Paul I

General Counsel Memorandum (GCM) 39310 deals with these issues. Essentially, once a nonvested amount is considered a forfeiture under the terms of the plan, it does not become fully vested upon the termination of (or complete discontinuance of contributions to) the plan. If the plan referenced in the original post had a provision that forfeiture occurred when a participant had a 5-year break in service, then those amounts would remain forfeited. The plan would have to deal with the operational failure of not following the plan's forfeiture provisions. If the plan provision also would mean that a participant who still had an account balance in the plan and had not had a 5-year BiS at the time of termination would become fully vested. If the plan provision also had a provision that the participant, upon a full distribution of their vested account balance, would forfeit the nonvested amount (either immediately or upon a BiS), then that participant would not become vested in that nonvested portion due to the plan termination. Based on the above, the timing of forfeitures needs to be reviewed. Given the passage of time, of the three plan options for handling of forfeitures, only the reallocation option remains available now. It is worth exploring if the plan document requires the allocation basis for the forfeitures to be the same as the allocation basis for the contribution. If not, then the plan could use a per capita allocation basis for the reallocation of the forfeiture which would greatly simplify the remedial action.

This is a question where the answer is based on the demeanor of the lawyer and using discretion to get to the ultimate goal of having a valid QDRO. I have seen lawyers who try to bully plan administrators into including in the DRO that are biased to the lawyer's client. Any conversation with them generally starts out with a comment like "I have done 5,000 QDROs and they all accepted this language..." I have seen lawyers who worked very hard on the divorce decree who were adiment that the decree superseded the DRO. I have seen lawyers put the idea in the head of the alternate payee that the plan administrator is favoring the participant to the detriment of the alternate payee. I have seen lawyers who ask politely what needs to be done to get the DRO approved and have been responsive. As Detective Joe Friday migth say, "All we want are the facts" to move foreward.

It is fixed at $1,000. That being said, I have seen an instance where the IRS deemed the filing incomplete because of the missing schedule and applied one of the other penalties for late filings that is based on days late. In that circumstance, it was worth challenging the penalty.

As @justanotheradmin notes, there have been instances where the intent to establish a plan was exceptionally well documented and all operational activities were performed correctly as if the plan was adopted properly, so the plan sponsor was allowed to adopt the plan formally. One persuasive piece of documentation is having signed trust documents with the institution holding the assets that acknowledges that the trust is for a qualified plan. Placing the assets in an account that separates control of the assets from the company helps support the argument. This is not DIY project. You can consider accepting the prospective client when they have engaged an attorney and the attorney provides guidance on the path forward to resolve the issue. Be clear that your services above and beyond routine services are not free regardless of whether or not they and the attorney are successful. The incentive for the prospective client is, absent getting recognition that the plan can be adopted formally and retroactively, there is a $500,000+ rollover that will be considered a taxable distribution in 2025.

How is the compensation from which the deferrals were made being handled? I would expect that the employee deferrals to the Division A plan were made from compensation paid (incorrectly) by Division A. If this is the case and the payroll records are being corrected to show compensation was paid from Division B, then that is a reasonable argument for moving the deferrals that were made to the Division A plan to the Division B plan. If in fact the plans are identical (including investments), the participant is kept whole. A purist may feel compelled to consider this a collection of interconnected operational failures each with its own prescribed correction procedures, but I've know agents and investigators who would be okay with the outcome. If the compensation reporting is not corrected, then the odds of getting some push back may go up a little bit.

@Peter Gulia highlights that a plan with all brokerage accounts doesn't have designated investment alternatives so the table of financial information in the 404(a)(5) notice is not applicable, but any fees chargeable to a participant's account (e.g., admin fees, distribution fees, brokerage account fees...) remain disclosable on the notice. There is no explicit penalty for a failure to issue the 404(a)(5) notice, BUT the DOL can deem the failure to be a breach of fiduciary responsibility by the plan fiduciaries. (No fiduciary wants to be in that position.) Send out the notice ASAP once the decision is made confirming the new investment menu, and disclose any fees payable from a participant's account. This will demonstrate good faith compliance going forward and likely would placate a DOL investigator.

I agree with the advice that the DRO be reviewed without regard to the divorce decree, and I would not consider a DRO is a QDRO if it incorporates other documents by reference primarily because of a lack of control over the content of these other documents. I agree that the reviewer of the DRO should not be giving advice to either party about the terms of the DRO beyond what content is needed to be clarified to gain approval as a QDRO. The authority for approving a QDRO on behalf of the plan should be explicit in the plan document. Service providers can opine to the holder of that authority on whether the terms of the DRO can be administered (and be able to explain if not, then why not) so an informed decision can be made. A service provider having final say if a DRO is qualified without having been delegated that authority is putting itself at risk of being challenged by either party to the DRO or plan fiduciaries. Just my thoughts.

@ConnieStorer could you clarify if the owner is making deferrals based on wages from both companies A & B, or based solely on wages from Company A?

An outstanding loan balance does not reduce the vested balance in the plan. The loan is an asset that is part of the overall plan account. It is included in the formula for determining the amount available should the participant is permitted to and wishes to take out a second loan. It is included in the total value of the vested account balance payable upon distribution (and any unpaid loan balance at the time of distribution is taxable.) For a QDRO, how it is handled is subject to the agreed-upon terms of the QDRO. (Commonly, the party who is the participant in the plan keeps the loan and continues to make loan repayments by payroll deduction, but if the plan loan procedures facilitate it, the alternate payee could agree to have part of the loan kept in the alternate payee's account inside the plan and make payments on the loan.

Managing cash is often behind the different methods and timing used to pay termination distributions. An ESOP may provide for an immediate payment of smaller account balances, but require for larger balances require payment over a 5-year period. Similarly, the plan may specify a starting date for payments to allow the company time to have sufficient cash available to make the payments. An ESOP may have provisions for recycling shares out of terminated participants' accounts where an annual cash contribution is allocated to active participants which in turn is used to purchase shares from the terminated participants. Since the contributions are subject to deductible limits and active participants' allocations are limited to annual additions limits, the repurchase is spread over time. The what and why of how your distribution is handled should have been explained to you. You seem to be seeking a clear understanding of when and how your distribution will be made, and are not being adversarial. If no one at the company can explain this clearly, then you may want to ask politely if there is a service provider for the plan who knows the details of how the plan operates who can.

The ADP test passes if the NHCE ADP is 4.06% (using +2). That leaves 0.45% (4.51% - 4.06%) available for use for the NHCE ACP % in the ACP test. The NHCE ACP test passes if the NHCE ACP borrows 0.07% to add to the 1.21% and get to 1.28%. The ACP test passes since 2 times 1.28% is 2.56%.

It is not clear who the pronoun "they" refers to in the OP. All to often I have seen situations where the partnership (Firm) acts as the plan administrator but Firm collects funds from the individual partners. Is the "they" who failed to deposit the SHNEC and PS contributions the Firm or the individual partners? Is the "they" who failed to deposit the deferrals the Firm or the individual partners? Is the "they" who already filed a tax return the Firm or the individual partners (or both)? From the perspective of the plan, the deposit the deferrals should be treated late deposits. Depending who "they" are, the correction could have an added dimension of making the correction for each individual partner. I also have seen some partners freak out because they have complicated personal tax returns and they do not want to do anything extra that may draw the attention of the IRS.

If the plan invested in mutual funds at all times throughout the plan year, then you do not need a Schedule D. If the plan invested at any time during the plan year in any of the investment types CCT, PSA, MTIA, 103-12 IE, then you will need to a Schedule D for that plan year.

You are doing this correctly where the plan is the Payor and responsible for tax withholding from taxable distributions. The plan sponsor definitely should want the plan to have its own EIN and have the plan make the tax deposits using that EIN. I have seen (typically small plan) sponsors who used their EIN as the Payor for a taxable plan distribution. The IRS could not distinguish some of the nonpayroll tax withholding for plan sponsor from the tax withholding from the plan, and sent a penalty letter for untimely deposits. It ultimately was resolved, but the it wasted a lot of people's time sorting it out. You can let the plan sponsor know that the plan having its own EIN does not require filing a 945 in any year where there are no tax withholding to report for that year. The language in the 945 filing instructions is clear about this. If the plan does withhold taxes from a payment, then the plan sponsor is prepared to make the filing.

@HRagain you have had a lot going on with your account and unfortunately have been left on your own to try to sort it out. It sounds as if the trouble started in November 2025 with an error in calculating your deferrals and safe harbor match due to a miscalculation of your eligible plan compensation. If there was a shortfall in these contributions that was not funded until a later date, then these could be considered late deposits requiring at least an adjustment for lost earnings. If so, then determining how much is going to depend on plan features such as auto-enrollment. The forfeiture of amounts due to an error in the compliance test results and the approval of the forfeitures by the internal plan administrator is a separate issue. Once the error was discovered and a restoration was made to your account (presumably from the forfeiture account), then you should have been credited for lost earnings. The amounts in question are relatively small, but the size of the amounts is not relevant in the context of there have been operational errors in which both the internal plan administrator and the recordkeeper appear to have played a part. Other plan participants may have been affected by these and other issues (including the CEO) and they may have not known to question what has happened in their accounts. You may want to suggest to the CEO that the plan should undergo an operational and compliance review by a third party covering a couple of years and definitely including the year in which the payroll changed systems. The review may seem pricey, but if there are issues, it will be a lot less expensive than having the DOL investigate or the IRS audit the plan.

The IRS does challenge whether a shareholder employee's wages are reasonable. The IRS has not provided a prescribed formula or methodology for making this determination and most cases are resolved by the court. When there is a finding that the compensation was not reasonable, there has been retroactive payment of payroll taxes and adjustments for compensation-based benefits. To answer the first couple of questions, yes the issue can go back to prior years, and yes it could affect the characterization of elective deferrals. The court will decide. Regarding the question about a non-fiduciary service provider, in the ethics presentation in the ASPPA Spring National Conference last week, a very similar poll question was asked. Only 1% of the audience said use the data provided while 68% said it was unethical for the service provider to use data that is inaccurate. Does the service provider have a responsibility - maybe - but read the service agreement before answering. Should the service provider rely on anything presented by the plan administrator - I believe most practitioners will have some level push back about inaccurate data. Regarding the last question, for the majority of plans (which primarily are sponsored by smaller employers), the plan sponsor is the plan administrator and the individuals who hold that title often are not involved in routine payroll processing. Similarly, a 3(16) plan administrator likely will not be involved in payroll processing. None of this relieves a plan administrator (keeping in mind this is a Named Fiduciary) of the responsibility to make sure that the W-2 information used in administering the plan is correct.

The challenge presented is when the net calculation of the vested distributable amount and associated fees is zero or negative. The terms of the plan matters, so declaring any amount a forfeiture is problematic. A plan is allowed to charge a fee (as long as it is clearly disclosed to participants so double check the 404(a)(5) disclosure), and the distribution process would need to be clear that a distribution admin fee payable to a service provider (although preferably it would be described as a termination distribution processing fee) is applied to the account balance before the distribution check is issued. The disclosure should clearly state that if the fee is greater than the distribution, there will be no distribution. In this case, the fee should be sent to the service provider and be permissible under the 408(b)(2) disclosure authorized by the Responsible Plan Fiduciary. The service agreement can clarify if the plan sponsor will pay the service provider the difference between the stated fee and the amount received by the service provider from the participant's account. The fee should not be charged to the account and then used to offset other plan administration expenses. Note that it is permissible to charge some or all terminated participants a reasonable admin fee for maintaining their account in the plan (again, subject to providing all disclosures.) This can be useful in clearing out very small account balances over time particularly if the plan doesn't make mandatory cash outs of balances under $200. There can be more steps needed based on a plan's distribution provisions and the service agreement with the service provider. A well-documented, fully-disclosed procedure can make the use of admin fees a reasonable solution.

We have at least one or more clients with each of the recordkeepers in your list. To the best of my knowledge, each offers a choice with the default being self-certification. Further, most clients who made an affirmative choice chose self-certification.

We use ASC and have had no issues.

I have not encountered this situation and am curious about some of the specifics. Perhaps an example may help. Let's assume a participant with a $5000 vested account balance requests total distribution and your firm charges a $100 distribution fee. Does the participant get $4900 and your firm receives $100, or does the participant get $5000 and your firm receives a $100 distribution fee payable from the plan as an administrative expense? Let's assume that the state sales tax on the distribution fee is 5%, so the state is owed $5. What is the process for paying the $5 to the state? Does your firm remit it to the state so you net $95 and then bill the client for the taxes to recoup the $5? Does your firm remit it to the state so you net $95 and then bill the plan for the taxes as an administrative expense to recoup the $5? Is there some other calculation that is done? You indicate that the tax payment process is detailed in the contract. If the recouping of the sales tax is charged to the plan, is it disclosed in the 408(b)(2) disclosure and signed off on by the Responsible Plan Fiduciary? If the recouping of the sales tax is charged to the participant either by adding it to the distribution fee or separately debited from the distribution, is it this detail disclosed to participants in the 404(a)(5) disclosure? Thanks in advance for teaching an old dog a new trick.

The process for authoring and obtaining IRS approval for pre-approved documents does not guarantee that any amendment made by the mass submitter also is pre-approved, and certainly no custom amendment by a plan provider is also considered pre-approved. That being said, mass submitters have for years issued interim amendments to their plans to cover changes in laws and regulations effective after the effective date of the LRMs on which the pre-approved documents were based. Operationally, the ability to make amendments is needed for situations like plan terminations where the plan termination amendment catches up the document to be consistent with current requirements. We obviously are in a new environment with the extended delay in deadlines to adopt plan amendments so there is more exposure to a plan that is continuing and is not being terminating. That being said, I have not seen or heard of an instance where an amendment to a plan prepared by the mass submitter for their document and used by a plan provider as been rejected by the IRS.

Keep in mind that the forfeiture account is supposed to be cleared out every year. If the plan has been accumulating forfeitures in a consolidated forfeiture account over multiple years, there could be an operational issue if the Plan Sponsor is thinking of splitting up and applying these aged amounts by employer.

This question is being asked by many and my take on it is there is no definitive answer and all suggested solutions have imperfections. Some of the larger mass submitters have made available to plan providers a SECURE amendment that can be adopted by December 31, 2026. This amendment includes choices tailored to the mass submitter document addressing the SECURE optional provisions. It is worth asking the mass submitter if they have this amendment available as a time-saver. Further, I expect that the IRS will be more accepting of an amendment provided by the mass submitter rather than amendment provided by another source. Some practitioners appear to be holding back on adopting a SECURE amendment in anticipation of being able to get the Cycle 4 document executed in 2026. This is a our industry's version of playing chicken (for those who haven't seen Rebel Without a Cause, it worth looking it up). Absent the above, hopefully plan sponsors have captured documentation of the administrative decisions they have made AND communicated to participants. If a plan sponsor has not done this, then they should be encouraged to adopt a SECURE amendment this year. We are communicating the available choices to our clients and allowing them to provide input. So far, less than a handful have asked for an amendment now and this is because they each have a need now to amend the plan.

Nothing has changed, and your understanding is correct. It may be helpful to break down the administrative steps and see how the labeling of contributions changes. Part of the confusion arises with the change in nomenclature such as saying "Roth elective deferrals" in place of "Roth contributions". The Nonelective Employer Contribution NEC is made to the plan and deductible for the plan year to which it relates. There is only one deposit made and there is no requirement to identify separately the NEC and Roth NEC amounts. Regardless of how the administrative process is set up, the fundamental requirement is a participant's election to have the NEC treated as a Roth NEC must be made before the NEC is allocated to the participant's account. Most commonly, the allocation of the NEC will occur in the plan year following the year for which the NEC was made. If the participant has a valid election to get a Roth NEC, then the NEC will become a Roth NEC upon allocation. The Roth NEC will be taxable to the participant in the year in which the allocation is made (and it is not taxable to the participant in the year for which the plan sponsor made the contribution.) Plan provisions and plan administration procedures can vary on issues such as the timing for the participant to make a Roth election, and for the allocation of the NEC. These do not change the year of deductibility of the NEC by the employer, nor the taxation to the participant in the year in which the allocation is made.

How each of us decides to approach this situation is a personal decision likely very much influenced by the policies of our employer. My personal approach is to attempt to get the facts. I agree that assumptions too often are inaccurate. If the facts reveal that the client, after being made aware of the issues, is doing something demonstrably wrong, then I have no problem with terminating the engagement. The client is free to move forward on their own or to engage another service provider. This is all included in our service agreement. It works for us.