Paul I

Congratulations on gaining new business! Technically, the Plan Administrator should make the decision and the PA likely will ask for guidance. Generally, the plan wants to be consistent in its basis for reporting, can make the change. The plan can change to reporting on an accrual basis which usually is a good idea if the plan needs or soon will need an independent audit. The auditors have to report on an accrual basis. Sometimes, full accrual accounting can be challenging particularly when the financial information is not reported to the plan on an accrual basis. Keep in mind that there is a third alternative to cash or accrual accounting and that is modified cash accounting. Under modified cash accounting, typically the assets are reported on a cash basis, but items like contributions made after the close of the plan year or distributions checks were cashed after the closed of the plan year are reported on an accrual basis. If this is a calendar year plan, you have 11 days to get the filings done. You may want to consider using cash basis for 2022 if you have to rely on data from the prior service providers, and then make the switch to accrual or modified cash basis for next year's filings.

Read the plan document and the loan policy carefully to understand who is and who is not eligible to take out a new loan. It sounds like this individual is an active employee who is on the company's payroll, and the individual has an account balance which makes him a participant in the plan. Do the plan and policy say a union employee cannot have a loan? If yes, you likely would not be asking the question. Do the plan and policy say to take a loan an individual must be an active employee and must make repayments by payroll deduction? If yes, then this employee meets those criteria. Do the plan and policy say to take a loan and an individual must be an active participant (defined as they are eligible to make or receive contributions into the plan)? If yes, then this individual does not meet these criteria and cannot take a loan. Keep going until the path from the plan document and loan policy to the answer to your question is clear. How the participant happens to be coded in the plan records does not supersede the official plan documents.

Since you have a valid QDRO in hand, you need to follow its terms. I would not suggest that the Plan Administrator act contrary to the QDRO's terms particularly if the action would prevent or inhibit the spouse's right to decide when payments should commence. One would think if the spouse somehow wants to walk away from the QDRO, she would not begin receiving benefits and would communicate her change of heart directly to the Plan Administrator. The QDRO has contact information for the spouse, so it should be easy for the Plan Administrator to find out what the spouse's position is about the QDRO. If there seems to be a consensus, then the PA should ask each party to consult their respective attorneys about asking the court to change or nullify the QDRO. It would be interesting to hear if they succeed in getting some form of amendment or agreement that supersedes the original QDRO. Tread carefully. Creating a QDRO very often is a highly emotional event and it is not rare that one party just likes making life more difficult for the other party.

If the spouse has no compensation, there is nothing to defer. If the spouse has not worked 1000 hours in an eligibility computation period, the spouse has not met the eligibility requirements. The owner must follow the plan provisions. If the owner wants to have more liberal eligibility, they can amend the plan and apply the new liberal eligibility to all employees.

We need to keep in mind that this is an 11(g) amendment adopted on 10/14/2022 after the close of the 2021 plan year and effective retroactively to 1/1/2021 = the beginning of the prior plan year. The OP says the amendment adds employees to the Plan that complete 1 year of service with no further clarification. The employee in question completed 1 year of service for the 2021 plan year. The fact that the employee terminated in the 2022 plan year on 3/1/2022 is not relevant with respect to the 2021 plan year. With an 11(g) amendment, we can pick and choose who gets to participate in the prior plan year and only need to add enough participants to pass coverage. The amendment could have specified additional criteria to restrict who was includable in 2021 but apparently did not do so. Unless there are more facts than have been presented such as the EBP's employee service history questions , this employee should have been included as participating in the 2021 plan year.

The nuance on the use of investment as an adjective to modify purposes easily can be argued, particularly if we consider it from point of view of the plan versus the point of view of the participant. From the point of view of the plan, it is an investment and is earning income (which you should reasonably ask what happens to that income). From the point of view of a participant, it is not an investment in the sense that the participant cannot elect to direct the investment of the participant's account into the interest-bearing account, but it could be considered if the participant receives some of the interest earned in that account. Sometimes its entertaining to contemplate our navels, or as a motivational speaker may say, engage in a thought exercise.

I agree that we should look to the plan's existing eligibility computation period rules and apply them to the LTPTs. Presumably, the plan could have different ECP rules for LTPTs simply because plans today can have different ECP rules for different classifications of employees - for example full-time versus part-time. Trying to use anniversary dates of hire where the date of hire used to determine the ECP shifts after a break in service to the most recent hire date likely would be a nightmare for some employers when applied to LTPTs. I say this simply because employers have a difficult time deciding if the last day the part-timer worked was a termination date or simply the last day worked with an expectation that the part-timer will work some more in the near future, and the employer does consider the part-timer as having terminated.

I suggest asking a simple question - Who owns the account that is holding the interest-bearing cash? If it is the Trustee of the plan, then it is an asset of the plan. Otherwise, it is not an asset of the plan.

I expect formulating administrative policy is allowed without impacting the ability to rely on the opinion letter. As an example, many pre-approved plans have a check box that asks "Are Loans permitted: Yes/No". The Adoption Agreement then has an appendix or addendum titled Loan Policy with all of the details like number of loans, interest rate, refinancing... I would see a Forfeiture Policy statement to be analogous.

I agree that there is very little guidance/rules on what to do when investment directions are not followed, and whether a correction is made or determining the amount of the correction seems to be driven either by the plan administrator finding the error and calculating lost earnings or by the participant informally or formally requesting to be made whole. This situation is fairly common but does appear anywhere as a prohibited transaction. I find 1.415(c)-1(b)(2)(ii)(C) regarding restorative payments and what is or is not counted for purposes of applying the 415 limit illuminating even though this section, too, does not address a correction method: Restorative payments. A restorative payment that is allocated to a participant's account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan's losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). This includes payments to a plan made pursuant to a Department of Labor order, the Department of Labor's Voluntary Fiduciary Correction Program, or a court-approved settlement, to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan). Payments made to a plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under title I of ERISA are not restorative payments and generally constitute contributions that give rise to annual additions under paragraph (b)(4) of this section. The focus of text in yellow includes recognizing a payment made to the plan to because of losses due to a fiduciary's failure to act and that failure creates a reasonable risk of liability. Put another way, if you think you're going to get sued, fix it and its not an annual addition. It is interesting that the text in green is added to cover a situation where the participant lost money due to market fluctuations and the fiduciary (out of the kindness of their heart I suppose) decides to put in a little something to make up for the loss. The participant making an investment decision that did not work our does not have a reasonable risk of liability, so any such restoration of the loss to the participant is an annual addition. We never know where we may find a little bit of guidance.

This case will be interesting. Before Cycle 3 restatements, pre-approved plan included provisions where the plan specified the sequence in which forfeitures would be applied, with one sequence applicable to forfeitures of non-elective employer contributions and another sequence applicable to forfeitures of matching contributions. For Cycle 3 pre-approved plans, the IRS approved language which pretty much said do what you want with the forfeitures as long as you use them before the end of the plan year following the plan year in which the forfeiture occurred (with some choices for doing so earlier). Plans commonly chose to use NEC forfeitures first to reinstate any forfeitures for rehires under the plan provisions, then to pay plan expenses, and then to allocate to participants using the plan's allocation formula (with allocating over compensation as the next best choice). Match forfeitures were required to offset the employer's match obligation which almost always depleted the match forfeitures. If in this case the plan had such provisions, then there should have been no discretion how to use forfeitures, or there was a failure to follow plan provisions. (Notably, a plan that allows for discretionary contributions provides an end-around to using forfeitures to offset the contribution. The employer declares the amount of the discretionary contribution with an eye on the total amount of contributions and forfeitures that are allocated to participants.) A plan document with the do-what-you-want provision essentially grants that discretion to a fiduciary as identified in the plan. This case sets up a conflict between exercising discretion granted in the plan document against always choosing what is the optimal use of forfeitures for the benefit participants. Charging plan-related administrative expenses to the plan has always been allowed and, where applied, has always had participants complaining about it. The counter argument boils down to employers are not required to sponsor a plan or pay the plan's administrative expenses, so why should they if they don't want to? With many states mandating some form of access to retirement plans and the federal government moving towards "encouraging" access, it may be possible that our future may include a mandate that the plan sponsor must bear at least some of the costs of plan administration (e.g., plan audit, retirement or RMD distributions, ...) One thing this case will do is having plaintiff's attorneys searching for plans (likely by reading audit reports downloaded from 5500 filings) that use forfeitures to offset plan expenses. We live in an interesting time with respect to retirement plans.

IRS Publication 7335 (Rev. 6-2021) notes IV. Vesting Line a. Section 401(k)(2)(C) of the Code requires that elective contributions and other contributions that may be treated as elective contributions, as described in V. and VI. below, must be nonforfeitable when made to the plan. In order for a contribution to be nonforfeitable each participant, regardless of age or service, must immediately be vested in his or her elective contributions. 401(k)(2)(C) 1.401(k)-1(c) and 1.401(k)-1(c) says (c) Nonforfeitability requirements (1) General rule. A cash or deferred arrangement satisfies this paragraph (c) only if the amount attributable to an employee's elective contributions are immediately nonforfeitable, within the meaning of paragraph (c)(2) of this section, are disregarded for purposes of applying section 411(a)(2) to other contributions or benefits, and the contributions remain nonforfeitable even if the employee makes no additional elective contributions under a cash or deferred arrangement. (2) Definition of immediately nonforfeitable. An amount is immediately nonforfeitable if it is immediately nonforfeitable within the meaning of section 411, and would be nonforfeitable under the plan regardless of the age and service of the employee or whether the employee is employed on a specific date. An amount that is subject to forfeitures or suspensions permitted by section 411(a)(3) does not satisfy the requirements of this paragraph (c). This section factored into the change in the IRS position that allowed forfeitures to be used to fund QNECs and QMACs. The IRS previously said forfeitures could not be used to fund QNECs and QMACs since these amounts had to be 100% vested and would not give rise to forfeitures. Upon revisiting their logic, the IRS said forfeitures could be used to fund QNECs and QMACs because these contributions were employer contributions when made to the plan and QNECs and QMACs were not subject to a participant election as elective deferrals when made. This is a subtlety but the interpretation allowing the use of forfeitures for QNECs and QMACs was welcomed in the community. This new logic, though, is not applicable to using forfeitures to fund elective deferrals made at the election of a participant, i.e., reduce the amount of elective deferrals owed to the plan. Have employers done this? Very likely because no one told them they couldn't. Is it a failure to deposit deferrals timely? Yes. Could the forfeitures used in this manner be considered a pre-funding of elective deferrals? Could be. My take on all of this is if the employer asks if they can do this, just say no. If an employer is doing this, they should stop (and try to clean up the mess).

Was the filing put on extension? If yes, then there is a reasonable chance they will get an IRS notice within the next year following up on it. Has the client already filed their tax return? If yes, I suspect they took no deduction for a SHM. If they did, then they have a tax return issue on top of everything else. If you have access to their tax preparer or financial, you may want to explain the issue and see if they will help convince the client to fund the plan. Sometimes, a client will listen to their tax preparer or financial adviser it those relationships are long-standing. This is going above and beyond trying to keep a client out of trouble, but sometimes if a client finally listens, they come to understand the value you bring to keeping them out of trouble. If the client adamantly refuses, you can try sending them letter that explains (not in great detail) the consequences of not funding the SHM, and mentioning to name a few: that the plan can be disqualified and everybody gets taxed along with paying penalties and interest; that the plan fiduciaries are personally accountable and liable for operating the plan according to its terms; that not filing or filing with false information under penalties of perjury carries separate penalties from the IRS and DOL that can quickly add up to amounts exceeding $100,000 each; and, that the cost of meeting their obligations now is far less than trying to clean up things later. You should consider taking a look at your service agreement for clauses dealing with termination of services and for clauses dealing with the client not fulfilling their obligations under the agreement and under the plan document. It is clients like this that make me think how much more fun this business would be without clients like this. Good luck!

IRS Notice 97-45 says: VI. CONSISTENCY REQUIREMENT FOR ELECTIONS (1) Consistency requirement — in general. Except as provided in section VI(3) and (4) [related to multi-employer plans], in order to be effective, a top-paid group election made by an employer must apply consistently to the determination years of all plans of the employer that begin with or within the same calendar year. Similarly, except as provided in section VI(3) and (4), in order to be effective, a calendar year data election made by an employer must apply consistently to the determination years of all plans of the employer, other than a plan with a calendar year determination year, that begin within the same calendar year. This also is reflected in IRS's Chapter 6 401k Examination Techniques Using Automated Workpapers The top-paid group election made by an employer must apply consistently to the determination years of all plans of the employer that begin with or within the same calendar year. The election must be reflected in the plan’s documentation (Notice 97-45). Note that this requirement applies to the ability to make the top-paid group election. If either plan does not use the top-paid group election, then neither plan gets to use the top-paid group election.

After you file the 5500-SF, you have to go to the DOL site and to the DFVCP Penalty Calculator (Google will find it for you). You will input information about the 5500s that were filed with the DFVCP box checked and the calculator will tell you how much you owe (which for 1 filing is the $750). From that page, you can click to the payment box where you can enter payment information. They take credit/debit cards and possibly electronic checks. FYI, they don't care who pays as long as they get paid.

You pretty much have all the steps down. The amounts transferred to the spin-off plan are not rollovers, so the spinoff plan should include all of the money types that are transferring over from the MEP. You can look at freezing future types of contributions to try to keep things clean going forward. Stepping back, it seems the participating employer just wants to do their own thing. They could consider withdrawing as a participating employer, setting up a new plan for their company for future benefits, and leave their accounts in the current plan until they have a distributable event that would allow a rollover. These are simple thoughts and warrant a deep dive into what the existing plan allows, what a new plan would look like, and how much annoyance both employers are willing to tolerate.

The debate over how to apply plan year limits when a payroll period spans the end of the plan year keeps coming up when situations like this one comes up. At the end of the day, a plan can pick a method and apply it consistently from year to year. Some thoughts: The application of limits to plan year should be consistent with the reporting of the deferrals and compensation for a plan year. In this case, it the deferrals and related compensation are reported on the 2023 W-2, then the they should be included in the application of the 2023 deferral limit for the 2023 plan year. This policy should be followed for each plan year. Just to be overly technical, if the situation was the company payroll took deferrals in excess of the deferrals limit, then this is a 401(a)(30) violation that should have been corrected by the April 15th following the end of the plan year. If a 401(a)(30) violation is not timely corrected, then the plan would need to file a VCP. The company was aware of its responsibilities and appropriately monitored the limits. If the TPA's service agreement said it would monitor the limits, the service would have value only if the issue was raised in time to make a correction by April 15. This thought also is applicable where the participant (not the company) was responsible for a violation of the 402(g) limit. The TPA has no regulatory authority over the plan. The TPA can point out what it thinks is an issue and can work with the plan to research the issue, but the TPA does not get to force its opinion on the plan. Any service provider that thinks otherwise can be replaced.

It would be helpful to get more details about the plan and which new Secure 2.0 rules that may be applicable. If this is a brand new plan, the 401(k) feature must be in place for at least 3 months during the plan year. Since you are talking about a calendar year plan, the 401(k) feature needs to be implemented before October 1st (which is this Sunday) with deferrals started on the first payroll in October. If you mean "effective date" when referring to "start date", it is common to use 1/1 so compensation for the entire calendar year can be used for calculating employer contributions and for compliance testing. The compensation limit is pro-rated for a short plan year, and the 415 limit is pro-rated for a short plan year. These are just a couple of examples and there are additional potential issues to consider depending on the details of the plan design.

I am not aware of an explicit rule that says so. A few thoughts: Does the plan or loan policy explicitly address this situation? If yes, follow the plan/loan policy. Generally, it is not good loan policy to allow a new loan if an existing loan is in default because: A defaulted loan is an outstanding loan. It continues to accrue interest. If the plan or plan's loan policy only permits one loan at a time, the defaulted loan is that one loan. The Plan Administrator should know about the defaulted loan and likely should not authorize a new loan because the participant is not credit worthy. If the plan or loan policy requires that loans must be repaid by payroll deduction, then what would argument would support taking loan repayments for a new loan and not taking loan repayments for the defaulted loan? If the participant is an HCE, there is a possibility that the defaulted loan is a prohibited transaction. If the additional loan is permissible, then the defaulted loan is taken into account when determining the amount available. If the loan is offset after a distributable event, then that loan is no longer considered an outstanding loan. Depending upon the circumstances, this may not get the PA off the hook for authorizing the loan.

There are two sides to the discussion you can see in the two attached commentaries - one authored by Ilene Ferenczy and the other by Derrin Watson. Also note the following guidance appears in IRS training material: "Chapter 9 Verifying 404 Deductions for Defined Contribution Plans Who is Benefiting under the Plan? Since the IRC 404 regulations do not define who is “benefiting”, the IRC 410 regulations governing coverage and how to determine which participant is considered benefiting should be used to make this determination. In general, in order to be considered benefiting an employee must share in the employer contribution. This would include Participants that received only a top heavy minimum allocation under 416 and those that only received a forfeiture allocation (if it was allocated in the same manner as contributions). With a 401(k) plan, participants only have to be eligible to defer to be considered benefiting. Therefore participants who are eligible to make salary deferrals during the tax year (whether or not deferrals are actually made) are considered to be benefiting and their compensation is included in determining the limits under IRC 404(a)(3). See T.R. 1.410(b)-3(a)(2)." As the commentaries note, the PLR does not establish a precedent upon which others can rely. The technical analysis and training materials also carry very little if any weight in a discussion with the IRS. Pick your story and stick to it. ASPPA ASAP PLR201229012.pdf FIS Technical Update PLR 201229012.pdf

I take it that "our plan eligibility computation period is anniversary/plan year" means the second ECP shifts to the plan year that begins during the employee's first 12 months of employment. We will look for 3 (for 2014) or 2 (for 2015 and later) consecutive years to determine whether an employee is LTPT. The shift will happen before the employee reaches an entry date, so the entry date will always be after the end of a plan year, so I agree it will always be January 1. It is worth observing that the shift can result in an LTPT entering your plan after 2 yrs + 1 month (for 2014) or 1 year + 1 month (for 2015 and later). Consider a new hire on December 1, 2014 who works between 500-999 hours on or before November 30, 2015. They get 1 year under the anniversary ECP, and then 1 year under the ECP shifted to the calendar year 2015. The entry date would be January 1, 2016.

There is no grace period. There are a few thoughts: Try to work with Empower to preserve the next day timing. We have been successful doing this if the conversion manager is knowledgeable and cooperative. It works particularly well if the payroll file is transmitted the day before the payroll date so Empower can run their edits and validations overnight and you can fund the next day. If the conversion manager does not know how to make this happen, complain to the Empower sales executive that made all of those wonderful promises about reaching Nirvana. The auditor does not have the authority to say when a deposit is or is not late. The authority belongs to the IRS/DOL. The auditor can disagree, but the Plan Administrator is signing the Form 5500 and answering the compliance question about late deposits. The client should be able to show they are funding as quickly as they can within the constraints imposed on them by the recordkeeper. If there is a change in recordkeepers and as a result there is a change in the timing of deposits from next day to 2-3 days due to the new recordkeeper's procedures, there likely will be no push-back from the IRS/DOL. If there is, appeal it to the agents manager with a full explanation of the circumstances. If the manager in intransigent, you could even take it to Tim Hauser, the Deputy Assistant Secretary for Program Operations of the Employee Benefits Security Administration (EBSA). He says he wants to hear when the DOL is being unreasonable and his contact information is publicly available. If there is a late deferral as part of the transition process, the world will not end and any financial impact will be minimal. Good luck!

If you have SSNs for the missing participants, there are low-cost search services that have a very high success rate in locating the them (~99%), and you will get a response in 2-3 days. The fee is reasonable and you can charge the participant's account for the cost of the search. (BL Message me if you want the name of the company we use.) If the participants who will not return the paperwork are still employed, then the company should be able to convince them to turn in the paperwork. If suggesting cooperation to a participant doesn't get a response, then a harder line is the company tells the participant that failing to turn in the paperwork is going cost everyone including the company and them money, and jeopardize the timely closing of the plan which will be significantly frowned upon. If any active or terminated participant still will not return the paperwork, then you can tell them if you don't get the paperwork within xx number of days, you are going to turn over their account to the government (PBGC) and they can deal with the government when then finally want to get paid. And by the way, the government will not invest the money. If that doesn't scare them enough, imagine their surprise when you do in fact use the PBGC program and tell them where they can find their account. None of this is complicated, costly, or overly time-consuming.

Maybe now you can educate me... what SH rules you are referring to?

The IRS does have records of who has filed 5500-EZs but I doubt they would disclose this information since the forms purposely are not made available to the public. If you are filing under the penalty relief program and you get push back from the IRS about numbers not matching previous filings, you at least will have an agent to work with who likely would amenable to either disregarding your filing for any years that were filed timely, or would accept your version as an amended return. I suspect as you do that the owner would have used cash accounting since the trust account statements would made the filing very simple to complete, and I expect you have access to the information on those statements. You may want to consider filing on a cash basis to keep things simple for your filing and for the agent to review.