Ananda

No, there was no such amendment.

Thank-you Lou. I have the same conclusion, and I could not agree with the claim of the Plan sponsor attorney that since the individual was not a Plan participant on the adoption date that he is not entitled to Plan benefits.

A plan adopts a 1.401(a)(4)-11(g) corrective amendment on 10/14/22 with an effective date of 1/1/21. The amendment adds employees to the Plan that complete 1 year of service. An employee completed one year of service for the Plan year 2021 based on the 1/1/21 effective date. However, this individual terminated service on 3/1/22 which was 7 months before the amendment was adopted. Since she terminated service prior to the adoption date does she still meet the one year of service requirement? I would say she does since the effective date of the amendment is controlling. Any thoughts?

A plan participant under age 59 and 1/2 has recently become permanently and totally disabled. He has 100,000 cash in his 401(k) plan and a 40,000 loan. He wants to withdraw his entire account balance because of dire financial hardship. The plan provides that upon disability the plan participant can withdraw the entire account balance. The plan does not deem that the loan must be paid under these circumstances and the loan is not in default. Here, even though the participant is under 59 and 1/2 there will be no 10% penalty given total and permanent disability. The participants total account balance should be $140,000, i.e., 100,000 cash and a 40,000 note receivable. However, upon distribution he will only be in receipt of $100,000 cash and not the note receivable. However, if he withdraws the $100,000 cash is this deemed a loan offset of $40,000 ($140,000 account balance less $100,000) that is included in taxable income? However, my understanding is that a loan offset only occurs if the loan is in default and here it is not. If it's not a loan offset then it's a $100,000 taxable distribution with a $40,000 loan outstanding with the plan. So the participant can ether try to make loan payments or preferably let the loan go into default whereupon its a deemed distribution not subject to the 10% penalty. Another possibility is due to concerns that the IRS may challenge his permanent and total disability diagnosis, he may decide to take a $100,000 hardship withdrawal and let the loan go into default and accept the deemed distribution. Any thoughts on this analysis especially regarding this not being a loan offset?

Thank-you Bill. I agree that the 1563 family attribution rules apply to brother sister companies. So in my set of facts, the concern is that since each parent has effective 100% ownership control of Company A, then are the parents deemed to own their children's 100% ownership in Company B which would then make the 2 companies part of a controlled group. The example in the article you attached seems to suggest this.

For 401(a) testing purposes would Company A which is owned 50/50 by husband and wife, and Company B owned 50/50 by their children be considered a brother sister company part of a controlled group? It's clear that if these individuals were unrelated the answer would be no because 5 or fewer individuals do not have more than 50% common ownership. So for example the children have 0% ownership in Company A and the parents have 0% ownership in Company B. However the Section 318 family attribution rules state that husband and wife are deemed to own each others shares and parent and adult children similarly are deemed to own each others shares. Further Reg Section 1.414(c)-2(c)(2) states that if an individual is in effective control of a company, (greater than 50%) then he or she is deemed to own their parents or children's interest in that company. However, I interpret Section 318 and the 414 regs to only apply to family attribution within a single company, not among 2 companies. So even though the husband and wife are deemed to each have 100% effective control of Company A, this shouldn't mean that the parents are deemed to effectively own their children's 50/50 ownership interest in Company B and vice versa? If this were correct then Company A and B would be deemed to be a brother sister controlled group of companies which I don't agree with especially since each owner does not have a greater than 50% interest.. Any thoughts or experience with this issue?

Thank-you Peter. This is very helpful. I was surprised that other than the "similar to an annuity" language I couldn't find any authority addressing whether ongoing required minimum distributions would be deemed periodic payments.

For qualified plans, the tax withholding certificate for non-periodic payments and eligible rollover contributions is Form W-4R. For non-periodic payments, if no withholding election is made, the default withholding is 10%. For periodic payments made in regular installments over a period of more than one year, to elect withholding Form W-4P must be used. For RMD's they are clearly not eligible rollover contributions and are arguably not non-periodic payments but rather are typically regular payments that must be made to the participant for a period of more than a year. Thus, it's my view that if a participant wants tax withholding on an RMD that the Form W-4P rather than Form W-4R must be used. In fact, Form W-4R should have nothing to do with RMD's because if it did, then if no withholding election is made the Form W-4R mandates 10% withholding which should never apply to RMD's Any comments?

A participant meets all the requirements for a hardship withdrawal and the plan allows hardship withdrawals in the amount of the participants elective deferral account. However, there is an outstanding loan on the participants account and the hardship withdrawal will wipe out the amount in the account securing half of the loan. The plan does not have a provision prohibiting hardship withdrawals given outstanding loans but my conclusion is to deny the hardship withdrawal given loan security issues unless the participant can prove the loan is secured by other than plan assets. Any comments.

Thank-you for your responses!!!

A plan participant in a 401(k) plan elected a lump sum distribution upon termination of employment. However, he has changed his mind and now wants an annuity payout option offered by the plan. He has not cashed his distribution check. It seems that since the check was not cashed that these are still plan assets and he should be entitled to make another distribution election. However, I can also argue that once the election is made its final. Any thoughts.

Thank-you for referring me to the prior post. Pursuant to this prior post it seems additional plan contributions were made in 2021 and the plan language did not support this so a retroactive plan amendment to 2021 was justifiable under SCP since this arguably is a correction of an operational failure. However, I have a different set of facts. The client is a DB plan that wants to amend the plan retroactively to 2021 to increase the accrued benefit formula to benefit NHCE's starting in 2021. So I don't see this as a plan document or operational failure so can the plan sponsor justifiably make an amendment in 2022 to retroactively increase the accrued benefit formula in 2021? It seems the IRS wouldn't challenge it since it is benefiting NHCE's and there are no anti-cutback concerns. But the retroactive amendment part concerns me since 11(g) and SCP are arguably not applicable

A plan client wants to make a retroactive amendment going back to the beginning of the 2021 plan year that is not corrective of a plan document failure, operational error or discrimination violation. This is a voluntary retroactive amendment to add additional accrued benefits to NHCE plan participants. Thus there are no anti-cutback or discrimination concerns. Shouldn't this retroactive amendment be permissible with no need to rely on SCP or 1.401(a)(4)-11(g) since this is not a correction of a plan or operational violation?

The IRS states that the Audit CAP correction penalties will not be excessive and will bear a reasonable relationship to the nature, extent and severity of the plan failures. However, Rev Proc. Section 5.01 states that the Maximum Payment Amount would be the tax imposed due to plan disqualification including tax on trust income, failure to file form 1041, income tax due to loss of employer deductions, etc., Has anyone experienced this type of an Audit CAP penalty or a similar severe penalty imposed on a client plan. Typically given my experience with Audit CAP I've seen penalties in the $15,000 range due to multiple plan qualification failure issues. Has anyone had a client that experienced the Maximum Payment Amount penalty, or severe high $ penalties, and if so, what amounts?

Yes this will be the actuarial equivalent of the the plan provided participant life annuity

Pension plans typically offer JSA options (50% through 100%) that name the spouse as beneficiary and which satisfy the QJSA rules. However can the pension plan offer a JSA option for a non-spouse beneficiary such as a child? Of course spousal consent would be required but I never saw a plan offer a JSA option for a non-spouse beneficiary, such as a child? Any issues or concerns here?

The owners of the business and HCE's want the variable annuity option for the plan. The plan does not permit lump sum distributions. The Regs, 1.415(b)-1 seem to permit variable annuities as a viable option for a DB plan that can still remain in compliance with 415. Any guidance anyone can provide on interpreting these regs and what is required to offer a variable annuity option in a DB plan that meets 415, would be approeciated.

A good number of DB Plan customers want to offer variable annuities as a distribution option to retiring plan participants but they are raising 415 limit concerns with me because the annuity payout is based primarily on a stock index and a rising stock market could cause a 415 limit violation in any given year. Pursuant to 415(b) the annual benefit for 415 purposes is a straight life annuity with equal installment payments. Pursuant to the 1.415(b)-1 regulations, there must be an adjustment to a variable annuity so that it is the actuarial equivalent of a straight life annuity beginning at the same time. Further, the regs. address a payout with an "automatic benefit increase feature", where certain complex annual limitation requirements must still be met, and it seems that a variable annuity which automatically adjusts the annuity payout based on the performance of a stock index could be an automatic benefit feature. Then there is example 10 of 1.415(b)-1(c) which seems to address a variable annuity and states that 417(e)(3) does not apply and that to determine the actuarial equivalent of a straight life annuity a 5% interest rate return on assets must be used. This is somewhat confusing to me so does anyone have experience determining whether a variable annuity whose payout is based on a stock market index or performance, meets the 415 annual payout requirements, and if so, how?

Thank-you for all your helpful comments. I agree that its unusual for the IRS to be asking proof of distribution. Typically they only ask for a copy of the SPD.

The IRS is auditing a plan client and requesting proof that SPD's were distributed to plan participants. Further IRS is requesting specific proof that other notices were sent such as benefit statements that are required for DB plans every 3years. This is a small plan and no such proof exists since in most cases the SPD's and other disclosures were hand delivered or sent by regular mail. Participants can't recall specific SPD receipt. I don't see any requirements under ERISA or the tax code requiring specific proof of delivery of SPD or other disclosures to participants, such as by certified mail. Further, regarding SPD's, even if the IRS claims SPD's were never distributed, becasue of lack of proof, I don't see any penalties under the tax code or ERISA. The only penalty I am aware of is failure to provide an SPD to a plan participant upon request. No such participant SPD requests were made.

A Money Purchase Plan invested in art work that has appreciated in value. The art work will be sold by the Plan in state. Typically when art wok is sold within state, sales tax must be paid. Are there any justifications for to a qualified ERISA plan being exempt from state sales tax upon sale of a plan asset, art work? I don't see an ERISA preemption argument since the art work will leave the plan and be taxed as a non-plan asset when distributed and sold.

Thank-you for your comments. Regarding the suggestion to try to obtain "other evidence of adoption" of the plan by the affiliate I'll try to do this. The affiliate is 100% owned and the parent and affiliate are typically treated by the organization as one and the same and that is why the affiliate never adopted the plan. Regarding the EPCRS section stating a "plan document failure consisting of the "initial " failure to adopt is not eligible for SCP correction, I view this as applying to the initial adoption of the plan by the parent company, and as the "initial" adoption this would not qualify for SCP relief if the plan was never initially adopted.. However, the "subsequent" adoption by an affiliate arguably is distinguishable from the initial adoption and should qualify for SCP relief. Alternatively under SCP, I would argue that the plan should be amended retroactively to state that affiliate employees were eligible to become plan participants. Again I would argue that this is an insignificant operational failure and SCP allows operational correction by amendment as long as it benefits the impacted plan participants but there is no longer a requirement to benefit all plan participants. For me, it would be absolutely unacceptable from a Title I ERISA standpoint, if the Service tried to argue that employees of the affiliated company that did not adopt the plan, retroactively are no longer plan participants which would result in inreperable harm to them.

OK Thank-you for your help!

Thank-you. Do you know what support there is under EPCRS/SCP to prohibit affiliates from retroactively adopting a parent's plan especially given that their employees were already participants in the plan. Again, it seems like an operational error since the plan document requires the affiliates to adopt the plan to enable their employees to participate. It seems that it would be problematic if the the plan sponsor never adopted the plan but possibly a better argument could be made that an operational error occurred if the affiliate did not comply with the plan document and did not adopt. Unfortunately we can't use VCP since the plan is already under IRS audit.

A parent company plan sponsor has affiliates that are part of an affiliated group as defined by the Code. The plan document states that employees of the affiliates can participate in the parent company plan as long as the affiliated companies adopt the parent's plan. Unfortunately, employees of the affiliates participate in the parent's plan, but the affiliates never adopted the plan, and the plan is now under investigation by the IRS. My proposed solution is that SCP allows for self correction of insignificant operational errors even if the plan is under investigation. I can make a good argument that this is an operational error since the plan document was not followed, and that its insignificant since it only involves a handful of employees and the dollar amounts involved are very small. Thus, I propose having the affiliates adopt the parent plan and such adoption would be dated and signed currently by the affiliates, but it would be drafted to have retroactive effect back to the date the affiliated employees started to participate in the plan. Any comments or concerns with this approach using SCP?