Luke Bailey

Transition rule referred to by ETA Consulting LLC is in IRC sec. 410(b)(6)(C). Read it and understand how it applies to your situation before you do anything else.

While, as others have pointed out, it might well be better for you to describe the class in your plan document and exclude it without getting individual participation waivers (largely because that could be changed in the future and also would avoid the complexity and potential for disagreement of getting individual written elections not to participate), you specifically asked about employees' electing out. There is case law saying that a plan provision that allows employees to voluntarily elect not to participate does not violate ERISA. Of course, for both tax and ERISA, the provision permitting this must be in your plan document. The key thing is that the waiver must meet the requirements for a one-time irrevocable waiver under Treas. reg. 1.401(k)-1(a)(2)(v), i.e. must be made prior to any participation, be irrevocable for all employment with the employer, forever, etc. Otherwise you will have an inadvertent CODA (even in a 401(k) plan) and that will disqualify the plan. Whether you exclude the group by describing it as excluded in your plan document, or go the individual waiver route (which of course some employees might not agree to), all of the employees who would otherwise meet the eligibility requirements of your plan (e.g., age 21 and one year of service), will be counted as part of d your eligible employee universe for purposes of determining whether your plan passes coverage under 410(b).

Right, I was just coming back to point that out, imchipbrown.

I had what seems like a very similar case 20+ years ago. I think the argument is probably still open under Code and regs, as it was then, that the returned amounts are not "contributions" for Section 416, because they didn't "stick" and, if timely distributed, are even considered taxable in year of contribution, but because the 415 regs treat returned excess contributions as "annual additions," I doubt the IRS would accept the argument. In the case I had, I represented employer very similar to yours. We offered the insurance company that had incorrectly advised the employer to let it try to get a PLR or other ruling from IRS saying the excess contributions were not contributions for the key employee under 416, but the insurance company just through in the towel and paid the amount for the non-keys. Not sure whether they even tried sounding out IRS informally and were discouraged, or just drew own conclusion. It does seem unfair.

I think a lot of plan administrators don't understand the difference between deemed and offset, as it is somewhat subtle. The issue is that the IRS wants you to be taxable, following a grace period, if you miss a payment and don't cure, but they don't want plans to violate the general prohibition on in-service distribution. So the regulations create useful fiction of a "deemed distribution," which means that you get a 1099-R for the amount that you defaulted on, even if you have not had a distributable event, such as a termination of employment. Believe it or not, the IRS regs say that that "deemed" distributed loan lives on, ghost-like, in the plan, continuing to earn ghost interest and, potentially, blocking a future loan from the plan, after the date of the default, until you have a distributable event, at which time the outstanding amount of the loan (but not the ghost interest, thankfully) is "offset" against your account, and thus finally gone. Note that you actually can repay a deemed loan before it is distributed, and thus resurrect that portion of your account, in which case you would have tax-paid "basis" in your account for the amount you repaid, but I digress. Anyway, if the loan default occurs before the distributable event, e.g. separation from service, occurs, and certainly if it occurs in a taxable year before the distributable event occurs, things are relatively simple: You have a deemed distribution in one year, and a 1099-R reflecting that, with its own code, L, in Box 12, and then in a later year you get your distribution, which does not include the previously deemed amount, and you don't pay tax on it again. It's also pretty simple if the event of default is, as it often is, the distributable event itself, e.g. separation from service. Assume that the plan documents and administration are consistent that if you separate from service and don't repay the loan within some fairly short grace period, it defaults. In that case, you would actually have a taxable distribution of your loan (surprise! you already got the money when you took the nontaxable loan out, so the distribution now is "air," but at least you no longer have the obligation to keep paying your account back). Because in this case the loan was not previously "deemed," so that you did not pay tax on it, it's not unfair that the offset is treated as a taxable distribution on your Form 1099-R, just unpleasant. And note that in this case, because IRS treats it as an "actual" distribution, it doesn't get a code L on the 1099-R. In your case, although a review of the plan and loan policy documents, and promissory note, would be required to say this with total assurance, it seems pretty clear that what caused your loan to default was probably your separation from service, because the plan probably follows the permissible rule that it defaults the loan when you separate and it can no longer withhold repayments from payroll. (Note that not all plans do that; some permit terminated participants to keep paying by check until the loan is paid off.) I mean, you never really missed a payment, right? So why else could they be defaulting your loan. The new law states that a loan offset occurring after 2018 qualifies for the more liberal rollover timing (i.e., you would have until your filing deadline in 2019 for your 2018 1040 to roll cash up to the amount of the loan into an IRA) if the loan default is on account of "the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the participant." Sounds to me like you will meet that requirement, assuming that the plan gave you at least 30 days following employment to pay the loan off without calling it a default and your termination date was after December 1, so that the 30 days would put you in 2018. However, if your employer treats the loan offset (seemingly, incorrectly) as a "deemed distribution" and codes it as such on the 1099-R, you could have problems with the IRS Service Center where you file your return, assuming you do roll it over. You might also have problems with the IRA custodian that you deposit the loan offset rollover with, although I doubt it. There's helpful discussion of the reporting issues and difference between the two types of distributions in the 2018 IRS Form 1099-R instructions. Just Google the .pdf of those and then search in the .pdf for "plan loan offset" and also "Code L." These are discussed in several places.

calexbraska, while the Code of course has an entire section (132) dealing with qualified fringe benefits, I think the term "fringe benefit" as used in Treas. reg. 1.414(s)-1(c)(3) is not limited to Section 132 fringes, but would include an item like this that is taxable, but still a "fringe benefit." Informal IRS guidance such as publications and training materials with respect to taxable "fringe benefits" gives the term a broad and somewhat uncertain meaning. Therefore, my thought is that if you exclude them you are not busting the 1.414(s)-1(c)(3) safe harbor, if that's what you're after. However, I am not sure that the safe harbor permits you to exclude "stock-related compensation" or differential wage payments, so you may already be required to test your compensation definition for nondiscrimination. Of course, if you have to test your definition for nondiscrimination, it seems unlikely that excluding this "points" compensation would cause you to fail. However, since I don't see an exclusion for this "points redeemable through a catalog" taxable fringe benefit from IRC sec. 3401, I think you would need to include the exclusion in your plan document.

Agree that no issue if want to 100% vest. Actually, you've got a 33.33% reduction and a "major corporate event," so probably is a PT.

OK, thanks ERISAApple. I recall the clarification in newsletter now.

I believe in informal discussions at ABA and elsewhere IRS made it clear, subsequent to Notice 2007-7, that as long as the nonspousal rollover was made to IRA before end of year following year of death (i.e., before deadline for first RMD of nonspouse beneficiary under life expectancy method) the nonspouse beneficiary could elect to receive distributions from inherited IRA using life expectancy rule, regardless of whether employer plan would have made it available. That is literally what Q&A-17(c)(2)(A) of Notice 2007-7 says, but I think it was overshadowed by the seemingly more restrictive language of Q&A-19.

We were successful recently in a VCP application dealing with definition of compensation. The SPD did not help, or hurt, because the language there was vague. (Hooray for vagueness!). We were able to show for almost all years using PowerPoints from employee meetings, as well as offer of employment letters, that the definition of compensation communicated to the employees was the definition that the employer had actually used in the plan's administration.the. We built a spreadsheet that showed each participant's "touches" by these materials in multiple years (was a fairly large plan, so not trivial). For the first years where the error had occurred, we had no materials, nothing (they probably just had not been preserved). The IRS did not give us those years. But the bulk of the money was in the years for which we did have very good evidence that employer's intent and understanding had been communicated.

I agree with Fiduciary Guidance Counselor's basic approach in his first comment. You need to gather all the facts and circumstances you can and then ask yourself whether this was a situation where the break-up was really initiated by Z or by ABC. It may not be clear, but in the former there would probably not be a PT, in the latter, there probably would be. With situations this small, there are probably lots of personal dynamics at work and potentially ambiguities.

Phlyer's, I would like to emphasize what Fiduciary Guidance Counsel said in his first post. Find where in the plan it states that the account can be divided into separate accounts, one for each beneficiary. It almost certain says that somewhere.

Jackie, probably because the STD is showing up on the W-2 from employer, the third party payer of the sick pay is treated for tax purposes as the employer's agent. See IRS Notice 2015-6. So my guess would be, no suspension if the amount of the STD after withheld taxes is at least as much as the loan repayment amount. But I don't know of any guidance precisely on point.

It's been a long time since I read the 1.411(d)-3 regs from start to finish, but I am not sure that this would not be protected. Am I right that you would be changing from a situation where, before the amendment, a termed vested who had not yet reached NRA or RMD can elect to take any amount he or she wants from his or her account, and leave the rest in, to one where, after the amendment, the participant would have to take everything in a single lump sum?

Since no one else has addressed your question, oldman63, I will take a shot. I think you're right. I don't know what they were thinking, assuming your description is accurate.

J. Bringhurst, as you suspect, I think, there's a little that needs to be unpacked in the phrase, "payroll-based." If (as is probably the case), the bonus falls into some payroll period as defined in the plan for purposes of the match, then it's almost certainly going to have to be included for that payroll period in determining what 3% of the participant's W-2 compensation is for the payroll period.

The most interesting aspect of this is that anyone who at any time is entitled to a distribution from a qualified plan (e.g., the millennial job changer who gets a separation from service distribution, the pre-retiree who can get an in-service distribution at age 59-1/2) and who understands the issue can avoid the problem by, as stated above, doing a token IRA rollover. Once the 5-year period on that IRA runs, everything stuffed into it later by way of further Roth rollovers is qualified money, whether or not (let alone how long) it was Roth in the qualified plan.

IHC, I think you have probably accurately described the consequences.

Which plan? Is this a situation where each participant is using a self-directed account in the plan sponsored by the medical practice to own land that will be leased to the medical practice?

Yep. The old "facts and circumstances," Flyboyjohn.

When you say that the LLC will have plan assets, do you mean that medical group lessor is the sponsor of the plan whose assets are in the LLC? Also, what percentage of the LLC is owned by the plan or related plans.

Flybyjohn, don't you think there is a risk of having an employer payment plan if you determine the extra taxable wages by whether they were used to pay premiums?

Larry, I'm not disagreeing with you. I'm done on this one (I hope). Thanks.

This is a tough question. Maybe it's not an IRS issue? If the SPD properly states the rule, the problem is bad administration in misstating the rule to employees in other communications, e.g. at employee meetings or in a rehire interview or letter. So maybe a fiduciary breach because failed to administer the plan with reasonable competence. But as just about everyone else has noted, the operational error for IRS purposes would be not contributing the match for those who did defer, which must be corrected under EPCRS, and clear how you do that. I guess under the right facts and circumstances you could say that the employer's miscommunication of the actual plan provision was so widespread and persistent that it amounts to not administering the plan in accordance with its terms, so an IRS problem, and the remedy would be a QNEC for the missed deferrals, but, again as noted by others above, that does not seem clearly required.

Effen makes a good point. Spousal consent may not have been required if a governmental. But if governmental could be community property, could maybe get a constructive trust, etc. Would depend on state law.