Artie M

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 and 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....

I am saying that an agreement between the parties does not equal a QDRO so there is no authority under which the Plan should have altered any benefits to anyone based on that agreement, whatever it is. The plan is only permitted to follow a QDRO. The Plan's QDRO administrator may have decided some decree, judgement, etc. met the requirements of a QDRO, but if that is the case there was a QDRO. All the facts reflect there was no QDRO. I stated my view that what they did could only have occurred under a separate interest QDRO,. But again no QDRO so what they did was likely wrong. Since the plan had not authority to pay the AP, I agree with @fmsinc the only claim the AP has is against the Participant. Now, though, the Participant may have a claim against the claim because, if what the OP says reflects the actual facts, the Participant's benefit has not been based on his actual accrued benefit but a lesser amount. If he sues and gets the amounts he has been shorted, the AP has a claim against those amounts.

How did the plan treat this as a separate interest when the participant began his benefit as a straight life annuity and from the facts it seems that there was no QDRO in place. The Plan cant informally treat this as a separate interest because the parties "intended" to share benefits. Only a QDRO could affirmative create the separate interest and the plan doesn't seem to have a legal position to have recognized the separate interest. I have never seen a separate interest QDRO applied retroactively... that doesn't mean it is permitted... and haven't seen any authority to permit it. If a separate interest, it would carve out an actuarial portion of the benefit and allow the AP to commence payments independently. But I believe that only happens from the date the order is determined to be qualified and doesn't relate back. Seems like you're saying this is a "de facto separate interest". Most cases, at least that I recall, where APs have tried to obtain retroactive treatment involve pre-commencement benefits or, even if won at the district level, were lost on appeal. I haven't researched any of this and am just kinda brain storming....

What they are saying is that the answer to your query depends on the specific drafting of the plan eligibility language. "Six months of service with 500 hours consecutive" can be interpreted in at least two ways.

Like @rocknrolls2 says get that SPD, and then review the SPD for what the contributions were but there will not be enough detail in there to get a precise calculation. I recommend the SPD so you can review the claims procedures. Make a formal written claim for benefits and follow the rules in those claims procedures. If there is no movement on the claim, contact the DOL EBSA by phone or I think you can file a complaint online at AskEBSA. Also contact the IRS. Maybe contact the taxpayer advocate service and they can direct you to the right office. You could contact an attorney, but this will cost you dollars, as most are not going look at this pro-bono... you are an HCE... or on contingency. Personally, I only point people to attorneys when the amount lost is substantial, the DOL or IRS don't move the needle, or employer is retaliating for making the claim, etc. Sometimes a delay is not bad. For example, under the missed deferral opportunity rules, where there is automatic enrollment, sometimes the required missed deferral contribution is lower if the error is corrected shortly after notice (whereas it goes up if they drag their feet).

Beware of AI is the first lesson here. I have found that AI will often use "intuitive" thought as opposed to actually looking at guidance or authority. Here, it likely responded simply with "taxable compensation ---> must be W-2 wages". First, any contribution under a qualified plan will be deductible by employer upon contribution. This is the whole concept behind qualified plans.... meet the rules and get the accelerated deduction. Moreso here because the Roth employer contribution (match and nonelective) is immediately taxable. Then, Notice 2024-2 says that it is other plan-based reporting under 1099-R. Needs to hit income this year and not W-2 because they are not wages for withholding or FICA. Folks who receive these Roth match/nonelectives should be told that they may wish to increase their withholding on their normal wages or make estimated tax payments.

you need to lay out the facts better. if there was a 401k plan termination, they did not have a unilateral right to move the distribution into a new plan. There would have had to have been a plan merger, not a plan termination. The only way we can assist is you have to have the facts. Also, you need to try to be precise in the terms you use of at least provide more information in the way you describe things... e.g., some will say rollover, when it is a transfer, etc. etc. etc.

Read up on "missed deferral opportunities"...there's lots of stuff on the internet concerning this. You indicate not only failure to enroll but also autoenrollment issues. This could affect correction methodology. You might need to know the ADP for HCEs under the Plan for the affected years. At a minimum, you should get a copy of the plan's summary plan description for the affected years.

On the way out the door but initially, have the executor/administrator of the estate provide you a copy of the trust instrument and perhaps a legal opinion indicating whether the trust was formed as a see-through or conduit trust or an accumulation trust. If it meets the rules as a conduit trust, you might be able to treat the underlying beneficiaries as the beneficiaries of the 401k. Usually, the key is ... are all the beneficiaries of the trust "individuals" without any "ghost" beneficiaries (e.g., no non-individuals, no remote beneficiaries, issues, heirs, charities, powers to appoint charities)? Of course, this assumes the plan's terms don't prohibit doing this. This is just general rules, I am sure there are folks on this board that know the details better than I.

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

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

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

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

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

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

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