Tag Archive for: salary deferrals

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Voluntary Fiduciary Correction Program and PTE 2002-51

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A financial advisor asked:  “Prohibited Transaction Exemption (PTE) 2002-51 exempts certain transactions that are corrected under the DOL’s VFC Program from the 15 percent IRS penalty pursuant to IRC §4795.  What is the definition of transaction?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question on the Department of Labor’s (DOL’s) Voluntary Fiduciary Correction (VCP) Program.

Highlights of the Discussion

The DOL’s VFC Program allows plan officials to voluntarily correct 19 specific transactions that are prohibited under the Employee Retirement Income Security Act of 1974 (ERISA). These 19 prohibited transactions are typically subject to an IRS excise tax under IRC §4975 of 15 percent. Prohibited Transaction Exemption (PTE) 2002-51 provides relief from the IRS excise tax for six of the 19 transactions.

The six transactions that can be exempt from the IRS penalty are

  1. The failure to timely transmit participant contributions to a plan and/or loan repayments to a plan within a reasonable time after withholding or receipt by the employer;
  2. The making of a loan by a plan at a fair market interest rate to a party in interest with respect to the plan;
  3. The purchase or sale of an asset (including real property) between a plan and a party in interest at fair market value;
  4. The sale of real property to a plan by the employer and the leaseback of such property to the employer at fair market value and fair market rental value, respectively;
  5. The purchase of an asset (including real property) by a plan where the asset has later been determined to be illiquid as described under the Program in a transaction which was a prohibited transaction, and/or the subsequent sale of such asset to a party in interest; and
  6. Use of plan assets to pay expenses, including commissions or fees, to a service provider for services provided in connection with the establishment, design or termination of the plan (settlor expenses), provided that the payment of the settlor expense was not expressly prohibited by a plan provision relating to the payment of expenses by the plan.

There is an important time constraint associated with utilizing the PTE. A business can only take advantage of the relief for a transaction once every three years. Assume a business has multiple failures to transmit participant contributions. The DOL has informally commented that multiple occurrences of delinquent deposits over more than one pay period can be treated as one transaction if the pay periods are close together in time and the delinquencies are related to the same cause.

EXAMPLE 1:

The employee responsible for payroll at Better Late Than Never, Inc., resigned, and the company is having a hard time replacing her. As a result, over the next few pay periods Better Late Than Never is late in depositing employee contributions to its 401(k) plan. The DOL would count the multiple delinquencies as one transaction because they all are related to the same cause.

Example 2:

Random, LLC, misses the deferral deposit deadline in December 2020, and in March and June of 2021. Each delinquency is for a different reason (e.g., power outage, switching payroll providers, sick employee). Because there is no common cause, the missed deposit deadlines cannot be treated as one transaction for purposes of the three-year timeframe.

Conclusion

The DOL’s VFC Program allows plan officials to voluntarily correct 19 specific prohibited transactions. (PTE) 2002-51 provides relief from the IRS excise tax for six of the 19 transactions. A business can only take advantage of the IRS excise tax relief for a transaction once every three years.

For more information, please refer to the following

Frequently Asked Questions of the VFC Program

VFC Program Class Exemption

 

 

 

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Two Plans–Two Limits?

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“My client is a fireman who participates in the department’s 457(b) plan. He also runs his own electrical business. Can he set up a 401(k) plan and contribute to both plans?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Massachusetts is representative of a common inquiry related to multiple retirement plans.

Highlights of Discussion

This is an important tax question that your client should discuss with his tax professional to make sure all the facts and circumstances of his financial situation are considered. Generally speaking, however, the IRS rules would allow your client to contribute to both his 457(b) plan and 401(k) plan up to the limits in both.

For 2020, 457(b) contributions (consisting of employee salary deferrals and/or employer contributions combined) cannot exceed $19,500, plus catch-up contribution amounts if eligible [Treasury Regulation Section (Treas. Reg. §1.457-5)]  and 457(b) contribution limit].  The same maximum deferral limit applies for 401(k) plans in 2020 (i.e., $19,500, plus catch-up contributions). The catch-up contribution rules differ slightly between the two plan types.

401(k) and 457(b) Catch-Up Contribution Rules

401(k) 457(b)
Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 402(g) limit of $19,500 for 2020.

 

 Age 50 or Over Option

 

Employees age 50 or over can make catch-up contributions of $6,500 beyond the basic 457 deferral limit of $19,500 for 2020.

 

Special “Last 3-Year” Option

 

In the three years before reaching the plan’s normal retirement age employees can contribute either:

 

•Twice the annual 457(b) limit (in 2020, $19,500 x 2 = $39,000),

 

Or

 

•The annual 457(b) limit, plus amounts allowed in prior years not contributed.

 

Note:  If a governmental 457(b) allows both the age-50 catch-up and the 3-year catch-up, one or the other—but not both—can be used.

Since 2002, contributions to 457(b) plans no longer reduce the amount of deferrals to other salary deferral plans, such as 401(k) plans. A participant’s 457(b) contributions need only be combined with contributions to other 457(b) plans when applying the annual contribution limit. Therefore, contributions to a 457(b) plan are not aggregated with deferrals an individual makes to other types of deferral plans. Consequently, an individual who participates in both a 457(b) plan and one or more other deferral-type plans, such as a 403(b), 401(k), salary reduction simplified employee pension plan (SAR-SEP), or savings incentive match plan for employees (SIMPLE) has two separate annual deferral limits.

Another consideration when an individual participates in more than one plan is the annual additions limit under IRC Sec. 415(c),[1] which typically limits plan contributions (employer plus employee contributions for the person) for a limitation year [2] made on behalf of an individual to all plans maintained by the same employer. It this situation, the annual additions limit is of no concern for two reasons:  1) there are two separate, unrelated employers; and 2) contributions to 457(b) plans are not included in a person’s annual additions [see 1.415(c)-1(a)(2)].

Conclusion

IRS rules would allow a person who participates in a 457(b) plan and a 401(k) plan to contribute the maximum amount in both plans. However, it is important to work with a financial and/or tax professional to help determine the optimal amount based on the participant’s unique situation.

[1] For 2020, the limit is 100% of compensation up to $57,000 (or $63,500 for those > age 50).

[2] Generally, the calendar year, unless the plan specifies otherwise.

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