Paul I

@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.

This comment is interesting since it implies that there is a time-based sequencing or labeling of match contributions as regular match or excess match. There is no such labeling and regulation that says match refunds must be made from LIFO (Last In First Out) match contributions. Not making a refund does not make sense when the participant has had match credited during the year that is sufficient to cover the refund. The ACP should have been done using the fully accrued match contribution and the refund can be done if the any of the match has been funded. The company is obligated to fund the match by the time funding is required to be made under the terms of the plan document and if that happens to be receivable at the time of testing, so be it. There can be an argument if the participant needs to get a refund and there is no or insufficient match has been made to the participant's match account during the plan year. This is highly unlikely, but could happen. In this case, the plan can make a refund to the extent there is current year match available in the participant's account, and refund the balance when the remaining match is deposited. Not making any refunds to all participants because one participant did not have a sufficient amount available to cover the refund is inappropriate. If the service provider is adamant but this is the only part of their service that is not satisfactory, then discontinue their compliance services and hire an independent TPA to provide compliance services. Then the existing service provider need only write a check when instructed to do so.

There is far less peace of mind in assuming the IRS closed a case as compared to confirming that the IRS has closed a case. The client should have in hand a copy of the IRS notice and of the response, and then call the contact number on the letter. The agent likely will ask for information on the IRS notice including the EIN, plan number, plan name, notice number, notice date... and then search for it in their system. If the response is not associated with the IRS notice, then the client may need to provide information from the response to see if it can be located. This may include the address where the response was sent, date mailed, delivery service (USPS or overnight)... to see if it can be located. Since the client has not receive a follow up notice, more than likely the case is closed.

@Lou S. is correct that the "waive out"/"participation waiver" is a lifetime election with respect to any retirements that the company may sponsor now or in the future. That is pretty harsh, particularly if a daughter wishes at some point in time to work for dad's company and want to get a retirement benefit. Lou also is correct to reiterate that if either already meet the eligibility and entry requirements of the plan, it is too late to waive out. The waiver is off the table. The discussion about Top Heavy Minimum contribution is most appropriate and the TH plan provisions should be reviewed carefully. Most importantly, Top Heavy status is based on accounts of Key Employees, and the definition of Key Employee is not synonymous with the definition of Highly Compensated Employee.

Part of the confusion comes from the way the instructions approach how to determine which form in the Form 5500 series must be filed. The instructions start from the premise that all plans must file the Form 5500 unless the plan qualifies for an exception - and qualifying for an exception allows the plan to file the Form 5500-SF . The instructions then go on to list what are the exceptions. To illustrate some of the requirements for a plan to be eligible to file the Form 5500-SF, the plan has to: meet the fewer that 100 participant rules, qualify for an independent audit exemption if the plan holds certain types of assets, cannot be a type of plan that must file a Form 5500 regardless of any other exceptions and new in 2023, must qualify for an exemption from having an independent audit exemption if the count of individuals with account balances as of the beginning of the year is under 100. There are some quirks related to the new provision. The Form 5500 series retain the question about the total number of participants in the plan as of the beginning of the year (see Line 5 on the Form 5500 and Line 5a on the Form 5500-SF) where this count continues to include participants under the same counting rules that have as in prior years. For example, an employee who is eligible to make elective deferrals to a 401(k) plan but elects not to defer is in this count. Also keep in mind that there are many types of plans that must file a Form 5500 that the form and instructions must accommodate (defined benefit, welfare, money purchase, pure profit-sharing...) but the new rule applies only to defined contribution plans. The new rule was written primarily for defined contribution plans with an elective deferral feature so the plan could qualify for an exemption from having an independent audit. The new rule basically allows - solely for purposes of determining if an audit is required - for the plan to exclude eligible participants with no account balances as of the beginning of the plan year to be excluded from the count when checking if an independent audit is required. Is this logical? There is logic to it if we start with the premise that all plans must file a Form 5500. Is there a better way for the form or instructions to be easier to understand? Likely.

If the union employees have not met the requirements to be able to take an in-service distribution, the employer can work with the union to coordinate a trust-to-trust transfer of accounts from the employer plan to the union plan. Part of that coordination may involve amending one or both plans to have provisions facilitating this approach. The union can decide what provisions in the union plan will be applicable to the balances received into the union plan. The key point is making this happen is between the employer and the union, and is not directly between the employer and the union employees.

You are correct that for purposes of testing, the employer can elect either to include LTPTs in all applicable testing or to exclude LTPTs in all applicable testing. The examples 1(A) and 1(B) in section f(3)(i) illustrate how this election is applicable non-elective employer contributions. They could have provided the same examples applicable to match as well. The rule remains "all or nothing" for all of the testing listed in section f(1).

For purposes of this reply, the use of "opt out" or "waive out" in the question means an individual makes an irrevocable election not to participate in an employer-sponsored plan prior to becoming eligible for any employer-sponsored plan. My understanding is: For coverage testing, this employee is included as a non-excludable employee in testing for deferrals, match and NECs. For nondiscrimination testing, this employee is excluded from ADP and ACP testing, but is included in testing NECs.

One of the requirements for being a new qualified employer plan includes a 3-year look-back - including predecessor employers - that had a plan that covered substantially the same group of employees. Note that EINs in particular are not a factor. See Sec. 45E Small employer pension plan startup costs, subsection (c)(2): "(2) Requirement for new qualified employer plans. Such term shall not include an employer if, during the 3-taxable year period immediately preceding the 1st taxable year for which the credit under this section is otherwise allowable for a qualified employer plan of the employer, the employer or any member of any controlled group including the employer (or any predecessor of either) established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the qualified employer plan." I suggest that you let the CPA know that you are not providing advice, and the CPA should decide what is appropriate when preparing their client's tax return.

EFAST2 does not have a validation edit for the compliance question asking for the Pre-approved Plan Opinion Letter number and there are plans that are individually-designed plans that don't have an Opinion Letter, so it is not a surprise that the filing DOL accepted the filing. Some software providers have added an edit check on the field at least to generate warning if the field is left blank, and some even go further to check the syntax (first character "Q" followed by 6 numerics, a maybe even a trailing character "a"). This seems like a prudent edit since around 90% of plans use a pre-approved plan document, and particularly because this question was not on last year's form and may not yet be incorporated into a preparer's routine.