Paul I

There is some missing and some confusing information. LTPT rules are designed for determining when an employee is eligible to make elective deferrals. Eligibility to receive an employer contribution really is not relevant to whether or not the employee is a LTPTE. If the plan's provisions related to eligibility to make elective deferrals are liberal enough to allow an employee who at least works 500 hours or more in an eligibility computation period, then likely anyone who meets the LTPT criteria would be eligible to participate like any other employee who is regularly employed. (Ignoring for purposes of this comment, non-service related exclusions based on classification.) Otherwise, the employee needs to have completed 2 consecutive years of employment with 500 or more hours. The OP does not say how long the employee has worked. If the employee does not yet have the 2 consecutive years, then the employee is not an LTPT. If the employee does have 2 consecutive years, then the employee is eligible to defer and is an LTPTE. It does not matter if the employee elects a zero deferral or completes an election that they do not want to contribute to the plan. The employee remains an LTPTE. Should the employee become eligible to participate in a future year, then the employee will be a former LTPTE and have more liberal rules for determining any vesting in employer contributions.

Yes, but be careful in drafting the match provisions and the timing of when amendments can be made to the plan. For example, if the SHM is described broadly as discretionary, then the plan would have prescribed notice requirements and could be subject to the "maybe SHM" rules which could affect all participants; or, if the plan has an SHM for NHCEs and discretionary match for HCEs, the match levels and match rates together could break the safe harbor. Also be mindful of the plan design if the intent for the SHM is to be an ADP safe harbor or both an ADP and ACP safe harbor. You may want to determine the goal the parents have in mind for contributions made to their son's account. For example, if they only want the son to have more contributed to his account, they may be able to increase his salary and have him increase his deferrals while still excluding him from the SHM. This could get the son to the same place without complicating the plan design. If they need to justify the salary increase, they can increase his hours or his responsibilities. Sometimes the plan sponsors can be myopic and they do not consider easy and available alternatives that can get them a desired result without messing around with the plan design.

You have to follow the plan document. For example, if it says all HCEs are excluded from the SHM, then the son doesn't get the SHM, or, If it says HCEs get the SHM but the owner and his wife are excluded, then the son gets the SHM. It is easy to say that a plan can discriminate against HCEs, but keep in mind that HCE participants have a right to any benefits the plan document provides for them. The plan administrator cannot assume that HCE benefits are always subject to the discretion of the plan administrator regardless of the plan provisions.

There are many ways in which a company may schedule the pay date for actual hours worked. Typically the company will adopt a pay period during which an employee work and a payroll date associated with that pay period. For example, a company may have a payroll date that as of the end of the week following the close of a two week pay period. Or, a company may have a payroll date that is as of the last day of the payroll period. Or a company may have some other payroll timing. Because there are so many different ways payroll may be administered, regulations do not attempt to define a set of rules for every possible way a company could run payroll. The company needs to decide its payroll practices and the key to being considered in compliance with tracking actual hours is to be consistent year over year in how the hours are tracked. The company should pick an hours counting method that the company can administer reliably (i.e., not screw it up). Many companies report payroll and hours based on payroll date. If the payroll period begins in year 1 and ends in year 2, theses companies report this payroll period for year 2. That being said, other companies may report payroll periods that start in year 1. Some have attempted to split a payroll period based on the days when the employee worked and learned that this takes a lot of work. Keep in mind that a plan can count hours differently for eligibility, vesting or benefit accrual (e.g., allocation conditions). The plan also may have different methods based on the classification of the employee (e.g., hourly paid versus salaried). The bottom line, be consistent and keep it simple.

Is this is a standalone plan where the plan sponsor is not part of a controlled group, and there is not a large group of employees excluded by classification? If yes, it is unusual that deferrals would fail coverage, and slightly more likely that match also would fail coverage in which case you may want to take a closer look at the test. If no, then the coverage testing starts to become orders of magnitude more complicated and you may want to engage a third party to help guide you.

Unequivocally, DO NOT get involved in making any decisions about the plan, and DO ask for written documentation (preferably with the signature of at least one fiduciary) about the pricing of the stock and about the value used for making distributions. If the client and fiduciaries refuse to do this, resign immediately. Otherwise, in the near future you may get a call from the DOL or IRS, and you may be making a call to you E&O insurance provider and legal counsel. Read the plan provisions about what value is used to determine the amount of a participant's vested benefit, and read the provisions about the permissible form of payment, including if it must be in cash or could be in-kind. It also would be prudent to read those often-unread provisions in the plan document (particularly in the Basic Plan Document if this is a pre-approved plan) dealing with trustee and fiduciary responsibilities. If the trustee clearly is violating the plan document or trust agreement and is adamant about directing you to violate these documents, resign immediately. If the plan was audited, the auditors may or may not be aware of the machinations being contemplated by the trustee. You may suggest to the client that they consult with the auditors and also with the plan's legal counsel. This is not your circus unless you make it your circus.

The feature to take an in-service withdrawal from match or profit sharing accounts if the amounts have been in the plan for at least 2 years has been around since before ERISA. Revenue Ruling 71-295 clarified Revenue Ruling 54-231 that the time period had to be at least 2 years, and Revenue Ruling 73-553 clarified that the count starts from the date a contribution is deposited into the employee's account (i.e., not the date the contribution was accrued). There does not seem to be any clarification regarding how earnings are considered. Using the actual account balance from 2 years ago is a safe option. It is clear that contributions deposited within the last 2 years are not available. Adjusting the amount for earnings is acceptable if the accounting detail is available to calculate the actual associated with the 2 year old balance.

Another way to look at this is to ask what is the plan year reported on the final Form 5500 or SF for Plan A. If as Lou notes this is an asset sale, the final plan year for Plan A could be a full 12 months (taking care to zero the assets by the end of the year). If the Plan A final plan year is less than 12 months, then the 415 limit will be prorated. A Plan A termination before the acquisition in a stock sale would result in a short plan year and a consequent proration of the final plan year. In all scenarios, Plan B's plan year is the full year, and all employees who become eligible to participate during the plan year can have annual additions up to the annual limit.

@RatherBeGolfing thanks for the catch! Everyone should note your comment about a final return and disregard mine. Checking a final return would require the assets to go to zero, and if they don't it would trigger an inquiry.

@Peter Gulia, I think considering circumstances as of the date a 5500 filing is signed is not acceptable. The form reports on activities occurring during the time period specified in the Part I at the very top of the form. (Arguably, financial information reporting accruals does this, but accruals are linked directly to the reporting period.) Similarly, when reporting other information on the form ranging from counts to the compliance questions, the proper entries report information occurring at any time during the reporting period. The fundamental question here is whether the plan was subject to ERISA, and the existence of a non-owner employee who was eligible to participate sometime during the reporting period says the plan was subject to ERISA. Hence a Form 5500-SF should have been filed. I suggest @Dougsbpc find out how long the plan had an employee and weigh the time and effort to file Form 5500-SF under DFVCP. While I agree with @RatherBeGolfing that the IRS likely will be accommodating if the client can demonstrate that some form of 5500 was filed for each year, the DOL more likely will not be as accommodating should they get involved. The Form 5500-SF is the DOL's baby and they have been known to act as if Form 5500-EZs don't exist. If, in this instance, the plan started out as an owner-only plan filing Form 5500-EZ and then of the owners became a non-owner employee, then ideallythe last Form 5500-EZ should be amended as a final return and Form 5500-SF should be filed for subsequent reporting period as an initial filing. This is all feels like discussing how many angels can dance on the head of a pin.

@kadvisor I agree - clean it up now or a few years from now some agent will show up and say the plan violated the successor plan rules. Then everyone will be scrambling to put together an explanation.

On the surface, of course there is no reason a plan would not want a zero-expense fund S&P 500 Index fund. But your question was is there any reason a plan would not want this zero-expense fund? This is another way of asking, cynically, what's the catch? From an AI point of view, "Essentially, the "free" thing is being offered in exchange for something valuable to the provider, usually your personal data or attention." Examples are free checking accounts, free shipping, free breakfast with an overnight stay... i.e., something that builds a recurring relationship. Empower is offering this as an "Institutional Separate Accounts" which their information says are "(also known as insurance company separate accounts are an insurance company version of a collective investment trust (CIT). Like a CIT, institutional separate accounts pool assets from more than one retirement plan to achieve economies of scale and pricing." https://docs.empower.com/empower-investments/pdf/isa/Institutional-Separate-Account-Platform-Brochure.pdf and https://docs.empower.com/empower-investments/pdf/isa/Institutional-Separate-Account-Platform-Brochure.pdf With this offering, Empower is one-upping Vanguard in a proverbial "race to the bottom" on plan administration and investment fund expenses. I applaud Empower for recognizing that investment fund fees are an irritant for many plans, and for coming up with a creative solution bolstered by great marketing. Plan fiduciaries and their advisors still need to do their due diligence and this includes considering the totality of the relationship. If their conclusion is Empower offers the best services for their plan, they should give this fund serious consideration.

@david rigby 's question is most appropriate because the employer will not like the results of using the elapsed time service spanning rules. This particularly will be the case if the employer has employees who do not work full time or are employed seasonally. Keep in mind that the plan can have a quirky vesting provision as long as it is backed up by a vesting provision that meets the minimum requirements (1000 hours per vesting computation period (VCP) and possible use of an age 18 requirement and/or a shift in the VCP from anniversary date of hire to plan year). Consider discussing with the employer a 3-year cliff vesting schedule based on 1000 hours, and also allowing full vesting when an employee has worked 18 months. You could then get into the details of how to count months. This could be: elapsed time from date of hire without regard to service spanning rules. counting months where a month is counted only if the employee worked at least 1 day/# of days/all month. counting days worked and dividing by 30 days to determine the number of months. Don't get too crazy because someone has to administer this thing!

Given the line number references in the original post, it looks like the Company B filing was a Form 5500-SF. There are questions that will help to determine if there is no problem or if there are several issues to be addressed. In what plan year was the plan terminated? Was this 2024 or 2025? Was the Final Return box in Part I B checked? if yes, then the ending balance on Part III line 7 must be zero. If there are still assets in the plan, the Final Return box should not be checked. Subsequent final filing for the Company B plan will be needed when the assets do go to zero. Is there an entry in Part III Line 8j indicating that assets were transferred to another plan? Since termination was before the acquisition and if participants needed to elect to rollover their account to the acquiring company's plan, there should be no entry here and there should be no entry for Part VII Line 13c(1). Are the "transfers" into Company A's plan are in fact rollover contributions? If yes, then there should be no entry in Part VII Line 13c(1). The instructions are clear: "Note. A distribution of all or part of an individual participant’s account balance that is reportable on Form 1099-R should not be included on line 13c. " The rollovers would be reported to participants as rollovers out of the Company B plan and Company A should show them as rollover contributions into the Company A plan. There would be no need for Plan A to annotate the rollover contribution as a plan merger. Please share any additional information that may color the issues.

The calculation of eligibility, vesting or benefit accrual using elapsed time rules fundamentally only consider an employee's chronological sequence of hire dates and termination dates. Here is the general concept. Imagine a spreadsheet with a column for hire date and column for the subsequent termination date. Add a column showing the number of days worked by subtracting the hire date from the termination date. These are days of service. Now add a column showing the number of days of severance by subtracting the termination from the subsequent hire date. if the number of days of severance is less than 365, consider these severance days as days of service. Add up all of the days of service. Count the number of multiples of 365 day in the total and that is the elapsed time. (The may be some accommodations needed for leap years, and hire/rehires on the same calendar day in different years.)

I agree with @RatherBeGolfing about the utility of each service. I use both services (including most of the ERISApedia eSources and their new AI Search feature). I also use Wolters Kluwer's Vital Law pension-related services. Let me preface my observations that I view each of these services as a tool to complete a task, and depending on the task, you need to have the right tools to complete the task accurately and efficiently. Wolters Kluwer has the most in-depth resources for current, historical and proposed laws, regulations, notices, memorandums, relevant case law... One of its particular strengths when working on plan corrections for past years is having ready access to what was in effect contemporaneously in each of those past years. Similarly to ERISApedia, WK provides access to several of their books on various topics written in "plain English". The TAG service is similar to ERISApedia's Ask the Author service. One plus to the TAG service is it notes when the question was asked and answered, and generally provides more detail supporting the answer. The EOB is the gold standard for researching a topic where knowing what, when and why about the topic is important. The EOB has accumulated information over the history of retirement plans which is informative but may not be relevant to what you are researching. A very big advantage to the EOB over other services is references to informal guidance gleaned from agency presentations at meetings/conferences with various industry groups, and from interactions between agencies and professional organizations. Navigating the EOB is a learned skill and is not intuitive. ERISApedia is very the most user friendly of the three services. Most of the time this is an advantage particularly when confirming what you think you know but are not completely confident about it. ERISApedia also is very helpful when faced with an unfamiliar topic and there is a need to get up to speed fairly quickly. Like Wolters Kluwer, you need to sign up for multiple eSources to get the most out of ERISApedia. While I like the Asked and Answered feature, the results often do not frame the Q&A in its time frame or regulatory context which can lead to assuming an answer that was correct in prior years remains in effect today. The ERISApedia AI Search is in its infancy and will grow in value as more people use the system. ERISApedia stresses that it is a productivity tool and the user needs to confirm the validity of results. It definitely saves time. One ancillary feature is the ability to ask the service to draft a memo, to draft an election form, or to draft an explanation. The final results almost always need editing, but the AI-generated content is a very big time saver. The cost of the AI service is peanuts and this feature is well worth the incremental cost. Again, I view each of these services as a tool to complete a task, and depending on the task, you need to have the right tools to complete the task accurately and efficiently. A firm needs to manage its operating expenses with a view towards what pays for itself both in terms of efficiency and in terms of doing things correctly. We all have had experiences where the cost of redoing or fixing something is orders of magnitude greater than the cost of getting things done correctly the first time.

In the original post, the plan sponsor is willing to give the participant until the end of the year to remedy the situation. This does not sound like a plan sponsor who wants to punish the participant, but does want to enforce the terms of the loan policy. The plan sponsor likely is willing to help the participant work out a solution that does not impact the plan. If the plan sponsor has lost all faith in the participant's word that it can no longer be trusted, then they likely would terminate the participant's employment. The plan sponsor does need to enforce the rules lest work get out that anyone can lie and take out a loan for any reason without consequences. This just as easily lead some participants to think other plan or company rules where lying will not have consequences. Or, the plan sponsor could acknowledge that restricting loans is no longer a good idea and remove the restrictions. That is the plan sponsor's decision. Plans should communicate in writing how the plan will operate, and then operate the plan accordingly. Put in more common language, plans should say what they will do, and then do what they say. Any teacher or parent can tell you that anything else is asking for trouble at some level.

Most plan documents include basic loan provisions about the availability of loans, and then refer to the plan's loan policy to provide the details about how the loan will be administered. The loan policy typically can be changed without amending the plan document. This sort of dual controlling provisions/policy does have the potential to cause some confusion. Notably, the loan policy can specify conditions that will cause the loan to become immediately due (as is common when a participant leaves employment), even though this is not a mandated, regulatory requirement. The loan policy also can specify how loan repayments must be made (e.g., through payroll) and other means of making repayments are unacceptable. In this instance, the loan is not violating any likely plan provision, but it is violating the loan policy. The company seems to want to work with the participant by allowing the participant until the end of the year to remedy the situation. Consider taking these steps: Review the requirements of the loan policy. Inform the participant that the loan is in violation of the policy, and beginning after the first loan repayment in July the plan will no longer accept loan repayments because of the violation of the loan policy. Inform the participant of the loan policy related to the cure period for not making loan repayments (which commonly would be as of the end of the quarter following the quarter in which the last loan repayment was made). This should give the participant until the end of the year to repay the loan. Inform the participant if the loan is not repaid by the end of the cure period, is will be considered a deemed distribution and taxable. Adjust the steps to conform to the provisions of the actual loan policy. Good luck!

Yes, the SH is based on gross. Assuming that the elective deferrals were made prior to the allocation of the SH, the plan will have to deal with an excess 415 amount. The plan document should spell out exactly how to correct the 415 limit when deferrals plus employer contributions exceed the limit (which likely is to refund the deferrals). If the plan definition is 415 comp w/o adjustment, there are many other forms of compensation that possibly do not appear in either box 1 or box 5 on a W2. The client will have to provide more information describing their benefits, fringe benefits, pay practices... to get a complete picture.

Before responding, let me share this. About 4 years ago I did some research for a client who asked how plans actually respond to this question. The client had responded 'yes' for several years and had never had any feedback from either the IRS or DOL. The client was checking 'yes' because the plan had some account for some missing participants who had been missing for a very long time, and in-house counsel insisted that they had to check 'yes' (even though the auditors disagreed). I downloaded the 5500 and 5500-SF data files from EFAST2 and looked at the responses to this question. There were not very many 'yes' responses, and almost all of the 'yes' of the were for DB plans. Only 21 'yes' responses were for DC plans. I called the DOL and asked them about how to respond to the question and they said this was an IRS question and I should talk to the IRS. I called the IRS and asked them about how to respond to the question and they said if it's on the 5500, I should call the DOL. After some persistent follow up, the agencies did speak with each other and agreed that the IRS would be the agency that would follow up with me. Never heard back from anyone. (The client ultimately sought advice from outside counsel and started responding 'no'. Guess who is no longer working at the company.) Enough tales of woe. Does the plan document have clear language that account balances under the cash-out limit for terminated participants absolutely must be paid within a fixed time period after termination (to allow for participant consent if available)? If not, then the is wiggle room for an interpretation that the payment is not mandatory. Be sure to read the details in any Basic Plan Document that is associated with an Adoption Agreement. The language in the Adoption Agreement tends to be abbreviated and sounds more absolute than the supporting language in the BPD.

You may want to suggest to the employer to look into how the contributions were handled on the company's tax return and how the IRA provider reported the contributions to the employee. If the employer took a deduction for the contribution and the IRA provider reported the contribution to the employee as a deductible contribution, then the contribution could have been deducted on the employer's tax return and on the employee's tax return. If this did happen, emphasize that this is just a question and for the sake of maintaining sanity, keep repeating to yourself either "not my farm, not my pig" or "not by circus, not my clowns".

The account balance is not affected by the limit when the limit applied to the investment election for contributions. The account can go up or down. I have not seen any forced rebalancing. Some plans believe that rebalancing is an investment strategy that over time captures more gains and cuts more losses. I have seen plans that say investments will be rebalanced periodically (commonly once a year, but I have seen quarterly) unless the participant elects not to rebalance.

Peter, it is not a nonstarter. Most recordkeeper's will accommodate a limit on the percentages that can be elected when the participant makes the investment elections for new contributions. Most will not accommodate a limit on the total amount invested in a particular investment. Some may demonstrate how a periodic rebalancing of participant accounts could accomplish enforcing a limit.

All automatic contribution arrangements - ACAs, EACAs and QACAs - must have QDIAs as a default investment election. This covers the situation when an employee is automatically enrolled and deferrals are taken from the employee's pay by default. A plan can be an ACA without being an EACA or a QACA. A plan can be an EACE without being a QACA. A plan can be a QACA without being an EACA. A plan can be both a QACA and an EACA. Asking a plan sponsor what they would like to have in the plan for employer contributions, vesting, testing extension, ... is like asking your kids what flavor or flavors of ice cream they would like to have on their ice cream cones.

A few things to consider: Elective deferrals are not counted in determining the maximum deductible amount. The 25% maximum deductible limit applies only to employer contributions (e.g., profit sharing, match...) and is calculated based on total compensation of all eligible participants. This is not a limit on any individual participant. The maximum deferral for 2024 was $23,000 and for 2025 is $23,500. It the participant is over age 50, catch up contribution limit is $7,500 for each year. If, for example, the employee has W-2 of $25,000 for 2024 and defers $23,000 for 2024, then the employee's net taxable amount for 2024 is $2,000. Since the employee total annual additions in this case is 100% of pay, then the employee could receive an employer contribution of $2,000 and this would not affect the employee's W-2 compensation of $25,000 nor the employee's net taxable compensation of $2,000. The calculations are the same for 2025 after adjusting the numbers for the deferral limit to $23,500. If the employee is the only eligible participant in the plan, the employer deductible limit is 25% of $25,000 (unreduced for deferrals) which is $6,250.