Paul I

From the standpoint of technology, I agree. There are brokerage houses that take the position that the participant is the owner of the account even if the account is titled "Trustees of Plan FBO Participant". The brokerage house then takes the position participant's privacy supersedes the trustees right and need to monitor the information in the account and will not grant the trustees access.

The fee has to be reasonable, and if the QDRO is complex or if the parties engage in extended negotiations that yield multiple draft DROs for review, then hourly fees are appropriate. Having a fixed fee makes sense for a "standard" QDRO where there is one DRO presented that is drafted properly and divides the assets between the participant and one alternate payee using reasonable time frames. If the practitioner wishes to avoid using hourly fees, consider having a fixed fee for the various parts of the process - a fee for each DRO reviewed, a fee for each additional alternate payee, and a fee for each year of data history needed. If there was a way to do it, I would add an incompetence fee. I am amazed at the number of DROs have the wrong plan name because the drafter used a DRO for a different client as a model and did not proof read the DRO before submitting it for review.

A brokerage house who understands the retirement plan industry will apply restrictions on type of securities that can be purchased. The capability is already baked into the validation of a trade instruction. Some go so far as to accept a modest list of specific investment such as mutual funds that are held in the plan's list of core mutual funds. This keeps a participant from investing in higher cost share classes or from paying trading frequency penalties when the participant can use the core fund menu. If an employer wishes to have visibility into participants' SDBAs, then the employer should do the due diligence on the capabilities of the broker or brokers that participants are permitted to use within the plan. We worked with one client with around 20 different brokers handling accounts for about 60 participants. We set up a list of requirements and if the broker did not agree to restrict the account to permissible assets and to provide electronic access to the trustees, participants were not allowed to use that broker. When the requirements were implemented, there were a handful of participants and their brokers who objected. The company made no exceptions and participants who wanted to continue having an SDBA acquiesced.

Having a default that automatically begins Roth catch-up contributions when a High Paid individual reaches the 402(g) limit could be a problem for that individual. The problem stems from the fact that payroll will withhold federal and state taxes on the Roth amount. The dollar amount of the deferral will not change and will be contributed to the plan (and likely be unavailable for in-service withdrawal). The individual's net pay will be less by the amount of additional income taxes withheld. One can reasonably assume that an individual who chose not to make an affirmative election on the whether to make catch-up contributions is less likely to consider the impact of taxes on net pay. It is not uncommon for plans - particularly smaller plans - to allow changes in deferral elections including catch-up contributions less frequently than every pay period. The net tax issue will be amplified if the individual wants to make a change to restore net pay and then learns the individual has to wait until the change can be implemented under the plan. In most plans, the only option then available would be to suspend deferrals until the change can be implemented.

Pretty much every brokerage house provides online access to the account holder. There is a minority of brokerage houses that provide trustee or PA access to a group of accounts even though each account is titled in the name of the trustees FBO a participant. Exceptionally frustrating to work with. We work with some plans where the brokerage house is of the opinion that the participant must authorize online access to the account and must authorize mailing a hard copy of the account statement to the trustee, PA or TPA. There is a minority of brokerage houses that enforce investment restrictions in a participant's brokerage account. These accounts most commonly are restricted to securities tradable on major stock exchanges. Trustees and PAs do need to monitor investments held brokerage accounts because without the brokerage house enforcing restrictions, the plan winds up with assets like limited partnership, private placements, naked put and call options, real estate, gold bullion and other nontraditional or high-risk investments. We have seen all of these turn up in accounts. Larger plans tend to require all participants who wish to use a SDBA to use the brokerage house chosen by the Plan Sponsor or PA. Small plans are more likely to allow individual participants to pick their own brokerage house and broker. (Enter into the picture here the owner's recently-graduated children, or Uncle Bob, or Joe at work who knows all about investing...) Unfortunately, working with a plan that uses a brokerage house that does not provide to the trustee or PA at a transaction and asset level can be a very labor-intensive effort, particularly when a plan is subject to an audit. Further, the plan fiduciaries are not aware when a broker who knows all about IRAs and squat about 401(k)s advises the participant about RMDs or suggests taking a payment and rolling it back into the account within 60 days. SDBAs definitely can add value to a plan's investment menu. It is important to work with a brokerage house that knows about and provides information needed by plan fiduciaries for the fiduciaries to fulfill their responsibilities.

I suggest keeping a copy of the Department of Labor's publication QDROs The Division of Retirement Benefits Through Qualified Domestic Relations Orders readily available. A DRO can be rejected by the plan administrator if the DRO places an undue administrative burden on the plan. For example, we have successfully had DROs redrafted to specify dates that are consistent with the plan's valuation frequency where the plan was or is not daily valued.

Peter raises some interesting points regarding the changes in RMD provisions by recent legislation including CARES, SECURE 1.0 and SECURE 2.0. The industry seems to operating under the consensus that plans can pick and choose how they want to operate and can wait until later to make formal amendments to the plan documents. Let's all sing kumbaya. With CARES, major recordkeepers generally chose between two approaches. One approach was to tell clients how the recordkeeper was going to administer the plan unless the plan opted out. The other approach was to tell clients that the recordkeeper was not going to allow for optional changes unless the plan opted into those changes. What is interesting with respect to the RMD changes is IRS Notice 2020-51 Guidance on Waiver of 2020 Required Minimum Distributions included a paragraph that said: "Under section 2203(c) of the CARES Act, any plan amendment pursuant to section 2203 must be adopted no later than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans), and must reflect the operation of the plan beginning with the effective date of the plan amendment. The timely adoption of the amendment must be evidenced by a written document that is signed and dated by the employer (including an adopting employer of a pre-approved plan)." This called for an affirmative action by the employer to adopt an amendment even if the plan document was a pre-approved and even though the pre-approved plan provider often has the privilege to amend the plan on behalf of all employers. This suggests that the IRS views RMD plan amendments should be treated differently from other plan amendments. This discussion gives rise to another question. If a plan document defines the Required Beginning Date explicitly as 70 1/2 (or 72 or 73 or 65 for that matter) and the amount is determined using the RMD formula based on factors for that age, does that make the distribution not eligible for rollover? Or, does the participant have the right to say the payment is not an RMD and roll it over until the participant reaches the latest permissible RMD age? Analogously, because a plan does not have to allow an active participant to defer RMDS until separation from service, it would seem participant discretion on how characterize a payment is not available.

Based on the circumstances in OP where there are a few salaried employees, a lot of hourly employees that work more than 1000 hours and the desire is to exclude the hourly employees using a classification, this would seem that the plan will struggle to pass coverage. Once the plan adds the classification for a reason other than one year with 1000 hours, these hourly employees are going to wind up in the denominators in coverage testing. It seems counter-intuitive that the ABPT would pass by a very comfortable margin. As far as basing the classification on hours scheduled to work, this definition seems to give the employer too much discretion to pick who is in or out, and there does not seem to be a valid business reason for the classification.

In the OP, and then the discussion has been all about match formulas. A match is an enticement to encourage employees to contribute to the plan. If the goal truly is to entice people to work for him, then a juiced up match is not likely going to achieve that result. Consider having a conversation to confirm the objective, and if it truly is to provide a work incentive then explore a profit-sharing contribution. If the work force is generally lower paid, giving everyone who is eligible a small, flat-dollar amount initial contribution and an allocation of a percentage of profits gets them into the plan and focuses on the message that work pays off. The allocation period can be more frequently than annual if the company really wants to push the message. The profit sharing contribution can have a vesting schedule to hold down cost if there is high turnover. The company can still add a basic safe harbor match for those who wish to defer.

Please see https://www.irs.gov/businesses/small-businesses-self-employed/employee-benefits where the IRS says: "Fringe Benefits A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Fringe benefits are generally included in an employee's gross income (there are some exceptions). The benefits are subject to income tax withholding and employment taxes. Fringe benefits include cars and flights on aircraft that the employer provides, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events." The Department of Labor notes here https://www.dol.gov/general/topic/benefits-leave/vacation_leave that: The Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as vacations, sick leave or federal or other holidays. These benefits are matters of agreement between an employer and an employee (or the employee's representative). And note https://www.law.cornell.edu/cfr/text/2/200.431 comments: § 200.431 Compensation - fringe benefits. (a) General. Fringe benefits are allowances and services provided by employers to their employees as compensation in addition to regular salaries and wages. Fringe benefits include, but are not limited to, the costs of leave (vacation, family-related, sick or military), employee insurance, pensions, and unemployment benefit plans. Except as provided elsewhere in these principles, the costs of fringe benefits are allowable provided that the benefits are reasonable and are required by law, non-Federal entity-employee agreement, or an established policy of the non-Federal entity. Literature searches will find many references saying the term "fringe benefits" is not defined. It seems the definition of what are or are not fringe benefits is based on the employer's and employees' common understanding of what that term means to the them (e.g. the DOL quote that they are "matters of agreement between an employer and an employee"). Much of the work we do involves defining how compensation is defined for various plan purposes such as calculating benefits, applying dollar limit, testing for nondiscrimination, and a myriad of other things. In all, there is something like 14 or so different definitions available for use in retirement plans. Much of what is common among these definitions is based on what the IRS considers taxable income, and we spend a lot of time setting plans to allow plan participants to not have to pay taxes on amounts set aside currently for their retirement. We see vacation in the category pay earned as a reward to performance of services and vacation pay as an integral part of annual compensation, but vacation in the eyes of the IRS is pay for time related for non-performance of services (to borrow from the definition of hours of service) and is a fringe benefit. The DOL reinforces that concept by noting employers do not have to pay employees for any vacation.

This is the type of situation where I like to mention the word "jail" in the conversation. 😁

I have seen two approaches that could be helpful. The first is all beneficiaries are subject to the same signing requirements as are used for the spousal consent. The requires notarization of the signature even if there is no spouse. The second is all beneficiary designations must be made through the plan's service provider and this is written into the plan and the SPD. This has led to some problems with situations like designations made near death, but challenges to the requirement have not been successful. One could consider having the plan allow the use of either of these approaches.

If all you have is a fax, there really is no way to confirm the authenticity of the signature. Today's image processing technology makes it fairly easy to grab a signature image from another source and apply it to a fax document. It can help to have some contemporaneous validation steps together with the transmission of the fax similar to steps taken with multi-factor authentication with texted verification codes to a known user phone.

Since there are no other plans involved, this is an operational error under 401(a)(30) and a qualification issue. Since the 2021 excess was not refunded by April 15,2022, the excess would have been taxable in to the employee in 2021. Since the employee is an HCE, the plan should have filed a VCP but did not. The VCP correction likely would have been to make the refund plus earnings, and swear it will not happen again. The refund and earnings are taxable in the year of distribution. The same fact pattern exists fro the 2022 excess deferral. It should have been refunded by April 15, 2023 and apparently was not. The same taxation pattern is applicable. So, yes, the same correction method will be applicable although it is because neither excess was refunded by the respective April 15th refund deadline. Both excesses will be double taxed - once in the year of deferral and once in the year of distribution along with related earnings. The plan will be following the the same correction process for both years. The new IRS guidance in IRS Notice Procedure 2023-43 allows for self correction of eligible inadvertent failures which must be done within 18 months from when the failure is identified. Hopefully this does not recur for 2023 or the characterization of the failure as "inadvertent" can be called into question. If the plan is uncomfortable with not having an IRS blessing on the refund because it involves an HCE and is a qualification issue, then the cost of getting comfort is the cost of filing a VCP.

Excess deferrals have their own set of rules for the consequences of not taking the excess deferrals out of the plan in a timely manner, so the correction will need to follow those rules. There also is a difference between the circumstances where the employee had excess deferrals due to amounts contributed to plans of unrelated employers versus when the excess deferrals are due to deferrals made under a plan or plans of the employer or related employers. The latter required a VCP which I understand can now be self-corrected. Keep in mind, depending upon the timing of the correction, there will be some unpleasant tax consequences for the participant.

Let's call it "regulator logic". They don't want to say it's okay not to send out a notice while de facto acknowledging that all of the required notices are equivalent to junk mail. There is no opt-out and no mercy. Queue strains of Hotel California.

I do believe we need to wait for more guidance for to make something more than an educated guess. There also is the need for Congress to undo the unintended repeal of all catch-up contributions which should spur some more information coming sooner than later. A reading of this provision is everyone must have the ability to make Roth catch-up contributions and the High Paid employees can only make Roth catch-up contributions. This translates into if you want catch-up contributions in the plan, you have to add Roth. There is the conundrum that you cannot make Roth deferrals until the plan specifies the effective date, and this concept of make an administrative decision today and formally amend the plan later. Is it a fantasy to think the IRS could be that explicit about Roth deferrals?

It is an operational issue, and you may want to gather some more information to understand more fully how this occurred. For example, how are termination dates reported to the platform (manually by the company, periodic payroll file, other?) If loans must be made through payroll deductions, should quarterly repayments been approved? How is the platform supposed to notify the company and payroll to start repayments? How did the participant know how and where to send in the repayments? Is the participant a former HCE? Keep in mind that corrections to operational issues involve showing the cause of the issue has been addressed. The answers to these questions will help in deciding how to correct the issue, and how to prevent the issue from occurring again.

Excellent questions! and you probably will not be thrilled with the information available to us. Here is the relevant Section from SECURE 2.0: "SEC. 603. ELECTIVE DEFERRALS GENERALLY LIMITED TO REGULAR CONTRIBUTION LIMIT. (a) Applicable Employer Plans.—Section 414(v) is amended by adding at the end the following new paragraph: “(7) CERTAIN DEFERRALS MUST BE ROTH CONTRIBUTIONS.— “(A) IN GENERAL.—Except as provided in subparagraph (C), in the case of an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000, paragraph (1) shall apply only if any additional elective deferrals are designated Roth contributions (as defined in section 402A(c)(1)) made pursuant to an employee election. “(B) ROTH OPTION.—In the case of an applicable employer plan with respect to which subparagraph (A) applies to any participant for a plan year, paragraph (1) shall not apply to the plan unless the plan provides that any eligible participant may make the participant's additional elective deferrals as designated Roth contributions." The yellow highlight says we uses the definition of wages in section 3121(a) for determining who is High Paid earning over $145,000. This may not be the same definition of compensation defined in the plan as plan compensation so payroll has some work to do. The orange highlight says the $145,000 is based on the preceding calendar year. Forget about off-cycle plan years. The light blue highlight references participants "for a plan year" to whom the High Paid definition in subparagraph (A) applies. It is not clear how reference to plan year is applicable (any part of a plan year? all of a plan year?).

I agree, and observe that SECURE 2.0 320 was in response to plans that complained about the burden of providing notices to unenrolled participants. I expect these plans pretty much have already made their decision to the point of having lobbied for it. It will be interesting to see the path the rest of the plans will follow, and interesting to see if major recordkeeping service providers will influence the market place via a bully pulpit or creative pricing for distribution or mailing services.

Just to clarify for my own understanding, your question is regarding Unenrolled Participants as referenced in SECURE 2.0 and the requirement to provide an Annual Reminder Notice. In this case, the Unenrolled Participant is already eligible to participate, has already received an SPD, has already received any other notices required to be given to someone who was newly eligible, and is not participating. I see the Safe Harbor Notice as a document apart from the SPD and the Safe Harbor Notice is among the other required notices. The required notices also would include, if applicable, a QDIA notice and 404(a)(5) notice. The Annual Reminder Notice is required to inform the Unenrolled Participant they are eligible, and let them know any applicable deadlines that may be applicable to their signing up for the plan. The notice as you pointed out specifically needs to let them know about the key plan provisions with an emphasis on employer contributions and vesting. My observation is the reminder notice is focused on the message to the Unenrolled Participant that: you are already eligible, you are not participating, here's what you're missing out on, here' how to start participating, here's where you can get more information, without getting into the weeds. Further, the timing requirement for the Annual Reminder Notice is more lenient than the timing requirement for other notices. I agree it makes sense to keep the Annual Reminder Notice and the Safe Harbor Notice separate.

Take a look at 1.401(k)-(3)(d)(2)(ii) regarding the content of the Notice, (iii) regarding what is permitted to be included in the Notice by referencing the SPD, and (d)(3) on the timing requirements.

I am not aware of any specific guidance with respect to the EACA extended testing window. I understand that the plan can choose to exclude LTPT employees from ADP/ACP testing which aligns with the idea that the LTPT group is like a plan unto itself.

Having an investment that requires a $500,000 minimum is discriminatory. Consider self-directed brokerage accounts. If a plan only allows SDBAs with a high minimum investment requirement, it is discriminatory. In this instance, it is apparent that a lot of time and effort has been expended to construct a scenario for the sole purpose allowing one owner/trustee/HCE to make an investment not available on a nondiscriminatory basis across the controlled group. You may or may not want to work with the client who stretches the rules to that extent. If you work with them, you may want to make it clear that your services do not encompass commenting on the investments or on nondiscrimination of BRFs. You may want to keep whatever documentation is available that indicates the attorney advised the client and the attorney directed or actually constructed the arrangement. You may even want to disclose the circumstances to your E&O provider. And may luck be with you.

It will be interesting to see how the IRS reacts to cases where plans do not allow LTPT employees to start deferring come 1/1/2024. Given the drumbeat about LTPT since SECURE 1.0 and the additional emphasis on LTPT in SECURE 2.0, I imagine the IRS may be less tolerant if a plan is not ready. If we look at the correction options, the option available to plans with Auto Enrollment could allow a calendar-year plan to start deferrals as late as 10/15/2025 for deferrals that should have started in calendar year 2024. If the LTPT employees are not eligible for a match, there would be no penalty. I expect that this will not be acceptable and the IRS will reason that the LTPT rules cannot use this correction method if the AE provisions are not available to the LTPT employees. Some of the other correction methods will encounter similar issues where the logic behind the correction method does not hold up well for part-time employees. For example, the first 3-months rule and brief exclusion rule are predicated on an employee being able to make deferrals from future paychecks in an amount that would make up for the missed deferral opportunity. The underlying assumption is an employee will have recurring paychecks with relatively equal amounts of pay which is not the case for part-time employees. My guess is the IRS will hold plans accountable to a 50% QNEC correction option and maybe, just maybe, would consider something less. The challenge here will be determining 50% of what. If IRS does not recognize the LTPT deferrals as part of an AE plan, then it doesn't make sense to use the AE default percentage. Since the plan may not have a history of deferrals for LTPT employees, it doesn't make sense to use the NHCE ADP percentage. Another overall challenge is documenting that each individual LTPT was informed of their eligibility to defer and made a decision about deferring. The first part of the challenge is identifying who among all of the part-time employees is eligible to defer as an LTPT employee. The next part is getting information into the possession of each LTPT employee in time to begin deferring upon becoming eligible. Many will not have corporate email accounts, and many also will not be actively working when the communications are sent out. The third challenge - assuming that the participation rate will be lower than for non-LTPT employees - dealing with a large number of no-responses. Just some rambling thoughts. Is everybody ready to rock and roll?!?