Paul I

They may hold a lot of knowledge but apparently they don't know they became a fiduciary by virtue of their actions. This is worth pointing out to the plan's named fiduciaries (plan administrator, trustee...) that there is a rogue fiduciary in their midst.

After we have completed the valuation, we use a table of factors for SLA and 100%J&S as of the valuation date that the actuary we work with provides to us. The factors are prepared using the specified parameters such as the interest rate and mortality table. We then download the participants' ending balances and birth dates, match the factors for each age, and apply them to the ending balance. The results are provided to our report writer where they are merged into the Lifetime Income Illustration model language. The whole process takes about 15-20 minutes, is a PITA, and many of the results are of questionable value - but it gets it done. This was our best effort to meet the requirements using the software we already have available (basically Excel and a report writer). Hopefully this can help provide some direction for a path forward. Frankly, all of the magic is getting the factors. It would be great if the EBSA would publish a table every month and just say use these factors to comply.

Dougsbpc, this is an idea that may seem like its coming from out of left field, but it may be attractive to the shareholder in this particular case. Has the owner considered offering a qualified small employer HRA (QSEHRA)? Help with medical expenses may be very attractive to the employees, and any unused amount can accumulate inside the plan and be invested much like in an IRA or DC plan. HRAs in general when used to cover medical expenses can be more tax advantageous for everyone, and the ability to include spouses and legal dependents may also be an added attraction. Just a thought.

I agree that right now there is unrestrained availability to rely on self-certification unless or until the IRS issues regulations where the PA has actual knowledge that the reason for the hardship is not valid. This leaves us with an open question: What would the IRS do should they audit an individual's tax return and determine that the hardship distribution did not meet the terms of the plan? The participant already is paying taxes on the amount withdrawn. Presumably, the participant already would have spent the distribution on some major expense. Could the IRS force the participant to return the invalid hardship to the plan? Currently, there does not seem to be any exposure to the plan if the plan receives the self-certification. As a permissible distribution having received the self-certification, it would be hard to argue there hardship distribution was a prohibited transaction. Certainly, plan disqualification would be ridiculously punitive to everyone else in the plan for the actions of one participant. This must be a nightmare for those who are concerned about leakage from a plan.

The answer likely will be to make a good-faith effort to comply. This is not very helpful and everyone whose good-faith effort doesn't mesh with future final guidance will have to change what they implemented. We do have a precedent with our experience with the pandemic. The world shut down in March 2020 and Congress went on a to pass a lot of legislation permitting bending the rules to make money available from retirement plans. There was very little guidance, and the shutdown lasted longer than anticipated. The significant cuts in funding to the agencies that preceded the pandemic had already hampered their ability to recover once we learned how to cope with pandemic. Dare we imagine a scenario where industry associations, major recordkeeping firms, benefits consulting firms and ERISA law firm come together collectively to provide guidance?

We have an ESOP that charges a fee to terminated participants once the terminated participant has the ability to take a distribution. Actives and terminated participants who are unable to take a distribution under the terms of the plan are not charged. The amount of the fee is based on the cost of recordkeeping and administrative fees divided by the number of participants.

Part of the challenge is the remaining 3/4 of the purchase likely is going towards an income-producing investment. The individual will not be able to treat the entire building as a residence when preparing the individual's income taxes. The personal income tax reporting rules may be illustrative in how to determine what is a personal residence and what is an investment property.

I suggest working with a selection service providers to balance cost and effort to finding missing participants. For example, EmployeeLocator.com has a very high success rate at a very low cost if you have and are willing to provide the SSN. (Check you PII policies.) At the other end of the spectrum are private investigators which often charge an hourly rate. They tend to be more successful working within the likely geographic area of the last know whereabouts of the participant, and are much more expensive. I have found using a combination of search sources - BeenVerified, TruthFinder, Google... - helps build a dossier which then can lead to a more focused search. For example, one participant died in a car accident. Having found an individual with a very similar name and with the same birth date lead to a news article about the accident which then lead to finding next of kin. Typically, if you can find the county in which a death occurred, the coroner will readily work with a plan but is less likely to work with an individual seeking information. In another example, it turned out that a former co-worker of the participant was named as a beneficiary on an insurance policy. The company had enough information about the former co-worker and when contacted, the co-worker provided enough information to be able to find the participant. The stories that emerge from some of the searches are amazing!

Notice 2010-84 Q&A 7 was modified by Notice 2013-74 Q&A 9.

We do not yet have guidance related to ADP corrections and Roth catch-up contributions. The answer to your question will hinge on whether we will look at the plan year for which the deferrals were made into the plan, or the calendar year in which the ADP refund is classified as a catch-up. The former would seem to the be practical way to go, and any ADP refund from a 2023 plan year test that could be left in the plan as a catch-up for a person who is High Paid in 2024 would not have to be Roth.

Jsample, it sounds like they will accept Roth catch-up contributions if the plan allow catch-contributions but does not have Roth. Generally, a payroll service provider will be sending in the contributions so I suspect they are saying they will accept them if they receive them. This seems to be a slick way of avoiding the issues and leaving it up to the plan sponsor and payroll to figure out what to do. Thanks for the information!

See IRS Notice 2013-74: "Q-9. Is an in-plan Roth rollover treated as a distribution for purposes of determining eligibility for the special tax rules on net unrealized appreciation (“NUA”) in employer securities paid in the form of a lump sum distribution under § 402(e)(4)(B)? A-9. Yes. An in-plan Roth rollover is treated as a distribution for purposes of determining eligibility for the special tax rules on NUA, whether the rollover is made by an in-plan Roth direct rollover or by an in-plan Roth 60-day rollover. See also Q&A-7 of Notice 2010-84." This goes to determining the amount that is taxable related to the conversion and the basis in the Roth account. If circumstances are such that a distribution in employer securities is made from the Roth account before the account has aged 5 years, then the basis will factor into taxation of the NUA on the securities at the time of distribution. This will be very complicated if there are other assets distributed concurrently with the stock, or if there have been multiple in-plan Roth rollovers involving employer securities. These transactions have their own pro-ration rules between the ordinary income on the other assets and the NUA related to the employer securities. Definitely seek knowledgeable, professional expertise for those calculations.

The OP notes that the "safe harbor match amounts were not calculated based upon a specific time period or earmarked for any specific participant". This implies there was no linkage between the deferrals and the amount funded for the match. We don't know how the amount of the match deposits was determined. The easiest thing to check is whether the accumulated funding for the match without regard to earnings exceeded the calculated match at year. If no, then probably there is no problem. If yes, then there is a problem. If the match funding was front-loaded during the year, then there is greater potential for a problem. Whether the match funding was made to a pooled account or to self-directed accounts is not relevant.

The conundrum for rule-making is companies have used classifications to keep part-timers out of their plans. The intent of the LTPT provisions is to force companies to offer the opportunity to defer to part-timers. Unfortunately, the definition of a LTPT employee is heavily service-based and ignores how non-service-based exclusions may apply. Let's hope the rules will not add too much of a work load to determine compliance. Something simple may be to allow non-service-based exclusions for LTPTs such as geographic location where all other employees are subject to the same exclusion. The IRS likes to use testing formulas and hopefully they resist the urge to create mathematical LTPT coverage tests. I can imagine a nightmare like identifying excludable and nonexcludable LTPTs in a plan for a group of LTPTs that represents more than the safe harbor percentage using the nondiscriminatory classification test, and then applying a percentage coverage threshold. 😱

See 1.401(m)-1(a)(2)(iii)(A). "(A) General rule. Employer contributions are not matching contributions made on account of elective deferrals if they are contributed before the cash or deferred election is made or before the employees' performance of services with respect to which the elective deferrals are made (or when the cash that is subject to the cash or deferred elections would be currently available, if earlier). In addition, an employer contribution is not a matching contribution made on account of an employee contribution if it is contributed before the employee contribution." A deposit for a matching contribution made before elective deferrals on which the match is based are deposited is not a matching contribution. You may want to review the timing of the "match" deposits versus the timing of the associated salary deferrals to see if any amounts intended to be a match were pre-funded. Similarly, funding match amounts before it is known that the deferrals will be eligible for a match is not allowed. This should not be an issue for a SHM but could be for plans that have allocation requirements like a last day rule or 1000 hours. As a corollary, if the match is always funded after the deferrals are funded, there is no need to keep the match contributions in a separate account earning income. The match should go into the participants' accounts and earn income in those accounts like any other allocated contribution. On a separate note, if this plan has been using any earnings to satisfy part of their matching obligation, they have underfunded the match and this should be corrected. In a similar vein, any such earnings would not be annual additions, not includable in ACP testing, or, as others have noted, deductible.

The first thing that came to mind while reading this thread is "let {whoever] is without sin cast the first stone." We are in a service business. Our business has grown exponentially over the years. It has attracted a very large and diverse array of service providers that today are delivering innovative services that where unimaginable not too long ago. Our business is unique in its focus on retirement plans. Our business is not unique as service providers within the financial services industry. The financial services industry in general wrestles with rapidly evolving technology, less-than-sophisticated users, cost pressures, consolidation of service providers, less-than-knowledgeable support, protecting clients' assets and PII, and more. This is not to excuse the frustration we all have experienced at one time or another while trying to help a client solve a problem. We hope our clients value our services and our expertise plus our ability ultimately to help them. Industry consolidation will continue, and as fewer and fewer service providers get bigger and bigger, and as it does it will be more likely we will have war stories of our experience with these providers. Imagine our world (and as some in our government have contemplated) if there is only one retirement plan service provider. Let's keep in positive and do our best for our clients.

The concept of Roth-only catch-up contributions for High Paid participants is a pure revenue gimmick that is inconsistent with the original concepts of a catch-contribution, a Roth deferral and treatment of participants with higher incomes. The original of a catch-up contribution is to allow participants age 50 or older to make up for lost opportunities to defer earlier in their careers. Think child care, college expenses, and big mortgages. Forcing the catch-up contribution to be Roth for a participant forces the participant to spend more out of their current paycheck. A $500 pre-tax salary deferral reduces current net pay by $500 and increases current net pay by the income tax savings. A $500 Roth deferral reduces current net pay by $500 but there is no current tax savings. It costs a participant more out-of-pocket using Roth while trying to make up for earlier lost opportunities. The longer a Roth contribution is in the plan, the greater the value of the tax break at retirement, so waiting to age 50 to start Roth is a less valuable tax strategy than (if the participant can afford to) making Roth deferrals at younger ages. Setting the High Paid threshold at $145,000 versus using the HCE threshold was acknowledged to be a pure revenue-driven decision. This provision did not even wink at nondiscrimination as a consideration. The end result is a whole new layer of compliance that needs to be monitored every year , and this new layer of compliance interacts with existing nondiscrimination compliance. Think who is or is not High Paid versus HCE, or treating ADP refunds as Roth catch-up for HCE but not High Paid NHCEs. Further, the High Paid threshold will impact a subset of the NHCEs. A common scenario is where the children finally are financially off the parents budget and both parents now are working and trying to save more for retirement. This provision works against them because combined household income makes them High Paid. Since this is a revenue gimmick, it almost certainly will not go away and its future is destined to see the High Paid threshold be adjusted lower and lower (at least relative to the HCE threshold). SECURE 2.0 made major changes, and as is often said of major changes in tax laws, it is a "[pick your profession - accountant, actuary, attorney, consultant, TPA]'s Full Employment Act"

The 5500 instructions does not link the two check boxes. "Line B –Box for Amended Return/Report. Check this box if you have already filed for the 2022 plan year and are now filing an amended return/report to correct errors and/or omissions on the previously filed return/report. See instructions on page 6. Check the line B box for an “amended return/report” if you filed a previous 2022 annual return/report that was given a “Filing_Received,” “Filing_Error,” or “Filing_Stopped” status by EFAST2. Do not check the line B box for an “amended return/report” if your previous submission attempts were not successfully received by EFAST2 because of problems with the transmission of your return/report. " "Line D –Box for Extension and DFVC Program. Check the appropriate box here if: ... • You are filing under DOL’s Delinquent Filer Voluntary Compliance (DFVC) Program." It seems almost certain that some of the information for the filing for the plan year ended 6/30/2021 was changed and hence the filing is an amended filing. If that filing was incomplete, then it technically was not valid anyway and would not necessarily have stopped penalties from accruing. It makes sense to include it in the DFVCP and get the bargain rates for multiple filings.

Every company in a group of companies will be in a QSLOB if any company is in a QSLOB, and a company must be in only one QSLOB. In this case, you will have a QSLOB for Company A and a QSLOB for Company B. Note that QSLOBs (Qualified Separate Line of Business) are all about the companies and not about the plans. You cannot have Company A's 401(k) plan tested on a QSLOB basis and have the DB excluded from than QSLOB. Once all companies meet the conditions to be a QSLOB, you can then pretty much separately look at each QSLOB and its plans without regard to the other QSLOBs and their plans. This is an oversimplification but may help suggest a path forward for you.

Roycal, good point about the money purchase plans. The window for in-service distributions is very narrow for them. https://www.irs.gov/retirement-plans/plan-participant-employee/when-can-a-retirement-plan-distribute-benefits

Keep in mind that Starter 401(k) primarily are designed primarily for small companies that do not have plans. They will not start out with a pot of accumulated assets and likely will not grow quickly. There are a lot of financial advisers that will shun the plans until the AUM grows. On the other hand, there is a fair amount of interest among some financial advisers that would like to team up with a fintech company or PEP with view that a lot of plans with small AUM collectively add up, and the FA would have an inside track for spinning off a plan that does outgrow the Starter 401(k) into full fledged 401(k). Time will tell if this is visionary.

I believe that the preferred model will be a PEP which would cover most if not all plan administration tasks.

The Starter 401(k) very likely is going to be the darling of fintech. The narrow focus of the design will allow them to create a simplified administrative structure from document signing through recordkeeping, investment, and ultimately distributions with very low overhead. Existing recordkeeping systems are designed to be all things to all plans and have an enormous amount of overhead to anticipate the myriad of ways plans can go off the rails. Take things like employer contributions, allocations, vesting and forfeitures off the table and the technology infrastructure shrinks dramatically. Expect the cost of set up and recurring services to be exceptionally low, and any tax benefits to the employer for starting and operating a plan are an added selling point. The biggest difference with using IRAs for an employer is the Starter 401(k) will have a single payroll feed to a single provider, and will plan level reporting available. Starter 401(k)'s will be available nationwide versus state plans. Starter 401(k)'s will have a much broader market available to them over state plans. Keep in mind that almost half of all businesses (and almost of of them are small businesses) do not have a retirement plan. There's more, and there were advocates who are prepared to implement Starter 401(k)'s that lobbied Congress to make them available.

There are a lot of ways for a defined contribution plan to allow in-service withdrawals of vested amounts before retirement, death, disability or other termination of employment. For example, a lot of 401(k) plans allow for in-service withdrawals (including elective deferrals) upon reaching age 59 1/2. Most plans allow in-service withdrawal of rollovers at any time. Vested non-elective employer contributions may be made available for withdrawal of amount that have been in the plan at least 2 years. Plans may make all vested NECs available once a participant has at least 5 years of participation. Most pre-approved plan documents provide a checklist of available in-service withdrawal options. Check your document - you may be pleasantly surprised by the choices.

See Section 2A in Notice 2020-50 Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act. The gist is the plan could expand the amounts that could be distributed if the plan permitted the distributions, but you cannot pay out amounts that are not permitted to be paid (which I read is like non-vested amounts). The vendor may have gotten creative and allowed payments of a vested portion of an account that was only partially vested (e.g. a partially vested NEC account). That would then require them to use the funky formula to add into the current calculation of a vested amount an add-back of the previously distributed amount. The auditors should look to the vendor to 'splain what they did.