C. B. Zeller

Has anyone explained to the participant that there is literally no point to doing this? Here’s the math to prove it. Let’s say we have a plan account balance (exclusive of the loan) of $300,000, and a $25,000 loan outstanding. Participant currently has $25,000 in their bank account, which they plan to use to pay off the loan. If they don’t repay the loan: 300,000 distribution + 25,000 loan offset = 325,000 total taxable event 25,000 already in bank account + 235,000 cash distribution (300,000 minus 20% withholding on the 325,000 total taxable distribution) = 260,000 in bank account after distribution Now for the other situation, if they did repay the loan before the distribution, now they have $0 in the bank and $325,000 in their plan account. 325,000 distribution is the total taxable event Less 20% withholding, the cash received by the participant is 260,000. Exact same tax consequences, and exact same cash situation both ways. If they wanted to do a rollover instead of a cash distribution, again it’s the same result. Because the loan offset was the result of a plan termination, it is a Qualified Plan Loan Offset, which means it can be repaid to the participant‘s IRA after the fact - as late as their personal income tax filing deadline.

I don't think that it would exceed any limit on the maximum loan amount. However, the replacement loan is not allowed to cause the term of the original loan to extend past 5 years from its original beginning date. Since all of the loans were taken for 5-year terms, the principal on each must be fully repaid by their original maturity dates. I ran up a quick amortization schedule and it looks to me like 4/30/2028 loan would still be fully repaid on time, but the participant wouldn't have repaid $13,200 (=$8,500+$4,700) by 5/15/2028. The other loans also look similarly problematic.

Is it possible these people are statutory employees? They would get a W-2 and have FICA/FUTA withheld, but wouldn't be employees for plan purposes and wouldn't have federal income tax withheld. See if you can get a look at box 13 on their W-2. The definition of statutory employee, from IRC 3121(d)(3):

Hold up a second. Is Empower actually the Plan Administrator, or merely a service provider? I'm using Plan Administrator in the ERISA sense; that is, the person who has the authority and responsibility to interpret the plan documents, approve claims for benefits, and determine the beneficiary of a deceased participant. Typically the Plan Administrator is the employer sponsoring the plan. Your masseuse should request a copy of the summary plan description (SPD) which will identify the Plan Administrator and list their contact info. Your masseuse almost certainly has at least a "colorable" claim to benefits (see Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989)), so she is entitled to receive the SPD, no matter what Empower says. If the front line customer service rep disagrees, cite Firestone to them and that should get them to escalate the issue to someone who understands. If the Plan Administrator does not provide the SPD, they could be subject to a penalty of up to $110 per day under section 502(c)(1) of ERISA. Once you have the SPD, find the section that describes the plan's claims procedures. Follow those procedures, including the procedures for how to appeal a denied claim for benefits, and see where that gets you. At the very least this will give you the opportunity to make your case before the person who has the authority to make a decision on it.

I agree with Effen. Unless the plan meets one of the exemptions, it is covered by PBGC. You only pay the flat rate premium on participants whose benefits are not fully offset. This can be confusing if the owner is the only one who is not fully offset, since normally you would not do a premium filing showing only 1 active participant, especially if that one participant is the owner. But that's how it works for floor offset plans. They will owe multiple years of back premiums plus interest. I agree that you should let a lawyer handle this in order to preserve privelege. Your comment about the audit threshold is confusing - did the DC plan hit over 120 participants with account balances this year, and now the IQPA is asking about the PBGC filings in the DB plan? Is that why the issue is coming up now? Or are you the IQPA? It would be helpful to know more about your role in this situation. And the plan is terminating (or has already terminated)? What is/was the termination date?

There is no clear answer to this in the law or regulations or other official guidance. Absent that, it seems to me that the most correct thing to do is 1. Net out self-employment earnings and losses from all entities 2. Apply reduction for 1/2 self-employment tax to the net anount 3. If the result is less than 0, treat it as zero 4. Add any W-2 income In your case I think their 415 comp is $25,000. Think about it this way: if this wasn’t the case, then everyone should start a second sole prop to absorb all their losses, and only recognize gains in the one that adopts the plan. That’s clearly not the intended result so I wouldn’t go that route.

I haven’t seen it personally but I’ve heard from attorneys on occasion that it can be justifiable. Were all other necessary actions taken that would normally be required for a plan termination? For example, was the plan amended to be up-to-date with changes in law and regulations, and were 204(h) notices and NOITs distributed? If all of that is clean then I wouldn’t worry too much about it.

IRC 401(k)(12)(A) is the cite you're looking for. Clause (i) says that the plan meets the safe harbor requirements if it provides the appropriate matching contribution and notice. Clause (ii) says that the plan meets the safe harbor requirements if it provides the appropriate nonelective contribution. No requirement for a notice. Does the plan does provide matching contributions? Are they relying on the safe harbor non-elective contribution to get them a free pass on the ACP test? If so then the notice is still required.

Companies aren’t subject to the ADP test - plans are. There is only one plan in place here and it satisfies all the required tests. You might be thinking of the rule under IRC 401(k)(3)(A) which says that if an HCE is a participant in more than one 401(k) plan of the same employer, then you include their deferrals on both plans’ ADP tests. In your case there is only one plan so this rule is not applicable.

In the context of Title IV of ERISA, which is what this rule relates to, "withdrawal liability" means amounts owed by a participating employer to a multiemployer plan arising due to an the employer's withdrawal from the plan while the plan is underfunded. See ERISA sec. 4021 at https://www.law.cornell.edu/uscode/text/29/1381 No other comments - just didn't want any readers to be confused by a discussion of PBGC rules that have nothing to do with QDROs or participants'/alternate payees' benefits.

Not sure I understand the situation. You said that the 401(k) plan passes coverage since company B (whose employees are not eligible) has a high proportion of HCEs. The plan meets the safe harbor requirements because every employee who is eligible to defer is also eligible for the safe harbor contribution, so no ADP test is needed. Where is the failure?

Are they on a bona fide leave of absence that could let them suspend repayments? Does the plan allow participants to make loan payments by personal check instead of by payroll withholding?

This is awesome. Very excited to see where this goes!

If you're seeing a ULT that starts at 70, it's outdated - the ULT is found in the regulations at sec. 1.401(a)(9)-9(c) and it starts at 72. The rule saying that a surviving spouse can use the ULT at their own age to determine the RMD is not actually in the final regulations yet, it's only contained in the proposed regulations from 2024. Consequently the expanded ULT is also only found in the proposed regulations at this point. You can find it here: https://www.federalregister.gov/d/2024-14543/p-115

Thanks! I should put "Pension Artist" in my signature 🤣