Artie M

These answers assume the excess deferrals were all made under this one plan... if it was under multiple plans there would be a different answer. But if one employer, 2026 1099R provides Box 1 gross distribution amount (including earnings), Box 2a same amount, Box 7 Code 8, then 2026 W-2 Box 1 wages (don't include the excess deferral plus earnings amount), Box 12 Code D for total amount deferred (which would include the excess amount). See W-2 instructions for example.

@fmsinc Typically a plan will provide that if a beneficiary fails to file a beneficiary designation or the beneficiary designation is determined to be "invalid" or "ineffective," the plan's default rules will decide the beneficiary. The plan would normally would not look to state law to determine the beneficiary (unless the terms of the plan specifically state to do so). Right, an agreement between the brothers would not normally supersede the order of precedence in the plan's default provisions. Also, I guess I cannot say that any ambiguity cannot form the basis of a distribution. As someone above stated. If a properly filed designation names "my brother" and there are two brothers, seems like some or all of it should go to at least one of the brothers... or did the participant accidentally leave off an "s" on his designation. Under this designation, if the plan's default rules say first to surviving spouse, if none, to children, if none, to estate, and there is no spouse but two children. Well neither of the two children are a brother. Here, if a settlement can be reached where the two brothers agree to split the account funds and the two children are okay with that then we would advise that the plan get a release from the brothers and children and, if they execute the releases, pay out 50/50 to the brothers. Here, I think it is possible that the agreement from the brothers could supersede the plan's default provision because it seems the intent is not for the kids to get the money but a brother would. Also, there was substantial compliance as we assumed the designation was properly filed. As far as costs go, not saying that it would happen but it is possible the fees could be paid through the interpleaded funds (though we always advise against interpleading the funds but only interpleading the parties, unless the court requires it, and we always note that fees can be requested but most likely not going to be paid). In ERISA cases, courts generally do not like to award fees from a participant's account but they might if there are truly competing adverse claimants, administrator completely neutral and acted promptly, dispute involves difficult factual or legal issues, and plan expressly allows payment of account specific legal expenses or extraordinary administrative expenses. They are less likely to award fees if the administrator created the ambiguity, they view there was poor administration, fees are substantial relative to interpleaded funds, and the court believes the determination of the beneficiary under the facts should have been a routine plan administrative decision.

I agree @QDROphile that the claims procedures should be used first. As queried above: what's ambiguous? Another fact that has not been provided is whether a claim has been filed. We never want to use an interpleader unless there is no other way to dispose of the claim(s). Interpleader is usually appropriate where multiple parties assert competing rights, or the administrator genuinely cannot determine the beneficiary after a prudent review. Interpleader isn't appropriate where no one has made a claim, the administrator simply has not finished interpreting the plan, or the administrator is avoiding making a fiduciary determination that the plan document clearly requires. In our experience, judges expect the administrators to interpret the plan, review beneficiary forms, review marriage/divorce records, apply the plan terms. Only when the administrator faces a real risk of multiple liability or genuinely irreconcilable claims should interpleader come into play.

Technically, no, using 12-month elapsed time for FT employees and 1 YOS (1000 hours) for PT employees doesn't automatically create a 410(b) coverage failure. But the design establishes separate eligibility conditions for different employee classifications so the matching contributions would need to satisfy 410(b) coverage testing, and the differing eligible rules could create a coverage issue if they disproportionately delay or excludes NHCEs. The IRS would question first if FT and PT are reasonable classifications with object criteria (presumably, yes) but then does the classification create a coverage problem. If full-time employees contain a disproportionate number of HCEs, the design could raise discrimination concerns. The issue is whether the distinction creates a coverage problem. If the PT group disproportionately consists of NHCEs (which is often the case), a larger percentage of NHCEs than HCEs could be excluded during a given year. Then your matching contribution component would have to satisfy §410(b). The coverage test would look at the benefiting employees for the match, not just the entire plan. I mean why is this being done? Is this a way to get around the LTPT employee rule under the SECURE Acts?

Though EPCRS was broadened to include corrections under SIMPLE IRAs and this would technically be an operational failure, the tricky part is that once valid salary reduction contributions have been deposited into a SIMPLE IRA, there is no SIMPLE IRA correction mechanism that allows the employer to simply pull the money back out of the employee's IRS. Unless things have changed, in the past, we have found that IRA custodians normally won't return the money because it is not an excess contribution under the Code (i.e., the contributions didn't exceed the SIMPLE IRA annual limits and were properly deposited). Like @justanotheradmin states, we see this type of mistake usually "corrected" under a practical approach. Here, that would be correct the payroll contribution settings going forward and leave the contributions in the SIMPLE IRA. If the employee is upset because the over-withholding caused cash-flow issues, reimburse the employee through payroll (some might gross this up, others wouldn't) and absorb the cost. Also, there should not be a "net out" going forward. The employee's salary reduction election controls future payrolls so there should not be a reduction in future contributions without the employee's consent. In the event of an audit, document this to include a description of the employee's actual election, the payroll error, the three affected payroll dates (if in one quarter, also in one year), the correction implemented, (i.e., any reimbursement provided to the employee outside the SIMPLE IRA, no net out going forward), and concluding with something like a failure to implement the election generally/technically is viewed as an operational failure, but, given the these facts, this isolated payroll error was corrected administratively outside the SIMPLE IRA. Really, since can't kick the money out and shouldn't reduce future contribution election, what else is there to do?

Agreed. My post was intended to apply only to a 457f arrangement

I meant to make clear that 10 years is not a bright line... the key is payment is made independent of severance or retirement.

@Peter Gulia starts his last post with "if a plan is ERISA-governed". I would suggest drafting the document so that it is not ERISA governed. It seems that you could comply with 457(f) without turning it into an ERISA pension plan. 3(2) pension plan must provide "retirement income" or "results in deferral of income... for periods extending to the termination of covered employment or beyond". Here put in a 5-year retention bonus, succession planning incentive or CEO transition arrangement. It's payable on a date specific and not termination of employment or retirement. We have a NQDC plan that was audited by the DOL just two years ago that is open to all 2000 employees of the client--it is not a pension plan or a top hat plan under ERISA because payments must be made no later than the 10th year after deferral (not til separation or retirement). (Also 10 years was as long as we felt we could push this,) I know this goes the opposite direction from your facts but it still covers 100% of the company's employees like your proposed plan. Our client's isn't a TH plan but it doesn't need to meet the exception because it isn't a pension plan. Along with that we use terminology like agreement (instead of plan), for retention (not retirement), no funding, unsecured promise, etc.... all self-serving.

I agree with the others. The IRS could make use of the SC arguments but aggressive IRS enforcement or application these arguments/rules is highly unlikely at this time. I mean SC was pretty fact specific, the IRS has not issued any guidance even insinuating its adoption or application of SC, and the consequences of adopting this stance would be enormous. If applied aggressively, the IRS would actually have to come up with some of its own standards just to administer its application. In discussions I have heard many practitioners state their view that the 414 regs would have to be rewritten to apply SC rules to regular retirement plans. That said, we have adjusted our due diligence when dealing with PE-backed clients to include a focus on who are the management/GP entitles, affiliated investment vehicles, level of operational control etc. noting a risk of potential future application. A low risk assessment (other than in multiemployer plans, PBGC issues, DOL investigations, and transactional due diligence) however is based on the typical structures being used currently. We all know that there are those out there who work day in and day out looking for an angle. I don't believe that PE groups are thinking about putting all their HCEs in one entity and all their NHCEs in another.... but who knows. If that were to happen, one could easily see the IRS pulling this nary used arrow out of its quiver.

I agree with @Peter Gulia. I am not aware of any general rule under ERISA or the Code that would render an individual ineligible to participate in a multiemployer plan solely because the individual lacked work authorization or provided an incorrect SSN. Rather, the relevant inquiry is whether the individual was a common-law employee performing covered employment for a contributing employer under the applicable collective bargaining agreement and otherwise satisfied the plan's eligibility requirements. Common-law employee? Likely yes. An individual may have violated immigration laws, but that does not automatically mean the individual is not an employee for plan purposes. The Code and ERISA do not condition employee status on lawful immigration status. The IRS and courts have long recognized that unauthorized workers may still be employees for federal tax and employment law purposes. E.g., wages paid to unauthorized workers are generally still wages for employment tax purposes, employers still have withholding obligations, and unauthorized workers may still be common-law employees. Covered employment under CBA? Presumably yes. Contributions required under the CBA? Presumably yes. False SSN? Administrative problem, e.g., W-2 reporting, payroll tax reporting, benefit administration, etc. And perhaps for the multiemployer plan a participation identification issue (wrong SSN = wrong Person). Sometimes multiemployer plans take the position that contributions cannot be credited because the SSN does not match SSA records. If so, the real issue is we cannot properly identify the participant. That is different from the participant was ineligible. Here, the correction may involve obtaining the correct identifying information and remapping contribution history. But those are generally administrative/reporting issues, not necessarily eligibility issues. Undocumented status? Potential immigration issue, but not obviously a plan eligibility issue. If the person was hired, performed services, paid wages, treated as an employee, direction/control etc, then the fact that the SSN later proves incorrect does not retroactively mean the person was never an employee. I mean what specific plan, CBA, participation agreement, trust, etc. provision makes these individuals ineligible? Some multiemployer plans contain eligibility language tied to covered employment, covered employees, bargaining unit status, participation agreements. Is there any language specifically addressing undocumented workers--I would be surprised to see it. Also, this isn’t an issue of first instance. Construction, hospitality, agriculture, and certain manufacturing industries multiemployer funds have had to have dealt with this We don’t usually see it in retirement plans but often there are provisions in welfare plan documents that state that fraud, misrepresentation to the company of material facts can vitiate eligibility. I have not looked at this but that might ve an avenue to look at. So at this point, I would be inclined to view this as primarily a participant identification and benefit administration issue, not an eligibility failure, unless the recordkeeper can point to specific plan language or legal authority that says otherwise. One other practical question: Are these individuals no longer employed and only now being discovered because they applied for benefits? That often reveals what the real issue is.

@Brenda Wren I disagree with their blanket statement. To me the issue is not whether the forfeiture can occur during/after termination. The issue is whether the participants have already incurred a forfeiture under the plan terms and the forfeiture simply was never processed. As stated above, that turns this into an operational failure. True, participant accounts are vested upon termination of the plan, but can amounts be vested if they were already forfeited. Now we haven't touched on this but did these participants receive full distributions previously or did never take distributions. You state the instant plan contains the 5 year break in service rule, so most documents would provide that the forfeiture occurs after the 5 year break even if no distribution occurred. As usual, my view is read the plan ,,, and do what it provides.

@BG5150 The OP stated the participant contributed after-tax contributions then made an in-plan conversion to Roth. I agree with you, from a practical standpoint, I think most modern recordkeepers (Empower, Fidelity, Schwab, Ascensus, Principal, etc.) distribute excesses following these rules: The plan document or administrative procedures specify the ordering. The recordkeeping system calculates the corrective distribution and allocates it between pre-tax and Roth sources accordingly. Plans typically don't have discretion after the fact to choose whichever source is more favorable. Here, it seems that the document does not state ordering and the recordkeeper is not offering up a method.

Agree. If the amounts were forfeited, they were forfeited... even though not moved to forfeitures.

Be careful to note that "unmatched elective salary deferrals" under the IRS fix-it guide would include "unmatched... after-tax and Roth contributions." A lot of folks take that language to only include pre-tax deferrals. Especially when reading the examples--they do not include any after-tax or Roth contributions in their facts. Operationally, the participant should have been limited on his after-tax contributions earlier in the year (since solo 401(k), they should know all the contributions, comp, etc.) so this doesn't occur. Next year.... Also, because it is a solo 401(k), you really need to know what the document states. The correction could vary by document provider (Ascensus, Schwab, Fidelity, Employee Fiduciary, MySolo401k, etc.). As always, first look to the plan/prototype language. Assuming the plan document is silent, it seems that EPCRS would point to reducing/distributing the after-tax contributions. See excerpt from RP-2021-30, §6.06(2) The nuance under your facts is there was also an in-plan Roth conversion. In my experience, most recordkeepers would still process a §415 excess annual addition correction with the distribution coming from the Roth source (plus earnings) attributable to those converted after-tax contributions. The exact mechanics may depend on the recordkeeper's system (and the plan documents). As far as reporting, there is no perfect answer but Code E appears to be the most defensible. This is a 415 correction ultimately. Code E is for an EPCRS correction. Code B has some appeal as the source of the distribution will be from the designated Roth account. However, the instructions for Code B state something like use E for a 415 corrective distribution. Code 8 seems the least defensible because the distribution is not due to excess deferrals (402(g) fix), excess contributions (ADP fix) or excess aggregate contributions (ACP fix), which is what that 8 is intended to cover. In case of an audit, we previously have put the following in a file documenting this type of correction: “The distribution corrects a §415 excess annual addition under the EPCRS correction methodology of Rev. Proc. 2021-30 §6.06. The excess is corrected by distributing the participant's unmatched after-tax contribution amount (plus earnings), notwithstanding that the amount currently resides in a designated Roth account following an in-plan Roth conversion. Reporting on Form 1099-R as Code E is a reasonable and supportable position.” Caveat though: make sure the recordkeeper/TPA doesn't have a strong coding convention for Roth-source 415 correction. If they do, using something different could lead to confusion or unnecessary IRS correspondence if audited. All just thoughts...

you are attributing the ownership of the spouse to the other spouse and then "reattributing" their ownership back and forth... don't reattribute ownership.