Artie M

I agree with buyer's counsel. Also, I agree on requiring a determination letter filing on the terminating plan. As buyer in a stock sale, it assumes all the obligations of the seller corporation. Presumably the plan is being terminated pre closing and the buyer is going to handle post-termination administration. Even if the DB plan was spun off and terminated, if there is an issue under that DB plan, there is a potential that liability could still fall back on the buyer if the IRS/PBGC thought that the spin off was a sone type of subterfuge to escape liability. Normally, in the case of a terminating DB plan, you would seek a letter and no distributions would occur until after the letter is received. I also agree that a QRP cannot be used if the plan terms simply state "any excess should be allocated among participants" without anything else. You conveniently left out language in IRS 7.12.1.17.1.2 (11-10-2022) @sobrienTPS states that provision from the manual correctly "a plan could provide a direct transfer to a qualified plan or choose to allocate the excess assets to participants (as IRC 415 allows) in the event the reversion language is absent or not in existence long enough to allow a reversion." The conditions of if the reversion is not allowed or not in place for 5 years modifies the allocation of excess asset to participants... the conditions do not modify the use of a QRP. I have always read this language to mean you either can (1) use a QRP or (2) allocate if you can't use a QRP. But youhave the perfect scenario to let the IRS decide. Amend the plan to permit the QRP, with the amendment laying out exactly how much of the excess assets will be transferred to the QRP, and how those amounts will be allocated in the QRP, CLEARLY indicating the effective date of the termination of the DB plan and the effective date of the change to the reversionary language. If the IRS blesses it, then all is well. If not, you are back where you are at now. If they don't permit the QRP, it should not be a problem because most plans would not permit distributions prior to the issuance of the IRS determination letter, and all that will be required is to work out is how to allocate the excess assets to the participants. If there is more than can be allocated, the IRS will be there to let you know what to do with the rest. Either way, as buyer's counsel, I would not be letting the seller walk off with any of the potential reversion. At most, we could escrow the amounts until resolved. And, yes, we always amend a plan for the QRP provisions (usually these provisions will contain language that is also going to be used in the QRP plan document) along with always requiring a letter on the termination of the plan. You should tell the seller/buyer, you are a TPA... not a lawyer. They can ask you your thoughts but no matter what you say, it should always be followed up with... but you should really ask your lawyer. As always, just my thoughts with absolutely no research...

@fmsinc I have several clients who do not permit loans for any reason and three who do not permit loans except for hardship circumstances. These clients are very paternalistic and believe that the 401(k) funds are for retirement and should not be used like their bank accounts. All of these clients provide generous matches and profit sharing contributions. At least two of the three who permit the loans would be seriously upset at someone who would take a loan under false pretenses. Both of these clients would have no issue causing a participant (especially if the participant was one of their union employees) "financial grief" because they would worry that the participant who took the loan under false pretenses would tell others "how easy it is" to do.

Not sure what all recordkeepers do but I have dealt with two recordkeepers, large ones, recently on issues that involved loans and can pass on this information. All loan participants who take a loan under the plans that they recordkeeper receive a promissory note that they do not have to sign nor do they have to return. It is part of the loan confirmation notice that they receive after taking the loan. We reviewed the promissory notes and they contained all the information required under the §72 regs (and the state laws that were applicable under our facts) for a valid promissory note, and we (and the recordkeepers) believe that they were legally enforceable. Of course, those were our circumstances and I have no idea if all the requisites will be met in your instance.

In my opinion, I don't care what the loan documents say. This loan was not permitted under the Plan. The Plan terms were violated and there is an operational failure. Tell the participant he needs to pay the loan back in full because this is a distribution when no distribution was permitted and we handle like a Refund of Excess Amounts under EPCRS. I mean, this Plan has a hardship loan provision. This is similar to asking for a hardship withdrawal, receiving it, but there was no hardship. So what if there's a loan promissory note. That note is a contract and is voidable ... contracts that are entered into under fraud or misrepresentation are unenforceable. Let him take us to court if he wants to enforce it. He has to tell the court that even though he lied to get the loan, we have to let him pay back installments... no we want the entire amount back because he lied. While he is talking to a lawyer (who won't take this) or going to small claims court (where it is preempted), we notify him to return the entire amount to the Plan plus earnings, no rollover. Assuming he doesn't return the full amount (so plan stopped taking loan payments), Plan issues a 1099-R with loan proceeds as taxable, indicating no rollover eligibility. Let him worry about early withdrawal penalty. If he has a problem, tell him to argue with the IRS. We have a reasonable position, misrepresentation, violation of plan terms, self-correction per EPCRS. Just my opinion..... oh, and I am having just a really peachy day....

Yes it is. file on pay.gov using form 14568-D schedule 4.

The general rule is that the correction is a 50% QNEC unless you meet an exception (i.e., to use the 0% or the 25%). Based on the facts, it appears that the requirements to use either of the exceptions are not met, so it seems that it should be a 50% QNEC.

Okay... so I am reading (c)(7)(A)(i) which states in part " contributions and other additions for an annuity contract or retirement income account described in section 403(b) with respect to such participant, when expressed as an annual addition to such participant’s account, shall be treated as not exceeding the limitation of paragraph (1) if such annual addition is not in excess of $10,000." (c)(7)(D) states that "For purposes of this paragraph, the term “annual addition” has the meaning given such term by paragraph (2)." The facts provide: 2024 Total EmployER [non-matching] contributions: $5,520 2024 Total EmployEE Roth contributions: $5,520 2024 Total Taxable [includible] Income: $2,633 So it seems to me the annual additions are $11,040 ($5,520 + $5,520) as the (c)(7) includes "contributions and other additions" and annual additions as defined in (c)(2).include both employer and employee contributions. If this is the case, the excess annual additions appears to me to be $1,040 ($11,040 - $10,000). Then due to ordering of corrective distributions/forfeitures for excess annual additions under 2021-30, s 6.06, $1,040 of the Roth contributions are to be distributed (by the deadline David D states). The corrective distribution would be reported on Form 1099-R, included in income, no 10% additional tax, and not rollover eligible. Since the participant had includible income of $2,633 they only used $7,367 ($10,000 - $2,633) of the $40,000 lifetime limit under (c)(7) and has $32,633 of their lifetime limit remaining, which can be used in later years.... in case this keeps happening. The regs have some additional rules and examples under 1.415(c)-1(d) but they only include employer contributions so they do not address this situation which includes the employee Roth contributions. Again, all of this is just my thoughts and reading the language of the statute.

I guess I should have been clearer.... I am not giving any thoughts on whether the 25% exception applies, I am just saying that it appears to not apply to terminated employees.

My recollection is that the notice to participants that is required in order to use the 25% QNEC must be provided to "eligible" employees or "affected eligible" employees (my recollection also is that these terms are used loosely) -- terminated employees are not eligible employees. The notice also requires that the Plan inform "affected participants" that they can increase contributions to make up for missed deferrals--which a terminated employee, of course, cannot do. The language would be somewhere in 2021-30. In addition, I think the IRS Fix-It Guide website says somewhere that "excluded employees must currently be employed" (or something very, very close to that) to use the 25% QNEC.

The last time I ran into 415(c)(7) was many years ago. This may simply be for my own education but it seems like this is a 415 excess annual addition, which would make life easier. My understanding is that 415(c)(7) gives the special catch-up provision for church plan employees of up to $10,000 per year. @David D My understanding is that this is an annual limit but there is a $40,000 lifetime limit of "additional" annual additions that may be given under this provision to an individual participant. If there are annual additions in excess of this special limit, I thought they were considered excess annual additions. I know that somewhere in 415(c) it states that the term "annual additions" is the same for purposes of (c)(7) so that limit still limits both employEE and employER contributions (with the employEE contributions being the Roth contributions). I guess I am unaware of a provision in (c)(7) or elsewhere that requires the excess annual contributions that are employEE contributions to be treated as 402(g) excess deferrals. Sorry if I am being dense.

Does anyone else feel like they are reading a student's thesis written by AI.....

Well, I would agree with Dare Johnson but for the regs under 3121(v)(2). Arguably, the IRS has tolled the statute of limitations with regard to FICA on nonqualified deferred compensation under those regulations. 3121(v)(2) states when nonqualified deferred comp is to be taken into account for purposes of FICA. I am not going to go through the rules. But you should note that if an employer does not follow the special timing rule, Treas. Reg. § 31.3121(v)(2)-1(d)(1)(ii) provides that the general timing rule will apply. This means that if FICA taxes have not been withheld and remitted upon vesting/performance, they must be withheld and remitted when the compensation is actually or constructively received. In addition, the non-duplication rule won't apply, resulting in the full balance of the deferred comp payment (i.e., including earnings) at the time of distribution being subject to FICA. Under the non-duplication rule, once the comp is "taken into account" for FICA purposes, the earnings on the amounts taken into account escape taxation. If non-duplication rule doesn't apply, the general result is more FICA tax will be paid (than if it applies), and also employees receiving distribution payments in retirement are less likely to have met the Social Security wage base during those years. Prior to 2017, employers could request a settlement agreement with the IRS that allowed them to remit in the current year the amount that should have been withheld in accordance with the special timing rule, preserving the applicability of the non-duplication rule, and not having to restate reporting for prior years. But it was eliminated. Also, there are potential litigation risks… see Davidson v. Henkel Corporation … an employer may have liability to employees if they do not apply the special timing rule, depending on the terms of the NQDC plan document. In Davidson, a former employee receiving distributions from his employer’s NQDC plan, sued when they took FICA from his distributions stating the company should have withheld FICA sooner (i.e., at vest) under the special timing rule. Because the company failed to properly withhold FICA tax, his ultimate tax hit was increased because he lost the benefit of the non-duplication rule. The company argued they could use the special timing rule or the general timing rule. The court agreed but then said the plan doc language required that they would follow the special timing rule. Since the company violated the terms of the NQDC plan they breached the contract and were held liable. Also if reported on 1099, don't see how FICA was accounted for because there is no where on the 1099 to do that.

Look at Treas. Reg. 1.402(g)-1(e)(8)(iv) Under 401A(d)(2)(c), the “qualified Roth contribution program” rules, a “qualified distribution” does not include any distribution of any “excess deferral”, or any income on the excess contribution or the excess deferral. The treatment of excess designated Roth contributions is similar to the treatment of excess deferrals that are attributable to non-Roth elective deferrals. Thus, if excess designated Roth contributions (including earnings) are not distributed by the applicable April 15, then those contributions (and the earnings thereon) are taxable when distributed. Based on the quoted statute in your post, though it may look counterintuitive, the result is that if the excess deferrals are attributable to a designated Roth contribution and are not distributed by the April 15 following the tax year in which the deferrals were made, then neither the elective deferral nor the distribution is tax-free. Note, just like regular excess deferrals, the participant will not get a distribution of these amounts until the participant has a distributable event under the terms of the 403(b) plan. The Plan will not distribute the excess deferrals after April 15 just because they are excess deferrals, they will only be distributed if the participant, for example, severs services

Look at the Sun Capital line of cases. Sun Capital partners III, LP v. New England Teamster ___ Pension. I don't have the cite but it was a First Circuit decision with the S. Ct,. eventually denying cert. The most important conclusions from Sun Capital are that PE funds may be found to engage in a “trade or business” for controlled group purposes, and that two or more funds may be deemed to be under common control or have formed a partnership-in-law (or partnership-in-fact). The key in Sun Capital is how "passive" is the investment. Under this line of cases, to ensure that there is no controlled group, PE funds may want to structure investments so that no single fund acquires more than 80% of any single portfolio company. If PE funds want to use related funds to complete an acquisition, they need to give consideration to how they structure an investment to stay within the principles identified in Sun Capital.

While I don't disagree with what is being said, I do believe that the terms of the plan need to be clarified for future purposes. As noted in my original post, I have an issue with what is occurring because the Plan is knowingly violating 415 (old school... thou shalt not violate 415). Also, though the solution that is being offered up... fix via EPCRS... can be used to fix a 415 violation, I am uncomfortable with its use on an annual basis (it is implied that it will keep occurring). To self-correct under EPCRS there must be "established practices and procedures "in place to keep this from re-occurring. The Rev. Proc. states in relevant part: (2) Established practices and procedures. To be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements. …. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and an Operational Failure or Plan Document Failure must have occurred through an oversight or mistake in applying them. SCP also may be used in situations in which the Operational Failure or Plan Document Failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure. A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under which excess annual additions under § 415(c) are regularly corrected by return of elective deferrals to the affected employee within 9½ months after the end of the plan’s limitation year. The correction, however, should not violate another applicable Code requirement…. This language appears to "exempt" repeated 415(c) failures under certain plans from this requirement but plans with matching contributions appears to be explicitly carved out of this "exemption."

Not sure of exactly how this benefit/pay practice works but look at the "contingent benefit rule" under IRC § 401(k)(4)(A) and Treas. Reg. § 1.401(k)-1(e)(6). 401(k)(4)(A) provides: A cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election. Treas. Reg. § 1.401(k)-1(e)(6) adds:. “(6) Other benefits not contingent upon elective contributions— (i) General rule. A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee's electing to make or not to make elective contributions under the arrangement. The preceding sentence does not apply to— . . . . (ii) Definition of other benefits. For purposes of this paragraph (e)(6), other benefits include, but are not limited to, benefits under a defined benefit plan; nonelective contributions under a defined contribution plan; the availability, cost, or amount of health benefits; vacations or vacation pay; life insurance; dental plans; legal services plans; loans (including plan loans); financial planning services; subsidized retirement benefits; stock options; property subject to section 83; and dependent care assistance. Also, increases in salary, bonuses or other cash remuneration (other than the amount that would be contributed under the cash or deferred election) are benefits for purposes of this paragraph (e)(6). The ability to make after-tax employee contributions is a benefit, but that benefit is not contingent upon an employee's electing to make or not make elective contributions under the arrangement merely because the amount of elective contributions reduces dollar-for-dollar the amount of after-tax employee contributions that may be made. Additionally, benefits under any other plan or arrangement (whether or not qualified) are not contingent upon an employee's electing to make or not to make elective contributions under a cash or deferred arrangement merely because the elective contributions are or are not taken into account as compensation under the other plan or arrangement for purposes of determining benefits.”

So, if the plan says you must contribute the match, then you must contribute the match. I was just saying look to the terms of the plan but make sure to look at all of the terms of the plan. Once that is contributed, again, you still have an excess amount that must be distributed. Since it is a safe harbor match, it seems it should be distributed to the affected participants because it was a match to which they were entitled and it they're 100% vested. This distribution would require a 1099 indicating taxable and not eligible for rollover. I didn't see in the 1099 instruction a heading for Refund After Total Distribution (nor did I see the phrase after a search) but I agree that a corrected 1099-R likely should be filed for the prior distribution since it contained incorrect information (i.e., a portion of the distribution actually should be taxable and actually is not eligible for rollover treatment). Not sure if your client actually issues the 1099s for the Plan or if it is issued by a third-party plan administrator/recordkeeper. Recently we encountered the issue of needing a corrected 1099-R to be issued by a TPA but the TPA refused to issue the corrected 1099 stating that the form was correct when originally issued. The client sent a letter to the affected participants with the required statements, and a suggested to consult their personal tax advisors. Without the corrected 1099R though, not sure if affected participants will do anything because the IRS won't know about the issue unless my client is audited. As an aside--though It was not included in the letter, the client's TPA was informed that if an affected participant contacts the client requesting a corrected 1099R they will be informed that the client requested that a corrected Form 1099R be issued but the TPA stated it was not required, and the affected participant will be directed to the IRS website Topic no. 154, Form W-2 and Form 1099-R (what to do if incorrect or not received) | Internal Revenue Service (which informs the taxpayer to contact the IRS and it will request the employer/payer to issue a corrected form). In the event the IRS contacts the client, all communications with the TPA were uploaded to a file so the client can give it to the IRS to show that it attempted to get the corrected 1099R but the "payer" stated it was not required.

Treas. Reg. § 1.401(k)-1(d)(4)(i) provides: (4) Rules applicable to distributions upon plan termination—(i) No alternative defined contribution plan. A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term “employer” contained in § 1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).

I would also look at the plan's terms regarding allocation of amounts. Many/most plans will have a provision that says you cannot allocate an amount in excess of the 415 limit (e.g., "If the Annual Additions the Plan Administrator otherwise would allocate under the Plan to a Participant's Account for the Limitation Year would exceed the Annual Additions Limit, the Plan Administrator will not allocate the Excess Amount, but instead....") Under your facts, the Plan knows that the allocation of the true-up will create a 415 bust so it shouldn't contribute the amount to the account (at least under the exemplary provision). Also, I am not sure how you are going to correct this by allocating more excess amounts... if had $70,000 in 2024 and should have distributed $1,000, the Plan is going to contribute an additional amount to the participant, let's say a $1,250 true up, so now the participant had $71,250 in 2024, so you distribute the $1,250 in the account but still have the original $1,000 excess that can't be fixed. Seems like you are in the same position. What am I missing (many of my friends say that I can be quite obtuse)?

Regarding your original question, Code Sec. 402(a) provides that, "[e]xcept as otherwise provided in this section, any amount actually distributed to a distributee by an employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, in accordance with section 72 (relating to annuities)" (emphasis added). The transfer of funds by the Plan Administrator to the "distributing custodian" is not an "actual" distribution to the participant. The distribution would occur when the distributing custodian actually distributes the check to the participant. Under your facts timing is important because it affects the participants' year of taxation for the distributions. As to the issue of whether interest should be added, what does the plan state is the annuity starting date... usually the first day of the month following the later of....? If paid after the annuity starting date, seems like there should be an actuarial increase for late payment unless the plan provides for RASD. If an actuarial increase is required, the service/custodial agreement between the plan and the distributing custodian should be reviewed to determine the custodian's obligations to distribute the payment to the participant following receipt of the amount to be distributed to the participant. If under the terms of the service/custodial agreement, the custodian was delinquent in paying the amount, it should pay the actuarial increase, if any. Seems like this would be spelled out in the agreement. Also, review the float income provision (there should be one or there may be a fiduciary issue) because it usually requires that amounts are distributed within at least a reasonable period after being provided to the custodian (if not within a set number of days or period).

This could potentially be a Brother-Sister Controlled Group but it might not be. Brother Sister exists when 5 or fewer individuals own 80% or more of each company. So H owns 100% of his business and W owns 100% of her business. Because H and W are legally married, under 1563's general rule, they are automatically considered to have shared ownership of each other’s businesses and become a brother-sister controlled group. However, under 1563(e)(5)(A)-(D) there is a spousal exception where any ownership attribution between spouses will not be attributed to the other spouse as long as all three rules below apply: No direct ownership or participation in the management of such corporation at any time during the taxable year. Additionally, the spouse cannot be a member of the board of directors, a fiduciary, or an employee of such organization at any time during such taxable year. No more than 50% of business gross income is from passive investments. Stock is not subject to conditions that restrict a spouse’s right to dispose of the stock and that run in favor of the individual or his children under age 21." Generally, this means that neither spouse can work for, be a board member of, or own any part of their spouse’s business, neither spouse’s business can have more than 50% of its revenue from passive income, and their children must be older than 21 years old. Also, I am not sure of the authority for this but we have also applied this exception only where neither spouse was listed in the other spouse’s plan documents and neither spouse participated in or was a trustee in their spouse’s plan(s). If H and W meet the three criteria 1563(e)(5), they could qualify for a spousal exception, meaning that they might not be in a Brother-Sister Controlled Group. As @PeterGulia notes, the SECURE Act provides the guidance where spouses in community property states are treated similarly to spouses in separate property states. Also, should make sure they are not in an Affiliated Service Group.

In addition to a death certificate, you could also seek a signed statement of death from the deceased's funeral director (I think there is a Social Security Form that is used for this) or a certified copy of the coroner's report of death. Also, I would not discount the possibility of the slayer statute coming into play as noted by @EPCRSGuru as we have recently had to withhold a distribution to a beneficiary due to its application (still awaiting trial).

Agree with the other posters. Anytime we submit a VCP not only do we submit any related defect but we look for anything else we can get covered under the compliance letter.

Or said differently, the Code wouldn't prohibit it if the plan document permits it.

Agree, not aware of any federal law that contains a time limit for obtaining or filing a QDRO, though there may be legal or procedural issues under state law if the parties delay too long in obtaining or filing one.