Ilene Ferenczy

Just to be clear ... you cannot change an allocation formula (or contribution formula, in the case of a mandatory match) once someone has earned the right to the allocation. So, for example, if someone needs 1,000 to share in the allocation, you have until that occurs to modify the allocation formula (usually considered to be about 5 months into the plan year, but if you have a company that has lots of overtime, that may be too late). If there are no allocation requirements in the plan, then you have to amend before the beginning of the year. If the plan has a last day requirement, people con't earn the right to the contribution until the last day of the plan year, so you have until then to amend. Hope this helps ...

All -- As Elmer Fudd would say "Be vewy vewy careful ..." First, it is common that so-called solo 401(k) plans are documented to include everyone immediately (since the presumption is that there is no one else). So, it is possible that each of the five plans, by their terms, include all employees. If that is the case, then you might have a tougher nut to crack, because the folks ARE eligible for stuff in those plans. Second, be sure that the plans have common provisions that permit aggregation for coverage and nondiscrimination. For example, you can't aggregate SH plans with non-SH or, I believe, different types of SH plans. Finally, the coverage and nondiscrimination concerns related to the salary deferrals when no plan existed for these guys at the time could be a real issue. It might be worth a VCP filing to ensure that the IRS agrees with what gets done, but it may be possible to design the employee plan (assuming that the stuff I noted above all aligns properly) to have a QNEC equal to the MDO that would have applied had the employees been covered by the 5 guys' plans. So, they are getting what they would have gotten had the correction been made in the individual "solo (k)" plans. However, if you do file VCPs, you might need one for each plan so that each of the plans is protected (or, alternatively, you could take the IRS's approved correction on one VCP and extend it in theory to a self-correction in the others, which would be relying on the idea that one VCP's approval can be considered agreement in principle to the other plans). Remember, however, that the IRS is strained both by a lack of personnel and a lack of expertise of the personnel that is still there, so this all may be hard to achieve.

Just a note: if you accidentally let an NHCE in the plan early, EPCRS permits you to amend the plan retroactively to lower the eligibility requirements for that one person. So, there is precedent to permit the kind of amendment you are doing. I would beware, however, of situations where you have plans that are combined for testing, because you need to do coverage testing taking into account people who could have been eligible if they were in a permitted class and consider them to be excluded. So, the question becomes, if you let in a guy with a 6 month wait, and the plan normally has a 1 year wait, and you are doing coverage testing, do all the other employees (including NHCEs and HCEs) who have 6 months to 1 year of eligibility service become "nonparticipating"?

I know that PE firms commonly take the "no CG" position. If I were a TPA or consultant on such a situation, I would draft a CYA letter saying that the client represented to me that its legal counsel has opined that there is no affiliation for retirement plan purposes, I am proceeding on that basis at the direction of the client, and that I am not responsible for any ramifications if they are wrong. If the TPA/consultant is a 3(16) fiduciary, be sure to carve this out of your responsibilities or refuse the engagement.

There are special timing rules that need to be followed if the participation of the sold organization is to be terminated from the existing plan, if you want to pay out the employees. In particular, BEFORE THE TRANSACTION, the sold organization has to terminate its participation in the existing plan. If it does, then you DO NOT spin off the portion of the plan, but you have distributions to the participants that are now part of the buyer's controlled group and they can roll over if the buyer so permits. The alternative, particularly if the timing rule is not met, is to spin-off the sold entity's part of the plan, either into a separate plan or into the buyer's plan. Be careful if the transition period is important to the transaction, because any amendment to a plan after the transaction causes the relevant plan to be subject to normal 410(b) testing (i.e., you lose the transition period). This can get weird at times .... Hope this helps. It's good to have ERISA counsel on an M&A issue, because it's not a walk in the park. Just sayin' ...

Sorry it took me so long to respond. There is no guidance as to your question. But it appears to me from the language of the law that a rollover of the SIMPLE money to the 401(k) means that the rollover account is subject to 401(k) distribution limits forever. The actual statutory language of 72(t)(6)(B) says: B) Waiver in case of plan conversion to 401(k) or 403(b) In the case of an employee of an employer which terminates the qualified salary reduction arrangement of the employer under section 408(p) and establishes a qualified cash or deferred arrangement described in section 401(k) or purchases annuity contracts described in section 403(b), subparagraph (A) shall not apply to any amount which is paid in a rollover contribution described in section 408(d)(3) into a qualified trust under section 401(k) (but only if such contribution is subsequently subject to the rules of section 401(k)(2)(B)) or an annuity contract described in section 403(b) (but only if such contribution is subsequently subject to the rules of section 403(b)(12)) for the benefit of the employee. Section 401(k)(2)(B) is, of course, where the 401(k) distribution limits live. This language is also repeated in Notice 2024-02. So, the statute says that the contribution must be subjec tto 401(k)(2)(B) - it doesn't say just for the 2-year period. If the participant wants to retain the right to take distribution, he/she should keep the money in an IRA.

For what it's worth, it is very common that a court, upon receiving a complaint filed on a divorce case, immediately issues an order binding the participant and spouse to not impair any marital assets, which would include the retirement benefit. Therefore, in such jurisdictions, taking a distribution from the plan without spousal consent would be contempt of court. It is not the Plan Administrator's job to enforce that rule, but in my experience many pension practitioners and HR people worry about protecting the rights of the nonparticipant spouse. If that is your worry, then if you are in a jurisdiction that does the above, worry not! Having said that, and acknowledging that ERISA grants no rights to a benefit to the spouse or other alternate payee in absence of a QDRO, there is no obligation for a participant to provide its employer with proof of no QDRO. There's a Supreme Court case that specifically says that having a QDRO just to say "the spouse gets nothing" is inappropriate. (See Kennedy v. duPont) Last but not least, i can understand a plan sponsor's lack of desire to get caught up in a "the participant took my money and the court awarded it to me" fight between ex-spouses. Even if the plan ends up being dismissed from any litigation, there are still legal fees and anguish to expend. So, IMO, I understand the desire to freeze the account. There was a case in my youth (sigh! - the truth of age is that I remember the details of the case but not its name) that dealt with the freezing of an account by a plan administrator upon overhearing a discussion between two employees in which one stated he was getting divorced. The plan administrator froze the participant's account to distributions and investment changes; the participant tried to change investments, was prevented from doing so, and lost money because of it. He sued for fiduciary breach. The court, to my recollection, found the plan liable for the loss, but said it didn't rise to the level of a fiduciary breach. The fault accorded to the Plan was because teh plan had no provision/QDRO policy that provided for the freeze. I do not remember the court indicating that a freeze was per se impermissible in absence of a QDRO. So, I'm not sure that a freeze is impermissible if the QDRO procedure provides for it, and it is reasonable, and can be removed without a QDRO showing that the participant spouse gets nothing.

This illustrates the broad problem of compensation definitions, which are hardly if ever properly applied. All the plans that i've seen will say whether the W-2 Comp definition should include or exclude deferrals to 401(k), FSA, etc. When they are saying that there is $20K of heatlh insurance expense, i would assume this is employer-paid health insurance that is excluded from taxable compensation, right? Barring other language in the document, i wouold think that this is not included. But, the document and the Code would control.

Note, there are rules that limit the aggregation of safe harbor plans with other plans for coverage and nondiscrimination testing. In all likelihood, you will need to meet coverage in the two SH plans separately for 2025 (i.e., as if both plans excluded all other employees). Also, check the plans to make sure that they don't cover the other entities by their terms. You could have some people being covered accidentally in more than one plan. Last but not least, there are rules about modifying safe harbor plans mid-year. These rules may prevent you from merging anytime other than the first day of plan year. So, in other words, therre is a lot to think about here. Consider legal counsel (regardless of whether it's me or someone else). M&A is complex and shouldn't be handled without knowledgeable advice, IMO.

If you are using the SECURE 2.0 Section 332 (i.e., new Section 408(p)(11) of IRC) rules to terminate a SIMPLE and replace it with a 401(k) plan during the year, there is a special provision that allows people to move the funds into the 401(k) plan even if the 2-year rule is not met. See IRC section 72(t)(6)(B), as amended.

Thanks Draper55. I'll pass it on. David, FWIW, I represent the plan sponsor. I assume anyone he deals with relating to this issue would also represent the plan sponsor.

Hi, all. I have a client that would like to sell his company and is thinking that the significantly I-can-never-have-enough-liability-to-use-this-up overfunded DB plan his company sponsors might be a great selling point to a buyer who has an underfunded plan or a significant pending liability in its plan. The idea is that the buyer buys my client, they merge the two plans and voila! No more excess assets. Does anyone know anyone who brokers or matchmakes this kind of business proposition? Thanks in advance! Ilene

EPCRS allows you to consider all amounts contributed by the participants to be excess allocations. To quote myself and my co-authors of the Plan Correction eSource on ERISApedia: Let’s suppose that the early entrants were predominantly HCEs or the plan sponsor doesn’t really want to include the affected employees—there is an alternative. The plan may treat the funds contributed to the plan by the early included employees as Excess Allocations. This means that the plan sponsor can correct the failure by distributing to the affected employees the elective deferrals they made to the plan, including earnings. Any employer money funded on behalf of such employees, and earnings thereon, should be forfeited, to be used in accordance with the terms of the plan. Having said this the 3% top heavy minimum for a new entrant cannot be that expensive. Is it worth the potentially bad employee reaction to return the funds to avoid the TH minimum? Just sayin'.

I also recommend reading the document (ALWAYS ABOUT EVERYTHING!) and the ERISA Outline Book. Note that there are things that appear in a W-2 that are never includible in compensation, such as true severance pay. So, you really need to take a look at what the document says should be included, plus any Code references in the document, and then compare that to the chart in the EOB, and that will likely get you to where you need to be in using the proper compensation.

At this risk of sounding like I'm just trying to sell our wares: Our firm wrote a text on correction programs for ERISApedia that can be purchased. If interested, go to ERISApedia.com. We also did a video certification program for NIPA (nipa.org). Having said that, I really recommend that you at least associate with someone who knows how to do plan correction work on your first venture into VCP-land. There are a lot of arcane rules about the filing, as well as things that people have learned over time that are good ideas or bad ideas for ways to approach the correction programs. Again, if you think that I am making this recommendation just to get business, contact me, and I'll refer you to another law firm for assistance. I'd rather send you in the right direction. Last but not least, kudos to Justanotheradmin for suggesting that the plan be fixed prospectively. Stopping the bleeding is one of the "best practices" things that people who do a lot of correction work always preach. Good luck!