Ilene Ferenczy

You cannot make a deferral election until the plan is established . See Treas. Reg. 1.401(k)-1(a)(3)(iii)(A).

Be careful about recent forfeitures. If the people whose account is being forfeited terminated employment within 5 years of the termination date, the IRS can take the position that they should be vested. Certainly if they terminated within 12 months of the termination, there is a vesting issue. If they haven't missed a forfeiture use date, so that the forfeitures are recent, then it makes me think that there's a problem here ...

One more thing ... when you send the document, if it is your preapproved document, be sure to remind them that they cannot rely upon you anymore to keep the plan up to date. That will let them know that they must amend onto another document (and if the "new" TPA doesn't have one, it will highlight that. Second, when they get nailed by the IRS for having their plan out of compliance, and they come crying back to you, you will have proof that you advised them that you don't do that anymore for them. FWIW. Ilene

An offset is a distribution. If you are within 60 days, you can roll over the offset by taking money personally and rolling it into an IRA. (I believe the QPLO regs are very clear on this point.) The QPLO rules extend the time for doing that to the tax return due date if the distribution is a QPLO. The original question, however, dealt with a spinoff, which makes me wonder about why the offset is happening at all. If the loan is not offset before the spinoff, the loans move to the new plan as part of the spinoff. There is no distributable event. And the recipient plan has an obligation on the merger to respect the contracts with the old plan -including loans. Hope this helps. Ilene

Bill Presson asked me to weigh in on this, Derrin and I are being cited quite a bit. Nice to hear you all thinks so well of us. We appreciate it. So, the starting point is the language of the law (imagine that! Ain't that just like a lawyer?): This is a new paragraph under Section 401(b): 2) Adoption of plan.--If an employer adopts a stock bonus, pension, profit-sharing, or annuity plan after the close of a taxable year but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year.''. So, when I read that, I thought, "Well, all it talks about is the employer adopting a plan. Whether it is a multiple employer plan or a single employer plan, all the company is doing is adopting a plan. So, I think adoption by the tax return due date is fine." Derrin, however, put on his "Controlled Group" hat and pointed out that, if the Husband company and the Wife company are part of a controlled group, then the Husband company (on behalf of the "employer," which is both companies combined) already adopted the plan. The problem here is that the Wife company failed to adopt a participating employer agreement under the plan. This potentially falls out of the language above and becomes a different situation - not a nonadoption at all, but a failure of the plan to be drafted to include the employees of the Wife's company. That arguably is a required AMENDMENT of an existing plan, not an adoption of a new plan, and is required to be adopted by the end of the year. And, as the amendment will not benefit all employees, it is likely ineligible for self-correction and must go through VCP. Remember that the Husband's company and the Wife's company are not necessarily part of a controlled group. The "noninvolvement exception" can break a controlled group if the spouses each own their own companies and (a) neither spouse has ownership in the entity owned by the other spouse; (b) neither spouse is a director or employee or participates in the management of the other spouse's company; (c) the spouses have no involvement in the other's company; (c) no more than 50% of the company's gross income is from passive investments, such as royalties, rents, interest, dividends, and annuities; and (d there are no restrictions limiting the spouse's ability to dispose of his/her ownership in favor of the other spouse or their minor children. The noninvolvement exception does not help break the controlled group if you are in a community property state and the business is community property (so that each spouse under state law actually owns 50% of the other's company, thus overriding the noninvolvement exception) or if the couple has any minor children (in which case each spouse's ownership attributes to the minor child and the bambino is deemed to own 100% of both companies). So, when all is said and done, if you are dealing with spouses, you might be better off doing the "separate adoption and later merge" method, distasteful as such a "form over substance" approach is. If we know anything after our collective years practicing in this area, the IRS tends to be very detailed in the way it applies statutory and regulatory language, thereby commonly promoting form over substance. Thanks again for letting me weigh in on Derrin's and my behalf. Best to all -- Ilene

One more thought, and I hate to give the mistaken impression that I'm telling you all your business ... To me, looking at the viability of a plan with the parameters you have discussed is like looking at buying a car with an eye only to the available colors it comes in. If a company is being forced into retirement savings either because the state mandates it or because employees demand 401(k) savings ability, why doesn't the employer embrace the concept and selfishly benefit himself in a qualified plan and consider acceding to the state/employee demands as a justification to finally do this? So, in my opinion, the key is to ask your hypothetical employer who does not want to make employer contributions for his employees: I assume you are saving for yourself outside any retirement program. You are doing that saving with after-tax dollars, which means you have to earn $1 to save 60 cents. If you could put that savings into a retirement plan for yourself and pay less than 40 cents for your employees, why wouldn't you do that? In other words, if you are agnostic as to whether you pay the government in taxes or your employees in contributions, why wouldn't you pay less dollars in employee contributions than you do in taxes? I know that this is the fundamental question for any plan that you recommend to your clients. But, a client that "doesn't want to contribute for his employees" is generally motivated by self-interest. Why doesn't that self-interest help him having a qualified plan with employer contributions if he is better off financially???? FWIW. Hope this helps. Have a happy, healthy, and prosperous New Year, everyone!

Just to confirm, we recently did a PBGC termination where the entire process was finished a day or two after the effective date of the termination. A word of caution, however: it's a really good idea to have a DETAILED schedule of what everyone needs to do when. It's easy to get off track and have the deadlines get away from you. This was especially true in our case (and probably most situations), because the process involved: the client (plan sponsor), the attorney (us), the TPA/actuary, and the investment advisor (who was working on the procurement of the annuities). It was clear to us from the beginning that everyone was underestimating their part of the project and the detailed to do list advised everyone of the details of their responsibilities and kept us all on track.

Here's another take on the IRM hardship substantiation method: the employer is required to give the employee certain information, which is easily provided in a preprinted packet, as well as a certification form for the participant to use to advise the plan of the amount of hardship needed, what it was for, and that the participant promises to keep the backup. If this is done correctly, the IRS can still ask for the source documents but (a) it can only do so under very restrictive situations, and only with a manager's approval; (b) if the participant can't cough up the support documentation, the problem is not the employer's or the plan's ... it has done what is required under the procedure. So, in my opinion, the substantiation method of the IRM takes much of the burden away from the plan administrator and lessens the burden on the plan if the IRS audits. I can't see the down side, unless the packet given to the participant is insufficient. So, be sure to read the IRM and follow it assiduously.

We customarily provide in the division of responsibilities that the Plan Administrator oversees any benefit claim appeals -- so the TPA determines the initial claim, but the client determines the appeals. Because a claims denial and appeals denial may lead to litigation, we thought it was more prudent to have the employer in charge of making that decision. Also, I think that there is something "good faith"-related about having a different entity reviewing an appeal than the entity that denied the claim in the first place. Keep in mind that the split of responsibility is either in the plan or in the delegation contract. It is important that this kind of issue - who decides what? - is outlined with specificity so that no one is responsible legally for something that they thought they had no say over.

FWIW, I would include it all in the VCP, because what could it hurt? And, this way, you get a comprehensive correction letter that protects your client from having an IRS auditor come around 2 years later on the self-corrected stuff and saying you did something wrong. And you give the IRS all the information in your filing that they will ultimately request, because, as Luke said, they are going to want to see that you corrected all years. So, this will give you a "payoff" for doing all the work. As to the correction timing, the value of correcting earlier is that you stop the bleeding, i.e., interest charges. The negative is that, if you are correcting in an impermissible manner, you create a new failure! On the issue that you are correcting, it's pretty cut and dried as to how to fix. I assume you are following the EPCRS rules for the earnings calculation. So, fix it now. There's very little risk.

Hi, all -- IMO (and that of my colleagues here at FBLC): DC RMDs, as required by IRC 401(a)(9) are suspended for 2020. That's mandatory. The answer to your more specific question lies with what the plan document says. Let's pretend the plan says: "No distributions unless specifically requested by the participant except RMDs under 401(a)(9)." Under that provision, no distribution can be made to a participant without his/her request because there is no RMD. Let's pretend the plan says, "In absence of an alternate election, participants over age 70-1/2 must receive an annual distribution, the amount of which is their account balance as of the last year end, divided by the rate in the 401(a)(9) regs." In that case, distributions must continue, because the plan document so requires. The distribution will be an eligible rollover distribution, as it is not an RMD. If it is to a qualified individual, it will be a COVID-related distribution. Let's pretend the plan says, "No distributions except lump sums, except for RMDs." In that case, the participant can get a distribution if he/she requests, but it cannot just be the amount that would have been paid as an RMD; it must be a lump sum. ALL of these plan provisions are subject to amendment, and most of the amendments can be done in 2022. Hope this helps. Ilene

Hi, all -- There is no clear guidance from the IRS or Treasury about how to determine HCEs in the year of a stock acquisition or a business merger. If you look at the Code and regulations, the clear intent of the rules was that there would be one applicable determination of who is an HCE and then that would apply across all plans. But, in a stock acquisition, particularly where the acquired company and the buyer each sponsors its own plan and the plans will operate separately during the transition period, it is not clear at all how to determine HCEs. So, I think it makes the most sense, and is defensible as a reasonable interpretation of the law, that you maintain the pre-existing HCEs from before the acquisition vis-a-vis each plan for the year of the acquisition. A couple of additional notes: first, the transition rules take you out of coverage testing, which relieves you of needing to define HCEs for that purpose. But, the transition rule does not relieve you of nondiscrimination testing. If your two 401(k) plans are just that, then you can go ahead and test them separately and the use of the prior HCEs in the year of transition probably makes the nondiscrimination testing harder to pass than if you had some kind of cross-company definition of HCE (i.e., there is some possibilty that people who were HCEs in the acquired company would become NHCEs due to the top 20% rule or something similar). HOWEVER, remember that, if any of the plans use cross-testing and you use the average benefit percentage test as part of the cross-testing, then you need to take into account benefits of all plans of the company ... which means that the definition of HCE becomes problematic from that standpoint. So, you may need to look at this a little differently in that circumstance. Last but not least, look for situations in which any of the assumptions about what the rules might be if the IRS/Treasury actually wrote them creates a skewed result which is abusive in nature. So, let's say that you make a reasonable assumption about who the HCEs are, and it turns out that, with that reasonable assumption, the amount that the HCEs get or can contribute quadruples from prior years. Just be careful that you are not creating a situation where the IRS would be tempted to exercise its rights under the coverage and nondiscrimination rules to consider something abusive and plan-disqualifying. Hope this helps. Everyone stay healthy! Ilene

There's a key problem to this, and that is whether the actions taken to eliminate the acquired employees from the existing plan and to adopt the plan of the seller represent amendments that terminate the 410(b)(6)(C) transition period. To make a judgment on what you can and can't do, I'd need to see how the documentation was handled. The fact that the plans are safe harbor plans and amendments to narrow the coverage of those plans mid-year are generally prohibited adds another element to the problem. All in all, get a lawyer involved, kids ... this is not for casual answers.

FWIW, you might want to augment your service agreement to add a provision outlining that there will be a charge for such a service, that it must be paid in advance, and the amount of that charge. That way, the client cannot claim surprise when you ask for the money.

I agree with Luke. If the spinoff agreement (or perhaps the original participation contract with the MEP in that situation) is written properly, it will address the treatment of terminated participants. In absence of explicit rules, it becomes the responsibility of the Plan Administrator to interpret. On the MEP situation, I'd be surprised if the MEP sponsor really wants to continue to deal with the terminated participants. Particularly for an Open MEP situation, where each employer's plan needs a separate 5500. Once the adopting employer has spun off active participants, there are actually 2 plans sponsored by that employer -- the one in the MEP that contains the terminated participants and the one that the actives were spun into. What a mess! Bad planning ... FWIW.

Um ... What does your service agreement say? It is critical that you not take on any responsibility carved out in your service agreement, and also that you do what you say you will do. Talking to participants engenders risk. There is a recent case where union officials who knew little about a pension plan gave participants advice about the plan anyway. One such person told a dying participant that he should not terminate employment, but should die "in service" to best benefit his soon-to-be-widow. He was wrong. The widow sued. The court found that the union had breached its fiduciary duties by having people giving advice to participants who weren't qualified to do so. There's nothing wrong with a TPA giving a participant information or advice. But, the owner of the company should be the one deciding whether to do so and who is qualified to do so, and the service agreement should match. IMHO.

How about if you merge the old plan into the new plan and then use the old plan's suspense account to fund the new plan's contribution? If it's the same plan year/fiscal year, shouldn't that preserve the deductibility?

Be careful in using the transition rule. The transition rule permits you to bypass coverage testing if you are in the transition period, but it does not permit you to ignore the plan provisions. So, if the plan includes everyone in the controlled group immediately, you cannot ignore that provision just because you are in the transition period. However, if the plan covers only one employer and you would fail coverage during the transition period operating the plan according to its terms, you are saved by the transition rule. In this case, you say that the acquisition happened in '17. If you have a calendar year plan, the transition rule ended 12/31/18. So, you would be okay through that date (assuming that the transition rule has not be eliminated through something like a plan amendment), but need to meet coverage normally for 2019. Hope this helps ...

One more thing: the IRS publishes an annual Required Amendments List. You need to update the plan for the items on this list by the end of the second calendar year following the calendar year in which the item appears in the list. So, while you should not restate, be sure to update on an annual basis if there's something on the list that affects your plan.

i hate to be a pain in the rear on this, but this is really technical legal stuff that has to do with the structure of the transaction, as well as the language of the Plan. Someone needs to evaluate the transaction paperwork to identify what really happened in the transaction and then determine how the plan is affected. This should not be determined through a discussion peppered with assumptions. Just sayin' ....

One more thing that you should note when there is insurance in the plan. There are two qualification rules that are affected when you have insurance. First, having the insurance cannot be discriminatory. So, i would be concerned if the insurance was only available to HCEs (which may be the case if no new insurance has been offered to anyone since 1904. :) Second, the amount paid for the insurance must be incidental. If there have been years with no profit sharing contribution (assuming a profit sharing plan), it is possible that the payment of insurance premiums ceased to be incidental. (n general, "incidental" for term policies means that the total premiums paid must be less than 25% of the total contribution and forfeiture allocations for all years; if it's a whole life policy, the percentage is 50%. If it's universal life, it's basically the term rules, applied to the term portion of the policy.) So, my only point here is that this is a Pandora's Box -- be sure to open it all the way or warn the client of ramifications so that it does not bite you in the proverbials. Of course, none of this should be interpreted to be legal advice ... Have a nice weekend, everyone.