Paul I

The tax withholding would have been reported on the Form 945. If this was within the last 3 years, then consider filing a Form 945-X. You can find the instructions here: https://www.irs.gov/pub/irs-pdf/i843.pdf

Each covered service provider is responsible for disclosing to the plan sponsor of any fees it receives from any source other than from the plan sponsor. If the broker account provider is receiving payments from the participants' accounts or from investments held in the participants' accounts, then the broker account provider is responsible for disclosing all such fees to the plan sponsor. If all of your fees are paid by the plan sponsor, then you have nothing to disclose. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/final-regulation-service-provider-disclosures-under-408b2.pdf

The follow Q&A on this topic is from the American Bar Association Section of Taxation - May Meeting in 2004. Basically, whether the forfeiture buy-back creates basis can depend on the source of funds that were used for the buy-back. 36. Sec.411(a)(7)(C)-Buy-back of Cash out Distribution Section 411(a)(7)(C) provides that the accrued benefit of an employee that is disregarded by the plan must be restored upon repayment to the plan by the employee of the full amount of the distribution. Employee A participated in Employer's qualified defined benefit pension plan, terminated employment, received a lump sum distribution of the present value of his normal retirement benefit and rolled over his lump sum distribution from the plan into an IRA. The lump sum distribution did not include the value of any early retirement subsidies. Employee A was rehired by Employer and would like to repay the Employer's defined benefit plan the full amount of the distribution with pre-tax IRA funds. The repayment will be part of the Employer's defined benefit pension plan trust and will not be segregated in a separate account in the name of Employee A. May the Employer's defined benefit pension plan accept pre-tax funds from Employee A's IRA as repayment and include the repayment as part the trust's general assets? Does the answer vary if the amounts in the IRA are not funds from a tax-qualified plan distribution? Is the repayment from Employee A's IRA to the Employer's tax-qualified defined benefit plan a taxable event to Employee A? Proposed Response: Employer's defined benefit pension plan may accept the pre-tax funds from Employee A's IRA as repayment of the prior distribution and include such amounts as part of the trust fund's assets. The repayment provisions of Sec.411(a)(7)(C) and Treas. Reg. 1.411(a)-7(d) do not state that only after-tax funds may be used to repay a pension plan and does not require that the repaid amounts be specifically set aside in a separate account for the participant. The answer is the same whether or not the pre-tax funds in the IRA originated from a tax-qualified plan. The amounts repaid by Employee A from his IRA to Employer's defined benefit pension plan will not result in ordinary income to Employee A because the amount is not distributed to Employee A. IRS Response: The IRS agrees with the proposed response. It doesn't matter whether the buy-back is made with pre- or post-tax funds. The source of the money used for the buy-back is not important, but buying back a benefit with after-tax funds may create basis in the benefit for the participant. The source of the funds might be relevant to whether lump sum distribution treatment is available for the ultimate distribution from the qualified plan.

There is no formal, explicit guidance so how these situations resolve is depends on the extant documentation and on the tenacity of the participant. We have the ability to retrieve plan accounting and tax reporting history for our clients extending back over 35 years. When these situations do come up - mostly when the Social Security Administration sends out the you-may-have-a-benefit letter - we can respond whether the individual was on a census file during the time period where we were the service provider. If yes, we can provide the last participant statement we prepared and the Form 1099R if that was within our scope of service. Still, having access to all of this history has not resolved situations where the individual terminated and was paid out before we became the service provider or where the individual joined the plan after we no longer were the service provider. Generally, when we have relevant information the matter is resolved quickly. If the matter is not resolved, the individual often considers the time and cost of continuing to pursue the matter. Relatively frequently, they may decide that they are gambling that the amount that may be recoverable may not be worth the effort. The DOL's focus on lost participants and their new charge to provide a resource to find missing participants seems to be trending towards a mandate that a Plan Administrator (as distinguished from service providers) should be able to inform any participant at any time the disposition of the participant's benefit. Given the evolution of technology, turnover of service providers, turnover of employer staff and a host of other factors, this will be a monumental challenge. This RFI regarding the DOL's new resource is out there with a June date for sending in responses. Perhaps plans could send the DOL a record that a participant in the plan EIN/PN was paid in full this amount on xx/xx/xxxx date and the plan is done with them. We could then refer these situations to the DOL. Just a thought.

Apparently, the IRS informed pre-approved document providers it would not approve Cycle 3 documents if the CBA formula was incorporated by reference. This approach had been allowed in the PPA cycle documents. The rationale was the allocation formula had to be in the Cycle 3 document itself or the formula was not considered definitely determinable (i.e., subject to modification if a change was made in the CBA which is outside the control of the plan). I have not seen an IRS directive to that effect, but I have seen commentary to that effect from pre-approved document providers.

File the Form 5500 and in Part I B check the box that the filing is an amended return/report. EFAST2 tracks Plan Sponsor EIN, Plan Number and Plan Year of all filings, and the most recent amended filing should supersede any prior filings.

The root cause for this scheme seems to be that the plan lacks cash available to give to the participant to make the loan. If so, then the scenario should start with the business making a cash contribution the plan sufficient to cover the MRC which would put the plan in the position to issue a loan check. That would provide a documented trail of the sequence of events. The idea of writing a check to himself is a stretch in an attempt to circumvent the lack of availability of cash in the plan. This supposes that there is $50,000 in the business checking account (for the contribution) that would cover a check to his personal bank account (for the loan). If there are not separate checking accounts, would a bank even cash a check from an account payable to the account upon which it is written? If the bank will not honor the check, is it a valid financial transaction? Trying to net the contribution and loan into a single transaction is vulnerable to an interpretation of events, and the IRS likely will have its own view of what transpired. Consider that the IRS could view the result of the net transaction as if the business funded the contribution by the having participant give the plan a promissory loan note secured by his vested balance in the plan, and then consider the potential consequences. @Lou S.'s suggestion to have a clear paper trail is on point. If the plan has the cash to make the loan, the paper trail should methodically step through the participant takes the loan, the participant makes the proceeds of the loan available to the business, and the business funds the MRC. If the plan does not have the cash to make the loan, the paper trail should include methodically step through the business funds the MRC, the participant takes the loan, and if necessary, the participant makes the proceeds of the loan available to the business. This is not advice of an kind, nor a recommendation. Frankly, this whole scenario has a whiff of a business in trouble and possibly with a plan that it cannot afford. Prudence would add taking steps to evaluate how assure the business and the plan can function within common norms.

@Lou S. is on target with the intent of USERRA. See the Department of Labor website here https://webapps.dol.gov/elaws/vets/userra/ben_pens.asp This is a link within this site https://www.dol.gov/agencies/vets/programs/userra and the Know Your Rights menu item. The short answers, subject to some disqualifying circumstances, are yes, the individual gets eligibility service, and no, the military service is not disregarded. These answers also apply to vesting and benefit accrual service. @justanotheradmin in on target with reading the plan document. There are some choices that plan sponsor can make that will affect how benefits are calculated such as adjustments to plan compensation. how hours are counted, crediting hours to avoid a break in service, treatment of an outstanding loan balance, in-service withdrawals, death benefits, make-up contributions and likely more.

I agree, leave it blank. To my knowledge, the responses to these new compliance questions (at least for the 2023 forms) are not edited. They could have, but apparently did not, build some edits to check the pension codes for a 401(k) feature and then checked to see if there were responses to the new compliance questions.

The allocation condition to be an active employee on the last day of the plan year typically applies to employer contributions such as non-elective contributions or matching contributions (allocated annually). The fact that the last day is on a Sunday is not an issue for employees who are continuing actives. The common decision a plan administrator has to make is whether an employee formally terminates employment and/or retires on the last pay date (6/28 in the question). Some plan administrators take the position the last day is satisfied if the employee worked on the last available work day. Some plan administrators take the opposite position. Some plan administrators consider the reason for the termination (retirement, disability, voluntary termination, involuntary termination). Some plan administrators look at payroll practices so if an employee is paid for a pay period that includes the last day of the plan year, then the employee was active on the last day. Some plan administrators look at how the last day is defined in their health and welfare plans. Whatever or however the decision is made, it must be applied consistently and uniformly to all similarly-situated employees. If the plan is top-heavy, the plan could exclude an employee who is not active on the last day from getting the top heavy minimum contribution (if there is one). Again, be careful that the decision is applied consistently and uniformly.

Thanks Bill. I should have noted that the Form 8955-SSA instructions do say in the Who Must File section: "Plan administrators of plans subject to the vesting standards of section 203 of ERISA must file Form 8955-SSA." That section ends with the comment: "Sponsors and administrators of government, church, and other plans that are not subject to the vesting standards of section 203 of ERISA (including plans that cover only owners and their spouses or cover only partners and their spouses) may elect to file Form 8955-SSA voluntarily. See the instructions for Part I, line A." The instructions for Part I, line start with: "Line A. Check this box if you are electing to file this form voluntarily." To rephrase the question, has anyone who is not required to file a Form 8955-SSA ever voluntarily filed one?

There is no need to file a Form 8955-SSA for this participant. The instructions to the Form 8955-SSA say: When To Report a Separated Participant In general, for a plan to which only one employer contributes, a participant must be reported on Form 8955-SSA if: 1. The participant separates from service covered by the plan in a plan year, and 2. The participant is entitled to a deferred vested benefit under the plan. In general, information on the deferred vested retirement benefit of a plan participant must be filed no later than on the Form 8955-SSA filed for the plan year following the plan year in which the participant separates from service covered by the plan. However, you can report a deferred vested participant on the Form 8955-SSA filed for the plan year in which the participant separates from service under the plan if you want to report earlier. I expect it is possible for a Form 8955-SSA to be required if the owner stopped working and kept the plan open with the owner's benefit as a deferred vested benefit. Has anyone ever encountered these circumstances and filed the SSA?

For what it's worth, a lot of plans have loan policies that say it is mandatory for repayments to be made by payroll deduction. I have seen a fair number of plan administrators take this literally and immutably in applying the loan policy. If an employee for whatever reason - termination, leave of absence, disability, transfer to another company in the controlled group that runs of a different payroll service that won't take payroll deductions (especially NRAs), ... - then the loans go into default unless the employee can again make loan repayments by payroll deduction. I, too, cannot say if this approach - mandatory repayments by payroll deduction - satisfies the statutory PTEs, but if it doesn't, there are a lot of plan administrators that don't know it.

The policy should be okay if it passes BRF testing. The policy likely will not solve the problem of per diem employees being unable to pay via payroll deductions. Consider that a regular employee takes a loan and begins repayments through payroll deductions. The employee subsequently becomes a per diem employee. The loan is outstanding and remains subject to required repayments to avoid default. If, in the opinion of the plan sponsor, there is a significant number per diem employees that need access to plan loans, then the plan's loan policy could be adjusted to allow for periodic, non-payroll-based repayments. In practice, the an employee not repaying through payroll deductions should be educated on the conditions and consequences associated with a loan default. One thing to consider is whether the availability of the non-payroll-based repayments should or could be restricted to per diem employees, and regular employees would remain subject to repayments through payroll deductions.

Let's acknowledge the value of pre-engagement due diligence followed by a well-written engagement letter.

My understanding is the plan is not required to get an new election each year from each participant. The plan is required to give each participant a notice each year before the start of the next plan year which explains the EACA including default elections, auto-increases, and opt-out elections among other things. The timing of the annual notice is the 30 - 90 day window before the start of the new plan year. That being said, the plan document can have provisions that require the plan administrator to solicit new elections for each participant every year. The plan may also provide that a participant that is not deferring anything will have default elections made unless the participant again opts out. The plan may extend this default to a participant that is deferring, but is deferring below the minimum default deferral percentage. Then there is administration of refunding deferrals if the participant requests to opt out and the plan permits it. These are yet more decision points for the plan sponsor, and hopefully the decisions be made with due consideration of the company's payroll being able to adhere to the requirements of the plan.

It's quirky. Take a good look at the demographics so the plan sponsor is comfortable with potential operational issues. What is the risk of the plan being top heavy? What is the anticipated allocation formula? Are there significant number of employees under age 21? Will Average Benefit Testing be needed? Are there Long Term Part Time employees? Is this a new plan or a new 401(k) feature that will need to be an EACA? There probably other questions and the answers may all prove to be inconsequential, but quirky designs can lead to quirky operational issues.

There was a message in my email inbox this morning (sent after hours on Friday) from an institutional recordkeeper notifying TPAs that the recordkeeper will apply the $7000 increased cash-out limit starting July 2024. The message in the email to TPAs essentially was the recordkeeper was going to apply this to all cash outs, but no rush, you have until 2026 to amend the plans. The message in the communication to the TPA's clients was the recordkeeper was going to apply this to all cash outs, and you (the client) will need to update any participant communications and amend your plan document. If you use the recordkeeper's pre-approved document, no worries, an amendment will be provided asap. If you do not use the recordkeeper's pre-approved document, then you should notify your document provider so the change can be made and appropriate notice is provided to your plan participants. It seems this recordkeeper is trying to put TPAs and document providers between a rock and a hard place. There is no discussion of amending now versus amending later. There is no suggestion of plan sponsor discretion. There is no opt-out offered. There is a sense of urgency communicated to plan sponsors that is not communicated to TPAs. What is your opinion of a recordkeeper making a unilateral decision applicable to all of the plans they service? Recordkeeper $7000 mandatory distribution notice.pdf Recordkeeper to TPA $7000 mandatory distribution notice.pdf

The pre-enactment plan had a 401(k) feature and is grandfathered. SECURE 2.0 did not say that any modification to a grandfathered plan had to be an EACA.

@Gilmore the proposed rule was met with a less than enthusiastic response as noted in the attached review, and in the comments from ASPPA found here: https://www.asppa.org/news/ebsa-proposes-adding-self-correction-component-vfcp and here https://www.asppa-net.org/news/ara-pushes-additional-changes-vfcp-self-correction-option To answer your question, I don't see that the option is available at this time, and it seems as if there are several decisions that a plan would need/want to consider if the option, unmodified, was available now. ferenczylaw.com-FLASHPOINT DOL Embraces Self-Correction Somewhat Kind of Unenthusiastically The New Proposed VFCP.pdf

The perceived clever idea of adjusting W-2's to recognize the amount of a refund (made on or before March 15) as taxable income in the prior year is enticing since it appears to remedy the test failure, but this is not a permissible remedy. First, keep in mind that someone getting a refund due to an ADP test failure is going to be an HCE. For HCEs, all deferrals made during the year count in the numerator of the individual's ADP. Making a refund doesn't change that amount, and neither will changing the W-2 but also to reduce the deferrals reported in Box 12 of the W-2. When it comes to HCE deferrals, if they are in the plan, they are in the plan. And, once they are in the plan the correction is made from within the plan. Just playing with the W-2s does not change the fact that money for the deferrals was deposited into the plan, and money for the refunded deferrals (and associated income) should come out of the plan. You may want to have a heart-to-heart talk with the plan sponsor about cleaning this up. They should issue correct W-2's showing correct income and deferrals. (Hopefully, the participants have not yet filed their personal income taxes.) They should issue refunds from the plan, and bite the bullet and pay the excise taxes. They should make sure the refunded amounts are reported for the proper year(s) on Form 1099R along with the proper distribution codes. They should make sure that were no adjustments associated with this clever idea that were made to current year W-2 data. They should make sure that refunds are properly reported on the Form 5500/5500SF as corrective distributions. They should consider taking steps that may be available under the plan to reduce the likelihood of the current failing the ADP test.

There has been no official guidance that I have seen. There is a comment on ERISApedia that the DOL informally has said the plan should use the accounting method that is consistent with the accounting method used in preparing the plan's financial information. Following this approach, the plan could determine the participant on a cash basis, an accrual basis, or a modified cash basis. On a cash basis, if there are no assets in the account then participant is not counted regardless of any amounts allocable to the account after plan year end. On an accrual basis, the participant is counted if there is an amount allocable to the account after plan year end. A modified cash basis most likely would follow the accrual basis approach. In the instance of cash basis accounting, the instruction that refers to a contribution that has been made could reasonably be interpreted to mean that a participant with only an unfunded contribution is not counted. There is some logic to this alleged informal counting method, but it would be better to have something more official than a whisper down the lane from the DOL.

The 2023 instructions to the Form 5500 page 3 includes the following definition: Pension Benefit Plan All pension benefit plans covered by ERISA must file an annual return/report except as provided in this section. The return/ report must be filed whether or not the plan is “tax-qualified,” benefits no longer accrue, contributions were not made this plan year, or contributions are no longer made. Pension benefit plans required to file include both defined benefit plans and defined contribution plans. The following are among the pension benefit plans for which a return/report must be filed. 1. Profit-sharing plans, stock bonus plans, money purchase plans, 401(k) plans, etc. ... For purposes of the Form 5500, the term pension is used to distinguish a retirement plan from a welfare benefit plan.

Returning to your original question, the answer is yes, and in fact excluding Key Employees from eligibility is explicitly available in some pre-approved plan documents. Since pre-approved plan documents are reviewed by the IRS, that further reinforces that this is a valid exclusion. As with all similar class exclusions (and particularly in very small plans), monitoring coverage will be critical. The assertion: implies that making the exclusion means the plan will never have to make a top heavy contribution is a stretch. If a client is told they will never have to make a top heavy contribution by making this exclusion and in operation they do have to make one, the client certainly will plead they relied on that assertion. How could a plan that is top heavy and that excludes key employees from making contributions ever be required to make a top heavy contribution is a valid question. This specific situation is not addressed in EPCRS, and generally we look for analogous situations to get some guidance. If making a salary deferral for a key employee that was excluded from making deferrals is treated as an excess deferral, then the excess would be paid out. If the employee is also an HCE, the excess would be included in ADP testing and it is possible the IRS would say would also be included in determining the amount of a top heavy contribution. In an ASPPA Q&A session, the IRS confirmed that amounts refunded to a key employee are included in determining the key employee's allocation rate for top heavy purposes. If the key employees deferral can be considered an excess allocation, then as @C. B. Zeller commented it could be returned to the employee with earnings. There does not appear to be any guidance on whether the amount would or would not be used in determining the key employee's allocation rate for top heavy purposes. Given the consequences, it would be prudent to get guidance from the IRS or legal counsel before telling a client they will never have to make a top heavy contribution. Regarding the dastardly rules, Assuming the plan excludes key employees, the owner of the small business who makes say $80K a year likely will have more than 5% ownership, will be excluded as a key employee and will not be able to save anything for retirement. They will not be any better off than they would be without the exclusion. They will just have to be satisfied that they can own up to 60% of the total plan assets in the plan. Cue the violins. About those windmills, Best of luck in getting confirmation that this strategy is a bulletproof strategy that eviscerates the top heavy rules. An International Man of Mystery certainly can dream the impossible dream, and may your dream come true.

Here is an analysis of Top Heavy plans done by the GAO in 2000 that provides explores the pros, cons, and practical considerations surrounding top heavy rules. On balance, the rules are accomplishing the goal of having owners who derive substantial tax benefits from their company needing to provide a level of access to retirement income on behalf of the company's employees. The trend in recent legislation has been to provide more lower cost avenues for owners to do so. From a technical standpoint, the Top-Heavy Innoculation Exclusion sounds plausible. From practical standpoint, it is a disaster that is waiting to happen. The greatest risk is operational compliance, particularly when the people performing HR, payroll and benefits functions at the company are making daily decisions about who is in or out of the plan. The Exclusion does not have a plausible corrective action in the event of an operational failure other than to make the top heavy contribution. IMHO, we can play knight-errant and tilt at windmills, but it is our clients that suffer the consequences when facts and circumstances result in this approach fails to live up to its guarantee. “Top-Heavy” Rules for Owner Dominated Plans.pdf