Luke Bailey

Larry Starr, thanks. I suspect they will say this was their answer as well. Peter, your point helps a lot with the justification of expense.

RatherBeGolfing, I really appreciate your response. That's what I told the client the last time, but I got (and am getting again) significant pushback from the trustee, via the client. The trustee is a large bank with a significant ERISA presence, and the client indicated that the trustee was surprised it was being asked to do such small allocations. Last time and this time I was somewhat surprised both that there did not seem to be any guidance on this, and at getting pushback from the trustee. I find it somewhat perplexing that the DOL in its VFCP release says that the employer has to contribute the total of the missed earnings, but doesn't go the next step and state how that interest must be allocated. Just one sentence in the release would have cleared the whole thing up. I think you are very likely 100% right about this, though, and unless another commenter comes up with something different and authority to base it on, this is what I will insist the client does. Your explanation was, again, very helpful. Thank you.

Treas. reg. 1.409A-1(g) says that a controlled group is to be treated as a single service provider. 1.409A-1(h)(3) says that for the purposes of the definition of "separation from service," the required quantum of ownership to determine a controlled group is reduced from 80% to 50%, whether you are dealing with a parent-sub (1563(a)(1)) or brother-sister (1563(a)(2)) relationship, but I can take the 50% up in my plan document, apparently for any reason, but not above 80%. I can also, but this time only if I have a business reason, instead reduce the 50%, but not below 20%. I think I've got all that right. However, either for some policy reason that escapes me or because it simply slipped the minds of the reg writers, the ability to ratchet the 50% down to 20% or any point in between is tied to the statute's reference to "80%." Works fine if the relationship you are dealing with is a parent-sub, but if you have a brother-sister, ratcheting down the 80% requirement (i.e., 5 or fewer individuals, estates, or trusts must own at least 80% of each company) will not help if you cannot also reduce the separate 50% requirement (i.e., looking to the lowest percentage that each of your five individuals, estates, or trusts own in each company, the 5 or fewer group must own at least 50% of each company). It's possible that part of the problem (either mine or the reg writers') stems from the fact that 1563(a)(2) is really 1563(f)(5) for purposes of 414(b) and (c). I'm pretty sure, however, that the references in 1.409A-1(g) and1.409A-1(h)(3) to 1563(a)(2) are really (i.e., really "really," not just intended "really") to 1563(f)(5), but I'm not sure if even that is absolutely certain.

So say you have a fairly large 401(k), 100's of employees, a few million dollars in deferrals ever year, $100k or so in deferrals each payroll period. CPA says that employee contributions should have been made, say, within 2 days of payroll date. That's reasonable. Most were, but some were made 3, 4, 5, or in one case 8 days later. Out of 24 payroll dates, maybe 10 have a problem. You calculate the lost interest and it is, say, in the 10's of dollars for each payroll, maybe $1,000 for the entire year. DOL's VFCP Notice says the correction is to contribute the "Lost Earnings," but does not elaborate further. So good, you contribute the $1,000. My question is, how do you allocate it? The lost earnings arguably should be allocated as of each payroll date that had a late contribution, to the accounts of the participants who deferred on that date, in proportion to their deferrals. This will result in hundreds of separate allocation amounts, many less than one dollar. The administrative expense of doing that may easily exceed the amount being allocated. And some of the participants will have left and already cleared out their accounts. Assuming your plan document can be interpreted to permit this and it passes nondiscrimination, can you do something different, like allocate per capita to anyone who (a) deferred during the applicable year, e.g. 2017, and (b) still has an account in the plan? I am aware of the recent EBSA regional office letter urging employers to use the formal VFCP process, even for small amounts, rather than self-correcting, so my question is not directly about that, although maybe that is involved because if you go through the VFCP process you could get your short-cut allocation method approved by EBSA? If you've heard this one before and it's got an answer, just point me to it. Thanks in advance.

TaxLawyer1978, I was thinking the party in interest was the service provider to whom fees were paid, but maybe the guidance you're referring to covers that. Do you have the cite?

TaxLawyer1978, of course there are not a lot of facts here to fully judge, but I would not have landed on 406(b)(2) as my problem if otherwise legitimate admin expenses were paid from "wrong plan." I would think your problem is 406(a)(1)(C), which normally would not be a problem because of 408(b)(2), but would be here if paid by wrong plan. Of course, there are 4975 counterparts to 406(a)(1)(C) and 408(b)(2).

Thanks, David. So that link works now, and if anyone is interested and scrolls down to Q&A-9, they will get a very detailed examination of the issue. As usual, Derrin's prose is crystal clear and very detailed. He expands on the factual possibilities. As Derrin does, I pointed out that a married couple without a child would not create a controlled group, but a controlled group would be formed as soon as the couple gave birth to or adopted a child. Derrin's examples go further and explain how the controlled group is broken if they divorce, and is not formed if they just live together. As Derrin implies, it doesn't seem to make sense from a policy perspective.

Griswold, if they are in controlled group based on board control, then #2 could adopt plan, if that is how they wanted to handle. I don't think that would be doable without a VCP submission, however. Whenever anyone says that an affiliate is "running payroll," I always get concerned about making sure that we (a) know where the employer/employee relationship is, and (2) if the company "running payroll" and the company for which it is run are, in fact, separate employers, that the IRS's payroll agent rules (found here: https://www.irs.gov/businesses/small-businesses-self-employed/third-party-arrangements) have been followed. Assuming #1 and #2 are in fact separate employers and the employee in question is an employee of #2, and assuming they are not in a cg, or don't want #2 to adopt the plan, then the correction under EPCRS is to terminate the employee's participation and account, and distribute his/her contributions, if any, with earnings, to him/her as taxable income for the year in which distributed, and use the employer's money to pay admin expenses or fund other contributions. Whether you can self-correct or must make a VCP submission follows the regular rules for that.

David, are you sure that's the right link? Did not seem to work for me.

K2retire, understood. But what you're saying, then, is if you want to use that clever and unscrupulous strategy, don't have children.

K2retire, I would be interested in hearing your rationale spelled out in a little more detail. I completely agree with you, I think, regarding the general purpose and importance of the controlled group rules. But on the narrow issue at hand, I.e., the IRC sec. 1563(e)(5)(A) thru (D) exception to spousal attribution, and the apparent 1563(e)(6) exception to that exception explained by Mr. Bagwell, my understanding at this point is that if two individuals are married and have independent business lives that includes their each owning 100% of their own company, and either no children or only adult children, then if they meet the requirements of the 1563(e)(5)(A) thru (D) exception, their interests in each other's separate businesses are not attributed to each other, so no controlled group. But if this same couple then gives birth to or adopts a child, then they are immediately a controlled group. It's this that makes no sense to me.

Mr. Bagwell, thanks. Learn something new every day, and this is it for today. Very unlikely to have been the result intended by Congress, of course, since seems unlikely they would have created such an elaborate, but fragile, way for a married couple to separate their respective businesses. Neither family- nor working spouse-friendly.

Bird, I am agreed no RMD.

Mr. Bagwell, I don't think that is right. Someone might think that that is a correct application of 1563(e)(6), i.e. you meet the requirements of 1563(e)(5) to avoid attribution from your spouse, but then 1563(e)(6) attributes your spouse's stock to your minor children (first attribution), and then your minor children's stock to you (second attribution). But I think 1563(f)(2)(B) blocks the second attribution.

I think to be in 1.402(c)(2) Q&A-7 you have to have an RMD for the year. 1.401(a)(9)-5, Q&A-1(b) would seem to say you don't have an RMD here in 2018.

Larry's usually right, so maybe has a cite. But Treas. reg. 1.401(a)(9)-5, Q&A-1(b) seems to say that if she is not a 5% owner and does not retire until 2019, 2019 is her first minimum distribution calendar year.

ERISA-Bubs, as long as you have a "transfer" for 83 purposes, I don't see how you are going to have 409A deferred comp. Check the regs at 1.83-3(a) and confirm whether there is an actual transfer of the stock to the employees based on the terms of the compulsory buyback.

John Cross, probably. I don't think there is anything on it. If the IRS wanted to say "no," they could probably argue that, while taxable, the Roth contribution is not "compensation" under Treas. reg. 1.219-1(c), because not really "wages,...[etc.]." Note that 402A(a)(1) doesn't call the Roth contribution wages, just says it is not excludable. But in the absence of guidance, my guess is you can do it. I don't think there is any guidance on this. Maybe someone else will have more information.

I don't think you would need to use the points-based allocation formula for your 11(g) amendment. I don't see anything in 1.401(a)(4)-11(g) that would require that.

Sort of. Characterization as separate property under state law is only the first step, and put them into the same position as if they were in a noncommunity property state. They are then treated as owning the other's stock or LLC interests by attribution, however, unless you comply with 1563(e)(5)(A) thru (D), so you need to look at those rules and make sure you comply.

EBECAtty, it is short-hand.

Thanks, Larry.

Patricia, we posted virtually the same answer at same time and yours was not visible to me until I hit Submit Reply, so I gave you a heart.

Speaking theoretically about the hypothetical you are asking about, there is a good argument they are PT's for two of the plans. I'll use 4975 instead of 406 references for simplicity, but both may apply. The payments were made to a DQ'd person. See 4975(e)(2)(B), and therefore may be PTs, see 4975(c)(1)(C). Ordinarily, 4975(d)(2) might exempt, but in the case you posit the exemption points back to the wrong "plan" at least in two cases. There are lots of other potential factors that could affect analysis, though. The above are just some thoughts

If it's COLI, the life insurance company selling the policy may have a form. If they don't, use a different insurance company.