Paul I

There is no doubt that creating a records retention policy and conforming to the policy can be a major effort. For small TPAs, the common approach seems to be to get a reasonable amount of E&O coverage from an insurance company with a reputation that they understand the business, fulfill the obligations in the contract for records retention and for notifying the insurer of possible claims, keep within the boundaries of personal professional knowledge, strive to do the best job for the client, and hope and pray not to have to swim with hungry sharks.

Pammie, here are some links to the IRS website that you can send to the participant: The first describes hardship withdrawal rules and mentions the possibility of paying a 10% excise tax: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions The second is a detailed table of exceptions to the 10% excise tax on early distributions and references to the tax code: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions You may want to point out the line that for Homebuyers. There is no exception to the tax for distributions from a 401(k) plan for a Homebuyer, but there is an exception for distributions from IRAs for up to $10,000 for qualified first-time buyers (with a lot of rules is 72(t) defining a qualified first-time buyer). I suggest everyone should at least bookmark or print the table of exceptions as a handy reference for when the 10% penalty is not applicable.

Basically, the plan administrator must make a good-faith effort to send out blackout notices unless circumstances are such that they are beyond the control of the plan administrator. It sounds in this case that all but one participant received the notice. See DOL 2520.101-3(b)(2)(iii) says "In any case in which paragraph (b)(2)(ii) of this section applies, the administrator shall furnish the [blackout] notice described in paragraph (a) of this section to all affected participants and beneficiaries as soon as reasonably possible under the circumstances, unless such notice in advance of the termination of the blackout period is impracticable." The current penalty for a failure to provide a blackout notice is $164 per person per day and to my knowledge there are no published correction procedures. It doesn't sound like the beneficiary was prevented from taking an action during the blackout period, and if so, there was no harm to the beneficiary. It does sound like there were reasons the beneficiary was not included. I suggest documenting those reasons. If you are very concerned about the situation, then send the beneficiary an informational copy of the blackout notice along with an explanation of what happened and that it no longer is applicable. I can't speak for the DOL, but I have not heard of any situation like this where a plan was penalized for not sending a blackout notice to one participant.

One related item of interest... one of the larger pre-approved plan providers has begun purging historical copies of plan documents from their system. Essentially, they are keeping the current restatement cycle documents and the immediate prior restatement cycle documents, and purging the rest. If you want to keep historical documents, then you have to print them or preferably have saved the original signed documents. The rationale likely syncs up with an IRS agent supposedly not being allowed ask for more than the current and immediate prior documents. On the other hand, I had an agent ask for every document since the original effective date of the plan.

There is a calculator that shows up on various websites such as: https://www.annuityexpertadvice.com/calculator/401k-withdrawal-calculator/#taxes-on-401k-withdrawal-calculator https://www.mortgagecalculator.org/calcs/early-retirement-withdrawal.php You could ask the participant to use a calculator and then provide the number a copy of the report supporting the amount of withholding they wish to have added onto the hardship amount. This would be a balanced approach between a one-size-fits-all calculation and a more realistic tax estimate that does not have the employee coming back later for a request for a withdrawal to cover the taxes. If nothing else, the calculators are fun to play with.

It would be great to get hear from the attorneys in the room, particularly those who have been involved in ERISA litigation. I have heard comments made at conferences on the topic of records retention. The sense I have is TPAs are inclined to save everything and attorneys are inclined to endorse having a records retention policy and follow it closely. I also get a the sense that TPAs literally keep everything including notes, draft copies, emails, regular mail, research, calculations, holiday greeting cards, and all data files both hard copy and electronic, whereas attorneys are inclined to endorse only saving what is needed to document the actual deliverables to the client.

The easiest place to start is the instructions for Schedule I in the instructions for the 2022 Form 5500 page 49 Line 4k. The instructions include examples which use a limited partnership to illustrate how the rules apply. The example also discuss how you may qualify for the audit waiver if the plan has an adequate amount of fidelity bond coverage. 2022-instructions.pdf

Many payroll systems set up records for each employee at the beginning of a new calendar year. Within those records is a field which is the catch-up limit for the year. Payroll then tests the limit when each payroll is run by comparing the YTD catch-up amount plus the current payroll period catch-up amount against the limit in the employee's record. It the YTD number exceeds the limit in the employee's, the current period catch-up amount is reduced to stay within the limit. To populate the field, the logic to setup the catch-up has been, as Peter notes, to look at the employee's year of birth. If the employee will not attain 50 during the calendar year, then the catch-up limit is set to zero. If the employee will attain age 50 during the calendar year, the set up limit will be set to the catch-limit for the calendar that the IRS has published before the start of the new calendar year. I expect that the IRS will publish a set of catch-up limits for each of the new age groups, and payroll will go through a similar process of determining the catch-up limit for each employee. The reason many payroll systems use this approach is the current year limit only needs to be determined once at the beginning of the year, and the logic of testing YTD amounts against the limit is the same for all employees. To summarize, a catch-up limit field for each employee already exists many payroll systems. To illustrate Peter's stages, the process to update the catch-up limit for each employee as of the beginning of the calendar year needs to have a programming statement that looks something like: If (Calendar_Year-Birth_Year)>=64,IRS_Limit_Age_64 <---this should be the same as the age 50 limit ElseIf (Calendar_Year-Birth_Year)>=60,IRA_Limit_Age_60 ElseIf (Calendar_Year-Birth_Year)>=50,IRA_Limit_Age_50 Else 0 endif

Use the previous year balance and check the box that this is the initial filing.

My comments more than anything else go more towards staying focused on informing clients and then helping them run their plans the way they want to run their plans. My comments also focus on the fact the methods and skills needed to administer LTPT employees are not new to the industry. Recordkeepers who have data stores structured to hold and make accessible historical data see the LTPT data as analogous to maintaining historical data for plan participants to be available in the event there rehires. Recordkeepers who summarize and purge historical data (commonly as part of an annual "roll forward" process) will not have a place to put historical data. They will have to create indicators within participant records to track LTPT data. For example, keeping a counter of the number of years of LTPT eligibility service. These recordkeepers will have a greater challenge to collect historical data from a client, map it into the recordkeeping system, and then integrate the logic to use the mapped data to determine eligibility. In this case, the recordkeepers will rely primarily on the client and payroll to provide the historical data. Note the plans that have a relatively small number of part-timers can accommodate the LTPT eligibility tracking on their own relatively easily by with simple tools. This can be done as simply as keeping a spreadsheet with each year's compliance data on a tab. If a part-time employee is on track to work 500 hours, a simple search across the entire workbook for the employee will likely reveal whether the part-time employee has prior service. The biggest factor contributing to the success or failure of implementing the LTPT rules is the willingness of service providers (recordkeeper and payroll) and the client to work cooperatively. At the end of the day, the service provider that takes a hard line that everything must be done the way they want it done and they take a hard line creates unnecessary work for the client or other service providers, then that service provider will lose the business. Clients do not have to wait for the recordkeeper to announce what they are going to need to support LTPT employees. Clients can anticipate the data requirements for LTPT employees (pretty much the same as for other employees), and can take an inventory of what is available from the clients' files or from payroll files. Payroll systems similarly are in the same boat as recordkeepers. If a client's routine payroll reports do not include the data needed, then the client should take steps now to expand or modify the routine reports. I am an optimist. Open communication, teamwork and cooperation has seen our industry undergo several transformations - emergence of 401(k)s, voice systems, daily valuations, the internet - and there are even more in our future. We have met every challenge, and we will meet this one.

I am a TPA and provide recordkeeping, compliance and reporting services to 125 clients ranging from about 200 participants down to solo plans. I also curently provide plan administration and consulting services to a dozen clients that range in size from 5,000 to over 400,000 participants. I personally have built recordkeeping systems from the ground up, have consulted on recordkeeping system design for several of the major recordkeeping providers, and have consulted with payroll departments on data structures, coding specifications, and data schemes. I programmed the recordkeeping system for and ran the system for the 3rd 401(k) plan that came into existence in 1982 for a Fortune 100 company with approximately 10,000 participants. I regularly work with C-suite members. Your outline of revised steps is good. Note that the logic is very similar to what needs to be tracked now for dealing with rehires. In discussions with clients, we talk about the rules and the data requirements, the implications for adding to participant counts, data maintenance and retention, system interfaces, relative effort and costs - and alternative plan designs. We stick to the facts. We inform. The client makes the decision.

I agree that alternative plan designs should always be part of the conversation because often the acceptable solution to administrative complexity is a change in design. I disagree that this is more that most clients can handle. Most clients that work with plans that have dual eligibility between full-time and part-time, and use age 21 and 1 year of service with 1000 hours, plus periodic entry dates have the skill set needed to implement LTPT rules. They speak the language. They understand initial eligibility computation periods. They understand vesting service. They track classifications of employees. They also have access to relatively recent historical data. If a client does not have a plan with these characteristics, they still are capturing data at the level needed to implement by the fact that the most common pay practice for part-time employees is pay for hours worked. Yes, it is change. Yes, it is not simple. No, the sky is not falling.

Generally, administrative expenses paid from the plan are for routine administrative services like recordkeeping, compliance, 5500s, investment monitoring, and plan audit. This does not sound like an administrative service, and if the plan sponsor had engaged search company to retrieve the unclaimed assets, that would seem to be more of a settlor expense (basically CYA for not being a diligent fiduciary). Just an opinion. Did the search firm provide any information about the potential source of the unclaimed funds? Were they attributable to a dormant account in the name of the plan? Or, possibly were they in a bank account that was used to pay distributions and amounts from uncashed checks were redeposited? Were they attributable to a litigation settlement and put into an account that was otherwise ignored? When the assets were returned to the plan sponsor, what was deposited into the plan's trust - full amount of what was missing, the net amount after the search company fee, or nothing (the plan sponsor kept it)? The answers likely will lead to a host of other questions.

This discussion brings back memories of when the computation periods, hours and service regulations in CFR 2530.200b-1,2 & 3 were first released soon after ERISA was enacted. There was a lot of complaining that the rules are impossible to administer, that companies would not adopt plans or would terminate plans rather than deal with the rules, that the expense of administration would be prohibitive, and more. Somehow we have lived with those rules for almost 50 years now and retirement plans are thriving. Yes, LTPT rules are challenging and recent legislation is not perfect. Let's inform plan sponsors of the rules, provide unbiased alternatives, listen to their feedback, respect their decisions, help guide them through implementation and monitor compliance. Regardless of how sane or insane these rules may seem, retirement plans will continue to thrive.

Metsfan, out of curiousity, is the Trustee an individual or group of individuals, or it the Trustee a service provider apart from the client like a bank? Similarly, are the "investment people" a financial advisory group, a custodian, a mutual fund group or other similar third party provider? I ask because 408(b)(2) is about documenting and managing fees, and has become deeply ingrained in the normal course of a service provider doing business with a plan. I have not seen any recent instances of a service provider not automatically making the disclosure. It sounds here as if a disclosure is required at some level and it is not clear that the service provider(s) or possibly the plan fiduciaries are on top of things. The service agreements underlying the disclosure are made between the service provider and a Responsible Plan Fiduciary. The RPF is a named individual who represents the plan in the agreement, so hopefully that individual knows they are the RPF and understands the duties and responsibilities associated with that role.

At the ASPPA Spring National last week, the session on LTPT included a point that "SECURE 2.0 provides that Safe Harbor Top Heavy exemption is not lost because otherwise excludible employees do not get it, so no Top Heavy contributions needed" The presenter seemed to have more positive than negative comments for plan designs with 401(k) eligibility of 6 months with 500 hours (effectively eliminating LTPTs), and continuing to apply 12 months with 1000 hours for match and employer contributions. The participants in 6 to 12 months range would be otherwise excludible.

The percentage is 150%. The topic was addressed in a presentation at the ASPPA Spring Conference last week. The question of what is indexed, the $10,000, the regular ($7,500) limit, or both was answered with "Who knows!?" - and we await guidance. Austin, you are not alone.

1.401(k)-(3)(b) reads: "(b) Safe harbor nonelective contribution requirement (1) General rule. The safe harbor nonelective contribution requirement of this paragraph is satisfied if, under the terms of the plan, the employer is required to make a qualified nonelective contribution on behalf of each eligible NHCE equal to at least 3% of the employee's safe harbor compensation." I did not find a reference to any maximum percentage. Apparently, you can give NHCEs as much fully-vested, restricted-withdrawal safe harbor non-elective contributions you want subject to regulatory 415 and annual additions limits. Assuming this is true, it does lead to a question of whether every NHCE must receive the same percentage, or could the SHNEC percent vary among the NHCEs as long as no one gets less than 3%.

We all agree that very, very likely this plan has one or more problems. Hopefully, Coleboy can provide some additional details that we can use to provide some suggestions on clarifying what may be problematic, identifying possible courses of action, educating the client and ultimately cleaning things up. That's what we do.

IF the employee's eligibility computation period started upon rehire started on the 8/2/2021 rehire date, then yes the entry date would be 10/1/2022. The circumstances here say the plan provisions shifted the ECP to a plan year for this participant and upon rehire, the employee needed to work 1000 hours in the year of rehire (and did not in this case). The employee worked 1000 hours in the next ECP (1/1-12/312022) and entered the plan on 1/1/2023. It's a wacky result based on an unusual combination of eligibility rules.

Try looking at defined benefit preapproved plans authored by specialty actuarial firms. We work with some actuaries that have plans documents that offer tremendous flexibility in describing the benefit formula, including factors such as groups, service and compensation. The IRS provides a list of preapproved plans on the IRS website in case you want to go "shopping". You may find you already have a relationship with one of these firms. https://www.irs.gov/pub/irs-tege/ppa-listdb3.pdf

When and how did the policy become an asset in the plan? Was it purchased with rollover contributions or profit sharing contributions, or perhaps came in as an in-kind transfer into the plan?

I take it from the limited facts provided that the only contributions going into the plan are profit sharing contributions. The amount of the profit sharing contribution would be based on the plan's allocation formula and would not be tied to the life insurance premium. As Lou is hinting at, the plan would need to check that the life insurance is an incidental benefit provided by the plan. It sounds like the plan has been around for a while. Is this a new client for you? If so, you should have a conversation with the client about how the plan was operated in the past. Part of the conversation should focus on the reporting of the cost of current year life insurance protection (to be known eternally as PS58 costs). The PS58 cost is taxable to the covered individual in each year and should be reported on a 1099. This also created after-tax basis in the plan even if the only contributions are profit sharing contributions. I suggest getting all of the facts about the plan. Hopefully, the client is fully aware of the operating requirements for the plan and none of this will be a surprised to you or to them.

Under the circumstances for the funeral expenses, there does not seem to have been an immediate and heavy financial need for which the participant had no other financial resources, and the PA has actual knowledge of the facts. I suggest the PA should deny the hardship, but that is the PA's decision. If the PA relies on self-certification and perchance the participant is asked by an IRS agent to prove the payment qualified as a hardship withdrawal, the participant likely will claim as part of their response to the agent that the PA approved the payment.

I have a client in the financial services industry with around 200 employees. They use the top paid group rules and HCEs are employees earning over around $370,000. Most of the NHCEs earn over $150,000. They use the after-tax feature to allow participants to reach the maximum annual deferral limit and make Roth conversions an option. When they were considering adding the after-tax feature, there really was no way to estimate utilization of the feature based on available census data. They provided employees with a detailed explanation of the how this feature would work and then polled the group to get a guestimate of utilization. Based on the poll results, they modeled discrimination testing. While the model passed, it was a a close call. They moved forward with the change and within a few years utilization increased and testing is no longer close to failing. The point of telling this story is sometimes the pathway forward to a plan design change is to educate and then ask if people are interested.