Cassopy

What is your basis for looking at New York state law to determine who is a beneficiary under an ERISA 403(b) plan? Unless the plan document provides that beneficiary designations are subject to state law, the impact of divorce on a beneficiary designation would be determined under federal law and the terms of the plan...

The LTPT rule trumps the 20-hour exclusion rule and the student exclusion rule thanks to SECURE 2.0's change to the last sentence of Section 403(b)(12)(A). I agree that it is easier not impose a service requirement on elective deferrals. I will add a somewhat related question: Has anyone seen anything about how the LTPT rule applies to employers with more than one ERISA 403(b) plan? I don't see an exception in the new ERISA § 202(c) that allows a 403(b) plan to satisfy the LTPT rule for employees who are eligible to participation in another employer 403(b), 457(b), or 401(k) plan. Without such an exception, this could require major changes for employers with more than one 403(b) plan. Thoughts? Am I missing something (I hope)?

What does the plan document say? If there is a QJSA/QPSA requirement that applies to the benefit, then the spouse at the the time of death has a right to at least 50% of the account if distributions hadn't yet commenced. Whether any non-QPSA portion is payable to the prior spouse depends on what the plan says about non-spouse beneficiary designations (state laws on this are generally preempted and don't apply unless the plan says otherwise). If distributions had commenced, then the death benefits go to the spouse unless the spouse consented to payment to another beneficiary. If there is no QJSA/QPSA requirement, then 100% of the death benefit would be payable to the current spouse under ERISA section 205 unless that spouse consented to naming a different beneficiary. Whether the prior designation was revoked upon divorce is moot.

I have a few clients who provide an unfunded death benefit for their retired employees. It is a relatively small amount ($2,000-3,000), but not small enough to qualify for the remembrance fund exception under ERISA. I am curious how other handle the 5500 filings for these benefits. These are larger employers, so there's a high participant count. Do you typically see these programs having their own filing, or wrapped with other welfare benefits? Does the large participant count create issues? (Since it is difficult to track the number of retirees at any given time and enrollment is not required to be covered.)

Thanks EBECatty, that is the type commentary I am seeing as well. And I misspoke earlier, the footnote I quoted above is from the final regulations to Section 401(a)(9) that were issued in November 2020, not the proposed regs. See Footnote #2 on page 2: https://www.govinfo.gov/content/pkg/FR-2020-11-12/pdf/2020-24723.pdf (85 Fed. Reg. 72473) I do wonder why the Feb 2022 proposed 401(a)(9) regs didn't include the same footnote...instead, they include a discussion of eligible retirement plans at Footnote #1 without expressly addressing the applicability of Section 401(a)(9)(H), which is maybe is a step toward backtracking from the position in Footnote #2 of the Nov 2020 final 401(a)(9) regs...? Either way, notwithstanding the not so great drafting of Section 401(a)(9)(H)(vi), I am reticent at this point to recommend adopting any 457(b) plan amendments that include the new 401(a)(9)(H) provisions in the absence of any indication/guidance from Treasury that negates Footnote #2.

Are the amendments that you are seeing including the changes under Section 401 of the SECURE Act (re beneficiary RMDs)? I have noticed that a few of the SECURE Act amendments include language incorporating the changes under Section 401(a)(9)(H) into the 457(b) plan, but in the preamble to the proposed regulations, the IRS noted that "[S]ection 401 (a)(9)(H) does not apply to an eligible deferred compensation plan under section 457(b) maintained by an organization that is not an eligible employer described in section 457(e)(1)(A) (because such a plan is not an eligible retirement plan described in section 402(c)(8)(B))." Any idea why some vendors are taking the position that 401(a)(9)(H) applies to tax-exempt 457(b) plans?

That is my understanding, but i would be curious to know what others think.

Yes, the Plan was operated according to its terms. For example, the Plan states that participants vest 100% after 3 years of vesting service, and all participants did, in fact, vest according to that schedule. The plan also provided for a 2% nonelective contribution, and all participants received the 2% nonelective contribution. No operational failure. However, the collective bargaining agreement provides for immediate 100% vesting for employees represented by the union and a 3% nonelective contribution for the union employees. The failure to immediately vest the employees and provide the enhanced nonelective contribution may be a violation of the CBA (which one would obviously want to avoid), but did it violate the terms of the Plan? And I WISH the plan document contained that language -- the good ones do. What's worse, it is a pre-approved volume submitter plan document that restricts the employer's ability to amend it. The approach described by @rocknrolls is how I've generally viewed it as well -- the company's approval of the changes to the 401(k) plan as set forth in the CBA would constitute a plan amendment (which, if not administered consistent with CBA, WOULD be an operational failure the could be corrected under EPCRS). However, more and more pre-approved plans are foreclosing this as an option by limiting the employer's autonomy to adopt discretionary/optional plan amendments. So what's left? And the 2018 discussion on the topic was lively, though I didn't see a discussion of the basis for using EPCRS to retroactively amend the plan document -- it seemed a foregone conclusion that there was an plan document failure, without any explanation of how. Under EPCRS. a plan document failure is "a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of § 401(a) or 403(a)." In the scenario described above, there is no plan provision that, on its face, violates 401(a) or 403(a). The plan's provisions violate the CBA, but that is not a qualification failure nor is it listed as a plan document failure under EPCRS. This will definitely require a creative solution, but I don't see how EPCRS, by its terms, is one of them.

I have seen it both ways in plan documents (including different plans of the same employer). I have also seen plans that say that the spouse does not remain beneficiary unless the participant affirmatively designated the spouse as beneficiary during or prior to the marriage, which seems reasonable but I would be curious to know whether others have found that more complex to administer. Either way, a participant should always manual update their beneficiary designations after divorce. Section 404(a)(1)(D) of ERISA says that a spouse ceases to be a beneficiary upon divorce and/or death if the plan's terms say so (so basically, yes, ERISA controls every breath taken by plan administrators, but they do get a substantial limitation of liability out of it, so it's not all bad). If the plan documents provide that a spouse's status as a beneficiary is terminated upon divorce (or death), then that is what applies. This was effectively the court's holding in Kennedy. In the world of ERISA plans, the terms of the plan dictate who the beneficiary is (unless the participant is married), and a plan that is explicit when it comes to deciding who is the beneficiary is so much better than a plan that is silent.

Employer entered into a new collective bargaining agreement a couple of years ago that provided additional non-elective contributions and full vesting under the 401(k) plan (more generous than what the plan provides). The Plan was not amended to incorporate these negotiated terms of the CBA. What is the fix? Technically, there is no plan failure. Rev. Proc. 2021-30 states that "VCP provides general procedures for correction of all Qualification Failures: Operational, Plan Document, Demographic, and Employer Eligibility." The plan has been operated in accordance with its terms, so there is no "Operational" failure, and it doesn't violate Section 401(a) by its terms, so there is no "Plan Document" failure. There is no failure to satisfy the requirements of § 401(a)(4), 401(a)(26), or 410(b) ("Demographic" failure) and the employer is eligible to establish a 401(k) plan, so there is no "Employer Eligibility" failure. Thus, I read EPCRS to say that there is no relief available for this scenario. Is that accurate??

Single-employer defined benefit plan is terminating this year. The plan is distributing the assets through the purchase of annuities from an insurance company for those participants who don't take a lump sum at termination. Participants can elect an immediate annuity that will commence benefit payments right away, or they can elect a deferred annuity and can commence benefit payments any time after plan termination - even if they are still employed by the company at the time they elect to begin benefit payments. The plan currently has an RMD provision that does not require distributions until the later of age 72 and termination of employment. Does that rule continue to apply after the plan is terminated to the participants who receive a deferred annuity? In other words, does the insurance company have to verify employment status witht the plan sponsor for those annuitants who are 72 or older to begin RMDs, or does the participant's employment status not matter for purposes of RMDs under Section 401(a)(9) once the plan is terminated (or RMDs don't apply at all)?

Not that I am aware of. I typically see date of distribution as the determination date, and when I last looked at this I came to the conclusion that distributing an amount that exceeds $5,000 (or such other lower limit under the plan) would violate Section 411(a)(11)(A) (and/or the Plan), even if it was less than the limit on the date employment terminated. I don't read the rules to require that the distribution be tied to termination of employment, so a plan could provide for cash out any time the benefit is reduced below $5,000 -- i.e., once the value dips below $5,000 (e.g., e.g. due loss of market value), it is distributed. For example, if a participant takes a partial distribution 5 years after terminating employment and leaves $3,000 in the plan account, the plan can now distribute this amount without the participant's consent. On the other hand I have seen plans that require the benefit be less than $5,000 at termination, so if an amount exceed that at termination but later decreases to below the limit, it is not distributed (and also would not be distributed if the benefit increases after termination but before distribution).

Looks like the IRS says the answer is Approach #1 https://www.irs.gov/faqs/retirement-plans/457b-plan-of-tax-exempt-entity-tax-consequences-of-noncompliance Amounts deferred in closed tax years would be included in gross income when distributed under the terms of the plan, and amounts deferred in open tax years are included in income in the year of deferral. Does anyone have a different read of this guidance?

Right, that is the question -- does "each eligible NHCE" as used int the safe harbor regulations refer to the NHCEs eligible for the 401(a) plan or for the 403(b) plan?

It was a bit of a tangent, but good catch on the matching causing the 403(b) plan to lose its non-ERISA status. I forgot about that. The question was really about whether matching contributions to a 401(a) plan could satisfy the ACP 401(m)(11) safe harbor if the contributions are based on deferrals to a separate 403(b) plan, where all employees are eligible to participate in the 403(b) plan, but only a subgroup of employees are eligible for the 401(a) plan (assuming it passes coverage testing). Both the 403(b) and the 401(a) plan are ERISA plans in this scenario and 5500 filings aren't an issue (assume they audit and file for both). So not so much an ERISA question and more a 401(m) question.

Interesting. If the contribution to the separate plan is a matching contribution as described in that provision of the 401(m) regs, then it should follow that it could be deemed to pass ACP if it satisfies the safe harbor provisions of 401(m)(11) (absent a provision to the contrary). I would think the same analysis would apply to a deferral-only 403(b) plan that is exempt from ERISA; but the assumption in this case is that both plans are treated as an ERISA plans.

I work with some tax-exempt employers who offer a 403(b) plan and a separate 401(a) plan that matches the elective deferrals made to the 403(b) plan by some (not all) of the 403(b) plan participants. A question has come up as to whether the matching contributions to the 401(a) plan could be structured as 401(m) safe harbor matching contributions to satisfy ACP testing (assuming it passes 410(b) coverage testing). In other words, the employer would sponsor an elective deferral-only 403(b) plan for all employees and a separate safe harbor match-only 401(a) plan for some of the 403(b) participants. What do you think?