Paul I

Is it fair to assume that the employee was not eligible throughout all of 2023? If yes, then correct the ineligible deferrals by distributing the excess amounts to the employee. You are correct that there would be not tax impact to the employee with the exception that any related earnings would be taxable in 2024. If the employee is now eligible and not deferring the maximum, they can up their deferrals to put the amount back into the plan. The Plan Sponsor is not on the hook for a 2023 top heavy contribution but the Plan Sponsor likely will pay the price of dealing with a disgruntled employee.

I agree with @Bri and suggest that Dr. X or his plan account pay the fee for the additional work.

I do not recall ever seeing a plan penalized for a late distribution of s SAR, nor have I seen an explicit corrective action other than to send out the most recent notice. It is worth observing that there is a push to be able to consolidate multiple disclosures into a single package of disclosures for purposes of distributing to participants, not to mention that unenrolled participants no longer have to get disclosures.

Our service agreement lists pricing for each specific service listed in our menu of available services. For example, one service is posting payrolls and instructions to the custodian on where to invest the payrolls. This service is predicated on receiving timely and correct data and related funding. Any service that is not explicitly listed, and any variance from the conditions applicable to a listed service, are considered special services and billable at the hourly rates of the staff who perform the special services. Yes, if the time involved is inconsequential, we alert the client we provided a special service but may waive the fee. If client does not take steps to ensure that we get what we need to perform our listed services timely and accurately, we do invoice the client for the extraordinary efforts. It's amazing how often it takes a small charge appearing on an invoice is needed to motivate the client to act within the scope of the services agreement.

If the employee was not a more than 5% owner when his original RMDs years age, and if the plan allows for active employees to defer taking RMDs until they separate from employment, then he can defer taking his RMDs now.

Consider keeping the contribution squeaky clean both for allocations and all other plan reporting, and having the plan pay an expense that would wipe out the excess. Confirm that the plan allows for payment of an expense and for the employer to reimburse the plan for any plan expense not paid for by the company.

Let's assume that no fraud is involved in the election process. Had the election been made on paper, there would be no basis for challenging the election other than the participant's misunderstanding. If the computer system was designed to confirm and reconfirm the election before formally accepting it on behalf of the plan, then there would be no basis challenging election. If the computer system is unforgiving, then it is more credible that the participant just clicked the wrong thing and made a mistake. Under a confirm and reconfirm process, the participant enters there election, the system displays a the election along with a short description of the election (e.g., "You elected to defer x% of your salary as a Roth deferral. Your Roth deferral will not reduce the withholding of income taxes from your paycheck. If your election is correct, please on the Accept button. If your election is not correct, click on the Cancel button." If the participant clicks on the Accept button, the election is recorded by the system with a date and time stamp, and becomes irrevocable. I have seen a handful of situations where a participant elects a Roth deferral and calls up HR/Benefits/Recordkeeper after receiving their paycheck to demand that their election be changed. In most of these situations, the participant did not understand that their net pay was going to go down by the amount of the Roth deferral and they experienced a form of sticker shock.

My response to the question How important is it to apply a cutoff during a year? is it is very important, but not mandatory. Anytime excess deferrals are taken by payroll, it is a violation of 401(a)(30) and an operational failure. If the excess deferrals are not removed by April 15th of the following year, the plan could be subject to disqualification (unlikely to happen) but the correction must go through EPCRS (which is not cheap). Note that a 401(a)(30) failure is a payroll failure that differs from a 402(g) violation which is a participant failure (e.g., where the participant had deferrals made while working for unrelated companies). From what I have seen, 401(a)(30) failures are more likely to occur when there was a change in payroll systems/providers. Another relatively common 401(a)(30) failure occurs when there are other related companies such as within a controlled group where payroll was not run on a common payroll system/provider and a participant had deferrals taken from multiple payrolls that did not share YTD information. Technically, all excess deferrals should be corrected through refunds which would address the distribution of earnings on the excess deferrals. If the refunds are not made by April 15th, the excess deferrals are corrected through EPCRS (SCP, VCP or Audit Cap) and are taxable in the year of deferral (except for Roth deferrals) and in the year of distribution (including the amount of any Roth deferrals). According to the IRS web site (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-werent-limited-to-the-amounts-under-irc-section-402g-for-the-calendar-year-and-excesses-werent-distributed) the refund could be subject to the 10% early distribution penalty, 20% withholding and spousal consent rules.

@C. B. Zeller & @Peter Gulia, I am not advocating for or against a plan being allowed to specify a catch-up limit. I will observe that I took a look at a half-dozen pre-approved plan adoption agreements and the language in their underlying basic plan documents, and interestingly none of them give the plan sponsor the option to choose a catch-up limit (i.e., there is no blank that says fill in the catch-up deferral -limit).

Reading Section 109 of SECURE 2.0, the change adding the availability of the increased catch-up limit for participants aged 60-63 does not appear to be optional. This increase is part of the definition of the overall catch-up limit. If so, then the only option a plan has is to permit catch-ups or not to permit catch-ups. If the plan chooses to permit catch-ups in 2025 and going forward, then the plan must permit the increased limit for participants aged 60-63. (I recently have seen a statistic that something like 98% of 401(k) plans allow for catch-up contributions.) While we are on the topic of catch-ups, there are some other related points to keep in mind: Section 109 notes the "adjusted dollar 19 amount, in the case of an eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year" so beginning January 1, 2025, a participant who on January 1, 2015 is at least age 59 (i.e., would attain age 60 before the close of the tax year) and under age 63 (i.e., would attain age 64 before the close of the tax year) will be able to make catch-ups up to the increased limit. Catch-up contributions are subject to an universal availability requirement applicable to all plans sponsored by the employer and any related employers. If the plan includes Long-Term Part-Time Employees (LTPTEs) from 401(a)(4), ADP, ACP and 410(b) testing, then if the plan allows catch-ups, the plan has to allow the LTPTEs to make catch-ups. If the plan excludes LTPTEs from all of these tests, the plan could exclude LTPTEs from making catch-up contribution. Payroll service providers are on the critical path to implement the new limits. Cycle 4 restatements likely will start in late 2026 with the cylce ending in 2028. IRS Notice 2024-3 includes the 2023 Cumulative List of Changes in Plan Qualification Requirements for Defined Contribution Qualified Pre-approved Plans which includes the age 60-63 catch-up limit. @Gina Alsdorf's observation about the coming mandatory Roth catch-ups for High Paid participants is fair warning to all other service providers who will be significantly impacted by that change. At least this change does not appear in the 2023 LRMs. All of the above may be particularly valuable for those practitioners who are contemplating retirement. 😀

I agree with @Bri that the individual trustee(s) of most small plans are associated with or part of the management of the employer. For many of these companies, all of the decision-making for the companies is concentrated within a group of 5 or fewer individuals, and the duties of the plan administrator are performed by individuals within that group, and the trustee is also within that group. When the company is named in the plan document as the Plan Administrator, often no one in the management of the company is specifically designated to have that responsibility, but the trustees often are clearly identified in the plan document. Often, the trustees are one or more of the owners, the individual named as the president/general partner, or the treasurer, and the focus of the trustees is on the investment menu. They leave (and don't ask, don't tell) plan operational considerations to others such as human resources or payroll. It is fairly common that only or two individuals have hand-on knowledge of the operations of the plan, and these individuals most often have some responsibility for the company's payroll. As a result, they should know about any missed/late payroll deposits, but often they do not know the timing requirements for the making deposits to raise the issue with others. Note that, in an effort not to be considered a plan fiduciary, outside payroll providers generally do not alert the company about late deposits. Investment advisers go out of their way to disavow any responsibility for fiduciary responsibility, and to limit their services to at most the oversight of the investment fund menu. Some advisers may comment to the company about a late payroll, but this comment primarily is in response to their keeping tabs on asset growth and associated adviser fees tied to deposits or asset balances. Most recordkeepers will alert a client if a routine payroll is not timely deposited. The alert occurs after the fact and at best is accompanied by a message that a correction may be needed. The service agreement does not include any accountability resulting from missed or late deposits. All of the above being said, the decision on whether to have an independent trustee often comes down to the company not wanting to pay a fee no matter how small that fee may be.

For the moment, let's shift focus away from issues related to disclosing information to participants who must make personal decisions about their ESOP interest, and focus on what the plan document says about voting rights. Do participants have the right to vote shares allocated to their accounts on the sale of the company or the assets of the company, on a dissolution of the company, or conversion of the company to another corporate status? Are there provisions that allow participants to vote unallocated shares? Does the plan designate each participant as a plan fiduciary? If the plan specifies that the participants must be involved in the decision to sell the company, then the participants will need access to information sufficient for them to make decisions.

Here is an article from Employee Fiduciary that does a decent job. You may want to search for it online to get a cleaner copy or a link to send to others. ASGs.pdf

The determination of who is or is not a nonresident alien can be very involved. Chapter 1 of IRS Publication 519, U.S. Tax Guide for Aliens provides guidance on how to determine whether an individual is a non-resident alien or is a resident (or has dual status!) https://www.irs.gov/pub/irs-pdf/p519.pdf The individual may qualify as a resident but can abandon their status. There also is a Substantial Presence Test which gets into topics like counting days worked in the US, commuting to work from another country, days while traveling through the US to name a few. The publication has 99 pages discussing rules for Aliens (but not even a word about UFOs 😁). The bottom line is a plan may have an exclusion for non-resident aliens but it may not be obvious when an individual is a resident alien.

The instructions for Code 2 say "Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4." Code 72(t)(2)(M) says "(M) Distributions from retirement plans in connection with federally declared disasters. Any qualified disaster recovery distribution." Codes 1, 3, and 4 respectively are 1—Early distribution, no known exception, 3-Disability and 4-Death.

@AlbanyConsultant do you know the type of MEP that Company F wants to join? Is it: an association retirement plan? a professional employer organization (PEO) plan? a pooled employer plan (PEP)? some other multiple employer plan (e.g., among related employers that are not in a controlled group)? For the first 3 types, the association, PEO or PEP will dictate what the Company F will be allowed to do if they join the MEP. If the MEP does not allow SDBAs, then Company F will need to assess the importance to them of that investment option. If the MEP supports all of the existing protected benefits in the Company F plan, then Company F likely merge their plan into the MEP through a trust-to-trust transfer. If the MEP does not support all of the existing protected benefits in the Company F plan, then Company F likely will need to freeze their plan, fully vest anyone who is not already vested, merge into the MEP those benefits that the MEP will support, and keep the frozen plan around until all participants are out of the plan. If the MEP is the "other" type, then Company F will need to sit down with the MEP sponsor and work through all of the details.

Let's assume as Peter notes that participant self-certification is not available. Generally, taking a hardship withdrawal to make loan repayments such as for delinquent mortgages (with the threat of eviction) financially does more harm than good. The withdrawal is taxable and often triggers the early distribution excise tax. Student loan provider haves many alternatives available to help individuals who have difficulty making loan repayments. It would be in the better interests of the participant to encourage them to pursue those alternatives before tapping into the plan. Student loans commonly are written for expenses for an upcoming academic year. It is not uncommon for an individual to have multiple loans that may be consolidated later. An administrator who is parsing the safe harbor language could conclude that a student loan repayment on a loan for a prior academic year does not meet the requirement that the hardship is for an expense associated with the next 12 months of expenses. It also is notable that paying off credit card debt by itself is not a safe harbor hardship reason, but having sufficient available credit on a credit card to cover a heavy and immediate financial need is a reason to deny a hardship. This quirk merely highlights that the safe harbor hardships are not intended to be a universal solutions for relieving debt.

Let's not be in a hurry to condemn the major recordkeeping platforms, and certainly only someone who has never made a mistake should cast the first stone. As a business, the major platforms operate within the constraints of their service agreements, most of which at some level leave to the plan sponsor the responsibility to interpret the plan and decide what to do. Plan sponsors should not assume that everything that could happen with a plan is within the scope of formal scope of services presented in the agreement. Plan sponsors also should not assume that the service agreements protect them from breaches in their fiduciary responsibilities. Yes, some individuals at service providers do not know the boundaries of their knowledge and try to be helpful (sometimes even try to be logical), resulting in providing incorrect information to the plan sponsor. Best practices for a plan sponsor is to work with a retirement plan professional who will have detailed knowledge about the plan provisions, the plan sponsor's perspectives on the goals and objectives for the plan, and the role of other service providers. This may be an attorney, accountant, retirement consultant, financial adviser or TPA. The independence of the retirement plan professional goes a long way to keeping a plan in compliance. Certainly none of us who are not lawyer's specializing in retirement plans should be providing legal advice to the plan or its fiduciaries.

The best approach is to follow the provisions of the plan to identify the source of the contributions whenever a deposit is made into the plan. It should be easier to identify the source at the time of deposit instead of trying to "redistribute" everything later on. Without going into too much detail, consider that: Partners as well as employees must make elective deferral elections on or before the end of the plan year. If partners are deferring from draws, then any deposits from the draws based on deferral elections are deferrals. If too much is designated as elective deferrals, it is appropriate for any excess amounts to be distributed using the excess deferral procedures. Deposits for the SHNEC and profit sharing contributions should be made for all partners and employees at the same time. The plan has a problem if the partners get allocations of these non-elective employer contributions earlier than the employees. While not endorsing the "redistribution" process, hopefully any earnings related to amount moved around include earnings associated with those amounts. Otherwise, those earnings are in the wrong accounts.

The company is making the decision to move to a MEP, and the company is picking the MEP as the service provider. The company is responsible for knowing the consequences of this decision before they sign documents and formally join the MEP. If the plan is going to merge into the MEP, the company also should take a look at any benefits in their existing plan that are protected benefits and ask how they would be handled in the MEP. These days, this is ripe for confusion and misinformation given that plan sponsors can make administrative decisions to adopt and apply plan features made available in recent legislation, but the plan sponsors do not have to incorporate these plan features in the plan document until later. If you are feeling magnanimous, consider doing the company a favor - BEFORE they sign up for the MEP - by sharing the questions they should be asking the MEP provider to help the company decide if the MEP provider is a good fit for the company's employees.

The option is not available so you likely will not find a reference. Often, we would like to see explicit rules about what cannot be done, but generally the rules are written to say what can be done. The MPPP contribution is an employer contribution and the employee has no choice to instruct the employer to change it. A CODA is an employee choice where the employer offers the employee the opportunity either to take cash or have a contribution made to the plan. This difference is highlighted in many ways. For example, the 410(b) coverage ratio test employer contributions separate and apart from CODA (think elective deferrals), and also separate and apart from matching contributions because the match is associated with the elective deferrals.

Keep in mind that plan documents have default beneficiary provisions and the Plan Administrator cannot force a participant to make an affirmative elective. Also keep in mind that a terminated participant who has an accrued benefit can change their beneficiary designation while they remain terminated. It is good practice to encourage participants to make affirmative elections, and to periodically remind participants to review their affirmative elections. Some plans have generic communications that center around how life events - including rehire - that can impact benefits and those communications include the reminder to update beneficiaries.

A money purchase plan specifies a mandatory employer contribution of a fixed percent of pay for each employee. It is not a CODA and employees cannot make an election to change the percentage. If the plan is a CODA, the notion of a negative deferral election in a CODA was raised in Revenue Ruling 98-30 (see the attached article). Assuming a negative election is permissible, there is no need to structure a plan with an arcane provision that will confuse everyone. Design the plan with an auto-enrollment default of 10% and participant can make an affirmative elective to adjust the percentage up or down, including completing opting out. Negative elections Revenue Ruling 98-30.pdf

A good starting point is the IRS web site: https://www.irs.gov/retirement-plans/voluntary-correction-program-general-description This site also will lead to some pages specific to 403(b) plans. For example: https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide If you are looking for a gold-standard resource, among your best bets are the ERISA Outline Book, Wolters Kluwer, or ERISApedia. Be prepared to pay for a subscription, but the value of the guidance and time-savings are worth every penny.

Focusing on the PS allocation, if the allocation conditions say a participant who works more than 500 hours will get a PS allocation regardless of whether the participant is active at plan year end, then modifying the definition of compensation used in the PS allocation for a terminated participant in a way that reduces their PS benefit would result in a cutback of the accrued PS benefit for that participant.