Paul I

Tax consequences and the whole repayment of these special payments aside, the victim of domestic abuse taking a payment may result in unintended consequences. Imagine the scenario where a person is the victim of domestic abuse but is still dependent upon the abuser or does not have protection from the abuser. The victim self-certifies and takes the distribution which is then reported to the address on record where the victim and/or the abuser resides. This sounds like a situation that could trigger further abuse. It also seems that the victim likely will wind up revealing the abuse to the plan administrator in the event the recordkeeper or IQPA auditor inquires about the payment. Where the plan administrator often is in a role within HR, might this trigger a need for the plan administrator to take steps to protect the victim?

Was there a forfeited amount that was removed from the participant's account upon payment of the partial distribution, and the forfeited amount was added back into the calculation of the current vested amount but the forfeited amount was not in fact restored to the participant's plan account?

Correct - and determining the ADP for use in the correction will be done without disaggregating the otherwise excludagle employees.

Assuming that you have verified that the was a Missed Deferral Opportunity (MDO) that must be corrected by making a 50% QNEC, then the correction is made in accordance with Rev. Proc. 2021-30 Appendix A .05(2) and Appendix B Section 2.02(1)(a)(ii)(B)(1), and you will need to have the ADP that passes for 2023 (determined without the use of exclusions for otherwise excludable employees) to calculate the correction. There may be a correction other than the need to make a 50% QNEC assuming the employee is still active and depending upon the plan or other circumstances: Although unlikely given the question, does the plan use auto-enrollment? There may be not need for a correction but you have to provide a notice to the employee. Was the MDO found and deferrals began within 3 months from the employee's eligibility date? There is no QNEC and you have to provide a notice to the employee. Was the MDO found and deferrals began after 3 months from the employee's eligibility date? The QNEC is 25% and you have to provide a notice to the employee. The guidance for corrections is fairly detailed and prescriptive once you can confirm the circumstances of the employee's MDO.

I expect FishOn can fill in the details. I read "the recordkeeper did not accept the contributions for the participant" to mean the recordkeeper did not keep the funds. I agree that some recordkeepers request the "as of" deposit dates and associated amounts to run through their corrections process. This works nicely if their system tracks a "plan date" (which is the as of date related to the amounts) and a "trust date" (which is the date the money is received into the trust). These two dates provide the documentation to show what happened and what should have happened.

Since the amounts were withheld from the employee's paycheck, they are late deposits. Assuming that this failure is limited to this employee (or a very small number of participants so the dollars are small), and assuming the client wants some assurance that the correction acceptable to the DOL and IRS, then consider making the correction under the DOL's VFCP under PTE 2002-51 and allocating the related excise tax to the affected participants (no 5330). Use the DOL calculator to determine the lost earnings, and make sure any associated match, if any, is fully funded along with earnings. In the real world, the primary focus is putting the participant in the position of not having been harmed by the operational error, and then giving the agencies their due. Any recordkeeper worth their salt can do this in their sleep. (Note: Back-dating anything generally is a bad idea.)

Vlad401k, could you please provide a little bit of additional information: Is the plan a 401(k) plan, and if yes, how much is each participant planning of deferring for the current plan year? Does the plan allow for a Non-elective Employer Contribution, and if so, what is the allocation formula? Is this the first plan year for the plan (or does "new plan" really mean a new client)? How long has the company been in business? Does the non-owner HCE have responsibilities and compensation that may make them a key employee? All of the above taken together possibly could result in determining the plan is not Top Heavy. For example, if this is the first plan year you will look to the end-of-year balances to determine in the plan is TH. If the owner has a balance from at the end of the year from salary deferrals of $22,500 for the plan year and the non-owner has a balance of $15,610 from salary deferrals, then the plan is not TH (but there is not room for an additional contribution). If the non-owner has a higher balance, this creates some room to a contribution to the owner (following the plan rules for NEC allocations.) Based on the responses to the questions, there may be some room for some creativity.

Let's be mindful that a loan to a participant is an asset of the plan. The loan may be a general asset or may be earmarked as an asset to the participant. Since most loans are from individual account plans and are earmarked as an asset of the participant, most discussions of loans assume that loan rules are solely between the individual and the plan. Let's recast the conversion from the perspective of a loan as a plan asset: A participant takes out a loan from the plan. The participant gets cash and the plan gets a promissory note. The participant makes repayments that include principal and interest. The principal repayment reduces the outstanding principal on the promissory note and the interest is income to the plan. All is in balance. The participant stops making repayments on the loan. The principal on the promissory note no longer is being repaid, and the plan no longer is receiving interest as income to the plan. The loan goes into default and the outstanding amount of the promissory note is declared a deemed distribution and reported as taxable to the participant (after all, the participant effectively still has the "cash" from the remaining original principal of the loan): The plan still hold the promissory note for the remaining outstanding principal. According to the terms of the promissory note, this outstanding principal continues to accrue interest effectively increasing the amount due to the plan from the participant. If the plan loan is earmarked to the participant, the plan remains an asset in the participant's account. If the plan loan is not earmarked to the participant, the participant's accrued benefit is not affected. If the loan is offset (say the participant terminates employment): The promissory note is worthless as a plan asset that the associated accrued interest and the remaining loan principal are written off by the plan as an investment loss. After the deemed distribution, the participant never repaid any additional principal or interest, and the participant does not receive any additional distribution on the amount of the loan offset. The participant's account balance is reduced by the amount of the remaining outstanding principal. The participant does not receive any of the interest that was accrued on the deemed loan. In effect, for the participant with an earmarked loan, the participant bears the investment loss applied against this accrued interest. If the loan was not earmarked as an asset for the participant, the plan bears the investment loss. Let's now consider what happens if the participant remains active and begins making loan repayments for the deemed loan: The plan begins to credit repayments of principal and interest against outstanding balance of the promissory note that includes the interest that accrued after the loan was declared a deemed distribution. The amount of the deemed distribution is considered as after-tax basis for the participant. The interest on these repayments is treated no differently that the way interest was treated before the deemed distribution. It is interest received as income to the plan. The interest repaid by the participant does not create additional basis in the account (just like how income on after-tax contributions does not create additional basis for the participant). Some loan policies may address the plan accounting which can impact the accounting of the above scenarios, but these policies should not create additional basis for the participant. Practitioners who have many, many years in the business may remember when interest on personal loans, credit card interest, and interest on plan loans were all deductible. Those were the days where loan interest was the equivalent of a pre-tax deferral.

Plans for professional service firms like many law firms and accounting firms rely on coverage of administrative staff to support the coverage for partners. There are significant numbers of employees working in these firms in roles like the mail room, receptionist, tech support, administrative assistant for example that do not have a baccalaureate degree. Excluding some of these employees would reduce the number of eligible NHCEs and that could have a significant impact on coverage testing (and can be particularly problematic if the plan uses a new comparability formula). The takeaway for us all is to consider factors like job descriptions and common characteristics within job descriptions when discussing LTPT employees and non-service-based classifications. Job descriptions are an integral part of HR, payroll and performance measurement processes and clients will need to assess the impact of making any changes to these processes versus the implications of including or excluding LTPT employees from making salary deferrals.

The conundrum with the LTPT rules is the accumulated vocabulary to identify other-than-full-time employees. This includes part-time, temporary, seasonal, gig worker, contingent, per diem, contingent, trainee, among others. Similarly, we have cultural inferences that imply an employee likely is other-than-full-time such and is assumed to devote more time to other activities and to have less time available to work . This includes student, intern, adjunct, among others. The "we" in my comments above include not only us as practitioners but also includes DOL investigators and IRS agents. The intent of the LTPT rules is to afford an other-than-full-time employee an opportunity to make 401(k) elective deferrals if they work 500 or more hours in designated 12-month periods. The proof that the rules are being followed will be documented in the counting of hours and the offering of the opportunity to defer. Frankly, this is not substantially different for having to prove that part-timers are excluded unless they work 1000 hours or more, or that employees are regularly scheduled to work x number of hours per week. With respect to proving an excludable classification that is not service based, ironically, would be helped by having a classification that excludes employees in that classification that do work more than 1000 hours. We must keep in mind that there should be a valid business reason for any such classification. To be tongue in cheek, let's exclude "gophers".

It would be helpful to learn some more about the prior TPA and about the corrections. When you say the plan document was created in the name of the prior TPA, does this mean that the prior TPA was the Plan Sponsor and the client was participating in that plan (think PEO or PEP, for example)? Or, was the situation simply the prior and new TPAs both use the same document provider and there is a concern that somehow the document provider will not allow the new TPA to amend the plan (which is highly unlikely, but is more an operational question for the document provider). When you say there are certain errors in the original document that need to be corrected retroactively, be very careful about these "certain errors". If they have anything to do with eligibility, vesting, benefit accruals or other protected benefits, then very likely the either the plan will have to live the consequences of the errors for the period the provisions were in effect, or the plan will need to get a blessing from the IRS (file a VCP) for any proposed changes with a retroactive effective date. My Spidey Sense says there is a lot more happening here.

There is a requirement for a separate accounting of contribution sources such as pre-tax elective deferrals, Roth elective deferrals, match contributions, employer contributions, rollover contributions and after-tax contributions (to name a few), but there is no requirement to open separate trust accounts or sub-accounts for each source.

IRS Publication 1635 does a decent job explaining the use of EINs. See https://www.irs.gov/pub/irs-pdf/p1635.pdf Plans do not get EINs. A Plan Sponsor gets an EIN. Each plan that the Plan Sponsor sets up gets a unique Plan Number (e.g., 001, 002,... 501, 502...) The pairing of the Plan Sponsor's EIN and PN creates a unique identifier for each plan. If the Plan Sponsor is designated as the Plan Administrator, there is no need for the Plan Sponsor to get another EIN for its role as Plan Administrator. If someone or some group separate and apart of from the Plan Sponsor is designated in the Plan Administrator, then that someone or group should get its own EIN. This may be an individual or a committee or a professional services firm. This EIN will not be an identifier of any of the plans the Plan Administrator serves, and the Plan Administrator does not have to get a separate EIN for each plan they serve. One way to look at it is the Plan Administrator's EIN is like a social security number for the Plan Administrator - it is a unique identifier for Plan Administrator and not the plans the Plan Administrator serves.

These above comments and observations are accurate. Whether or not to have an audit for a plan year where it is not required is a business decision for the plan sponsor after taking into consideration the potential of returning to the plan being required to have an audit. One factor to take into consideration when the expense of the audit is being paid from the plan. Consider whether it is appropriate to charge the cost of a plan audit to the plan if an audit is not required.

This process is common among the very large recordkeepers. I agree with you that it appears to be an interest-free loan, and it certainly gives the big guys an advantage over small recordkeepers who do not have the financial resources to front payrolls. I have raised this point at conferences that have included IRS and DOL staff and at conferences with a room full of ERISA attorneys, and the reactions have been tepid at best. The DOL surprisingly were a little less troubled by this because of the overall speed of getting funds into participant accounts. This does not meet the criteria for being a mistake of fact that you will find in plan documents and regulations, so the recordkeeper is off base on that point. From what I have heard from recordkeepers is they treat the ACH failure/transaction reversal more like a failed trade.

Read the plan document and more specifically any basic plan document associated with an adoption agreement. Most documents have a section that addresses the situation when the plan upon adoption fails to be a qualified. If you have some difficulty finding the section, it often exists alongside "mistake of fact" language. The provision typically calls for a return of contributions. Having the document in hand may facilitate the process of closing down the plan.

From the perspective of accounting principles, an expense is incurred when the employer becomes liable for during the accounting period for paying that expense. If this liability is paid during the accounting period, then the expense is categorized as incurred and paid. A clean example in our industry is a fixed match calculated each payroll period. On each payroll date, the employer incurs the liability to fund the match for that payroll period. If the funding occurs during the accounting period, then that payroll period match was incurred and paid. If the liability is paid after the close of the accounting period, then the expense is categorized as incurred and accrued. In effect, all accrued expenses are incurred expenses, but not all incurred expenses are accrued expenses. If, in our example above, a payroll funding occurs after the close of the accounting period then that payroll funding was incurred and accrued. From the perspective of plan accounting method, cash accounting would include only expenses that were incurred and paid during the accounting period, modified cash accounting would include all expenses that were incurred and paid during the accounting period plus some but not all expenses that were incurred and accrued, and accrual accounting would include all expenses that were incurred during the accounting period including all those that were paid during and paid after the accounting period. For tax purposes, the accounting for the tax credit should follow the accounting for the tax deduction for discretionary employer contributions (both match and NEC). Best practice for discretionary contribution is to memorialize tax year of the contribution in a Board or entity resolution declaring or authorizing decision.

We have no knowledge of anyone floating that idea. I doubt is would be considered by the IRS. The RAC process was part of a major initiative to reduce IRS staff time and commitment of resources. I also had a similar impact on plans and plan sponsors. The vast majority of plans now are on pre-approved documents and the IRS has drastically cut the number of determination letters they issue. Further, the concurrent cycles for types (DB, DC, 401(a), 403(b)...) of plans are scheduled to manage peak work loads for the IRS by spreading out pre-approved plan document approvals over time. On balance, the process was a big improvement. The current chaos springs from a very active period of Congressional actions that resulted in significant changes compressed into a short period of time. An overall RAC for a type of plan is very active for the IRS and document providers on the front-end (roughly the 2-3 years leading up to the release of IRS approval letters) of the cycle, and then very active for plan sponsors for the next 2 years through the restatement period. We had emergency legislation attributable to the pandemic in 2020 continuing into 2021, followed by multiple retirement plan proposed bills that were consolidated and passed in a massive new law, and now most recently a repeat performance. It is not surprising that the RAC now seems to follow a leisurely pace compared to the pace of legislation. Using specific legislation-based restatement periods would likely will be doomed to fail unless the pace of legislation moderates, or the IRS and industry comes up with a much more efficient document process. Imagine in some alternate reality if the IRS created a master plan document that included all of the required language to be a qualified plan, and then the document providers could create effectively adoption agreements that linked into that master basic plan document. (This would be similar to a plan today incorporating required provisions by referencing applicable regulations.) This would eliminate a substantial amount of the work that currently goes into creating, reviewing and approving pre-approved plan documents, and would preserve the ability of document providers to decide which choices will be made available under their documents.

My bet is on the IRS will not delay the next DC cycle for any reason other than their having insufficient resources to review and approve the documents. The document cycle has been resilient to increased frequency of regulatory changes (with my thanks to all of the pre-approved document providers out there). A large number of changes already have accumulated that need to be memorialized in the C4 RAC, and I don't see the IRS waiting just because there are more changes in the queue. This does not even consider that we do not guidance on several of the most recent changes, and in some instances will not have guidance until 2025 or later.

Both of the above suggestions above are worth exploring. Part of the consideration to declaring this particular loan as having been distributed and therefore having been offset is there was no distribution of the participant's remaining balance.

From in-person interaction with IRS and DOL reps, I have the impression there is a lot of concern about a classification that looks like, smells like or acts like a service based classification. From experience with large medical services employers and with large staffing services employers, they seem to be resigned to considering per diem/ad hoc/on call employees as LTPT employees if the 500 hours/consecutive years requirements are met. They do intend to exclude LTPT employees from match and nonelective employer contributions, and from all coverage and nondiscrimination tests. Several companies do not track in their HR/payroll systems hire dates and termination dates for these workers. Rather, the systems track an original hire date and a last day worked. This is a PITA for their retirement plans where regulations rely on service definitions based on periods of active employment or hours worked. These companies are implementing in the employment agreements and in company policies definitely determinable definitions of a termination date to help fix the time periods. For example, if an employee does not provide services for a period of 6 months, that employee is considered terminated as of the end of the 6 month period. We have been promised guidance by the end of this year, so it should not be too much longer before we get the big reveal. Sentiment seems to be leaning towards we will be underwhelmed.

Fundamentally, (or should I say SIMPLy stated), an employer with a SIMPLE IRA cannot have any other retirement plan. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan

This situation may be very nuanced, and you should read the plan very carefully as well as having a conversation with the recordkeeper about any tax reporting that will occur. The IRS has FAQs that can be helpful in sorting out the possibilities. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans There are two technical terms - "default" and "offset" - that too often are used casually and interchangeably, and they are not the same. You should get clarification on the plan provisions describing the treatment of the loan upon termination. If it is truly defaulted, check to see if the date of default is specified in the plan document. For example, if the loan is considered in default as of the end of the calendar quarter following the calendar quarter in which the last loan repayment was made, this default date may be later than the date the rehired participant returned to active status (and restarted repayments and made up missed repayments). If the plan truly says there was an immediate default, then IRS FAQ #6 says "[A] deemed distribution is treated as an actual distribution for purposes of determining the tax on the distribution, including any early distribution tax. A deemed distribution is not treated as an actual distribution for purposes of determining whether a plan satisfies the restrictions on in-service distributions applicable to certain plans. In addition, a deemed distribution is not eligible to be rolled over into an eligible retirement plan. " That is pretty harsh news for a rehire to pay taxes on the loan and possibly pay an early withdrawal penalty. Should the plan language supports characterizing the loan as being offset, the IRS FAQ #7 says it can be rolled over to an eligible retirement plan by "the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs." This is the rule you referred to in your last question. If your plan allows for rollovers of loans into the plan and this loan was an offset (not a default), then the rehired participant could rollover the loan back into the plan. Document, document, document all of the details surrounding how this ultimately is handled to protect the plan, to protect the participant and to memorialize the precedent it will set for future situations that may occur under these circumstances.

The math works, but you will not know if the IRS put all of the pieces together until time passes without the participant receiving correspondence from the IRS. This may take as much as three years or so. Do consider letting the participant and plan administrator know the details so any correspondence will not be a surprise.

Here is the link to the IRS website: https://www.irs.gov/retirement-plans/form-5500-corner#collapseCollapsible1699465613274 Essentially, the IRS is saying EFAST2 will be open for business for plans to file the 5558 electronically. There is no association between the availability of filing electronically and the plan year. Note that there is no ability to batch filings for a group of clients, so an electronic filing will be submitted for each plan. Also note that "Form 5558 is no longer used to apply for an extension of time to file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans. You can, instead, use Form 8868, Application for Extension of Time To File an Exempt Organization Return or Excise Taxes Related to Employee Benefit Plans, to apply for an extension of time to -file Form 5330."