EBP

Are you asking how to determine the amount of each missed deferral or how to correct missed deferrals? When you say this includes on the employer side, do you mean employer contributions (not deferrals)? If you're trying to determine missed deferrals, you need to start by determining the amount of deferrals that should have come out of each paycheck for each individual participant, the date the deferrals should have come out, and the date the deferrals did come out. You can't calculate on an overall basis. (I'm not sure what you mean by that.) Also, what other contingencies are you referring to? Are you the employer or a recordkeeper? Lots of unanswered questions here so it's hard to give you guidance. For how to correct, check EPCRS (Rev. Proc. 2021-30). It gives specific correction methods for the situations here.

They may be exempt, but consider whether they might want to get coverage anyway. No one ever thinks their co-owner will be dishonest, but what if they are? To me, it's a small price to pay for some reassurance.

I recently evaluated a similar situation for a client who had a terminally ill participant under age 59-1/2 who was on leave. Here is part of my answer: "As far as the 10% early withdrawal penalty because he’s not 59-1/2 yet, SECURE 2.0 does contain an exception to the penalty on early distributions for individuals with a terminal illness. A physician must certify that the employee has a terminal illness on or before the date the employee takes a distribution. Further guidance is needed on what type of evidence is sufficient for the plan administrator. The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification. (Code §101(g)(4)(A)) SECURE 2.0 says that 84 months is substituted for 24 months in this case. It sounds like [recordkeeper] is not yet set up for this provision of SECURE 2.0, which is not surprising. There are so many moving parts to the changes in SECURE 2.0 for recordkeepers in particular that they’re scrambling right now. And, as with this provision, we all await further guidance on many provisions. Because the 10% early withdrawal tax is assessed to the individual and does not affect the distribution amount, there is some time for [recordkeeper] to figure out how to report this. [Recordkeeper] would withhold the normal 20% now when it distributes. When the participant files his taxes, he would pay the 10% tax penalty at that time. I assume that by tax season next year, [recordkeeper] will be able to code his 1099-R with a special code indicating a physician certified his terminal illness and there will be a Schedule to attach or someplace to report it on the Form 1040, but that is unknown at this time. Here are two other exceptions to the 10% early withdrawal penalty that could work in this participant’s case: The participant is totally and permanently disabled. The employee separates from service during or after the year the employee reaches age 55." In my client's case, they looked into the requirements for life insurance and other benefits to see if they would be adversely affected by terminating the participant. They determined that his benefits would not be adversely affected, so they opted to terminate him and presumably, he used the age 55 exemption to avoid the 10% early withdrawal penalty. That was a cleaner approach than going with the SECURE 2.0 provision for them.

No, this is not industry standard. With a daily valued platform, the prior method should not be that hard to calculate. And unfortunately, a DRO is not always submitted to a plan administrator shortly after the date of divorce. We've, on occasion, gotten orders many years after the divorce to qualify. Then what? I appreciate Peter Guilia's practical remarks. We often advise clients to check with the recordkeeper before implementing certain plan provisions to minimize possible operational failures, but we don't like it. This is another area where recordkeepers force plans into their pre-determined computer programming boxes because it's easier for them. It's also in line with the IRS approach over the last 20 years to force the standardization of all plans. I miss the good old days where plan design could be tailored to the sponsor's needs by legal counsel (limited only by the law), recordkeepers could provide an individualized approach customized to the plan and the sponsor's needs, along with personal customer service, and accountants could advise on the tax aspects. I guess I'm showing my age.

Yes, if you want to be exempt from testing, the eligibility requirements need to be the same.

Easy correction under EPCRS by amending plan retroactively to permit early participation for the one affected employee: Rev. Proc. 2021-30, App. B, section 2.07 - (4) Early Inclusion of Otherwise Eligible Employee Failure (a) Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan's minimum age or service requirements, or (ii) has completed the plan's minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan's actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif § 401(a) at the time it is adopted, (ii) the amendment would have satisfied https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees. For a defined benefit plan, a contribution may have to be made to the plan for a correction that is accomplished through a plan amendment if the plan is subject to the requirements of https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif § 436(c) at the time of the amendment, as described in https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif section 6.02(4)(e)(ii) Document Title:Rev. Proc. 2021-30, 2021-31 IRB 172 -- IRC Sec(s). 401; 403; 408, 07/16/2021 Checkpoint Source:Revenue Procedures (1955 - Present) (RIA) © 2023 Thomson Reuters/Tax & Accounting. All Rights Reserved.

Assuming the grown children are the beneficiaries and that this is a defined contribution plan, they would have the right as beneficiaries to elect a rollover to an IRA(s) at any time in most, if not all, plans (RTFD). Any RMDs owed would have to be taken first. After rollover to an IRA(s), the RMD issues are the responsibility of the beneficiaries.

Hire ERISA counsel to guide the process and keep them on track for the future.

Thanks so much, Brian! That's very helpful!

It's the middle of the night and I'm answering partly off the top of my head, which is always a bit dangerous. Form 5330 instructions for Schedule C, line 1, include the following: "Transactions involving the use of money...will be treated as a new prohibited transaction on the first day of each succeeding tax year or part of a tax year that is within the taxable period." Form 5330 instructions for Schedule C, line 2, include the following: "A disqualified person who engages in a prohibited transaction must file a separate Form 5330 to report the excise tax due under section 4975 for each tax year." Accordingly, I believe you should file a 2021 Form 5330 and a 2022 Form 5330 and that you cannot do a combined reporting. You don't say what the date of correction is, but I'm assuming it was 12/31/22. That means you had two PTs - one in 2021 and one in 2022.* The tax due with the Form 5330 is only the tax, not the interest and penalties due for the delinquent filing of the Form 5330. Again, from the instructions: "Any interest and penalties imposed for the delinquent filing of Form 5330 and the delinquent payment of the excise tax...will be billed separately to the disqualified person." It sounds to me like the "late letter" may have actually been the normal assessment of interest and penalties that are billed separately by the IRS after the filing and payment of the excise tax. When we do Forms 5330 for late payments, we advise our clients that they'll likely receive an additional bill from the IRS at a later date of a miniscule amount. Sometimes they do and sometimes they don't. *The 2021 Form 5330 takes into account the earnings on the 2021 late deposits from the date the deposit should have been made to 12/31/21. The 2022 Form 5330 takes into account that amount reported on the 2021 Form 5330, plus the earnings on the 2021 late deposits from 1/1/22 - 12/31/22 (assuming that's the date of correction) - two separate transactions listed in #2 on Schedule C.

Brian - Very helpful summary. Do you happen to know how Medicare coverage obtained at age 61 for ESRD affects HSA eligibility if the person qualifying for Medicare is covered under a spouse's HDHP (family coverage)? I believe the spouse could continue to make maximum HSA contributions under the spouse's plan, correct? Could the person qualifying for Medicare continue to make a $1,000 catchup contribution to his own HSA? Thanks!

Just went through an IRS audit for a client. Had to point out (more than once) that the amount of the contributions for the year matched the Form 5500, matched the trust deposit, and matched the company's deduction, etc. Two years down the road when this client gets audited, you will not be able to just give copies of the contribution check, contribution deposit, and shoe corresponding amounts on the Form 5500 and business tax return. As others have pointed out, it's not worth the time to explain this later. If everything matches up, no explanation is needed. (And I might add that the agent we had seemed to not be familiar with some basic retirement plan knowledge despite working as an IRS auditor for 15 years. I would not have wanted to explain this situation.)

Agreed.

Side note - one of our attorneys always wanted us to spell out the amount (one hundred ten dollars vs $110) in the hopes that it wouldn't jump out as much and entice a participant to file suit. In recent years, another of our attorneys uses this language instead: "In such a case, the court may require the plan administrator to provide the materials and pay you a penalty up to a certain amount per day until you receive the materials, unless..." Nonetheless, in 35 years of practicing benefits, I've never personally seen a case where this has happened. Of course, we tell all our clients that they need to provide the SPD promptly if requested.

Perhaps. But I'd bet that IRS wants to see it anyway. And is it possible that even if single-sum distributions are provided to everyone, part of someone's distribution could need to be classified as an RMD ineligible for rollover? We would opt for the more conservative approach of not taking the chance that there could be an RMD due in the final plan year and not fielding questions from the IRS as to why a required amendment was not adopted.

If terminating in 2023, you would need to amend for required provisions and any chosen optional provisions of SECURE 1.0 and CARES, if not already amended. Also, for any required provisions of SECURE 2.0 that are effective before the termination date, and any chosen optional provisions that are effective before the termination date.

I don't have any ideas for validating a deceased participant's signature other than those already suggested, but this situation is why we include language in our plan document that requires the beneficiary designation to be received by the plan administrator during the participant's lifetime to be valid.

Is this a 401(k) plan? If so, you need to look back to the employee's records since the company began or back to the effective date of the plan, if later, to see if the employee ever made deferrals. If yes, the employee may become a participant immediately. The rule of parity only applies to nonvested participants so isn't really relevant in a 401(k) plan. In general, an employer must keep employment records back to whenever is needed to determine an employee's benefit. See ERISA section 209, which states that an employer must maintain benefit records sufficient to determine the benefits due or that may become due to its employees. So practically speaking, that's back to the beginning of the plan. Of course, real life is another matter, but speaking from experience, benefit claims that come up after an employer has lost, archived, or otherwise no longer has access to employee records, and that go back many years are extremely difficult to deal with. (The ones where the original company doesn't exist anymore or has been bought and sold a few times can be particularly challenging.)

In my opinion, you need to have more to go on than "the market was down." Have the client or investment institution provide you with the rate of interest those participants would have received had the matching contributions been invested in their accounts (assuming participants give investment direction, those rates would likely be different for each participant). It's possible (although maybe not likely) that one participant was invested in a very conservative investment vehicle and had a small positive return. If all of those accounts had investment losses, the safest thing to do may be to not allocate interest on the late matching contributions (rather than reducing the matching contributions for the loss, although there may be validity to that argument). There's no requirement to allocate interest if there is none. We have done a few corrections where we did not include interest because of negative returns during the period of failure. We always document an EPCRS correction with a memo to the file that describes the failure; gives a detailed description of what we did to correct the failure, including the process, calculations, and other considerations, if any; and recites which sections of EPCRS we relied on in making the correction. And we attach any pertinent calculations or documentation (such as something showing what the interest rates were for each person). This is very helpful for the client to have in case of audit so they can show that they appropriately fixed an operational failure. It's also helpful in cases where there are personnel changes in a company and the new people are trying to figure out what their predecessors did.

And if the plan was first in existence no earlier than January 1 of the 10th calendar year preceding the year in which the application is filed, you may be exempt from paying a user fee if you meet the eligible employer requirements under Exemption From User Fee in the instructions to the Form 8717.

I agree with Lou S. We have often had clients adopt interim amendments after the plans were terminated (if they were still adopted before the amendment deadline). In most cases, it was because we didn't yet have all the guidance we needed or wanted to adequately draft the interim amendment at the time of termination. I'm talking within the same year as the termination. (We would not terminate a plan and then adopt an interim amendment two years later.) We always make sure to warn the plan sponsor that they must adopt the amendment and that it will be after the termination date so that they understand the importance of signing the amendment when we send it later. If you submit a termination application to IRS, they may require the plan sponsor to adopt an amendment post-termination to bring it up to date with current law provisions that they don't think have been included so clearly a plan can be amended after the termination date. I do not think a VCP application is necessary.

It's always safer to err on the side of the participant, especially since in most cases, the losses will be minimal and therefore the cost to the employer also minimal. Generally, it's a small price to pay to appease the participant and the IRS. But maybe your facts are different in this case. I would think that in general it would be easier to do an EPCRS amendment to let those employees in early and not worry about returning money or any investment losses. Just amend it and leave everything else alone. Much simpler and less time-consuming for everyone.

In order to use the safe harbor correction method in EPCRS Appendix A, ALL of the following conditions must be satisfied (conditions greatly abbreviated and simplified): 1. correct deferrals begin 2. notice is given 3. corrective allocations are made Since the participant has terminated employment, you can't satisfy #1, which means you can't satisfy #2 either. Since you don't satisfy all of the conditions, you can't use the safe harbor correction method.

Yes

This is a question every cycle. For the last restatement cycle, IRS allowed you to use a retroactive effective date OR the the first day of the plan year in which the restatement was signed. (We were told that directly by the volume submitter coordinators.) That was a little confusing. We mostly used the latter except for a couple of particular cases where there was a compelling reason to go back six years. When we had our nonstandardized plan approved by IRS for this cycle, they specifically said that the restatement effective date could NOT be earlier than the first day of the plan year in which the restatement was signed. In fact, we were required to add that as a parameter in the document. So, for calendar year plans, the ones we restated last year were effective 1/1/21 and the ones we restated this year were effective 1/1/22. We've found that for changes in the document that were previously covered by an interim amendment, there's no need for a special effective date in the restatement. For clients who are adopting new provisions in 2022, we add the effective date to the pre-approved language. IRS has said that adding an effective date to a provision is not considered to be a modification to the pre-approved language. For example, we have a client on a calendar year plan who is adding Roth deferrals effective 7/1/22. The restatement is effective 1/1/22 but we inserted a 7/1/22 effective date for the Roth deferral provisions.