Plan Doc

Can/must a church having a 501(c)(3) determination and offering a nonqualified deferred compensation plan limit eligibility to a "top-hat" group? Also, as I understand 457(f) doesn't apply in the case of a church employer, can plan accounts avoid current taxation upon vesting, as usually occurs with other tax-exempt organization nonqualified plans?

A governmental 457(b) plan that allows employees to designate their normal retirement age wants to establish normal retirement ages of 55 for "special risk" employees and 65 for all others. Normal retirement age under the plan is meaningful only for purposes of the special 457(b) catch-up. It does not play a role in vesting, as all contributions are 100% immediately vested; waiver of any allocation conditions, as there aren't any; or as a distribution trigger. What limitations, if any, apply to the employer's ability to make this change? For example, would its application be restricted to new participants only?

Brian/Peter, I don't know that it makes a difference, but I'm not arguing that the twins had a COBRA qualifying event at the time B acquired S or that they lost dependent status at that time. I concur 100% that there is no qualifying event upon the sale of S to B where the participant continues in employment with S after the transaction. My contention is that B assumed responsibility for S employees' COBRA rights when it acquired S, and the qualifying event occurred later, when the dependents lost coverage. The twins lost coverage when they effectively "aged off" the coverage at the time S's plan terminated, and notwithstanding the observation that they "never were actually in dependent status with B," I would argue that they were in dependent status with B for COBRA purposes, since B assumed responsibility for the COBRA rights of S's employees when B acquired S. The qualifying event is the loss of coverage due to the children aging off the coverage, with coverage broadly construed to include the group health plans of both S and B, consistent with the operation of the M&A COBRA regs, as I understand them. As such, the analogy of assuming the transaction never happened and S amended its plan to remove the age 30 dependent provision and changed it to age 26 appears apt, and there are "good arguments on both sides as to whether that's a COBRA QE," including in this situation where the transaction did happen. I don't think I am arguing here that B's purchase of all the S shares means that B assumed S's obligations under S's group insurance contract, so much as that B assumed COBRA responsibility for S's employees by virtue of the application of the M&A COBRA rules. As for the suggestion that the insurer of S's terminated plan might have an obligation to these dependents pursuant to the insurance contract, "including that contract's governing State insurance law," the carrier is not owning up to any such obligation, but I agree that the situation probably does call for a careful reading of the insurance contract. Thank you for the thoughtful comments!

Employee (E) of Seller (S), a small company with a group health plan covered by Florida mini-COBRA, has twins age 28 on the coverage, thanks to Florida law that requires allowing certain unmarried dependents to remain covered to age 30. Buyer (B) acquires all of the S stock in mid-July, 2023, and E continues working for S, with the twins remaining on the coverage, as before. S terminates its group health plan on July 31, and E, along with other S employees and their dependents, enrolls in B's group health plan effective August 1. Only the twins are left out in the cold. B's plan is subject to COBRA. Though operating in Florida, B's coverage is underwritten in Illinois, where it also does business. The policy does not extend coverage to dependents beyond age 26, consistent with Illinois law. B refuses to offer continuation coverage to the twins, who lost coverage when the S plan terminated, insisting that the carrier won't allow it because the twins are older than 26. In a phone conversation with the Florida Office of Insurance Regulation, I was informed that a company doing business in Florida but "headquartered" in another state does not have to follow Florida's coverage rules, at least insofar as allowing certain dependents to remain on the coverage to age 30. My contention is that federal law, in the form of COBRA, supersedes whatever state law may have to say on the subject, and that B became responsible to the twins under COBRA when B acquired S, followed by S's termination of its plan. The twins "aged off" of coverage at that time, thereby experiencing a COBRA qualifying event when they lost coverage due to B's policy failing to pick them up because of its lower age threshold for terminating dependent coverage. Sound reasonable? Even if B is unable to enroll the twins on its coverage, isn't B still under some obligation to them for failing to honor their COBRA rights? Perhaps B can help offset the cost of the twins obtaining Marketplace coverage, for example.

I appreciate the response, Former Esq. This is helpful!

B's plan is not SH.

Plan sponsor (S) of a calendar year 401(k) safe harbor match plan is acquired in a stock purchase by Buyer (B), which has its own 401(k) plan. S's plan is NOT terminated prior to closing of the transaction. All of S's employees will be hired by B upon closing, and will be immediately eligible to participate in B's plan. S will continue to exist as a subsidiary of B, though without employees, and will retain the EIN it has now. Can S's plan retain its safe harbor status for 2023, notwithstanding there will be no new money coming into the plan because S no longer has employees? I know S's plan can't terminate post-closing without running into a successor plan issue, but must it remain in existence until 12/31/2023, at which time it would merge with B's plan, to be able to preserve safe harbor status for 2023? Would merging the plans before year-end forfeit the S plan's safe harbor status for the year?

Thanks, EBECatty!

401(k) plan sponsor (S) is being acquired in a stock purchase by Buyer (B), which has its own 401(k) plan. S intends to terminate its plan before the stock purchase transaction closes. S's employees will be hired by B upon closing, and will be immediately eligible to participate in B's plan. S will continue to exist as a subsidiary of B, though without employees, and will retain the EIN it has now. The TPA for B's plan contends that the successor plan rule is violated thereby and proposes merging the plans upon or after closing instead. I believe that if S terminates its plan pre-closing, the successor plan rule is inapplicable, even if S survives under its own EIN as a subsidiary of B. Any thoughts on who has the better argument? I also believe that S can terminate this safe harbor match plan mid-year without advance notice to participants and still have safe harbor and top-heavy protection for the short plan year ending mid-2023 because S is being acquired in a Code Section 410(b)(6)(C) transaction. B's TPA says I'm wrong about that, too.

Thank you, Towanda, Former Esq. and Paul I, this is great information!

Start-up 401(k) plan for small employer (no more than 5 regular employees, not including interns) intends to have eligibility criteria for all contribution sources attainment of age 18 and completion of 6 months of service, elapsed time, with quarterly entry dates. The sponsor wants to exclude interns, but there is a concern that the exclusion may result in a coverage failure, given the number of interns and their potential duration of service. To avoid a coverage failure, can the plan provide for an exclusion of interns subject to a fail-safe that allows an intern to enter the plan effective the first day of the quarter coincident with or next following the intern's attainment of age 21 and completion of 12 months and 1,000 hours of service?

Thanks, Lou S. and CuseFan. Good points!

Can a participant who inherited an IRA from her late spouse roll over the IRA into the 401(k) plan in which she participates? The plan allows rollovers from all permissible sources. Can she then take a loan from these rolled over assets, given the plan allows loans from all sources?

Can the 3-year pre-normal retirement age catch-up apply to allow employer nonelective contributions in excess of the applicable dollar amount ($22,500 in 2023)?

Thanks, WCC! The Canadian corporation is acquiring the stock of the U.S. company that currently sponsors the plan. The Canadian company, which already has a wholly owned U.S. subsidiary, will become the plan sponsor. The U.S. company that is about to become a wholly owned subsidiary of the Canadian company will no longer be plan sponsor but will be a participating employer. The already existing U.S. subsidiary of the Canadian corporation will also be a participating employer. In addition, U.S.-based individuals who are employed directly by the Canadian corporation will be eligible to participate. If I understand your comment correctly, all of this should be okay, given the context of a stock acquisition by the Canadian corporation.

Existing U.S. company sponsors a 401(k) plan and is to be acquired by a Canadian corporation, which has an existing U.S. subsidiary with U.S.-based employees and U.S.-based employees of its own. Upon acquiring the U.S. company that sponsors the plan, the Canadian corporation intends to become the plan sponsor, having its own U.S.-based employees participate, as well as the employees of its existing U.S. subsidiary and the employees of its newly acquired U.S. company. Any problems with this concept? The Canadian corporation owns other entities in various countries outside the U.S., but no other U.S.-based organizations.

Peter, That seems a reasonable position; not as accommodative as hoped, but makes sense. Thanks!

Thanks, Belgarath and Peter Gulia! This information is helpful. The plan provides for nonelective employer contributions in an amount and allocation formula determined by the employer in its discretion. Contributions . . .er . . . credits are 100% immediately vested. As the plan doesn't establish any fixed employer nonelective contribution, and it does not appear that any participant has a fixed right to a 2022 employer nonelective contribution under an employment contract or other arrangement, it seems the character of the credit may just depend on how it is reported for tax purposes. For example, an amount credited today may be treated as a 2022 "deferral" if it is reported in box 12 of the participant's 2022 Form W-2 and it is treated as FICA wages earned in 2022. You think?

Can an employer nonelective contribution for 2022 be made in January, 2023 for a calendar year nongovernmental 457(b) plan? The contribution would be made to the account of a participant who contributed less than the applicable deferral limit in 2022.

Thanks, CuseFan. That it's a NQDC plan perhaps raises yet another question about making it retroactively effective. Is it a permitted deferral, even though it's employer nonelective contribution only, if based on compensation earned before the effective date? I agree, FICA is payable at vesting.

Can a 6/30 fiscal year tax-exempt plan sponsor adopt a calendar year nongovernmental 457(b) plan today, having an effective date of 1/1/2022? The plan will have no employee elective deferrals, so the only contributions will be employer nonelective contributions. The idea is for the employer to be able to contribute the maximum of $20,500 for 2022 based on full-year compensation of eligible employees by providing for either a retroactive 1/1/2022 entry date or a current entry date while including pre-participation compensation since the beginning of the calendar year. Relatedly, must employer nonelective contributions for 2022 be made by 12/31/2022?

Thanks, Luke! I think we'd best play it safe and make the plan effective December 1 instead of November 15. Deferral elections made in November would then not be effective before the first payroll in December.

Thanks, BtS and Luke, To be more specific, my concern relates to the rule requiring that a deferral election under a 457(b) plan must be in place by the last day of the month prior to the month in which the deferral is to become operative. So, ordinarily, a deferral election filed in November could not take effect before December. My question concerns whether, in the case of a new plan, there is an exception to this rule that would allow for deferral elections to be filed in the first half of November to be effective in the second half of November.

Can a new nongovernmental 457(b) plan becoming effective 11/15/2022 allow employees to make initial deferral elections after 10/31/2022, but before the plan effective date, that will be effective to defer pay beginning 11/15/2022? These are not new employees.

It doesn't appear that the funds can be returned to the employer under mistake of fact. I think it appropriate to treat the contribution as an excess 415(c) amount, since the 415 limit is the lesser of (i) $58,000 (in 2021) or (ii) 100% of the Participant's compensation, which was zero. The Participant will forfeit the amount contributed and it will be transferred to an unallocated account under the Plan to be used to reduce employer contributions in the current year and, if applicable, subsequent years.