Paul I

Gilmore, you are correct about the former LTPT employee continuing to accrue vesting service using the LTPT vesting rules, i.e., needing at least 500 hours of service. I should have been more explicit in distinguishing post-LTPT eligibility versus vesting service. This is destined to become a TPA/recordkeeper's nightmare. Section 401(k)(15)(B)(iii) reads: (iii) Vesting For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting "at least 500 hours of service" for "more than 500 hours of service" in subparagraph (A) thereof. and Section 401(k)(15)(B)(iv) reads: (iv) Employees who become full-time employees This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of paragraph (2)(D) without regard to paragraph (2)(D)(ii).

FYI, in the TE/GE regional conference on August 30th the IRS said LTPT guidance is expected to be released "towards the end of the year" but that was not guaranteed, so we in the industry and our clients are on our own for now. Gilmore, my understanding is an LTPT employee keeps any vesting years of service earned by while the employee is classified as an LTPT and these years are added to any year of vesting service earned by that employee should the employee subsequently qualify for participation under the plan's rules for eligibility and entry. Once an employee meets the plan's rules for eligibility and entry, there is no going back to LTPT status. Regarding your auto-enrollment question, my understanding we look to the plan's rules for eligibility and entry. Keep in mind, no one is auto-enrolled until they meet the eligibility and entry rules. If an LTPT employee meets these rules, they are auto-enrolled just like any other employee and they are no longer LTPT employees. If they do not meet these rules, they are not auto-enrolled. Note that several practitioners have suggested adopting eligibility and entry rules that are sufficiently liberal so that all employees will become eligible under the plan's rules before they would be considered LTPT employees. Essentially, the plan by design would have no LTPT employees. It will be interesting to see what guidance we get for different atypical situations like: Application of LTPT rules of parity to LTPT vesting service accruals (where a break in service is a year with less than 500 hours) A terminated employee's eligibility service is wiped out by the rules of parity, and that employee is subsequently rehired. A terminated employee's vesting service is wiped out by the rules of parity after a total lump sum distribution, and that employee is subsequently rehired. Upon rehire an employee with a break in service must satisfy the eligibility requirements before re-entering the plan retroactively. An employee is in an excluded classification (other than bargaining or NRA): Does LTPT classification supersede other exclusions by classification? What if the employee met the plan eligibility requirements but was excluded by the classification, and then the employee became part-time and subsequently changed to a covered classification? Will a non-service-related classification be allowed? It also will be interesting to see what guidance is provided for any required plan language addressing LTPT employees. It would seem to make sense that there would be some definition of LTPT status and eligibility to make deferrals. Hopefully, there can be a simple way in a single section to list out all of the available exclusions/inclusions of LTPT employees from coverage, nondiscrimination testing, top heavy, match eligibility, non-elective employer contribution eligibility. Oh, the anticipation!

ERISA-Bubs, you do not say how long the plan has allocated revenue sharing using a formula that is contrary to the 404(c) disclosure, nor do you indicate which method was approved by the plan administrator for use by the plan. If there is documentation of an approved method and the plan actually has been using that method, then you are dealing with a miscommunication in the disclosure. Correcting the disclosure and issuing a new disclosure may be sufficient. If there is documentation of an approved method and the plan actually has not been using that method, then there is an operational issue that could have accumulated over time to be more than only pennies per at least some participants. It should not be too onerous to so look at participants within the funds that paid the most revenue sharing to see if how much of an impact using the incorrect method had on those participants. If it does have an impact, then you can consider making whole the participants who were did not get the full benefit of the revenue sharing on their investments, plus a little more to bring them up to the level of other participants who improperly received revenue sharing amounts that they should not have received. Keep in mind that if you know there is a problem and you do something reasonable to correct it, you are will be better off in the eyes of a DOL or IRS agent than if you know there is a problem and you ignore it. If the issue truly is pennies per participant, a creative fix may be as simple as skewing some of the next revenue sharing allocations to in favor of those participants who had a shortfall.

The answers ultimately distill down to a discussion of what boundaries, if any, exist between co-fiduciaries. In both the PPP and the 3(16) administrator scenarios, the plan sponsor and the service providers are distinct, unrelated entities which suggests that the terms of the service agreement will play a crucial role in resolving the situation. In both scenarios, it is very likely that the employer controls payroll, and payroll will follow the instruction of the employer. Payroll is the entity that will calculate the amount of a deferral that should be funded to the plan. The PPP is the PEP plan sponsor and the PPP trustee or other fiduciary designated by the PPP (thanks SECURE 2.0) is responsible for collecting contributions due to the plan. In this scenario, if the PPP determines that there is an LTPT that should be included and the employer disagrees and refuses to instruct payroll to take the deferral, then the PPP should start the multi-step process to rid the plan of the "bad apple". The 3(16) administrator likely does not possess same level of authority over the plan as the PPP has. The 3(16) administrator could look to the service agreement to see if the administrator was delegated the authority to determine eligibility. If not, the administrator's choices are in that range between resigning or trying to generate enough documentation to try to show they were just following the instructions of the employer. If the administrator was delegated the authority to determine eligibility, then they should have an obligation to pursue getting the employer to respect the delegation of authority to the administrator. If the employer refuses, it sets up a conflict between co-fiduciaries. As always with conflicts between an employer and service provider, it is easier to say what should or could be done versus real-life decisions about business relationships and ethics.

In the TE/GE regional conference yesterday, the IRS said they would make the announcement is their newsletter. There will be no formal IRS Notice and they will not send any correspondence to plans.

Managing the titling of SDBAs can be a major PITA where the plan allows each participant to set up the account and the financial institution plays hardball and insists that the names of individual trustees appear in the title. The greatest pain comes when one of the individual trustees leaves the company or worse, dies, and the financial institution insists that they will only accept an instruction if it is authorized by all of the trustees named on the account. The paperwork and time delays can drag on for months. When we work with a plan that wants to let participants choose their own brokerage (or even multiple brokerages), we explain this issue up front and strongly encourage them to not set up any accounts until they and we have an opportunity to review the account paperwork before that paperwork is signed. We look at things like the titling of the account, authorizations for the accounts to hold assets like limited partnerships, hedge funds, gold, annuities, real estate, and authorizations for the participant to participate in transactions like private placements or option trades. We also look at the financial institutions reporting to the plan administrator and to us as recordkeeper. We recommend keeping things simple and setting boundaries applicable to all participants. We don't always get our way and when we don't, we explain that the additional work for working with assets or accounts outside the boundaries will be billed (with a recommendation that the participant's account pays the fee). The biggest headache is when a trustee in senior management has a kid who just graduated from college and joined a financial firm. That trustee wants throw a little business to the kid get the kid's first sale and doesn't want to hear about how big a pain an uncontrolled SDBA can be. Bottom line, we like to see accounts titled as [Trustees of Name of Plan] FBO Participant so any change is trustee effectively happens upon the formal addition or removal of any individual, and we want to be copied on statements (electronic or paper) with the most frequent reporting (typically monthly).

Check the plan document, and in particular, check its definition of spouse. Some documents say the couple has to be married for one year before the newly-wedded spouse is recognized by the plan. Some documents are explicit in saying the date of the marriage automatically considers the spouse as the default beneficiary overriding any other existing elections.

We ask for a completed application for benefits from the spouse as beneficiary as part of the documentation of the closing out of the deceased participant's account. As has been alluded to in the replies above, the age difference between the deceased participant and the beneficiary/current employee, and the difference in the size of the account balance in the deceased participant's account versus the beneficiary/current employee's account factor into the decision to keep the accounts separate of combine them. We have seen beneficiaries who request the accounts be merged (akin to a distribution rollover the deceased participant's account into the beneficiary's account), and beneficiaries who keep the accounts separate where each account has its own RMD calculation. One of the more interesting circumstances was when the beneficiary/current employee was older than the deceased participant and the employee already was taking their RMD. The employee determined that due to the deceased participant's account balance and the RMD factors, the employee would have a lower total RMD amount each year.

Keep in mind that the LTPT rules were designed by the Legislative Branch and not by the IRS. Part of the design was to provide LTPT employees access to salary deferrals without disrupting existing rules for qualified plans. One of the features of the LTPT rules is the employees who are LTPTers are excluded from all of the testing applicable to existing qualified plans and most importantly from coverage testing. We have not yet heard from the IRS about how classification exclusions (other than bargaining and NRAs with no US income) will operate with respect to LTPT employees. It does not make sense that a classification such as job title or geographic location is overridden by LTPT as long as that classification is not discriminatory. If a plan covers employees in Oklahoma and excludes employees in Florida, why should an LTPT in Florida be allowed to defer? The fear in Congress is the potential situation in this example is where most of the Florida employees are LTPT employees and the classification provides a way of not allowing them to defer. But, Congress wants LTPT employees to be able to defer. If everyone in the classification is excluded from participation, that sets up an issue where the LTPT employees would be considered Excludable in coverage testing even if they defer, but the FT employees who are otherwise eligible for the plan except for the classification would be considered Non-Excludable, Not Benefiting. This could be an incentive to use the LTPT rules. Let's see how imaginative the IRS will be when providing guidance on this topic.

Note SECURE 2.0 section 338 effective for plan years starting in 2016: Annual Paper Statement Requirement Requires the provision of a paper benefit statement at least once annually for a DC plan and at least once every three years for a DB plan, unless the participant is covered by the 2002 e-delivery safe harbor or otherwise affirmatively consents. The DOL is directed to amend the 2002 e-delivery rule to require a one-time paper notice before any disclosure may be sent electronically after the effective date. This gives the DOL almost 2-1/2 years to amend the rules. Maybe they will let generative AI take a turn at coming up with the new rules.

No need to speculate. The IRS says starting in 2024 you no longer have to take RMDs from designated Roth accounts. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs "Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. You must still take RMDs from designated Roth accounts for 2023, including those with a required beginning date of April 1, 2024."

Unless there is explicit language in the plan document, SPD or other formal plan communication saying the request is valid when put in the mail (which I highly doubt there is), then the Plan Administrator could reject the distribution based on the status of the participant when the paperwork arrived. I suggest you discuss the situation with the Plan Administrator (unless you are a 3(16) provider with authority to make this decision) and discuss options. This situation has occurred a handful of times among our clients and most of them decided to reject the distribution request. Very few have approved the payment. In all cases, it was not our decision.

jsample, that's the tip of the iceberg. No one reconciled W2s to deferrals. No one reconciled match to deposits. No one noticed current contribution amounts to a deceased participant. The tax return for the business likely is messed up with invalid deductions. Where was the recordkeeper? the bookkeeper? the tax preparer?

Catch-up contributions are not mandatory. Roth is not mandatory. So, yes, it could be done. The definition of feasible is "possible to do easily or conveniently". If removing these features has the participants showing up on your doorstep with pitchforks and torches, then it certainly is not feasible. A Roth feature within a 401(k) plan is a much better deal than a Roth IRA. The Roth IRA has much lower limits that, based on income, phase out to zero.

We have several clients that like to fund the SHNEC more frequently and some even every pay period. Given the contribution is fully vested and there is no last day rules, it makes it easier to distribute the entire vested balance all at once and avoid making a residual payment afterwards. Note that having an accrued SHNEC for a terminated participant as of the beginning of the next plan year could affect the count of participants with account balances used to determine if the plan needs an audit. The 2023 form instructions say " line 6g(2) should be the number of participants counted on line 6f who have made a contribution, or for whom a contribution has been made, to the plan for this plan year or any prior plan year." It is not clear if the phrase in bold is intended to be applied.

The provision in the act specifies that a High Paid person is an individual whose 3121(a) wages in the prior year were over $145,000. That specific reference does not describe compensation earned by self-employed individuals such as sole proprietors and partners. Since the statute specified 3121(a) wages, it is not clear if the IRS has a path to extend the definition of High Paid to self-employed individuals without literally without an act of Congress.

Are you concerned that the plan did not file 5500's for the year's between 1988 and 1998? Was the plan in fact started in 1998 and this was a typo? Was there a change in service provider around 1/1/1998? (I have seen service providers complete a 5500 using the effective date the provider began working with the plan because they were too lazy to look up the correct date.) In any event, point out the discrepancy to the client and ask if they can provide any clues that my help solve the mystery. Note that the DOL edits check to see if this date is missing, not a valid date, a date before 1800/1/1, or is after the plan year end. If you can establish the correct date, then make the change prospectively.

In order to treat the HCE's an amount as a cash bonus, it would have to be included in the plan's definition of compensation and already eligible for a deferral. The HCE would still get the 7% profit sharing on top of that unless the HCE was excluded from the allocation of that particular contribution source. It will be interesting to get a clearer picture of how this plan is set up.

There are some financial firms that sponsor a prototype SEP IRA that do not prohibit having other plan like the prohibition when adopting a Form 5305-SEP plan. Note that the IRS in 2022 temporarily suspended its program for issuing opinion letters for these prototype SEP IRA, but allow firms that sponsor plans with opinion letters to continue to rely on their letters to create new plans.

Short answer - the client is opening themselves up to an issue as soon as they adopt this design. Just curious - you refer to "the HCE" which leads me to believe there is only 1 HCE. Does this also happen to be the owner of this business? You comment that "if the employee has already deferred", so can we assume that the plan already is a 401(k) plan? You note the "they also allocate the 3% to all participants" which is addition to the "7% profit sharing to all participants". Is the 3% a Safe Harbor Nonelective Employer Contribution? And, is the 7% a discretionary profit sharing contribution allocated pro-rata on compensation to all participants who meet the allocation conditions? You note the plan is cross-tested. Is there a reason the plan is cross-tested? The answers to all of these questions will help describe the plan's situation. Fundamentally, giving employees the right to make a cash-or-deferred election on the 7% contribution makes this a 401(k) election as you seem to acknowledge. Giving only the HCE that right makes it discriminatory.

The IRS issued opinion letters for protoype SEPs, but I have not been able to find a published list. FYI, the IRS has temporarily suspended is prototype IRA opinion letter program. https://www.irs.gov/pub/irs-drop/a-22-06.pdf If you do a search for the "name of a financial institution" + "SEP" + "5305" you will get a fair amount of information about their offerings. For example: "merrill" "sep" "5305" brings up a link to https://olui2.fs.ml.com/publish/content/application/pdf/GWMOL/SEPandSEPPlusAgreement.pdf

Electronic filing allegedly is coming soon. We don't know all of the details. Some speculate that each plan may need to sign in to EFAST2 to file the request. (Batch processing by service providers would be much more efficient.) There also is some speculation about what documentation will be available to the plan to confirm the extension was accepted. Again some speculate that an AckID will be provided and that would be sufficient. There are others who think the IRS will send out letters to each plan notifying that the extension was approved (and no letter means no extension). May logic and reason prevail. (Cue the scene where Lucy assures Charlies Brown that she will not pull the football away when he tries to kick it.)

Lines c(9) through c(12) on Schedule are used to report the value of each type of DFE ( MTIA, CCT, PSA, or 103-12 IE) as of the beginning and ending of the plan year. A plan has to report on Schedule D if the plan had investments in a DFE at any time during the year. The implication is you cannot rely solely on having a zero beginning and ending balance on these lines to determine if the plan needs to file Schedule D. DFEs are supposed to provide reporting relief to plans. They do, unless they don't. The DOL publishes a user guide and notes: "Private pension plans participating in DFEs do not have to fully report investment amounts on the Schedule H if the DFE in which the plan is investing files a Form 5500 Annual Return/Report along with all required schedules. In that case, the participating plans need only complete Part I c(9) through c(12) describing the value of their interests in the DFEs. All MTIAs are required to file Form 5500, while CCTs, PSAs, and 103-12 IEs may choose to file in order to provide the investing pension plans the reporting relief described above. All DFEs that file the Form 5500 are required to file a Schedule H. Pension plans investing in filing DFEs are afforded reporting relief through decreased reporting on Schedules A, C, and H; however, they must file a Schedule D, outlining the specific investments in each filing DFE. Plans investing in DFEs will enter the value of their investment in all DFEs of a certain type (MTIAs, CCTs, PSAs, or 103-12 IEs) on the corresponding Schedule H line item." This is great except only MTIAs are required to file 5500s. The other types of DFEs can choose to file or not file a 5500. Most do, but some don't. The plan may be investing in a DFE that does not file a Schedule H. In this case, the plan has to apportion the funds assets into the other categories listed on the Schedule H. Not all a fun job. The investment fund is required to notify each plan each that invests in the fund whether the investment fund will file a 5500 as a DFE. If the plan sponsor did not save the notification, then the plan sponsor or financial advisor (or you if you are so inclined) can contact the fund and ask. The filings are public so there is no reason for a fund not to respond.

I am not aware of any state that would treat a federal-tax-free rollover as state-taxable. A nuance to consider is a rollover distribution from non-Roth sources to a Roth source or Roth IRA could have a taxable amount reported in Box 2a on a 1099R with a rollover code. I expect that if there is an amount reported as taxable, many if not all states would also consider it taxable. I think - but haven't confirmed - that if this occurs in Pennsylvania and the individual is not over 59 1/2, PA will tax it.

The policy can be distributed to the participant. The value of policy can be determined by using one of the methods available as defined in Rev. Proc. 2005-25. (They are a little complicated to go into detail here, but the insurance company that issued the policy likely can do the calculation.) For purposes of determining the taxable value of the policy distribution, 1.72-16(b)(4) does not permit owner-employees to exclude an basis attributable to PS 58 costs previously taxes while the policy was held within the plan.