Paul I

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.

See the instructions for the Form 1099R: "Losses. If a corrective distribution of an excess deferral is made in a year after the year of deferral and a net loss has been allocated to the excess deferral, report the corrective distribution amount in boxes 1 and 2a of Form 1099-R for the year of the distribution with the appropriate distribution code in box 7. If the excess deferrals consist of designated Roth contributions, report the corrective distribution amount in box 1, 0 (zero) in box 2a, and the appropriate distribution code in box 7. However, taxpayers must include the total amount of the excess deferral (unadjusted for loss) in income in the year of deferral, and they may report a loss on the tax return for the year the corrective distribution is made."

I also agree with Zeller. This particular example is interesting because the rehire has to wait longer to become eligible because their prior service was not disregarded. It seems like this particular individual would have entered the plan earlier in their prior service was disregarded, and there was no upside for them by continuing to recognize that prior service. It is not unusual for a mix rehire rules, service rules and rules of parity to lead to some seemingly counterintuitive results.

I understand that the plan loses its top heavy exemption if there is any actual allocation of an employer contribution or forfeitures (using a contribution type basis) other than a SHNEC or SHM.

The IRS says an entity that is an LLC can be a corporation, does not distinguish the LLC as C or S, and does not need to get a new EIN. https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein If, for some reason, the business does get a new EIN, I agree with the comments above that you will want to amend the plan sponsor keeping in mind that the EIN/Plan Number pair is the unique identifier for plan purposes.

Under the circumstances, you cannot assure the plan sponsor that this is self-correctable without any penalties. Just above signature line on the paper version of the form, it reads: "Caution: A penalty for the late or incomplete filing of this return will be assessed unless reasonable cause is established. Under penalties of perjury, I declare that I have examined this return including, if applicable, any related Schedule MB (Form 5500) or Schedule SB (Form 5500) signed by an enrolled actuary, and, to the best of my knowledge and belief, it is true, correct, and complete." Point out to the plan sponsor that no one else can relieve them of the liability should the IRS determine that the filing is incomplete, and let them know the penalties are exceptionally punitive ($250 per day up to $150,000 per plan year). If the issue looks to extend to years earlier than the 2021 filing, then the more years involved, the worse the situation can be if it is not addressed now. If the issue is limited to just the 2021 year, then the $500 late filing fee is pocket change compared to the daily penalty that could be assessed. The plan sponsor can decide if they want to avoid the exposure by using the late filing program. One would think they would consider it is like buying insurance, but it is their call. The additional downside for the plan sponsor is, if caught, they will have a difficult time claiming reasonable cause. If the issue goes back further in time, then there is a much, much bigger issue that the plan sponsor needs to address. If you wish to assist them, then keep in mind that corrections often take more time than recurring work, the fees for the correction are not-recurring, and the time commitment can disrupt the delivery of services to other clients.

Yes, as long as the SHM is the only employer contribution made to the plan, and the match rate does not increase with the increases in the rate of deferrals. Here are a couple of "gotchas": A plan that allows deferrals to be made before participants become eligible for the SH contribution/match is subject to the TH rules. A plan that allocates a discretionary nonelective employer contribution is subject to the TH rules in a year for which the contribution is made. A plan that reallocates forfeitures to participants on the same allocation basis used for contributions is subject to the TH rules in a year for which the reallocation is made. I have not seen a definitive answer to the question whether QNECs made to correct a missed deferral opportunity, a failure to implement deferral elections, or other operational issues would cause the plan to lose the TH exemption.

Did your fees that were paid 12/22 include prepayment for the 2023 Form 5500 and final Form 8955-SSA, any distribution processing fees, or 1099Rs? Are there other service providers that have not yet been paid, or their invoices in 2022 or 2023 were paid by the company and not the plan? What is the source of the funds in the "plan master account"? Is it from uncashed checks? Differences between amounts funded and amounts allocated? Income variance of sort like amounts received from litigation settlements, or excellent market performance on assets that may not have been sold to cash to make payments? Unused forfeitures? If the source is attributable to contributions or forfeitures, there is some logic to using the plan's allocation basis for those sources. If it is for uncashed checks (or missing participants), then an effort needs to be made to find the payee. (If that fails, the PBGC has a program available for missing participants in a DC plan termination, and the PBGC will want the cash.) If the amount is due to income variances or there is no clear documentation on where the amount came from, then it would make sense to allocate over account balances. I suggest avoiding any allocation method that is not in the plan document and that skews the amounts towards the owners. The plan may consider allocating the amount to everyone with a balance in 2023 excluding the owners. Alternatively, the plan may consider allocating the amount to everyone based on their termination distribution amount. If this would create a lot of very small checks, then the plan could consider limiting the group to participants that had more an amount that was more than the cost of making the additional distributions. There also would be the fees involved in taking these steps.

Ultimately the filing needs to be completed correctly. The pathways to get there could be submitting an amended filing (hopefully) or submitting a late filing after taking corrective actions. Technically an incomplete filing could be rejected and plan considered not to have filed, so you would want to determine if a good-faith effort was made to file a complete and accurate form. If this is not a new plan, I suggest asking for copies of the last 2-3 years' filing and actuarial reports. Review them to see if the filings are completed correctly, and see if there is anything in the actuary's report that signals funding, timing of funding or other issues. Since this is a prospective client, you do not want to help fix problems due to a prior service provider without being fairly compensated for your services. If it seems the prospect is the cause of the problems (no census or bad census, ignoring funding instructions, being unresponsive...), respectfully decline the engagement. Some relationships are just not worth the time and frustration.

For starters, the assets in any and all of your 401(k) plans have all of the protections from lawsuits as are available to you. You can take that concern off the table. You are not violating any rules by having multiple 401(k) plans, but you are making life much more complicated than it needs to be. The multiple 401(k) plans do not allow you to contribute any more to them in the aggregate than you can contribute to a single 401(k) plan. (We can save for another time talk about pairing the 401(k) with a defined benefit plan.) The TPA is suggesting that you consolidate plans into a single plan by picking one of the existing plans and merging in the others. Technically, you want to add each of the other businesses as related employers of the plan sponsor. From the way you described the businesses, they all seem to be 100% owned by you and your spouse. The each plan that merges in will need to file a final Form 5500-EZ even if all of the assets collectively held in all of your plans do not exceed $250,000. This is a relatively small but necessary expense to closing out those plans. I am sure you went into these arrangements fully informed of the perils of having common law employees become eligible in these plans. Continue to be diligent about this or you will wind up having to deal with a host of additional compliance rules. By the way, if you still have W-2 jobs with companies you don't own, and those companies have retirement plans for which you are eligible, you can participate in those plans, too. Just don't exceed the annual deferral limits in total. It sounds like the TPA is on top of things. Good luck with your business ventures!

You have the cite that describes the IRS position. All of the safe harbor cures require that the participant has the opportunity to make themselves whole or otherwise mitigate the impact of being left out of the plan. A terminated participant does not have that opportunity, so there is no other remedial action to giving them the 50% QNEC.

You are right to be concerned. The IRS and DOL use the pairing of the Plan Sponsor's EIN and Plan Number as a unique identifier. In your case, there was a final filing for the EIN/001 pairing. When the plan merged there was no reporting for that EIN/001 pairing, and starting to use that pairing now will cause confusion. I have seen this happen under different circumstances, a request was received for an explanation for the missing filings, and it was a pain to straighten out. The spin-off plan is a new plan, has a new effective date, and has a distinct identity from the original plan EIN/001 and the parent's plan. The distinct identity to the agencies is EIN/002.

There are two places to look for guidance. One is 1.411(d)-2(d)(1), and the other is the plan document. Within the reg you will find: "Among the factors to be considered in determining whether a suspension constitutes a discontinuance are: (i) Whether the employer may merely be calling an actual discontinuance of contributions a suspension of such contributions in order to avoid the requirement of full vesting as in the case of a discontinuance, or for any other reason; This item suggests you can suspend contributions for a short time and not have to fully vest everyone. The IRS weighs in on the topic here https://www.irs.gov/retirement-plans/no-contributions-to-your-profit-sharing-401-k-plan-for-a-while-complete-discontinuance-of-contributions-and-what-you-need-to-know with: "Employee Plans Exam guidelines state that if the employer hasn’t made contributions in three of the past five consecutive years, the plan may have incurred a complete discontinuance of contributions. When a complete discontinuance of contributions occurs, the plan sponsor must treat the plan as a terminated plan and fully vest all participant accounts for the plan to remain qualified. Determining if there’s been a complete discontinuance of contributions is based on facts and circumstances, for example, the plan sponsor’s history of profitability, and the probability of future contributions from the sponsor." If you are using a preapproved document with an Adoption Agreement, definitely read the Basic Plan Document. Some document providers include provisions with more explicit language or with other terminology than is found in the regs that would require full vesting. This may be done to avoid the ambiguity of a determination based on facts and circumstances. If you find such language, then you must follow the terms of the plan. With regard to this specific situation, if a "few years ago" means three or more years ago, you likely will have a hard time convincing an IRS agent that everyone should not be fully vested.

We have had similar conversations. We point out that not only is there a threat of personal liability, we also note that their ERISA fidelity bond does not cover their fiduciary liability.

You are self-correcting but you need to report. It is reported on the 2022 Form 5500, and since it was outstanding (not yet funded) during part of 2023, reported on the 2023 Form 5500. The 5330 can now be filed electronically although there is a threshold count of number of tax forms the filer submits that triggers when electronic filing is mandatory. I believe the threshold is 250 for 2023. The tax year and year of the late deposit information is reported on the form. https://www.govinfo.gov/content/pkg/FR-2023-02-23/pdf/2023-03710.pdf

Short answers, yes each plan files a form, and yes it is wise to file and seek relief.

Here is another analysis https://1npdf11.onenorth.com/pdfrenderer.svc/v1/abcpdf11/GetRenderedPdfByUrl/01_05-ERISA-Litigation-Update.pdf/?url=https://www.goodwinlaw.com/pdf%2Fen%2Finsights%2Fnewsletters%2F2023%2F01%2F01_05-erisa-litigation-update The Sompo is an insurance company and seems to be sounding a general alarm that the litigation is out of control and that other insurance companies have stopped writing coverage for plans. Goodwin is a law firm with an ERISA Litigation practice and seems to be noting trends that "smaller" plans are now being sued (although the smallest of the small plans are described as having under $250,000,000 in assets). My takeaway is the success of lawsuits that picked the low fruit by suing the biggest of the big plans provided a road map for others to file lawsuits against mid-sizes plans. On the other hand, the plans that have successfully defended themselves from lawsuits have provided a road map for a plan to follow to succeed in fending off litigation. As the litigation continues, the courts also seem to have more precedents that guide them to earlier dismissals of the copycat suits. Hopefully, we reach the point where plans that do not fulfill their obligations to participants are held accountable, and plans that do fulfill their obligations are not alone in the fight against predatory lawsuits. My personal view is this speaks to opportunities for ERISA attorneys (and I am not an ERISA attorney) to educate plan sponsors and service providers on best practices and risk management.