Artie M

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

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 ...