionary valuation dates, to take care of situations where assets have declined between quarter end and date valuation complete. If your plan and/or trust document(s) do not currently provide for interim valuations, you might think of amending now retroactively. My recollection is that there are several cases where retroactive application of such amendments has been litigated, but I don't recall how they came out. You should definitely do research on those cases before retroactively amending the plan here to add an interim valuation.

Kevin C, maybe you're right and I am just too stubborn or whatever to get it, honestly. But I don't, yet. T-12 is addressing who is a key employee for purposes of determining whether plan is top-heavy. Says a dead key is a key until he or she falls off under what was then a five-year rule, now by statute a one-year rule. It seems to me that when example 2 of T-12 says its conclusion is indifferent to whether the beneficiary is a key or non-key, they are just saying that for purposes of clawing the distribution back in, the key- or non-key status does not matter because T-12 is just talking about the status of the person that had the account prior to its distribution. Notice that nowhere in T-12 or its examples are rollovers discussed, since they are a separate topic taken on in T-32. I don't see how you can say my interp depends on the key or non-key status of the beneficiary. If in lcollins' original question the beneficiary had, for example, been a non-key coworker of the deceased, I think the rollover would still be "related" under T-32, and so would tip the plan towards NOT being top-heavy. I would ask you: Suppose that was the situation here. Literally, then, a non-key employee would have made what, under the literal wording of the reg, was a "related rollover." If that kept the plan from being top-heavy, would you really be concerned that the IRS might come along and successfully argue that the plan was still top-heavy, because while their reg said it was a related rollover, that's not really what they meant? One thing I did get wrong in a prior post was to say that there was potential overlap between T-12 and T-32, in that a distribution with respect to a dead key that is the subject of a "related rollover" under T-32 would be counted both under T-12 and T-32, but would of course not be double-counted. Actually, I see now that the latter part of T-32 says that if both T-12 and T-32 might apply to a "related rollover," T-32 takes precedence. As for your statement that, , I'm having trouble understanding exactly what you mean by the "'employee' made up of the deceased participant and the beneficiary," or where that concept is explained in the statute or regs. My guess is that you are saying that even though the beneficiary of the deceased employee is a key employee, we should disregard that fact in this situation, because it makes more sense to say that the beneficiary rules apply to him, and not treat him as an "employee" for purposes of T-32. My point is simply that he is an employee, and T-32 doesn't seem to contemplate the "'employee' made up of the deceased participant and the beneficiary" concept that you want to base the outcome on. Correct me if I'm wrong on this, but what you are really saying is that, if the IRS had thought about the issue, they would have added the following sentence after the first sentence of the "A" part of T-32: "For purposes of the preceding sentence, an employee who rolls over a distribution received from a plan of the same employer that the employee received as a beneficiary of another participant is not considered an employee." My argument is simply that the IRS might have done that, but didn't. Finally, I would note that 416(g)(4)(A) specifically grants the IRS authority to prescribe in regs which rollovers are taken into account. Such a grant of authority by Congress for the IRS to promulgate a "legislative" reg usually makes it more difficult to get around the reg's wording, even if that wording arguably causes an unexpected result. I could be wrong. The interp you are advocating makes at least as much sense as the one I am putting on T-32, but unless you or someone else can find some other provision of the regs, or something else from IRS, putting the desired gloss on T-32, I'm stickin' to my story.

Larry, just for full disclosure, I did not have you personally in mind when I wrote that, but rather everyone who was on that side of the issue. And I have to say that if the straight, unadulterated text of the reg got me out of a problem and I wasn't sure it made sense, I would nevertheless feel very safe relying on it. I'm a big believer that if the law is with you, you argue the law, if the facts, you argue them, and if you have neither, you pound the table. Done all them at various times. :)

Secure copies of the forms you gave employees. If 250 or over, make sure you secure an electronic copy. It's not clear to me whether you have been contacted by IRS about failure to file. In any event, you will likely be contacted by IRS telling you that they have not received and giving you 30 days to file. At that point, you will need to file, electronically if 250 or more. You can probably get an extension. If you want to accelerate this process, discuss with your legal counsel. You can of course call the IRS group that is handling 1094-C and 1095-C delinquencies. You have plenty of company, so it should not be hard to find the phone #.

In addition to the points made by Tom Poje and Cuse Fan, is it not possible to argue that the safe harbor notice incorporated the terms of the SPD by reference for purposes of Notice 2016-16, so we would want to know if the SPD described the current allocation formula in detail?

A plan is not "terminated" until there is a resolution saying that it is, and that distributions will be made to all remaining participants as soon as administratively feasible. It sounds like what occurred here was a de-facto "freeze," because there was no more payroll after 2/23/2018, and presumably most of the funds were distributed based on employees' terminations of employment. I don't think this is a problem, and in fact you are terminating the plan now, so 10/31 is a good plan termination date.

Kevin C, the decedent was a key by attribution under 318. Dies in 2014. Distribution in 2015. Under 416(g)(3), the Q&A you cite and its examples (which use the old 5-year period, which of course was later changed to 1 by Congress), and Q&A-31, the amount of distribution is included in top-heavy for 2016, whether rolled back in or not. But it is rolled back in. We don't double count it, but it is in for 2016 for two reasons. After 2016, it is included because of the literal application of the rollover rule. I think that's the literal, plain language, straightforward, however you want to call it, way of applying the reg (Q&A T-32). You can say, they did not think of this odd situation where they were both in same plan so when the survivor rolls to his/her employer's plan, it happens to be the same plan from which the distribution was made, but I think we need to have the IRS say that, not us say they should have said that. All I'm saying.

MPSLAW and Carol V. Calhoun, I don't think it's ever been in any of the Rev Procs either way. My case dealt with matching contributions that COULD have been contributed to a companion 401(a), but were not, so exceeded 457(b) limit. We asked to be permitted to transfer the excess accumulations to the employer's newly established matching 401(a). The excesses were not properly reported on the employees' W-2's. Yes, you can say there is a distinction, in that you only asked to recharacterize one plan to a plan of a different type, whereas we were asking to have our new plan treated as if it had been created years earlier, but I think it's essentially same except for optics, although optics matter. Also, arguably, I guess, the 457(b) rules for including excess contributions currently in income are probably a little clearer in the 457(b) regs than the rules in 401(k) regs for including nonqualified cash or deferred amounts, but I think they're pretty clear in both places.

Kevin C, you bring an interesting perspective , but it seems to me your mixing apples, pears, and oranges. There are rules for how you draw distributions back in for top-heavy calculations, whether rolled over or not, rules for determining who is a key employee, and rules for rollovers. We are dealing with the last, and to me that rule says that you have to count this one, because it was rolled back to a plan of the employer that sponsored the distributing plan. That's what the reg literally says, and I don't think it's so clearly out of step with the Congressional purpose of the top-heavy rules, as any of us might perceive that purpose to have been, that it was clearly unintended by the reg writer, so why would an EP agent in the field take it upon him- or herself to rewrite the rule mentally? Most plans allow distributions out of rollover accounts at the participant's discretion, so although I would agree that my reading of the reg makes it a "trap for the unwary," and such traps are sometimes disfavored by the courts, this is one that is pretty easy to get out of.

Carol, I agree, and I stated at outset in my post that you'd probably get it. But as you pointed out in your initial post, EPCRS (and I'm sure this can be supported by language in every EPCRS Rev Proc) was designed to permit correction of qualification errors, mostly where plan operations do not match plan wording. I don't recall actually that the ineligible employer issue for any type of plan (SIMPLE, 403(b), 401(k)) is specifically addressed in any of the Rev. Procs., e.g. with an "Appendix" correction method, though it might be. Again, as your post pointed out, your plan may not be disqualified. Actually, probably isn't. It could be a perfectly good, qualified, 414(d) DC plan that just happened to permit after-tax employee contributions and the employer failed to properly report as such. That's a tax reporting failure, not qualification error. Or maybe not. Maybe you show your document to IRS and say, "Look, it says here that sponsor is a government, and says here that will take 401(k) deferrals, so is disqualified as to form." Or the plan did not contain a provision for after-tax contributions, so arguably they cannot have been made? Arguably there's a lot of ambiguity here even before you get to Service's lawful exercise of discretion. Good luck.

For some reason, below did not post timely, but I post it now for completeness. With respect to your last comment, Larry, and having Googled who was the 37th Pres to make sure, I rest my case. First of all, I inferred from question that both the deceased and widower are employed by same employee, so they were both "employees," right? The reg does not make a distinction between employee who is rolling over amount received as survivor and employee who is rolling over amount received as employee. Also, the reg literally says it is "related" if made to a plan of the same employer. You are guessing (probably correctly) that the people who wrote the reg didn't think about how their words might apply to the relatively rare situation of an employee of same employer as his/her decedent spouse, who chooses not to roll to an IRA. But maybe they did, and just didn't want to get too carried away with the exceptions to exceptions, and figured a person in that situation who wanted could roll the money to an IRA, just like someone who receives a distribution from a terminating DB of same employer could roll to an IRA. As I stated at outset, maybe there is a PLR or something on point that would support the counterargument, but in absence of that, I would be cautious. Also, I'll bet if this was a large distribution to a non-key that saved the plan from being top-heavy, you'd be arguing that, "well, the reg's the reg, and it is counted." And you'd be right.

Carol, a year ago I would have said that this would pretty easily go through VCP with the result you want, and it probably will. However, I had a somewhat similar (in some ways, and different in some ways) situation with a 457(b) recently, and the IRS effectively rejected our VCP submission, saying that the existing rules were adequate to provide the tax consequence (employees had income), and no VCP fix was available. (Actually, even though 2016-51 said that governmental 457(b)'s were now under EPCRS, the case didn't end up with the VCP group, but with the non-VCP corrections group in Southern Calif.). This was a surprise, because in the past I had had good experience with getting the result you are describing in "ineligible employer" situations for 403(b), SIMPLEs., etc. I don't think it's so much a quality issue as a resources issue, because in a way they were right. So in your situation, they could say that the regs (1.401(k)-1(a)(5)) do provide clearly for what happens in this case, and no VCP is required. They did tell us, however, that distribution of the amounts as taxable income in the current year, and treating just as current year income, was appropriate because we were doing that under EPCRS. That was OK with us since all the years were still open. If you have closed years then you have to work through all of that and the consistency doctrine, etc.

Let's say the loan offset distribution occurs today: * The $50k cash is rolled. No issue. * No withholding on the $10k not immediately rolled. See 1.402(c)-2, Q&A-9(b) and (c). * So no withholding at all on distribution. * Even under old law, he/she had 60 days from today, so until about Xmas 2018, to come up with some amount from $1 to $10k and deposit that cash into IRA as the rollover of the loan offset. To the extent he/she did so, only the excess, if any, of $10k over amount rolled over would be 2018 gross income subject to 10% penalty. * The only thing new law changes about preceding bullet is that he/she now has until April 15, 2019, or later, until extended due date, if goes on extension for 1040, to roll the money over. Whatever gets rolled over, he/she indicates that amount on 1040, just as before. * If he/she knows for sure going to roll over some, but not all, of the $10k, then he/she may want to pay estimated tax or, probably better, adjust 2018 withholding with new employer on W-4.

BenefitsAnalyst, I would stop right there. She may qualify for special enrollment coming off COBRA, but even if she does not, it's almost November. Figure out what her coverage would be on the Exchange, recommend that she do that, pay her a lump sum, and have her sign a release.

You're welcome Belgarath. I think you're probably right that some SIMPLE VCPs might be more complicated, but would be interested in knowing the situations. It struck me that the IRS was pretty much behind the 8-ball with inadvertent SIMPLE noncompliance, because you had all these employees with fully vested IRAs, current and former, and it would have been VERY complicated (really, impossible) to adjust all of their returns, or even use that as a credible threat against employer. The employer's deduction was not an issue, since it had paid the money and was fully vested at time of payment, so even timing was right.

I'm going on what it says, not what it contemplates. Typically safer with IRS. I have come across contemplative EP agents, but don't count on doing so.

I agree with FPGuy on this one. That is stuff that should go in the nonrequired notice.

ETA Consulting LLC, I sympathize with your argument, but it is saying that the IRS doesn't really mean what they say in their reg. Spirit of law not letter, and all that. It might win in Tax Court.

You could look for PLRs or other subregulatory guidance, but in absence of same literal application of the first sentence of Treas. reg. 1.416-1, Q&A T-32 would say related, because the rollover was "to a plan maintained by the same employer." Again, in absence of any other guidance (which I have not researched), you could argue that's not what the reg writer meant (i.e., the reg writer meant, e.g., a rollover from employer's terminated DB to DC), but tough to argue against literal wording based on what you think it should have said instead of what it does say.

ERISAgeek111, here are some thoughts. First, there is ancient guidance that an employer's payment of premiums for employer's plan (e.g., COBRA) for a former employee is the equivalent of payment for employee, so pre-tax under 106. Would also apply to post-COBRA, if coverage was still under employer's plan. If plan fully insured, you'll probably need a rider to policy (and probably won't get it) to cover former employee after expiration of COBRA. If plan self-insured with stop loss, ditto re the stop loss policy, but also if the individual is highly compensated and you don't do this for everyone, then you will have a 105(h) violation and all HCEs will be taxable. For that reason, employers with self-insured plans usually post-tax the premium, with or without taxable gross-up, both during and after COBRA. If your paying the employee to purchase his/her own coverage post-COBRA or apart from COBRA, whether you pre- or post-tax, you will have the dreaded $100 per day per employee (here, it would just be the one employee, I take it) Section 9831 penalty, because the plan is just the reimbursement promise, which of course does not meet any of the ACA requirements. Be careful.

Belgarath, if memory serves me correctly there were three related companies, they all had adopted a SIMPLE with same broker, and while each separate company was < 100, the three together (which formed an unidentified controlled group from get go) had about 150. Would never have discovered it except were being acquired. We represented seller and they asked what the ERISA rep meant in their purchase agreement, and I explained and they gave me facts and I gave them bad news. We checked some boxes in VCP form, added a paragraph of explanation, said we would not do any more, and got our compliance statement in a few months with no other interaction with Service, again if memory serves me correctly. Didn't hold up deal, buyer just reviewed submission and was fine with it.

Depends on facts and circumstances, Larry.

I don't really know the answer to your question, coleboy, but I believe that daycares are commonly run as parts of churches, and IRS is OK with that. If that is the case here, then you have only one entity, and the different fiscal years is just sort of an internal accounting anomaly, since the church is not going to file any returns. There would be only one employer, the church. Special rules, of course, apply under Code to church plans that do not elect into ERISA.

See if you can satisfy yourself that there is sufficient regulatory supervision of trust companies in your territory. They are typically subject to greater regulation than broker-dealers. Note that there are no adequate protections against fraud, other than the size of the institution.

NQDC plan amounts are 415 comp only to extent paid in the year, not on account of separation from service (e.g., timely deferral election deferred for 3 years, 3 years is up and participant still employed). If not 415 comp, you are going to have imputed compensation, and it really won't work. As others have said, check your plan language. Do not add to your plan if not there, because will bust your determ or opinion letter. Not really practical in any event, except where can be treated as 415 comp, as explained above.