Message Boards Digest

January 30, 2023

Here are the most recently added topics on the BenefitsLink Message Boards:

ajc0202 created a topic in Defined Benefit Plans, Including Cash Balance

Partial Distribution from Fully Insured Plan

"We have a participant in a fully insured plan that is past NRA and would like to take a partial distribution. They have 4 annuity contracts in the plan and want to distribute 2 of them to an outside account and continue to pay premiums on the other 2. I realize we have to amend the formula to make this work, and there are only owners in the plan, so that part should be ok. I'm wondering if this partial distribution would be allowed? I had been told in the past that in-service distributions aren't allowed from fully insured plans. But, this participant is past NRA, so this could be considered a partial distribution of the retirement benefit. Thoughts?"

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M.B.S., QKC, QKA created a topic in Operating a TPA or Consulting Firm

Moving from Accrual to Cash Basis for 5500 and Other Year-End Reporting

"Our firm is considering changing methods from Accrual to Cash Basis for 5500 and year-end valuation reporting. Is there anyone out there with experience who can provide any tips on how best to do this? I have worked on a cash basis previously, but would like to explore any pitfalls of making the switch from accrual to cash. Trying to make the transition go as smoothly as possible."

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Ian created a topic in 401(k) Plans

SECURE 2.0 New Distributable Events

"Based on the language of SECURE 2.0, it appears that new distributions for those terminally ill can only be made when the person is otherwise eligible for a distribution. But other new distributions (e.g., emergencies and domestic abuse) create new distributable events. In either case, however, allowing any of these new distributions is optional. Do you all agree, or do you read the law differently?"

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EmpbAF created a topic in 409A Issues

Change of Control and Attribution Rules

"We have a client that is setting up a deferred compensation arrangement and wants to exclude from the Change in Control benefit any transactions between family since it is a closely held company. I think for 409A purposes this is not problematic because they only further restrict the 409A-acceptable definition of a CIC, rather than expand it. It seems to me that, within a family, if a person is treated as owning any interest owned by the person's spouse, children, grandchildren or parents, then (for example) a child who purchases stock from his parent would not trigger a Change in Control, because the child is already deemed to own the interest under the 318 attribution rules. I cannot find any guidance that explicitly states that, though. Has anyone dug into how this works?"

1 reply so far   |    Click Here to Add a Reply

401kAllTheWay created a topic in 401(k) Plans

Vesting Schedule with Merging Plans

"Was hoping anyone has experienced this before and any thoughts. Am trying to think through all possibilities and with compliance testing for the HCE and NCHE employees also rehired participants. The thought is to merge plans so not one is terminated. Vesting Schedule Plan A -- For hires on/after 1/1/2017, 25% after 2 years; 50% after 3 years; 75% after 4 years; 100% for 5 or more years, 100% vested if employed on 12/31/2016 Plan B -- 3-year cliff; 6-year graded vesting for pre amendment of 12/31/2016 Possible Vesting but what happens to rehired participants and compliance testing? are all of these possibilities?

  1. Apply the legacy vesting schedules to amounts accrued through 12/31/23 and a new schedule to amounts accrued on/after 1/1/2024.
  2. Vest all participants immediately
  3. Vest 25% after 1 year, 50% after 2 years, 100% after 3 years
  4. Changing everyone to 100% after 2 years
  5. Vest everyone 25% after 2 years, 100% after 3 years."
1 reply so far   |    Click Here to Add a Reply

Henry Zephyr created a topic in 401(k) Plans

ROBS Funding Source

"I know that ROBS arrangements aren't really all that well thought of around here, and there does seem to be some sleight of hand involved in how the actual plan can be initially started (business valuation, for example), and there are certainly enough on-going potential PT and other (5500, ERISA bond, etc.) compliance issues that it could be problematic, but it _may_ be that I am actually in a position where a ROBS might make sense. One issue, though, is that some promoters, such as mysolo401k, claim that you cannot use Roth 401K funds for the initial investment, and other promoters, such as guidant, claim (obviously correctly because of well-known rollover rules) that you can't start with a Roth IRA, but also claim that a Roth 401K account would work as a funding source. Several articles about the process also parrot mysolo401k's claim.

"I'm trying to figure out if they really found a legal issue with buying QES with 401K Roth account funds, or they just don't want to go to the time and expense of modifying their plan documents. For me, it certainly wouldn't make sense to do this if I couldn't use 401K Roth account funds, because, as some clever commenter (sorry, forgot who!) around here wrote: "Congratulations! You just converted capital gains into ordinary income!" But I'm 62, I have skills that I could utilize on my own (no other employees) without any help to bring in some reasonably significant income with very little capital investment, I have savings that I can live off of (including some non-Roth IRAs I could be drawing down if I am showing very little W2 income from a business), and I have a well seasoned Roth IRA. So, in theory, it seems that if the ROBS 401K plan documents allow partial in-service distributions, I could continuously roll over corporate dividends received by the 401K into the Roth IRA, where they could be reinvested at a brokerage and/or removed and spent at will. And if the 401K plan documents allow distribution of plan assets without conversion to cash, I could, after 5 years, distribute the company stock to myself with no tax consequences, which would simplify the chicken and egg problem of needing correct valuations to sell the business out of the 401K plan, because, at that point, it would simply be like a zillion other solo 401K plans. At current corporate tax rates (and Texas's low franchise tax rate), with no further taxation on the dividends, that seems like a pretty good deal. There are even some other tax planning opportunities, due to the greenfield nature of starting something up. For example, if valuation is set to par for injected cash, a contemporaneous co-investment could be immediately gifted to a trust, or directly to grandchildren, at well below any valuation that would trigger gift taxes or GST. But of course, if an idea seems too good to be true, that means it's time to invite others to throw rocks at it. So thanks in advance for any boulders you can provide."

1 reply so far   |    Click Here to Add a Reply

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