You Live, You Learn… Correcting “Qualification Failures” under the Self-Correction Program

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by Leslie Thomson

 The Employee Plans Compliance Resolution System (“EPCRS”), as set forth in Revenue Procedure 2021-30, allows plan sponsors to correct “Qualification Failures,” which are defined as any plan document, operational, demographic or employer eligibility failures. Failure to follow the terms of a plan constitutes an operational failure.

Operational Failures can be corrected without IRS supervision under the Self-Correction Program (“SCP”) of EPCRS without paying a fee or sanction in two circumstances: (1) insignificant operational defects can be corrected at any time, even if the plan is under an IRS audit; and (2) significant operational defects can be corrected by the end of the third plan year following the plan year in which the defect arose. EPCRS summarizes the factors a plan sponsor may use to determine if a failure is insignificant or not. Moreover, SCP is only available if the plan sponsor has established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Internal Revenue Code requirements, and the failure occurred through an oversight or mistake in applying the procedures or because the procedures were not sufficient to prevent the occurrence of the failure. Read more

Deferred Compensation Arrangements for Non-Profits: What I’ve Felt, What I’ve Known, Is Not Consistent with the Code

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by Benjamin Gibbons

Deferred compensation options for executives of tax-exempt entities are often misunderstood by those organizations who have not previously delved into them. Traditional tax-exempt organizations – think charities and non-profits – are subject not only to the deferred compensation rules of Section 409A of the tax code, but also Section 457 (though note that Section 457 does not apply to deferred compensation arrangements of churches). Section 457-subject organizations without deferred compensation experience are often under the impression that they are able to establish deferred compensation arrangements that are similar to those of for-profit entities, in that the right to deferred compensation can vest now and be taxed at a later date. When such organizations begin moving forward to put a deferred compensation arrangement place, they are often surprised to learn that Section 457 generally limits their ability do so.

The most analogous deferred compensation arrangement for tax-exempt executives compared to a traditional for-profit deferred compensation plan is what’s generally known as a Section 457(f) plan. While there are a number of differences between a Section 457(f) plan and a for-profit deferred compensation plan, the biggest is the timing of the taxation of the deferred compensation. A for-profit deferred compensation plan can be designed so that once the right to deferred compensation vests, it can be taxed (for income tax purposes) on the date that it is paid, which can be many years in the future. With a Section 457(f) plan, once the deferred compensation vests, it becomes immediately taxable, even if the plan provides for payment of the deferred compensation in a future year. Read more

A Change Would Do You Good, But Do The Section 125 Cafeteria Plan Rules Permit It?

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by Elizabeth Nedrow

Inevitably, an employee will wake up from their holiday food coma and realize that they made a mistake in open enrollment. “But I didn’t mean to elect family coverage! My spouse is covering the kids this year!” Employers are allowed to set enrollment rules for their self-funded medical plans. One response to the employee is the hard line that the door was closed at the end of the enrollment period. But what if you want to be more flexible?

If the employee catches their mistake before the ball drops on New Year’s Eve, the IRS won’t care. But if the question comes up in January, it’s likely too late. The IRS’s rules on cafeteria plan elections don’t make any exception for mistake. Elections can only be changed if the employee has a change in status event like a divorce or new dependent. Read more

Bring me a Higher Limit…2024 IRS Limits Announced

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by Lyn Domenick

The IRS has announced the 2024 cost of living adjustments to qualified plan limits. Below are the highlights, and our full historical chart can be found here for easy reference. Read more

Don’t Think Twice, It’s All Right to Ignore That Late Form 8955-SSA Notice

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by Benjamin Gibbons

I have heard from a couple of clients recently who have received a penalty notice from the IRS for purportedly filing a late or incomplete 2022 Form 8955-SSA (the IRS form that plan sponsors use to report terminated participants with vested benefits), despite having timely filed Form 8955-SSA earlier this summer. While initially causing some concern, the IRS recently announced that due to a programming error, the IRS’s system automatically sent out Form 8955-SSA penalty notices to those plan sponsors who had already timely filed their 2022 Form 8955-SSA. Read more

You Make My Dreams Come True! IRS Delays Roth Catch-Ups

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by Elizabeth Nedrow

You don’t have to be a connoisseur of 1980s pop (we see you, Hall & Oates fans!) to appreciate the relief the IRS granted the retirement industry. In Notice 2023-62, the IRS announced a two-year delay on the Roth catch-up requirements for those earning more than $145,000. All eligible participants – regardless of income – may make catch-up contributions on a pre-tax basis (or Roth basis, at participant election but not required) until January 1, 2026. Read more

Simply Irresistible…To Not Seek Recoupment of Overpayments

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by Lyn Domenick

Many retirement plan errors are inadvertent and involve small dollar amounts. However, the work involved in correcting such errors can be time consuming and burdensome. Fortunately, SECURE 2.0 provides that for certain overpayment errors a responsible plan fiduciary can now decide not to seek repayment. While plan fiduciaries are entitled to seek recoupment of overpayments, subject to some limitations, many plan sponsors will welcome this guidance since it allows them to forego seeking recoupment of overpayment errors.

For example, if a 401(k) plan incorrectly included PTO payouts upon termination in eligible compensation, and thus, applied plan contributions to such ineligible portion, the affected participants would probably not notice and in fact might not reasonably be expected to know whether or not the PTO payout should have been included in eligible compensation in their final paycheck. The dollar amounts of the overpayments would in many cases be small and also would include the participants’ own deferrals. In such a case, the plan fiduciary might reasonably choose to not seek recoupment, while correcting the payroll error going forward. Read more

You Can Count On Me…But Check Your Math When Counting Participants for the 5500 Audit Rule!

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by Becky Achten

Bruno Mars may be crooning “Count on me,” but make sure you don’t overcount your retirement plan participants! New rules may allow you to leave some employees out of the count, which could save you the expense of the annual audit.

If your retirement plan is considered “large” – generally 100 or more participants – you’re probably in the middle of the Department of Labor required annual independent audit of the financial statements that must accompany the Form 5500. There are a few exceptions to the audit requirement – plans that have less than 100 participants at the beginning of the year and those with between 80 and 120 who filed as a small plan in the prior year. If your plan is just over that 100-participant level, there may be relief on the horizon from the required audit and another reason to keep track of those separated participants. Read more

Crazy Little Thing Called . . . Automatic Enrollment

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by Leslie Thomson

Secure Act 2.0 requires certain plans to automatically enroll participants once they become eligible to participate. Plans that were established prior to December 29, 2022 are exempt from this new requirement. Plans that are established after December 29, 2022 are subject to the automatic enrollment requirement but not until the 2025 plan year. Read more

Can’t Stop the AI*

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by Benjamin Gibbons

Today’s Benefits Dial post was written in part by a special guest author, ChatGPT. With all of the buzz surrounding AI chatbots, I decided to see how ChatGPT would do composing a blog post on a somewhat technical but fairly common executive compensation scenario. As discussed below, the results were not so good. Here is our guest author’s blog on the ability to make subsequent deferral elections in a nonqualified deferred compensation plan:

Making a Section 409A subsequent deferral election can be a complex process, but it is an important step for individuals who have previously deferred compensation under a nonqualified deferred compensation plan. The subsequent deferral election allows these individuals to change the timing of their future payments, providing greater flexibility and control over their income streams.

To make a subsequent deferral election under Section 409A, an individual must first meet certain eligibility requirements. Specifically, the individual must have originally deferred compensation under a nonqualified deferred compensation plan that complies with Section 409A, and the election must be made at least 12 months before the original payment date. Once eligibility is established, the individual must submit a written election to the plan administrator outlining the new deferral election terms.

It is important to note that making a subsequent deferral election is not a decision to be taken lightly. There may be significant tax consequences associated with a change in payment timing, and it is important to consult with a tax professional before making any changes to a nonqualified deferred compensation plan. In addition, the plan document may contain specific rules and procedures for making a subsequent deferral election, and failure to follow these rules could result in adverse tax consequences.

In summary, a subsequent deferral election under Section 409A can provide valuable flexibility for individuals who have previously deferred compensation under a nonqualified deferred compensation plan. However, it is important to carefully consider the tax implications and procedural requirements before making any changes to a plan. For more information on making a subsequent deferral election, consult with a benefits attorney or tax professional.

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