Artie M

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

As @RatherBeGolfing is alluding to, it depends…if the PS plan already has a 401(k) feature in place, a safe harbor match can only be added at the beginning of a future plan year. If the PS plan does not have a 401(k) feature, the safe harbor feature can be implemented on a prospective basis for 2026 as long as it is in place for at least 3 months of the year. So, if the PS plan doesn’t have a 401(k) feature and is a calendar year plan, it can add the safe harbor match until October 1, 2026. If adding a safe harbor nonelective there is more flexibility, including retroactive options.

Don't know of a cite but generally federal income tax withheld in one year can't be applied to a prior year's tax liability. For example, if an employer incorrectly withholding taxes in a prior year, they can't simply correct it in the current year. This IRS Chief Counsel Advice states that generally you can only fix if find the mistake in the same calendar year. http://irs.gov/pub/irs-wd/201727008.pdf

Here's my two cents on the OP's question. Taking into account the facts @Santo Gold has provided and assuming they are accurate, the plan administrator may want to do the following: Wait for a claim to be filed (see @Peter Gulia) or a request for information is made. If a potential beneficiary or estate representative makes a claim or requests information, the plan should provide them the information required for them to make a viable claim. Here, the proper question is being asked in the OP. The company must take care regarding who is actually entitled to receive communications or information about the benefit. Under the terms of the plan as quoted above (assuming the Adoption Agreement does not have a specific provision), the plan can only provide information to the decedent’s spouse, child, or estate representative. The plan must ensure that it gets any and all necessary documentation to identify that it is providing any detailed benefit information to a person who is authorized under the plan to receive that information. Perhaps, the first thing that should be requested from a person who states they are going to make a claim is for them to provide the plan a copy of the decedent’s death certificate. Usually if that person is a spouse, child, or estate representative, they should have access to the decedent’s death certificate. If they cannot provide one, we have advised plans to simply provide them the Plan’s SPD and point them to the provisions as to how to make a claim. Then tell them that to make a claim they need to provide a copy of the death certificate and documents supporting their status as a beneficiary (i.e., under the OP’s plan: the spouse—marriage certificate with decedent as spouse, child—birth certificate with decedent as parent, estate rep—letters testamentary, of administration, or of authority, depending on state law, etc.). If using a small estate affidavit, we would require an original notarized affidavit, certified by the clerk of court of the decedent’s last county/parish of primary residence, certified or long-form death certificate, government-issued photo ID, and proof of relationship (the plan would then request their attorney determine if the affidavit meet's applicable state law). In conjunction with these actions, the plan administrator, at a minimum, should check its other plan records for helpful information (e.g., group term life plans, welfare plans etc. for dependent or beneficiary info, if any) and have someone obtain a copy of the decedent’s obituary, which normally is available online and would list the decedent’s living relatives, if any. If there is a question concerning whether a spouse exists or an individual is the legal spouse, the plan administrator could also do a search of the marriage and divorce records in the county or parish in which the decedent had their primary residence. The clerk of court in that county or parish usually has a digital database that can be searched or procedures to request certified copies of these records. In some states, state vital records offices can provide one or both of the certificates. Also some states have services such as VitalChek, which partners with state and local government agencies to provide these documents. Searches for potential children are more complex and might be impractical. If the plan receives any information indicating there may be multiple beneficiaries or conflicting claims, it may want to notify the other potential beneficiary(ies) that a claim has been made for these benefits and they may wish to file a claim. They might not… we have had instances where a beneficiary did not make a claim for benefits for which they were the rightful recipient, attempting to bypass the tax consequences (e.g., a spouse did not want the benefit but wanted it to go to their children (a disclaimer in that instance would not have achieved that effect)) and the plan could not make the distribution based on the children’s claim for benefits (first, it had actual knowledge there was a spouse and, second, even if the spouse was considered deceased, the benefit would have went to the estate and not the children). Once the proper recipient of the plan account balance has been determined, the plan would notify the individual (or the executor, if it’s the estate) that they have the right to the benefit and give them the information they would need to apply for benefits to commence (copy of SPD and/or distribution forms) or detailing their abilities to leave money in the plan and when the latest date they can take a distribution. Depending on who is determined to be the proper recipient, the plan should request Social Security numbers and/or IRS Form W-9. Caution--Any distributions paid to the executor of an estate should be made payable to “[Name of Executor], as Executor of Estate of [Name of Employee]” or simply to “Estate of [Name of Employee]” (or a similar variation or a variation required by your plan recordkeeper). Any distributions paid to the deceased’s heirs under a small estate affidavit should be divided among the named heirs and paid directly to each of them. While the IRS rules normally allow beneficiaries to elect to rollover a qualified plan death benefit to an IRA (to avoid withholding taxes on the distribution), neither an estate nor the heirs listed in a small estate affidavit can elect a rollover distribution. The key legal proposition here is that ERISA Section 514(a) explicitly preempts state laws that “relate to” an employee benefit plan that is subject to ERISA, with limited exceptions for certain insurance, banking, and securities laws. Courts have interpreted this preemption language to mean that any state law that refers directly to an employee benefit plan, or that bears indirectly on an employee benefit plan, is not enforceable against an ERISA-governed employee benefit plan. See Egelhoff v. Egelhoff (essence--terms of the plan govern). The only state law that should be consulted is the law that supports the claimant’s status as spouse, child or executor/administrator/estate rep. FWIW, if a plan that has an order of precedence for designating beneficiaries as set forth in the TSP as noted above were presented to us by a client, we would vehemently recommend immediately amending that provision. Our view is that in no way should a plan take on the responsibility of making legal decisions under any state law. If the question is of immediate concern, like here, and we would not amend the provision to cover the instant decision, we would try to find a way to throw this into court and/or make someone else make the legal determination. (Note that the determination of who should receive these amounts under the laws of descent and distribution is the executor of the decedent’s estate.) Also, the plan administrator should ensure that they checked the plan terms to see if any employer contribution (matching, profit sharing, or other non-elective contribution) is due to the employee for the year of death. Some plans require that an employee normally be employed on December 31 or have completed 1,000 hours of service during the year to receive an employer contribution, but often those requirements are waived if the employee dies while employed. Also, confirm that the account uses the proper vesting as death often accelerates vesting. Not advice, just my two cents (does this idiom still have meaning as the penny is no longer being minted?)

Not sure how this isn't a PT.... Under ERISA §3(13) states a party in interest as to an ERISA plan includes (C) an employer any of whose employees are covered by the plan... [and] (H) an employee ... of a person described in subparagraph (C)... Since this person is a participant in the plan, presumably he is an employee of an employer maintaining the plan. ERISA §406(a) prohibits various types of transactions between a plan and parties in interest including a direct or indirect ... transfer to, or use by or for the benefit of a party in interest, of any assets of the plan. Even if you use the one bite of the apple principle that might allow the initial purchase to be exempt, the ongoing business aspect of this investment seems fraught with risk.

Presumably the plan at issue utilizes the safe-harbor rules, as most do. If so, the rest of this post is purely academic. That said, a plan does not have to use the criteria set forth in Reg. Section 1.401(k)-1(d)(3)(iii)(B), cited above, for making hardship distributions. For example, funds in a profit-sharing plan (obviously with a 401(k) feature) generally may distribute employer contributions under more lenient hardship rules where the "hardship" is sufficiently defined in the plan, is consistently applied, and limits the distribution to vested amounts. See Rev. Rul. 71-224. If the plan at issue does not utilize the safe-harbor rules you must scrutinize the plan definition of hardship and perhaps how the plan has historically administered hardships under these circumstances.

@Peter GuliaI understand that service provider encompasses a broader group than just employee. I simply meant that the dynamics of determining advisee/advisor issues can be extremely different depending on the character of the service provider. if advising a company regarding an individual employee and the tax consequences under 409A, one often notes the adverse tax consequences, at least at this time, are almost entirely on the employee. In which case, the employer might take a riskier path than another. The dynamics change drastically if you tell the same company client the adverse tax consequence would land on the directors even if you have language stating the company doesn't guarantee any tax consequences and has no liability, etc.. That's all I was saying.

I think there is a problem. Initially, @M Gerald's view seems problematic because the directors appear to be able to defer different amounts each year ("allows a company's directors to elect to defer a portion of their director fees") so there are no "consistent" amounts to support that take. @gc@chimentowebb.com's view seems more plausible because his view is premised on each year's deferral being a separately identifiable amount under a plan, which they are. The anti-toggling rules apply to each separately identifiable amount. It is very typical of deferred compensation plans that permit service providers to defer all or a portion of their compensation for an upcoming year to have separate elections for each of those "tranches". However, the installment form of payment with the 10 installment limit throw a wrench into this argument, at least to me, because with the 10-installment form of payment it does not seem that the director's are making different elections for each tranche. Also, because they are "installments," generally that would mean there are 10 equal annual installments (equal inasmuch as they can be with potential earnings/losses of principal in later years). So, the issue again comes back to there is no "consistent" deferral amount (plus the additional years of deferral after 10) that would support the installments. So, just spit balling here but there seems to be an issue because a separately identifiable payment type of argument doesn't seem to fit the OP's facts. I generally also agree with @Peter Gulia's sentiments but these facts involve a directors' plan ...

I really am not following everything in the facts in OP (I don't understand the facts in the second paragraph of the OP so won't be addressing anything related to that paragraph) but your client could have an operational failure that would need to be corrected under IRS EPCRS (need to determine if the plan documents require the amounts to be contributed by a certain time period) and your client definitely has a failure to timely deposit the contributions that would need to be corrected under DOL VFCP. Under EPCRS, normally corrections are limited to contributions that could be made without exceeding an IRS. Thus, under that reading, if an operational failure occurred, the correction appears to be limited to $4,000. However, for VFCO failures, I don't recall any language in the VFCP that would limit the contribution. In fact, the DOL's general view is once the amounts are withheld from the participant's pay, the withheld amounts are plan assets. So, conservatively speaking, it appears the correction under VFCP would include the full $5,000. If you have both an operational failure and an failure to timely deposit, a conservative approach would correct by contributing the full $5,000 as there is also a method by which to correct the excess deferral (and if done prior to April 15, there should be no downside to correct the excess deferral). Also, normally, under the corrections principles for both, employers do not adjust the Forms W-2 for the corrections. So the employee's W-2 would not be adjusted. A 1099-R would be issued for the return of the excess deferral in the following year by April 15 with the amount of the excess deferral and earning contained in Box 2 and using a Code P. Again, I don't fully understand what happened with the $1,000 but if not put in plan and paid to employee, normally that would go on the Form W-2 so a W-2C might be needed (employees typically do not receive a 1099 and it wasnt from plan so no 1099R)' Flying by the seat of my pants here so absolutely not advising you... just spitballing

I believe it would be Code 7. Under the applicable regulations, excess designated Roth contributions are taxed twice if not timely corrected. Treas. Reg. § 1.402(g)-1(e)(8)(iv) provides, if not corrected by April 15 of the following year, the distribution from a Roth account of the excess Roth contribution and the attributable earnings are taxable no matter when they are later distributed, subject to the normal limitations on distribution of elective deferrals, despite the fact that the distribution is from a Roth account. Treas. Reg. § 1.402(g)-1(e)(8)(iv) regarding distributions after the correction period states: So it seems that while a normal distribution from a Roth 401(k) is not taxed at distribution at all, an over contribution is taxed in the year received.

The answer is yes. The issue is under the DOL rules. The no-later-than-30-days deadline really doesn't apply in the eyes of the DOL, the key phrase is "as soon as they can be reasonably segregated." You should review the rules under the DOL Voluntary Fiduciary Compliance Program (VFCP). The DOL VCFP website states: The latest iteration under the DOL rules can be accessed at Federal Register :: Voluntary Fiduciary Correction Program. For older versions see https://www.federalregister.gov/citation/67-FR-15062; https://www.federalregister.gov/citation/70-FR-17516; https://www.federalregister.gov/citation/71-FR-20262. The VFCP general website can be accessed at Voluntary Fiduciary Correction Program | U.S. Department of Labor. The correction might be fairly complex if as your post states this issue has been occurring for perhaps every payroll period in the last 6 years. Also, though there is a 7-day safe harbor, when correcting under VFCP, earnings are to be calculated from the date the deferrals were actually withheld from the affected employees' wages (not the end of the 7-day safe-harbor period).

Just thoughts. Generally speaking, group health plans are not federally required to cover weight loss meds. Most of the plans I deal with would not cover them if simply for weight loss but might cover them if for some other medical issue, e.g., to control Type 2 diabetes or high blood pressure. Most of those plans would require preapproval. Employers, especially those with self-insured plans, have discretion to dermine their drug formulary. Since self-insured (and possibly one day with fully insured) offering the meds to one group versus another would be permitted if not discriminatory under §105(h). If different between plans, do the separate plans satisfy 410(b) coverage testing? If different for different groups within a plan, is the approach structured to meet 105(h)? how does the employer classify the employee groups? etc....

This amount should just be earnings that goes into the participant's account. These lost earnings are technically interest paid on a loan the employer is considered to have taken from the participant's account during the period of time the loan payment was being held by the employer before being sent to the trust. The participant did not pay this interest, the employer did. It is considered like the employer took a separate loan from the participant's account and must pay interest on that separate loan. It is the earnings that were lost (should have been earned in the participant's account( because the payment of the loan repayment was not sent to the trust on time Accordingly, the payment of these lost earnings should not affect the amortization schedule of the original loan. Again, due to it being an untimely deposit of the loan payment, it is not an amount owed by the participant on the participant's loan but an amount owed to the participant by the employer due to its prohibited transaction loan. Make sense?

Terminating a SH Plan mid-year generally requires amending the plan to stop contributions, giving participants at least 30 days' notice to adjust deferrals, making final SH contributions through the termination date, and then applying ADP/ACP testing for the short year unless (i) the plan termination is in connection with a 410(b)(6)(C) transaction or (ii) the employer incurs a substantial business hardship. See Treas. Reg. § 1.401(k)-3(e)(4). It seems the transaction might be able to meet the 410(b)(6)(C) rule. The practical question I have is that the small firm is taking a risk terminating the plan that far in advance of the closing. No matter how sure they are that the deal will close, it may never close or the closing may be delayed. In these situations, we normally advise terminating the plan "effective as of, and subject to and contingent upon" the closing and include language that if the closing doesn't occur, the plan is not terminated. Of course, this is business call and up to the parties.

@khn perhaps provide the specific language of the purchase agreement. The word "removed" is not a term that I have ever seen in a purchase agreement (as it is ambiguous at best) and, from the responses above, it appears the responders are struggling with this concept. Being removed could simply mean that no one will have any obligations to make further contributions to these employees under the plan effective as of closing. I mean your client would want some form of a withdrawal of participation agreement that says this at a minimum (along with all the other required provisions...whatever they may be).