Artie M

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

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

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

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

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

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

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

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

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

I thought your facts assumed death. Also, if the participant was the sole participant it seems likely the plan sponsor would know if they died. Also as a sole participant, I question whether the plan sponsor continues to exist... solo 401k or what, or, if it does continue to exist, it could terminate the plan and force the distribution.

Don't think so. I am not aware of a §401(a)(9) rule (or other) that would require or permit the administrator to force a distribution before 2035 merely because the beneficiary has failed to file a claim, assuming the plan document itself does not contain an earlier distribution provision. Under your facts, there is no annual RMD amount that must be imposed/distributed before 2035. Rather, the requirement is that the entire remaining account be distributed by December 31, 2035. Given your area of interest, I also think there is also the issue of fiduciary prudence and missing-participant administration until 2035. That is, to ensure proper distribution, the administrator should: Properly identify the beneficiary or all the beneficiaries; provide required notices and distribution information to them; maintain records; make reasonable efforts to locate a missing beneficiary if necessary; and continue to administer the account under the plan. It would be especially important to make periodic communications or outreach attempts to ensure that a beneficiary doesn’t end up becoming a lost beneficiary so, if the beneficiary remains simply unresponsive, invoke the plan's default distribution provisions sufficiently before the 2035 deadline to ensure the distribution is actually completed by December 31, 2035.

Based on the assumptions and plan silent, the beneficiary is subject to the SECURE Act 10-year rule. Because death occurred before the participant's RBD, there are no annual RMDs during years 1-9 and the statute would require the entire account be distributed by December 31, 2035. Different result under pre-SECURE Act, where the September 30 beneficiary determination date and December 31 first-distribution-year deadlines often drove election timing. For a non-EDB inheriting from a participant who died before the RBD, the SECURE Act's 10-year rule largely eliminates those earlier distribution-election deadlines.

@BG5150 How it is treated on the partnership's returns doesn't change what may have happened in fact. If the partnership paid the partners the money that should have been deferred, even if it took a deduction of the amount as a deferral as opposed to e.g., an additional amount of a guaranteed payment, it paid the partners the money and therefore there seems to be a MDO. The language quoted in my post above seems to state pretty clearly that the partnership paid the money to the partners and asked the partners to send the money to the 401k. If the company paid the partner the amount of their elected deferrals, its a MDO.... seems the same to me. How can it be a late deposit if the partnership did not retain the funds (they said they were paid the funds)? Yes, I know the horse is dead....

Since it is on the SPARK website and the Spark website is updated, it seems like that would be the latest version. Note that Version 1.01 is actually the second version. The first version was originally issued in December 2011. Don't know the cite for this but I have this in my Spark definitions "file". The website does not state that this document is "maintained" but there are other resources provided on the website that are fairly current. SPARK could circulate a member-only update that is not publicly available but I've not heard of them doing so. From a practical ERISA perspective, if a client asked me whether using the SPARK glossary creates a problem because it is "old," I would generally say no (or at least it shouldn't). The DOL regulations require access to a glossary of investment-related terms. The key is whether the provided glossary (whether SPARK or not, or version 1.01 or not) adequately covers the investment terms that actually appear in the plan's disclosures and designated investment alternatives. The SPARK document itself expressly contemplates that plan sponsors may customize and supplement it.

Dunno. This sounds like they were paid and then asked to send money to the plan. The quoted language makes it seem like there is no "withholding" event. I am very uncomfortable with the process of paying a partner money and then asking them to write a check to the plan. Even though partners, the arrangement is still a CODA-elect before comp becomes currently available. In your situation, did the partnership: A. Pay the partner 100% of the 2025 compensation and never reduce the cash distribution? or B. Retain the elected amount but simply fail to transmit it to the plan? If A, its a missed deferral opportunity. If B, late deposit/late remittance (because the partnership had effectively segregated the deferral amount but failed to fund the plan timely).

As @Peter Gulia states, the 401k regulations do not define “principal residence.” However, there is solid IRS authority indicating that a mobile home, trailer, house trailer, or similar dwelling can constitute a “principal residence” for federal tax purposes (and should, without a prohibition, be relevant to the 401(k) hardship distribution rules). The hardship regulations under IRC §401(k) use the term “principal residence.” The IRS and Treasury have long interpreted “principal residence” broadly under IRC §121. Treasury regulations under §121 expressly recognize mobile homes and house trailers as residences. Treas. Reg. §1.121-1(b)(1) provides: “A residence may include a houseboat, a house trailer, or the house or apartment that the taxpayer is entitled to occupy as a tenant stockholder in a cooperative housing corporation....” (emphasis added). The regulations use the phrase “may include” denoting that the regulations list is not exhaustive but illustrative. We have consistently viewed this regulation as strong support for the proposition that recreational vehicles, mobile homes, and trailers can be principal residences for the purpose of a 401(k) hardship distribution. The issue here really is whether the travel trailer is truly the participant’s principal residence. This becomes a facts and circumstances determination. So, you may need more facts such as: where the participant actually lives, their mailing address, utilities, etc. There is a list of factors in the regulation. The determination is easier when there is a foreclosure with an actual mortgage/security interest. If the lender is foreclosing on the mobile home itself, or the land and improvements including the home, that fits more comfortably within the hardship safe harbor. Some recordkeepers are overly restrictive and assume a “principal residence” must be fixed real property. There is language in the 121 regulations stating that a residence doesn't include " personal property that is not a fixture under local law" which the recordkeepers point to but I believe this is a misapplication of this rule. They say a trailer with wheels isn't fixed to the property. These recordkeepers usually citing state law regarding the definition of a residence in the state in question. My recollection is that there is substantial authority contradicting that position for federal tax purposes. Note if youR plan uses self-certification… without actual knowledge…

tl;dr version Nowhere in your facts do you say anything about the participant or alternative payee presenting an order or decree (something that could reasonably be interpreted as a domestic relations order) to the plan QDRO administrator to determine if there is a QDRO.... whether 11 years ago or recently. Your statement that a QDRO can be put in place well after the divorce is accurate but that doesn't mean it can be retroactive. Once benefits are being paid, then the QDRO would need to conform to the payment structure. A DB plan QDRO could be a separate interest or a shared/stream of payment QDRO. These are significantly different. Also, if there was no QDRO in plan when the participant elected his 10-year certain and life annuity, I find it difficult to believe that the plan would have made any adjustments to the annuity payment for a "potential" QDRO. Also, if the P elected the 10-year certain and life annuity, there is very little protection for the spouse (unless it is a JSA with 10-year certain annuity, which is very unusual). Under the usual 10-year certain and life annuity, payments will stop when participant dies (10 year certain period already over under your facts) and there is no survivor benefit. From a plan perspective, the alternate payee could get a new QDRO to conform to the current situation, perhaps even getting a greater percentage of the income stream that previously contemplated to make up for benefits already paid. But again, I don't see where the plan would have adjusted anything (and no liability for the plan) without a QDRO in place years ago. If the plan reduced the partcipant's benefit without an actual QDRO in place, the participant should file a claim for benefits of the shorted amount. The alternate payee could sue the participant for any benefits they already collected... the QDRO they have may have a "constructive trust" provision... but this would be outside the plan context.

Not sure if I have ever been called "mainstream". I would say I can be overly conservative at times. Granted some of this goes (way) back to one of my first IRS audits where the client was berated--no penalties but was told don't do it again--for paying a participant's legitimate medical expense but the substantiation provided to the auditor was the participant's master card receipt from the emergency room. The IRS agent said this was not payment for a medical expense but was payment for credit card debt. I think it was harsh but the client changed its procedures as this was an old school "resident agent" for a very large corporation where the audit examination process was essentially continuous. I have also had internal auditors sample some of the documents and come back with similar issues. Perhaps it is battered-lawyer syndrome but I "shy away" from these issues when I can.

I don't believe there is a provision in the hardship regulations that states that a plan “must provide” that self-certification is permitted for an administrator to rely on a participant's representations. Thus, if a plan simply permits hardship distributions and does not require a different substantiation method, the administrator can ordinarily use self-certification operationally without a specific plan provision authorizing it. However, if a plan’s governing documents (e.g., the plan document, SPD, and/or incorporated administrative hardship procedures) require documentation or substantiation, operating solely on self-certification would cause an operational failure. So, self-certification need not be expressly authorized but using it cannot contradict the plan’s existing substantiation requirements. If the client desires self-certification, our approach, ultra conservative, is to include explicit language in the plan document, the SPD and other hardship procedures to permit self-certification and, by doing this, we will review all the "relevant" documents to ensure they are consistent (and inconsistent language shouldn't exist). .

If he already paid for the furnace repairs etc. then there is no immediate and heavy financial need. The hardship rule @Peter Gulia cites is intended to cover an existing need to repair. Here, the need is for a reimbursement. It would be different if these were unpaid repair invoices. Without that, approving a hardship solely because the participant previously spent money on repairs and now has cash-flow issues could be difficult to square with the “immediate and heavy” requirement even if the company is sympathetic to the participant's needs. Now, if the plan doesn't use the safe-harbor rules and the administrator can reasonably conclude it still meets the general "immediate and heavy financial need" standing, it might be possible. The other thing they might consider would be if she has any eligible medical expenses. Though she is not a dependent--I don't advise this but it is a technical possibility--he could name her as his primary beneficiary under the plan. See http://https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(3)(ii)(B)(1)

I don't think it can be repaid like the husband requested and @CuseFan's suggested course of action is the way to go. The issue is that upon the participant’s death, the loan typically becomes immediately due and payable under the plan terms. If not repaid within the applicable cure period, the outstanding balance becomes a deemed distribution or loan offset. However, because of the death of the participant there is a legal/operational barrier to the beneficiary repaying the loan because the loan was an obligation of the deceased participant. That is, pursuant to §72(p) the plan loan was made to the participant and only to the participant. (There are provisions in §72(p) that would permit a loan to a beneficiary from the beneficiary's own interest in the plan (e.g., a loan taken after the participant's death from the account that has been transferred to the beneficiary) but that is not what would be occurring here.) Here the original loan was to the participant and the beneficiary repaying the loan would be an assumption of that loan. Not saying it couldn't happen, but no plan documents, loan policies, or promissory notes that I have ever seen provide that a beneficiary (or anyone for that matter) can assume an outstanding loan and almost all of those documents would have flatly stated that the loan cannot be assigned or assumed.

I am unaware of any direct IRS authority squarely addressing de minimis balances of terminated participants where fees (distribution or otherwise) exceed assets> However, anecdotally, I was at a seminar/conference many years ago where some practitioners posed this question to an informal IRS panel. Can't remember where or when or who said it but an IRS agent stated that they see the issue and related that they had seen plans structure these as expense allocations specifically to avoid characterization as an impermissible forfeiture of vested benefits and they (another agent agreed) felt that was likely a better way to do it. Notably, there were no DOL agents present and the IRS agents, of course, stated this was their personal opinion blah, blah, blah. (I assume they had seen this on audit or something and did not find a violation but don't recall anyone pressing that issue.) Apparently, under this administrative process the recordkeeper would conduct periodic sweeps of accounts with balances less than the distribution/recordkeeping fee through some kind of administrative write-off process and then use the swept amount for some type of expense allocation that was characterized as some type of bookkeeping procedure. My understanding was that the key to this was that the swept amount was used to pay or reimburse actual permitted plan expenses and not ostensibly as a forfeiture available for employer benefit, e.g., reduce future matches. Again, a DOL agent being present would have been nice as this could be a plan asset question). I have never been asked to look at this and am not sure how this expense allocation would work but I do prefer the view that it is an expense allocation as opposed to a forfeiture (as I agree there are several issues raised with characterizing it as a forfeiture --violating the exclusive benefit rule, anti-forfeiture/vesting requirements under IRC §411, and potentially ERISA fiduciary standards). Forgive me for the lack of details, e.g., continued use of "some type", but my memory is not as good as it once was....

Make sure you don't sign anything and you don't sign off on anything. Document and communicate your view that legally other things should be occurring. Then at the bottom of your communication state that of course what the client does is its choice. From what they want it seems there could be several civil penalties, breach of fiduciary duty exposure, and potential criminal exposure (extremely rare but not unimaginable) e.g. with regard to signing and filing a Form 5500SF that the signer/filer knows contains incorrect information. The 5500SF is signed under penalty of perjury that it is "true, correct and complete" Issues arise under ERISA 502c2, IRC 6652e, and 18 USC 1001. it seems the IRA provider is also working with the participant to correct this in a "clean" manner. Here, "clean" and "cleanest" are being defined as documented in a manner that is the least problematic for the participant.... who is the individual who created the problem.

You state what the post-PPA plan document. Is that the document that was in effect when the participant dies? What did it provide as the general rule? If it provides the "typical" rules for pre-SECURE Act, since the participant died after his RBD, the participants remaining 2018 RMD had to be distributed if not already taken before death and beginning in 2019, each son could take distributions over his own single life expectancy (ie. stretch IRA), using each beneficiary's age under the appropriate table if the account was timely divided into separate inherited accounts by the end of 2019. If separate accounts were not established by then, the beneficiaries usually would use the life expectance of the older beneficiary. Under the old rules, the sons are not required to empty the account within 5 or 10 years. Again, this is assuming the plan provides the typical rules, the plan document could have imposed a faster payout as many employers required a 5-year lump payment or even immediate distribution even though the tax law permitted stretch treatment. If the assets were rolled into inherited IRAs and stretch treatment was properly established, the life expectancy rules should govern. Noting that if the separate inherited accounts were not established by December 31, 2019, then the payout period for the beneficiaries is permanently determined using the life expectancy of the oldest beneficiary. This doesn't affect ownership, the two beneficiaries still each own their separate economic shares but if the deadline was missed, it would affect the RMD divisor (s). So after the deadline the accounts can still later be physically divided but the inherited accounts would use the older beneficiary’s life expectancy factor. See Treas. Reg. §1.401(a)(9)-8, Q&A-2, etc. This is basically from recollection (though I did look up the cite to get some comfort) so you need to research this for yourself.

Your recitation of the facts imply that the participants were paid the exact benefits owed under the qualified plan and the employer simply used corporate/company cash as an administrative convenience. If this is the case, the employer has an argument that it satisfied plan liabilities on behalf of the trust and the trust should reimburse the employer. This is akin to the employer advancing expenses for the trust. But I worry if everything was done properly if the distributions were not processed through the plan. Were proper Forms 1099-R provided, withholding (if any) correct, spousal consent (if required) obtained, rollover rights provided, etc.,. Also, need to look at the plan to determine what is permitted if there are excess assets in the plan. The DOL or IRS could argue this is a reversion. Wouldn't seem right but they could do that. or even that there is some prohibited transaction if paid. If the plan and trust documents, including the termination amendment, only permit payment of benefits, payment of expenses, reallocation of residual amounts, then the reimbursement may be questioned. At a minimum, you should ensure that all plan liabilities have been paid off before returning the "excess" to the company/physician. At that point, it could be documented that all participants received their plan benefits, the plan had no more liabilities, remaining assets are economically duplicative ad the reimbursement merely prevents unjust enrichment by the participants. One should attempt to be able to make the alternative arguments first the employer owns the excess assets and/or second the employer advanced and satisfied plan obligations that otherwise would have been payable from the trust, so the trust should reimburse the employer for those specific liabiilities previously discharged. Once we get past those hurdles, especially all benefits paid, if the physician's company is still intact, the "reimbursible" amount arguably are owed to the company and it seems that either the amount could be wired into any account held by the company or a check in that amount could be written to the company (and providing it to the company's authorized representative). If the company has been liquidated or dissolved and all of its creditors have been paid off, assuming the company was a solo physician PC with one shareholder and there was no sales transaction, the practical answer likely would be the residual value of the dissolved PC (which would include these amounts) ultimately belongs to the physician-shareholder. So, if already dissolved and liquidated and all creditors were paid off, the payment likely could be made to the retired physician. Lots of assumptions here, and of course the form of organization of the employer and state law could affect how the company's receivables are handled. As usually just thoughts....