Artie M

I think you need to be more specific on what type of correspondence you are referring to. If it is a document that relates to a filing the ERISA statutory retention period is 6 years (though we normally advise 8 years). If it is a document that relates to determining participant's benefit which is due or may become due, there is no set period (we recommend holding it until at least 3 years after final distribution). One big warning...do not rely on prior record keepers to retain your documents.

Though the listed authorities usually come out with estimates prior to the IRS formal release and their estimates are usually on point, they all still state they are estimates. Not sure when the IRS guidance will come out due to the government shutdown

I am not sure we have enough facts to answer your question. Is this person still working at the law firm in 2025--presumably so or there doesn't seem to be an issue. Are you asking whether the switch from partner status in one year to non-partner status the following year affects or doesn't affect the start of their RMDs? I mean for retirement plan purposes, a self-employed individual (i.e., a person who has earned income for a tax year) is treated as an employee. See 401(c)(1). Also, no 5% issue. If they are still working at the law firm in 2025 with no ownership then I take that to mean they are providing services as a non-partner (a person could be a non-equity partner, i.e., no ownership, and still be a treated as a self-employed partner if they receive a share of the firm's income). A question then is whether they are providing services as an employee or as an independent contractor. Another is whether the plan has a definition of "retires" with regard to partners. Assuming they haven't retired for purposes of this query, if they are providing services to the law firm as an employee, seems like they would not be required to take a distribution simply because they have not retired (also assumes that the plan uses both the "age 73" and the "later of" rule). Otherwise, if they are providing services as an independent contractor (or not providing services at all) then it seems they would be required to take a distribution by 4/1/2026. Sorry if I am being dense or reading more into this than is necessary (overly anal)...

This can be done. Your company should put all the language it can in the service agreement stating the limits of its activities with regard to an ERISA plan and must ensure that it doesn’t do anything that goes past those limits. The service agreement, at a minimum, should state that the company does not provide specific investment recommendations to a plan on a regular, defined basis under a written agreement for compensation. The service agreement should explicitly state the company is not acting as an investment advisor and is not providing investment recommendations. It should state that it only provides factual information or administrative services. The company should carefully document its activities to show a lack of discretionary investment advice. The company should merely provide “access” to investments. It shouldn’t state something like this is the standardized slate we offer to plans…. They should likely frame this more as here is a slate of investments that we have seen ERISA plans utilize… it makes no recommendations regarding the appropriateness of an investment for an ERISA plan… tell the client to consult their own financial and investment advisors as to whether any investment is a prudent and proper investment for their plan…. All investment decisions, whether they are obtained through your company’s service agreement or through another provider, are the decisions of the plan sponsor. Nothing in your communications should even allude to or be able to be interpreted that any determination has been made by your company as to whether the offered investments are appropriate for any ERISA plan (just relay the fact that ERISA plans utilize them). The company can provide facts concerning the investments, prospectuses etc. This means it can provide educational materials about investment options in general and concepts but it cannot communicate anything that even appears to be recommending particular funds. Not advice, stream of thoughts here...

Parroting the Regulation example quoted above (changes to Reg language are bracketed and italicized), using your facts: "Because Participant['s] FICA wages from Employer[] for calendar year 202[5] exceeded [$145,000], Participant[] is subject to the requirements of section 414(v)(7)(A) for 202[6], and any catch-up contributions that Participant[] makes under the plan during 202[6] (which includes the [latter portion] of the plan year beginning [May 1, 2025]) must be designated Roth contributions." So, if your participant has catch up contributions in 2026, which you are saying they will (assuming they contribute to the plan after March 1, 2026).... Just substituting your facts in the language from the example in the Regulation.

Given what has been stated, the plan does not explicitly prohibit a loan to a participant on or going on leave. Since it is silent, it seems the plan could permit a loan to this participant. There is no prohibition in the Code for a loan being given to a participant on or going on leave. To me this would fall under the plan administrator's right to interpret the terms of the plan. As long at the loan provisions (e.g., suspension of payments, reamortization, and deemed distribution, if necessary) are administered properly, I don't see a qualification failure if the loan is provided. Once concern though is that your post states that the Plan Sponsor wants to work with this participant and permit the loan. Presumably this type of situation has never come up before (if it has, it should be treated like it was in the past). However, if the loan is approved and this situation comes up again, the loan should be made to the next participant who requests a loan when they are going on or are on leave (regardless of the Plan Sponsor's desires) as loans must be available to all participants and beneficiaries on a reasonably equivalent basis and the loans must be administered according to a uniform loan program.

While researching something else I saw this today. This may not be directly on point because of the structure of the transactions under the facts of PLR 9836028 but note the precise use of the terms seller and purchaser and the one way nature of the interpretation by the IRS in this excerpt from the PLR. Section 1.401(k)-1(d)(4)(i) of the Regulations provides that (i) the seller must maintain the plan. A distribution may be made under section 401(k)(10) and paragraph (d)(1)(iv) or (v) of this section only from a plan that the seller continues to maintain after the disposition. This requirement is satisfied if and only if the purchaser does not maintain the plan after the disposition. A purchaser maintains the plan of the seller if it adopts the plan or otherwise becomes an employer whose employees accrue benefits under the plan. A purchaser also maintains the plan if the plan is merged or consolidated with, or any assets or liabilities are transferred from the plan to a plan maintained by the purchaser in a transaction subject to section 414(l). A purchaser is not treated as maintaining the plan merely because a plan that it maintains accepts elective transfers described in sections 1.411(d)-4, Q&A-3(b)(1), or rollover contributions of amounts distributed by the plan (including distributions that the recipient elects, under section 401(a)(31), to have paid in a direct rollover to the plan of the purchaser).

You may want to check with the author of the plan document for clarification. Plus the answer may depend on if this is an EACA, QACA, etc. For instance, Treas. Reg § 1.401(k)-3(j)(2)(iv) regarding QACAs states: (iv) Treatment of periods without default contributions. The minimum percentages described in paragraph (j)(2)(ii) of this section are based on the date the initial period begins, regardless of whether the employee is eligible to make elective contributions under the plan after that date. However, for purposes of determining the date the initial period described in paragraph (j)(2)(ii)(A) of this section begins, a plan is permitted to treat an employee who for an entire plan year did not have contributions made pursuant to a default election under the qualified automatic contribution arrangement as if the employee had not had such contributions made for any prior plan year as well. Here, the plan is permitted to provide for something... but it doesn't have to....

Treas. Reg. §1.414(v)-2(d)(3) Example (3). Application of section 414(v)(7)(B) to a plan with a plan year other than the calendar year. (i) Facts. Participant B participates in an applicable employer plan sponsored by Employer E. The plan year begins on July 1 and ends on June 30. Participant B had $160,000 in wages within the meaning of section 3121(a) from Employer E for calendar year 2026, and is a catch-up eligible participant for calendar year 2027. For the plan year beginning July 1, 2026, the plan allows all catch-up eligible participants to make catch-up contributions and requires that any elective deferrals in excess of an applicable limit made by catch-up eligible participants who are subject to the requirements of section 414(v)(7)(A) be designated Roth contributions. (ii) Analysis. Because Participant B's FICA wages from Employer E for calendar year 2026 exceeded $155,000, Participant B is subject to the requirements of section 414(v)(7)(A) for 2027, and any catch-up contributions that Participant B makes under the plan during 2027 (which includes the second half of the plan year beginning July 1, 2026) must be designated Roth contributions. Because Participant B is permitted to make catch-up contributions that are designated Roth contributions under the plan for the plan year beginning July 1, 2026 (after Participant B reaches an applicable limit (as defined in § 1.414(v)-1(b)(1)), all catch-up eligible participants under the plan must be permitted to make catch-up contributions that are designated Roth contributions for the plan year. Furthermore, if the plan continues to permit catch-up contributions for the plan year beginning July 1, 2027, then any catch-up contributions that Participant B makes under the plan during the first half of that plan year must be designated Roth contributions (as well as any catch-up contributions in the second half of the plan year if Participant B had wages exceeding the applicable threshold in 2027). Only authority I know of that is "directly" on point regarding your question.

quickly consulted Mr. Google... no formal authority but IRS website (https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts) says this:

I would look this up... my understanding is that a deemed distribution from a defaulted loan cannot be a qualified distribution even if the 5-year rule is met. Also, if less than 59 1/2 10% penalty.

Agree with above....A distribution can only be taken if their employment has been terminated due to a permanent layoff, not a temporary layoff with a reasonable expectation of being called back to employment.

I haven’t looked at this in ages but here is my concern. I believe you need to make sure that the $12,000 you are crediting as earnings as of 12/31/2025 ($62k-$50k) is no less than the amount of earnings you would credit if you used the applicable AFR for the period from the date of the original deferral to the vesting date. Your stub year calc methodology looks reasonable. I looked at a document I have on this and, at least at the time we looked at it, there was not a ton of authorities out there to review (I didn't look to update this). I pasted authorities from that document down below. In each of the authorities listed, it appears that the operative term under each is the “amount deferred”. So our interpretation was that if you use the lag method and pay on the later within-3-months’ date, earnings are calculated from the date the original amount was deferred through the date of payment, compounding annually using the AFR for each January during this period. The parenthetical under Ex. 4 seems to support this interpretation also. Not advice, just my thoughts…. Treas. Reg. §313121)v)(2)-1(f)(3) states: Lag Method. Under the alternative method provided in this paragraph (f)(3), an amount deferred, plus interest, may be treated as wages paid by the employer and received by the employee, for purposes of withholding and depositing FICA tax, on any date that is no later than three months after the date the amount is required to be taken into account in accordance with paragraph (e) of this section. For purposes of this paragraph (f)(3), the amount deferred must be increased by interest through the date on which the wages are treated as paid, at a rate that is not less than AFR. If the employer withholds and deposits FICA tax in accordance with this paragraph (f)(3), the employer will be treated as having taken into account the amount deferred plus income to the date on which the wages are treated as paid. Treas. Reg. §313121)v)(2)-1(f)(4) Examples: Example (1). (i) Employer M maintains a nonqualified deferred compensation plan that is an account balance plan. The plan provides for annual bonuses based on current year profits to be deferred until termination of employment. Employer M's profits for 2003, and thus the amount deferred, is reasonably ascertainable, but Employer M calculates the amount deferred on March 3, 2004, when the relevant data is available. . . . . Example (4). (i) The facts are the same as in Example 1, except that an amount is also deferred for Employee B which is required to be taken into account on October 15, 2003, and Employer M chooses to use the lag method in paragraph (f)(3) of this section in order to provide time to calculate the amount deferred. (ii) Employer M may use any date not later than January 15, 2004, to take the amount deferred into account (provided that the amount deferred includes interest, at AFR for January 1, 2003, through December 31, 2003, and at AFR for January 1, 2004, through January 15, 2004). Preamble to the Final Treas. Regs. Under 3121(v)(2) (TD 8814) At page 18, states: Further, the final regulations provide that, under the second alternative method, the lag method, an employer may treat the amount deferred on any date as wages paid on any date that is no later than three months following the date the amount deferred is required to be taken into account. In addition, in response to comments, the final regulations simplify use of the lag method by permitting the FICA tax due to be calculated using a fixed rate of interest, not less than AFR, rather than on the basis of income under the plan. Text accompanying footnote 2 states: Alternatively, FICA tax payment can be postponed by treating the entire amount deferred as if it were deferred on a date that is within three months of the date the amount is otherwise required to be taken into account, provided that the amount deferred is increased by interest at the applicable federal rate (AFR) until it is included in wages.

I don't understand. How is it a 411d6 protected benefit? 411d6 protects accrued benefits, early retirement benefits, and certain optional forms of benefit distributions. AE is not a benefit within the meaning of 411d6. It's just a feature of how contributions begin where employees can always choose to stop contributing or opt out. (and frankly I don't see it as a BRF either). my 2 cents... which are frankly not worth much anymore... if ever.

most of our clients use 10 or 15 years... can't tell you why. The recordkeepers probably have more info on this topic.

Perhaps you can escheat it to the State. Generally, state escheat laws are preempted but the DOL has a temporary enforcement policy that allows escheatment of $1,000 or less provided the plan fiduciary follows specific guidelines, including conducting a good-faith search for the participant. See https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2025-01. Many State unclaimed funds do not require a Social Security Number. Ask your lawyer....also might need to amend your termination amendment.

If the employer adopts an alternative defined contribution plan within 12 months after all distributions from the terminated plan.... (assume more than 2% of employees will participate). Treas. Reg. 1.401(k)-1(d)(4)(i) states: No alternative defined contribution plan. A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term “employer” contained in §1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f). If ABC terminates its plan pre-closing, distributes funds, and joins the DEF plan post-closing (assuming the adoption of the new plan is within 12 months from the final distribution of funds of ABC plan), the DEF plan will be a successor plan such that the funds distributed due to the termination of ABC plan would be impermissible distributions under the -1(d)(4)(i).

Not sure how the timing rules work here. See 1.414(v)-1(c)(3). "For purposes of determining the maximum amount of permitted catch-up contributions for a catch-up eligible participant, the determination of whether an elective deferral is a catch-up contribution is made as of the last day of the plan year (or in the case of section 415, as of the last day of the limitation year), except that, with respect to elective deferrals in excess of an applicable limit that is tested on the basis of the taxable year or calendar year (e.g., the section 401(a)(30) limit on elective deferrals), the determination of whether such elective deferrals are treated as catch-up contributions is made at the time they are deferred." Assuming 2026 is considered the year of deferral, it could be reported on the 2026 Form W-2.

This would be an issue. You can terminate the target plan because it was maintained by a different Employer (capital "E" controlled group employer). The buyer adopting the target would have a second plan (the alternative defined contribution plan) of the same employer (don't even have the controlled group issue).

Question 1. Depends. A fiduciary of an ERISA governed plan may eliminate a group annuity contract (GAC) and not breach their fiduciary duties, even if the participants incur large losses. However, this is a legal question that depends on the facts and circumstances and would only be answered after a participant files suit and there is a determination in court. Here, where the plan sponsor by its actions is going to create large individual losses, you friend should be taking all actions necessary to minimize the risk of a finding of breach of fiduciary duty. Your friend needs to be able to show that he fulfilled his ERISA fiduciary duties. He can’t just say I don’t like the GAC and I want mutual funds. He has to show that he conducted a prudent and detailed analysis of whether surrendering the GAC and paying the surrender charge is in the best interest of the participants as a whole, taking into consideration the current market and participant needs. He should do a detailed comparison of the various alternatives, i.e., holding the GAC, a partial surrender, total surrender, costs of other investments, etc.. It is a given that he must show that he followed all the plan provisions and also the GAC provisions to ensure that the minimal surrender charges were paid. If possible, he should consult with an independent financial advisor/expert (preferably not the advisor he is moving to.. to avoid conflicts of interest) to ensure the decision was prudent and in the best interest of the participants. As with all fiduciary decisions, but especially here where there may a high risk of litigation (he is in essence creating a loss), he must be certain to document his decision (including detailed records of all the analysis performed, alternatives considered, the decision-making process, and the reasons for the final decision to surrender the GAC, etc.). Also, he should attempt to effectively communicate the change to the participants showing how it is in their best interest to do this. Of course, he has to walk a fine law … if he shows the GAC is such a bad deal someone might consider filing suit questioning the initial decision to put all the money in the GAC in the first place. Another option which many plan sponsors utilize when in this situation is simply freezing the GAC and redirecting new contributions into new investments, e.g., mutual funds. Here, he simply stops adding any more money to the GAC and in essence starts a new investment plan with the new mutual fund investment slate. At the point the GAC surrender period expires, he would terminate the GAC without the surrender charges and the GAC money would then flow into the new investments. Don’t know how long the surrender period is but at least for some of the money the participants will have more control. He may need to amend the plan for this. It doesn’t sound like your friend would want to do this but some plan sponsors will pay the surrender charges. Paying the surrender charges is more complex under the tax code and, if desired, your friend should consult an ERISA benefits attorney. see @CuseFan Question 2. This allocation should already be addressed in the plan and the GAC. All qualified plans must have “definitely determinable” benefits. Even though the funds are all invested in a single GAC, there should be current terms under which those funds are allocated to each of the participants. As you state, they are all getting statements now that track the amounts in the GAC allocated to each of the participants. The surrender charges would be allocated amongst the participants under a formula in the plan/GAC. There must have been participants who terminated employment and qualified for a distribution from the plan. How were their benefits determined? Overall, your friend should stay away from any type of modification or amendment of these provisions. Just thoughts...

This is a TL:DR post so sorry if I am repeating what someone else said... Q1a... don't see in the regs (or anywhere else) anything that permits the plan to recharacterize a "pre-tax catch up" election and deem it a regular pre-tax contribution. Once they hit the limit of $8,000 in Roth catch-ups they can no longer contribute any catch-ups. Since can't do any more catch ups, no pre-tax catch-ups either. Q1b... again, once they hit the $8,000 limit, how can they elect "pre-tax catch-up"?? Perhaps you mean they can go back an increase their regular pre-tax election but that is not what you are saying (or doing). Q2a, b, c... why do it that way.... Under your facts, their limit is $24,000 + $8,000. So, they keep contributing a $1,000 pretax and $1,000 Roth until week 16. At weeks 13, 14, 15, and 16 the $1,000 Roth deferral is converted to a $1,000 Roth catch-up (so $4,000 Roth catch up), also, at the end of weeks 13, 14, 15, and 16 $1,000 of the previously contributed regular Roths are now deemed Roth catch-ups (so additional $4,000 catch up after 4 weeks). Note, under the regulations, a spillover doesn't apply until (1) the HCI's YTD pre-tax deferrals reach the 402(g) limit or (2) the HCI's YTD aggregate (pre-tax and Roth) deferrals exceed the annual limit. And yes, you communicate to them that they can switch anytime... you may want to do follow-up communications. The key is simply communicating with the participants.

hmmmm.. @Peter Gulia I believe you are agreeing with my post (at least generally) and are providing more detail, but I am not certain.

There could be a more significant issue here. I think that this structure likely does not violate the indicia of ownership rules for plan assets under ERISA 404(b) but that probably should be analyzed. The bigger issue to me is that under the Code a plan is not tax-qualified unless its trust is a "domestic trust" under 7701 of the Code. Under the control test portion of the statute, to be considered a domestic trust, one or more U.S. persons must have the authority to control all "substantial decisions" of the trust. If an all-non-U.S. board is making the decisions for the plan, the trust could be classified as a "foreign trust". This would likely disqualify the plan for tax purposes.

This is an operational error for failure to carry out the terms of the plan (i.e.,, the election of the participant). As such self-correct by removing the contribution from the participant's pre-tax account under the plan and put it into a Roth account under the plan. No QNEC is necessary because you simply did not put it in the right account. (The employer had authorization to deduct the amount from their paycheck and the deduction was made.) Then, as @justanotheradmin suggests you must take care of the taxation aspect of the contribution to ensure the Roth nature of the contribution. The 1099-R as @justanotheradmin suggests would remove the issue of withholding and ensure its taxation but something about it seems a little distasteful as it was not the employee's fault (no election should be required for Roth treatment as it should have been a Roth from the beginning). Since this error likely occurred recently, I would likely suggest that the employer manually correct the payroll to reflect the proper income tax withholding (that means the correction would flow through to their W-2 for the year) and contribute the missed withholding for the employee as it was the employer's fault that withholding wasn't taken (of course, the employer could request the employee pay the required withholding or withhold amounts from the employee's next paycheck to cover the withholding but, if considering getting the withholding from the employee, just issue the 1099-R).

We prefer not to use the Social Security definition but prefer to line it up with the employer's basic long-term disability definition. The SS definition requires that they cannot "engage in any substantial gainful activity" and most of our clients do not use that strict of a standard. I have not run into your "equal protection" argument, but I can see where there is a concern (and perhaps gives us another con to the SS definition). Here is language we suggested under a Schwab prototype we recently reviewed. Of course, this assumes the Employer maintains a long-term disability plan (and that it is not self-insured/administered).