Luke Bailey

I have had similar situations. Generally agree with the other answers, BUT: 1) If the employer has uniformly excluded the amounts in operating its 401(k) plan, in all years, AND there is some arguable basis in the plan document for the exclusion (e.g., the plan document doesn't flat out say all Box 1 W-2 is 401(k) comp, but has some exclusion such as "fringe benefits," or says that 401(k) comp is "based on" Box 1 W-2, then the argument can be made that the additional pay is considered by the employer to be a "fringe benefit" or some other adjustment. Believe me, notwithstanding Section 132, there is no uniform definition of "fringe benefit." But if the plan document just says "Box 1 W-2 with deferrals, etc. added back," this argument is not going to work, because IRS will say that the employment contract, bonus plan document, or whatever, does not amend the plan, and you have to follow the plan, just as previously stated. 2) It may be possible to get a correction in VCP of retroactively amending the plan document to exclude the amounts from compensation. What I think you would need to show IRS is that every employee who had the amounts excluded was fully aware that they would be excluded. Every situation is unique, but I believe that with the right facts (again, primarily that all the employees who had the exclusion were fully informed of the employer's intent to exclude the comp for 401(k) purposes), you might get a retro amendment in VCP.

This is an operational error. Failure to follow plan doc. The plan doc says that the participant defers what he elected. They deferred more than he elected. You are within the "by the end of the second full plan year after the plan year in which error occurred" period for self-correction, and anyway probably "insignificant." Your self-correction is to have the plan pay him the amount, plus earnings, and give him a 1099-R for this amount for the actual year of distribution with code E, as stated by CJ Allen. Alternatively, you could pay him/her the money now from company, with earnings, and then treat the excess in the account, including allocable earnings, as if it were a forfeiture, so company can offset against contributions. In the latter case, it would be compensation income to him in the year paid, including the earnings, and reportable in Box 1 of W-2 as such by the employer for the year paid, since he was neither in actual nor constructive receipt of the funds in earlier year when mistakenly contributed. He is a cash basis taxpayer and thus taxable on it when paid. Payment from the trust and reporting on 1099-R using Code E is probably preferable, sinc If you have company pay and report on W-2, a manual intervention in payroll may be required to suppress application of employer and employee FICA to the returned amount (the earnings increment would be subject to FICA), and the discrepancy between Box 1 and the FICA wages box might be questioned by the Service Center.

I haven't seen many plan documents with separate definitions of compensation for deferrals and match. Are you sure that including bonuses for deferrals, but not for match, is consistent with plan document? Second, I'd really want to see the plan document's wording regarding testing compensation. Does it say that for testing you use ANY 414(s)-compliant compensation definition, or the 414(s)-compliant compensation definition that you used for allocation purposes?

Whether you can force distribution in kind depends on the terms of the plan, I think. You probably can't. Might even have to amend the plan to NOT distributed in cash. Anyway, my post assumed a willing participant and an eventual sale of the property that provided a decent rate of return. I think the cautions expressed in some of the other posts, as well as my earlier, are all valid.

I think my post earlier is correct, and I think Tom Poje is articulating why. Note that the language quoted from 1.411(a)(8) specifically says that you can't reduce the vested percentage in the employee's "accrued benefit." Treas. reg. 1.411(a)-7(a)(2) defines the "accrued benefit" in a DC plan as the "balance of the employee's account balance held under the plan." In other words, the "balance of the employee's account balance held under the plan [as of the date of the amendment]," and not the account and whatever, ever goes into it.

I have had clients who do this. Pain in neck because of requirement to true up when predicted does not equal actual precisely. I believe there is a provision in the 401(a)(4) regs that says the timing of contributions will not be discriminatory (e.g., if more front-loaded for owners) b/c nondiscrimination determined on annual basis, but I have not been able to locate it in the time I allocated to task.

Assuming they are self-employed (K-1), they just have to have their written deferral election filed with the plan administrator (yes, themselves) by 12/31 (assuming plan year is calendar year). So yes, they could defer in "one shot" in December. If the plan just covers the dad and sons, and again the firm is a partnership or LLC taxable as a partnership, ERISA does not apply, but the deposits for any elective deferrals actually elected by the participants should be made within a short time after the compensation from which the deferral is taken is paid. The match and any profit sharing can of course be made by tax return filing deadline.

What am I missing? You can't apply the new 3-year cliff to any matching contributions made before 1/1/2019 for anyone. You can apply it to any matching contributions made on or after 1/1/2019 for anyone except a participant with 3 or more years of service. If the participant has 3 or more years of service, the keep the full and immediate vesting. See IRC sec. 411(a)(11). Of course, the group you can't apply it to for new contributions (3 or > YOS) would be fully vested under the new schedule anyway, so doesn't make a difference.

Completely agree with John Cole, and of course the distribution of fractional interests to both of them on plan termination can be to an IRA. Of course, there are lurking issues of fiduciary liability here. The participant's getting a good price that reflects decent long-term rate of return is the best protection, unless owner wants to go to DOL and get a PT exemption to buy property him- herself or do VFCP.

One more thought: Hard to believe that they did not have a missed reportable event at some point along the way, but maybe not.

You're quite welcome, TaxLawyer1978. A good year, btw.

Change your "presumably as of date Y" to "as of date Y," and you're not changing the time of payment, just the executive's vesting. That should be OK under 409A.

Not sure I understand. The 410(b)(6)(C) transition rule is not on the table, since the plans were merged, thereby changing their eligibility. Also, it is indicated that while the target store's employees joined the plan as of the date of merger, they were not given credit for service towards match requirement. If you merge the plans the surviving plan has to credit all service that was credited under nonsurviving plan.

I'm not sure there is a relevant statute of limitations, but would be interested in jpod's further thoughts on that. I would look at the economics of the plan. Was there just one or perhaps two majority owner(s)? Is the plan sufficiently funded to pay rank and file benefits if benefits for substantial owners are short-paid? Since you say the plan requires an annual audit, it is presumably > 100 participants, so likely that the owners' benefits are only a small proportion, however. Don't forget that you also have the minimum funding excise tax to be concerned with as well. Check if the owner(s) own(s) other companies, because the liability is on the entire controlled group. If there is no controlled group liability, whether the PBGC can go after the owners generally depends on whether they have respected the corporate form or not, so that the corporate veil can be "pierced." Note that the IRS minimum funding excise tax will follow the owners as successors to the corporation, so they cannot rely on fact that corporation was the taxpayer for the excise tax. However, successor liability should be limited to the proceeds of the liquidation, which you say were nil. However, if some of the debt repaid was personally guaranteed, IRS could see that as a distribution.

If in addition to a formula the plan document had a provision for a discretionary match, would probably be OK, as long as the discretionary does not have specific provisions regarding allocation that would conflict. As Mike Preston and perhaps others have pointed out, the "lost earnings" are really additional m contributions that have to be included in ACP testing.

No problem, Kelly. Good luck.

Kelly, you're talking about the 104(a)(3) exclusion for a governmental plan? Sure. See Treas. reg. 1.104-1(b), second sentence. Beneficiary could also exclude if a death benefit for an on-duty death.

Agree with the above. See Treas. reg. 1.401(m)-1(a)(1)(ii) (for the BRF issue) and (a)(2) (for the "are these matching contributions" issue).

Maybe they're not going after "sham" divorces, or at least not mainly, but in their endless drive to bring more assets in for their broker-dealer they are trying to find real alternate payees, who have been part of a legitimate divorce, that (for whatever reason) have left their money in the participant's plan and they're pointing out to these alternate payees, and the plan sponsor, that the alternate payee can roll out even while the participant spouse stays employed.

That is the correction I would think would apply. Thanks for confirming.

I think that the answer is probably that for the buyback they're never going to get the Roth status back. If the participant is reemployed and starts making new Roth elective contributions or does a Roth in-plan rollover, the Roth period will go back to 2010 in the employer plan. But I don't see how they can ever get the Roth they took out back in the plan as Roth money. We know they can't roll it back as a Roth. If they take money out of the Roth and use it to buy back into the plan, and it's not a rollover, then that's fine, but there's no basis for putting it back into a Roth account in the plan and they have tax consequences of the distribution from their Roth IRA. If it's a qualified distribution (i.e., participant is 59-1/2 and the money's been in the Roth IRA for 5 years), then it's just nontaxable income to them (if they don't roll it over), but then it is an after-tax contribution to plan. If it is not a qualified distribution from the Roth IRA, then they pay tax on some of what they get out of the Roth IRA, and maybe some 10% penalty, and again what they put back into the K-plan to buy back in is after-tax. This actually makes sense, once you accept the rule that there can be no rollover from Roth IRA to employer plan.

I agree with you, Belgarath. Has to be a mistake, but harmless. Perhaps a form document from someone who works on both governmental and nongovernmental plans. I guess you could also have a situation where an entity changes status during plan year, e.g. a consolidation of a private school with a public charter. But this would be very rare and I think you're right, it's just a mistake in your circumstance.

This is a little outside my area, but I will take a stab at it and someone may correct me. For purposes of the deduction, a professional services firm is "any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees." See Code sec. 1202(e)(3)(A). So does not seem to require a professional license. My guess is that even TPA services that do not involve actuarial work would hit one or more of the other categories, e.g. accounting, financial services, or principal asset being reputation or skill of employees. However, nothing is certain until we have guidance from IRS. However, a lot of "lowly pension administrators" (assuming they are not W-2 employees, but sole proprietors or partner of the TPA firm) will still get all or much of the benefit, since the exclusion for "professional service firms" only applies to joint returns where taxable (not gross or AGI) income exceeds $315,000, or individual returns $157,500. Above that the benefit is phased out to 0% once taxable income hits $415,000 or $207,500 respectively.

Good question as to whether a buyback is a rollover. I am not aware of any reg that explains exactly what a buyback is. I have seen and drafted (and gotten DLs) on provisions that say that the buyback can come from any source and tax consequences depend on source. E.g., the participant can roll back in from a traditional IRA (in which case the plan says the money is treated like a rollover), can use after-tax funds that have never been in a plan (in which case the funds are treated as after-tax contributions but not subject to 415(c)). I would think it's a rollover if it's coming out of an IRA, and not doable if from a Roth, but maybe not.

Kevin, C, agree. We're saying same thing and quoting same reg, although you're being more blunt. In short, it's VCP or audit lottery time.