Ilene Ferenczy

While it makes sense not to sign an amendment in the interim unless the plan is terminating, you need to be sure to keep track of actual administrative decisions in the meantime. The client or TPA may want to mark the proposed amendment as PROPOSED or DRAFT or something like that with a plan year notated, and then complete it simply as a means of denoting for the file what elections were made. It is possible that preapproved plan providers are ... um, providing ... something for this purpose. Just sayin' ....

If the loan repayment policy is part of the plan, I believe you can correct retroactively, because it increases, rather than decreases, participant rights. If it is just a procedure, I would do a resolution of whoever is the governing body (i.e., Committee or company, whatever is applicable) to identify that the change was inadvertent and is being put right. The only exception i would have to all of this is if the only affected participant is an HCE - it could look discriminatory. But, I am not sure if that would even concern me in this situation, barring other facts that are problematic (such as, 3 NHCEs asked to repay by ACH and were denied during the relevant period).

Just to add my voice to this, we have strongly recommended to our clients that they do not do anything in relation to this until guidance comes.

First, i agree that an attorney is needed to assess whether someone has a case. Second, be aware that anyone providing services has a standard of care that is required and not fulfilling a contractual obligation is breach of contract. So, there may be a cause of action here. It depends on (a) what the TPA agreed to do; (b) what conditions needed to exist before the TPA had that duty (e.g., receiving data, being paid, etc.); (c) what limitations there are on liability in the TPA service contract; and (d) what limitations there are on how litigation can take place (e.g., statute of limitations, arbitration or mediation vs. litigation, etc. as stated in the TPA contract). Last but not least, the client should have an attorney send a demand letter to the TPA ... there is a lot of potential for results between the bad action and litigation .... Many TPAs are willing to stand behind their work. If nothing else, this is a good illustration of what I keep telling TPAs who do not think they need a service agreement! Stuff happens! Ilene

it's actually more complex than that. There was a court case (Heinz) that led to different regulations about 10 years ago. If you want, give me a call after TG, but the sum is: (a) for purposes of money in existence at the merger, the right to the old vesting schedule on that money must be protected. (b) for new money after the merger, if a participant has at least 3 years of service, he/she gets to choose the schedule he/she wants and a participant with fewer than 3 years of service must be vested at least as much as he/she is at the date of change, but may have to wait for the new schedule to exceed that vested balance to get additional vesting. Check out the case 32 EBC 2313 (Supreme Court 2004) and also Treas. Rg. 1.411(d)-3(a).

Here's the thing i suggest we all think about before using employment hours (ever, not just in the LTPT situation). If you have any significant number of participants (and I leave it to you to identify what is "significant" in your circumstances), you end up with needing hours for these employees all on different years. Not so hard to get in the first year, but if you had 20 employees and you had to follow their hours for two or three years of employment based on anniversary dates, it might be challenging to do. I imagine this is sensitive to the vagaries of a company's payroll system, but it's something to consider. And, then, you need compare the hassle of watching hours this way for a longer time to the hassle of enrolling a LTPT in the plan. What a Hobson's Choice!

FWIW, while Peter is right that retirement plan loans are unique in their characteristics, it doesn't hurt to contact local banks and ask them what they are charging for secured loans these days to get some sense of the market. I don't know if anyone does this nowadays, but in the olden days, people used to secure bank loans with accounts at the same bank so-called "passbook" loans) and that always seemed to me like a reasonable facsimile of plan loans.

This likely falls under what my partner calls the "Spandex Rule" - just because you can doesn't mean you should. A cash balance plan is no place for real estate, IMO, because of the volatility. On the one hand, you could lose a lot of money and have a huge underfunding problem. On the other hand, you could make a lot of money (which is what the owner usually hopes for) and end up with an excess asset problem. How happy would the owner be if he found out that his great real estate gain was going to be excise taxed 50% plus his normal rate of income tax. Put conservative investments in the cash balance plan and use another vehicle for the volatile investments. Ilene

Two more things to consider. Insurance in a plan is a benefit, right, or feature. If the insurance was offered only to the HCE, you have a discrimination problem. (Even if it's a voluntarily added benefit, the fact it wasn't offered can create a discrimination situation.) In addition, if your plan doesn't permit insurance (as many preapproved documents have a provision where you select whether the plan allows insurance), you have an operational failure for allowing it to be in the plan. Just sayin' ...

the actual source of the rule is Treas. Reg. 1.415(f)-1(f)(3).

What does the plan say should happen with forfeitures if they are not used to pay expenses? You need to follow the plan, even if it includes making an additional distribution to the paid-out participants.

I assume that there is no limit on how much salary deferrals are matched. (If there isn't, it makes me wonder why a true-up is necessary ...) If there is and you do a payroll period match, the owner's deferrals to be matched will be subject to the limit. E.g., if the plan said that it matches deferrals up to 6% of pay, only 6% of that one payroll period for the owner can be matched. If that is not enough to get him the match he wants, then it's a problem. If you need to use a "true-up" technique to get the owner what he wants, then it needs to be nondiscriminatory. You can't have a "no true-up except for the only person who is self-employed, who does get a true-up" provision.

Just wanted to add my two cents. There is nothing wrong with flat fee billing. Nor is there anything wrong with hourly billing. But, you need to see what your agreement was with the client. While the law requires your fees to be reasonable, I would argue that this is a standard to be determined by the plan sponsor (and we put that into our service agreements, BTW). So, if the client determined that the $15K fee was reasonable, the fact that you could have charged $12K and still made money is likely not relevant. (If, on the other hand, you were accused of charging an unconscionable fee under Circular 230, there would be an argument that what others would have charged or how much time it took to do the project could be probative of whether the fee was off the chart. The difference between $12K and $15K,however, should be so large that the high end is "unconscionable.") Having said all that, your service agreement or your "estimate" language likely made it clear whether you were billing by the hour or by a flat fee, and you need to stand by that. And, what everyone else said about whether you would charge more if it had taken you longer, etc., are important factors.

Yes, Luke, we now agree. If the participation of the subsidiary in the MEP terminated prior to the acquisition, then the exception in the regulations would apply and the MEP could make payments to the subsidiary's employees. But, if action was not taken to terminate the subsidiary's participation in the MEP before the transaction, i agree that the money would either need to stay in the MEP (and, I guess, the MEP would charge the former parent for those accounts), or the MEP would spin off the plan to be a separate, inactive plan to pay benefits to the sub's employees as they terminate, or the MEP would spin off the plan to be merged into the new parent's plan. If the new parent has no plan, then the spun-off sub plan could be terminated and distributed. But, Yuck!!!

Actually, I would disagree respectfully, Luke. If you have a parent company that "sponsors" a plan and a subsidiary participates in the plan, there may be a same desk rule (This is the last remaining vestige of this rule.) if the subsidiary continues to participate in the plan after it is sold to a third party. So, if X company is a participating sponsor in a MEP and a subsidiary is also participating in the MEP, there would be no distributable event unless the provisions of Treas. Reg. section 1.401(k)-1(d)(6), Example ii. Jen, how this is treated in a MEP situation is largely dependent on how the MEP has been adopted and maintained by the controlled group. I can't really go through all the permutations here. I would spend the money to buy 10 minutes of attorney time to go over the details, if i were you ....

There is no guidance from the IRS on how to test merged plans. If the two plans have the same plan year, it makes more sense to test the deferrals together for the entire year -- e.g., plan 1 has a calendar year; plan 2 has a calendar year; merger date is 7/15/2022 - take all 2022 deferrals/comp from plan 1 and all 2022 deferrals/comp from plan 2 and test them together in one big test. the justification for this is that the surviving plan "owns" all the assets/liabilities of both plans for the entire year. Again, no guidance, but i've spoken with IRS people on the dais at several conferences, and they have always said this is a reasonable interpretation. If the plans had different plan years, I'd test the disappearing plan for the "short year" as you suggest (and I agree with the correction deadline), and then test the surviving plan for the entire year with the merged-in participants being like new entrants for the period between the merger date and the end of the year. One more thing ... if the two plans are PRIOR year tested, there IS guidance on how to do it in the regulations. You do a weighted average of the prior year ADRs for the two plans. FWIW. :)

Santo Gold, there is really more to this than meets the eye. As was mentioned, if the intent was always to exclude and you can demonstrate that intent in some manner that is not dependent on people's recollections (for example, an SPD that said that these folks were excluded, or perhaps even a powerpoint presentation or letter to the plan administration/document provider that outlines the intent to exclude), you have some basis for asking the IRS to let you amend retroactively. The key is that the expectation of both the employer and the affected employees must be shown to exist -- so that the employees knew that they were not supposed to participate. This is really hard to prove. In addition, the IRS will ask why you went through X versions of the document and didn't fix it before now (the error in document was repeated over and over). In absence of being able to demonstrate this definitively, you should plan that the IRS will require that you fix this back to the original effective date, as these people are entitled to restitution for the mistake. As Luke mentions, if data is not available (and that means really not available, not just that you don't want to spend the time), you can use reasonable estimates for earlier years. But, you can't just say: we're not going to do it for the earlier years. Having said all this, you probably want to assess what the risks and rewards are for intermediate corrections and the like. For this, seek legal counsel who knows how to do this stuff. You want to make a really informed decision here, assuming that the dollars involved are significant. This is where the consulting stuff comes in. Good luck! Ilene

Just to add a thought to Peter's post: it's important to know what an entity requires in its governing documents for action. In a partnership, does the partnership require agreement by all partners? Does the partnership documentation and/or the "resolution" document of the partners (if there is one) authorize someone to act on behalf of the partnership? Perhaps there is a managing partner that has been so authorized? The key issue is that the signor on plan document should be someone who is authorized to act on behalf of the entity, whether it's a corporation or a partnership. (Clearly a sole proprietor can act on behalf of the proprietorship.) If that authorization is in the governing documents for the company, fine. If not, you want to have something signed by the Board or whoever is the governing group/person that delegates the authority for signature to the person signing the plan. (That's why you normally see in a Board resolution some language that says, "Any officer of the Corporation is hereby authorized to adopt such amendment or take such further action as is necessary to carry out these resolutions.") It can also be a matter of state law. Under most states, i believe, any general partner (but NOT a limited partner) is authorized to act on the partnership unless the governing documents provide otherwise.

One important point you are missing, with all due respect. The IRS has said in some of its discussions on the issue that the reason you can use seasoned money is that it constitutes a distribution (and so the entire premium is taxable). (The concept of "seasoned money" is that it is distributable at the participant's election.) I don't know if this is their current position ... it's been a long time since I discussed insurance in a plan with the IRS .... but i would at least warn the client that the IRS could take the position that the payment of the premium is taxable income. In any event, you need to be sure your plan document permits seasoned money to be distributed, or this option doesn't work. Three more things: first, the 49.99% is applied on a cumulative basis in a DC plan. So, you add up all contributions for all years (up to the year in which the premium is paid), take 49.99% of that, and that is the total premium that could be paid and still have an incidental death benefit. So, you may have more "room" than you think. Second, don't forget that, even if you take the position that the premium payment is not taxable income, remember that the term cost always is. And, the amounts on which taxes are paid becomes a basis if the insurance policy is distributed to the participant. Last but not least, the provision of insurance is a benefit, right, or feature, and cannot be discriminatory. If it has not been offered to other participants, you have a problem that needs to be repaired, probably through VCP. Best wishes for a likely big mess!

Remember that all the transition period permits you to do is to operate the plan without change even though it might fail coverage testing otherwise. If the plan includes people who are employees of the sponsor with no exceptions, you cannot exclude the newly acquired employees who now work for Company A. However, if they put these employees in an excluded class through the transition period, you are fine. Be careful to read the plan thoroughly.

Let me make a fine distinction to what C.B. Zeller says. Code section 402(g) and the regulations thereunder provide a mechanism whereby a participant may request a refund of an excess deferral, and the plan can do so up to 4/15 of the year following the year of the excess. Different plans have different deadlines for this request, usually 3/1 or 3/15, so that they have time to process. But, once the 4/15 deadline for those refunds passes, the distributable event window is closed and a distribution of the excess amount CANNOT be made until another distributable event occurs.

Back to the original question: since it's a PSP and since it allocates to all participants, you should not only take the money out of the non-participant's account but reallocate it to the others, as it should have been allocated to begin with. I would imagine that any "bad blood" that the terminated employee would spread could be tempered by a notice from the employer that says, "We accidentally include Nasty Guy in the plan when he wasn't eligible. Pursuant to IRS-prescribed procedures, we've taken the money out of his account and given it to you guys, which is where it belongs." Just sayin'.....

Bill's answer is likely correct, but i wanted to point to another issue that he did not address. What kind of business transaction was it? If it was an asset sale and all employees went to work for the buyer, then they had no service after the sale and there is likely little information after your termination date. If it's a stock sale, then employment continues after the sale, and this point is moot. In that case, it just depends on what the plan and the termination documentation say about the accrual of rights after the termination of the plan.

I'm not sure of the answer, and both arguments make sense to me. But please remember that the latest regulations require that the employee provide to the plan administrator "a representation in writing ... that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need." So, if this person has a ton of money sitting in a bank account, he/she could not qualify for the entire $500,000 without some reason why that money was not available for the purchase. Just something more to think about.

FWIW, i would use the percentage needed to pass the ADP test. Surely failing to offer the plan to R&F is not an excuse to bypass the ADP test! So, if your HCE deferred 6%, i would use 4% for the NHCEs. If your HCE deferred 10%, I would use 8%. But, if you are going into VCP, you have an opportunity to make other suggestions for corrections. I'm just not sure why the IRS would accept a lower rate.