Paul I

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?!?

Your question is focusing on work and pay practices which primarily are in the realm of the collective bargaining agreement between the company and the union or unions involved. Some agreements go into extraordinary detail about the type of work and related pay, and each and every benefit available to union members. It is an issue of labor law if the company has pay practices do not comply with the bargaining agreement, and the company needs to work with their employment law attorneys to sort that out with their union(s). You did not provide any details about how this issue is affecting any retirement plans that the company or union may sponsor. If the union employees are treated in the retirement plans in exactly the same way as non-union employees, then there likely are some but not a lot of complications. If the union employees are excluded as a classification and the non-union pay is being considered in the plan as eligible compensation, then there likely are operational and compliance issues that need to be addressed. In our practice when a union is involved, we ask for a copy of the sections of the bargaining agreement dealing with benefits and compensation as part of the information we collect. We also monitor when the contract is up for renewal and ask for updated documentation in the new agreement.

Bri is on target. While you are checking the plan provisions, keep in mind that the plan document contains many definitions of compensation for compliance purposes that can be different from the definition of compensation used to calculate contributions. For example, there can be a different definition of compensation used for ADP testing, 415 limits, and deduction limits. You should also check with the plan service provider(s) to confirm that the correct definition of compensation is being applied correctly as appropriate to the services provided.

All of the big recordkeepers currently have an option for processing hardship withdrawals for reasons that are in the list of safe harbors. A client has to authorize this service formally and the agreement is structured to be very clear the recordkeeper is acting administratively and only to the extent authorized by the client. The goal for the recordkeeper is to avoid fiduciary responsibility as much as possible. Some have taken the step to become 3(16) administrators but still ask for similar authorizations from the client. Claims of acting as a service provider in an administrative functional role and off-loading fiduciary responsibility seems to have offered some protection to recordkeepers when claims have been pursued. I suspect there is some discomfort for recordkeepers on relying only on a participant certification of the hardship. The participant (almost always) is not a fiduciary and the new provision says the plan administrator can rely on the participant's certification. That seems to give the PA some distance from the hardship, which may be perceived as increasing the recordkeepers' exposure. Maybe the recordkeepers are hoping the IRS will acknowledge the recordkeepers role is administrative and the IRS will say explicitly that the recordkeepers can rely on the participant's certification. This is a lot of speculation on my part, and probably a flight of fantasy about the IRS.

It would seem that dollar amount of deferrals made by a part-time employee that could get wiped out by fees would have been a small amount compared to the value of the time and effort to analyze and implement the perfect solution that dots the i's and crosses the t's of every possible correction method. Consider keeping the plan out of it since technically the plan accepted the contribution sent to it by the employer and the plan applied fees consistently to all participant accounts. Suggest to the employer that they pay the employee at least the amount of the deferrals that should not have been taken from the employee's paycheck, and include an acknowledgment that it was a payroll error (not a plan error).

As Peter noted, additional details about the plan and the circumstances would be helpful, and as Connor points out, the plan likely is a pre-approved document that certainly would contain language in the basic plan document pointing to the applicable death benefit rules. It is highly unlikely that the plan has a provision that requires the payment of a death benefit by the end of the year of the participant's death. If this actually is the plan provision, the worst case scenario for the plan would be someone who drops dead at a New Year's Eve party just before midnight. Since the deceased turned 72 this year, there is no RMD in pay status so you have time to sort out the plan accounting related to the investments and strategies on how to have sufficient liquidity for paying benefits when due. You may find that some of the investments have performed exceptionally well and undoing them could be detrimental to their value. Start with reading the plan document including the basic plan document, follow any code and regulation references within the documents, gather facts and terms regarding the plan accounting and the investments, identify the beneficiaries and any plan participants with an interest in these investments, layout a plan and move forward. This quickly can get complicated and require expertise beyond my and many other TPA's. If that happens in this case then definitely involve an ERISA attorney and possibly an accountant knowledgeable about the types of investments in the plan.

Short answer, distribute as soon as possible. Arguably, they could get hit with a penalty but I have never heard of one being imposed when action was taken to make the disclosure as soon as possible after the deficiency was discovered.

There will be a little more to it than that since a new spinoff plan will need its own trust and money has to be moved around. Out of curiosity, what does the spouse see is the perceived advantage of having a second plan?

Let's not ignore the fact that the partnership had over $1,000,000 in net income. I would expect that at least some if not all of that to show up on the K-1 for the GP as NESE.

You may want to point out to the owner that investing in real estate from inside a qualified plan does not have anywhere near the same preferential tax treatment she may get by personally directly investing in real estate. Taxable distributions from the plan generally are all subject to ordinary income tax rates and do not benefit from capital gains rates. I also hope she has no personal connection with the real estate in question that would make this a prohibited transaction.