Paul I

Manage the timing and the effective dates of any plan amendments very carefully. A significant change in a plan's provisions will end the transition period immediately.

I searched 3121(a) and other referenced subsections for "self", "self-employed", "sole", "sole proprietor", "partner" and pretty much came up empty. There is a reference to "individual" but the context is when someone else pays you a wage to do work for them like a housekeeper. The section focuses on withholding and remitting Social Security taxes from wages. A self-employed individual is not subject to this requirement (they can take a draw without specifically withholding Social Security taxes). The nuance comes in when the self-employed individual files a Form 1040 and files a Schedule SE to pay both the employee and employer Social Security taxes. The individual pays the tax but is not required to withhold it from payments made during the year. If I had to place a bet on it, I would bet on the a self-employed individual with net earnings from self-employment of $145,000 or more will have to make Roth catch-up contributions. But it remains an interesting question on the path that could be taken to lead to that conclusion.

I agree with Bill that we likely will see guidance that uses in-plan Roth conversion rules to re-characterize amounts as Roth catch-up. I think this logic also will be used as guidance for administering an employee election to have non-elective contributions or match treated as Roth. There is a convenience to having one set of rules apply in at least 3 different situations (in-plan Roth conversions, test recharacterizations, NEC/match elections). If so, then tax event would occur in the year the conversion occurred. It will be interesting to see where the IRS comes out on these topics.

Interesting question. Technically, a self-employed individuals do not pay themselves wages. The fact that net income from self-employment is taxed using income tax rates used by workers who receive a wage, and the self-employed individual must pay payroll taxes on self-employment income certainly clouds the issue. Words do matter, as we all know when trying to nail down the various definitions of compensation that we find within retirement plans.

Employee benefits for unions are collectively bargained and timing of the effective dates of changes to the union plan are tied to effective date of the bargaining agreement. That often differs from the effective dates of changes in the nonunion plan.

I have had clients comment that it seemed unfair for terminated participants to benefit from future increases in share value since the terminated participants were not adding value to the company. Almost all of them put in place a mechanism to replace the shares of terminated participants with cash. The rest have gone the route of replacing the shares with a secured note. I have not heard anyone just freezing the price. Keeping shares in the accounts of terminated participants but not allowing the share value to fluctuate is treating these shares differently from the shares held in other participants' accounts. This sounds to me like a problem. Assuming the shares are not publicly traded, it would be interesting to see if the independent appraiser has commented on this policy.

I assume the 2022 filing also did not check the box that it was the final filing. If final filing is checked and there is an ending balance on the financial schedule, it could trigger an edit and possibly an inquiry. There should be no issue answering no to the "all assets distributed" question if the final filing box is not checked and a balance is reported. Plans essentially have a year to get all of the assets paid out, so it is not uncommon for a plan to have assets at the end of the year in which the termination occurred.

Is there something magical about 2025 that the plan was going to be terminated at that time? If the doctors are contemplating selling the practice or pursuing some other exit strategy and if revenues are low and declining, then there is very little time between now and early 2025 to fund the minimum from revenue, to experience asset growth, or to pay off loans to the business. If the plan was to sell the practice, they may want to consider accelerating their plan and use part of the proceeds to make up the funding (at least for the employees and a possible haircut for themselves). I agree with CuseFan that they should involve an accountant or lawyer in formulating a strategy. They also should give some serious thought to working with a financial adviser who can help them manage their investment risk with such a short time horizon.

The changes in the draft instructions for the 2023 5500-SF say: IV. Changes to 2023 Instructions for Form 5500-SF Short Form Annual Return/Report of Employee Benefit Plan 1. Instructions for Form 5500-SF, “General Instructions,” “Who May File Form 5500-SF,” numbered paragraph 1 is revised to add two new sentences at the end to read as follows. 1. The plan (a) covered fewer than 100 participants at the beginning of the plan year 2023, or (b) under 29 CFR 2520.103-1(d) was eligible to and filed as a small plan for plan year 2022 and did not cover more than 120 participants at the beginning of plan year 2023 (see instructions for line 5 on counting the number of participants). To determine the number of participants covered by defined benefit pension plans and welfare plans, use the number described on Form 5500-SF, line 5a. Defined contribution pension plans use the number described on the Form 5500-SF, line 5c(1), except use the number described on line 5c(2) for defined contribution pension plans that check the “first return/report” box on Part I, line B; Similar wording appears in the Form 5500 instructions. Short version, if you check the box that says this is the first filing, the count to determine if the plan is a small plan or a large plan is based on the end of year count that is reported on line 5c(2).

Here literally is the sanitized notice that was sent out to everyone who received the NOIT. The language was adapted from the letter received from the PBGC. We added the second paragraph because individuals had made elections for their form of payment to be made as a result of the plan termination. Notice of Withdrawal of the Plan Termination of the Retirement Plan The Corporation has withdrawn the plan termination of the Retirement Plan. The Plan is an on-going plan. The Plan did not terminate as of the proposed termination date stated in the Notice of Intent to Terminate that was distributed when the process began. You will be notified in advance of any further effort to terminate the Plan. Under 29 CFR section 4041.28(b), the plan administrator may not make any distributions of assets unless a participant has a distributable event such as retirement, death, disability or other separation from employment, and is eligible to commence benefit payments.

I just had a plan that went through the entire plan termination process with the PBGC up to the point where annuities were purchased for all terminated participants and the plan was negotiating the purchase of annuities for the remaining actives. All filings were made timely. A week before the final PBGC filing was due, the company decided that it could not afford the contribution needed to complete the annuity purchases. The PBGC said as long as no distributions were made that relied on the termination as the distributable event and everyone who was sent an NOIT was given a notice was called off, the PBGC would acknowledge the withdrawal of the termination and the plan is back to business as usual. The plan was frozen so everyone already was fully vested, and we recommended an amendment to withdraw the termination to complete the documentation. Frankly, it was surprisingly simple.

Here is an article going back in time regarding Qualified Plan Distribution Annuities. I highlighted some items related to this discussion (starting on page 10). As I understand it, a plan can allow the participant can ask the plan to purchase a QPDA and have that QPDA distributed to the participant when the participant's benefits become payable from the plan. The plan document is not required to have specific language allowing for the distribution of a QPDA and can be available as long as the document allows for a lump sum distribution that is not limited to a cash distribution. The QPDA is distributed to the participant as an in-kind distribution. This distribution is not a rollover and is not reported on a 1099-R but rather is a "payment of the balance to the credit of the employee for purposes of 402(c)." The QPDA is subject to qualified plan rules such as direct rollovers, qualified plan RMD rules, 20% default withholding and more. QPDAs have been around a long time, and they recently received some recognition in the SECURE Act Portability of Lifetime Income Options (Section 109). I must admit I have had no experience with QPDAs. It's been said and hopefully is true that learning and growing as we age increases our lifespans. NYU-BenefitsReview.pdf

Generally, the plan can allow the participant to defer the coming year's deferred comp to a point in time defined by a specific time period or definitely determinable event. The election is made before the year starts and the distribution occurs at a definitely determinable point in time. For example, a younger individual with a child that is now 8 years old may elect to take distribution in 10 years - roughly around the age the child may go to college. The election can be tied to the payment being made in 10 years - that is determinable. The election cannot be tied to when the child goes to college because that is not determinable. An older individual in the same plan could elect to have the amount payable at age 65. The plan can allow a participant to make different elections for different years. Allowing that option requires meticulous administration. Vesting will have to occur with respect to this deferred amount on or before the amount can be paid, and the amount will be taxable when it vests without a substantial risk of forfeiture. Some plans use class-year vesting so there is always an amount at risk of forfeiture. As CuseFan noted, timing of taxation and distribution can occur at different points in time.

HCE, NHCE, family member... all should not be an issue if the individual is excluded from participating by name as long as the plan passes coverage. If the plan uses rate group testing, then the individual will be in the test as non-excludable, and also the exclusion cannot be used to pass the reasonable classification part of the average benefits test. Short version, know where the mines are buried so they don't blow up compliance.

We know the plan must follow its terms. We know that a plan fiduciary's best practice is to document, document, document what, when and why anything that is done in the management and administration of the plan. We know that documentation of transactions and participants' elections that are supported by contemporaneous financial statements and signed documents and administrative forms have the most credibility with the IRS and DOL. Let's hope that the plan fiduciaries - including the trustees - who receive advice that the plan can be operated based on unsupported bookkeeping entries know better. They are the ones who will be held accountable.

You may find this case interesting reading - https://casetext.com/pdf-email?slug=brooks-v-metrica-inc and any of the 20 citing cases. It is somewhat aged, but it includes references to other cases that helped set precedents. Most TPAs and plan sponsors are not likely see the assessment of the penalties since they occur at the direction of the court primarily as part of litigation associated with an individual participant's claim. It is worth noting in the above case that the 30-day clock started ticking when the participant made an oral request for the SPD. The penalties are real and exist because there are plans that are unresponsive to participant requests. I imagine most attorneys who handle claims cases are aware of the penalty and let their clients know about it whether or not the penalty amount is numeric, is spelled out, or is referred to generically as an amount in the SPD.

You likely have to wait until you receive the IRS acknowledgement and results of your transmission. Along with that acknowledgement will be instructions: "To review the results of your file, log back into the FIRE system at HTTPS://FIRE.IRS.GOV, and at the Main Menu select Check File Status. You must select a file status using the drop down menu to display file results. If you select an incorrect status, you may not get any results. If your File Status indicates 'BAD', select the filename to review error messages. Correct the errors and timely resubmit the file as a 'REPLACEMENT'. Do not send as an original or correction file. If your File Status indicates 'GOOD' and you are satisfied with the Count of Payees, you are finished with this file. The file will automatically be released after 10 calendar days unless you contact us within this timeframe to stop the processing." I expect if the File Status is BAD, option to upload a Replacement File will be unlocked. I expect if the File Status is GOOD, the Replacement File option will not be unlocked and you will have 10 days to contact the IRS to stop the processing. In that case, before you dial the IRS, go to the bathroom whether you need to or not, grab your favorite beverage and snacks, and settle in for the duration.

Peter, interesting question because there are two penalties under the heading of failure to provide an SPD upon request. Your question relates to when a participant requests an SPD. The DOL sets the amount in §2575.502c-1 - Adjusted civil penalty under section 502(c)(1) at $110 per day. Per the EOB, that number is not indexed and has been constant for while. Common literature references this as a DOL penalty (it is set by the DOL) but you correctly note it is the court that can direct the payment of this amount to the participant. I believe that the penalty is based on days exceeding 30 days of receipt of the participants, but I don't have a handy source to confirm. The DOL has its own penalty if the DOL requests the SPD and the plan does not provide it to the DOL. This is under §2575.2(e) and is indexed. The current amount is $184 per day, not to exceed $1,846 per request (as confirmed in the link above from C.B. Zeller to the 2023 adjustments).

If there is no ESOP, then very likely there are no dividends available to pass through to participants. All of the references to 404(k) deal with ESOP shares. I asked about KSOPs because some are designed to allow participants to have the pass through of dividends from the ESOP portion's dividends redirected into the 401(k) part of the plan. They even take this one step further by allowing the dividend pass through to offset deferrals taken from payroll, but the dividends themselves are not deferrals. My understanding is dividends on employer securities in non-ESOP accounts are not available for pass through to participants. I double checked some ESOP, KSOP and 401(k) documents as well as the regulations and do not see anywhere that dividends on non-ESOP accounts are available for pass through. Hopefully some of our BenefitsLink ESOP colleagues or perhaps whoever drafted the plan you are working with can let us know any explicit rules on this topic.

The question asked about a "foreign government entity". It seems clear that a "foreign entity" (e.g., corporation, business, commercial activity, individual...) can sponsor a plan. It seems probable that a "foreign government" can sponsor a plan where the sponsoring entity is an organization operating as part of the foreign government (e.g., embassy and consulate staff, trade representatives...) There are discussions that indicate both qualified plans and non-qualified plans (403(b), 401(a), 457, 409A...) may be available. The common denominator is individuals who can benefit from these arrangements must have income that is taxable in the US. If the question ultimately is about a plan for US-based employees with income taxable in the US, then it seems likely they can be covered under a plan. Looking for information on this topic felt like trying to see if Sasquatch, Big Foot or a Yeti can participate in a plan. Hopefully, one of BenefitsLink colleagues with the very special expertise can enlighten us all.

For starters, I suggest taking a look at General Instructions for Forms W-2 and W-3 (2023) page 14. It gets complicated depending upon the situation and the amounts involved. There are some breaks available if the amounts are small or if you are a small business. Also, do not overlook the ripple effects on State and Local reporting. The worst thing is to ignore the issue. Personally, I would seek legal advice with knowledge of the applicable taxing authorities. If there are compensation-based benefit plans including retirement, and health and welfare, have them look at the implications on under-reported income on those plans as well.

Tegernsee, is the plan a standalone 401(k), a KSOP (combined 401(k) and ESOP), or are there two plans (a standalone 401(k) and a standalone ESOP)? The answer to your question about the use of dividends on employer securities likely depends part on the type of plan that holds the employer securities. There are differences in the rules applicable to employer securities held in an ESOP versus employer securities held in a 401(k).

The artifice for convenience needs to be in sync with the reporting. Filing a 5500 with the final return box checked and with a balance on the Schedule H or I is an edit check that can trigger an inquiry. We have seen the merger agreements with the date and time of the plan merger set specifically at 11:59pm on 12/31. Some agreements take extra care to note explicitly that the ownership of the trust assets for the plan merging in also is effective as of that time and date. In real-world trust reporting, the trust statements very likely will show assets as of COB 12/31 for the plan being merged. If the trustee is also associated with the recordkeeper that is preparing the 5500, the draft 5500 likely will show those assets as the ending balance and will not have the final return box checked. The trust reporting will not show a zero balance until the assets leave the account. So, yes, easier said than done and a balancing act. We had to involve an agent's supervisor to overrule an agent's refusal to accept that the merger was consummated as of the effective date of the merger even though there was a trust report that showed a balance in the name of the merging plan. All too often merger agreements are done with considering the implications on the plan, and the client's benefits staff and the plan's service provider only learn about the merger until after it is too late to provide input. For smaller plans, it is far easier and less time consuming to go with the flow and file a 5500 that covers the days into the next plan year when the trust reporting in the name of the merging plan will show a zero balance.

The answer will depend in part on the plan document. I have seen documents where the Adoption Agreement has an election to cash out less than $200 vested account balances immediately. I also have seen documents where the definition of an eligible rollover distribution in the paired Basic Plan Document explicitly excluded these distributions. Is the notice language that no response to the request for the distribution form will result in a rollover to an IRA based on the plan document, a procedure implemented by the Plan Administrator, or the IRA provider service agreement? If the document says the under $200 distributions are not eligible for rollover, then there could be a conflict between the procedure and the plan document (and the document wins every time.)

We can talk about what the plan woulda, coulda, shoulda have said, but in the end the plan has to follow the terms of the plan document. The FT William Adoption Agreement sets the Valuation Date in Section H5 as the last day of the year, quarter, or month, as daily, or as a fill in the blank. The BPD references the AA and adds the Plan Administrator can call for a special valuation for the assets in case of a distribution, asset transfer or division of assets from the plan that are not daily-valued to protect the plan. The BPD does not have an explicit formula for determining the amount available for an in-service withdrawal and leaves it up to the PA to adopt a procedure. Similarly, the PA can spell out ordering rules. That being said, from the days before daily valuations became industry standard, termination distributions and interfund transfer typically are based on the valuation following the date of payment or the effective date of the transfer request. In cases where there is an immediate need for a payment (hardships or often death payments), typically the amount is based on the prior Valuation Date less any interim payments or expenses, plus any contributions. In terms of ordering, if the plan also has daily-valued assets, either amounts were based pro-rata across all funds, or the daily funds were used first before tapping the pooled accounts. Check the document for the frequency of the valuation. If there are pooled accounts, consider asking if the pooled accounts have a daily value available - many do. If assets are held in a mix of daily accounts and periodically valued pooled accounts, then the adoption agreement should say so. The PA should decide on the procedure for allocating income in the pooled account, and should decide on how amounts will be determined for each plan event requiring a movement of assets in or out of the pooled account. Participants should be given a copy of these procedures. And, I believe that Bird is correct that the feature of an in-service withdrawals is a protected benefit and cannot be taken away from individuals who have met the eligibility to take such withdrawals from the plan (e.g., like age 59 1/2, 5 years of service for NEC...)