Paul I

Thanks Bill. I should have noted that the Form 8955-SSA instructions do say in the Who Must File section: "Plan administrators of plans subject to the vesting standards of section 203 of ERISA must file Form 8955-SSA." That section ends with the comment: "Sponsors and administrators of government, church, and other plans that are not subject to the vesting standards of section 203 of ERISA (including plans that cover only owners and their spouses or cover only partners and their spouses) may elect to file Form 8955-SSA voluntarily. See the instructions for Part I, line A." The instructions for Part I, line start with: "Line A. Check this box if you are electing to file this form voluntarily." To rephrase the question, has anyone who is not required to file a Form 8955-SSA ever voluntarily filed one?

There is no need to file a Form 8955-SSA for this participant. The instructions to the Form 8955-SSA say: When To Report a Separated Participant In general, for a plan to which only one employer contributes, a participant must be reported on Form 8955-SSA if: 1. The participant separates from service covered by the plan in a plan year, and 2. The participant is entitled to a deferred vested benefit under the plan. In general, information on the deferred vested retirement benefit of a plan participant must be filed no later than on the Form 8955-SSA filed for the plan year following the plan year in which the participant separates from service covered by the plan. However, you can report a deferred vested participant on the Form 8955-SSA filed for the plan year in which the participant separates from service under the plan if you want to report earlier. I expect it is possible for a Form 8955-SSA to be required if the owner stopped working and kept the plan open with the owner's benefit as a deferred vested benefit. Has anyone ever encountered these circumstances and filed the SSA?

For what it's worth, a lot of plans have loan policies that say it is mandatory for repayments to be made by payroll deduction. I have seen a fair number of plan administrators take this literally and immutably in applying the loan policy. If an employee for whatever reason - termination, leave of absence, disability, transfer to another company in the controlled group that runs of a different payroll service that won't take payroll deductions (especially NRAs), ... - then the loans go into default unless the employee can again make loan repayments by payroll deduction. I, too, cannot say if this approach - mandatory repayments by payroll deduction - satisfies the statutory PTEs, but if it doesn't, there are a lot of plan administrators that don't know it.

The policy should be okay if it passes BRF testing. The policy likely will not solve the problem of per diem employees being unable to pay via payroll deductions. Consider that a regular employee takes a loan and begins repayments through payroll deductions. The employee subsequently becomes a per diem employee. The loan is outstanding and remains subject to required repayments to avoid default. If, in the opinion of the plan sponsor, there is a significant number per diem employees that need access to plan loans, then the plan's loan policy could be adjusted to allow for periodic, non-payroll-based repayments. In practice, the an employee not repaying through payroll deductions should be educated on the conditions and consequences associated with a loan default. One thing to consider is whether the availability of the non-payroll-based repayments should or could be restricted to per diem employees, and regular employees would remain subject to repayments through payroll deductions.

Let's acknowledge the value of pre-engagement due diligence followed by a well-written engagement letter.

My understanding is the plan is not required to get an new election each year from each participant. The plan is required to give each participant a notice each year before the start of the next plan year which explains the EACA including default elections, auto-increases, and opt-out elections among other things. The timing of the annual notice is the 30 - 90 day window before the start of the new plan year. That being said, the plan document can have provisions that require the plan administrator to solicit new elections for each participant every year. The plan may also provide that a participant that is not deferring anything will have default elections made unless the participant again opts out. The plan may extend this default to a participant that is deferring, but is deferring below the minimum default deferral percentage. Then there is administration of refunding deferrals if the participant requests to opt out and the plan permits it. These are yet more decision points for the plan sponsor, and hopefully the decisions be made with due consideration of the company's payroll being able to adhere to the requirements of the plan.

It's quirky. Take a good look at the demographics so the plan sponsor is comfortable with potential operational issues. What is the risk of the plan being top heavy? What is the anticipated allocation formula? Are there significant number of employees under age 21? Will Average Benefit Testing be needed? Are there Long Term Part Time employees? Is this a new plan or a new 401(k) feature that will need to be an EACA? There probably other questions and the answers may all prove to be inconsequential, but quirky designs can lead to quirky operational issues.

There was a message in my email inbox this morning (sent after hours on Friday) from an institutional recordkeeper notifying TPAs that the recordkeeper will apply the $7000 increased cash-out limit starting July 2024. The message in the email to TPAs essentially was the recordkeeper was going to apply this to all cash outs, but no rush, you have until 2026 to amend the plans. The message in the communication to the TPA's clients was the recordkeeper was going to apply this to all cash outs, and you (the client) will need to update any participant communications and amend your plan document. If you use the recordkeeper's pre-approved document, no worries, an amendment will be provided asap. If you do not use the recordkeeper's pre-approved document, then you should notify your document provider so the change can be made and appropriate notice is provided to your plan participants. It seems this recordkeeper is trying to put TPAs and document providers between a rock and a hard place. There is no discussion of amending now versus amending later. There is no suggestion of plan sponsor discretion. There is no opt-out offered. There is a sense of urgency communicated to plan sponsors that is not communicated to TPAs. What is your opinion of a recordkeeper making a unilateral decision applicable to all of the plans they service? Recordkeeper $7000 mandatory distribution notice.pdf Recordkeeper to TPA $7000 mandatory distribution notice.pdf

The pre-enactment plan had a 401(k) feature and is grandfathered. SECURE 2.0 did not say that any modification to a grandfathered plan had to be an EACA.

@Gilmore the proposed rule was met with a less than enthusiastic response as noted in the attached review, and in the comments from ASPPA found here: https://www.asppa.org/news/ebsa-proposes-adding-self-correction-component-vfcp and here https://www.asppa-net.org/news/ara-pushes-additional-changes-vfcp-self-correction-option To answer your question, I don't see that the option is available at this time, and it seems as if there are several decisions that a plan would need/want to consider if the option, unmodified, was available now. ferenczylaw.com-FLASHPOINT DOL Embraces Self-Correction Somewhat Kind of Unenthusiastically The New Proposed VFCP.pdf

The perceived clever idea of adjusting W-2's to recognize the amount of a refund (made on or before March 15) as taxable income in the prior year is enticing since it appears to remedy the test failure, but this is not a permissible remedy. First, keep in mind that someone getting a refund due to an ADP test failure is going to be an HCE. For HCEs, all deferrals made during the year count in the numerator of the individual's ADP. Making a refund doesn't change that amount, and neither will changing the W-2 but also to reduce the deferrals reported in Box 12 of the W-2. When it comes to HCE deferrals, if they are in the plan, they are in the plan. And, once they are in the plan the correction is made from within the plan. Just playing with the W-2s does not change the fact that money for the deferrals was deposited into the plan, and money for the refunded deferrals (and associated income) should come out of the plan. You may want to have a heart-to-heart talk with the plan sponsor about cleaning this up. They should issue correct W-2's showing correct income and deferrals. (Hopefully, the participants have not yet filed their personal income taxes.) They should issue refunds from the plan, and bite the bullet and pay the excise taxes. They should make sure the refunded amounts are reported for the proper year(s) on Form 1099R along with the proper distribution codes. They should make sure that were no adjustments associated with this clever idea that were made to current year W-2 data. They should make sure that refunds are properly reported on the Form 5500/5500SF as corrective distributions. They should consider taking steps that may be available under the plan to reduce the likelihood of the current failing the ADP test.

There has been no official guidance that I have seen. There is a comment on ERISApedia that the DOL informally has said the plan should use the accounting method that is consistent with the accounting method used in preparing the plan's financial information. Following this approach, the plan could determine the participant on a cash basis, an accrual basis, or a modified cash basis. On a cash basis, if there are no assets in the account then participant is not counted regardless of any amounts allocable to the account after plan year end. On an accrual basis, the participant is counted if there is an amount allocable to the account after plan year end. A modified cash basis most likely would follow the accrual basis approach. In the instance of cash basis accounting, the instruction that refers to a contribution that has been made could reasonably be interpreted to mean that a participant with only an unfunded contribution is not counted. There is some logic to this alleged informal counting method, but it would be better to have something more official than a whisper down the lane from the DOL.

The 2023 instructions to the Form 5500 page 3 includes the following definition: Pension Benefit Plan All pension benefit plans covered by ERISA must file an annual return/report except as provided in this section. The return/ report must be filed whether or not the plan is “tax-qualified,” benefits no longer accrue, contributions were not made this plan year, or contributions are no longer made. Pension benefit plans required to file include both defined benefit plans and defined contribution plans. The following are among the pension benefit plans for which a return/report must be filed. 1. Profit-sharing plans, stock bonus plans, money purchase plans, 401(k) plans, etc. ... For purposes of the Form 5500, the term pension is used to distinguish a retirement plan from a welfare benefit plan.

Returning to your original question, the answer is yes, and in fact excluding Key Employees from eligibility is explicitly available in some pre-approved plan documents. Since pre-approved plan documents are reviewed by the IRS, that further reinforces that this is a valid exclusion. As with all similar class exclusions (and particularly in very small plans), monitoring coverage will be critical. The assertion: implies that making the exclusion means the plan will never have to make a top heavy contribution is a stretch. If a client is told they will never have to make a top heavy contribution by making this exclusion and in operation they do have to make one, the client certainly will plead they relied on that assertion. How could a plan that is top heavy and that excludes key employees from making contributions ever be required to make a top heavy contribution is a valid question. This specific situation is not addressed in EPCRS, and generally we look for analogous situations to get some guidance. If making a salary deferral for a key employee that was excluded from making deferrals is treated as an excess deferral, then the excess would be paid out. If the employee is also an HCE, the excess would be included in ADP testing and it is possible the IRS would say would also be included in determining the amount of a top heavy contribution. In an ASPPA Q&A session, the IRS confirmed that amounts refunded to a key employee are included in determining the key employee's allocation rate for top heavy purposes. If the key employees deferral can be considered an excess allocation, then as @C. B. Zeller commented it could be returned to the employee with earnings. There does not appear to be any guidance on whether the amount would or would not be used in determining the key employee's allocation rate for top heavy purposes. Given the consequences, it would be prudent to get guidance from the IRS or legal counsel before telling a client they will never have to make a top heavy contribution. Regarding the dastardly rules, Assuming the plan excludes key employees, the owner of the small business who makes say $80K a year likely will have more than 5% ownership, will be excluded as a key employee and will not be able to save anything for retirement. They will not be any better off than they would be without the exclusion. They will just have to be satisfied that they can own up to 60% of the total plan assets in the plan. Cue the violins. About those windmills, Best of luck in getting confirmation that this strategy is a bulletproof strategy that eviscerates the top heavy rules. An International Man of Mystery certainly can dream the impossible dream, and may your dream come true.

Here is an analysis of Top Heavy plans done by the GAO in 2000 that provides explores the pros, cons, and practical considerations surrounding top heavy rules. On balance, the rules are accomplishing the goal of having owners who derive substantial tax benefits from their company needing to provide a level of access to retirement income on behalf of the company's employees. The trend in recent legislation has been to provide more lower cost avenues for owners to do so. From a technical standpoint, the Top-Heavy Innoculation Exclusion sounds plausible. From practical standpoint, it is a disaster that is waiting to happen. The greatest risk is operational compliance, particularly when the people performing HR, payroll and benefits functions at the company are making daily decisions about who is in or out of the plan. The Exclusion does not have a plausible corrective action in the event of an operational failure other than to make the top heavy contribution. IMHO, we can play knight-errant and tilt at windmills, but it is our clients that suffer the consequences when facts and circumstances result in this approach fails to live up to its guarantee. “Top-Heavy” Rules for Owner Dominated Plans.pdf

The Top Heavy determination is based on account balances. Account balances grow not only from receiving contributions but also from reallocation of forfeitures and from investment income. Account balances for non-Key Employees shrink from decreases due to distributions, in-service withdrawals, forfeitures and also from investment losses. High turnover among non-Key Employees and longevity among Key Employees can work together to increase the percent of total plan assets in the accounts of Key Employees. Then there are some pesky compliance rules. Key Employees are not necessarily Highly Compensated Employees. This can have an impact of various compliance tests depending upon the test and upon the plan's allocation formulas. Generally, declaring a contribution ineligible after it is made to the plan is like trying to un-ring the bell. Some have tried and failed to succeed with an argument that contributions made by Key Employees were a mistake of fact. Now, if all of the Key Employees are in fact Highly Compensated Employees, you may get a little bit of traction with the concept by focusing on restrictions on the HCEs, but the odds of this working year-over-year are not very good. There are unforeseen circumstances that can work against the strategy like variances in compensation due to terminations early in the year or hires late in the year, changes in ownership, changes in job responsibilities, and other similar facts and circumstances. Never say never. Be sure to explain everything to the client before selling them on this idea.

@Jakyasar You have the correct dates. Hopefully your RMDs due 2023 were paid to you in 2023. The following chart is handy for looking at start dates. BIRTHDAY RMD AGE Born before July 1, 1949 RMD age is 70 1/2 Born July 1, 1949 to December 31, 1950 RMD age is 72 Born January 1, 1951 to December 31, 1959 RMD age is 73 Born after January 1, 1960 RMD age is 75

I agree with @RatherBeGolfing that an individual who has not yet satisfied the plan's eligibility requirements to make elective deferrals, receive a match or receive an NEC, but who is permitted under the plan to make a rollover contribution and does so should be considered in the participant account. This individual's rollover account will be subject to all other plan provisions regarding rollovers. For example, there are (very few) plans that restrict the availability of rollovers for in-service withdrawals. The situation in the original post was an account that was created because the "employee incorrectly made 401k contributions during the year" and ultimately they were "returned timely". We don't know all of the circumstances. Keeping in mind technically, an employee doesn't make a contribution but rather elect to have the employer reduce the employee's paycheck and the employer makes the actual contribution to the plan. We don't know as examples: if the employee was not eligible at the time the 401(k) deferrals were made. if the employee was eligible and elected not to make deferrals. if this was purely a payroll error that started deferrals for the employee who was not eligible. if this was a recordkeeper error that sent an instruction to payroll to begin taking deferrals for the employee was eligible when the employee was not eligible. if the amounts that were "returned timely" were treated as excess amounts and had associated income returned, or if only the amounts of the original deferrals returned. The point of these types of questions is to determine if the deferrals were ever treated under the terms of the plan as belonging to the employee as a participant in the plan. I think this type of situation is more nuanced if the plan is an EACA. Given that SECURE 2.0 calls for plans adopted after 12/29/2022 must be EACAs starting in 2025 (subject to grandfather rules and certain small plan exemptions), there is a more fun ahead of us as we sort out the boots-on-the-ground, operational details.

An irrevocable election not to participate must be signed before the individual is first eligible to begin participation in the plan (or any other retirement plan sponsored by the employer which I think includes any other member in a controlled group with the employer. As a word of caution to the plan administrator, this is the type of election where in individual who misses the cut-off date may be tempted into trying to convince the plan administrator that the individual intended to sign timely, or was delayed by circumstances beyond their control, or even attempts to back date a form. The plan administrator needs to hold fast to the timing.

It would help to get clarification on the relationship between the worker and the Employer of Record (EOR) and the relationship between the worker and the prospect. Some EORs are independent companies and some are PEOs. Under the PEO structure, the prospect could be a co-employer of the worker and the prospect should have provisions in the plan to specify if the worker meets the plan's eligibility requirements. If the EOR is the worker's employer and the prospect is not, then the EOR may have a US retirement plan and the worker may be eligible in the EOR's plan. One possible indicator of the prospect/worker relationship is whether the prospect gets a tax deduction for the compensation paid to the worker, or the prospect only gets a business tax deduction for the fees it pays to the EOR.

The IRS seems to be content with remaining ambiguous about 457(f) rules rather than being prescriptive which leaves the consideration of facts and circumstances as a primary tool for determining the validity of the deferral of compensation. Fundamentally, they do not seem to be able to get their head around what would motivate an employee to agree to put compensation at a substantial risk of forfeiture unless the employee was reasonably certain that the risk was not substantial. The Proposed Regs 1.457-12(e) and in particular subsection (iv) provide some insight into IRS-think about SROF and non-compete provisions, and the sort of facts and circumstances the IRS may consider. You may wish to point the client to this section for their own enlightenment.

The core issue from a participant's perspective about is the stock is or is not company stock is whether the participant can take an in-kind distribution of the stock from the plan and be able to exclude the stock's net unrealized appreciation from taxation at the time of distribution and also get favorable capital gains treatment upon distribution of the stock. If you have access to the EOB, I suggest reading CHAPTER 7 TAXATION RULES Article 1. Calculating NUA. The topic as it relates to corporate transactions is too complex for a simple post here. You will see in the discussion that there are rules that are applicable to spinoffs and to acquisitions where employer securities are swapped out or are transferred in-kind. Under certain circumstances, the character of the stock as employer securities is preserved and NUA treatment remains available. For the most part, the circumstances involve both employers to structure their plans to preserve the status of the stock as employer securities and to coordinate any movement of employer securities. This is not something an individual participant can do (with a possible exception if leaving the participant's total account balance and employer securities in seller's plan.)

I have seen similar situations that fit this fact pattern and how each situation was resolved has varied. There are four parties involved: the participant, payoll, the recordkeeper, and the plan administrator. Here the participant requested a loan and obviously received the loan check since the it was cashed. I expect that the promissory note accompanied the check along with the comment that repayments would start on April 7, 2023 - and most likely said the repayments will start automatically by payroll deduction. The April start date was 8 weeks after the loan was issued and, depending upon payroll cycles, the repayments could have started as much as 10 weeks after the loan date. That is more than enough time for the start of loan repayments to be out-of-sight, out-of-mind for the participant. (In one situation I have seen, the participant's spouse died between the date of the loan and the expected payroll start date and the participant certainly was not focused on the loan.) In all of the situations, the participants took for granted that the company knew what it was doing and payroll was going to start taking loan repayments on time. That argument becomes weaker over time, but the default date can arrive before the participant becomes sufficiently concerned to ask the company why payroll deductions have not yet started. Certainly, receiving a default letter should at least triggered the participant to ask, but here it did not. In all of the situations, the plan's loan policy required the loan repayments to be may through payroll. Fundamentally, this is the root cause of the problem here and it is the participant who is suffering due to the failure of payroll to start taking the required loan repayments on time. Under this policy, a participant's ability to repay a loan fully depends on payroll. The IRS has acknowledged employers can be a root cause of loan failures as seen in Rev Proc 2021-30 6.07(3)(a). The recordkeeper sent a letter to the participant about the pending loan default. In most of the situations I have seen, the recordkeeper also sends a periodic report to the plan administrator listing loans with missed payments and also reporting the impending loan default date. Some recordkeepers copied the plan administrator on the letter sent to the participant. There is no mention here of any reporting from the recordkeeper to the plan administrator. If such reporting already exists, then the plan administrator should share some responsibility for not taking action to have the loan repayments taken from payroll, and in effect protecting the participant from the consequences of the payroll failure. In some of the situations I have seen, the recordkeeper is adamant that the default and 1099R are irrevocable. Given that Rev Proc 2021-30 6.07(3) provides correction methods for loan failures, I find this position to be overly restrictive. Further, we now have Notice 2023-43 regarding the availability for self-correction for certain inadvertent loan failures. The notice comments: "Section 305(b)(1) of the SECURE 2.0 Act provides that an eligible inadvertent failure relating to a loan from a plan to a participant may be self-corrected under section 305(a) according to the rules of section 6.07 of Rev. Proc. 2021-30, or any successor guidance, including the provisions related to whether a deemed distribution must be reported on Form 1099-R." I offer these observations to highlight that in the situation described here, the participant suffers all of the consequences yet others were involved in the loan process and contributed to the participant's loan default. I suggest exploring relief in this situation that may be available under SECURE 2.0 section 305 which may alleviate the consequences for the participant. I suggest that the payroll, the recordkeeper and plan administrator discuss modifications to the loan administration and default procedures to address potential future such situations. If robust reporting of missed loan repayments does not exist, I suggest the plan administrator should request the recordkeeper to prepare such reports preferably at least quarterly and include any participant who has any missed loan repayments.

There should be information in the letter on how to contact the IRS, including a telephone number. If not, try calling the number which appears in the instructions 800-829-4933. Have a copy of the letter in hand when you make the call and explain the situation. It is difficult to know what possibly may have triggered the message in the letter without seeing the information submitted with the application. EINs are used by many entities and for many purposes, and a single entry can throw the process off track.

I concur. The IRS procedure essentially is allowing the participant to self-certify with the condition participant must preserve the documentation in the form of the physician's certification. The only circumstance where the employer would(should?) ask for documentation is if participant wishes to repay the distribution. The employer may decide if a copy of the 5329 filing suffices as adequate documentation (which would preserve some level of privacy for the participant), or the employer may ask for a copy of the physician's certification. Either way, it would be prudent for the participant to keep both the 5329 and the physician's certification if they are contemplating possibly making a repayment.