Luke Bailey

Yes. VCP. We did one a few years. Employer had not realized was part of a controlled group so went over 100. Very simple VCP. The correction is to stop doing it.

Agree with Bird and Larry Starr, but we have typically done a one-paragraph notice to the employees explaining date of last contribution and that they should just continue on with their IRAs as their own.

Chaz makes an interesting point, and maybe that argument would work with IRS. I guess another way to look at it, though, would be that it is the employer's choice whether to pay premiums for the employee or former employee, which would be tax-free, but if it's policy, e.g. in writing, is that it will not do that, then that creates a debt, separate from the 105 plan exclusion, and if you forgive that debt, the employee has forgiveness of debt income. Having said that, I will again say that Chaz's argument seems a good one tp me and might well be accepted by IRS.

To the best of my recollection, last time I had to look at this, I could not find anything in the regs that actually said it was discriminatory if you charged HCIs less, because all of the discussion in reg of discrimination was linked to eligibility and "benefits," and nothing specifically made employer subsidization of cost a "benefit." Seems like it would be discriminatory, but the closest I could come to finding anything in reg that addressed this was 1.105-11(c)(3)(ii) (nonspecific prohibition of "discriminatory operation"). I think I looked at EBIA as well and they may have confirmed the lack of guidance. Generally, the way around any 105(h) discrimination issue is to include in income, because 105(a)(1) conditions the operation of 105 on attribution of benefits to a contribution paid by employer and excluded from employee's income. No exclusion from income, no 105 (including 105(h)), so I agree that after-taxing the discriminatory portion of premium would likely fix.

The ABA, last I checked (which was a while ago), had a booklet on what "of counsel" means, and the of counsel attorney can be a K-1 partner getting guaranteed payments, a W-2 employee, or a sole proprietor with payments reported on a 1099-MISC. If a sole proprietor AND he or she no longer has any capital account or trailing interest in receivables, in theory they could have their own plan, since the 414(m)(5) and (o) proposed regs (which would have prevented) are currently a dead letter. If they still have a capital account or interest in receivables of even $1, then 414(m)(2)(A) would require aggregation.

I think you should probably consult a labor attorney as well as ERISA. I know from experiences that often the new contracts are not in place at the time of expiration of the old, and they keep on bargaining, perhaps with hiatuses, and then when the new contract is finally signed it's retroactive. Having said that, if you have a situation where bargaining has completely failed, the union has left the field, and the employees are coming back to work outside any contract, as nonunion employees, then clearly their benefits or lack thereof are not the subject of a CBA, so I would think would at that point be considered nonunion. But again, make sure you understand your facts and get input from a labor attorney. Your client must have one if it was negotiating with a union.

So EBECatty, on your first issue, i.e., employee has option to purchase stock from majority shareholder, I would think that, depending on facts and circumstances, the arrangement is either (a) not compensatory, e.g. if the employee pays the shareholder for the option, or, more likely, (b) just as you describe, i.e., a deemed transfer of the stock on exercise by the majority shareholder to the corporation, followed by transfer of the stock by the corporation to the employee under 83, if the arrangement is clearly in connection with performance of services. Either way, should not be a 409A issue. As for the rest, whether there is a redemption as in your second scenario, or even just a payment by the employee to the shareholder to exercise the option, there is a set of corporate tax issues (i.e., potential dividend treatment) under Section 302 and related provisions of the Code, and you need or a corporate tax lawyer or CPA need review those carefully.

Below is Treas. reg. 1.125-3, Q&A-3(a)(3)(iii). I think the IRS's failure to mention that the rule is pre-tax only if both the leave and return/repayment are in the same calendar year implies that they don't have to be. The same reg clearly indicates that the pre-pay method (i.e., employee has amount withdrawn up-front, before goes on leave) is after-tax to the extent of the leave taken in next year, because that would result in a deferral of compensation. But in the catch-up scenario, which is the reverse, there is no deferral. "(iii) Contributions under the catch-up option may be made on a pre-tax salary reduction basis from any available taxable compensation (including from unused sick days and vacation days) after the employee returns from FMLA leave. The cafeteria plan may provide for the catch-up option to apply on a pre-tax salary reduction basis if premiums have not been paid on any other basis (i.e., have not been paid under the pre-pay or pay-as-you-go options or on a catch-up after-tax basis)." I do understand your concern, I think, lappinlandis, because in year 2 the payback is, economically, the repayment of a loan, not the purchase of medical expenses. That's probably what's bothering you, but it looks like the IRS's reg writer decided to cut us some slack on this one. The beauty of this forum is that if anyone has a different view or experience, I'm sure we'll hear about it.

TaxLawyer1978, what I meant by a "plan" is a written document, mayb3 3 to 5 pages, that has whereas's and resolveds and that sets out (a) that you are doing a recordkeeper and trustee change, and the identity of the players, (b) the date of the change, (c) whether you are going to map or liquidate participant accounts, and any financial measures put in place to deal with market volatility, (c) the communications to participants, including of course blackout notice, and similar factors. It's a document that the plan committee can adopt as a record that at a very high level it understood it's fiduciary duties and addressed them. If it were a plan merger, then both committees would adopt. This is separate from the more detailed roadmap that the vendors will put together for the vendor change, that has the account and wire details, etc.

Typically in these situations, if there is a trustee change, we will have the plan fiduciary adopt a plan that will address the blackout and transfer issues and show that they have considered options and made rational decision.

If there is 100% board overlap (which sounds like what you have, i.e., each entity has a board, and each board is comprised of the same individuals), then there would be a controlled group. See 1.414(c)-5(b). There are no "soft" factors to be taken into consideration that would vary that theoretical result. Of course, I have not analyzed your actual situation, so am only speaking hypothetically, WCC.

buckaroo, yes, it s a bonus directly tied to 401(k) deferrals. I think XTitan's reg cites are on point.

ERISAApple and XTitan, very good points. Thanks.

Generally, if they pass coverage (410(b)) alone, they can have different formulas. And during the transition period, they are treated as passing coverage alone, even if otherwise would not. Beyond that, it gets really complicated and fact-specific.

Bird, I doubt this was a 402(g) issue, but it may be. Would be very helpful to know from original question what type of contributions involved and whether plan has any other participants.

QDROphile, that was sort of my thinking as well as to the consequences, but you hit the nail on the head that EPCRS has rules for fixing qualified plans, not for fixing arrangements drawn into a qualified plan's orbit by the anti-conditioning (aka "contingent benefit") rule. Thanks. Thought of another slightly interesting oddity of the regs. Suppose I amended the bonus arrangement the I described in my original post to say the more typical, "You get something under this bonus plan only if you max out what you can do under the K plan." If I had an nonqualified deferred comp plan, I would then fit exactly under the second sentence of 1.401(k)-1(e)(6)(iii), second sentence. But because this is a bonus payable within the 409A short-term deferral period, not deferred comp, it wouldn't fit exactly. However, I don't think it takes too much of a leap to conclude that the regulation did not intend the distinction.

K plan sponsor has bonus plan that says to execs: Every year, if you make more than $275k, I will give you a bonus equal to your Box 1 W-2, without any limit, times 6%, minus the 402(g) limit, and then all that multiplied by $.50. So if I make $400k, my bonus is $2,750, which is $24,000 (6% of $400k), minus $18,500, or $5,500, times $.50. The intent is basically to make up for the missed match based on the statutory limits, which it does not do perfectly, but anyway, that's what they do. But then they also say that to get the bonus you have to have deferred into the plan, at least something. They do not penalize execs who defer less than the limit (e.g., defer $10,000), but they do exclude you if you deferred $0. This violates the anti-conditioning rule of Treas. reg. 1.401(k)-1(e)(6)(ii), right? And the result would be the same if instead of only excluding those who did $0, they reduced the product of 6% times comp (e.g., the $24,000 in my example) by the sum of the 402(g) limit and the difference between the 402(g) limit and what the exec actually contributed (but not to where your bonus was negative, obviously), which would seem more rational than just basing it on whether the exec did or did not defer at all. If this is a violation of the anticonditioning rule, what is the fix under EPCRS other than stopping it? Seems hard to believe the IRS would say you have to go back to all the folks you excluded and pay them the bonus they would have received if the employer had not conditioned payment of it on 401(k) participation, which is the only correction I can think of that would put folks in the position they would have been in but for the violation.

Just put in the resolution that, "To the extent that the allocation provided for in this resolution might be contrary to any provision of the plan, the plan is hereby amended," and make sure that the person/body that adopts the resolution has authority to amend plan.

I assume based on question that the $24,000 is all elective deferral and catch-up? This is obviously a mind-bender, because as a sole proprietor, the participant with the issue is also (and I mean "is" in the most direct, literal sense) the plan sponsor. I actually don't know the right answer. If you treat it as a 415(c) violation under EPCRS, or perhaps even better, as a failure to follow terms of plan (since the plan document probably says to multiply his elected percentage times his self-employment income to determine his deferral amount, and that was not done), and you distribute to him and report on 1099-R with code E, IRS will treat that as gross income, right? But he will not be able to take a deduction on his schedule C to offset that, right, because in excess of 25% of comp (unless he has employees)? Larry's answer is the most practical, but the money is in the trust, so unless they are comfortable leaving it there to fund future contributions, it needs to come out, and if paid back to sole proprietorship account without 1099-R, difficult for me to fit that into the mistake of fact rationale.

In case you need safety in numbers, Mel_1999, I agree 100% with Bird. You could probably get by IRS exam with just the resolution, but if that's all you do there is large risk that plan will not be administered correctly and eventually you will need to fix in EPCRS.

Pretty much in agreement with James K and Pam Shoup, although less optimistic than she that was addressed in a document. Unless the plan document, the stock purchase agreement, or some other corporate instrument appoints someone else as plan administrator, the default "administrator" with legal responsibility to file the 5500's is the current sponsoring employer. This becomes a routine business expense of the sub that the acquirer bought into when it bought the sub, like unpaid bills or fines. Place to deal with this was probably the stock purchase agreement. You should probably check to make sure it wasn't addressed there.

Mr. Bagwell, the "liberal rules" aptly noted by QDROphile for "imputed service" (which, as QDROphile also points out, is what you have) are in Treas. reg. 1.401(a)(4)-11(d)(3)(iii). I've almost never encountered a situation did not meet these requirements, but you may want to check to reassure yourself that there are, indeed, some limits..

Thank you, CJ Allen. I think a client who has this issue and goes through the formal VFCP process can probably try something practical and creative. However, if they are self-correcting, they would probably not be able to take the risk.

CJ Allen, thanks. I tend to agree with RatherBeGolfing at this point, but I recognize your points. It's odd to me that (a) the DOL guidance from 2006 did not include an allocation rule, and (b) 12 years later there does not seem to be an accepted, obvious answer to the question that has emerged from practice..

Mr. Bagwell, I guess that's right. Divorce breaks the spousal attribution, but not the minor child attribution. Thanks.