Paul I

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.

How expense accounts are funded, how and what expenses are paid, whether excess amounts are allocated to participants, are expense accounts plan assets, and even more topics are all factors to be considered. I find the Plan Sponsor Best Practices page in the Oppenheimer guide (attached, see page 9) to provided an excellent framework for a plan fiduciary to use when considering implementing or reviewing the operation of an expense account. The Multnomah white paper on defining expense accounts - while aged - also comments on how an expense account may or may not be a plan asset. We do not have bright-line official guidance on expense accounts likely because of the many ways in which fees are paid to service providers (such as basis point loads, sub-TA fees, revenue sharing, direct payments, management fees, administration subsidies...). We not have bright-line official guidance on how determining what are excessive fees (which has generated a whole class of ERISA litigation aimed at making that determination on a case-by-case basis). We do see the agencies voice concerns about fees, and this has led to enhanced disclosure requirements like 404(a)(5) and 408(b)(2). These disclosure requirements were put in place with the intent of providing participants and plan fiduciaries with more information about fees so they can make their own determinations. There also was the attempt to force disclosure of fees paid to service providers on Schedule C. For now, I think it is best to leave it up to the plan fiduciaries in consultation with ERISA legal counsel to determine if an expense account is a plan asset and if the account is operating properly. I also think it is appropriate for a TPA "if they see something, then say something" but not to attempt to make the determination. Oppenheimer-A-Guide-to-Retirement-ERISA-Accounts.pdf Multnomah Group White-Paper-Defining-Expense-Accounts.pdf

Here are some random thoughts that may be relevant to assessing the status of accounts that hold unallocated amounts. If the account is included in the plan's trust account, it is an asset of the plan. All assets of the plan should be accounted for in the reporting on the From 5500 series, and any differences between the Form 5500 reporting and trust reports should be reconciled and the reconciling items should be legitimate receivables or payables. The IRS abhors unallocated amounts. They emphasized this a few years ago in their highlighting that plan's should not accumulate assets in forfeiture accounts, and that all forfeitures needed to be handled in a timely manner in accordance with the plan provisions. Grudgingly, they acknowledge that sometimes there are practical operational reasons where an unallocated amount may exist, but any such amounts also should be handled in a timely manner and in accordance with plan provisions. In effect, "timely manner" means no later than the end of the plan year following the year in which an amount was credited to an unallocated account. The DOL has its own rules about payment of plan expenses and they, too, frown on accumulations in unallocated accounts. The logic is along the lines of if amounts are not posted or are deducted from participant accounts but instead are moved to an unallocated account to pay expenses, and these amounts exceed what is needed to pay valid plan expenses, then the excess amounts belong to the participants and is should be credited to them. Otherwise, participants are being charged for that the amount of the valid expense. If the unallocated account is considered to be outside of the trust, then the source of the funds put into the account should be reviewed carefully. If the source of the funds was the plan's trust, then moving funds to an account unrelated to the plan smells like a prohibited transaction. If the trust and the unallocated accounts are both held by the same financial institution, then this raises potential questions about a plan fiduciary's responsibilities. Just some food for thought...

@CuseFan's comment about the requirement for S-corp owner/employees taking a reasonable salary trumps everything. Regardless of any considerations about a plan definition of compensation, the S-corp owner must have a reasonable W-2 salary. The answer to the question of how much an S-corp owner can contribute to a pension plan can vary widely. A fundamental question is for which employees (including the owners) does the owner wish to provide a retirement benefit? Another fundamental question is how much can the business afford to contribute to the plan year, and is this stable and sustainable over time? And, what are the owner's personal expectations for how the plan may benefit the owner? With the answers in hand, there will be a starting point for suggesting a plan design and presenting all of the pros and cons of the alternatives.

See https://www.irs.gov/retirement-plans/plan-sponsor/401k-resource-guide-plan-sponsors-starting-up-your-plan "Effective date of plan. The plan may not be made effective earlier than the first day of the employer's tax year in which the plan was adopted. In other words, an employer may adopt the plan document on the last day of its tax year, with an effective date retroactive to the first day of that tax year, but not any earlier." A CPA firm discusses the topic of Determining When a Business Starts for Tax Purposes "When deciding to open a business, it is important to understand when a business has started for tax purposes. It is normal for a new business owner to misconstrue when the company is liable for taxes. In some cases, a business owner may believe that their company must only pay taxes when they start advertising or when the company draws in clients and begin to earn income. However, for tax purposes, the start date does not consider these factors. Normally, the start date for a business is when the business is registered. This means that a company like an LLC or a partnership is responsible for paying taxes on the date they register with a particular state. Note, however, that it may be possible for a business to choose their start date. Additionally, when registering a business with a state, a company is often required to also register with the IRS in order to receive an Employer Identification Number (EIN). A company’s EIN is used to identify the company for tax purposes. It is important to note that the start date of a business can change depending on other factors. For example, under certain circumstances, the IRS may analyze a company’s activities to determine whether they are liable for taxes." Taken together, these steps seem appropriate: The starting point is for a business first to decide what will be its ongoing tax year. Next the business should decide when its first tax year began. Then the business can decide when the beginning and ending date it wants to have for its plan's ongoing plan year. Finally, the business can decide on the beginning date of the first plan year - subject to the IRS comment above. Once the first plan year is determined and if it is a short plan year, then the rules applicable to pro-rating limits over a short plan year come into play.

I agree with CBZ that it is the Plan Administrator that ultimately has to make sure the 1099-R is sent to the participant, and that service agreements with the service providers should address who has that responsibility. The IRS has a process for situations where an individual does not receive the forms they need to file their personal tax return: https://www.irs.gov/taxtopics/tc154 The IRS not only will get involved in, shall we say, motivating the payer they also will provide the individual with a Form 4852 so the individual can file their return. (Given the information provided about the situation, I would suggest giving the IRS service provider 1's contact information.) Relevant to Bri's comment, I understand that no matter when the 1099-R is sent, the participant is on the hook for reporting the distribution as having occurred in 2023. The situation in the original post says the payment ultimately was made to an IRA so none of this should impact the individual's tax calculations.

There is a requirement for a separate accounting for NECs, pre-tax elective deferrals, Roth deferrals, rollovers, after-tax contributions, QNECs... to be able to administer vesting rules, availability for withdrawals, and tax basis among other things. There is no requirement for maintaining separate investment accounts. The rules for crediting income to each sub-account must be clear since income factors into determining taxable versus non-taxable amounts upon distribution. The biggest pitfall is when the recordkeeping system is not capable of tracking the separate accounting (including separate basis for some of the accounts). Trying to compensate with a manual accounting process is very time consuming (no matter how proficient one's spreadsheet skills may be).

The eligibility service rules in the plan can be a potential trap for the unwary. A lot of plans with an hours requirement do not select an hours equivalency so the plan should use actual hours. If the plan does specify an hours equivalency, then the choice of the equivalency can, as @Peter Gulia notes, significantly accelerate a participant being credited with 1000 hours. Elapsed time rules carry their own risk. Effectively, the plan does not look at consecutive plan years with at least 500 hours under the proposed LTPT rules: "this proposed regulation does not include an amendment to the elapsed time rules under § 1.410(a)–7. Therefore, a plan may not require an employee, including an employee who is classified as a part-time employee, to complete more than a 1-year period of service under the elapsed time method in order to be eligible to participate in a qualified CODA." In a recent conference, a comment was made by the IRS that there was no guidance anywhere that would provide an equivalent number of hours associated with a period of service under the elapsed time method. The attendees were quick to point to IRS's own 1.410(b)-6(f): "(1) In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if - (v) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (f)(1)(v), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year)" It will be interesting to see if this equivalency makes its way into final LTPT regulations.

The concept of specifying the order in which forfeitures is okay but be careful about where you put the "re-allocate to participants" choice. I recommend putting it at the bottom of the list. Re-allocating forfeitures is treated the same as if the employer made an employer contribution which can impact things like NEC coverage, gateways, top heavy contributions, creation of a lot of small balance accounts and more. Include items like restoration of forfeitures for rehires, corrective actions including QNECs, and other similar situations where an employer puts money into the plan. It also makes sense to prioritize match contributions over NEC contributions.

I suggest the correct way to look at it is a Schedule R is required whenever a plan must report information on any line on the form. The Schedule R has an array of topics that apply to specific types of plans or to specific circumstances. It is possible for a Form 5500 not to be required to attach a Schedule R, but this has become unlikely. The requirement to report the opinion letter number for a pre-approved plan will by itself cause the vast majority of plans to have to attach a Schedule R.

Is the purpose of these resolutions solely to document a plan sponsor's choices for LTPT employees receiving other contribution types in addition to 401(k) deferrals? Or, is the purpose to have a resolution adopting an interim plan amendment? Either way, I think it is a bad idea for a plan to say LTPTs get the other contribution types by default unless the sponsor elects otherwise. If the plan sponsor felt before SECURE some part-time employess should get the other contributions, why did they exclude them before there were LTPT rules?

Notice 2024-2 has this new term "pre-enactment qualified CODA". I don't see how a PS-only plan that does not yet have a qualified CODA could be considered a pre-enactment qualified CODA. Here is the Q&A from Notice 2024-2: Q. A-1: When is a qualified CODA established for purposes of determining whether the qualified CODA is excepted under section 414A(c)(2)(A)(i) of the Code from the requirements related to automatic enrollment (that is, whether the qualified CODA is a pre-enactment qualified CODA)? A. A-1: For purposes of section 414A(c)(2)(A)(i), a qualified CODA is established on the date plan terms providing for the CODA are adopted initially. This is the case even if the plan terms providing for the CODA are effective after the adoption date. For example, if an employer adopted a plan that included a qualified CODA on October 3, 2022, with an effective date of January 1, 2023, then the qualified CODA would have been established on October 3, 2022 (that is, before December 29, 2022), even though the qualified CODA was not effective until after December 29, 2022.

Don't forget to explain LTPT employee rules to the plan sponsor. They very likely will want to move away from elapsed time and use an hours-based service provision. They also very likely will not at all like the LTPT rules.

If there was only one local taxing authority that would require withholding of local taxes on retirement income, my guess is it would be New York City. They do tax retirement income above a certain threshold ($20,000?) and they do expect the taxpayer to make estimated tax payments. Pennsylvania is another state that allows municipalities, boroughs, and townships (generically termed "political subdivisions) to assess earned income taxes (EIT) and local services taxes (LST). Taxes are calculated based on place of residence AND work place. Withholding is mandatory, but fortunately only wages are included in calculating the EIT. The LSTs commonly are per capita amounts. The biggest challenge for the entire system is getting the tax withholding credited to the correct taxing authority. I agree that recordkeepers do not calculate local taxes based on a local tax formula (there probably is an exception), but some recordkeepers alert a participant that a taxable distribution may be subject to state and local taxes and the participant may want to increase the withholding from their distribution. While not directly on point with local taxes, Vanguard has a detailed summary of state tax withholding rules (attached). Vanguard - Applicable state tax withholding for retirement plan distributions.pdf

It sounds like this is a stock acquisition and the plan will terminate after closing. The one big thing happens under these circumstances that messes things up is when employees of the seller who do not have a distributable event from the seller's plan and who continue to be employed by the buyer are allowed to take a distribution from the seller's plan when it terminates. Here's hoping 401(k) closures is something the legal team does have the knowledge and experience to do.

We do a lot of work in both worlds and the administration of beneficiary designations is too often an afterthought during a transition in either world. There are valid reasons why it is very important to include a discussion of beneficiary designations during any transition. Here are some of the "whys": Beneficiary designations are primary documents which often require multiple wet signatures including one each for the participant, the spouse and a notary public. The original document often is the basis for determining death benefits which requires keeping and tracking paper documents or maintaining a document management system that captures sufficient data to document the designations validity. Larger companies are more likely to have an in-house document management system where they track beneficiary designations along with elections needed across a wide variety of other HR applications. Smaller companies are more likely to keep paper forms with a physical file folder for each employee. In these cases, "[beneficiary designations] are maintained by the employer." Some recordkeepers will collect and retain beneficiary designations and they may charge a separate fee for this service. Others will collect beneficiary designations but then transmit them to the employer to maintain. The details of the scope of service most likely are found in the details of the recordkeepers service agreement. Plan documents and Summary Plan Descriptions include language that specify how a participant must make a beneficiary election to be valid. If so, and a participant does not follow the specified procedure, then the beneficiary designation can be declared invalid. It is important that beneficiary designation procedures used within the company or contracted for with recordkeeper are consistent with the plan documentation. Each plan a recordkeeper services may have its own definition of who is the beneficiary, and each definition can present its own data tracking and administration challenges. This thread about default beneficiaries is an example. Other common complexities arise when the plan defines a spouse other than the person who is married to the participant at the time of the participant's death (for example, the plan uses the one-year rule). Other complexities arise if the beneficiary designation remains in effect after a divorce or a QDRO. Beneficiary designations that include designating primary and contingent beneficiaries add more complexity, and plan provisions that specify the division of a death benefit per stirpes versus per capita can make it even more complicated. (Be honest folks, how many of us can explain the difference between per stirpes and per capita without looking it up.) Bottom line, managing beneficiary designations is important, can be complicated, should have clearly documented procedures and should have clearly assigned operational responsibilities between the company and its service providers - no matter what the size of the plan. We all should not wait until a participant dies to discuss who does what.