Paul I

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.

SECURE 2.0 section 312 says the plan administrator may rely on an employee's self-certification. We have several plans where the plan administrator continues to review and approve all hardships, and does not rely on employee self-certification. We have one plan that does not permit any hardship withdrawals. Some plan administrators have been very conservative and enforce a strict interpretation of each of the safe harbor reasons. An administrator in this camp likely would not approve a hardship for housing that did not involve a purchase of a principal residence. Others have been more lenient, basing their approval or disapproval by focusing on the immediate and heavy financial need that cannot be met from other financial resources available to the participant. An administrator in this camp likely would approve a hardship where an employee who lacked other financial resources was required to put down a deposit and pay one month's rent up front to be able to rent a principal residence (a fairly common requirement among landlords). Anecdotally, plans that allow self-certification are experiencing an increase in hardship withdrawals. It would be interesting to hear of others experience.

Never underestimate the value of employee relations and participants' perception of the integrity of the company or the plan's service providers. We work with more than a dozen recordkeepers and none of them would push back on posting an expense reimbursement if it is available under the plan document. Trying to fix this with a few extra buck in a bonus just pushes the hassles on to payroll (not to mention the hassles when payroll does not report the bonus correctly when reporting plan compensation). On the other hand, tell a participant that their account was dinked $100 for an expense that was due to a setting that was missed during a change in the investment platform would not be received well. The participant likely will respond that the $100 less in their account will translate into $2,000 (or more) less money that will be available to them when they retire. (Yes, some participants read the communication material they get bombarded with.) Another participant just as likely will say $100 would get them dinner and see a movie. Own it, clean it up and let participants know the company is a responsible steward of the participants' money in the retirement plan.

See https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs questions 8 & 9. Very short version: the individual files a 5329 and attaches an explanation.

Check your plan document for provisions related to the payment of expenses. If you are using a pre-approved plan, be sure to check the provisions in the Basic Plan Document. It is very common for the BPD to have a provision that the Employer can reimburse the plan for expenses, and the Plan Administrator can determine what is a reasonable and nondiscriminatory approach on how to allocate (credit) the expense to participant accounts. If the plan document supports making a reimbursement, operationally the Plan Administrator should be able to give the recordkeeper a file of amounts by person/source, make a deposit for the total of the amounts, and instruct the recordkeeper to post the amounts so they are categorized as something other than contributions (e.g., income, positive expense amount, adjustment...).

I believe the sponsor is requesting you to send out Form 1099Rs and they did not specify the "R" and were only using the generic plural of 1099, i.e. 1099s (lower case). The Form 1099S reports Proceeds From Real Estate Transactions, so you definitely do not use this form. Before you jump into any kind of tax reporting, you should clarify your role and the facts and circumstances surrounding the "plan termination". Your brief statement suggests that there are multiple employers involved and possibly other plans associated with these employers. The statement also suggests that there was some sort of business transaction that occurred. If any of the suggestions are factual, it is possible (and maybe likely) that the options made available to some of the participants in the terminating plan were not permissible. Trying to help by sending out Forms 1099S now could make a problem far worse. Please explain more about what happened: Was there one or more plan terminations? and Bird asked, what was your role? Was this the sponsor of the plan that terminated or some sponsor of another plan? This suggests that there was some type of transaction where one company bought another company. Is this the case? It also suggests that there are multiple employers and you need to identify each of the employers involved and their role. This suggests that some people who were in the plan that terminated are still in a plan that you work with. Is this the case?

Attached is a very well written explanation of the start-up plan tax credits. It does not answer 100% of all questions, but does provide a good summary of points to consider in deciding in the credits are available. In Zoey's initial case, it is not likely that a credit can be claimed because the plan is not a new plan. There are two plausible scenarios about how the plan of the acquired company was handled and neither leads to the plan being a new plan. This was a stock transaction so the seller's plan survived and became an existing plan sponsored by the buyer (or a member of a controlled group of the buyer). If the EIN change was made to reflect the EIN of the buyer as the plan sponsor, that change would be reported on the 5500 or 5500SF on line 4 as a change in EIN. If the buyer set up a new plan and merged the seller's plan into the new plan, then the merger would be reported when the assets were transferred from the buyer's plan to the seller's new plan. This latter scenario is a more plausible argument for trying to take the credit, but given the facts is not likely to succeed. If the buyer's plan was kept separate and apart from the seller's plan, the buyer's plan could have a plausible argument to taking a credit for the buyer's plan. The strategy of creating new plans for each seller's plans going forward likely will become unavailable fairly quickly as the buyer's employee count grows. The tax credit is available to small businesses, not small plans. The tax credit starts phasing out between 50 and 100 employees. I suggest paying careful attention to the rules where the seller has made contributions to a SIMPLE or SEP IRA. It is easy to overlook these arrangements in planning for an acquisition. Changing topics from tax credits to auto enrollment/escalation, if the acquiring company established (or added) a new 401(k) feature on or after December 29, 2022, the plan needs to implement auto enrollment/escalation starting in 2025. There are rules in Notice 2024-02 about grandfathering plans of acquired companies that did not have a 401(k) feature prior to SECURE 2.0 enactment. This is an equally vexing topic to consider in doing mergers. tax_credits_under_secure-2.0-easy_reading_version_from_gps-2023-02.pdf

The IRS notes that: https://www.irs.gov/retirement-plans/is-my-401k-top-heavy "Account balance adjustments You may need to make some adjustments to the account values before calculating the top-heavy ratio. Add back these amounts: Distributions made to the employee from account during your testing period (such as hardship distributions) Cash-out distributions to terminated employees Loans to the employee during the testing period Subtract these amounts: Rollover contributions from another employer's plan or IRA. Profit-sharing contributions that were not actually paid to the accounts during the testing period (for example, an amount declared in December but not contributed in cash until March the following year)."

I have not seen any sample forms, nor have I seen anyone touting that their recordkeeping system all set to administer Employer Roth and just waiting on a client to choose that option. Unless there is a recordkeeping system set up to administer the elections employees can make on a form, a client would be foolish to tell employees that they are offering that feature. There are some pesky issues they need to deal with like documenting the decision to offer the feature. Will they amend the plan document? Or, could they have a resolution describing the provision, setting an effective date and intent to amend the plan when they can? Are they going to offer this only for Roth employer non-elective contributions, or will a Roth employer match also be available? If both, will there be separate elections for each Are they ready to communicate to employees that this will be available only if the participant is 100% vested? How often can employees change their election? There also is a not quite settled question on whether Employer Roth accounts will have their own 5-year time clock. (Most commentary I have seen says no.) Good luck finding a form, and better luck getting the client to realize there is much to be done to implement their decision.

It seems these terminated employees are includable in 410(b) testing if they get an increase in benefits. The "and" in the 1.410(b)-6(f) below makes (i)-(v) look like a 5-part test. If they event they do not get an increase attributable to the FAE, then see (v) below where the failure to accrue is not solely because of the failure to satisfy the minimum period of service. Frankly, I have never focused on this exclusion at this level of detail and it would be great to hear counterpoints. The EOB says Benefiting employees - these are the employees who get an allocation of employer contributions under a defined contribution plan or who increase their pension benefit under a defined benefit plan. If the plan includes a section 401(k) arrangement, also keep track of all employees who at any during the plan year had the right to elect to defer compensation under the section 401(k) arrangement. 1.410(b)-6(f) tells us: (f) Certain terminating employees (1) In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if - (i) The employee does not benefit under the plan for the plan year, (ii) The employee is eligible to participate in the plan, (iii) The plan has a minimum period of service requirement or a requirement that an employee be employed on the last day of the plan year (last-day requirement) in order for an employee to accrue a benefit or receive an allocation for the plan year, (iv) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement, (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), and (vi) If this paragraph (f) is applied with respect to any employee with respect to a plan for a plan year, it is applied with respect to all employees with respect to the plan for the plan year.

The EOB has a fair amount of discussion about a mistake of fact that includes some tenuous references to sources. The discussion most on point with this thread says: "1.b. Tentative contribution for employee who fails to accrue benefit for plan year is not subject to return under mistake of fact. The Joint Committee on Employee Benefits of the American Bar Association posed this question to the IRS in an informal technical session conducted in 2001. Suppose an employer, for budgetary reasons, deposits monthly to the accounts of participants in a 401(k) profit sharing plan. It is determined after the close of the plan year that some participants don’t qualify for the contribution because they fail to satisfy the plan’s last day employment requirement. May the funds revert to the employer? The IRS’s response was that the funds could not revert to the employer because the IRS doesn’t view estimates as a mistake of fact." Looking collectively at the various sources that dealt with mistake of fact situations, it seems the IRS says "we will recognize it when we see it, and we will let you know if we see it."