Plan Doc

Thanks for these comments, Peter and Lou. I will look further into the circumstances here, including whether there may be cause to treat this as a mistake of fact.

Employer contributed $10,000 in January, 2022 as a 12/31/2021 elective deferral to the account of the business owner's wife, who is a Participant, but had no compensation in 2021. Should/can the contribution, adjusted for earnings/losses be returned to the employer? Is there any way the funds can stay in the Plan, if not in the Participant's account?

Seller of assets terminated its 401(k) plan the day before the asset sale to Buyer. In connection with the transaction, some Seller employees became employed by Buyer, while others remained employed by Seller. The transaction also created an affiliated service group comprising Buyer and Seller. Employees of Seller hired by Buyer and employees remaining with Seller will all participate in Buyer's 401(k) plan, with Seller becoming an adopting employer of Buyer's plan. Can Seller distribute the accounts under its terminated plan or is this a violation of the successor plan rule?

An employer sponsors a nonqualified deferred compensation plan, which it would like to terminate before year-end and begin paying out beginning after 12 months and ending within 24 months in accordance with the plan termination rules. Individual agreements with each of the 3 participants provide for a specified dollar amount to be paid to the participant every year for 10 years beginning when the participant attains age 62. The specified dollar amount will be reduced by 5% in connection with the termination, a reduction all participants are agreeable to, and will sign releases concerning. Is this an exception to the otherwise applicable prohibition against applying a "haircut" to accelerate payment? Also, can the timing of payouts over the 12 - 24 month post-termination period vary among the 3 participants (e.g., participant 1 gets a lump sum distribution on 12/31/2022, participant 2 gets a lump sum distribution November 30, 2023 and participant 3 gets a partial distribution on 12/31/2022 and the balance paid on November 30, 2023)?

An ESOP sponsor is controlled by husband and wife, who are direct shareholders in the sponsor and are also the ESOP's trustees. Is there a prohibited transaction or fiduciary breach if the ESOP sponsor leases or purchases property from a company that is in a controlled group with the ESOP sponsor? The ESOP is not a party to the lease or purchase transaction, but it seems there is opportunity for abuse, for example, if the ESOP sponsor pays more than fair market value to lease or purchase the property. The value of the plan sponsor is thereby diminished, to the detriment of ESOP participants, while the controlled group member is unjustly enriched. Would an independent valuation of the leasehold interest or of the property offer protection against any prohibited transaction or fiduciary breach concerns?

Good, helpful comments, all. Thank you!

Thanks, C. B. I believe that may be the intent and agree that this is not an impermissible plan design. I just question whether it's safe harbor and gets them out of testing, even for ADP, much less ACP.

It appears that the “safe harbor” contribution, 100% of deferrals up to 4% of compensation, available only to NHCEs, is intended in the first instance to satisfy ADP. Also, this contribution formula is consistent with the limitations applicable to the ACP safe harbor, since the match does not apply to deferrals in excess of 6% of compensation or provide for a greater level of match at higher levels of deferrals. The discretionary match appears under a provision in the adoption agreement describing additional matching contributions that purportedly satisfy the ACP safe harbor. To that end, this additional discretionary match is limited in application to deferrals not in excess of 6% of compensation and it cannot total more than 4% of compensation. Also, no allocation condition, such as a last day or minimum hours of service requirement, applies to the discretionary match, which it seems should wrap up the ACP safe harbor neatly with a bow. So far, so good, and we are protected by both ADP and ACP safe harbors, or so it seems. That is, until we get to the part of the adoption agreement for describing “special rules,” where appears the following seemingly innocuous typewritten entry: “Discretionary Match excludes Nonhighly Compensated Employees. Those employees are matched using the Enhanced Safe Harbor Matching Contributions.” Whether limiting the allocation of discretionary matches to HCEs is or isn’t formally described as an allocation condition, inasmuch as it isn’t service-based, it seems nonetheless problematic for our safe harbors. Please correct me if I’m wrong, but I believe from Luke’s comment that he is inclined to hold that this plan design runs afoul of the ACP safe harbor and so must undergo ACP testing. Must it also undergo testing for ADP?

I'm looking at a plan that provides for a safe harbor match of 100% of deferrals up to 4% of compensation, available only to NHCEs. The plan also has a discretionary match, which excludes NHCEs. Consistent with the otherwise applicable requirements for safe harbor status, the plan states that matching contributions will only apply with respect to deferrals that do not exceed 6% of plan compensation and to the extent that any matching contribution formula is discretionary, the total amount of discretionary matching contributions will not exceed 4% of plan compensation. However, I am concerned about the exclusion of NHCEs from the discretionary match. It seems that this plan design might negate any reliance on the safe harbor. Any thoughts? Does the exclusion of HCEs from the safe harbor contribution make any difference insofar as upholding the plan's safe harbor status?

Thanks, Bird. I'm inclined to think so too, but I have a TPA telling me that the RMD amounts for the first distribution calendar year, which was the year before the participant died, and for the following year, the year of participant's death, though never distributed, belong to the participant's estate rather than the designated beneficiary. Anyone familiar with any authority on this question?

Participant turned 70-1/2 in 2014 and had a required beginning date of April 1, 2015. She died April 4, 2015, 3 days after her RBD, without taking any RMDs. An RMD should also have been made for 2015, the year of the participant's death, but was not. The participant's account remains completely undistributed because no one was paying attention to it until now, and there is a designated beneficiary. Can the entire account be paid to the designated beneficiary or must the RMD amounts for the 2014 and/or 2015 distribution calendar years be paid to the participant's estate? If the estate, any idea of how, if at all, to adjust for earnings, etc.? Also, it has been suggested that the 2014 and 2015 RMDs be paid to the estate and leave the estate to file Form 5329 and ask for abatement of penalties with respect to those amounts. But we also have missed RMDs for 2016 - 2019. Regardless of whether the estate is entitled to part of the account, wouldn't it make more sense, and have a better chance of success, if the plan were to file under VCP both to correct the operational failures due to the missed RMDs and to obtain relief from RMD penalties?

Thanks, BG. Oh, I've put everything in writing, including that they have 6 years of missed RMDs subject to 50% penalty, qualification failures that need to be corrected through EPCRS (and probably VCP), and that plan fiduciaries may be liable for breach of fiduciary duty for having neglected this account, not only as of the required beginning date, when P was still alive, but for another 5 years after she died, the first few years of which, at least, the designated beneficiary's whereabouts were readily ascertainable. BTW, I am an ERISA attorney, or at least I play one at the office. But the client has found someone they'd rather listen to, which I get. In their minds, distributing the account to an IRA solves everything. That's a lot more appealing than my recommendation that we go through VCP and ask IRS to waive RMD penalties and that the plan's tax-qualified status be maintained. That's why I posed the question, the premise of which is that no prospective IRA custodian would want to get anywhere near this account! Anyone with a take on that assumption?

Thank you, Luke. After recommending VCP to the client/plan sponsor, they came back to me two weeks later with a "solution" of their own. They are sending a certified letter to the designated beneficiary (DB) at her last known address. Whether she will get the letter, much less respond to it, is doubtful. The DB is a 70-year-old, possibly suffering from dementia, who lost her home at assessment sale a year ago while a $150,000 retirement plan account, which she should have received five years ago when P, her sister, died, remains to this day undistributed. Nevertheless, the client now asserts that "we have followed the guidelines for locating the 'lost participant/beneficiary' with the mailing of the letter." My sense is that the mailing of the letter is the very least of what they need to be doing. Given the size of the account, my advice was to engage a commercial locator service to track down the whereabouts of the DB, something the plan sponsor has shown no enthusiasm for doing, as they are convinced that mailing a certified letter, whether or not it is received, is all they need to do. Indeed, they have informed me that their intent, should the DB fail to reply to the letter, is to distribute the account to an IRA in the DB's name. While the plan provides for distribution to an IRA of an account that remains unpaid solely by reason of the inability of the plan administrator to ascertain the whereabouts of a participant or beneficiary, I would think that a more diligent search for the beneficiary must first be made. I am also questioning whether any IRA custodian would want to come within 10 miles of this situation. Recall that RMDs from this account should have begun in 2015 (for the 2014 distribution calendar year) before P died, and the DB should have been receiving RMDs since 2016, the year after P's death. As such, it is arguable whether the account remains unpaid solely by reason of the plan administrator's inability to ascertain the whereabouts of the participant or beneficiary. P's whereabouts were known to the plan administrator at the time she should have started receiving RMDs, and the DB's whereabouts, if not known, were at least readily ascertainable at the time of P's death in 2015. The client appears convinced that six years of missed RMDs (2014 - 2019) and associated penalties, and the plan qualification issues arising from the failure to distribute RMDs, will all disappear with distribution of the account to an IRA. I think otherwise, and that whether the DB comes forward to claim the account or the account is distributed to an IRA in her name, we still have missed RMD penalties and plan qualification failures to address. That said, the client appears to be getting advice from a third party administrator whose approach to the situation is more to their liking than mine. I'm thinking at this point that the only thing that might bring them to their senses is that they try to distribute the account to an IRA and won't be able to find a custodian that will accept it. Am I right to think that no prospective IRA custodian will want to get anywhere near this account? I appreciate any input anyone has to offer.

P born February 1944, retired 2012 and died early April, 2015. Seems, therefore, RBD is April 1, 2015, just before DoD. No distributions were made prior to DoD or since. Had P died a week earlier, in March instead of April, I believe plan would have had until 12/31/2021 to distribute the entire account (end of year containing 5-year anniversary of DoD + 1 for 2020 RMD waiver). However, because P died after RBD, I fear we are looking instead at missed RMDs for the 2014 and 2015 distribution calendar years (the year P turned 70-1/2 and the year P died, respectively), and for 2016 - 2019, because distributions to the designated beneficiary (DB) have not begun. Now that these problems have surfaced, it may yet be a challenge to get a distribution to the DB, currently age 70, whose whereabouts are unknown and who reportedly may be suffering under some incapacity and might require appointment of a guardian. I believe we at least don't have a 2020 RMD to worry about, thanks to the covid relief legislation. Does this sound like the right analysis so far, even though the plan says that if the Participant dies before the date distributions begin, the five-year anniversary year payout is available? P did in fact die before distributions began. P died after the RBD, is all, never having received a distribution. If indeed, this is a penalty situation, and a qualification failure, besides, what is the best approach to fix? Six years of missed RMDs from a $150,000 plan account may not be an "insignificant failure" eligible for self-correction. Is VCP a viable approach to seek both plan correction and penalty relief? Is penalty relief more likely available through VCP than through a Form 5329 filing? It's not even clear who would file Form 5329, since P's estate has no interest in the account and we don't even know if DB should, or even can, file, or if we can locate her. What if the reasons for missed RMDs reflect an absence of sound plan practices and procedures, or even a lack of diligence on the part of plan fiduciaries? Will IRS collect penalties from the account and require the plan sponsor make the account whole as part of any VCP correction? Or will it be left to the DB or her heirs to file a suit for breach of fiduciary duty to recover the penalty amounts. Thanks for any input on these or related issues or solutions you might think of!