Paul I

I have not encountered this situation and am curious about some of the specifics. Perhaps an example may help. Let's assume a participant with a $5000 vested account balance requests total distribution and your firm charges a $100 distribution fee. Does the participant get $4900 and your firm receives $100, or does the participant get $5000 and your firm receives a $100 distribution fee payable from the plan as an administrative expense? Let's assume that the state sales tax on the distribution fee is 5%, so the state is owed $5. What is the process for paying the $5 to the state? Does your firm remit it to the state so you net $95 and then bill the client for the taxes to recoup the $5? Does your firm remit it to the state so you net $95 and then bill the plan for the taxes as an administrative expense to recoup the $5? Is there some other calculation that is done? You indicate that the tax payment process is detailed in the contract. If the recouping of the sales tax is charged to the plan, is it disclosed in the 408(b)(2) disclosure and signed off on by the Responsible Plan Fiduciary? If the recouping of the sales tax is charged to the participant either by adding it to the distribution fee or separately debited from the distribution, is it this detail disclosed to participants in the 404(a)(5) disclosure? Thanks in advance for teaching an old dog a new trick.

The process for authoring and obtaining IRS approval for pre-approved documents does not guarantee that any amendment made by the mass submitter also is pre-approved, and certainly no custom amendment by a plan provider is also considered pre-approved. That being said, mass submitters have for years issued interim amendments to their plans to cover changes in laws and regulations effective after the effective date of the LRMs on which the pre-approved documents were based. Operationally, the ability to make amendments is needed for situations like plan terminations where the plan termination amendment catches up the document to be consistent with current requirements. We obviously are in a new environment with the extended delay in deadlines to adopt plan amendments so there is more exposure to a plan that is continuing and is not being terminating. That being said, I have not seen or heard of an instance where an amendment to a plan prepared by the mass submitter for their document and used by a plan provider as been rejected by the IRS.

Keep in mind that the forfeiture account is supposed to be cleared out every year. If the plan has been accumulating forfeitures in a consolidated forfeiture account over multiple years, there could be an operational issue if the Plan Sponsor is thinking of splitting up and applying these aged amounts by employer.

This question is being asked by many and my take on it is there is no definitive answer and all suggested solutions have imperfections. Some of the larger mass submitters have made available to plan providers a SECURE amendment that can be adopted by December 31, 2026. This amendment includes choices tailored to the mass submitter document addressing the SECURE optional provisions. It is worth asking the mass submitter if they have this amendment available as a time-saver. Further, I expect that the IRS will be more accepting of an amendment provided by the mass submitter rather than amendment provided by another source. Some practitioners appear to be holding back on adopting a SECURE amendment in anticipation of being able to get the Cycle 4 document executed in 2026. This is a our industry's version of playing chicken (for those who haven't seen Rebel Without a Cause, it worth looking it up). Absent the above, hopefully plan sponsors have captured documentation of the administrative decisions they have made AND communicated to participants. If a plan sponsor has not done this, then they should be encouraged to adopt a SECURE amendment this year. We are communicating the available choices to our clients and allowing them to provide input. So far, less than a handful have asked for an amendment now and this is because they each have a need now to amend the plan.

Nothing has changed, and your understanding is correct. It may be helpful to break down the administrative steps and see how the labeling of contributions changes. Part of the confusion arises with the change in nomenclature such as saying "Roth elective deferrals" in place of "Roth contributions". The Nonelective Employer Contribution NEC is made to the plan and deductible for the plan year to which it relates. There is only one deposit made and there is no requirement to identify separately the NEC and Roth NEC amounts. Regardless of how the administrative process is set up, the fundamental requirement is a participant's election to have the NEC treated as a Roth NEC must be made before the NEC is allocated to the participant's account. Most commonly, the allocation of the NEC will occur in the plan year following the year for which the NEC was made. If the participant has a valid election to get a Roth NEC, then the NEC will become a Roth NEC upon allocation. The Roth NEC will be taxable to the participant in the year in which the allocation is made (and it is not taxable to the participant in the year for which the plan sponsor made the contribution.) Plan provisions and plan administration procedures can vary on issues such as the timing for the participant to make a Roth election, and for the allocation of the NEC. These do not change the year of deductibility of the NEC by the employer, nor the taxation to the participant in the year in which the allocation is made.

How each of us decides to approach this situation is a personal decision likely very much influenced by the policies of our employer. My personal approach is to attempt to get the facts. I agree that assumptions too often are inaccurate. If the facts reveal that the client, after being made aware of the issues, is doing something demonstrably wrong, then I have no problem with terminating the engagement. The client is free to move forward on their own or to engage another service provider. This is all included in our service agreement. It works for us.

Condensing @Peter Gulia 's (not so) hypothetical scenario question, if I know something is wrong and I know I cannot be held accountable, would I still do it? It is a question about character. My answer is I would not do it. The answer was the same when I was an employee and since I have been a business owner. I will observe that in our business there are many paths forward for resolving issues, and keeping a focus on clarifying the facts and identifying solutions has proved many times over to be key.

Here is a slide from an IRS webinar about Circular 230. When situations like this come up, we see it as an opportunity to educate the client on the issues and potential consequences of their actions. In the vast majority of these situations, the client (admittedly often grudgingly) does the right thing. If we know that the client will disregard our input and proceed with making a bad decision, we will resign. This has happened very rarely. Getting fired by the client has happened rarely. Becoming a trusted service provider has been the most common outcome.

@WCC highlights that how the plan amendment is worded impacts whether and when this individual can re-enter the plan. If the wording simply deleted the rule, then this individual is an active employee who has met the current eligibility requirements of the plan. Regardless of the final determination, how much impact would there be by letting this employee in the ESOP? Is there a 1000 hour allocation requirement? Are there rules of parity that would have wiped out previous vesting service? How high is the participant's compensation on which an allocation would be based? How far back does the company have records to determine if anyone else in the future is hired was previously employed by the company before the amendment was adopted? In short, is the cost of letting this employee in worth worth the cost having to administer a hold-out provision?

Purely from the perspective of managing compliance, it may help to look at this as if it is one plan with 401(k), SHM, and profit sharing with 2 formulas. The 401(k) and SHM features should be okay across the board. The profit sharing could get even more messy than one might imagine depending on demographics primarily because of the interplay among the Top Heavy Minimum rules, the profit sharing eligibility provisions and coverage rules, the profit sharing allocation formulas, and the difference between the definitions of Key Employees and HCEs. A good starting point will be to gather all of the census and contribution data for both plans and use that to guide next steps. I do suggest that you discourage the client if they are considering treating the plans as unrelated or they are considering having the payroll company do any of the compliance work.

This sounds like a situation where the college child has a campus or similar job associated with the college and receives a 1099-MISC. If this is the case, then the income is not received from the plan sponsor and is not plan compensation. There are other possible scenarios, almost all of which point to this is not plan compensation. I suggest that you ask for a copy of the 1099 and look at who is listed as the payor. If the payor is the plan sponsor and the form is a MISC, then there is at least an argument that this could be plan compensation. Regardless of who is the payor, if the form is an NEC (Non Employee Compensation), then by definition the college child was not an employee of the plan sponsor and it is not plan compensation. If the client is insisting that you must recognize the 1099 compensation as plan compensation, then you have to wrestle with where the boundary is for your professional ethics and your willingness to continue to serve the client. Some may accept a client's written instruction to use the 1099 compensation, some may accept documenting receipt of some other verifiable documentation, and some may only accept having a copy of the 1099 that was sent to the college child (which should be part of their personal tax return documentation.) Keep in mind that if you are the one making the decision absent formal documentation, this can be construed as a fiduciary act.

The parity rules around breaks in service only apply to vesting service. The closest thing related to eligibility service is a one-year holdout with retroactive credit which does not wipe out predecessor eligibility service but only defers its recognition.

@Jakyasar exactly which flavor of 1099 was issued to the children? MISC? NEC? or any of the other 20 flavors?

I have not seen a plan take this specific action. I have seen situations that effectively yield the same result. For example, as a result of a change in recordkeeper all participants were required to make new investment elections. The accounts of missing participants in some instances are defaulted into the QDIA. In other instances, these accounts were defaulted into the fixed income option. It also is interesting to note that the PBGC's acceptance of account balances for missing participants when a plan is terminated also yields a similar result. I have not seen any instance where missing participants' account balances were invested at the direction of a plan fiduciary. The AO says that was acceptable but notes that the plan fiduciary would not 404(c) protection.

There is no readily available resource to provide a quantitative analysis of investments held in trust accounts of retirement plans. Financial advisers are being very cautious about promoting crypto so they have not taken a public stance on the merits of adding digital assets to plan investment menus. Much of the caution is around the ability of individual plan participants to make informed investment decisions about digital assets. I will speculate that professionally managed defined benefit plan trusts already have started testing the waters. Here is a publication (a compilation of articles) released by Fidelity Digital Assets looking forward into 2026. One of the more telling charts appears on page 11. It shows the number of public companies (49) that hold over 1,000+ bitcoin which is a 223% increase since the beginning of 2025. This is at least $76,180,000 for each company at today's price. Certainly, there are many more that 49 public companies holding bitcoin. https://fwc.widen.net/s/qdl5rdxqrg/fda_2026_lookaheadreport_v3 Given that public companies are regulated and are willing to communicate to shareholders that the company hold digital assets. It is reasonable to conclude that as shareholders' comfort level with digital assets increase, then that comfort level will spill over into retirement plan investment portfolios. The number of public companies currently investing in digital assets is relatively small, and the investment each company makes into digital assets is relatively small, it is reasonable that when digital assets start showing up in plan investment menus, there initially will be limits put on a participant's ability to allocate their plan accounts into digital assets. Right now, no one wants to go all in with digital assets lest they lose big and be the face of the biggest retirement plan disaster since the Studebaker shutdown inspired ERISA.

The IRS is in a position to decide what they will or will not accept in response to the penalty letter. Was the IRS letter a CP 283 Notice? If the reasonable letter was not seen by the IRS or was somewhat superficial, then consider putting together a complete and detailed explanation (with facts and dates including efforts to get the formed files and failures on the part of service providers). The DFVCP program is cheap relative to other costs associated with fighting the letter. Consider filing under the DFVCP and then responding to the letter with the update reasonable cause letter and noting the DFVCP filing. In many cases, the IRS is more interested in compliance than it is in collecting penalties. You may be pleasantly surprised by the response.

The details are very helpful. Since the Roth conversion is taking place in 2026, the 1099-R will be for 2026 filed on a 2026 Form 1099-R. On that 2026 1099-R, Box 1 Gross Amount will be the amount of the contribution. Box 2a Taxable Amount will be the amount of the contribution Box 7 will be Code G. You should remind the client to factor the taxable amount into the calculation of any estimated tax withholding for 2026. Consider offering to give the financial adviser a copy of the contribution check as documentation of the after-tax contribution creating basis in the plan.

From where did this money come from? Was the after-tax money a contribution into your client's plan or was it a rollover into your client's plan from another qualified plan, or from somewhere else? Once the after-tax money was inside your client's plan, that after-tax account should have had a tax basis associated with it. This would then get to next question about when was or will the after-tax account was/is being converted to Roth?

It would help to have clarity on exactly what is being reported. Are you preparing a 1099-R for: the plan from which the after-tax money was moved into a receiving plan, OR for a plan where an in-plan rollover was made from an after-tax account into a Roth account, OR something else?

It is not too late to file the 1099R for 2025. It is never too late to file 1099R for 2025 as long as you are reporting amounts that are taxable in 2025. To further document the prior comments, if you look at page 7 of the instructions for the 2025 instructions for 1099-R it says: "Corrective Distributions You must report on Form 1099-R corrective distributions of excess deferrals, excess contributions and excess aggregate contributions under section 401(a) plans, section 401(k) cash or deferred arrangements,..." "Excess deferrals. Excess deferrals under section 402(g) can occur in section 401(k) plans, section 403(b) plans, or SARSEPs. If distributed by April 15 of the year following the year of deferral, the excess is taxable to the participant in the year of deferral (other than designated Roth contributions), but the earnings are taxable in the year distributed. Except for a SARSEP, if the distribution occurs after April 15, the excess is taxable in the year of deferral and the year distributed. " I repeat my earlier caution: If the refund is not made by April 15, 2025, it is still taxable for 2025 and the excess amount must remain in the plan and cannot be removed until a distributable event occurs (or is corrected under EPCRS). When the excess amount subsequently is paid, it is taxed again in the year of distribution.

Lets break is down further. Merging plan Participant terminates in 2025. In calendar year 2026, the plan files a 2025 8955 and reports the participant with Code A. In calendar year 2026, the plan merges mid year into the surviving plan. The merging plan files a final 5500 for the short plan year ending on the date of the merger. The plan files a 2026 8955 reporting the participant as Code D Surviving plan In calendar year 2026, participant has vested account balance transferred into the surviving plan. In calendar year 2027, the surviving plan files a 2026 8955. The participant is reported on the 2026 8955 with Code A.

Yes, a 2025 1099R still needs to be prepared and included as 2025 income on the participant's tax return. If they already filed their 2025 return, then they need to file an amended return. If the refund is not made by April 15, 2025, it is still taxable for 2025 and the excess amount must remain in the plan and cannot be removed until a distributable event occurs (or is corrected under EPCRS). When the excess amount subsequently is paid, it is taxed again in the year of distribution. The taxation in 2025 does not create tax basis in the plan.

This issue has been addressed by each both the IRS and DOL. See IRS §1.401(k)-1(a)(6)(iv) and DOL Advisory Opinion 99-04A.

The intent for reporting participants on a For 8955-SSA is to enable the Social Security Administration to inform someone that they may have a retirement benefit available. The SSA uses the a pairing of the individual's SSN with the EIN of the plan that has the available benefit. With the plan merger, the EIN of the plan that has the available benefit will be the surviving plan from the merger. Because the plan is merging in 2026, the plan will file a 5500 for the entire plan year using its own EIN. The 2025 terminations can be reported on the Form 8955-SSA for 2025 also using the plan's own EIN. When the merger occurs, the merging plan will file a final 5500 for 2026 for the short plan year ending on the date of the merger using the plan's own EIN. The plan should file for the short year a Form 8955-SSA using the plan's own EIN for all participants who previously were reported on Form 8955-SSA using the plan's own EIN and Code D (delete) for all participants. The surviving plan should include all of the merged-in terminated vested participants on its 2026 Form 8955-SSA with a Code A.

He gets 2 1099Rs, one for his 2025 tax filing reporting the return of the $4100 with a Code E in Box 7 and one for his 2026 tax filing reporting the earnings also with a Code E in Box 7. Code E is for Distributions under Employee Plans Compliance Resolution System (EPCRS).