Artie M

I thought a terminating defined benefit plan could send actual dollars to the PBGC. I just looked at the website and the Overview page for the Missing Participants Program (https://www.pbgc.gov/employers-practitioners/help-finding-missing-participants) states: I have not had to look at this in a while so perhaps the website has not been updated.

Just in case, I agree with @David D's response as long as the "contributions" are solely after-tax contributions and does not include any earnings on those after-tax amounts. If the "contributions" include earnings, those earnings (and just the earnings) are taxable and reported in Box 2A. Also agree that Code G is used, but sometimes also Code 2 or 7 depending on plan/admin system (and age, of course).

I agree with the timing as relayed by @EBECatty. Though I have relayed my views of the required timing under the tax laws, I have a couple of clients who have been advised by their accountants that it is common practice to take the compensation into income not necessarily on the day that the option is exercised but in the same quarter it is exercised. Under the tax rules, the withholding, etc. should occur at or very near the exercise date (paid or constructively paid). The accountants noted that employers have some administration issues such as batching equity comp in payroll cycles, waiting for broker confirmations or fair market valuations, or their equity systems or stock agents' systems lag. It is kind of an "as soon as administratively practicable" attitude. To delay income inclusion, it seems there should be some impediment to immediate inclusion (e.g., 31.3121v2 allows some flexibility if the amounts are not reasonably ascertainable). Perhaps the more reasonable argument may be a stock agents' systems showing that the stock is not delivered to or made available to the participant until later so they actually don't have receipt of the optioned stock. I know that the IRS has informally stated (where I can't recall) that some minor timing differences may not be an issue if the income is included in the correct year and withholding deposits/payments are timely based on when the wages are treated as paid. Also, under 1.415c-2e, compensation is to be taken into account when it is actually paid or made available (i,.e., constructively received). As stated above, option income becomes taxable wages at exercise. Legal rule... include at exercise. Real world...maybe short delay Perhaps you can fall back on the Plan administrator has the power to interpret the terms of the plan provisions (assume your plan contains that) as long as it is applied consistently. I don't like taking that position because using this provision really means the Plan admin would be changing the definitions from W-2 wages paid or constructively received to W-2 wages as reported. Item 2 to me is answered by item 1 response. Seems like 50% QNEC + full match + earnings (unless Plan or IRS limits kick in).

I guess this is an operational failure because the distribution did involve a failure to follow the written terms of the plan document (i.e., distribution made when not eligible for the distribution). As you state, the corrective action is to return the amount of the distribution plus earnings to the plan. The employer is required to notify the participant that the distribution is not eligible for rollover reporting on a 1099R (so Code 1 or perhaps 7) and presumably requests the return of the amount to the plan. A late 1099R likely should be issued (there was a plan distribution) but there may be penalties for issuing it late. Note, the employee is not required to return the amount (at least under EPCRS). If they don't, the employer has to make a contribution to the plan in the amount of the distribution plus earnings. If this is an issue, the employer may wish to file under VCP to ensure the employee does not get a double dip (VCP would be used to put forth a proposal of what will be used with the employer contribution... for example, to be allocated to other participants or what). At least state that the unreimbursed distribution was an "advance payment" of their benefit. Based on your characterization of the facts, it appears that the participant accessed funds without Plan authorization so the transaction appears to involve a fiduciary breach and possible prohibited transaction. This person appears to be a fiduciary, even if not named one, because they have the functional ability to make discretionary distributions under the plan. As a fiduciary, the Plan may be able to sue them as fiduciaries are personally liable to make good to the plan any losses resulting from their breaches. If the DOL gets involved, there could even be criminal prosecution (or state law violations of embezzlement laws). If the participant improperly accessed funds there likely is a prohibited transaction under Section 4975, specifically an unauthorized transfer of plan assets for the participant’s benefit (i.e., self-dealing). This could be treated as a deemed distribution plus a prohibited transaction with an excise tax (15% initially and 100% if not corrected within each taxable period not corrected). Also, for the IRA, loss of IRA status. There is also possible plan asset control failure by the Plan fiduciaries. The Plan sponsor and the Plan administrator should review the distribution controls and determine how the participant could do this. Recordkeeper error? Admin approval failure? Participant circumvention? All of the above? Then, document the facts, corrections and methodology of correct and finally add some internal control improvements to ensure this cannot occur again. This violation does not appear to fall under VFCP. All of the above should be thoroughly documented in the event of an IRS and/or DOL audit(s). Just running through thoughts as they come to me....

1.401(a)(4)-1(c)(10) A plan does not satisfy the nondiscriminatory amount requirement of paragraph (b)(2) of this section unless it satisfies § 1.401(a)(4)-11(c) with respect to the manner in which employees vest in their accrued benefits. 1.401(4)-11(c), A plan satisfies this paragraph (c) if the manner in which employees vest in their accrued benefits under the plan does not discriminate in favor of HCEs. Whether the manner in which employees vest in their accrued benefits under a plan discriminates in favor of HCEs is determined under this paragraph (c) based on all of the relevant facts and circumstances, taking into account any relevant provisions of sections 401(a)(5)(E), 411(a)(10), 411(d)(1), 411(d)(2), 411(d)(3), 411(e), and 420(c)(2), and taking into account any plan provisions that affect the nonforfeitability of employees' accrued benefits (e.g., plan provisions regarding suspension of benefits permitted under section 411(a)(3)(B)), other than the method of crediting years of service for purposes of applying the vesting schedule provided in the plan. Seems like the client needs to show how having these two different vesting schedules doesn't favor their HCEs. Note that the IRS position is that "differences in vesting are not discriminatory per se" RR 74-166 (dealt with DB plans not DC plans).

I don't have time to look for authorities but I believe the person would be included for testing purposes as an NHCE that does not benefit. They receive no W-2 Plan comp and have no deferrals. All the nonresident aliens with no US source... the other employees of the EU entity... would be excluded for all purposes TR 1.410(b)-6(c).

New Jersey is very odd. Back in 2021 one of my clients asked us to assist one of its employees (someone pretty high up on the food chain) who had deferred over 90% of their income into the company's nonqualified deferred comp plans. This employee was a NJ resident. We are located in the South and normally do not provide any services with regard to NJ so I contacted a friend, tax partner in D.C who is barred in NJ, to assist. The client had treated the deferred comp as required under the IRC, which, we found did not align with the NJ rules (we didn't advise on the original set up). The employee had paid the increased NJ tax based on 2019 601B and was assessed a tax, penalties and interest of over $40K and asked the client if they could provide assistance with at least a possible waiver of the penalty and interest. Though we formulated arguments to assist the employee, we were not optimistic based on our reading of the NJ law. We in fact were researching the statute of limitations as to how far back could they go with this. After "chasing this rabbit" as the client phrased it, and working with the programmers to change the payroll set up, NJ ended up conceding that the deferrals weren't subject to NJ state tax and refunded the client all of the $40K plus interest. None of us understood the NJ reversal but of course did not argue.

A--Code 2 (Early distribution, exception applies), G (Direct Rollover) B--Code 2 (Early distribution, exception applies), G (Direct Rollover) C--Code 7 (Normal distribution), G (Direct Rollover) Box 1--$10,000 Box 2a--$10,000 Box 4--$0

We still give the notice even using the Brief Exclusion rule. I did not go back and look for authority...not time right now... perhaps it is just a best practice principle. I mean how does a plan sponsor provide an excluded participant an "opportunity" to make up the missed contributions without providing them notice that something happened.

After seeing the follow up posts, I reread the OP and have a couple other items to note. The prior recordkeeper is doing what is required under the Regulations. I don't believe they have a choice "to change their mind." As previously noted, the defaulted loan must be taking into account in determining the limits on any new loan but I omitted the requirement that "phantom interest" also must be taken into account for those purposes. See Treas. Reg. §1.72(p)-1 Q&A 19 ("A loan that is deemed distributed under section 72(p) and that has not been repaid...").

Since you do not have HCEs this should be doable. The Plan docs would have to be amended to provide for this. Usually, this would be a BRF as loans should be available to all participants on a reasonably equivalent basis and, as such, offering one to some and two to others would need to be tested. But if NO HCEs this difference would satisfy BRF testing (not sure "if no HCEs in that situation" means something else). Just have this rule set forth as an objective rule. The outstanding loan is still count for maximum loan purposes. (Just note that some commentators have stated that any loans after a deemed distributed defaulted loan is also considered a deemed distribution, but I have never seen authority for that statement. Plus that never made sense to me... just say if have deemed distributed defaults loan can't give another loan... but that isn't said anywhere either.)

Just to be sure, any reduced correction requires a notice (0% or 25%)

Right, this is not an advice column. I responded once above and have not read all the various posts since (I am confident the responses contain a wealth of good information but I am not reading through all of them) because this appears to be a situation of one spouse being taken advantage of (or fearful of being taken advantage of) by another spouse. I did read the OPs posts for the facts and lingering questions. Staying in the lines (addressing QDRO question), the key facts seem to be Divorced May 2021, 50% split with valuation date in May 2021, daily valuation, assets not segregated (yet... I think... only quick read of facts). The only real questions you need answered are what was the value of the account on May __, 2021, the date of the divorce (presumably the date the 50% is assigned). So, you want a copy of the P's account statement for that month to ensure that the value you have been given is in the ballpark and you want Ascensus to give you something stating that the amount assigned to you is the amount in the account on May __, 2021, the daily valuation amount. Ascensus is not going to collude with the P and give you bad info. They have no stake in this and are too big to worry about the ex-spouse. Then since this was almost 5 years ago hopefully the QDRO contains language that the assigned value should include earnings and losses from the date of assignment to the date of actual segregation (i.e., the funds are put into an account in AP's name). AP wants the earnings clause since the market has experienced substantial growth since May 2021 (even with recent dips). Otherwise, AP doesn't get those earnings. It sounds like the amounts have never been segregated which may be good because AP has not been able to direct the investments, etc. If the QDRO contains all this language, then seems like AP's next questions should be why hasn't the amount been segregated and why haven't the distribution and/or investment forms been provided? Wanting the language from the Plan, etc. is just window dressing ... AP: just get your 50% and move on. The Plan is not going to have any language that affects your split. The Procedures will just lay out what ERISA requires, etc. Daily valuation is daily valuation. Move on with life....

First, implicitly this issue appears to be a question arising only under a plan using elapsed time. As someone stated above, under the applicable rules, the employment commencement date is the date on which the employee first performs an hour of service. This is the date that the rules require that service begins. That is, a plan cannot credit less time than what this rule requires. I believe a plan could use a more generous standard to determine the date on which service has to begin. Like someone said above, since it is the first year, it should not be discriminatory. § 1.410(a)-7(a)(2) provides in parts relevant to my thoughts: (2)(i) ...Under this alternative method of crediting service, an employee's service is required to be taken into account for purposes of eligibility to participate and vesting as of the date he or she first performs an hour of service within the meaning of 29 CFR 2530.200b-2 (a) (1) for the employer or employers maintaining the plan. Service is required to be taken into account for the period of time from the date the employee first performs such an hour of service until the date he or she severs from service with the employer or employers maintaining the plan. (3) Overview of certain concepts relating to the elapsed time method--.... (ii) Employment commencement date.... (B) In order to credit accurately an employee's total service with an employer or employers maintaining the plan, a plan also may provide for an "adjusted" employment commencement date (i.e., a recalculation of the employment commencement date to reflect noncreditable periods of severance) or a reemployment commencement date as defined in paragraph (b) (3) of this section. Fundamentally, all three concepts rely upon the performance of an hour of service to provide a starting point for crediting service. One purpose of these three concepts is to enable plans to satisfy the requirements of this section in a variety of ways. (C) The fundamental rule with respect to these concepts is that any plan provision is permissible so long as it satisfies the minimum standards. Thus, for example, although the rules of this section provide that credit must begin on the employment commencement date, a plan is permitted to "adjust" the employment commencement date to reflect periods of time for which service is not required to be credited. Similarly, a plan may wish to credit service under the elapsed time method as discrete periods of service and provide for a reemployment commencement date. Certain plans may wish to provide for both concepts, although it is not a requirement of this section that plans so provide.

The rule for QDROs and RMDs is odd. See https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-8#p-1.401(a)(9)-8(d)(2). YOu would think that once in a separate account it would be treated as the alternative payee's, but for RMD purposes it isn't. don't know why but that is what the Reg says. The alternate payee should consider @fmsinc's suggestion and roll the account balance into an IRA or she may be subject to this same RMD treatment next year, etc. That said, probably won't help with this year as the amount that is required to be an RMD this year normally cannot be rolled over. So, there likely would be two 1099-Rs issued, one with the RMD non-eligible rollover amount and one with the remaining eligible rollover amount.

I did not read all of the posts in the thread but the OP states that payments are "in pay status". Maybe one of the posts stated that benefits are not in pay status... if so, disregard my post. This is because I view a coverture fraction only helpful when benefits are not "in pay status", i.e., benefits are going to start at a later date. Like you said, it is used because you know the numerator but do not know the denominator. The fraction allows for adjustments for the participant's additional service time post-divorce for which the alternate payee should not receive a benefit. For example, QDRO issued in YR 1 awards 50% of the coverture fraction. QDRO states at divorce the participant has 10 years of service and the alternate payee and participant were married for all of those years. When the participant retires in YR 21, they would have an additional 20 years of service. Benefits begin to be paid, so the alternate payee's portion of the monthly benefit payment would be 50% x 10/30 of the monthly benefit. The coverture fraction is needed to ensure the alternate payee does not benefit from the additional service when the payment start. If, as stated in the OP, payments are already started, I don't see a problem with amending the QDRO to do the math... using the example... the QDRO would simply state that the alternate payee should receive 16.67% of the monthly benefit. I am not saying the plan administrator is correct, I am just saying, practically speaking, amending the QDRO would be easier than arguing with the plan administrator or taking them to court.

The delinquent filing of a 5500 form would be under the DFVCP, an operational failure (i.e., an IRS issue) would be under the VCP as contained in EPCRS, and if there is a fiduciary breach regarding the real estate held in an ERISA-governed plan that would be under the VFCP (it the breach is eligible for correction under that program). Alphabet soup.... If your fear is a potential fiduciary breach or prohibited transaction regarding the purchase or sale of real estate using plan assets, your client should at some point contact an ERISA attorney. If you are not an attorney, you should not engage in the practice of law.

Hmmm... interesting. I thought DRG claims were considered incurred at discharge.... as that is when the relative-weighted DRG pricing is charged because they take multiple factors that come up after initial diagnosis into account. However, I can see where an initial DRG could be set upon initial assessment. Upon admission, they bill the entire DRG amount and then perhaps make an adjustment based on objective factors if necessary (though the adjustment seems to go against the DRG concept). I think this is done in some forms of Bundled Payments. This timing does seem like an "end run" around normal timing rules for when a claim is incurred (i.e., when services rendered). Sorry, this isn't helpful... just replying in hopes someone responds with an authoritative answer. This should be coming up more often as this pricing has moved out of just Medicare/Medicaid environments.

You should really read or re-read the proposed regs. Federal Register :: Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k) They generally permit an employer to elect to exclude LTPT employees from the application of the nondiscrimination requirements of section 401(a)(4), the ADP test, the ADP safe harbor provisions of section 401(k)(12) and (13), the ACP test, the ACP safe harbor provisions of section 401(m)(11) and (12), and the 410(b) minimum coverage requirements. So, generally they can be excluded when determining whether a plan satisfies those nondiscrimination and minimum coverage requirements. They basically say that if you exclude LTPTs from nondiscrimination, they must be excluded from all nondiscrimination testing. In fact, the plan could exclude them from testing and still give them additional benefits (e.g., matches). Note that if your plan is not intended to satisfy the ADP or ACP safe harbors, the proposed regulation would not require an election to be set forth in the plan. However, the regs state that the plan would need to provide “enabling language.” It say in this case if the plan document doesn’t include enabling language, or an election under the proposed reg, then LTPT employees would not be excluded for purposes of determining whether the plan satisfies 401(a)(4), the ADP test, the ACP test, or the 410(b) minimum coverage requirements (to the extent those provisions would otherwise apply to the plan). If the plan is a safe harbor plan, it must specify in the document whether the safe harbor provisions will apply to the LTPTs. Apparently, this exclusion from testing seems like it would allow the owner the ability to get "creative" since these potential HCEs, i.e., the spouse and children of HCE, can escape testing.

Don't know of anything that can help. To repeat, it is my understanding that once the money is in the Roth IRA, it is not coming back.

Perhaps I didn't read your post closely enough, but when I read "to be paid, from plan assets" my focus was on the plan restoring the amounts.

Usually, I would not add anything to the responses of the wise folks on this thread but I have to commend the OP for questioning the response they received from "AI". While AI may give one a starting point, AI responses can be flat out wrong so, in my view, AI responses should always be viewed extremely critically. I fully agree with @Peter Gulia and @austin3515. I would like to add a couple of thoughts. OP notes that their initial query is in response to IRS Notice CP1348. The IRS's purview does not cover the entire universe of whether plan amounts can be used to pay penalties. So what occurs in an IRS Notice regarding prohibited transactions may not be the end of the story. Their purview only covers whether there is a prohibited transaction under 4975 and the consequences under the tax code. @austin3515 and, ultimately, @Peter Gulia look at the entire universe in bringing up the views of the DOL under ERISA. Also note that the concept of "plan assets" is an ERISA concept monitored by the DOL. In my experience, under ERISA, civil penalties assessed against fiduciaries, plan sponsors, or other parties for some sort of legal violations or prohibited transaction cannot be paid using plan assets. Plan assets must be used exclusively to provide benefits to participants and beneficiaries and to defray "reasonable administrative expenses." I have not researched this recently but my understanding is the DOL maintains that paying penalties from plan assets is not a reasonable expense and is strictly prohibited. DOL has stated that penalties under ERISA 502(i) must be paid by the party in interest involved in the transaction not the plan, and using plan assets to pay penalties is likely a breach of fiduciary duty. Also, regarding restoration or disgorgement as @Peter Gulia brings up, I have colleagues who distinguish between restoration/disgorgement, which are remedial in nature, as opposed to penalties, which are punitive in nature. They seem to imply that plan assets could be used for restoration or disgorgement but I must be thick-headed because I don't see it. How can you use plan assets to restore something to the plan? disgorge from plan? There may be circumstances that I am just not thinking of but it seems like a zero sum game.

W-2 Comp has different meanings depending on whether you are looking at this from a qualified plan perspective or from a payroll perspective. If looking at it for payroll purposes, what is included as wages for purposes of reporting on a Form W-2 is determined under § 3401 (income tax withholding), i.e., wages, tips and other compensation reported in Box 1, which do not include Section 125 deductions. Because Section 125 plans allow employees to pay for certain benefits—such as health insurance premiums—with pre-tax dollars, these amounts are subtracted from their gross pay before their taxable wages are calculated. Since these deductions are taken out pre-tax, they are not subject to federal income tax, Social Security tax or Medicare tax (§§ 3101-3128). Note that some employers report Section 125 contributions in Box 14. However for qualified plan purposes the definition of W-2 Wages is defined under § 415. Under § 415, elective deferrals—including pre-tax contributions to a § 125 plan—are included as compensation. Though these amounts are excluded from taxable wages reported in Box 1 of Form W-2, they are specifically required to be added back when calculating compensation for § 415 purposes. When a qualified plan uses a "W-2 wages" for its definition of compensation, it must explicitly include § 125 deferrals to satisfy § 415 requirements. If the plan uses the "415 Safe Harbor" definition directly, these amounts are already included by definition. The reasoning behind this is because § 415 provides the limits for the total annual additions to a participant's account in a defined contribution plan, and including § 125 deferrals ensures that employees are not penalized for participating in pre-tax benefit programs (it is view as a more accurate reflection of total compensation for qualified plan limit testing).

The last time I looked at it an accidental rollover from a 401(k) to a Roth IRA cannot be reversed or recharacterized. I haven't looked at this recently so the law could have changed but I don't think so. This could be done prior to 2017 or so but the Tax Cuts and Jobs Act of 2017 eliminated the ability to "undo" or recharacterize Roth conversions making this error irrevocable. You must treat the distribution as a taxable event, which will generally be reported on your tax return for the year the rollover occurred. So this will have to be included in gross income for the tax year the transaction took place. Not sure of the Form that should be used to this 4852 or 5498. Also, could be subject to early withdrawal penalty if an exception does not apply. Bottom line is the funds can’t be moved back into the 401(k) or into a traditional IRA. Once the month money is in the Roth IRA, under current law, it stays

Note that under ERISA a valid QDRO does not require the signatures of both parties. The essential legal requirement is that the order be issued or approved by a court of competent jurisdiction. However, judges normally insist on both signatures to confirm that the document accurately reflects the parties' divorce settlement before they will sign it…. having both signatures is the standard to avoid a contested court hearing but sometimes it is necessary to file a DRO only one signature (e.g., a former spouse refuses to cooperate, so the other spouse petitions the court to issue the order regardless of their lack of consent) but in these cases the judge usually requires that they show that the QDRO aligns with the existing court-ordered property division. If the OP wants to contest the property division, that’s a bigger issue than a QDRO