Q&A 2 involves a 401(k) plan participant who took out a loan from the plan and then failed to timely repay the loan. This resulted in a deemed distribution. In November of the same year, a loan offset occurred because the defaulted participant reached the age of 59½ (a distribution event under the plan). No exception to the Code Section 72(t) (26 U.S.C. § 72(t)) early distribution penalty applied at the time the participant defaulted on the loan.

The question is whether the loan default is still treated as a deemed distribution for purposes of Form 1099-R reporting. The IRS representatives agreed with JCEB's proposed response that the plan administrator who issues Form 1099-R must indicate that the distribution is a deemed distribution (Code L in box 7 of Form 1099-R), in addition to an early distribution (Code 1), even if there is a loan offset and the participant is over 59½ by the time the plan administrator issues the Form 1099-R.

For more information on plan loans, see Practice Note, Qualified Retirement Plan Loans. For a sample loan policy, see Standard Document, 401(k) Plan Loan Policy.

The hypothetical 401(k) plan discussed in Q&A 4 provides for an employer matching contribution of 1% of compensation, but only if the participant defers 4% of her compensation. An employee was inadvertently excluded from the plan. The average deferral percentage (ADP) for the employee's group was 3.8%.

JCEB's proposed correction requires the employer to make a corrective contribution equal to the compensation for the period of the exclusion, multiplied by 3.8%, which is then multiplied by 50% (a missed deferral opportunity correction), adjusted for earnings. The employer will not be required to make a matching contribution, however, because the ADP for the group was 3.8% and under the terms of the plan no match is due unless an employee contributes 4%. The IRS representative agreed that no matching contribution would be due and also referred the reader to Appendix B of Revenue Procedure 2013-12, Section 2.02(1)(D).

For more information on missed deferral opportunity corrections, see Practice Note, Correcting Qualified Plan Errors under EPCRS: Missed Deferral Opportunity Corrections.

In Q&A 8, Companies A and B are members of a controlled group of corporations under Code Section 414(b) (26 U.S.C. § 414(b)) (see Practice Note, Controlled Group and Affiliated Service Group Rules). Each company sponsors a 401(k) plan for its employees.

On December 31, 2011, all 100 of Company B's employees were eligible to participate in Company B's plan. On January 1, 2012, Company B terminated the employment of 95 employees and the remaining 5 employees were transferred to Company A where they were eligible to participate in Company A's plan. On January 1, 2014, Company B had zero employees, but the 100 former employees (including the 5 transferred to Company A) maintain account balances in Company B's plan. Effective December 31, 2013, Company B terminated its plan and made distributions to all 100 former employees who still maintained an account balance in the plan.

Treasury Regulation Section 1.401(k)-1(d)(4) provides that a distribution may not be made from a 401(k) plan if the employer establishes or maintains an alternative defined contribution plan. An alternative defined contribution plan is a defined contribution plan that exists at any time during the period:

However, if during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the original plan as of the date of plan termination are eligible under the second plan, the second plan is not an alternative defined contribution plan.

JCEB's proposed response hypothesized that Company A's plan was an alternative defined contribution plan but that the 2% exception applied because Company B had zero employees in the 24-month period beginning 12 months before the plan's termination (and zero is less than 2%).

The IRS representatives stated that they could not come to a consensus on whether Company A's plan is an alternative defined contribution plan under Treasury Regulation Section 1.401(k)-1(d)(4), and if it is, whether the 2% exception applies. They recommended that the question be resubmitted next year.

In Q&A 9, an employee requested a hardship distribution for post-secondary education and attached a contract from a cosmetology school for $5,000. Post-secondary education is not defined in the 401(k) plan document or the Code. The IRS representative agreed with JCEB's proposed response that cosmetology school would be considered post-secondary education for purposes of a hardship distribution if the institution is eligible to participate in a student aid program run by the US Department of Education.

For more information on hardship distributions, see Hardship Distribution Checklist.

In Q&A 11, the IRS affirmed that a 401(k) plan's dual eligibility requirement does not affect the plan's ability to qualify as a safe harbor plan under Code Section 401(k)(13) (26 U.S.C. § 401(k)(13)).

In the hypothetical plan discussed in the Q&A, the employees who must meet the lower eligibility requirements are not eligible for the safe harbor contributions under Section 401(k)(13), while those employees who must satisfy the Section 410(a) statutory eligibility requirements are eligible for safe harbor contributions. JCEB's proposed response hypothesized that because Code Section 401(k)(13) was added by the Pension Protection Act of 2006, the safe harbor guidance issued before then could not address it. However, as Code Section 401(k)(13) is an alternative method of meeting nondiscrimination requirements like Code Section 401(k)(12) is, the same holding would also apply to Section 401(k)(13) plans.

The IRS agreed that the plan disaggregation rules under Treasury Regulation Section 1.401(k)-1(b)(4)(iv)(A) apply to Section 401(k)(12) and Section 401(k)(13) plans.

For more information on safe harbor 401(k) plans, see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities.

In Q&A 16, IRS representatives agreed with JCEB's proposed response that the transition rule of Code Section 410(b)(6)(C) (26 U.S.C. § 410(b)(6)(C)) would apply following a stock acquisition where the target maintained a non-safe harbor 401(k) plan and the acquirer maintained a safe harbor plan, such that the coverage rules of Code Section 410(b) would be satisfied if the plans tested separately (that is, the safe harbor plan would be exempt from testing and the non-safe harbor plan would be separately tested).

Code Section 410(b)(6)(C) provides special transitional relief for a buyer that continues a seller's plan after certain acquisitions and dispositions. The plan will be deemed to have satisfied the coverage rules of Code Section 410(b) until the last day of the first plan year beginning after the date of the transaction if the employer ceases to be a member of a controlled group and:

For more information on the Code Section 410(b)(6)(C) transition rule, see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Minimum Participation and Coverage Issues.

Q&A 21 involves an employer mandate full-time employee determination for an ongoing employee who:

For analysis of full-time employee determinations, see Practice Note, Employer Mandate under the ACA: Determining Full-Time Employees for Employer Penalties.

Regarding the employee's status while on unpaid leave, the IRS representatives indicated that because the employee was not terminated, he is considered a full-time employee for employer mandate purposes because he remains in the stability period. However, if the employee's employment was terminated at any time during the unpaid leave, he would no longer be either an employee or a full-time employee for the remainder of the stability period (unless rehired within 13 weeks, in which case the employee would be treated as a continuing employee).

According to the IRS representatives, the employer may treat the employee as a new hire beginning September 1, 2015 (notwithstanding that he earned full-time status in the related standard measurement period), because he had no hours of service for a period of at least 13 consecutive weeks (see Practice Note, Employer Mandate under the ACA: Determining Full-Time Employees for Employer Penalties: Break in Service Rules).

Q&A 22 addresses the full-time employee determination for a new employee who:

The IRS representatives were asked whether an employer in this situation:

The IRS representatives indicated that a new employee's status as variable hour (or non-variable-hour employee) is determined based on the employer's reasonable expectations at the employee's hire. For employees who are reasonably expected to average at least 30 hours of service per week at hire, full-time status is determined based on the employee's actual hours of service for each month. The employer mandate final regulations do not permit a subsequent recategorization of a new full-time employee as a new variable hour employee. As a result, the employee will remain a new full-time employee until completion of the full standard measurement period.

Q&A 23 involves an employee who was hired as a full-time employee but who transferred to a part-time position and therefore became ineligible for coverage under the employer's group health plan. Under the governing plan terms, the employee's coverage terminated, and the IRS officials addressed:

The IRS representatives indicated that when the employee changes to part-time employment, his status as a full-time employee is determined based on hours of service in each month (because he had not completed a full standard measurement period when his employment status changed). Although COBRA coverage in this situation counts as an offer of coverage for employer mandate purposes, it is sufficient to avoid an employer mandate penalty (under 26 U.S.C. § 4980H(b)) only if the offer is affordable and provides minimum value (see Practice Note, COBRA Overview). According to the representatives, the employer could avoid these penalties by offering subsidized COBRA at a low enough cost to satisfy one of the affordability safe harbors.

Regarding information reporting on IRS Form 1095-C, the IRS representatives indicated that Line 14, which is used to indicate offers of coverage, should include an entry for either:

(Regarding ACA information reporting, see Practice Note, Information Reporting of Health Insurance Coverage by Large Employers (Section 6056).)

In contrast, Line 16, which is used to indicate applicable Code Section 4980H safe harbors, may have monthly boxes that can be left blank if none of the Series 2 does apply. This could occur, for example, for months when:

Q&A 20 addresses a calculation issue involving whether a voluntary employees' beneficiary association (VEBA) that provides fully-insured, wholly employee-paid voluntary benefits provides impermissible benefits that are more than de minimis (26 U.S.C. § 501(c)(9)). According to the IRS representatives, if it is reasonable for a VEBA to determine the value of a benefit provided by the VEBA on the basis of the cost paid to provide such benefits, the VEBA must include amounts paid by members toward the cost of the benefits in calculating the value of:

Q&A 3 involves four stock option scenarios. The IRS directly responded to one of them, which involves a company with an omnibus plan that caps at 500,000 the number of options that may be granted under the plan. The plan was approved by shareholders in 2012. In each of 2013, 2014 and 2015, the company's compensation committee granted executives 200,000 options that cliff vest on a later date. The 2015 grant inadvertently caused the number of options granted to exceed the plan's 500,000 maximum, but this error was not discovered until after the end of 2015.

In JCEB's proposed response, because 100,000 of the shares in the 2015 option grant exceeded the plan's 500,000 limit, these would no longer qualify for Section 162(m)'s performance-based compensation exemption from the $1 million deduction limit.

The IRS representatives agreed with this proposed response. Performance-based compensation is typically looked at on a grant-by-grant basis, so that either the entire grant fails or the entire grant is considered performance-based compensation. But for stock-based compensation, including grants of stock options, only the part of the grant that exceeds the shareholder-authorized limit would fail to be performance-based compensation under Section 162(m). Therefore, 100,000 options are not eligible for the exemption here, rather than the entire 2015 grant of 200,000 options.

The IRS representatives noted that the same reasoning applies to the other scenarios provided by JCEB.

(The IRS representatives observed that the fact patterns did not mention whether the plan also has an individual employee limit and a time period over which the options may be granted. A performance-based compensation plan must have an individual employee limit and must provide the time period during which stock options may be granted.)

Q&A 12 involves Treasury Regulation Section 1.409A-1(i)(6), which provides that in the event of a corporate transaction in which a non-public company joins the controlled group of a public company, the non-public company's employees are not taken into account until the next "specified employee effective date," generally the next April 1.

In the scenario presented by JCEB, a corporate transaction occurs on March 1, 2016, and the public company has a specified employee identification date of December 31, 2015 and a specified employee effective date of April 1, 2016. JCEB asked if the non-public company's employees are taken into account starting April 1, 2016 or April 1, 2017.

The IRS agreed with JCEB's proposed response, which is that the non-public company's employees are taken into account starting April 1, 2017. Because the employees were not employees of the public company or its controlled group on December 31, 2015 (the identification date), they should not be taken into account starting April 1, 2016. They are covered one year later, on April 1, 2017, assuming they continue to be employed by the controlled group.

Q&A 13 focuses on Treasury Regulation Section 1.409A-3(c), which provides that a plan may designate only one time and form of payment in connection with events such as separation from service, with a limited exception if the event occurs before a specified date, such as retirement age.

The question posed by JCEB concerns whether this rule allows participants to designate a different post-retirement starting date and form of payment for each year's deferral. For example, JCEB asked whether a participant may designate that 2014 salary deferrals be paid five years after retirement in a lump sum, and that 2016 deferrals be paid in ten annual installments beginning on the retirement date.

According to the IRS representatives, there is no violation of Section 409A in the hypothetical situation. Deferrals for each year are separate deferred amounts to which the time and form of payment rules apply separately. Treasury Regulation Section 1.409A-3(c) refers to a limit per plan, but it was not meant to provide that all deferrals under the plan be limited collectively as long as the payment of each yearly deferral, with deemed investment earnings on that amount, can be objectively determined under Treasury Regulation Section 1.409A-3(i)(1)(i).

In Q&A 14, JCEB presented a scenario involving a specified employee who is entering into an employment agreement with a publicly traded company. Under the agreement:

JCEB proposed that the two payments are separately identifiable amounts under Section 409A, and that the six month delay does not apply to the severance payment because it fits within the separation pay exception. The restrictive covenant payment, on the other hand, is subject to the six month delay for specified employees because it is paid on a voluntary separation from service.

The IRS representatives disagreed with JCEB's proposed response. In this situation, the IRS would disregard the purported separate nature of the two plans and would consider all of the payments to be payments on a voluntary termination subject to the six month delay, because the employee will receive six months of pay regardless of whether he voluntarily or involuntarily terminates.

(For more information on specified employees, see Practice Note, Specified Employees under Section 409A.)

Q&A 15 provides a scenario in which an employee's employment agreement provides:

The severance payment provided in the employment agreement is intended to fit within Section 409A's short-term deferral exception. JCEB asked whether, if the release consideration period spans two calendar years, the payment of severance benefits must be delayed until the second calendar year.

According to the IRS representatives, the payment of severance benefits need not be delayed until the second calendar year because the payment fits within Section 409A's short-term deferral exception. However, the IRS representatives gave no opinion on the application of the constructive receipt doctrine in situations where executing a release is required to receive a payment.