Artie M

Again, I don't think you will find authority on this but in my less than 50 years (30 years) of dealing with this a person is terminated prior to reaching NRA as defined by the plan, they would not be able to age into the vesting (unless they came back within a year and could bridge service time).

Presumably, this wouldn't be being asked unless the plan is using a graded vesting schedule. My reading of the provision is that the participant is not 100% vested. In the example, this person's Normal Retirement Age is the 5th anniversary of participation because it is the later of the two... i.e., it is later than her attaining age 65. If she has not attained the 5th anniversary prior to her termination of employment, she would not be 100% vested (though she may be partially vested under the normal vesting schedule). I don't see the issue if you are quoting the adoption agreement for the plan at issue and the basic plan document that is to be used in connection with that adoption agreement. You follow plan terms. If you are quoting just some basic plan document that is not being used in connection with the adoption agreement for the plan at issue, I still believe that is the way that everyone I know would interpret the language. If you must have specific IRS authority for this conclusion, I don't think you will find it. (I will check back in hopes that you do.)

Not sure if the participant should have had to return all the funds to the qualified plan but since they did what happened before seems to be moot. From your facts, it sounds like the participant was 72 in 2024 and turned 73 in 2025. Since she is 73 and receiving a distribution from the pre-tax account, she is required to receive a minimum distribution. To determine the amount of the RMD, the plan should only be looking at the portion of the account that is non-Roth 401(k). Prior to 2024, RMDs would have been based on the aggregate total of pre-tax and Roth 401(k) amounts. But, generally beginning in 2024, Roth 401(k) amounts are no longer subject to the RMD rules so the plan should look at those amounts separately. When the plan makes a distribution in a year when an RMD is due, the RMD amount (as determined based on the 12/312024 balance in the pre-tax account) is required to come out first (Also, although the distribution date of the first RMD normally can be deferred until April 1 of the following year, since this is a distribution from the terminated plan, the due date of the first RMD cannot be deferred until April 1 of 2026 but will be in the year of distribution). Treas. Reg. 1.402(c)-2(c)(2)(ii) states that RMDs are not eligible for rollover. Then Treas. Reg. 1.402(c)-2(f)(1) states that if a participant receives a distribution when an RMD is due, the first portion of the distribution is treated as the RMD and is not eligible for rollover. She will not want to mistakenly roll over all or a portion of the RMD from the plan to an IRA, as the rolled over RMD will be considered an excess IRA contributions subject to an annual 6% penalty unless the participant withdraws the excess amount (the RMD), plus any earnings attributable to it, by October 15 of the following year.

This sounds odd to me because a solo 401k plan, by its nature and legal structure, does not (usually?) have the safe harbor feature that is found in traditional 401k plans because those rules ensure that the plan is not discriminating between the employees and HCEs or owners. Solo 401k plans are specifically structured for owner-only businesses without full-time employees (except the owner(s) and possibly their spouse(s)). If the owner(s) hire full time employees, they may want to implement a plan with safe-harbor features so they could contribute the safe harbor contributions without testing but that wouldn't let them provide an additional 21% nonelective contribution just for the owner(s) as any contributions in excess of the safe harbor would have to be tested under 401(a)(4). That said, back to your actual question, annual additions paid to a participant's account cannot exceed the lesser of: 100% of the participant's compensation, or $70,000 (assuming <age50) for 2025. But, as you state, there is also the deduction limit where an employer’s deduction for contributions to a defined contribution plan cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan. Since the 25% limit is on the employer's deduction for contributions to the plan it does not apply to the salary deferrals as the deduction for those deferrals is really for wages paid. See 404(n). So with $100K compensation, assuming these are W-2 wages, she can contribute $23,500 (assuming <50) and she as employer can contribute an aggregate employer contribution of $25K in 2025. Note that I am assuming these are W-2 wages. If her compensation is actually earned income, there will be a difference (see Self-employed individuals: Calculating your own retirement plan contribution and deduction | Internal Revenue Service). Also, this example assumes only one owner and no spousal compensation.

Online is a fine starting point, depending on your resources, but personally, I don't rely on information I find online unless those sources are citing IRS authorities and I have tracked it back to those authorities. Here, I would simply look at Rev. Proc. 2021-30 and the 1099-R instructions. My recollection is that Rev. Proc. 2021-30 has special rules for excess additions/allocations that specifically state that a 1099-R is to be used with 415 corrections and the instructions for the 1099-R have specific rules for distributions under EPCRS. Of course, don't rely on my statements.... Based on the facts you provided, it appears that there are no matching contributions, so in my view the correction should be first, to distribute 2025 salary deferral contributions (adjusted for earnings), then, if any excess remains, to forfeit 2025 employer profit-sharing contributions (adjusted for earnings if necessary) until the annual additions no longer exceed the 2025 415(c) limits. This priority order is used so the participant retains as much of the employer monies that they can. The corrective distribution (not the forfeiture, if any) made to the participant, presumably in 2026, should be reported on a 2026 Form 1099-R. The participant should include the distribution as income in 2026 but does not have to pay the 10% additional tax on early distributions under IRC Section 72(t). I think this is a Code E but not certain. The distribution is not eligible for rollover (the 1099-R should reflect this and we usually send a letter of explanation making that clear). The forfeited employer contributions (plus earnings) should be transferred to an unallocated plan account, which must be used to reduce employer contributions in subsequent periods. No additional employer contributions are to be made to the plan until the unallocated plan account balance is reduced to zero. This is not an instance where the participant has the double whammy of income in the year earned and income in the year distributed (which applies to late distributions of excess deferrals or 402(g) busts).

I guess I was wondering what is the authority that permits them to restrict the distributions during their period of decision making?

If one HCE gets a match and some NHCEs don't, could be BRF issues.... right? I am not a big testing guy.

How do you know the agreement is subject to 409A? are there other payments within the agreement subject to 409A? What does the agreement state with regard to payment? It is hard to answer 409A questions without more context and language. Note that there are arguments that you can correct a 409A failure prior to the year of the substantial risk of forfeiture lapses or even in the year the substantial risk of forfeiture lapses but prior to the date the substantial risk of forfeiture lapses. See Chief Counsel Advice Memorandum 201518013; 1.409A-4 (can't remember if in proposed regs or final). If this is the only payment under the agreement, it seems that arguably the sale should be considered the "vesting" event and the document failure may be able to be corrected if the sale hasn't occurred.

If the plan uses one of the major TPA/recordkeepers, they should be able to handle the earnings calculations. They do it all the time. I assume you have asked them. Assuming you did and they said they can’t do it, then the big questions are whether the majority of the affected participants are NHCEs and was there an overall gain in plan investments during for the period of correction? If the answer to both is yes, you do not have to do any earnings calculations. First, note that you have to make sure you are looking at the right way to calculate earnings. Under EPCRS, corrections that require a reduction of a participant’s account balance have different rules for determining earnings than corrections that require a contribution/allocation to plan accounts. Here, you are reducing a participant’s account so you use (or first start with) those rules. If the majority of affected participants are NHCEs and there has been an overall gain for the period of correction, an adjustment for earnings is not required for the affected participants. If the plan sponsor decides it wants to remove the earnings from participant accounts, the reduction to the account balances may be adjusted by the lowest rate of return of any fund available for the correction period for administrative convenience. Hopefully, the plan sponsor will not want to do this but at least you should be able to determine that fund. However, if the majority of affected participants are not NHCEs (i.e., HCEs) or there has been an overall loss for the period of correction, reductions to earnings may be required for corrections (and using the lowest rate of return is not permitted). EPCRS doesn’t address losses in earnings for corrective distributions or reductions in a participant’s account balance. The common view is that the safest method to calculate earnings in such instances is to make corrective distributions or reductions in account balances without adjustment for negative losses in earnings if the majority of the participants affected are HCEs. (So the affected participant is funding the loss. That is, you take the full amount of the overcontribution and don't offset it for any loss.) If most of the participants affected are NHCEs, a plan sponsor may choose to apply the loss in earnings to the amount to be recovered (i.e., the Company will fund the loss, which is what we normally do if it is NHCEs, but the problem here is you have to determine the loss so the plan sponsor would not choose to apply the loss and thus make the participants fund that loss). When the majority of affected participants are HCEs we go back to the earnings calculation rules for corrections that require a contribution/allocation. Distilling the rules based on a majority of affected participants being HCEs and assuming, because you state there are 10 investments, that the plan allows participant direction of investments, it would be best to use the actual rates of return for the period of correction. Alas, the instant TPA cannot make that calculation. Our rule is never to use the CFVCP calculator... If the affected participants are primarily HCEs, of course, they will want to use the DFVCP calculator, as it actually gives really low earnings (at least from our experience)). That said, be careful when you start to get into the administrative convenience rules or the rules that allow you to use alternative methods as you have to show various things. For instance, to use the DFVCP calculator that it is not feasible to make a reasonable estimate of what the actual investment results would have been. If this is the way you go, you should require the TPA to memorialize all the reasons as to why it is not feasible for them not to be able to do it. Our concern is that feasibility will be from the perspective of the IRS not ours. If it is a $9M question (and not hyperbole), you may wish to go to VCP. Like it says below… Just my thoughts…

Based on IRS guidance, the plan sponsor should transfer the forfeited employer contribution plus related earnings to an unallocated plan account. This amount would then be used to reduce employer contributions in subsequent periods. This sounds simple but there is a complication. In determining how to use the excess contribution, the IRS has stated to us during an audit where this issue came up, the timing of the actual deposits of the contributions is relevant. Though in your case the contributions were for 2024, you must determine when those amounts were actually physically deposited. For example, were they funded with each payroll period in 2024 or in part or all after the end of the year. Even if per payroll period, it is possible the amount for the final December payroll was contributed in 2025. The IRS stated that amounts physically deposited in one year can be allocated to that year and earlier years but cannot be allocated to a later year. They said that in their view if done differently there is a danger that the plan sponsor would be accelerating deposits into an earlier year and possibly getting a larger tax deduction. (Note that our specific issue on that audit was on a much broader scale and not with respect to just one employee and our client funded the match on a quarterly basis with the final quarter's contribution being deposited after the end of that quarter in the next year.) So, in your case, if all of the excess amounts were deposited in 2025, there is no issue. The amounts could be used to reduce employer contributions in 2025 or 2026 (forfeited in 2025 and thus can be used in 2025 or 2026). However, if some or all of the excess amounts were deposited in 2024, you must look at the Plan document to see what alternatives are available. That is, what other matches or employer contributions could be made to participants under the terms of the Plan that can be funded with those excess amounts deposited in 2024. E.g., an additional match on top of the safe harbor or a profit sharing contribution. In my client's case the amounts were significant enough to allow them to provide a small (albeit very small) profit sharing contribution to all participants. One alternative the IRS would have permitted our client to implement (but the client opted not to) was to simply allocate those amounts to the NHCEs as a QNEC. Since the amount here is so small, that seems like the most practical solution. As regards a mistake of fact, quoting IRS Private Letter Ruling (PLR) 9144041: Mistake of fact is fairly limited. In general, a misplaced decimal point, an incorrectly written check, or an error in doing a calculation are examples of situations that could be construed as constituting a mistake of fact. What an employer presumed or assumed is not a mistake of fact. In my experience, there are very, very few mistakes of fact. Also, unallocated suspense account amounts are only to be used to fund employer contributions (and not to be used for plan expenses). See EPCRS Rev. Proc. 2021-30. I want to reiterate my sign off below...

The last time I dealt with something like this the illiquid investment property in the profit sharing plan was the decedent's (the 100% owner of the plan sponsor's) beachfront weekend home ....

To correct the error, the deferrals should be transferred, adjusted for earnings, from the pre-tax account to the Roth account. We have done this by issuing a corrected Form W-2 for the year of error. The downside to this was that the employee then had to file an amended Form 1040 for that year. We also saw that the IRS website (Fixing common mistakes - Correcting a Roth contribution failure | Internal Revenue Service) states that the employer can include the amount transferred from the pre-tax to the Roth account in the former employee's compensation in the year of transfer, which might be easier for you since this is a multiple year issue. We didn't do that because we weren't sure what would happen with the required withholding and we were only dealing with one year. Note that only federal income tax withholding is at issue because FICA etc. should have been previously applied.

Usually, plans permit a distribution of rollover amounts at any time. The distribution would be subject to tax so the 20% withholding is not necessarily a bad thing and, yes, unless an exception applies that distribution would be subject to the 10% premature withdrawal tax. Peter seems to have covered the possible exceptions. Don't think the 72t2Aiii exception would apply because it would cover the client's disability and not the father's, so the medical expense exception seems like the best possibility. If the father is indeed disabled, it seems like there would be a very good chance he would be a dependent of your client's. The father may qualify for a dependent if his gross income doesn't exceed $5,200 (2025) and the support the client provides exceeds the father's income. Social Security doesn't generally count towards the father's gross income for this purpose but income generally does. The client can count food, medical bills, living expenses as well as the fmv of the portion of the home the father occupies as part of the support he provides his father. Medically necessary home improvements, e.g., ramps, wider doorways, bathroom modifications, etc. can be deductible under 213 if directly related to the medical condition and not just for general home improvement. This should all be properly documented with letters from doctors, contractors, etc. I believe that only the portion of the medically necessary expenses in excess 7.5% of the client's AGI would be able to escape the 10% tax but you should confirm. Like Peter says, he should have his CPA/lawyer/financial advisor look at all of this.

Like the others have said, since an IRA is not a qualified retirement plan, a QDRO is generally not used to split the assets (IRC s 408(d)(6)). Instead, IRAs are split via a transfer incident to divorce (which is just a provision in the settlement agreement/divorce decree that directs the transfer of IRA funds or a percentage of the IRA funds to the non-owner's spouse's own IRA). The settlement agreement should include language that shows how the assets will be divided, the method of division, the valuation date for the IRA division, how gains and losses will be divided, and who pays the fees for the division. The specifics of what is needed may be affected by the applicable state law. Usually, before the transfer of IRA assets is initiated, the receiving spouse needs to have an IRA account open in their name. If the receiving spouse does not have an IRA, they should open one (the easiest would be to open one with the IRA custodian where the main IRA is held). Once the IRA is opened, the former spouse should send the divorce decree/separation agreement to the IRA custodian holding the IRA assets, indicating how the assets will be split. If the IRA custodian is satisfied with the documentation provided, the funds can then be transferred to the receiving spouse’s IRA usually within a short time period of days or weeks. This should be able to still be done even though the receiving spouse has died. If they have an IRA already open that would be easiest, but the executor of the estate (assuming one has been appointed, etc.) could open up an IRA. The issue again would be whether the IRA custodian is satisfied with the documentation and the structure of the transfer.

An IRA is a non-probate asset that does not generally get settled through a will. The IRA designation forms and agreement will determine the beneficiary. If there is no designated beneficiary, then you look to the IRA agreement to determine the beneficiary. Each IRA custodian has its own agreement and each will have their own provision to determine who inherits the IRA when there is no beneficiary named on the form, when there is no form at all, or when the form is defective. Sometimes it will be clean and simple with the spouse as the default beneficiary, then the children, if there is no surviving spouse. But, here, based what the bank is saying, your IRA agreement may provide that upon the death of the account owner with no designated beneficiary, the proceeds will default to the estate of the account owner. You should confirm that this is correct by asking the IRA custodian for a copy of the IRA agreement and for them to point you to the portion of the IRA agreement that provides the default beneficiary language (or as fmsinc states, see "what does your Order of Precedence say"), In these instances, we have seen where IRA custodians will not permit an estate to assign or transfer the IRA out of the estate to a properly titled inherited IRA for estate beneficiaries, although the IRS permits it, and will instead require that the entire IRA balance be paid to the estate. Regrettably, unless the IRA agreement states otherwise, this appears to be within the IRA custodian's powers. If this is done, it will be a taxable distribution(s) that cannot be undone. (Also, depending on the size of the estate there may be estate taxes.) If the beneficiary is the estate, the balance would be required to be paid out to the estate within 5 years.

sorry for not giving full references...

Roth gets the 50% QNEC per Rev. Proc. 2021-30, App. A. .05(3)

Once you have your facts lined up... “Compensation” for HCE determination means “… compensation within the meaning of section 415(c)(3) without regard to sections 125, 402(a)(8), and 402(h)(1)(B) and, in the case of employer contributions made pursuant to a salary reduction agreement, without regard to section 403(b).” The definition of compensation found in IRC § 415(c)(3)(A) includes all compensation paid by the “employer.” The "employer" for these purposes includes foreign companies in the controlled group. A plan may not automatically exclude compensation from foreign companies in the controlled group when determining HCE status. Furthermore, according to Reg. 1.415(c)-2(g)(5), the determination of whether an amount is treated as compensation under paragraph (b)(1) or (2) of Section 415 is made without regard to the exclusions from gross income under sections 872, 893, 894, 911, 931, and 933. This means 415 comp includes foreign earned income even if it is not included in gross income for regular tax purpsoes. However, there is an exception to the requirement to include foreign income in the determination of HCE status found in 1.415(c)-2(g)(5)(ii) under which compensation earned while a nonresident alien was not eligible for the plan can be excluded if the nonresident alien has no U.S. source income for the year. Note that this rule must be applied uniformly to all similarly situated employees.

There shouldn't be a legal impediment to merging the Plans (if there is a coverage issue, the client may need to enter VCP to resolve). Presumably, B and C are going to enter into a PEO agreement with the existing PEO; otherwise, I don't see them permitting the merger. Note that it is the PEO plan that will be merged into so you will need to seek their approval and will likely to coordinate with them along with the other recordkeeper(s)/administrator(s).

I don't have any authority readily available but a participant should be able to elect to have an amount in excess of the required withholding (here, 0%) on the distribution. Recordkeepers that we have worked with permit the election and have required that the participant fill out a Form W-4R in order to effect the additional withholding. Not that they are always right but... Here's a klip of part of the form used by one of the recordkeepers we have dealt with.

I agree the two companies are part of a controlled group. So, compensation for determining HCE status would be aggregated. Compensation as far as contributions on behalf of the participants, however, is usually based on compensation from the participating employer (confirm by checking document as Bill states), in which case, Company B comp would not be used for Company A plan contributions (Company B does not appear to participate in Company A's plan (which is fine as Bill states)). The spouse does not appear to be able to participate in Company A's plan unless she is an employee of Company A (based on the ownership percentages you provided, she does not appear to be a self-employed owner of Company A). If you want to include comp from Company B for purposes of contributions and you want to include the spouse in the Company A plan, perhaps Company B should adopt the Company A plan (especially since there are no other employees in Company B).

I have never worked with a cooperative so I don't come close to knowing the answer to your question. I guess I just have questions for my own education. Can it really be as easy as simply dividing 100% by the number of worker-owners? If set up as a S or C Corp (presumably corporate), I guess the worker-owners would own stock but in a cooperative I don't believe that stock provides them with an equity or ownership right. My understanding is that members of a coop usually only have the right to vote and the right to share in earnings. That is, the amount of stock "owned" by an owner doesn't really determine their vote because in a coop each member technically is always equal as each just gets one vote, right? Also, each member isn't allocated earnings based on their "equal" ownership rights but rather on their "patronage", e.g., the amount of work they put in or the amount of goods they put in. For instance, if this is a farmer's coop and a member brings in one bushel of tomatoes and another member brings in a truckful of avocadoes, their shares of the profit from the sale of the aggregate amount of produce is not going to be equal. Plus, if the worker owners were not treated as owners, I have to believe there would be a strong likelihood that there would be just a few HCEs and a multitude of NHCEs in these types of organizations. Sorry for the questions but this is an interesting question though, for me, purely academic.

ERISA requires that the plan administrator follow the plan documents and pay plan benefits to the beneficiary as determined under the plan. Thus, the determination of who is entitled to benefits under a plan as the beneficiary of a deceased participant depends on the plan's terms. Without knowing the language of the plan, I do not believe anyone can accurately respond to your question. The responders above all have solid questions and thoughts but without the terms of the plan each is responding with hypos or using assumptions. Note Peter Gulia's response contains "One imagines", "If so," "Many plans," "and no QDRO" with his ultimate conclusion being a question. You state that "The plan provides that a spouse must consent to an alternate beneficiary designation." If, for example, the plan uses typical wording such as "Any designation by a married Participant of a Beneficiary other than the Participant’s spouse will not be valid unless the Participant’s spouse consents in writing to such designation (which consent acknowledges the effect of such designation, the identity of any non-surviving spouse Beneficiary, including any class of Beneficiaries and contingent Beneficiaries, and is witnessed by a member of the Plan Administrator or a notary public)..., " then a conservative reading of this type of language would be that the 1988 beneficiary designation is invalid because, upon the new marriage (after the filing of the 1988 designation), the Participant's new spouse did not consent in writing to the prior designation (even if a prior spouse had consented to the designation). Like Peter G... not advice (just thoughts)

Depending on the facts, one of several earnings methods could be used. If permit participant direction of investments, if not, if have automatic deferrals, if most affected participants are NHCEs, etc... or if actual return less than DOL calculator then use the DOL calculator (as it is a floor). Ultimately, if the client is submitting this under VFCP it can use the DOL calculator. To me, the client (you) should do it right and submit the VFCP filing accordingly and also file an amended 5330 with explanation. In the VFCP filing the client should describe what happen edin the prior "correction" (and, if you cannot determine what happened, disclose that you don't know what was used to determine earnings in that correction) and then describe your "correction of the correction". If the client paid too much in earnings, it should just disclose that fact and tell the DOL that it is not going to seek the return of those amounts. The DOL should not have an issue with giving the participants an extra $100 (unless the $100 went to the plan sponsor's owner or only HCEs or something like that. I would also disclose that the demographics of the affected participant group wasn't just the plan sponsor or only HCEs or something like that). The worst thing about filing the amended 5330 is that the excise tax difference will likely be nominal (a % of a % is pretty low) and it sounds like the client might actually be seeking a refund. I would also describe what you are doing with the amended 5330 in the VFCP.

Another issue, based on your (Bruce1) original facts, the client wants to put the match in for the prior year. The only times we have utilized this type of match (including a triple stack) is when we had it in place at the beginning of the year, not after year end. I am not quickly finding any authority for this position... maybe just us being conservative.