FORMER ESQ.

Thank you for this information. My comment still stands, which is that the estate is the designated beneficiary, and amounts from the plan can only be distributed to the estate, not an IRA. The estate can elect to take the whole account balance or receive the RMDs over time pursuant to the RMD rules that apply. In either case, amounts distributed are taxable income to the estate (or if applicable to the beneficiary).

I am assuming that the plan document provides that in the event the participant dies without a designated beneficiary and is not married, the designated beneficiary is the estate. The estate is not an individual or an eligible rollover recipient. So, this is not an inherited IRA situation. Amounts cannot be distributed to an IRA account. They must be distributed to his estate. The RMD rules apply. Specifically, the "at least as rapidly" rule would apply in this case. Amounts received by the estate are taxable to the estate (or beneficiaries, if passed through).

That's correct--11(g) amendments can only be used to fix coverage, non-discrimination and minimum participation failures.

Unfortunately, the vendor is correct and I wish the IRS would clarify this issue because it does cause a great deal of confusion. Your situation is an excess allocation. ECPRS treats excess allocations differently than excess amounts for purposes of the $250 rule. Excess amounts are generally ADP/ACP refunds, excess deferrals, etc...these are amounts that are normally corrected by distribution. The IRS says, okay, if it is normally corrected by distribution and the amount is less than 250, you don't need to distribute. However, in your situation, you have an improper application of the definition of compensation (that is an operational failure) that is causing an excess allocation. The normal correction is not by distributing this amount to the participant. Rather it is forfeiture or re-allocation to other participants. The $250 rule does not apply in such case.

Wrong. It would technically not be a PT if rolled over to IRA, but it would still be an operational failure.

Not automatically a PT. It depends on whether the $250K withdrawal was rolled over to his IRA/other qualified plan or if he took a distribution as cash or segregated it into his own personal account. The former is arguably not a PT, while the latter is absolutely a PT.

It is allowed under certain circumstances. That is why I mentioned IRS Notice 2016-16, Section D4.

That's great to know. But, they have not been operating the plan using a 415 definition, so there is still the possible need to go back and make corrective contributions.

I assume both plans have a 12/31 plan year end. If so, unless you are able to permissively aggregate the plans under 1.410(b)-7(d)(5) and, therefore, treat the plan merger as if it had occured on the first day of the plan year, the coverge testing for the seller's plan prior to the plan merger must be conducted by including all otherwise eligible employees in the controlled group. This is because, according to the fact pattern, the 410(b) transition rule does not apply.

Is the change really retroactive for the entire plan year under D4 of IRS Notice 2016-16 if the matching contribution is trued-up for a portion of the year and then based on payroll by payroll for the remaining portion?

Many retirement plans’ governing documents include a definition or provision that a worker is not an employee for the retirement plan unless the service recipient classifies the worker as an employee. That can be so even if the service recipient’s classification of a worker as not an employee is contrary to all public laws. If you have an owner only plan and the DOL has stated for unemployment insurance purposes your independent contractor is really an "employee" beginning in 2023, you are suggesting that one possible option is to look at the terms of the plan document to determine if there is either a Microsoft carveout or if there is a plan document definition of "employee" or employee classification would somehow preclude including this employee in the plan? No matter what the plan document says, if this employer has agreed to the DOL's position that the service provider is an employee (as evidenced by the fact that they agreed to pay back-taxes for employment and report him on a W-2 on a going forward basis) that is pretty strong evidence that the service provider has been since at least 2023, a common law employee under state law. The plan will fail 410(b) coverage by excluding him from the plan.

No. I think you are using a corrected reporting requirement (i.e., on the Form W-2 vs 1099) mid-2025 as the key to when the service provider's classification changed from independent contractor to employee. But, it seems based on what you have stated, the DOL took the position that the service provider has in fact been an "employee" since 2023. The 2023 date is the date the service provider should be treated as an employee for purposes of the retirement plan. I would imagine an exception if the DOL explicitly states that the employer may treat the service provider as an employee on a going forward basis (for the remainder of 2025). I doubt the DOL would offer that concession.

Interesting fact pattern. I'm not sure that one can just ignore a plan document that is intended to be a safe-harbor by stating "oh well," we used a non 414(s) compliant compensation definition, so it's not really a safe harbor, and we will run ADP/ACP. That would constitute an operational failure--not running the plan as a safe-harbor plan. The correction, it would seem to be, is to retroactively amend the plan document to a 414(s) definition that you know will meet a safe-harbor compensation definition (e.g., W-2) and therefore SH compliant, and then make corrective contributions for any potential missed deferral opportunities and safe-harbor contributions under EPCRS. Of course, your idea of just moving on with the ADP/ACP for 2025 would likely be less expensive and for the record, I prefer it. But, it just doesn't feel "right."

Argue "mistake of fact" under Rev. Rul. 91-4 interpreting ERISA Section 403(c)(2)(A): The schedule C income was calculated incorrectly (i.e., there was a mathematical error) which caused the 27K contribution in error. Return the 27k minus the $600 (or whatever amount they can defer from compensation under the plan). Need more facts to paint a full picture, but this would be my first line of defense.

Lots of moving parts here. In summary, SH NEC and PS contributions were allocated for 2021 PY, and presumably a corresponding 404 deduction was taken for 2021, but the contributions have yet to be made. At this point, the only way to correct the late contributions is under EPCRS. The corrective contributions plus interest will be made. Question is whether the correction would be an annual addition for 2021, 2022, or 2023 (the year of correction). Under the 1.415(c) Regulations, if we assume that the employer's 2021 income taxes (with extensions) is due on October 15, 2022, then a contribution made by November 15, 2022 would relate to the 2021 limitation year. Likewise, a contribution made by November 15, 2023 would relate to the 2022 limitation year. There is no "double counting" of annual additions that I see in the 1.415 Treasury Regulations. EPCRS, however, says that the correction is an annual addition for the limitation year to which the "corrective allocation relates"--2021 no matter when the correction is actually made. Yes, EPCRS is giving you a freebie. But because you are correcting under EPCRS, its an annual addition for 2021.

I think you are on the right track. If the Plan will fail 410(b) for 2023 because it excludes Company A employees, the Plan should be retroactively amended to 1/1/2023 (not 7/2/2023) to have A adopt the Plan. This is because you are giving the Company A employees a corrective contribution (for a missed deferral opportunity) for the period 1/1/2023 to 7/1/2023. You cannot give a corrective contribution to employees without first making them participants, and they cannot participate unless Company A has adopted the plan. To answer your second question, all Company A employees who would otherwise be eligible to receive a SH NEC under the Plan if Company A had adopted the Plan as of 1/1/2023 should be included in your corrective contribution (missed deferral opportunity). Hope this helps.

The only testing issue I see is determining whether the timing of the amendment is discriminatory under 1.401(a)(4). I don't see this as an amendment to the formula that changes matching contributions, so I think Notice 2016-16 is not an issue.

BG5150: In my experience dealing with the DOL, they would look at this through the following lens: The ERISA fiduciary (Plan Administrator) "messed up" in this case--late contributions, etc... Plan participants should not have to "pay" for the fiduciary's mistake. In their view, this would not be a reasonable expense of plan administration. Others may have a different view, but this is mine. The answer is no.

The calculation of interest for DFVC filings is a settlor expense. How would this be different?

You are correct that the interest itself is a settlor expense, but so is the cost of calculating the interest (late contributions and missed deferral opportunity) and preparing the 5330. Not payable by plan assets.

Plan Doc: Thank you for your response, and my apology for the typo above: It should read "type" as opposed to "time", but I think you figured it out. Moving on to your specific question: Under your factual scenario (no plan termination but reduction or suspension of safe harbor matching contributions), I believe that 1.401(k)-3(g) provides your answer. The reduction or suspension is permissible if S is operating at an economic loss or the more likely scenario (the SH notice for S' plan had "maybe not" language). If so and assuming that the other requirements of 3(g) are met, such as notice, etc... the S plan would still have to pass the ADP test for that year. So, in the sense that you will not be able to preserve SH status for 2023.

Is B's plan a SH plan of the same time as S's plan?

It's prospective only. The 2022 unpaid RMD would be subject to the 50% excise, not the 25% excise tax or 10% excise tax.

I think consulting with an attorney on this specific issue is a good idea. Myself excluded, you can contact me directly, if you would like some recommendations based on where you are located. This is because I know of other ERISA attorneys around the country who have looked into this before in detail.

AlbanyConsultant: Non-union pay to union employees is surprisingly, in my experience, something that happens frequently. It presents an additional compliance challenge as Paul I alluded to: Mainly, to the extent these employees are receiving non-union pay, they cannot be excluded from the non-union plan's 410(b) testing, unless another plan exception applies (i.e., 410(b)'s statutory exclusions). In practice, this means that you will need to convert their non-union pay into hours of service for purposes of determining eligibility, benefits, etc... I have not found much guidance on how to do this, but one possible method is below: Example: if total W-2 compensation (definition of compensation under the plan) is $100,000, and the non-union portion is only $5,000, then about 5% of their hours of service (however that is measured under the plan) would be counted as hours of service for eligibility/benefits/vesting under the non-union portion of the plan. I am sure there are other methods, but the above is purely on my experience.