Paul I

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.

The two crucial questions are does the plan include or exclude non-resident aliens? and does this individual receive income from US sources (e.g. is on the US payroll)? If the plan includes NRAs and this individual is on the US payroll, and they otherwise meet the age, service and entry date requirements of the plan, they are covered by the plan.

Here is a good overview from an ASPPA presentation https://www.asppa.org/sites/asppa.org/files/PDFs/Conferences/LAPC/2016 Outlines/WS15 - Establishing timelines.pdf Most conversions follow very similar steps, but nuances of how a plan was run with the current provider and how the new provider expects to provide the corresponding services can leave you caught between the two. There are conversion consultants who will sit on your side of the table and go through the conversion process with you. The consultant call BS when appropriate, explain to you any issues and how they typically are resolved, and alert you if there is a legitimate issue that needs to be addressed to complete the conversion. The service usually is provided based on a rate per hour and while it may seem a little pricey, you probably understand now why it is well worth it.

Since the determination period and the frequency of elective deferrals are the same, then our C3 pre-approved plan would say a true-up is optional (unless the sponsor specifically chose to require an annual true-up.) You should check confirm that your plan document it contains similar provisions and hopefully you can put that issue to bed. You do need to address the missed deferral opportunity and the need for the company to make a corrective match of 100% of the match for January that participants would have received if deferrals started in January according to the plan provisions, plus earnings.

Was there any change is the relationship between the PE and OE (change in ownership, spinoff, ...)? Was or is the PE part of a controlled group with the OE? If not, was or is there any other affiliation between the PE and OE? Is the OE 401(k) plan a MEP? There is a pathway forward and likely it will be influenced by the answers to these questions.

The brief exclusion rule (applicable in the first 3 months of the plan year) does not require a notice. The rolling 3-month rule requires a notice within 45 days after correct deferrals begin, but in this case the brief exclusion rule avoids the need to review what and when anything was communicated to employees about the late start.

The plan will not need to make a QNEC for actives if the circumstances described are accurate. The plan could use the 3-month brief exclusion rule or the rolling 3-month rule to avoid the QNEC. Auto-enrollment, if it were the case here (but it is not) would have also allowed an exception to the QNEC. Our C3 pre-approved document says a true-up may be optional if the match determination period is more frequent than annual and the match is funded no more frequently than the match determination period. If the match determination period is more frequent that annual and the match is funded more frequently than the match determination period, then a true-is required. This is buried in the BPD.

Some additional information would help focus a response. Is the match on a payroll basis an operational decision or does the plan document specify the match is made on a payroll basis? Does the document specify if there is a true-up at plan year end? On a separate topic, does the plan use auto-enrollment, and when did employees first meet the plan's eligibility requirements to defer? These questions may lead to a discussion about a failure to implement/missed deferral opportunity, and possibly there is a match due on January deferrals that were not made. If this turns out to be the case, good luck with any conversations with the advisor.

The path forward likely will be uncomplicated, but we all know to take one step at a time. One of the first things to nail down is how the CG relationship will come about, and then doing some homework on both plans. Here is a sampling: What is the nature of the transaction? Will it be a stock purchase or asset purchase? Are the companies currently unrelated, or is there some level common ownership prior to the transaction? Is Corp B plan also a calendar year plan? Has it been decided to keep the plans separate after the closing date of the transaction? Keeping in mind that 410(b) testing is done separately for elective deferrals, match and non-elective employer contributions, do both plans offer similar benefits with similar eligibility and allocation conditions? Does one plan have an ADP safe harbor and the other does not? Is either plan top heavy and the other is not? Do both plans use/not use top paid group rules? Does either plan have outstanding compliance issues in need of corrections? Essentially, I suggest comparing both plans across all levels of design and operational compliance to see where there are mismatches. If you find some, the earlier you can point them out to your client, the more time there is to develop strategies for a clean transition. It also will be beneficial to inform legal counsel working on the transaction so that nature and timing of plan-related actions are taken timely. May your path forward be clear and uneventful.

You are correct. This was an example for CuseFan's comment where "maybe the employer whose employees participate is owned by the trust."