Artie M

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.

I would tell the governmental entity thank you and go on. But if they pay back the funds, perhaps the "claim of right" doctrine if it is above $3,000 (see IRC s 1341).

When did the failure to take the deferrals out of the bonus occur? If less than 3 months ago it seems like this could fit under the safe harbor correction for any elective deferral failures (including Roth contributions) that don't exceed 3 months.

Just to make sure, one participant plans are not subject to ERISA if the sole participant is the owner of the business (because there are no common law employees). But if the sole participant is a common law employee who is not the owner then it is subject to ERISA. Not being subject to ERISA means it would be exempt from the fiduciary duty rules (it is subject to the Code but that doesn't contain the fiduciary standards). That said, even if subject to ERISA, investing it differently from the other plan assets wouldn't necessarily be a fiduciary violation as long as it was a prudent decision. However, investing it differently to ensure a lower return does not seem prudent (given what will surely be the DOL's stance in this political environment.... all that matters will be the pecuniary factors). Also, it seems that essentially your client doesn't want to make money because they don't want to pay taxes. So let's take an example.... excess transferred is $100K and over 7 years it earns $50K when invested in volatile stock. $100K is allocated within the 7 years leaving the 50K to be reverted. So then he has to pay let's say 60% on the $50K (20% reversion tax plus income tax... the taxes are just on the amount that wasn't allocated in the 7 years) and they net $20K after taxes. ...So he is willing to forego the $20K just so he doesn't have to pay the $30K in taxes??? God forbid it made $100K earnings during this time.

We're all different but why do you care if she is getting life long benefits? As one of the posters stated she is likely only getting the marital portion of the benefit (the portion that accrued during your marriage). You and your new spouse will be getting the other portion. If you pay her a lump sum payment, you would still be giving her the same present value and, if I am her lawyer, a little more. It's not like YOU are cutting her a check every month.

Seems to me you would have the ultimate Parent seller assume sponsorship of the plan of the target sub prior to (and maybe subject to) closing of the deal and the target sub would adopt the plan as a participating employer. Effective upon closing, the target sub would withdraw as a participating employer in the plan. When the target company is no longer in the Parent seller's controlled group, the employees of the target sub will have had a separation from service from the Parent seller and all the members of its new controlled group. This should be a distributable event as they have had a separation from service from the "Employer" (with a capital "E") that is maintaining the plan. Now Parent Seller may not like this merely because some of the target sub employees may not take a distribution and it will be left with administering some orphan legacy type of accounts. The Parent seller then would merge that plan with the orphan accounts into the plan it maintains for its employees. I don't think you terminate the target sub plan because some of the target employees may not take their distribution and they can't be forced to (unless small account balance).... As my dad once said... there's always one in the bunch...

Also, if the domestic partner qualifies as a dependent/qualifying relative, the pre-tax/HRA issues would go away. However, most DPs do not qualify as a dependent/qualifying relative of their partner. If the domestic spouse is in fact a domestic spouse.... As with any issue, one alternative that is always available is to do nothing and go on. In that case, the company and the employee assume the risk. However, they should be aware that not only did the employee pay the DP's premiums on a pre-tax basis when it should have been on an after-tax basis, there also is likely to be income to the employee that was not imputed. (You have not mentioned children of the DP so I assume there are none or none were covered under the employer's plan.). Imputing income is complicated but the gist of it is that the fair market value of the coverage(s) provided to the DP must be imputed to the employee. Employers usually use one of three methods to impute health plan benefit income: (1) the COBRA rate for employee-only coverage; (2) the incremental cost or the additional cost of adding an individual to the coverage (e.g. the difference in cost between employee-only coverage and employee + 1 coverage, etc.). This cost is not just the employee's cost of adding the CP but the portion of any amount the employer contributes for the employee + DP coverage attributable to the DP coverage. (Note an insured plan with no incremental cost c/would use the employee only rate because, under the IRS's view, the incremental cost can never be zero); and (3) the actuarial value as determined by an actuary based on actual plan costs, demographics, etc. If the employee paid for the group health plan coverage on an after-tax basis that amount would reduce the imputed income.... but if paid on a pre-tax basis it would not reduce the imputed income. Under your facts, imputed income should be only at the federal level because IIRC California does not have imputed income for DP coverage (but confirm because I do not work in California and it would be imputed for many states with income taxes). Employers must report imputed income on the employee's IRS Form W-2 and failure to do so may result in penalties and interest charges for both the employer and employee. Also, higher taxable income for the employee may also have other effects such as reducing eligibility for tax credits (e.g., Earned Income Credit) or increase the phase-out of itemized deductions. The IRS has provided almost no guidance on how to impute income for HRA coverage provided to a DP. Here, the fair market value of the HRA benefit is the amount that an individual would have to pay for the benefit in an arm's-length transaction. Arguably, the full value of the HRA (the COBRA rate) must be imputed regardless of utilization; however, many employers impute only the value of reimbursements provided to the DP.

As always, what follows are just my thoughts…. Worse even because I am eating lunch and going to try to type this… Assuming the Plan was not amended as laid out by the prior posters, this is an operational failure (i.e., a failure to operate the plan in accordance with its terms) and the general rule for self- correcting an operational failure is to fix what was done in the plan’s operation by correcting the mistake to match the plan’s terms. The other alternative that can be used to self-correct under limited circumstances is to retroactively amend the plan so that its provisions match the way the plan was operated. Self-correction through retro amendment under the circumstance you describe doesn’t appear to be permitted. Essentially any failure that qualifies as an “EIF” can be self-corrected at any time and regardless of its significance. My colleagues and I have batted around what exactly is an EIF and defining it is not all that simple. Under the statute the only failures that are definitely not EIFs are egregious failures, failure involving the diversion or misuse of plan assets, and abusive tax avoidance. The IRS adds to that list of non-EIFs, at least until it issues further guidance, significant failures in terminated plans, failures in orphan plans, written plan document failure in a startup plan, and any failure corrected by plan amendment that is less favorable for a participant than the original terms of the plan (there are others but not applicable to qualified plans). So the failure you describe is not an EIF if corrected through a plan amendment. So, it may still be an EIF, unless or until it is corrected through a retroactive amendment. (Strange in that the failure might qualify for a retroactive amendment, until it is actually retroactively amended.) If it is an EIF, it may still be self-corrected under the principles of the SECURE Act (just not through a retroactive amendment). Under the guidance, with any potential self-correction, the key is determining whether the procedures a plan has in place, if any, are “reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements” and that they’ve been “routinely followed, and [the failure] must have occurred through an oversight or mistake in applying them” (emphasis added). Arguably, the procedures you have described appear to meet those rules but for the fact that the plan limit is $1,000 and not a higher amount. Arguably, the cash-outs you describe meet “applicable Code requirements” as it appears that the maximums used would be permitted under the Code. I say, arguably, because it is also a requirement of the Code to follow the terms of the plan. However, failure to follow the terms of a plan cannot disqualify a failure from being an EIF because every operational failure is a failure to follow the terms of the plan. You indicate that notices are and were sent, there is an IRA agreement in place, etc. Those seem to indicate reasonable procedures that were mistakenly applied… so why can’t this be an EIF? Also any involuntary cash out in excess of $1,000 would appear (at least to me) to constitute an “overpayment” as described in SECURE 2.0. Notice 2023-43 states that an “inadvertent benefit overpayment” for these purposes “is an [EIF] that occurs due to a payment made from [certain plans that include a qualified plan] that exceeded the amount payable under the terms of the plan or a limitation provided in the Code or regulations. An inadvertent benefit overpayment also includes a payment made before a distribution is permitted under the Code or under the terms of the plan” (emphasis added). (Just because the amounts were vested doesn’t mean they weren’t overpayments. Most defined benefit overpayments are vested.) If any of these distributions were involuntary cash-outs in excess of $1,000, including an involuntary rollover to an IRA (and even if the amount was vested), they were payments that “exceeded the amount payable under the terms of the plan” and they were payments that were “made before a distribution is permitted… under the terms of the plan.” It does not seem unreasonable to self-correct the involuntary cash-outs that were made under the circumstances that you describe through the SECURE 2.0 rules applicable to EIFs that are inadvertent benefit overpayments, provided, they are not self-corrected through a retroactive amendment. So it doesn’t seem unreasonable to apply any of the corrective steps permitted to be used under SECURE 2.0 under your circumstances. Along with that, the plan would be amended prospectively to increase the involuntary cash out amount. Of course, the last alternative is to simply submit this under VCP, proposing the correction of the failure through a retroactive amendment and then see what the IRS says. Of course, the plan sponsor would have to pay the VCP fee ($1,500-$3,500 plus attorney’s/advisors’ costs).

I guess the characterization of this bonus as a "sign-on" bonus is throwing me off a little.... since it doesn't vest for at least 12 months, it doesn't sound like a sign on bonus... sounds like a "stay-on" bonus. If it's actually a sign-on bonus why would the employee subject themself to a 12-month vesting schedule (assuming the vesting constitutes a SROF). Anyways... To me it appears to fall under the forfeitable (unvested) rights election rules that applies to compensation that will not vest unless the employee provides services to the employer for a period of at least 12 months,. so they have until on or before the 30th day after the date that the employee receives a legally binding right to the compensation to make a deferral election. I do not see it as falling under the first year of eligibility election rules because that election is primarily used (or is primarily useful) with regard to compensation earned during the first year in which an employee becomes eligible to participate in a NQDC Plan ("In the case of the first year in which a service provider becomes eligible to participate in a plan...." Treas. Reg. §1.409A-2(a)(7)(i)).

Ooops...I noticed I wrote a "does" where I meant to write "doesN'T"... revised

Isn’t that addressed in the latter portion of § 1.409a-3(i)(f)(iv)(A): If before and in connection with a change in control event described in paragraph (i)(5)(v) or (i)(5)(vii) of this section, transaction-based compensation that would otherwise be payable as a result of such event is made subject to a condition on payment that constitutes a substantial risk of forfeiture (as defined in § 1.409A-1(d), without regard to the provisions of that section under which additions or extensions of forfeiture conditions are disregarded) and the transaction-based compensation is payable under the same terms and conditions as apply to payments made to shareholders generally with respect to stock of the service recipient pursuant to a change in control event described in paragraph (i)(5)(v) of this section or to payments to the service recipient pursuant to a change in control event described in paragraph (i)(5)(vii) of this section, for purposes of determining whether such transaction-based compensation is a short-term deferral the requirements of §1.409A-1(b)(4) are applied as if the legally binding right to such transaction-based compensation arose on the date that it became subject to such substantial risk of forfeiture. I have not looked at this in a while but the way I understand the quoted provision it can apply to a deal bonus that is based on the transaction price paid for a company and payable, e.g., to a CEO upon closing of a covered transaction. If the CEO is paid on the same schedule, terms and conditions applicable to the shareholders and the applicable conditions qualify as an SROF (determined as if the conditions were being applied to a new award) the subsequent deal bonus payments would be treated as exempt from 409A as a short-term deferral. I also note that this portion of the reg doesN'T refer to the 5-year payout rule so I thought that these types of earn out payments made within 5 years of the transaction don’t have to be subject to an SROF to be compliant under this exception (but I am definitely foggy on this).

Right, you are going to have to let the other side see it because the parties have to agree to the terms. All QDROs that we have reviewed have been signed by representatives of both of the parties and the judge (I have not reviewed one that was prepared following the death of one of the parties). There should be a lot of negotiating to be done between the parties because the true substantive provisions of the QDRO should correspond to the terms of the property settlement, which is the document that would require the real negotiations.

The roles might not be fully laid out in the plan document so also look to see if there is a separate trust agreement that may provide additional information. Peter's answer doesn't necessarily directly respond to the OP's question but provides great information when addressing the question as to whether one would want to be a co-trustee of an ERISA-governed trust (especially where their responsibilities and duties are not clearly delineated).

I agree with Lou S that if that's a discretionary match formula it would not meet the SH rules. I guess I just want to confirm though that the "425% of the first 6% of compensation deferred" is not the fixed match formula in a triple stack.

I think there could be a BRF issue. A right or feature is essentially a catchall that the IRS can apply to any feature that is different for one group of participants than another. The IRS excludes from rights or features any feature that has no meaningful value to participants. That seems to imply that if there is meaningful value to a right or feature to a participant that c/would be a right or feature that needs to be tested. Here, an early contribution arguably has value because someone would get investment returns for a longer period than someone who got the later contribution. I mean that is why most participants who load up deferrals early (even if there is no match) do so. Though you point to losses, the IRS will have the issue with the potential for earnings. Different groups having different investments is definitely subject to BRF testing. Doesn't seem like a stretch that allowing different groups to invest amounts earlier than another could also be problematic. I also note that EBP's document makes no reference to one group versus another. That document simply recalculates for all participants, no matter how much the participant makes--there is nothing in it that refers to two different groups. Under EBP's document there is a true up for everyone who qualifies for one at the time the employer makes the recalculation. The proposed change differentiates between two groups of participants so that at a point of recalculation some participant who might otherwise qualify for a true up will not get one (until a later date of recalculation). As you state, it seems especially problematic because depending on the HCE definition and demographics it will in all likelihood favor HCEs.

Sorry, I don't know the answer to your question but i do recall some IRS Q&A guidance concerning 403(b)'s having a definite true-up match allocation formula that was issued in 2022 or 2023. Maybe run a search with the terms "Q&As" "preapproved" "403(b" and "match" or something like that.

I agree with EBECatty, though will add that it often is used to refer to a non-profit's defined contribution plan

Are you drafting the plan and asking if you can meet the service recipient's desires regarding that timing or has the plan already been executed and it is silent on this issue (now the service recipient wants to "credit" the amounts on 6/1)? Also, when you use the word "credited" do you mean accrued in their notional account on the books/ledger? All the posters above are correct that this is a contractual issue and the application of 409A is complicated. Having said that, here are my ramblings. Regarding the language used in your specimen document, I agree it seems that it is using short-term deferral type of language. To me this is an overly conservative use of that language as that timing only comes in with distributions and not with accruals. The specimen document must either provide or the quoted provision assumes that the service provider has a legally binding right to the match on 12/31/yr1. If that is the case though, it doesn't seem like it should matter when the accrual is actually being made because legally speaking the amount that should be accrued would be set as of 12/31/yr1. That is, even if the service recipient waits until 3/15/yr2 to accrue and the service provider terminates on 2/1/yr2 (assuming no other vesting provision), the service provider still would need to be credited with the amount of the match as of 12/31/yr1. Ultimately, it seems like it wouldn't matter when it is actually credited on the books as long as the service provider can calculate the amount owed to the service provider when a distribution is due. The problem with delaying would be that the calculation of earnings is more difficult (unless there is a fixed earnings rate). Of course, the plan document could be drafted such that the service provider does not have a legally binding right to the match until 6/1/yr2 (a type of tin handcuff) so they do not have to credit it until that date (if this is done you should make it clear whether this credit is retroactive to 12/31/yr1 or treated prospectively). Could this be what the service recipient is seeking? Even if this is not a pure notional account but amounts are to be contributed to a rabbi trust, then a delay would be a contractual issue between the service provider(s) and the service recipient and not a tax issue. Reiterating everyone else... not advice.

In the correction I describe in my prior post, there would be no amending of returns.