loserson

There is also the new 500-hour rule from the SECURE Act. Long-term part-timers have to be allowed partway into the plan. If the sole eligibility rule is "1,000 hours within 6 months or within 12 months" then you would miss those people.

I have never looked at this before, but my first instinct is that it probably would not work. VEBAs serve the members' health care costs and the assets need to be used for that. Probably still worth looking into, since maybe my first instinct is wrong. But you do not want this treated as a reversion to the employer, because then you could be facing confiscatory excise taxes. But I have to ask, what is their goal? Are they just trying to spend down an over-funded VEBA? Because there are other options that are more common and easier to achieve. I have had to help clients decide how to spend locked-away money and there are easier ways that pose less risk of violating tax law. Do they actually want to start a charity and this seems like a convenient pile of free money? Because that seems like a bad way to start off a charity. Here is a recent PLR for a VEBA that added a new benefit (to spend itself down, presumably) and the IRS blessed the arrangement. (PLR 201833014)

First, check the plan document. If it addresses this situation, it likely says this is a deemed distribution. The plan can have a cure period for missed loan payments, but the cure period must not be longer than the last day of the calendar quarter following the quarter in which the last timely payment was made. After the cure period ends, loans not being repaid are deemed distributed. So if the participant took out a loan in AUG 2018 and no payments were ever made, the first payment was due in Q3 2018 and the maximum cure period ended on 31 DEC 2018, the last day of Q4 2018. After Q4 2018 ended with no repayment, the loan is deemed distributed as of the first missed payment. If the plan has no cure period, then the loan is still deemed distributed as of the first missed payment. The plan needed to issue a 1099 this past JAN/FEB 2019 for the deemed distribution. The participant's 2018 taxes will probably have to be amended to account for the income from the deemed distribution. The employer could choose to make the employee whole or give some kind of special bonus for tax relief. The employer could possibly pursue some kind of service credit with whichever vendors accept blame. Frankly, most of the parties involved bear some blame here, including the employee - who apparently never noticed the loan repayments were not coming out? It's unfortunate that the employer, the payroll vendor, and the plan vendors all failed to catch this earlier, and it's a failure of process overall. But the employee also failed and as the only person personally at stake, is arguably the one most responsible for watching that paychecks and the 401(k) plan balance are correct. There is an exception for leave of absence, where you can miss payments up to a year, so long as the loan is still fully repaid in the 5-year term (with a more aggressive payment schedule). See Treas Reg § 1.72(p)-1, Q/A-10 See also CCA 201736022 on a Section 72(p) loan cure period. Or see IRS 401(k) Plan Fix-It Guide on plan loans. The payroll vendor usually is not in a position to check who has 401(k) loans. The sponsor and the 401(k) plan vendor(s) will have access to the list of loan-holding participants and are in a better position to check regularly whether those loans are being repaid. The payroll vendor probably messed up the initial deduction instruction, or maybe the employer messed up by not correctly issuing the instruction to the vendor. And then nobody at the employer double-checked that the instruction was followed by the payroll vendor. The plan sponsor and the plan vendors appear to have messed up for a year by not monitoring whether 401(k) loans were all being actively repaid. The employee messed up by not checking paychecks and not checking the 401(k) to see that everything was being done correctly, or messed up by not understanding that the plan loan should have been repaid. Plenty of blame to go around.

Ah! Got it. Sorry, I am used to the outside lawyer perspective and I do not always think about admin details with regard to cost containment and vendors. I am used to focusing on the actual comp, which is only part of the picture. The exception for me is DBs, where I have trouble not thinking about all the time and money "wasted" on actuaries and PBGC premiums The DOL will sometimes let you get away with filing a single top hat registration statement, which is plausible to argue with the broker that this is "one plan." You might use some creative drafting to make a "single" plan document and get a one-plan fee, maybe? For your convenience: DOL Advisory Opinion 2008-08A Melbinger on group top hats and 2008-08A

So is your goal to get two tax-exempt entities into a non-governmental 457(b) plan, meaning an unfunded top hat plan? If there is no trustee and this is just NQDC held separately by each employer, couldn't you just design two plans to use identical documents, but then modify the employer name? You could use the same name for each, like "Entity A 457(b) Deferred Compensation Plan" and "Entity B 457(b) Deferred Compensation Plan." You could probably even send the same SPD/booklet to every covered executive and just say it applies to both plans and both employers. Maybe I am missing some administrative issues and that's why you are asking.

I believe that reg is referring to controlled groups, not to affiliated service groups, isn't it? I might be misunderstanding.

I have less experience advising fully insured employers on their health plans, because they are usually too small to use us regularly and many fully insured plans are trying to avoid administrative costs, but I trust that this is accurate. Though I imagine you could probably muddle your way through by having somebody come in most days of the week but being flexible about their job search. Like, instead of knowing a lot of your full-time white-collar employees are mostly checking facebook or amazon, you know this employee is checking linkedin and job boards. So you couldn't let them blow off their work like if you were self-funded. But so long as they are still doing a reasonable amount of work and they are mostly showing up every day, I suspect you would be on the kosher side of this requirement, right?

"Terminated" in the sense that you have selected them for termination, but have decided to keep them on the books as employees for several months to ease their transition into other employment. Obviously if you're paying wages or salary, they are not yet terminated. It's not meant for people "in danger" of losing their jobs and on probation. It's for people who are told "you 100% will lose your job in a few months, go ahead and use work time to find a new job." It works better in situations where you have many people doing the same thing and can cover their job. So like professional service firms, where lots of highly paid people do similar work. It's less well-suited where you need a manager to actively work and keeping deadweight in a single position for 3+ months is a drag. But you could make it work as long as the condemned executive is willing to keep putting in some time as manager. Or I have also seen situations where a doomed executive has all their reporting employees taken away but they keep lingering.

I think you are looking for a 401(a) equivalent of Treas Reg §1.403(b)-3(b)(3): I am not sure that there is an equivalent Treas Reg provision for 401(a) plans. It's sprinkled in various places already identified in this thread. I guess you could cite the EPCRS rev rul. It goes into plan document failures. It at least goes to the IRS' interpretation and enforcement standard. Agreed that fiduciary failure under ERISA does not translate into tax disqualification, unless there is some provision I am not thinking of. Almost no qualified plan get disqualified because IRS and employers both want to avoid it and all advisors try desperately to avoid it. But if the IRS said "you have some plan doc failures, go fix them" and you refused to cooperate with the IRS at all, I think your intransigence might eventually get to disqualification. Similar to how the DOL has the power to get a court order to force plans to comply, but they basically never use it because the plans all know to do as they are told before it gets to that point.

Yeesh, melodramatic? It's hardly fraud. You have an employee. You tell the employee "find another job within 3 months because we are going to let you go." You continue paying salary and self-insuring their subsidized group health plan coverage. You stop expecting the employee to do regular job duties and excuse their absences so there is time for job interviews.

Would it be simpler to just offer severance to your execs? Then they can go to the marketplace for coverage. You can give better benefits to execs without any discrimination issues and without imposing uncertain coverage costs on the group health plan. You might also have a practice of keeping terminated execs on the payroll for a period of time after they are locked out of the system and no longer coming in to work. You still need to pay them a minimum wage, but you can keep them employees for GHP eligibility. There are certain industries where this is commonly extended as a courtesy to terminated employees, who remain "employees" while they search for a new job. But you need to be vigilant about periodically clearing them off this status, or you could accumulate lots of zombie employees.

I wanted to chime in to agree with david rigby. If it makes sense in this case, might it make sense to change the rule overall? It's often easier administratively if changes in practice are universal rather than particular. They could put in vesting if they are concerned about their match.

I would be concerned about Medicare secondary payer. CMS does not want employers to free ride off of Medicare. A special benefit only to Medicare-eligible employees could be a problem. I am less concerned about age discrimination, since age discrimination in the US almost never punishes pro-senior discrimination, only anti-senior. So if the 65+ HCE gets benefits at least as good as the under-65s, then it is probably okay. But a policy to exclude 65s from ER GHP coverage, rather than just paying 65s to choose Medicare-only coverage, would raise age discrimination issues. It would help to know their goals here. Why are they doing all this weirdness?

If we are talking about 12 out of 1800 employees in the company/group (0.67%), and they are the top 12 in terms of pay, and all HCEs, and they are all managers, and they are all company officers, then I would not really worry if this is a good top hat group. If those things are mostly true, like maybe they are not all officers, then it's probably still fine. It helps if it's a clearly defined group and clearly designed to stay select and small. If it's tied to job title or the employer has a narrow pay-grade class for top managers and executives, then that helps. The feds have pay grades like GS-15 and FS1 and so forth, and they have a Senior Executive Service above the regular pay grades. If this company has a similar (though certainly less formal!) pay grade system, and the NQDC plan is only for the executive pay grade, that really helps show it's a small, select group. I might feel less sanguine if they exclusively define it as HCEs, with no other requirements for job title or job duties, officer or manager duties, pay grade, etc. The main concern, both as drafted and as enforced, is to not let the top hat exception apply to too many people in a company or group and thereby let the exception swallow ERISA. If the group is very small and the employees are highly paid (sotto voce: and sophisticated), then DOL is unlikely to blink. Though the absence of 401(k) coverage is an unusual twist and I have not thought through how it might alter the DOL view here.

Thanks, I had forgotten that they just updated EPCRS again in 2019. My spiral-bound EPCRS copy is now like 4 rev procs out of date (counting the partial amendments in 2015 or 2016). We have definitely seen lots of DOL enforcement of missing participants, but what is to be done if you tried hard, paid a formal search firm or two, and add those people to your re-try list every year? I have told clients to change their procedures to capture addresses before people go missing, but other than increasing search frequency and search firm spend (which I agree is probably what DOL wants), at some point you just have to shrug, don't you? There are enough noises that I think within the next decade they will have some system or authority that either lists all the orphaned account balances or that actually holds them for wayward participants (like PBGC). So my personal opinion, which I do not give as advice, is that you just need to tread water and show you are really, really, trying until the law changes. Because the way it is now is just untenable and the product of nobody realizing how big a deal this is and how avoidable it ought to be. I know that practitioners have been telling PBGC they want a program to take missing participant balances for DC plans. So maybe that will be the result. Or maybe IRS/SSA will go back to telling us where these people are. The vast majority of missing participants are eventually going to either file tax returns, receive tax statements, collect Social Security, or receive Medicare, so the feds already know where almost all our missing participants are, especially the ones that are age 62 or 65.

I agree with the others that the first QDRO cannot be revised, so what you are looking for is a new QDRO. If you are not getting the answer you want from the existing divorce lawyer, then search around for a new one and ask each prospective attorney under what situations it would be possible to amend the property settlement and get a judge to sign a new DRO. If you find one that says yes, and who seems otherwise competent and appropriate, both ex-spouses can engage that attorney or firm (waiving the conflict) in the interests of speed and cost-savings. If the existing lawyer and a few prospective lawyers all tell you no, it's not likely to happen, then be ready to accept their advice. And maybe look for other options. Am I right that this new QDRO hail mary is just you searching for a way to get money out of the wife's 401(k) to pay off taxes? There are a few other ways to get money out, though they are far from ideal. One is to change jobs, which will allow her to elect a 401(k) distribution - which will be taxable, same as before. The formula to figure out how much you need to withdraw is: [total amount you must withdraw] = [tax debt being paid off] / (1 - [tax rate plus penalty rate]) So if you need to pay off $10k in taxes and the tax rate plus penalty rate is 30%, just for example, then you need to withdraw 10,000/0.7 or around $14,286. Another is to take a 401(k) loan, which she would repay on payroll (or, if her employment ends, she would probably have to repay in a lump sum or else get hit with a bunch of taxes). The benefit of a plan loan is the interest is usually low and at the end her plan still has money in it. But ultimately this sounds like a budgeting situation. Did they reach out to the IRS to negotiate a payment plan? The IRS charges interest but they will work with taxpayers, based in large part on your financial situation. I am guessing that their financial situation and credit scores are too weak to allow for additional mortgage, home equity line of credit, or unsecured personal loans? If none of those are possible, there are also the high-rate loans like auto title loans and payday loans. In those cases, a 401(k) loan would have a much better interest rate and relatively convenient loan administration. Also, as I pointed out before, it seems quite possible that only the alternate payee (the husband? whoever didn't have the 401(k)) owes the taxes on the failed rollover. Unless the divorce shared the bill for the taxes here, then when they filed their 1040s separately for 2018, I am guessing only the alternative payee had income from the 401(k), right? So if they have agreed to both share the tax debt, then they might need to execute some documents formalizing their agreement. If only the husband owes the tax, and he is low- or no-income, then he might be able to get a lot of the tax debt reduced. If the wife has steady decent income then her chances for tax debt reduction are not as good.

NQ plans are great and I am certainly not trying to talk you out of them. If you tell the HCEs that they will get thousands or tens of thousands of dollars a year, I doubt most of them will be paying attention to the bankruptcy risk. They will be watching the dollars. I think the employer may need to pay an especially generous NQDC benefit to compensate for the worse tax consequences and the lack of 401(k). If the executives can move to competitors that offer 401(k)s in addition to exec comp, then they need to be more generous to keep up. But maybe this is a low-paying industry (if they can go years with no plan at all and now expect employees will be happy with zero match, then it's probably low-paying) and maybe competitor compensation is equivalently paltry. In which case, maybe even a modest top hat plan is fine.

Are you terminating or is this just because the participant is 65 or 70.5? Because this can just be a lost participant, can't it? Once you do a good faith search, you are not in trouble for failing to pay benefits or make RMDs. Wouldn't that work? Rev Rul 2018-52, 6.02(5)(d): Just do your search and if you do several good faith attempts and cannot find the participant, they are lost. EPCRS says you are not at fault if the participant is lost, so long as you pay the benefits when they are rediscovered. Consider keeping a list of lost participants and retrying the search every year or two. Maybe I am missing some detail here. If you're trying to terminate, then you have a different problem.

You can't unwind the tax consequences from a prior year. Or in this case, after 60 days. They can renegotiate and agree to submit another QDRO to further split the remaining 401(k) balance. Then use that to pay tax. But will owe more taxes on that distribution if they do not roll it over. Are they really forced to use the 401(k) to pay their living expenses, taxes due, and/or legal fees? Do they both owe the tax? Or just one of them? If they are fully divorced or have even been separated for a while, then I would expect only one of them owes the tax. Whoever got the distribution should have gotten several written warnings that they must roll it over into an IRA or another qualified retirement plan, or else pay tax. They should have also had a portion withheld for taxes. If they have not done a final division of all the assets, then whoever is stuck with the tax bill could demand more from the other assets to balance it out. It is not a good idea, if it is at all avoidable, to withdraw MORE money from the 401(k) in order to pay the taxes from the last time they withdrew money from the 401(k).

Ahh, this helps explain the issue. That means it's not really a concern that they will fail testing in the 401(k) plan but it is a concern that they are concentrating risk in the rabbi trust and they are forgoing lots of tax advantages. I think it makes a lot more sense to suck it up and just do a 401(k). More employees understand it, the tax consequences are generally better, the administration and vendor selection is easier, and as you pointed out originally the bankruptcy risk is segregated from past plan contributions. Sticking all the HCEs into a top hat plan means they will not see tax-free accumulation all the way to retirement, unless they keep their NQDC at the company the whole time. So instead of HCEs getting $19k deferrals limit and $56k annual additions, they have the $6k IRA limit. For the catch up folks, that's $12k IRA limit, but still nowhere near $25k and $62k limits. I think you need to have a really generous plan to counteract how much costlier this is to the HCEs to cut them off from the 401(k). I think that it might be costlier than just making a 401(k) plan that passes testing, but maybe their workforce mix of HCE to rank-and-file is lopsided enough that they can get by with a not-too-generous top hat NQDC and a threadbare 401(k). If the employer goes through with it, remind their payroll not to report the HCEs as being covered by a retirement plan at work. That'd be Box 13 on the W-2. Not checking that box helps the HCEs deduct their IRA contributions.

I think you're talking about annual additions max? I was talking about annual deferrals max. A highly compensated employee could very plausibly hit $19k in their own deferrals, and many of them do. Though if the plan allows after-tax deferrals, then a highly compensated executive could potentially hit the annual additions max of $56k. My point is that the rabbi trust is not so worrying, especially if HCEs have the chance to make 401(k) deferrals to move part of their retirement saving activity into qualified trusts instead of a rabbi trust.

Remember that the HCEs can still max their 401(k) accounts, so they are getting some 401(k) trust protection already. The idea of a nonqual plan is to get them extra deferral beyond the qualified plan. I agree that this is poor tax planning on the employer's part. But the decision to use a rabbi trust as part of the overall comp strategy is a reasonable one. I think you are being overly conservative about rabbi trusts. Rabbi trusts are quite common and most executives are fine with it because the alternative is immediate taxation. The bankruptcy risk over the time horizon of their deferral is usually not significant. They can keep rolling it over in 5-year increments if they want (as long as they elect to re-defer at least 12 months in advance). In exchange for deferring tax, and the opportunity to stretch out your distributions to reduce tax bunching, the bankruptcy risk is usually an acceptable trade-off. There are other ways to deliver exec comp. You can do a 401(k) excess plan. This is just a particular kind of NQDC or SERP, but it's designed to simplify the executive's elections and to cross over the limits and maximums of the 401(k) plan. That might be what they meant by a "carve out" plan. With equity awards, like restricted stock or stock options, the equity gives some deferral until the equity is sold. But that can bunch up employees' portfolios in one stock, which is bad, and it has lots of administrative and legal complications, and the ownership consequences need to be considered. You can do phantom equity and stock units, but all those non-equity awards are just different ways to tally what are ultimately just cash bonuses. You can offer special perks, like travel and housing and transit, or reimburse things like car insurance or home insurance or gym memberships or mobile phone costs. But many of these benefits will usually be structured to be taxable, so they are really just a fancy way to pay salary but in a way that is less flexible than salary. I really think a simple top hat nonqual is easier to explain and easier to administer. For a small top hat group of 12, I think a simple NQDC works well. other ideas- The employer could offer HDHPs and HSAs so that HCEs get another opportunity at tax deferral. HSAs are held in trust by a bank, so it avoids rabbi trust limitations. It's not a costly benefit, but it tends to see disproportionate use by more sophisticated and higher-income employees. If the participants do not spend the HSA money on their medical expenses, then they can reimburse themselves in later years, and the money is a tax-free savings vehicle. And at age 65, it starts to work like a trad IRA, with no more penalties for voluntary non-medical distributions. So it's a deferral chance without using a rabbi trust. If you really want to remain in the qualified plan world, will you be offering the after-tax non-Roth contributions? The folks who max out their $19k can keep contributing up to the annual additions limit, which is $56k now. So if there are no employer contributions and no other allocations, an executive can contribute $19k pre-tax and then an additional $37k after-tax. That's not a Roth contribution, but you can allow in-plan rollovers into Roth, or you can allow them to do in-service distributions of their after-tax amounts. There is no tax on the rollover, except to the extent of gains, and after that it just becomes Roth. It gives high-income people an extra bite at deferrals. After-tax non-Roth is an easy benefit and most plans could offer it with little difficulty. This is not really a special trick. But not everybody is aware of it. You can have the employer present it to executives as an extra chance at deferral - and the funds would be either in the 401(k) trust or their own IRAs, so that avoids the rabbi trust problems. Maybe if you give the executives several opportunities to get deferral into secure trusts, you can be more comfortable with using a rabbi trust as one portion of the overall executive compensation strategy.

That has come up before but I forget if I found specific guidance on that point. Sometimes the client either wants an excuse to let it quietly drop or wants an argument to make internally to fix everything. And in either of those situations, nobody really cares about the legal minutiae, as long as they have a broadly defensible and reasonable interpretation. In general, if it's a while back and all your reporting in the last 3-5 years is correct, my first instinct is you can probably ignore an error like that if you want. Even if the statute doesn't close, the IRS and DOL both prefer to focus on the most recent three years in their enforcement activity. But I have had many clients where a previous benefits administrator royally ducked up the old 5500 reporting. For one client they had a bunch of plans, a bunch of subs with distinct EINs sponsoring different plans, they had plan mergers and spins and new plans and plan terms, and they had really sloppy reporting of it all. I think we told that client they could probably let the old errors sit, since some of the shoddy reporting was like 10-20 years old. But they got their reporting vendor to handle all the fixes in a big package, so they cleaned it up, even though the old errors were probably only important to the Benefits manager. We ended up giving more literal, strict advice so that he could support his decision internally. i.e. mentioning the penalties and obligations, and not highlighting the fact that nobody is likely to come after them for 10- and 15-year-old foot faults on the 5500. Yeah, the "we did our best srylol" argument does not relieve you of the obligation to file an accurate and timely return/report. It might get you out of some penalties if the agent thinks you made an innocent mistake and takes pity on you. The IRS has formal penalty relief guidelines that tend to privilege both good faith and well-meaning ignorance. And it means that you did not commit perjury when you signed an inaccurate 5500 or other statement or return. You still needed to do it, so *if they catch you* it's a problem. The question is whether you want to take the time and expense to fix a return or statement that is inaccurate and might actually fail your reporting obligation, but which might not be worth fixing and might only attract unwanted attention.

That comes from the perjury statement on the 5500: The argument that you do not have an obligation to amend a tax return or a tax statement or other regulatory filing is the typical legal advice I would give and that other tax and ERISA lawyers often gave to my clients and their clients. This is the typical tax lawyer position, most often seen with regard to filing tax returns and filing/furnishing tax statements, that you have an obligation to be as correct as possible based on the perjury signature but not actually an obligation to amend later. The advice is that you often do not have to amend a return or statement. For example, you may not have to correct your 1040 return if it is against your financial interest to do so. But it is very clear that if you do choose to amend or correct a return or statement, then you must correct all known errors, not just the ones in your favor. Again because of the perjury statement, but also because of statute and regulation. There are some situations where you probably have to amend, and many situations where you really should amend. Maybe your error is affecting dollar amounts or something else critical or important, like the EIN in this case. And sometimes doing a corrected filing coming shortly after the error can mitigate some of the penalties, so correction may be wise even if it is not truly required. But as a general rule, you probably do not have a separate obligation to amend. That means you do take on the risk that the regulatory will tag you for failing to make an accurate filing, and you can try to head that off by internal recordkeeping explaining why you chose not to correct. "Correct at the time we filed" becomes important here in showing good faith, which might be available as a formal avenue to avoid penalties or else as an informal argument to show to auditors. If you can show the error was not consequential and not intentional, that may be protective against penalties. You might want to avoid correcting precisely because it attract regulatory attention and could bring on late penalties. But there is usually no separate penalty for failure to amend. If you have seen contrary guidance that there is a general duty to amend, not just an IRS or DOL opinion that you should amend/correct but actual concrete regulation, statute or caselaw, then I would be very interested in adding it to my research file. The IRS and DOL will probably always tell you to amend and correct if you ask them, but that is distinct from whether you must. But this is the legal advice I have commonly heard and also given.

The plan sponsor probably is not required to amend the 5500, since it was correct to the best of their knowledge at the time. But yeah, the government could very well be confused and if the IRS or DOL opens an examination or investigation, they might tell you to amend anyway. So I would look at amending as preempting a possible instruction to amend. I would be concerned that immediate termination probably sets off a lot of flags and might bring some formal regulatory attention, whatever you do.