Paul I

This is an interesting conundrum. There is one element of loan administration that is a protected benefit, but it likely will not help with allowing loan rollovers. The distribution of an employee's accrued benefit upon default under a loan is a protected benefit under 1.411(d)-4 Q&A 1(c), but nothing else related to loans is protected. An IRS Issue Snapshot regarding loan offsets notes: "Plan loan offset Treas. Reg. Section 1.72(p)-1, Q&A-13(a)(2) provides that a distribution of a plan loan offset amount occurs when, under the plan terms governing a plan loan, a participant's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the participant's accrued benefit). A distribution of a plan loan offset amount can occur in a variety of circumstances. For example, a plan loan offset can occur where the terms governing a plan loan require that, in the event of a participant's termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. Treas. Reg. Section 1.72(p)-1, Q&A-13(b) provides that, in the event of a plan loan offset, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code (IRC), not a deemed distribution under IRC Section 72(p)." All may not be lost. The ability to take an in-kiind distribution is a protected benefit under 1.411(d)-4 Q&A 1(b)(2) which says: "Example 8. A stock bonus plan permits each participant to receive a single sum distribution of his benefit in cash or in the form of the property in which such participant's benefit was invested prior to the distribution. This plan's single sum distribution option provides two optional forms of benefit." Technically, the participant who has a loan earmarked to the participant's account is holding that loan as an investment. If the plan allows for in-kind distributions, then the in-kind distribution of the loan note could be considered a protected benefit. A final note. A recordkeeper's system limitation does not take precedence over the plan document, nor does it take precedence over the IRC or agency regulations. If they wish to cop an attitude, then ask the IRS to ask the recordkeeper about the recordkeeper's system limitations.

The correction process in EPCRS 6.02(4)(b) would have the missed amounts deposited as contributions into the plan as Safe Harbor contributions along with missed earnings on those contributions. The contributions would be considered an annual addition for 2022 purposes of applying the 415 limitations for that year. The contributions will be deductible on the employer's 2023 tax return.

It does, but the influence is not only in one direction. On one side, we have clients that want to pay admin fees out of pocket, particularly when they realize that the fees often are charged to participants based on account balances and the owners and senior employees have the biggest balances. On the other side, we have clients take the attitude that they have the plan so employees won't gripe about not having a plan and the plan also helps with recruiting. They figure the employees should pay for the cost of administration.

These are very thought-provoking questions, and bring out of the shadows and into the light some of the nuances of being a fiduciary versus trying very hard not to be fiduciary. In our business, we are not a 3(16) administrator. As you allude to, even being a limited fiduciary will not fully isolate us from the fiduciary mandate that "if you see something, you must say something". We take every precaution we can to educate and inform the plan fiduciaries about their responsibilities, and to document that it is a plan fiduciary that ultimately is making a fiduciary decision. If these proposals are adopted, we will have to be able to explain them to plan fiduciaries. We are compensated for our work strictly based on our fee schedule which has no links to investments. We offset our fees with any revenue we receive from sources other than the plan sponsor. When we participate in a vendor selection process, we educate the client on any revenue streams that each vendor and each investment has available. I expect there will be a lot of resistance to these proposals from investment professionals involved with ERISA plans. Generally, the structure of compensation within that profession is interwoven with the revenue streams from the assets held in a plan such as commissions, trailing commissions, 12b-1 fees, other forms of revenue sharing, finders fees, expense charges based on AUM and other similar sources. This puts an investment professional in the untenable position of explaining how being rewarded for doing their job well is simply a by product of not acting in their self-interest and always putting the best interests of the plan ahead of personal reward. Try as they might, investment professionals are not omniscient about global financial markets, perfect investment performance is elusive, and the near-term performance of investments based on the advice of the most successful investment professional can fluctuate significantly.

I agree if the plan merger occurs on 12/31/2023, but the OP only says 12/31/2023 is the end of the transition period and does not specify the effective date of the merger. The cautionary point is to make sure the plan has documentation that the merger date is no later than 12/31/2023 and not some date in 2024. The OP also explicitly says the Company B plan recordkeeper will liquidate the assets (most likely because the investment menu in the Company A plan differ (but we don't know that from the information provided).

The situation seems to have some blanks that need to be filled in. Is this the scenario? A company had a standalone 401(k) plan and decided to move the plan to a PEP. The 401(k) merges into the PEP, assets were transferred out of the 401(k) plan and transferred into the PEP. Contribution sources continue to be accounted for separately in the PEP (pretax to pretax, Roth to Roth, NEC to NEC, match to match, rollover to rollover,...) All protected benefits in the 401(k) plan continue to be available in the PEP. The 401(k) plan filed final 5500 showing assets going to zero as a result of the transfer. The auditor discovered that additional Safe Harbor contributions were due to some employees. If this is pretty much the complete picture, then the company should fund the amounts due to the PEP and have them deposited into the Safe Harbor source. If the scenario differs, there could be some major compliance issues. Some examples: If the 401(k) was terminated, and the PEP was set up within 12 months, then there is a violation of the successor plan rule. If active employees were allowed to take distributions (not otherwise available as in-service withdrawals), then there were distributions made without a distributable event. If the PEP treats all of the assets transferred as rollovers, there is a problem that the character of and provisions related to the different contribution sources were removed (e.g., restrictions on the availability of elective deferrals for in-service withdrawals before age 59 1/2). If the PEP did not preserve protected benefits, then there is a violation of anti-cutback rules. Ask questions, get the complete picture, confirm that the transition from the 401(k) to the PEP was a merger, confirm that the final reporting and compliance for the 401(k) was completed timely, and if everything checks out, then addressing where to fund the missed Safe Harbor contributions is a trivial task.

It sounds as if the Company B plan is merging into the Company A plan. Is there a corporate resolution or other similar documentation of the plan merger? Assuming yes, what was the effective date of the merger? If the date is 12/31/2023, then the asset transfer on 1/15/2023 is the administration of the plan completing the merger. If the formal merger date is after 12/31/2023, then there were two plans in existence up to the formal date of the merger. This scenario would strengthen the argument that the Company B has a short plan year in 2024 along with all of the reporting and compliance requirements applicable up to the date of the merger. Lou is correct that you should be good with the transition through 12/31/2023, but if the merger is not formally documented or the documentation creates a short plan year, that will be a PITA.

Read the document carefully. For example, some pre-approved plan documents use the term Statutory Compensation to define 415 compensation with choices for permissible adjustments. Plan Compensation has its own definition elsewhere in the plan document, and it is Plan Compensation that is used for calculating contributions to the plan.

Fundamentally, this is not a payroll issue. Student loan repayments are paid to the loan service provider. A student may have multiple loans from multiple loan service providers. Participants are submitting a claim in which case the participant controls the timing of that claim, and that can be up to 3 months after the close of the plan year. There is no payroll related involvement with respect to participant compensation nor is payroll involved with the loan repayments. It will be interesting to see if large recordkeepers think there is a sufficient population of plans and participants who wish to use this feature, or will the bulk of the administration be left to individual plan sponsors to build their own internal solutions.

Managing a retirement plan for an employer that has PRN, on call, per diem, gig worker and other similar categories of employees is challenging. Retirement plans have a presumption that the employer knows when an employee is no longer employed by the employer. That is not always the case. Best practice is for the employer should document the criteria that will be used to determine when a termination of employment occurs. This could be in an employment contract, a job description, an employee handbook or other similar written document. For example, an employee could be considered if the employee has not worked for specified time period (e.g., 90 days, a calendar quarter, ...). An employee is considered terminated if the employer communicates to the employee that the employee is considered terminated. An employee is considered if they file for unemployment. These types of policies create bright lines that can help the plan to determine when distributable events occur, to determine eligibility service and vesting service, and potentially apply allocation conditions such as a last day rule. If formal policies are not in place, then decisions such as determining an employee's status under the plan can be contentious. Like most policies, put it in writing, communicate it, and apply it uniformly and consistently.

Check the plan's definitions of: Disability, because the plan's requirements to be considered may be different from the definition was using to make the disability payments. Hours, because the plan may provide for crediting of hours while the participant was considered disabled under the plan. Compensation, because the plan may have rules about whether the payments made by the firm are considered as compensation.

Section 112 of SECURE 1.0 says for LTPTs: (D) SPECIAL RULES.— (i) TIME OF PARTICIPATION.—The rules of section 410(a)(4) shall apply to an employee eligible to participate in an arrangement solely by reason of paragraph (2)(D)(ii). (ii) 12-MONTH PERIODS.—12-month periods shall be determined in the same manner as under the last sentence of section 410(a)(3)(A). The last sentence of section 410(a)(3)(A) says: For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee's employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced. This is the language that gives rise to the ability to shift the eligibility computation period to the plan year starting within the participant's first 12 months of employment. If the plan provides for the a shift in the eligibility computation period for LTPTs, then an LTPT very likely will have the eligibility service to enter the plan before the LTPT employee's 3rd anniversary of employment. I have not seen anything that requires the plan to apply the same eligibility service computation period to all employees. If there is no such requirement, then the plan sponsor may consider using the anniversary date ECP for LTPTs and the shifting rules for non-LTPTs. Given the lack of guidance, the recommendation is for a plan sponsor who chooses to take this route of having differing rules minimally to adopt a formal eligibility service policy for LTPTs in anticipation of a future plan amendment. This is all dependent on the availability of data and systems to be able to do the eligibility determinations correctly.

The issue of class exclusions for LTPT that are not based on service remains a known unknown. At a TE/GE regional conference in August I asked the IRS panel this question. The response was the IRS is concerned that classes would be constructed to exclude LTPT employees contrary to the intent of Congress. This last part was emphasized. The IRS continues to say they expect to release guidance before the end of the year.

I don't think I have ever seen a SHNEC allocation condition that excludes key employees. I have seen SHNEC allocation condition that excludes HCEs. "Key employee" is a term of art used to determine if a plan is top heavy and there are several criteria based on ownership percentage, officer status and compensation, plus in some cases the total number of key employees may be limited to a subset of employees who meet the criteria. Top heavy provisions and related definitions often appear in a separate section of the plan document, and it the case of pre-approved plans, in a separate section of the basic plan document. If this plan is using the top heavy definition of key employee as an allocation condition, then the plan will have to specify the year of the determination of the key employees. Top heavy testing is done as of the last day of the prior plan year, so key employees for that test are determined based on ownership in the prior year.

Peter, a strict reading of the provision would say the original distribution did not qualify as a distribution on account of a terminal illness because the participant did not furnish the physician's certification to the disbursing plan's plan administrator. What is a known unknown is the "form and manner as the Secretary may require". Your scenario is interesting because the participant only needs the distribution to be considered as attributable to a terminal illness so the individual can repay the amount. The Secretary could be permissive and allow for a repayment if the participant provides the documentation to the plan administrator receiving the payment. This will not help the 401(k) participant who paid the 10% penalty. I note that the 10% penalty is not withheld at the time of distribution but is calculated when the participant files a personal tax return. The Secretary could be permissive and allow the participant to self-report the terminally ill status on the participant's individual tax return at which time the 10% penalty would be treated as not applicable. Like so much else, we wait for guidance.

The HCE ADP of 64.93% and the NHCE ADP of 62.93% you provided indicates you are using the +2% part of the ADP test. At these percentage levels, you should be using the 125% part of the ADP test so the NHCE would need to get to 52.944% to pass. Could you share the employee's annual compensation for the year in question so we can explore the net impact of the proposed corrections? Is the $65,000 the total of the compensation of the husband and the compensation of the wife, or is did the husband have compensation of $65,000 and the wife have compensation of $65,000? Is the $65,000 before or after reductions for payroll taxes? The employee's QNEC for the MDO will be 3%. This like would be 3% of compensation earned after the 7/1/2020 entry date. You can also use that as the testing compensation which would leverage the QNEC as a % of pay. If the employee's compensation is low relative to the owners, the net cost may be tolerable after considering the time and cost involved with a VCP or retroactive plan amendments. Don't forget about a top-heavy contribution which will be separate and apart from the ADP debacle. This will add 3% of the employee's annual compensation to the price tag.

This topic was discussed at the ASPPA National conference earlier this week. The bullet points for the discussion were: For this purpose, a terminally ill individual means an individual who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification. The employee must furnish sufficient proof to the plan administrator that the employee qualifies under this standard. Not subject to the 10% early withdrawal penalty tax Can be repaid within three years Note: This provision does not create a new distribution right under retirement plans, so a participant would need to be eligible for a distribution under an existing rule. It was taken as a given that the employee needs a physician to certify the individual is terminally ill and is expected to die within 84 months. There was a lot of discussion around the employee furnishing proof to the plan administrator. Some comments addressed HIPAA and privacy concerns. Other comments were concerned that an employee would be hesitant to disclose to their HR department that the employee was likely to die within 84 months. The concern primarily focused on the information leaking out and on the impact the information could have on career advancement and salary increases. These would be a significant burden on an employee where the only additional benefit derived from this disclosure is avoidance of the 10% penalty. Note that the text of S2.0 326 says "an employee shall not be considered to be a terminally ill individual unless such employee furnishes sufficient evidence to the plan administrator in such form and manner as the Secretary may require". No one yet knows what the Secretary may require, and there are efforts to have any such requirements acknowledge the privacy concerns. The rules for repayment within 3 years for the terminally ill provision points to the QBAD rules in 72(t)(2)(H)(v). The repayments are at the discretion of the participant and the repayments could be made to an eligible retirement plan or an IRA as a rollover contribution. The provision does not say the repayments have to be made to the retirement plan from which they are taken. The question was asked why would a participant want to repay the distribution? The response was the repayment would be part of a death benefit distributed to the plan's beneficiaries (as opposed to being part of the participant's estate). The treatment of the terminally ill distribution is different from virtually every other one of the newly or recently added forms of distribution that allow for self-certification. Expect more clarification to come from the agencies.

On the surface, it seems like an attractive plan design feature to have a mandatory lump sum distribution at a retirement age that is earlier than the RMD age in an attempt to avoid all of the complexity in determining the benefits payable under 401(a)(9). Practically speaking, there is no foolproof way of completely avoiding the RMD rules in a 401(k) plan. Consider, we cannot prohibit an eligible participant from making deferrals based on age, which means dollars can flow into the plan in each year for an active participant who is RMD eligible. If these dollars are credited to the participant at the end of the plan year, then the dollars could be part of the calculation of an RMD (for example, where the participant terminates in the following plan year, or elects to begin taking RMDs, or elects to take an in-service distribution).

Transferring the balance to states unclaimed property division reminds me of the last scene in Raiders of the Lost Ark. The balance will live forever in a government warehouse never to be seen again. Unfortunately, the DOL and IRS are not on the same page with how to handle the case where a plan truly has made extraordinary efforts to find a beneficiary and the search has not been successful. The IRS says the plan can subject the balance to a "contingent forfeiture" which is kind of like a forfeiture of a nonvested amount, but the plan must retain all of the information it has about the participant (and about the search effort). If the plan gets a legitimate claim for the benefit, then the plan has to restore the account and pay the benefit. The DOL, when asked, most often rarely otherwise, says the plan cannot forfeit the balance, and the plan needs to keep searching. Some DOL investigators are not even aware of the IRS contingent forfeiture provision. The PBGC will accept balances from defined contribution plans for lost participants, but will do so only in the event of the termination of the plan and if they get all of these lost participants. The PBGC requires that the terminating plan give them cash equal to the amount of the balances and give them proof that a good-faith effort was made to locate the individuals. (Does the PBGC own the warehouse where the ark is stored?) So, where does that leave a defined contribution plan? Unless and until the agencies can agree on a common solution, the plan can consider periodically including these accounts in a search while keeping the account open (i.e., cash available) along with the search documentation until forever when the plan terminates, and at that point in time dumping this all on the PBGC. This seems ridiculous, but it pretty much covers what each agency says should be done.

You should report a Schedule A for each contract year ending with or within the plan year.

A lot of people have wondered about how to count participants for purposes of determining whether an audit is needed, and applying the rules to the first plan year has always been, shall we say, counterintuitive. First, we should understand that these counting rules are not IRS rules. They are DOL rules appearing in 2510.3-3(d)(1)(ii): (ii) An individual becomes a participant covered under an employee pension plan— (A) In the case of a plan which provides for employee contributions or defines participation to include employees who have not yet retired, on the earlier of— (1) The date on which the individual makes a contribution, whether voluntary or mandatory, or (2) The date designated by the plan as the date on which the individual has satisfied the plan's age and service requirements for participation For a new plan, look at the employees who satisfied these eligibility requirement on the effective date of the plan to do the count and note that this has nothing to do with whether an employee gets an allocation of a contribution later in the year.

Unfortunately, the LTPT vesting service rules have no such restriction.

Since the issue has to do with plan documents, it should be reported to the IRS. The IRS has forms (of course they do, and are we surprised?) for reporting improper activities. One such form is Form 3949-A Information Referral where you might check the box for False/Altered Documents. Another is Form 14157 Return Preparer Complaint where you might check the box for False Items/Documents (False expenses, deductions, credits, exemptions or dependents; false or altered documents; false or overstated Form W-2 or 1099; incorrect filing status). Copies of these forms are attached. f3949a.pdf f14157.pdf

A quick and easy first step is to Google the name of the participant and "obituary". Obituaries often disclose names of spouses or former spouses, and surviving family members. If you are lucky, the surviving spouse lives at the address of the former employee. Otherwise, you can ask your locator service to search for the surviving spouse. If the spouse passed away before the former employee and the plan identifies beneficiaries that are next in line, then you can have the service look for the surviving family members.

It sounds as if this attorney is going to wind up "working for the man" breaking rocks in the hot sun!