C. B. Zeller

The cite is 1.401(a)(9)-2 (which has not yet been updated for the changes in RMD ages made by SECURE and SECURE 2.0, so mentally insert other ages as appropriate)

Agree with you 100%. The lifetime income illustration is a Title I requirement. Unless the CPA believes the plan is subject to Title I - in which case, bonding, disclosures, etc. all apply - then there is no requirement to provide the lifetime income illustration. That said, there is nothing saying you can't provide one, and if the CPA really wants to see it, I'm sure you'd be happy to prepare one for him, for a modest fee....

What does the plan document say? I have seen pre-approved documents with a checkbox option to limit the beneficiary to the participant's spouse. I don't know that I've ever seen that option used, but strictly speaking a DB plan isn't required to offer any forms of benefit other than what's required under the QJSA rules, and QJSA means spouse.

IRC 414A as added by SECURE 2.0 sec. 101 applies to any cash or deferred arrangement established on or after 12/29/2022. While a profit sharing plan could have a retroactive effective date, a CODA which is part of a profit sharing plan can not. In other words, the effective date of the 401(k) feature can't be earlier than the date on which the plan document was signed, and the effective date of the 401(k) feature is what controls whether mandatory auto-enrollment applies (with the caveat that this is my best reading of the law as written, since IRS has published no guidance on this yet). Does that answer your question?

I agree with DavidO. You only count compensation for employees who actually receive an allocation of the profit sharing contribution. The IRS's position is that an employee who only benefits under the 401(k) portion of the plan doesn't count for 404, because of 404(n). See PLR 201229012.

No need to apologize - we all had to start somewhere. Although, given the seriousness of this situation - the employer apparently held on to all of the employee's contributions for 4+ years, if I am understanding you right - you might want to work with an ERISA attorney, or at least a plan professional who has experience in complex plan corrections on this. Casual advice offered on a message board might not be the best fit. Others may disagree, but I am thinking that the fact the employer just kept all of the employee's money for this long of a time may cause this to rise to the level of an egregious failure, which is not self-correctable. Late deposit of employee contributions is a prohibited transaction, which is subject to an excise tax under IRC sec. 4975, and is also a breach of the employer's fiduciary duty under ERISA sec. 406. On top of this, it is also a plan qualification failure. Some practitioners will correct the qualification failure by using the IRS self-correction program, and paying the excise tax to the IRS, then considering the fiduciary breach to be solved. Others prefer to formally correct the fiduciary breach by filing with the DOL, which is also deemed to satisfy the IRS's correction requirements. Both methods require the participant to be credited with lost earnings; the DOL method allows the use of the calculator on their website whereas the IRS requires earnings to be credited at the plan's actual rate of return (in other words, you need to calculate what the contributions would have gained if they had actually been deposited on time). Late deposit of the matching contributions is not a prohibited transaction, so there is no excise tax, but it also falls solely under the IRS's corrective regime, which means you have to use the actual rate of return.

I have heard (although I do not have first hand experience with this) that you can request a copy of Form 5500-EZ using Form 4506. You might need a Form 2848 to request it on your client's behalf.

The VFCP calculator is used to calculate the correction under the DOL's Voluntary Fiduciary Correction Program. Is the sponsor actually filing under VFCP? If not, the VFCP calculator should not be used. Late deposit of employee contributions is a prohibited transaction, but late deposit of employer matching contributions is not (although it may be a self-correctable operational failure). So you would only include the deferrals in the VFCP calculator, not the match. The recovery date is the date that the principal was deposited. The final payment date is the date that the lost earnings will be deposited. The final payment date takes into account the earnings on the earnings, so it should be a date in the future when the amount determined by the calculator will be deposited.

One other alternative, keep the plan but eliminate the 401(k) feature - make it profit sharing only starting in 2024. The LTPT rule is only for 401(k) plans.

Why does an owner-only want a safe harbor plan?

Is it at least 1/7th of the amount transferred to the replacement plan? Only the balance at the last valuation date on or before 12/31/2022. The exclusion of prior service is not valid due to the termination of the DB plan which creates a predecessor plan. See 1.411(a)-5(b)(3)(v)

No. You have to use the same elections for all purposes. From the 2023 premium filing instructions:

Good point. I think the difference is that an election to use the yield curve would also require a revocation of the prior election to use an alternate applicable month. It would have been nice if the IRS had addressed this in the rev proc, as it's not really clear either way.

Your comment made me curious, as I almost never see plans with a lookback month election. I went and downloaded the 2021 schedule SB data set from EFAST and did a quick pivot table on the applicable month code. The blanks are probably yield curve elections, I don't know how the other numbers got in there. Anyway, it seems like an election to use the 4-month lookback is not entirely uncommon, which I suppose makes sense—the benefit of using a lookback month is that you can determine your funding liabilities earlier in the year, so why not go as early as possible? But still, use of the month containing the valuation date is the overwhelming popular favorite. And for those plans, they could switch to the yield curve without IRS approval.

If the plan sponsor has not previously made an election to use the segment rates for a month other than the month containing the valuation date, then they may make an election to use the yield curve without IRS approval. Once they have made an election—either to use a lookback month, or to use the yield curve—that election can only be revoked or changed with IRS approval. See also rev. proc. 2017-57.

Top heavy minimum is required. Rev. rul. 2004-13 example 2. Now if the employer had a separate profit sharing plan, they could make the contribution to that plan without triggering the top heavy minimum, because the first plan would still consist solely of deferrals and safe harbor contributions, and in the second plan no key employee gets a contribution. It seems silly, but that's the way the top heavy rules are written/interpreted...

You're correct that the fix for this is to have the participant repay the amount that was in excess of the available limit, with accrued interest. However, the bigger question to me is why did the brokerage house accept direction from an individual who is not a trustee?

For eligibility purposes, you generally can not disregard any prior service. There is a special rule in section 410(a) that says a plan may disregard eligibility service that occurred before 5 consecutive 1-year breaks in service if the employee terminated with no vested account balance. If this rule applies, then the employee would be treated as a new hire. This so-called "rule of parity" is an option that may be used for determining eligibility service, but plans are not required to use it. edit: ESOP Guy is 100% correct below where he points out that this is a plan document provision, and whether/how to apply it is described in the document. It's not something that can be applied at the employer's discretion.

It's not truly disaggregation, where you would treat it as two separate plans as you might be used to with 410(b) and 401(a)(4). Rather, what the new law says is that employees who have not met age 21/1 year of service can be disregarded when determining if a DC plan has satisfied the top heavy minimum. So it doesn't matter if there are any otherwise excludable key employees, you just ignore all of the under 21/under 1 year employees when determining who is entitled to a top heavy minimum. Where it gets weird is with the safe harbor match. The IRS ruled (in rev. rul. 2004-13) that a plan which different eligibility for deferrals and safe harbor does not consist "solely" of deferrals and match meeting the safe harbor requirements, which is the rule to be treated as not top heavy under IRC 416(g)(4)(H). That clause wasn't affected by the new law. So presumably a plan with different eligibility for deferrals and match is still treated as top heavy, and subject to the top heavy minimum. The fact that they don't have to give the top heavy minimum to otherwise excludable employees doesn't change this, it just means that employees who are not otherwise excludable (over 21/1 year of service) will have to get the top heavy minimum. The top heavy minimum for these people could be satisfied by their safe harbor match contribution, or if they don't get any safe harbor (or enough safe harbor, because they didn't defer enough or not at all), then by an additional employer contribution.

Hi longjongbongkingkong, welcome to the forums! 401(k) plans are governed by ERISA, which preempts state law. ERISA sec. 206(a) allows a plan to delay a distribution to as late as 60 days after your normal retirement age under the plan, or even later in some cases. So them allowing you to take a distribution 30 days after termination of employment is sooner than the legal minimum standard.

That is not necessarily a universally held opinion. The other point of view would be that the employer, i.e. the controlled group, has already adopted the plan, and while it may take the form of a participating employer agreement, it is really an amendment to allow a previously-excluded class to participate. That said, I don't think there is a problem with amending a safe harbor plan to bring in a class of previously-excluded employees mid-year, and I agree it would be advisable to do it before 10/1 to cover yourself under either interpretation.

I agree with your interpretation, in fact I think it's the only reasonable interpretation. Instead of 10/1, say we have someone who enters the plan on 1/1 - which is always a holiday. If they were allowed to defer from the previous paycheck, they would have contributions in the plan not just before their entry date, but actually in the prior plan year, which is problematic for lots of reasons.

So it seems they told ASPPA they would be making an official statement, not clear from this when exactly that might be.

Was the employee's vested account balance at the time they last performed services for the employer less than $5,000, and does the plan contain a provision requiring the involuntary distribution of vested account balances of less than $5,000 upon termination? Did the employee have 5 consecutive 1-year breaks in service after the time they last performed services for the employer and before they died? If the answer to both of these questions is no, then I think it's clear that the account should become 100% vested upon the employee's death. If the answer to either question is yes, then a forfeiture may have occurred upon the employee's separation from service, or after 5 consecutive 1-year breaks in service. However, if the dollar amounts involved are not large, and the employer is concerned that the issue may not be entirely clear and wishes to avoid a potential dispute with the employee's beneficiary, the employer might choose to explicitly grant the additional vesting and pay out the full account balance.

Safe harbor contributions can be reduced or eliminated under certain circumstances. Since HCEs don't have to get the safe harbor in the first place, you can reduce or eliminate their contributions without losing the plan's safe harbor status. IRS issued Notice 2020-52 to address how this could be done in the context of COVID relief, and to grant some special flexibility during that period. Is it possible your client took advantage of this mid-year modification in 2020? If so, there should be a plan amendment, and related notices.