Cardscrazy

Thank you for your replies. Our ESOP beneficiary form is hard copy and is put in front of new hires at orientation and they get returned back (now and then people refuse). Our 401(k) form is done electronically at the TPA's website. So we have forms for the ESOP but typically not the 401(k) because they are done separately and you have to seek out the 401(k) form on your own after you've been auto-enrolled. My HR department doesn't want to hold and manage ESOP beneficiary forms and while the ESOP and 401(k) TPA is the same company, there are two methods to get beneficiaries set up. I'm asking these same questions of the TPA. If we can get an electronic form that 1) provides a record and 2) spits out a report that can be uploaded for both plans to the one TPA, that's what I'm looking to do. I'll let you know what I learn from the TPA. Thanks everyone!

If you could create a beneficiary form that allowed participants to check the box for applying this primary bene for ESOP and/or 401(k) and this secondary bene for ESOP and/or 401(k) or check the box for "same" and could work it all out in a logical electronic format, can one beneficiary form (actually two within one) cover 2 qualified retirement plans?

Just focusing on the taxation aspect, wouldn’t FICA be due in 2019 and income taxes be due in the year paid in 2020?

Thank you Justanotheradmin! I appreciate you putting scope around the type of participants who are impacted by the capping of the match to no more than 6% of wages. I will find the ACP test, but I presume they passed. And so you think that this was an overall permissible interpretation of 25% of contributions, up to 6% of wages? Well, at least I'd force them to document their interpretation of the formula and maybe stop the capping going forward. Clean up how they express the match to employees. I guess at least I didn't cause a stir for no good reason or end result I should say. Thank you!

Thank you! Yes, the ER did declare an annual discretionary match formula and it was: “25% match of contributions, up to 6% of eligible wages.” What they actually did in practice was match 25% of contributions, but (I neglected to add this above) no participant was allowed to receive a match equal to an amount greater than 6% of eligible wages. Examples: 25% of contributions: 1013 participants Match <= 6% of eligible wages: 3 participants Wage: $1,100,000; deferral: $24,500 Wage: $50,000; deferral: $15,000 Match 25% of $24,500 = $6,125 Match Match 25% of $15,000 = $3,750 > 6% of $50,000 Adj match = $50,000 x 6% = $3,000 Wage: $100,000; deferral: $20,000 Match 25% of $20,000 = $5,000 Match The plan document (an adoption agreement) was discretionary (i.e., silent as to the match formula). The above practice of providing a match of 25% of all deferrals, while capping the match off at 6% of eligible wages, was done consistently through the years. It was explained to me by an adviser that given that the Plan Administrator has the authority to interpret the terms of the plan, the above interpretation, while not be a conventional interpretation of the “25% match, up to 6% of wages” formula, could be deemed a reasonable interpretation, agree? I was advised that the IRS could say that "as long as the interpretation is not arbitrary and capricious", then there won't be a challenge, meaning there’s no real problem here – and nothing to change? The cap off of a match that exceeds 6% of wages is okay to everyone? In my mind, due to the awkwardness of the company’s interpretation of “25% of contributions, up to 6% of wages” compared to the typical understanding of such a stated formula, I would think the company would at least change the way they express their match formula going forward, assuming such a formula that caps off the match at 6% of wages is a permissible match formula since it only impacts NHCEs. Due to the minimal cost, I’d suggest they blow off capping of the match. Also, to avoid any audit issue, I’d still recommend some sort of correction be employed. If a VCP is not warranted, maybe an SCP be employed with a retroactive amendment under Rev. Proc. 2019-19 expressing what the actual match formula used in the past was based on plan administrator interpretation, while leaving the future match formula completely discretionary. Not sure SCP would be allowed. Maybe a VCP and pay in the 6% cutoff back to those NHCEs. Any ideas? Any comment on the “cap-off of the match at 6% of wages” as being a legitimate part of the formula? Did I make a mountain out of a molehill? Thank you all again!

Thank you all again for your comments. I think that I have a much better understanding after reading all your comments: 25% of the deferral is a permissible match formula and we should be able to retroactively correct via amendment for the interpretation error that the company made when it initially said 25% of contributions, up to 6% of eligible wages; but, then went and ignored the 6% wage cap in calculating the match. Also, that there is probably no 401(a)(17) issue either because a match formula that is 25% of contributions doesn't need to be capped by wages, when 402(g) and 415 will cap it instead. It might be a testing issue, but I'll let the TPA worry about that. And finally, we'll see if the company wants to save $750K a year by keeping the 6% wage cap and doing it right or if they will just drop the whole 6% thing and go with a flat 25% of contributions formula. We will see. Thank you again!

Thank you all. What you wrote above got me thinking and it was confirmed later in a private message to me (that I can't seem to find anymore and didn't even know could be sent) that when my employer told employees (and the audit report reads the same) that the discretionary match was 25% of contributions, up to 6% of eligible compensation, what they really contributed was 25% of contributions. And so if the plan was retroactively amended to reflect that the match formula from 2003 to 2017 was actually 25% of contributions then at least problem #2 is fixed, right? But what about the first problem in which compensation was not capped at the 401(a)(17) wage e.g. $275K? Does it even matter since a 25% of contributions match formula has nothing to do with wages? This is what I think you, justanotheradmin, and that private person are driving at. Am I understanding what you are saying? They complied with the 402(g) and 415 limits btw. Thanks again!

Thank you duckthing and justanotheradmin. It is a fully discretionary formula in the plan. You helped by giving me the idea that we might be able to bifurcate the two errors and mix and match the solution with the IRS to fix the two errors. I'll keep reviewing what you both wrote. Thank you for your time!!

I just joined a great company as a 401(k) administrator and immediately saw that their annual 401(k) match calculation formula of 25% of first 6% had two failures (1) failed to cap wages at the the 401(a)17 compensation limit and (2) failed to cap the match computation based on the first 6% of wages. They essentially took 25% of deferrals across the board as the company match. $750K overpaid match in 2018 by my calc. Match was correct for those whose effective deferral rate was 6% or less (400 EEs). The match on 600 EEs with higher deferrals than 6% were all overpaid. It is an audited Plan; been around for many years making this mistake. I can see that a VCP filing will be needed. I took a look at Rev Proc 2018-52, 2.07(1)(b), Example 25 and I don't see how a retroactive amendment will work when it's not just a 401(a)(17) failure but compounding computational errors. The company is successful and expensed and shelled out way more than it should have. The company I'm sure they would be more willing to fix going forward than pull funds out of accounts. I'm sure we'd offer to pull out money from executives at a certain level and above if that's what it takes. Has anyone seen such a longstanding mistake and what would be a typical IRS response to the company be with such a huge overpayment? How far back would they make the correction go? What negotiation can be done? Haven't informed ERISA counsel (I'd fire the auditor if it were my decision) yet only working my way up the chain of command at this point. I am a new hire afterall. I just want to have some idea of what the company is facing here before I push harder. Thank you!! https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-using-a-plan-amendment-for-correction-in-the-self-correction-program

termination doesn't end business as usual; it just stops new contributions and new participants post-termination date.

Madison, I might think about passing on issuing the 2016 corrective 1099-R because it was a rollover in any case with no tax consequences to the participant. His IRA's sending money back now to the Plan is a lucky occurrence and will be a plan to plan transfer probably with no 1099-R. Not all IRAs would send the money back. Even if the IRA issues a current year 1099-R to report the rollover back to the plan it won't hurt the participant either as it will be another nontaxable rollover to a qualified plan. But if you issue a corrective 2016 1099-R, it might require the participant to file an amended 2016 tax return and explain all the back and forth; I don't know for sure. Are you prepared to hire an accountant to prepare an amended 2016 tax return for this participant?

So let's list the items of proof: 1) stmts to zero balance; 2) 1099-Rs; 3) 8955-SSA D; 4) contemporaneous excel spreadsheets; 5) copies of distribution elections; 6) TPA summary of distributions. Maybe only the 8955-SSA one would stop the SSA letter from being issued, but I think I've used all of the other ones listed above at one time or another to prove distributions were made and to give concrete facts in the letter that I wrote to to the former participant.

Normally, I'd argue acquisition shouldn't disrupt the target EEs deferral savings. It would be more liberal to get them started in their new plan from the acquisition date. However, in your example they had no 401(k) plan in target Company B. Giving them time until 7/1 to get acquainted and educated and enrolled on their new 401(k) plan might be an alright thing to do. With the new company added, Company A might want to rethink their investments and fee structures in their current 401(k). I can see waiting to bring Company B into the fold having some merit from a business and HR point of view. Does Company A have auto enroll? I assume not. I think if Company B were just like all new hires then 7/1 would be fine for an entry date and I think it works here too for an acquisition. You might have to look at the negotiated sale agreement to see if Company B negotiated something different. I'd like to see if Tom finds something different. If Company A will continue with acquisitions then I'd recommend some policy drafting on this topic.

Yes, referring to Luke's comment we would have a special HRIS flag for each of the following: rehires; EEs who were acquired from an acquisition; interns to perms; Interns; temps; EEs having reached 1,000 hours; and involuntary terms. When we were advised of a rehire we did a special rehire memo to them at the time of hire, and also, if applicable, we advised them of their buy-back rights with numbers like Luke advised via a separate one-time only email.

Sorry for not replying sooner; I'm new to BenefitsLink. That an ESOP would loan money back to the company is a possible prohibited transaction issue. That's why the notes are being requested I think. You'd have to defend that they are not prohibited. As far as the valuations, the IRS wants to see that they are legitimate performed valuations. You shouldn't explain them unless an issue is raised. Valuations are the property of the trustee so you need the trustee's permission to send them to the government. We never send the valuations to the TPA, just a signed letter of certification as to what the share value is for the period.

Yes I agree with Bob the Swimmer. What does any investment committee do when EEs ask for a certain type of fund to be included in the fund lineup? Whether it's emerging markets or contra funds or real estate, etc. the committee should consider the request along with its advisors and either adopt a change or disregard/table the request, but document the prudent decision-making in meeting minutes. Then someone can call the EE and explain why...e.g., "already too many funds in the plan or we have it on our future agenda, or can't find a good fund, but will keep looking and thinking about it." As far as the link and someone trying to opt-out for religious or other reasons, I agree with the train of thought in the link that if you can't opt them out under a general clause (whether by amendment or if an opt-out exists in the plan already) or if you can't or don't want to find a suitable special fund to add, or other suitable compromise under the terms of the plan, you must follow the plan design and give the EE an account. Later if they refuse the distribution of their vested account you escheat it to the state but you can look an auditor in the eye that you have maintained the plan according to its terms and the regs. I think that's your overriding requirement as an administrator until the DOL says otherwise. The DOL has some skin in this issue to advise on conflicting federal laws. If one of my EEs came to me I'd call the DOL and if possible submit some formal question to them and put the burden on them.

If the employee were to file bankruptcy wouldn't that allow her to meet the hardship burden?

Hi Tax Cowboy, I'm just an internal ESOP administrator but I'd suggest you don't go down the road of getting the TEGE to issue your client an adverse ruling so you an pursue an appeal. You know ESOP's are so tied into the bank credit agreements and trustees and everyone will get very worried if you get any kind of negative determination. Who knows what financial triggers would come from just a negative ruling. And OMG the cost of an appeal! I'd say get in there and get the issues from the TEGE and tread carefully. Negotiate a settlement. If client wants to exclude leased employees or if they want to include them just figure out a way to fix it and move on.

Brenda, while there may be no regulatory requirement, your HR department may not want to deal with an angry employee someday. We know employees don't read. You have to be okay in making the business decision not to inform the rehires. The DOL wants us to track down missing ex-employees, do you really think rehires are not going to be an issue at some point for the DOL? We had a rehire policy; we used it as part of our rehire efforts. This is one of those things that's a business decision. They're coming back to your company for a reason; I suggest you don't give them a reason not to be happy with their return. I say do the analysis and see how much money you're dealing with. So many won't buy back their vesting or forfeitures anyway, it at least makes the company look transparent.