Paul I

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.

@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.