Paul I

@MD-Benefits Guy you are correct to ask questions because the when and how the acquisition is done can have a significant impact on your current plan's participants. First and foremost, pay attention to @david rigby's comment about whether the buyer will acquire all of the stock of your company (the seller) or the buyer will acquire all of the assets of your company (the seller). If this is a stock transaction, then upon closing the buyer in control of the plan. If this is an asset transaction, then upon closing the buyer is not in control of the plan and the seller continues to exist after closing and the seller can decide the fate of the plan. You do not say if the buyer has an existing 401(k) plan or, if not, intends to adopt a 401(k) plan. If yes, there are rules about whether the buyer's 401(k) plan is considered a successor plan to a seller's plan that is terminated after closing, and these rules can be particularly onerous after a stock transaction. The more common scenario for handling an acquired seller's plan is for the seller's plan to be merged into the buyer's plan. A plan merger is different from a plan termination. If the buyer expects to have an existing 401(k) plan operating alongside the seller's plan, each plan's document should be carefully reviewed to address potential unintended consequences. Each plan's provisions regarding eligibility, excludable employees, plan compensation, contributions (including answering your question about true-ups), vesting, and the safe harbor features should state clearly what applies to all or each subgroup of employees. This review definitely should be done before closing a stock transaction. Another note to keep in mind is that plans are terminated by adopting an amendment to terminate the plan. In addition to setting the termination date and the plan year end date, the termination amendment can be used to address the questions you raised in your original post. Mergers and acquisitions, handled properly, can go smoothly with few surprises. Handled improperly, they can lead to bad feelings and costly compliance issues. Hopefully, both the buyer and seller in this transaction have experience with what needs to be done with existing plans of both the buyer and seller.

Often this is true, but not all plans allow immediate termination distributions. Plans can have provisions that delay the timing of when a termination distribution is payable, and a terminated participant has to wait until then. A classic example is when a plan has only annual valuations (yes, these still exist), and the terminated participant must wait until the valuation is completed following their termination date. In this case, the participant may have to wait a year before they can receive their distribution, and the participant would not be able to take a hardship distribution. The point which often is lost on the participant is, yes, they are eligible take a termination distribution, but the plan controls the timing of when the payment is made.

The pre-approved basic plan document we use (and is used by a very large number of institutional providers) defines a hardship distribution as "an in-service distribution upon the occurrence of a Hardship event". The selection of hardship distributions in the adoption agreement is under the section titled " AVAILABILITY OF IN-SERVICE DISTRIBUTIONS". For plans that use this document, hardships are not available to terminated employees. Some of the choices for distributions available to terminated employees include timing that could extend the timing of the availability of the termination distribution. For example, the plan could require a participant to incur a set number of breaks in service, or to have to wait until the next annual valuation date. The plan also allows a choice to pay at Normal Retirement Age, death or disability. As oft-repeated, read the plan document.

Adding to the chaos, DC Cycle 4 technically has started already but the IRS is not yet open for business to receive submissions. The IRS expected to open the submission window from Feb. 1, 2024, through Jan. 31, 2025, but I have not seen an announcement. If the window is open soon, we likely will be doing Cycle 4 amendments for everyone with the restatement period running from the latter part of 2026 into 2028. The December 31, 2026 hits right around the beginning of that restatement period. The LRMs were updated this January and are available here https://www.irs.gov/pub/irs-tege/dc-lrm0124.pdf if anyone has time to spare to read through 149 pages. If the submission window does open soon, imagine how much guidance has yet to be issued that will not be in the LRMs included in the Cycle 4 documents.

Managing plan amendments and operating plans in accordance with the terms of the plan document has become unwieldy. To rip off a quote from the Pirates of the Caribbean: "The pirate code is more like guidelines than actual rules". We are in a era where effective dates of legislation has compressed the time frame for implementation that the Agencies have insufficient time to follow an orderly procedure for issuing regulations. With effective dates of provisions that are earlier than official guidance is available, plan providers are faced with implementation without any official guidance. A plan sponsor that wishes to take advantage of provisions in new legislation can do so by starting to administer the plan based on a reasonable interpretation of the new provision at any time after the effective date of the provision. If official guidance is issued subsequent to the start of the use of the new provision, the plan must adapt its administration to conform with that guidance. These steps, taken together, are labeled as the plan is being administered in good faith. The plan document does not have to be amended to reflect any of this until much later. Some questions that arise at this point are: What is the appropriate communication of the new provisions to participants (the SPD and SMM are based on the official plan document)? Who has to receive the communications of the new provisions (is all participants and beneficiaries, affected participants and beneficiaries,...?) Can the plan sponsor change the mind and modify the administration of a new provision or even rescind it if, for example, official guidance requires onerous administrative procedures than are palatable to the plan sponsor (assuming the legislation is silent on the ability to rescind using the provision)? At a higher technical level, is the plan violating the requirement that it must follow the terms of the plan document if the plan document has not yet been amended to contain the new provisions (granted this is a stretch, but possibly, could an unenrolled participant argue the plan failed to provide required disclosures)? Moving on, the vast majority of plans use pre-approved documents. Pre-approved plan documents are authored by Mass Submitters, and Pre-approved Plan Providers offer the documents to Plan Sponsors. Mass Submitters provide periodic updates to their plan documents and author interim plan amendments needed for plans that are terminating. Without official guidance available, it is common for Mass Submitters to provide Pre-approved Plan Providers with "good faith" amendments (literally using quotation marks) to indicate that these amendment are more like guidelines than actual rules. These "good faith" amendments come with a caveat that they have not been blessed with a formal review by the IRS and are made available for Pre-approved Plan Providers to make a good faith effort to keep plan documentation somewhat formal. This brings up some other questions for a Plan Sponsor to consider when presented with an interim amendment: Am I adopting this interim to take advantage of new provisions available as a result of recent legislation? Is the decision to adopt a new provision reversible and am I ready to make that commitment (basically, am I adopting a protected benefit)? Will integrate the communication of the new provision into the existing required plan disclosures? Are my HR, payroll and recordkeeping systems ready and available to support my decision? We also must be aware that change fatigue (resistance or passive resignation to organizational changes) plays a part in how a Plan Sponsor will react to a recordkeeper presenting an interim amendment with a recommendation to sign it now. I am sure there is much more to this discussion, and many other points to consider.

We cannot overlook the DOL. Per the EOB: "Contribution of property is generally a prohibited transaction. A contribution of property (rather than cash) to satisfy a funding obligation is treated as a sale of property to the plan and is a prohibited transaction. See Commissioner v. Keystone Consolidated Industries, Inc., 113 S. Ct. 2006 (1993). The DOL has provided guidance on the Keystone decision in Interpretive Bulletin 94-3, DOL Reg. §2509.94-3. According to the DOL, all in-kind contributions to a defined benefit plan are prohibited transactions, even if the value of the property exceeds the minimum funding obligation, because the contribution would result in a credit against funding obligations which might arise in the future. See DOL Reg. §2509.94-3(b)." The interpretive bulletin found here https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.94-3#p-2509.94-3 provides more details on the DOL's viewpoint.

There are implications when managing cybersecurity and PII meets legacy retirement software. HR, payroll and retirement systems all need to have a unique identifier for each person in their system. It was a matter of convenience that SSNs could fill that roll but we now live in a world where knowing a person's SSN makes them vulnerable to identify theft. In the retirement world, SSNs are required only when we need to report amounts leaving a plan (e.g., 1099R, annuity purchase, ...) or reporting terminated vested individuals on Form 8955-SSA. The challenge for getting HR, payroll and retirement to work optimally is to share the same unique identifier for each person across all systems. When we work with a client with a policy that SSNs cannot be used a unique identifies, then we ask for the client preferably to provide the identifier that they use within their HR or payroll systems. We have had instances where a client will not share this information which requires us to build our own unique identifier for each person that works within the constraints of the field length for the person's record key within our system. It helps that the record key is treated as an alphanumeric field versus a numeric-only field. When we do need to capture an SSN, is it stored in an available "other" field. We maintain a table of record keys and SSNs that allow to cross-reference identifiers when needed. We also run edits to confirm that all record keys are unique. From what I have seen is many of the large institutional recordkeeping systems use a similar approach where the systems builds its own unique identifier for each person in a plan. This also allows them to be able to report to a participant if that participant has an account in another plan that is recordkept on the system. (This happens relatively often in major metropolitan areas.) My suggestion is to engage the client in a conversation about the need for a unique identifier to track non-financial information like service dates, birth dates, compensation and hours of service to be able to perform compliance testing required for operate the plan. Make them aware of what is at stake (ultimately plan qualification, but more likely avoidance of costly corrections) and ask them to work with you to gather the necessary data for all employees. Good luck!

@Dougsbpc perchance, is the participant catch-up eligible (and does the plan allow catch-up contributions)? Grasping at straws, I ask because catch-up contributions have a universal availability requirement. Employees must have the effective opportunity to make the same dollar amount of catch-up contributions 1.414(v)-1(e)(1)(i), and the employer can only restrict the amount of compensation considered in calculating the catch-up contributions to the employee's compensation available after withholding for income and withholding taxes (where a limit of 75% of compensation is deemed to satisfy this requirement). If the participant is catch-up eligible, then the deferrals above the 40% limit (a plan limit) up to the catch-up dollar limit could be considered catch-up contributions. That would leave a chunk of cash in the participant's account. The catch-up amount would excluded in calculating the participant's ADP as would any excess that may be refunded.

CBZeller, I stand corrected, withdrew my comment, and thank you.

As a further clarification to CBZeller's note that participants must have the same effective opportunity to make catch-up contributions, IRS 414(v)(2) says: This language allows for a plan to limit catch-up contributions to an amount that is lower than the catch-up limit. The Joint Committee on Taxatation General Explanation of section 109 of SECURE 2.0 says in part: This reinforces the idea that the SECURE 2.0 increased limits are themselves optional.

I don't see how the owner can say an ESOP bought his stock on 12/31/2023 if the ESOP did not exist at that time, particularly where the company is operating on a cash basis.

The PE ceasing participation in the plan does not by itself create a distributable event. The spinoff concept may work but the buyer and seller need to agree on all of the details about how the spinoff plan is handled. A misstep in timing, pre- and post-transaction plan amendments, employment status of the PE participants after closing, and host of other details can lead to an undesirable outcome. For example, distributions from the seller's plan could be disqualified and become taxable, or the coverage transition period could terminate early. As a starting point, the buyer and seller should articulate their vision and expectations for the plan after closing.

I agree with everyone else, their best path forward is a per payroll match. If this happened in 2023 (and a calendar year plan), the client has to live with the plan provisions in effect in 2023. If they want to try implement something in 2024, they should make sure no one loses a benefit that before the plan is amended. If they want an annual true-up, or if the have a true-up by a plan default because they are funding less frequently than every payroll, the math very likely will wash out any perceived value to ignoring the comp. If they don't go with a per payroll match and somehow did implement what they are asking for, then this likely will create variances in match rates. There likely are more "gotchas" to this concept. I can only imagine the client's reaction when they are faced with correcting a failure to implement or missed deferral opportunity. Do you even dare telling this client how much more they will have to pay you to try to administer their idea?

The instructions to the Form 5500 in all 3 places where the question is asked are: "The Opinion Letter serial number is a unique combination of a capital letter and a series of six numbers assigned to each Opinion Letter." There is no reference to an ending letter, and no EFAST2 edits on the field although software providers may add their own edits.

@Bill Presson is correct that addressing the transition for sending payrolls to the new recordkeeper is among the very first topics to discuss among the old recordkeeper, new recordkeeper and payroll, and having a work plan agreed to by all parties before the blackout notices go out can eliminate a lot of anxiety. It is worth noting up front that, while not ideal, by default the fallback if the work plan does not work out is having to deal with some late payroll deposits. Having a work plan demonstrates a good-faith effort was made and if stuff happens to derail the work plan, everyone needs to focus on the big picture of completing the transition as accurately and as timely as possible. So what should be in the work plan? At a very high level: The old recordkeeper will need some time to prepare the participant demographic and plan accounting conversion records. The records for this process will be available after the old recordkeeper completes the processing the last payroll for which they are responsible for investing. The new recordkeeper will need some time to have in place sufficient information to accept payroll records and process any activities associated with payroll records. This may include calculating a match or posting principal and interest amounts for loan repayments. Minimally, the new recordkeeper needs an employee identifier (ID or SSN), and name, but almost certainly will gather additional information. The new recordkeeper also will need to have investment elections in place. This will involve a detailed discussion of setting up the investment menu and working out process of mapping old fund elections to new fund elections, or completing an investment re-enrollment (with a default fund). A plan to address dividend and interest received during the blackout also should be discussed. Payroll will need to make any adjustments to synchronize the payroll data interface with the specifications needed by the new recordkeeper. All processes and file formats should be fully tested before starting kicking off the conversion. The client needs to be prepared to fill in potential gaps in the records for circumstances such as when a participant terminates employment during the conversion. Everyone should be prepared to provide a complete, 100% to the penny reconciliation of all funds leaving the old recordkeeper, funds received by the new recordkeeper and any payrolls processed during the blackout period. The fastest conversion we have done for a plan with more than 100 participants - measured from the old recordkeeper generating data files to the new recordkeeper going live - was 2 hours. More realistically, the typical conversion takes 3 to 7 business days. The overall conversion planning and execution takes 10-12 weeks. Done right, this is a lot of work and the client should be prepared to pay for it. Done right, participants will start out with a feeling of confidence in the plan and the new recordkeeper.

You will need a lot more information about the old company, the new company, the plan sponsored by the old company, the disposition of that plan after the dissolution of the old company, the disposition of that plan after the formation of the new company, a plan sponsored by the new company, the employees of the old company that become employees of the new company, and more. This is a complex situation the needs a careful review by legal counsel with expertise in plans involved in business transitions. There are rules and guidance spread throughout various IRC sections related to business transactions that can be complex and can have a bearing on the analysis. For example 1.415(f)-1(c)(2) points to a determination of a predecessor employer at an employee-by-employee level: "Where plan is not maintained by successor. With respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. This will occur, for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer." This example is not definitive but does illustrate the type of issues that, depending on the facts and circumstances of reforming the business, could impact a plan. A change in an EIN of a plan sponsor happens routinely in business transactions and also is not definitive. Ultimately, risk of mishandling a plan or plans could rise to the level of disqualification of the old plan or a new plan, the cost of which would make seeking competent legal counsel a bargain.

The plan can have an enhanced Safe Harbor Match and match 200% on participant elective deferrals up to 5% of compensation. That is the "there" in your question. What also in important to discuss with the client is how to get "there" from where the plan is currently - the "here". For example: Is this a new plan? If it is an existing plan: what it the plan year? does it have a 401(k) feature? does it have any other safe harbor features (existing safe harbor match, safe harbor non-elective contribution, QACA) and if yes, what are they? does it have an existing match? If yes, what are the eligibility provisions and what are any allocation conditions? The answers to these and other questions may factor into how and when the plan can get to "there" from "here".

The red forms are Copy A for the Internal Revenue Service Center. A Form 1096 is used Annual Summary and Transmittal of U.S. Information Returns is used to send these forms to the IRS. Hopefully, you also also have been preparing the Form 1096 and sending the red copies to the IRS. To answer your question, you can send the participant copies (Copy 1, Copy B, Copy 2, Copy C) and the payer's copy (Copy D) on plain paper. There are two reasons for using the red forms: it is scannable by the IRS, and it protects against submission of multiple copies of the same form for the payee. Typically, if a TPA is preparing the Form 1099R's on behalf of the plan and the plan is the Payer. There is a threshold for mandatory electronic filing is reduced to 10 forms for form filed in 2024 (including filing forms for the 2023 tax year), and the count is based on almost all 1099's and W2's. The plan as the Payer may not reach this threshold, but most companies will. https://www.irs.gov/filing/e-file-information-returns It is possible to file forms directly with the IRS using their IRIS Taxpayer Portal. You need to have a TCC (Transmitter Control Code) to do this. The IRS says this can take up to 45 days to get, although anecdotally they have been obtained much faster than that. FYI, there are service providers that mirror the FT fulfillment service who continue to print/mail/ and send everything to the IRS for a nominal fee.

david rigby has excellent recall. The story goes back even further for the history buffs and those who worked with H.R. 10 or Keogh plans. Attached is a GAO report from 2000 titled "Top-Heavy" Rules for Owner-Dominated Plans. The background section provides a provenance of the concept starting with noting that "Congress first legislated requirements for nondiscrimination in pension plan coverage of a firm’s employees in 1942". The narrative continues with "[b]efore 1962, sole proprietors, partners, and the self-employed were prohibited altogether from participating in tax-qualified pension plans, though as employers they could establish a plan for the benefit of their employees. In contrast, shareholder-employees in corporations could participate in qualified plans..." After 1962, plans created by unincorporated “owner-employees” became eligible for tax qualification with owner-employee participation in the plan, but the plans were subjected to both the nondiscrimination rules and a second, more restrictive set of requirements for equitable apportionment of contributions and benefits." This was the predecessor of current top heavy rules. "The current top-heavy rules came about as part of the Tax Equity and Fiscal Responsibility Act of 1982, when the Congress decided that additional restrictions on owner-dominated plans should not be based on corporate versus non-corporate business structures but on whether any plan’s delivery of contributions and benefits was “top-heavy” in favor of owners and officers." The report also includes a compare-and-contrast commentary of nondiscrimination rules versus top heavy rules which in part links the 5% ownership in the definition of Highly Compensated Employees to the 5% ownership in the definition of Key Employees. Section 242 of TEFRA added 401(a)(9)(A) which linked the RMD ownership to the top heavy rules by referencing "key employee": SEC. 242. REQUIRED DISTRIBUTIONS FOR QUALIFIED PLANS. (a) GENERAL R U L E - Paragraph (9) of section 401(a) requirements for qualification) is amended to read as follows: (9) REQUIRED DISTRIBUTIONS.— (A) BEFORE DEATH.—A trust forming part of a plan shall not constitute a qualified trust under this section unless the plan provides that the entire interest of each employee (i) either will be distributed to him not later than his taxable year in which he attains age 70 1/2 or, in the case of an employee other than a key employee who is a participant in a top-heavy plan, in which he retires, whichever is the later, ..." “Top-Heavy” Rules for Owner Dominated Plans.pdf

Here are article from Ascensus, Fidelity and RMS about self-certification of hardships. All three see self-certification as optional and citing a need for further guidance. They vary in the sense two are what I would characterize as bullish on plans using self-certification and one is bearish. The biggest conundrum seems to be that a plan administrator who has knowledge that a participant does not need a hardship is not absolved of all responsibility if the participant abuses privilege to self-certify a hardship withdrawal. Self-certification makes the process easier to administer and plan administrators like not having to poke into a participant's personal financial circumstances. Plan administrators are uneasy because they do not know the extent they will be held accountable in the event of abuse of the privilege for a participant to self-certify. Recordkeepers understand that there is a point where abuse has to be addressed and will take steps to protect themselves by delineating between routine approvals and patterns of abuse. The latter are dumped into the lap of the plan administrator. r2023-08-24-secure-2-0-hardship-distributions.pdf SEC2.0 Self-Certification Hardship Emergency.pdf Self-Certification-of-Hardship-Distributions.pdf

I suggest there is an argument saying the ability for a terminated employee to repay the loan by ACH was a protected benefit at least for anyone who was doing so at the time of the restatement, and the continuation of the ACH repayments was appropriate. If this situation is treated as a protected benefit, then there is no reason for a retroactive amendment. If the company wishes to add back that provision prospectively, they should do so. Calling anything is a Scrivener's Error will get a knee-jerk response from the IRS that there is no such thing. Attached is a fun read about this. 49_Scriveners Error_ Qual Plan Corrections.pdf

From your question, it sounds as if the participant: contributed $30,000 to the 401(k) plan in 2023. the contribution earned about $100 in income. the after-tax account balance of $30,100 is being distributed as a rollover to a Roth IRA. If so, the 1099-R reporting looks correct. If your question was the intended to ask if the participant: contributed $30,000 to the 401(k) plan in 2023. the contribution earned about $100 in income. the after-tax account balance of $30,100 is being converted to Roth as an In-plan Roth Rollover (IRR). If this is the case, then you also should complete Boxes 10 and 11 on the 1099-R (and visit IRS Notice 2010-84, Q/A-13 before doing so). Changing topics, sort of, all of the moving money around and tracking tidbits of income on after-tax contributions to make a "mega backdoor Roth" could be avoided if the participant designates a profit sharing contribution as an Employer Roth contribution. As a one-participant plan, the contribution could be up to the annual additions limit ($69,000 for 2024, plus catch-up if eligible). The contribution will be taxable in the year it is made. Life will be much simpler for everyone involved.

You will find the information in the Department of Labor's Reporting Compliance Enforcement Manual Chapter 5: Enforcement Programs Procedures in the section titled Non-Filer Program Enforcement Procedures very educational: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement/oca-manual/chapter-5 Enforcement actions a highly structured with controlled timing, and it may be the case that comment in the Closing Letter does not formally preclude the plan from using the DFVCP. Again, having an attorney or consultant experienced in working with the DOL on delinquent filings could review the Closing Letter and provide guidance on whether you can still use DFVCP. The DFVCP penalties are the lowest available, and no matter what course of action the plan takes, it will have to prepare and file all of the delinquent forms. Receiving a formal penalty letter definitely takes the DFVCP option off the table, so the client should move forward with seeking confirming guidance and preparing the missing filings for prior years.

The DOL and IRS are most interested in plans being operated in compliance. They do not want to destroy the plan or the plan sponsor. The penalties are the big stick. The client is going to have to provide an explanation of the what and why the filings were missed, and the tone and nature of that explanation will contribute to the negotiation of an agreed-upon penalty. Given the dates, it would not be surprising if somehow the pandemic contributed to the plan going off the rails. If the DOL says you can't use VFCP without permission, then expect any agree-upon penalty to be more than the cost of a VFCP filing. Hiring an attorney or consultant experienced in working with the DOL on delinquent filings and that has a reputation with the DOL of being helpful and reasonable can go a long way to reaching a viable resolution.

fmsinc, from the perspective of a loan being an asset in a participant's account, much of what you say is true. From the perspective of how the loan is treated when reported on a 1099R, there can be a big difference. The loan 1099R could be coded as an 'L' or 'M' and paired with at least 5 other distribution codes. The number of combinations of distribution codes leads to discussion threads like this one. Then there are the plan accounting issues when a loan is defaulted before the participant terminates, becomes taxable and the participant resumes repayments. This creates tax basis in the participant's account which also is reported on a 1099R. While in many plans the loan is strictly earmarked to the participant and the participant's account, there are plans where the loans general assets of the plan. In this case, the loan is a plan level investment and not a participant level investment. The loan rules have to accommodate this scenario. When dealing with the treatment of loans, simple often is not so simple.