Paul I

The Roth account by definition was 100% vested when the participant terminated. Any forfeiture would have come from an employer source (match and/or nonelective employer contribution). If the amount distributed from the partially employer sources are repaid, then the associated forfeitures should be reinstated.

I agree with @Bill Presson since the company had the opportunity to review the calculations and it was the company that wrote the checks and took the deduction on their tax return. The only possibility that this was done in error would be if the plan document has a fixed allocation formula and with no discretion to decide each year how the contribution should be allocated. This is pretty rare these days. Take a close look at the plan document. The comment that only "certain HCEs" were not going to get the same rate as the owners implies that there different allocation groups among the HCEs, and there is no mention of what NHCEs (if any) received as an allocation. Has the CFO thought about the employee relations aspect of taking contributions away from participants? One would think that HCEs in general are making substantial contributions to the success of the company, so why create a disincentive by saying the company made a mistake and wants to take back part of their contributions (probably including related earnings)? Any change from past practice is a decision that should be made by the owners.

I admire your initiative, thirst for knowledge, appreciation for the complexity, and desire to be efficient productive. Certainly the time and effort to build out the chart is requires a lot of focus and is itself an learning experience. Here are things to consider as you build out your chart: Ask questions about the environment in which the plan lives: Is there only one employer or are there other related employers who are or are not participating employers in the plan? Does any employer sponsor another qualified retirement plan? What is the type of the business of each employer (C-corp, S-corp, Sole Proprietor, Partnership, LLC, LLP...)? Is this the first year that the plan is in existence? Does the plan specify using Current Year ADP testing or Prior Year ADP testing? Does the plan specify using Current Year ACP testing or Prior Year ACP testing? Note that Top Heavy is a status of the plan and is determined as of the end of the preceding plan year, so ask if the plan is Top Heavy for this year before launching into allocations and compliance testing for this year. Yes, you will want to determine the Top Heavy as of the end of this year so you will have the starting point for next year. Check whether census data is complete and accurate. There's nothing like doing all the work and finding out the census data is incomplete or inaccurate. In many ways, the rules look at a plan not as a single plan but rather as three separate plans - elective deferrals, match, and non-elective employer contributions. Each of these can have their eligibility, entry and allocation provisions. Having a top-down hierarchy may not be the best work flow. Complete the determination of HCEs up front. You will need this for just about everything. You may want to have a separate procedure just for this. If there are other related employers, check 410(b) coverage across all of the employers. (A failed test needs fixing and will have an impact on everything else.) Keep in mind that forfeiture reallocations are annual additions that can impact the 415 limit. These are just some random thoughts that may help you progress further. Good luck!

What is notable about this situation is the relative informal approach the DOL is taking. It seems as if they are going out of their way to avoid opening an investigation of the plan. Here is a well-done article the provides an in-depth description of what can be involved in an investigation: https://www.groom.com/wp-content/uploads/2022/12/Guide-to-Dealing-with-Department-of-Labor-Investigations-of-Retirement-Plans.pdf Regarding the circumstances in this posting, the guide clearly states on the first page: "The DOL does not have the authority to compel the plan or any service provider to create materials or analyze issues on the DOL’s behalf." The guide also notes that: "The DOL has broad authority under the statute to: Require the submission of reports, books, and records of the plan. Enter places to inspect books and records. Question persons deemed necessary to determine the facts relative to an investigation." Given this authority, it begs the question in this case why, after all other attempts to contact the plan fiduciaries, hasn't the DOL sent an agent to the plan sponsor's (or any other fiduciary's) last known physical address? They DOL loves to harp about finding missing participants. They may wish, in this case, to try to find a plan sponsor that is MIA,

My understanding is the DOL Delinquent Filer VCP is used for when no filing was made. If a filing was made without the audit report, that is a deficient filing, but nonetheless a filing which can be amended. With respect to the DOL, as long as the plan has not received the dreaded NOR letter (Notice of Rejection), the they will accept the amended form.

I can appreciate that documents, procedures and regulations often are written to say the rules are black and white, right or wrong, good or bad... which makes it easy to obsess with being perfect. But we live in the real world where stuff happens and there is a need to be practical. Even the IRS has guidelines for rounding to the nearest dollar on tax forms. Yes, distributing $0.02 is very costly relative to the amount. If you ask the payee about it and they want the $0.02, then send them a letter with two pennies taped to it. Even that is disproportionate to the amount, but that's okay if it makes everyone feel better. The same suggestion applies to adding $0.02 to next year's payment. I appreciate your understanding of the situation and seeking input for a pragmatic approach resolution. These are my thoughts, but others may feel differently.

I assume this has to do with how the Form 5500 is completed. It is an annoyance. If should be using full accrual accounting which would get the plan to zero no matter which date is used for the plan year. Technically, the plan year ended on the merger date but the trust continued. If the trust also was considered merged on the merger date, then the assets belonged to the new plan. If not, then the trust persisted after the merger date. What really matters is that if the Form 5500 has the Final Return box checked, then the ending balance on the Schedule H must be zero. The transfer of assets also is disclosed on Schedule H. Whether the plan year is entered as 10/2 or 10/15 is not a big deal, nor is the cost of professional time that the client could get charged for "discussing" the issue. And, by the way, the client can decide since they are signing the form under penalty of perjury (and it is okay if the audit report differs from the form as long as the difference is explainable).

Roth Deferrals are Elective Deferrals. The IRS now calls them Roth Elective Deferrals. The issue with the correction rules is they specify that the corrective contribution is a QNEC, which is a pre-tax employer contribution, but there is no Roth QNEC. The challenge is how to try to get the QNEC into a Roth source which is what the participant originally wished to do. The IRS possibly could have come up with some Roth QNEC rules, but I suspect their focus was elsewhere and Roth transfers seem to be a reasonable solution. I don't expect any clarification on this anytime soon given everyone in the IRS is probably wondering if they will still be employed at the end of this year (or if they are shut down come the March 14th deadline to fund the government).

First, confirm what the plan documents has to say about the use of forfeitures, and be aware that forfeiture provisions may scattered around in the document in sections dealing with contributions, forfeitures, allocations, expenses and plan termination. Also pay attention forfeiture provisions where the plan may require forfeited amounts to be reinstated for terminated participants who were not fully vested. These rules can be particularly tricky if the plan uses hours of service rules, or has been aggressive in making cash-out distributions of small balances. A lot of Cycle 3 pre-approved plan documents have a provision that says the plan sponsor can choose what to do with the forfeitures. Be mindful that this happens to be at the center of a lot of recent law suits against the plan sponsors. Let's assume that the decision is made to use available forfeitures to pay for plan expenses. Frankly, this is common. Best practice is to make sure that the plan expenses will equal or exceed the amount of available forfeitures. The plan does not want to be in the position that all participants are paid out and all expenses have been paid, and there is still money left in the plan. It can be a nightmare trying to get rid of what likely would be a small amount by reallocating it to participants who already have been paid, or by reverting funds to the employer (just don't do this). Also keep in mind that the plan really isn't terminated until the trust assets equal zero, and Form 5500s need to be filed for each year until the year in which that happens. If the trust persists for more than 12 months from the date of the plan was terminated, then the plan may be considered as no longer terminated. This really is not onerous. Read the document, fully vest current participants, check for any required restoration of accounts, decide on the use of the forfeitures, get a good estimate of the expenses, write the checks, close out the trust and file the final Form 5500.

I am not aware of anything in EPCRS that provides an explicit correction method for missed Roth deferral. (This is different from when a pre-tax deferral is made when it should have been Roth,which is addressed in the IRS article for which you provided the link.) The IRS article does provide a suggested approach which get the participant close to where they wish to be. Assuming the plan allows transfers from pre-tax to Roth, make the appropriate QNEC correction and then have the participant elect a transfer from the amount of the QNEC to Roth. This would be taxable to the participant in the year the transfer is made. Note that the IRS proposed using a similar transfer in the recently released rules for allowing participants to elect to have an employer contribution made to their Roth account (and a QNEC is an employer contribution). Absent specific guidance, think through the correction steps and any associated plan provisions needed to implement the correction, and discuss all of the implications with the client. The rapid proliferation of Roth throughout the plan easily may have unintended consequences.

Daily valuation uses end of day market values or end of day asset positions (as appropriate for the transaction). When we recordkeep SDBAs, we use end of day market values or end of day asset positions (as appropriate for the transaction) in the participant's account. It all works if the brokerage account is readily available to us via the financial advisor, participant or read-only online access. @Bri does raise an interesting point about plan provisions that provide check boxes to choose the plan's Valuation Dates. Typically the document has an annual Valuation Date be default and then allow choices like daily, monthly or quarterly and maybe an option to describe other dates. These choices may also be made for each contribution source. I am curious: Does anyone use the describe line to identify the SDBA as a real-time Valuation Date? Does anyone with a daily plan that holds assets that are not valued daily (e.g., real estate, LPs) use the describe line to disclose that some assets are not valued daily?

If I understand the situation correctly, we can look at as Companies A, B and C are in a controlled group. Company A sponsors a plan and Companies B and C are participating employers in Company A's plan. There is a Buyer who wants to buy Company A, and does not want to buy Companies B and C. You do not say if the acquisition of Company A by the Buyer is an asset sale or a stock sale. If it is an asset sale, the employees of Company A will be considered to have terminated employment from Company A and been hired as new employees of the Buyer. Company A will continue to exist until it goes out of business. A scenario under these circumstances may be to have either Company B or Company C assume sponsorship of Company A's plan. After the acquisition, the former employees of Company A could take a distribution the former Company A plan (now the B or C plan) including making a rollover their balances into the Buyer's plan. If it is a stock sale, the employees of Company A will not be considered to have terminated employment from Company A. If the goal is not to have a multiple employer plan, then action will need to be taken before closing on the sale. A scenario under these circumstances may be to have either Company B or Company C assume sponsorship of Company A's plan, and to make Company A's employees ineligible to participate in the plan as Bri commented. After the acquisition, the Buyer could arrange a trust-to-trust transfer of the Company A participants' accounts in the former Company A plan (now the B or C plan), into the Buyer's plan. These are just two scenarios out of many. Some key points to keep in mind are: there are more scenarios available before closing than are available after closing. treatment of plans in asset sales generally are simpler that in stock sales. in the chosen path forward for the plan(s), be mindful of the need to coordinate the structure of the associated trust or trusts .

I observe that if the client has no clue where to find a resource on which to base their investment decisions, they should not be making any investment decisions for the plan. You may want to point the client to articles about their fiduciary responsibilities and the risk they are taking by doing a task for which they are not qualified to do. Here is an example: https://www.employeefiduciary.com/blog/meeting-401k-fiduciary-responsibility Good luck!

As @Bill Presson noted, plan accounting for SDBAs for individual participants existed many years before than daily valuations applied across the entire plan. The plan accounting methods used for those SDBAs are fully compliant with all requirements for any defined contribution plans. Note that there are multiple approaches to the accounting techniques so the math may differ, and the results may vary slightly, but all are compliant. This also happens to be true about daily valuations. Not all recordkeepers use exactly the same plan accounting math and the results do vary slightly, but each recordkeepers' results are compliant. There are many variables that come into play. Some are related to plan design like, as @Gadgetfreak notes, includes vesting, administrative fees, Roth tax basis, investment in contract from other already taxed amounts, prior partial distributions, and loan accounting to name a few. Others are related to the type of investment that may be permitted in the SDBA like employer securities, limited partnerships, private placements, periodically valued investments, certificates of deposit, non-benefit responsive GICs and gold bullion to name a few. There also may be a need to accommodate securities that will only trade in whole shares. I have seen and done plan accounting for all of the above, and all of that plan accounting is and was fully compliant. Timing of transactions is not an issue. Distributions from fully or partially vested sources, could be made daily (if the assets were liquid). Practically, SDBAs that have several complicating features require can require individual attention and that comes at a cost, and the plan can have that cost paid by the participant's SDBA. That added cost should factor into the plan sponsor's decision whether to have SDBA's and, if allowed, whether there will be restrictions placed on the sources that can be in the SDBA and the types of investments that can be held in the SDBA. As an industry, we all are obsessed with being 100% accurate, but what we really are obsessed with is being 100% compliant. An the often unrecognized beauty of the laws and regulations that govern the plans we work is the flexibility to creatively design and recordkeep a plan that meets the objectives of the plan sponsor.

I have not had any clients offer incentives. If I may add a question, has anyone seen a plan with an auto-enrollment feature provide an incentive either for making an affirmative election to elect deferrals, or for not opting out of the default election by the end of the plan's opt-out time period?

The facts and circumstances that @Peter Gulia points out are relevant, but it may take a significant effort to get the information needed to make a decision. I suggest starting with asking the bundled service provider to give you for the due diligence they did to be able to assure clients that this is acceptable. Further, you may want to ask them to answer questions that you can anticipate receiving from participants like: If I have an existing rollover account, will the entire account have no fee? If not, how will the new rollover contribution be accounted for? If I take a distribution from the new rollover account before the end of the 6 month period, will I be charged an asset-based fee? If I take a loan from the new rollover account before the end of the 6 month period, will I be charged an asset-based fee? If I take rollover a distribution from my existing rollover account and then subsequently decide to roll it back into the plan, will that be eligible for this offer? Does this offer apply to all asset-based fees such as including fees that may be associated with the plan's investment options such as 12b-1 fees, commissions, sub-TA fees, redemption fees and other similar fees? You also may want to ask: If the bundled service provider's fee schedule is based in part of total assets of the plan, will the new rollover contributions be included in determining the provider's fee applicable to all participant in the plan? If a Schedule C of the Form 5500 is required, will the amount of the fee that is not charged to the participants be reported on Schedule C? As a colleague always liked to say, the devil is in the details.

Look beyond the distribution paperwork and look at the plan document. Most pre-approved plan documents have several sections addressing hardships. These sections answer questions like: which accounts are available (and under what circumstances)? is there an order in which accounts are accessed? are hardships limited to specific events? does the employee have to take an available loan before taking a hardship distribution? The documents are Cycle 3 documents. Note that the Bipartisan Budget Act of 2018 required certain changes to plan provisions related to hardship distributions. Final regulations were effective on or after 1/1/2020 and plans had to be amended to include the changes by 12/31/2021. Most pre-approved plans provided an Interim Amendment that added the required hardship amendments. Some of the new provisions were optional, so the Interim Amendments may or may not have modified the provisions in the original text of plan document. The Interim Amendments were very lengthy and often included a menu of choices for each provision. check to see if any Interim Amendments modified the plan provisions. All of this was happening during the pandemic, and a plan easily may have continued to use distribution paperwork and related procedures that do not reflect the plan documents and related amendments. On another note, if the plan is using a recordkeeper, the recordkeeper may have default hardship provisions in its service agreement that may or may not align with the plan document as amended. If copies of the plan document and the Interim Amendments are available, it should take less than a half-hour to confirm the answers to any questions.

If the plan wishes to approach the issue an overpayment, here is an excellent article about how to recoup overpayments after SECURE 2.0: https://www.mercer.com/insights/law-and-policy/correcting-retirement-plan-overpayments-under-secure-2-0/ Given the size of the extra payment ($11K), the plan should consider making an attempt to get the money back. Regarding the 1099R, it can be corrected by filing a corrected 1099R (basically void the original and providing a replacement. The participant would then file an amended 1040X to recoup the taxes. This is not as onerous for the participant as it may seem. Here some guidance with some greater detail on how this would flow: https://www.irs.gov/taxtopics/tc154 The rationale as to why the participant may want to do this is the same rationale the participant should have for her contributions - accumulating assets for retirement. She would not be double-taxed on the amounts returned to the plan, and there would be no need for the plan to set up an after-tax amount. The whole situation does beg the question why no one checked the trust to see if the first refund was cashed before issuing another check, or if someone did check the trust, why the second check was written. If the check was cashed but not credited to her account, it seems there may be an issue with reconciling trust assets to participant accounts that is worth investigating.

It sounds as if the portfolio companies that the company buys and sells can have very different demographics and very different benefit plans. In an environment like this, the approach the company may want to take is to put in place a due diligence action plan of steps taken before an acquisition to assess how a target's benefit plans could impact the other plans of the portfolio companies. At a very, very high level, the action plan would assess how the acquisition could impact post-transition period 410(b) coverage testing across all of the plans in the company. Assuming there is no impact (everybody continues to pass), then the action plan would assess if the target's plans could pass 401(a)(4) nondiscrimination either on its own or possibly when aggregated with another plan among the portfolio companies. I agree that QSLOBs likely are not the better solution in most cases, but they would always remain available as an alternative. The challenge to executing the action plan is having current testing data across all of the portfolio plans. Another challenge is getting testing from a target company before the transaction closes. A benefit to executing the action plan is being able to negotiate and inform the terms of the acquisition on topics such as if and when it makes sense to terminate or freeze the target's plans. Notably, the action plan likely will reveal if the target's plans have any potential compliance issues that could expose the company to an expensive cost of correction. Again, this is at a very, very high level. I have seen many times where due diligence before closing has avoided a major disaster, and I also have seen many times where not doing due diligence before closing has led to a major disaster.

Benefits are negotiated between the company and the union. The union represents the union employees in the negotiations. Once an agreement is negotiated, there is a collective bargaining agreement documenting among other things, if the company will include the union employees in the company's retirement plan and if yes, any plan provisions that may or may not apply specifically to union employees. You may want to first speak with your union representative and also read the most recent bargaining agreement to get an answer to your question.

The plan has a 3% Safe Harbor Nonelective Contribution, so there is no need to test ADP. From an ADP standpoint, it doesn't matter if they defer or do not defer. If the owners do not want to get the 3% SHNEC, then they would have to be excluded from participating in the SHNEC. Since a plan does not have to give an SHNEC to HCEs, I expect an amendment that excluded just the owners from the 3% SHNEC would not invalidate the safe harbor.

You may also want to put on your bulletin board $10 as another magic number. You will see on the IRS website https://www.irs.gov/instructions/i1099r that: "Specific Instructions for Form 1099-R File Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for each person to whom you have made a designated distribution or are treated as having made a distribution of $10 or more from profit-sharing or retirement plans, any individual retirement arrangements (IRAs), annuities, pensions, insurance contracts, survivor income benefit plans, permanent and total disability payments under life insurance contracts, charitable gift annuities, etc." This can come in handy when the plan posts dividends to a terminated participants' accounts who already received a distribution, or to accounts where a correction of late deposits results in a lot of participants getting very small deposits.

@Lou S. is correct that you want the EIN on the 1099s to be the same as the EIN used to make the tax deposits AND the EIN used to file the Form 945 Annual Return of Withheld Federal Income Tax. TPAs and recordkeepers do not all use the same approach, but as long as the EINs are used consistently, there should be no problem. That being said, here is a word of caution - avoid using the plan sponsor's EIN. If the plan sponsor files a Form 945 for tax deposits for other payments that are not plan distributions, the plan sponsor likely will get a notice from the IRS that the Form 945 amount does not match total tax deposits reported to the payees. It can consume a lot of time trying to straighten this out. As examples where this can be a problem, the instructions to the Form 945 say: All federal income tax withholding reported on Forms 1099 (for example, Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.; Form 1099-MISC, Miscellaneous Information; or Form 1099-NEC) or Form W-2G, Certain Gambling Winnings, must be reported on Form 945. We are sitting here in January 2025 preparing forms for distributions made in 2024. Hopefully, the tax deposits made during the year did not use the plan sponsor's EIN.

Great question! The EOB says in Chapter 8 Coveage Testing Part C., Average benefit percentage test, 2. Computing benefit percentages, 2.i. Certain distributed amounts must be included in benefit percentage: 2.i.2) Corrective distributions of excess deferrals under IRC §402(g). Whether to apply the rule described in 2.i.1) to excess deferrals under IRC §402(g) is less clear. Treas. Reg. §1.415(c)-1(b)(2)(ii)(D) provides that excess deferrals which are distributed by the April 15th deadline under IRC §402(g)(2) are not treated as annual additions for §415 purposes. However, Treas. Reg. §1.402(g)-1(e)(1)(ii) provides that the excess deferrals of nonhighly compensated employees (NHCs) are excluded from the nondiscrimination test (i.e., the ADP test) under §401(k), but the excess deferrals of the highly compensated employees (HCEs) are included in the ADP test. With the difference in treatment between HCEs and NHCs for nondiscrimination testing purposes, it is recommended that excess deferrals made by HCEs be included in the benefit percentage, even if they are distributed by the April 15th deadline. The short version of the logic that leads to this conclusion is it the excess is included in the ADP test, the excess should be included in the ABT. Note that the analysis admits that this is "less clear" and the conclusion is "recommended" which will leave up to the plan and the practitioner to decide if they embrace this interpretation. The most conservative approach is to include the excess deferrals.

Given the circumstances, it seems that the plan administrator and/or recordkeeper have conflated the rules for treating deemed distributions and for treating loan offsets. Either way, the interest should not have been reported on a Form 1099R (see the Instructions for Forms 1099-R and 5498 (2024) page 9). [Note that the instructions also address topics related to reporting deemed distributions and loan offsets on a Form 1099R that you may find interesting.] Many plans require loans to be repaid solely through payroll deductions, so a terminated employee cannot continue to make loan repayments even if they wanted to. Some plans do allow terminated employees to continue making payments, and the participant should be informed of the process on how to continue making loan repayments and also how to inform the plan/recordkeeper not to default the loan. Part of the issue may be incomplete disclosure about how the plan will treat loans in the event a participant terminates employment. IMHO, leaving the loan for a terminated participant on the books and simply waiting for the loan to default is probably the worst way to administer the loan.