Luke Bailey

Definitely for its applicability, Mike. I just reviewed the terms of the exemption, PTE 80-26, and as far as I can see, it fits this situation well. Note that (a) there should be some provision in the plan document permitting the loan, at least obliquely (because the loan must be "in accordance with the [plan's] terms or written modifications thereof..."), and (b) the loan would become a PT (or need to be recharacterized as a contribution, I guess) if it went over 60 days without being memorialized in a formal loan document.

The short-term loan to plan PTE specifically covers loans to pay benefits.

More briefly, the plan administrator could, I'm sure, prevent the tool from being presented to the plan's participants, and so is passively deciding to permit it to be presented in association with the plan. So sure, they have some responsibility to know what the tool does and determine whether they think it's suitable.

Not disagreeing with any of the above, but I will perhaps say more plainly that until the amount was no longer subject to a substantial risk of forfeiture (SRF), it was not includable in her income, and therefore FITW and FICA should not have been withheld. See 457(f)(1) and 3121(v). Timing is not optional, Should be taxed only when vested. IRS instructions to Form W-2 starting at bottom of page 24 say "Use Form W-2c to correct errors on Forms W-2, ...." That's imperative language. IRS has statutory authority to command taxpayers to do certain things in forms, so yes, the W-2c is required. Of course, your wife got the benefit of $3,000 or so in federal income tax withholding over the course of the year, and she also got FICA wage credit (which of course won't do her any good if she was already at or over the limit or has more than 35 years of wages at the limit). Unwinding that benefit will be complicated and, depending on what's done, will impact the corrected numbers on W-2c.

Right, ETA Consulting LLC, but just want to make sure that the most likely does not get in the way of the possible.

calexbraska, if you were an NHCE for the year and are required to get a QNEC (which, as others have pointed out, seems unlikely), then as MoJo pointed out this will be a question of whether, under your partnership agreement nonelective retirement contributions are specially allocated to individual partners. Maybe you are an HCE and what they're saying is that you have to bear your share of the cost of a QNEC for staff? Again, either way, it's a question of whether the partnership does or does not allocate this expense individually, rather than according to overall profit share. Most partnerships specially allocate, some do not. The Internal Revenue Code is indifferent to which is done.

Agree with all of the above, but would note, khr, that if the plan language turns out to be ambiguous it may be possible for the employer under its authority (as stated in the plan document) to interpret the plan to adopt an interpretational rule that would be applied consistently.

If your documents (plan, SPD, and deferral election forms) indicate that all W-2 pay would count for deferral purposes, and the procedure the employer was using was oral/informal, then, again without knowing all the facts, you may well have a "failure to follow the terms of your plan" qualification failure. If you could convince the IRS in VCP that substantially all the employees knew about the semi-documented change and that substantially everyone deferred what they intended, than as jpod already said you might get a better result in VCP.

Will.I.Am, I think what is meant by combining the safe harbor and discretionary matches is that you look at what you did (i.e., including your discretionary, once you have determined what it is going to be), and then you just think about it arithmetically as the dollars, dispensing with the safe harbor and discretionary labels. So in your example, your combined safe harbor and discretionary matches have the result of a 200% match on deferrals up to the first 3% of pay, then a 150% match on deferrals of the next 1% of pay, and finally a $.50 match on deferrals up to the next 1% of pay. If that is the case, then I think this would be OK. A person deferring 5% of pay would get an 8% match, but you would not be matching on deferrals in excess of 6% (your safe harbor match only takes into account deferrals up to 5% of pay, and your discretionary match takes into account only deferrals up to 4% of pay), so 1.401(m)-3(d)(3)(i) would be satisfied, and your discretionary match does not exceed 4% of comp, so 1.401(m)-3(d)(3)(ii) would appear to be satisfied.

MWeddell, I'm getting confused, but I think I still disagree. The requirement in Treas. reg. 1.401(k)-3(c)(4) is that, "The safe harbor matching contribution requirement of this paragraph (c) is not satisfied if the ratio of matching contributions made on account of an HCE's elective contributions under the cash or deferred arrangement for a plan year to those elective contributions is greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible NHCE with elective contributions at the same percentage of safe harbor compensation." In your example, the HCE defers 4% of safe harbor comp and the ratio of his/her matching to elective deferrals is 1 to 1. In this plan, "any eligible NHCE" who deferred 4% of safe harbor compensation would also have a ratio of match to elective deferrals of 1 to 1.

With lateral partners, etc., occurring so frequently, I don't think it's an issue. Partner vs. associate is a classification, not an age or service condition.

Belgarath, I think the concern is cash flow, but it is not even so much swings in price of stock as just having to pay at all under the put option. The company wants to budget its cash obligations.

If they just include a paragraph describing what they found and that controls are going to be put in place to prevent in future, what's the harm?

Interesting argument based on careful semantic parsing of terms. Thanks, Ace. Would be interesting to know what KCA ended up doing.

Yeah. Well, anyway, KCA seems to have been quickly satisfied with the answer that the plans had to be aggregated, so maybe not much money involved.

Kevin, I had seen same language and still don't think it nails down what it means to "participate" for purposes of required aggregation. I am not disagreeing with you either, and my bet would be that IRS would agree with your conclusion, less clear what a court would say, although I would not want to take it on a contingency. My point was that the consequences of an inadvertent RAG could be so harsh, depending on financial facts, that the employer might want to know all of its options. May not be a question of what is likely the "right" answer, but rather what is defensible and weighing risks.

My point was different, I think. Of course if the plans are aggregated, all non-keys must get the top-heavy minimum. My issue was whether the K-plan had to be aggregated with the ps just because the two keys were not excluded from it, although they had not every contributed (or, dare I say it, "participated"). My question was whether it was clear under Section 416 and the top-heavy regs that the two keys "participated" in the K-plan if they were eligible but had never had a dime allocated under it. Maybe I misunderstood the question.

Don't know if I agree. 1.401(k)-3(c)(4) and (d)(4) just refer to 1.414(s)-1 compensation, which includes both the all-inclusive "safe harbor alternative" definitions of compensation and other definitions of compensation that pass 414(s), which the questioner says his does. There is still the question of whether the plan document permits.

VCP. One think I don't know is whether, since a plan was in place, but these employers just did not formally adopt it, the IRS would permit retroactive adoption in VCP and not require the employee deferrals for the non-adoption period to be distributed. My guess is they'd allow retroactive adoption and not require return of the deferrals.

I realize that for purposes of 410(b) testing and 5500 mere eligibility to make deferrals under a K plan makes you a "participant." But is it clear that the same definition applies for purposes of 416(g)(2)(A)(I)?

If the deposits were not consistent with the deferral elections, there is no doubt that under EPCRS they can be pulled from the participants' accounts, together with allocable earnings and placed in a suspense account within the plan; based on the timing, this can be done by self-correction. Then the money could be "burned off" by using it to make matching or other contributions that the employer would otherwise be required to make going forward. If the employer really wants to pull the money out of the plan's trust now, then whether this is a mistake of fact contribution may be tricky and, for me to give a certain answer, would require a little research. However, on the face of it one could argue that the employer made a mistake contributing the excess amounts, even if the employee who induced the employer to contribute the amount knew what he or she was doing. Sort of another way of saying what jpod is saying above.

IRC 1563(b)(2)(C) generally excludes foreign companies from being "component members" of the controlled group they are otherwise included in. This has corporate tax consequences. However, for employee benefit purposes, the "component member" rules are not relevant. You are looking only at what is the controlled group under 1563(a). See IRC sec. 414(b) and Treas. reg. 1.414(b)-1(a).

Good discussion, but on your last point, Larry, suppose instead of bare bones corporate resolutions we had a 10-page signed plan document that left out any issues that needed design input, and replaced that in the first few months of the year, without any cutbacks, with a new document that is then submitted for a determination letter. The first document might have been too incomplete to be qualified under 401(a), and about as brief as the corporate resolutions I referred to, but I think everyone would agree that would be OK, because the second document would replace the first within the remedial amendment period. I think this is the same principle. For completeness let me point out that of course even the "initially specified in corporate resolutions" plan that I posited had a signed trust agreement between the employer and trustee so that deposits could be accepted.

Thanks for all the responses, all of which seem to be in basic agreement. I think what it comes down to is that the law is clear that the excess Roth deferrals, if not distributed by April 15 of the following year, are, under the law, considered pre-tax deferrals and the entire amount attributable to them (original deferral and earnings) is, under Code sec. 402A(d)(3), includable in gross income when distributed from the plan and cannot rolled over. But where more than one employer's plan is involved, the onus to make this happen is on the participant. There is no way the employer will know or, without a lot of instruction from its TPA, understand, this complex accounting issue. (The occurrence is probably rare, but in an economy the size of the U.S., it probably happens 100's if not thousands of times each year.) In that regard, I don't think I've seen any preapproved plan language addressing this, or any LRM language, and I don't see anything in the W-2 or 1099-R instructions that address this, reinforcing the conclusion that enforcement, if any, on this issue is going to be "self-enforcement" by the participant. That is fine, and is the basic principle of the federal income tax generally, but the retirement world is accustomed to a complex and comprehensive reporting structure and this seems to be a "loophole," as ETA Consulting LLC puts it, in that reporting structure, though not the law itself.

Suppose employee X works 1/1 through 6/30 for employer A and defers the 402(g) limit in employer A's 401(k) plan, then goes to work for employer B and defers the 402(g) limit in employer B's 401(k) from 7/1 through 12/31 of same year. Assume employee X does not take steps to have any portion of the deferrals for the year from either plan distributed to him/her by the April 15 of the following year. If both deferral episodes were pre-tax, then the IRS aggregates the amounts from the W-2 data it gets from employers A and B with respect to employee X , includes the excess in employee X's gross income, and adjusts employee X's 1040. Because the amounts were allocated to employee X's pre-tax account in both employer A's and B's 401(k) plans, when they are later distributed (presumably, with earnings), it's reported as taxable on employee X's 1099-R's, so you have the archetypal double tax that you can only avoid by utilizing the process to have the excess deferrals distributed (notifying the plan(s) by April 15 of following year), which in this example employee X did not do. But what if employee X had elected Roth elective deferrals for the amounts under both plans? The amounts are already reported in employee X's W-2's as gross income, so there should be no adjustment to his/her 1040. To the extent there is asymmetry in the treatment of pre-tax vs. Roth excess deferrals, seems like what the IRS would need to do is notify the employer that the excess Roth deferrals had been made and that those should be moved by the employer, as plan administrator, with earnings, out of the employee's Roth account and into his/her pre-tax account. But boy, that would be complicated and I have not seen anything explaining the requirement to do this. There is an example on page 19 of the current W-2 instructions that involves an excess Roth deferral under a plan of a single employer, but it doesn't touch the administrative issue that exists where the Roth elective deferrals occurred under plans of different employers. IRC sec. 402A(d)(3) pretty clearly says that employee X is going to be taxable on the amounts attributable to the excess deferrals, but how are the administrators of employer A's and B's plans going to know to report as taxable? Is employee X simply on his/her honor? (Both to do the right thing and to study tax law in the evenings so he/she will even understand this?) Maybe there is a clear answer to this and I've just been out of the loop on the issue, but I am puzzled about it.