Artie M

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.

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).