DJL

Thank you, Bri and Nate S. Bri--that is what I thought. To my mind, then, the IRS intends that each contribution type be corrected. Nate S--I agree that the ADP test is blind to whether the deferral is pre-tax or Roth eligible. That's why the result I suggest looks strange. I feel strongly that we need to give the client this information, to decide how to correct. In my opinion, since the participant is a non-highly compensated employee and the amounts are relatively small, it would be good insurance to correct for both. Thank you both, again, for your comments.

Good morning. I work for a TPA firm. We have a client who missed offering its 401(k) plan to one eligible employee for 2021 and will be making a QNEC for the missed deferral opportunity under Rev. Proc. 2021-30. The client's 401(k) plan is not a safe-harbor plan. It permits pre-tax deferrals, Roth contributions, catch-up contributions. It does not permit after-tax contributions (other than Roth contributions). It is a deferral-only plan so does not have a matching contribution. The conditions are met to use the safe-harbor correction method for elective deferral failures that exceed 3 months but do not exceed the SCP correction period. (Appendix A, Section .05(9)) The employer will make a QNEC equal to 25% of the missed deferral for this eligible employee. This employee is not catch-up eligible. The question--does Rev. Proc. 2021-30 require a QNEC for the pre-tax contribution and another QNEC for the Roth contribution? I think it does, but my colleagues do not. The eligible employee is a non-highly compensated employee. The average of the ADP for the group of non-highly compensated employees is 2.25% Since the plan permits both pre-tax contributions and Roth contributions, I think that the employer makes a QNEC of .5625% of this employees' 2021 compensation for the missed pre-tax contribution and a QNEC of .5625% of this employee's 2021 compensation for the missed Roth deferral. (Compensation as defined in the plan document.) Do you agree? Thank you for any insight you can provide for this question.

BenefitsLink experts--I just ran across an article regarding this topic, and searched and found this discussion. I work for a small TPA firm. We draft our own pre-approved documents. This issue did NOT come up during the review of our defined contribution document last year before it was approved by the IRS. We were not instructed to add any statement (as referenced in Mr. Watson's discussion above) to our approved Adoption Agreement regarding the matching contribution formulas. Now that I have reviewed this issue more closely, I'm wondering if our discretionary match formulas fall into the "flexible" category when the employer has the discretion to declare the portion of employee contributions which will be matched. Our Adoption Agreement requires that the following selections be made for each match: 1. match rate--(a) declared by employer each year or (b) stated rate 2. whether the formula will include tiers 3. what portion of employee contributions at each tier which will be matched--either (a) declared by employer each year or (b) stated percentage or stated dollar amount 4. whether there is a minimum and/or maximum match per participant--specified as (a) none, (b) stated dollar amount, or (c) stated percentage of compensation 5. calculation period--(a) payroll, (b) monthly,(c) quarterly, (d) semi-annual, or (e) annual 6. true-up at year end--(a) yes or (b) no Our pre-approved Adoption Agreement also permits the Plan to have 3 separate matches (we call them "levels"), which can cover different groups of employees. So, if the employer wants to have a different match for a group of employees, that group has to be covered in a separate match level from the other participants. Do you agree that the match formula is "flexible" if the Adoption Agreement selection gives the employer the discretion to declare the portion of employee contributions at each tier which will be matched?

EBECatty and Mr. Feldt, thank you for this explanation. Mr. Gulia, thank you for these citations. We did think that the employer contribution was more like the profit sharing contribution, but the fact that both the employee contribution and the employer contribution are referred to as "deferrals" made us question whether an actual deferral election for the employer contribution needs to be made. Mr. Feldt, thank you-- I had already found your response to a question in 2014 regarding what amounts apply toward the annual limit each year--"Employee deferrals, vested employer contributions, and any prior non-vested balances that now become vested during the year - all of these add together and count against the annual 457(b) deferral limit ($17,500 ignoring any last-3 years catchups)." [my emphasis] This statement has been added to our work-papers for this client, of course with respect to the current years' 457(b) deferral limit!

Our TPA firm has just been engaged by our first client that makes employer contributions to their non-governmental Section 457(b) plan. (We have 5 other clients with non-governmental Section 457(b) plans, but none have employer contributions.) The plan also permits the participants to make deferrals from their salaries. I have a very basic question for which I have not been able to find the answer--does the participant in this 457(b) plan need to make a deferral election with respect to the employer contribution? If so, must the election be made the month before that employer contribution is made to the Section 457(b) plan, just like deferrals from their paychecks? The deferral form that this new client has been using does not seem to address a deferral election for the employer contribution because it requires the participant to elect either a dollar amount or a percentage of his/her compensation for each payroll period. Thank you for any guidance to which you can point me.

Thank you, Mr. Gilmore. I appreciate receiving both the citation and the explanation.

Health plans and COBRA are not my area of experience. A question has arisen from my employer regarding COBRA continuation of health plan coverage. It seems a basic question, but I have not found any discussion on this point. Say an employee voluntarily terminated his employment in January 21, 2021. He was covered by our health plan at that time, and his coverage ended that day. Under the current rules, he has until the earlier of (1) one year from January 21, 2021, or (2) 60 days after the announced end of the Covid-19 emergency to elect to continue health coverage under our plan. If he does not obtain health coverage during the ensuing months, we understand that he remains eligible to elect COBRA under our plan until that deadline. What if he is covered by a health plan with his new employer and then he terminates that employment before the deadline to elect COBRA coverage under our plan--could he elect COBRA under our plan rather than the new employer's plan? Or, does the intervening coverage under another plan mean that he can no longer elect COBRA coverage under our plan? Thank you for your guidance/thoughts/comments.

Yes, thank you! Always helpful to have a visual approach to solving the question.

Thank you, Rather Be Golfing and Mr. Bailey. Rather Be Golfing, thank you for the comment that the distribution form include acknowledgement that the loan repayments are being continued, even if a distribution is requested. We will look at adding this to the form with the plan restatement next year. The language of the Plan's loan program provides that the 30-day suspension is automatic. : In the event that the participant terminates employment before the entire loan has been repaid, the collection of all loan repayments shall be suspended for a period of 30 days following the date of termination of employment. At the end of the suspension period, the Trustee shall declare the outstanding principal sum of the loan plus any accrued interest to be in default, offset the participant’s account under the Trust by the defaulted amount, and treat the offset as a taxable distribution to the participant, unless one of the following actions by the participant occurs prior to the expiration of the suspension period: The participant continues to make loan repayments in accordance with the loan note; or The participant repays the full outstanding principal sum of this Note plus any accrued interest; or The participant rolls over the participant's total vested interest in the Plan, including the outstanding principal of the loan, to another retirement plan that accepts such rollover.

Lou S. -- you are correct. We did not contemplate this situation when we set up our CRD forms. I will suggest to the client that he contact the participant to give him the option to default in 2020. We'll figure out how to document this if the participant elects to default in 2020.

Thank you, RatherBeGolfing. I understand that this participant does not have the funds to repay the outstanding loan balance. I agree that your suggested action would have been a good result for this participant. Thank you, Lou S. and Mr. Bailey. This loan program provides that the participant can continue to make loan repayments after termination of employment provided he/she starts 30 days after termination. If payments are not started within that timeframe, then the loan is defaulted and the offset applied. So, under that provision, the default would occur July 1, 2020 and the loan offset applied. Since the Plan suspended loan repayments for each participant who certified as a qualified individual, we think that suspension overrides the loan program provision. (This is one of the very few plans we service that permits loan repayments after termination of employment.) Most of our plans provide that the participant has 30 days after the date of termination of employment to either repay the loan or roll the loan over to another qualified plan (that is willing to accept it). If not done, then the loan is defaulted. In that case, we think that the default would occur 30 days after termination of employment, even if the plan suspended loan repayments under the CARES Act until January 1, 2021.

Thank you, Mr. Bailey. We were leaning in the direction that the offset would occur at January 1, 2021 and would not be a CRD distribution. Thank you for the reminder that he has until he files his 2021 tax return (including extension) to contribute the offset amount to his IRA.

Agreed. This is not a controlled group. If, however, the true question is whether these companies are related employers for retirement plan purposes, the inquiry should continue with questions whether they are part of an affiliated service group.

Good afternoon. Just when I think I understand the CARES Act . . . I cannot find a thread that discusses a loan offset under the following situation, though I was sure I had read one. Please advise me of the thread if one already exists. The participant had an outstanding loan and was up-to-date with his loan repayments at March 27, 2020. The Plan implemented the CRD and CARES Act loan provisions. Loan repayments were suspended until January 1, 2021, at which time they are re-amortized and resumed. The participant is a qualified individual and stopped making loan payments when the Plan offered the loan suspension. The Plan permits participants to continue making loan repayments after termination of employment. The Plan provides that a loan is in default if payment is not made the end of the maximum cure period On June 1, 2020, the participant, while still a qualified individual, terminated employment and took a CRD of all his vested account, except for the outstanding loan. When does his outstanding loan become a loan offset: June 1, 2020, when he took the CRD distribution? No--because the Plan permits him to continue making loan repayments after termination of employment. And, the IRS has suspended loan repayments until July 15, 2020. OR Yes--because he took distribution. He can treat the entire amount, including the loan offset, as a CRD distribution. (The sum of the CRD and loan offset are less than $100,000.) July 15, 2020, when he failed to resume loan repayments? No, because he is a qualified individual and has until January 1, 2021 to resume loan repayments. OR Yes, because he had 30 days after termination of employment to repay the loan and he did not. He can treat the entire amount, including the loan offset, as a CRD distribution. January 1, 2021 if he fails to resume loan repayments? If so, this cannot be treated as a CRD because it occurs after December 31, 2020. Thanks for your help.

Thank you, Mr. Presson and Kevin C, for your responses. As it turns out, the client is bound and determined to find the funding for this contribution, at least through 2020. We have recommended that they amend before January 1, 2021 to cease the safe-harbor nonelective contribution for 2021. If they can find the funding for 2021, we will then see if there is anything from the IRS that would prohibit them from adding the safe-harbor contribution in 2021. Kevin C.--you are correct that their document does not require them to deposit the safe-harbor contribution per payroll period. They had just made a commitment to fund it in that manner, and didn't want to stop unless they could no longer afford it.

Is it possible to amend the Plan to stop the safe-harbor nonelective contribution in accordance with Section IV. of Notice 2020-52, but then amend the Plan 30 days before the end of the same plan year to reinstate the safe-harbor nonelective contribution? Our client maintains a safe-harbor 401(k) plan to which the safe-harbor nonelective contribution is made. The safe-harbor nonelective contribution is funded on a payroll-period basis. The plan year is the calendar year. The client is concerned about its ability to continue to fund this contribution for the rest of this year since Covid-19 has started now to affect its business. Under Notice 2020-52, the Plan would be amended to suspend the safe-harbor nonelective contribution for payroll periods after August 31, 2020. The amendment would be signed by August 31, 2020 and the notice to participants given no later than August 31, 2020. If this client is able to find the funds to make the safe-harbor nonelective contribution for payroll periods after August 31, 2020, is there anything that would prevent the Plan from being amended by December 1, 2020 to provide for the safe-harbor nonelective contribution? The participants would receive notice by December 1, 2020 of the safe-harbor nonelective contribution (this Plan has a discretionary matching contribution which might need the safe-harbor nonelective contribution to satisfy the ACP test, so the notice would be needed.) I don't see any provision in Section 103 of the SECURE Act that would prevent this subsequent amendment. Am I missing anything?

I hope that you can help me with this question. I have spent part of today trying to figure this out, and am getting nowhere. I seem to recall that there is an issue to address when a plan wants to change the timing a forfeiture occurs. Currently, the profit sharing plan provides that forfeitures occur after 5 consecutive breaks-in-service. The client wants to change that provision to the earlier of distribution of the vested interest or 5 consecutive breaks -in-service. Forfeitures have always been used to reduce the profit sharing contribution. There will be a large amount of forfeiture to be used this year as a result of the change because most of the unvested amounts are attributable to terminated participants who have already taken distribution of their entire vested interests. Is there is something I should be looking at before telling the client that it can be done? Thanks!

BG5150 and C.B.Zeller--thank you for your comments. Based upon the Plan's actual return for each year, the earnings are approximately $3,600. (There were some great years of earnings, but there were also some years of negative earnings.) So, the payment to the participant will be approximately $6,100.

Mr. Preston and ESOP Guy--thank you for your comments. Section 5.7 of the prototype, Location of Participant or Beneficiary Unknown, states "In the event a Participant or Beneficiary is located subsequent to his benefit being forfeited, such benefit shall be restored, adjusted for earnings." There is no further guidance on how to adjust for earnings, such as reference to the earnings allocation section of the prototype. The client's auditor had suggested using the Department of Labor's online calculator for late deposits, even though this situation has nothing to do with late deposits. The client chose our recommendation to use the Plan's annual rate of return each year. Thank you, Mr. Bailey. The client's main concern is the desire to avoid a dispute over the amount being paid, since it is a small amount and the document does not give specific guidance on how to adjust for earnings. I hope that providing the participant with a summary of the investment return by year will avoid a dispute.

Thank you for your thoughts. You have confirmed that my concerns are in the right direction. We want to give a response to this employer so that he makes an informed decision. We always suggest that legal counsel review such issues, but clients are not always willing to seek such advice since "you are the 'experts'" and "that's what we pay you for." MoJo, CuseFan, Bird and Mr. Starr--I agree that ultimately this release is meaningless. CuseFan--the value at the time the vested benefit was forfeited was approximately $2500. I think the employer was trying to get lingering accounts closed to remove the servicing fees which are charged per participant account. We did suggest that the vested benefit be left in an account for this participant, but ultimately that's not what the employer chose to do. Yes, this Plan is not participant-directed. Mr. Rigby--there is a point at which we would disagree with the employer's decision, and would not be able to continue to provide services. At this point, we do not think that this decision impedes our ability to continue to provide services for the Plan. Thank you all again.

Is it permissible to request a participant to sign a release that he accepts the calculation of his benefit from an ERISA pension benefit plan? Long history short--the participant terminated employment over 15 years ago, and disappeared with a vested balance remaining in the Profit Sharing Plan. The employer could not locate the participant, and so after 5 breaks in service the employer decided to forfeit the entire account balance including the vested amount, with the understanding that the vested amount and earnings would need to be restored if this participant were found. This forfeited amount was used to reduce the employer contribution for the year it was forfeited, in accordance with the Plan provisions. Fast-forward to last week--the employer was contacted by this missing participant. We (third-party administration firm) have calculated the investment earnings on this benefit. I have suggested that the benefit statement show the amount of earnings by year, so that the participant understands how his final benefit amount has been determined. After all, the participant would have received a benefit statement each year had the employer been able to locate him. The amount involved is under $10,000. I am not comfortable that the employer wants to condition payment of this benefit on a release by the participant. The employer does not require any other participants receiving benefits to sign such a release. I'm not sure what they are concerned about. Have any of you faced this situation? Thank you for any thoughts you care to share.

Thank you, Gentlemen. Mr. Starr--the contingent beneficiary is alive. We have suggested that the Plan sponsor consider having a court make the determination. Mr. Rigby--yes, we have already notified the Plan sponsor that we cannot make this determination.

Thank you for this Forum. I have been a loyal follower, but have never posted. I work for a third-party administration firm. My question involves an issue that has occurred for one of our client plans. I have searched for this topic on this Forum, but have not been able to find any prior threads. If there are other relevant threads, I would appreciate your reference to therm. Have you had experience with determining whether a trust is in existence when a death benefit becomes payable from a 401(k) plan? FACTS: In 1989, a participant named his parents' Family Trust as the primary beneficiary of his 401(k) plan account (and a non-family member as the contingent beneficiary). The participant was the sole beneficiary of the Family Trust upon the death of the last of his parents. In 2016, the participant set up his own Revocable Trust, but did not change his 401(k) plan beneficiary to be his Revocable Trust. The participant passed away in 2019. The trustee of the Revocable Trust has filed claim for the 401(k) plan death benefit. Since this is not the trust named as beneficiary, the Plan asked for a copy of the Family Trust. The trustee has provided a copy of the Family Trust, but stated that the Family Trust no longer exists. There is no language in the trust documents connecting one to the other. The Plan has denied the claim, on the basis that the Family Trust no longer exists. The Plan has now received a letter from the attorney representing the Revocable Trust, who has argued that the Family Trust still exists. The attorney has cited 26 CFR 1.641(b)-3 as authority that the trust continues. This regulation deals with termination of trusts in relation to federal income taxes. There is no reference to California trust law or any case law. The Plan is now faced with determining whether the Family Trust still exists for purposes of paying the death benefit. I welcome any thoughts you care to share.