Fully Insured Plans

<span style="font-weight: 400;">Under the 2024 final RMD regulations, the surviving spouse will automatically be treated as the participant (without the need to make a special election) if all of the following are true: (1) the surviving spouse is the sole beneficiary, (2) the original participant died before their required beginning date and (3) the surviving spouse will receive payments under the life expectancy rule (rather than the ten-year rule).<a href="#_ftn1" name="_ftnref1">¹</a></span><span style="font-weight: 400;">  </span><br /> <br /> <span style="font-weight: 400;">If the original participant died after their required beginning date, the surviving spouse must make a separate election to be treated as though they were that participant.<a href="#_ftn1" name="_ftnref1">²</a></span><span style="font-weight: 400;">  </span><br /> <br /> <span style="font-weight: 400;">This election is only available when the surviving spouse's first RMD would be in 2024 or later.  If the original participant would have reached their required beginning date in 2024 or later, the spousal election is permitted.</span><br /> <br /> <span style="font-weight: 400;">Whenever an election to be treated as the original participant is in effect, the Uniform Lifetime Table factor will be used to determine the amount of the surviving spouse's RMDs up until the year of the surviving spouse's death.  Generally, this will result in smaller annual RMDs when compared to use of the Single Life Table.</span><br /> <br /> <span style="font-weight: 400;">Also assuming an election to be treated as the original participant is in effect, upon the surviving spouse's death, that spouse's beneficiary must continue to receive distributions based on that spouse's remaining life expectancy using the Single Life Table if the surviving spouse dies on or after the date they have begun to receive required distributions.  The factor is determined using the surviving spouse's remaining life expectancy in their year of death (based on age), and then reducing that by one for each subsequent year.  The surviving spouse's beneficiary has ten years to empty the account (i.e., they are not treated as an eligible designated beneficiary).</span><br /> <br /> <span style="font-weight: 400;">The proposed regulations also propose that, although the spousal election allows the spouse to be treated as the participant for purposes of the RMD regulations, that treatment does not apply in all situations.  It would, however, apply so that the spouse would not be subject to the 10% early withdrawal penalty for pre-age-59 ½ distributions.  The surviving spouse's RBD would also be determined by reference to the original participant's age, rather than the surviving spouse.  The proposed regulations also provide that when determining the account balance for RMD purposes, all amounts held in a designated Roth account and any other account under the plan are included for purposes of calculating the RMD for the year.<a href="#_ftn1" name="_ftnref1">³</a></span><br /> <br /> 1.   Treas. Reg. §§ 1.401(a)(9)-3(d), 1.401(a)(9)-3(e).<br /> <br /> 2.  Treas. Reg. § 1.401(a)(9)-5(g)(3)(i).<br /> <br /> 3.  Prop. Treas. Reg. § 1.401(a)(9)-5(g)(3)(ii).

<div class="Section1"><br /> <br /> For purposes of certain qualification requirements, as well as for the vesting requirements, top-heavy rules, Section 415 limits and the requirements for SEPs, all employees of the members of an affiliated service group generally are treated as employed by a single employer.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> An affiliated service group is a group consisting of a service organization (referred to as "FSO" for "first service organization") and:<br /> <p style="padding-left: 40px;">(1)  an additional service organization (referred to as an "A" organization) that is a shareholder or partner in an FSO and that regularly performs services for the FSO or that is regularly associated with the FSO in the performance of services for third parties, or</p><br /> <p style="padding-left: 40px;">(2)  an organization (referred to as a "B" organization) if a significant portion of the organization's business is the performance of services for an FSO or for an A organization (or both) and the services are of a type historically performed by employees in the service field of the FSO or A organization; and</p><br /> <p style="padding-left: 40px;">(3)  10 percent or more (in the aggregate) of the interests in the B organization is held by highly compensated employees of an FSO or an A organization or certain common owners.<a href="#_ftn2" name="_ftnref2">²</a></p><br /> The term affiliated service group also includes a group consisting of (1) an organization the principal business of which is performing management functions for another organization on a regular and continuing basis, and (2) the organization for which the functions are performed.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> An organization is a service organization if its principal business is the performance of services in one of the fields enumerated in the regulations (e.g., health, law, etc.) or if capital is not a material income-producing factor for the organization.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The performance of services for a first service organization or for an A organization (or both) will be assumed to constitute a significant portion of a B organization's business if 10 percent or more of its total gross receipts from all sources during the current year, or two preceding years, was derived from performing services for such organization or organizations. It will be assumed that the performance of services for such organization or organizations is not a significant portion of a B organization's business if less than 5 percent of its gross receipts derived from performing services during the current year and two preceding years was derived from performing services for such organizations.<a href="#_ftn5" name="_ftnref5">⁵</a> Services are of a type historically performed by employees in a particular field if it was not unusual for the services to be performed by employees of organizations in that service field in the United States on December 13, 1980.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The principles of the constructive stock ownership rules of IRC Section 318(a) apply. Thus, ownership generally will be attributed to an individual from the individual's spouse, children, grandchildren and parents, between a partner and the partnership, between a trust or estate and its beneficiaries, and between a corporation and a more-than-50 percent shareholder, including a corporate shareholder.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Two or more affiliated service groups will not be aggregated merely because an organization is an A organization or a B organization with respect to each affiliated service group. All organizations that are A organizations or B organizations with respect to a single FSO, together with that FSO, must be treated as a single affiliated service group.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Taxpayers may rely on the proposed regulations covering service-type affiliated groups until final rules are published. Examples explaining the tests for a service-type affiliated service group can be found in Revenue Ruling 81-105.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 414(m)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 414(m); Prop. Treas. Reg. § 1.414(m)-2(c)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 414(m)(5).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 414(m)(3); Prop. Treas. Reg. § 1.414(m)-2(f). See Rev. Rul. 81-105, 1981-1 CB 256.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  Prop. Treas. Reg. § 1.414(m)-2(c)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  Prop. Treas. Reg. § 1.414(m)-2(c)(3).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 414(m)(6)(B).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.  Prop. Treas. Reg. § 1.414(m)-2(g).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.  1981-1 CB 256.<br /> <br /> </div>

<div class="Section1"><br /> <br /> An owner-employee is an employee ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3827">3827</a>) who owns the entire interest in an unincorporated trade or business or, in the case of a partnership, owns more than 10 percent of either the capital interest or the profits interest in the partnership.<a href="#_ftn1" name="_ftnref1">¹</a> Even if a partnership agreement does not specify a more than 10 percent interest in profits for any partner, if the formula for dividing profits (e.g., based on a partner&rsquo;s earnings productivity during the year) in operation produced a distribution at the end of the year of more than 10 percent of profits to a partner, the Tax Court has ruled that he or she is an owner-employee for the year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> An individual who owns the entire interest in an unincorporated trade or business is treated as his or her own employer.<a href="#_ftn3" name="_ftnref3">³</a> Thus, a proprietor or sole practitioner who has earned income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3827">3827</a>) can establish a qualified plan under which he or she is both employer and employee.<br /> <br /> A partnership is treated as the employer of each partner who is an employee ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3827">3827</a>).<a href="#_ftn4" name="_ftnref4">⁴</a> Thus, partners individually cannot establish a qualified plan for a firm or solely for themselves, but the partnership can establish a plan in which the partners can participate.<br /> <br /> Persons who are shareholder-employees in professional corporations or associations or in business corporations (including S corporations) are not self-employed individuals. These people participate in a qualified plan of the corporation as regular employees of the corporation.<a href="#_ftn5" name="_ftnref5">⁵</a> This is true even of a shareholder-employee who is sole owner of the corporation. S corporation pass-through income may not be treated as self-employment earnings for purposes of a Keogh plan deduction, even where the shareholder performed services for the corporation.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> A common law employee is an employee under common law rules, as distinguished from a self-employed individual who is considered an employee only for qualified plan purposes. An individual generally is considered an employee under common law rules if the person or organization for whom the individual performs services has the right to control and direct his or her work not only as to the result to be accomplished, but also as to the details and means by which the result is accomplished ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3928">3928</a>).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> The common law rules also apply generally in determining whether an individual is an employee for Social Security purposes. Ordinarily, therefore, an individual who is an employee under Social Security is a common law employee for self-employed plan purposes.<br /> <br /> A person&rsquo;s status for self-employed plan purposes is determined by the definition of employee under the Social Security law, irrespective of whether or how the person&rsquo;s earnings are covered under Social Security.<br /> <br /> Thus, if a person is an employee under the common law rules, it is immaterial that his or her earnings are treated as self-employment income under the Social Security law. For example, a minister or other clergy who is employed by a congregation on a salaried basis is a common law employee, and not a self-employed individual, even though for Social Security purposes the person&rsquo;s compensation is treated as net earnings from self-employment. Amounts received by the minister directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, represent earnings from self-employment.<br /> <br /> Full-time life insurance salespersons are treated as common law employees for both Social Security and qualified retirement plan purposes even though, under the common law rules, they are self-employed. This is because of special statutory provisions in the Social Security Act and the IRC. Thus, a full-time life insurance salesperson under the Social Security law is prohibited from establishing a qualified plan for himself or for herself.<a href="#_ftn8" name="_ftnref8">⁸</a> Depending on the salesperson&rsquo;s contractual arrangements, he or she may be considered a self-employed individual for some sales or services, allowing them to establish a qualified plan. These provisions do not appear to apply to general agents and most general lines insurance agents and brokers. As a result, based on their situation, they may be considered self-employed individuals and are eligible to establish qualified plans for themselves and their employees.<br /> <br /> Attorneys with a law firm, depending on the circumstances, can either be self-employed or have the status of an &ldquo;employee&rdquo; of the firm.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> An individual may participate in a qualified plan as a self-employed person even though the individual performs work as a common law employee for another employer. For example, an attorney who is a common law employee of a corporation and who in the evenings maintains an office in which he or she practices law is eligible to establish a plan as a self-employed person with respect to the law practice.<br /> <br /> An individual may be self-employed with respect to some services the individual sells to a business even though he or she also provides other services to the same business as an employee. In either case, the individual may participate in a qualified plan as a self-employed person with respect to his or her self-employed earnings, even though the employer maintains a qualified plan under which the individual is covered as a common law employee.<a href="#_ftn10" name="_ftnref10">¹⁰</a> A tenured university professor who conducted seminars in a separate capacity at the university with which he was employed was determined by the Tax Court to be self-employed, despite objections by the IRS. As a result, he was permitted to establish a Keogh plan with amounts earned from his self-<br /> employment.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;401(c)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; <em>Hill, Farrer &amp; Burrill v. Comm.</em>, 67 TC 411 (1976), <em>aff&rsquo;d,</em> 594 F.2d 1282 (9th Cir. 1979).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;401(c)(4).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;401(c)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401-1(b)(3).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; See <em>Durando v. U.S.</em>, 70 F.3d 548 (9th Cir. 1995).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect;&nbsp;31.3121(d)-1(c)(2).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401-10(b)(3). See also IRC &sect;&nbsp;7701(a)(20); IRS Pub. 560.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; See Rev. Rul. 68-324, 1968-1 CB 433.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; <em>Pulver v. Comm.</em>, TC Memo 1982-437; Treas. Reg. &sect;&nbsp;1.401-10(b)(3)(ii).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; <em>Reece v. Comm.</em>, TC Memo 1992-335.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under the regulations, trades or businesses are under common control if they constitute a parent-subsidiary group of trades or businesses, a brother-sister group of trades or businesses, or a combined group of trades or businesses. The existence of these groups is determined under rules similar to those discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8964">8964</a> for controlled groups of corporations. &ldquo;Trades or businesses&rdquo; include sole proprietorships, partnerships, estates, trusts, and corporations.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;414(c); Treas. Reg. &sect;&sect;&nbsp;1.414(c)-1, 1.414(c)-2, 1.414(c)-3, 1.414(c)-4.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. The IRS may retroactively revoke a plan's determination letter by notice to the<br /> taxpayer if:<br /> <p style="padding-left: 40px;">(1)  there has been a change in the applicable law;</p><br /> <p style="padding-left: 40px;">(2)  the organization omitted or misstated a material fact;</p><br /> <p style="padding-left: 40px;">(3)  the organization has operated in a manner materially different from that originally represented; or</p><br /> <p style="padding-left: 40px;">(4)  in the case of organizations to which IRC Section 503 applies (which includes qualified plan trusts), the organization engaged in a prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purpose, and such transaction involved a substantial part of the corpus or income of such organization.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> The IRS has broad discretion to determine the extent to which rulings and regulations will be given retroactive effect.<a href="#_ftn2" name="_ftnref2">²</a> The wide array of correction procedures established by the IRS in the past decade offers a choice of less severe remedies, however, and suggests that the IRS is reluctant to disqualify plans except under the most egregious circumstances.<br /> <br /> The IRS also may retroactively correct its own mistaken application of law, even where a taxpayer may have relied to the taxpayer's detriment on the IRS's mistake.<a href="#_ftn3" name="_ftnref3">³</a> Concerning determination letters, the IRS has voluntarily limited its authority by the issuance of revenue procedures stating the standards by which the continuing effect of a determination letter will be judged. In substance, there are two standards.<br /> <br /> First, if a published revenue ruling is issued that is applicable to a previously approved plan, to retain its qualified status the plan must be amended to conform with that ruling before the end (and effective at least as of the beginning) of the first plan year following the one in which the ruling was published.<a href="#_ftn4" name="_ftnref4">⁴</a> Thus, with respect to the approved plan, the revenue ruling is not given retroactive effect and becomes effective only at the beginning of the next plan year.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Second, if no applicable published ruling affecting the qualification of the plan has intervened between the approval and the revocation of the approval, the revocation ordinarily will not have retroactive effect with respect to the taxpayer to whom the ruling was originally issued or to a taxpayer whose tax liability was directly involved in such ruling if:<br /> <p style="padding-left: 40px;">(1)  there has been no misstatement or omission of material facts;</p><br /> <p style="padding-left: 40px;">(2)  the facts subsequently developed are not materially different from the facts on which the ruling was based;</p><br /> <p style="padding-left: 40px;">(3)  there has been no change in the applicable law;</p><br /> <p style="padding-left: 40px;">(4)  the ruling originally was issued with respect to a prospective or proposed transaction; and</p><br /> <p style="padding-left: 40px;">(5)  the taxpayer directly involved in the ruling acted in good faith in reliance on the ruling and a retroactive revocation would be to the taxpayer's detriment.<a href="#_ftn6" name="_ftnref6">⁶</a></p><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Rev. Proc. 2017-5. See also Tax Consequences of Plan Disqualification at http://www.irs.gov/Retirement-Plans/Tax-Consequences-of-Plan-Disqualification.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  <em>Automobile Club of Mich. v. Comm.</em>, 353 U.S. 180 (1957); IRC § 7805(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  <em>Dixon v. U.S.</em>, 381 U.S. 68 (1965).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  <em><em>See generally</em></em> Rev. Proc. 2016-37, 2016-29 IRB 136.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  <em><em>See also Wisconsin Nipple &amp; Fabricating Corp. v. Comm</em></em>., 581 F.2d 1235 (7th Cir. 1978).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  Rev. Proc. 2016-6, 2016-1 IRB 200 at 21.03. See also <em>Churchill, Ltd. Emple. Stock Ownership Plan &amp; Trust v. Comm</em>., TC Memo 2012-300 (2012), <em>pet. denied</em>, 2013 U.S. App. LEXIS 11046 (8th Cir. May 29, 2013); <em>Lansons, Inc. v. Comm.</em>, 622 F.2d 774 (5th Cir. 1980); <em>Oakton Distributors, Inc. v. Comm.</em>, 73 TC 182 (1979); <em>Pittman Construction v. U.S.</em>, 436 F. Supp. 1215 (E.D. La. 1977).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Precise top-heavy ratios need not be computed every year so long as the plan administrator knows whether or not the plan is top-heavy. For this purpose, and for the purpose of demonstrating to the IRS that a plan is not top-heavy, an employer may use computations that are not precisely in accordance with the top-heavy rules but that mathematically prove that the plan is not top-heavy. Several such methods are provided in the regulations.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.416-1, T-39.<br /> <br /> </div>

<div class="Section1"><br /> <br /> A top-heavy plan must provide that an employee has a non-forfeitable right to his or her accrued benefit derived from employer contributions in accordance with one of the two following requirements:<br /> <ol><br /> <li><em>Three-year vesting.</em> An employee who has completed at least three years of service with the employer must have a non-forfeitable right to 100 percent of his or her accrued benefit.<a href="#_ftn1" name="_ftnref1">¹</a></li><br /> <li><em>Six-year graded vesting.</em> An employee who has completed at least two years of service must have a non-forfeitable right to at least the following: 20 percent of his or her accrued benefit after two years of service, and 20 percent additional for each of the following years of service, reaching 100 percent after six years of service with the employer.<a href="#_ftn2" name="_ftnref2">²</a></li><br /> </ol><br /> Except to the extent that they are inconsistent with these fast vesting schedules, the rules that pertain to vesting in qualified plans generally (including years of service and breaks in service, etc.) apply for purposes of the fast vesting requirements.<a href="#_ftn3" name="_ftnref3">³</a> Thus, the fast vesting schedules are not safe harbors; even faster vesting may be required by IRC Section&nbsp;411(d) where there is a pattern of abuse ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3869">3869</a>).<br /> <br /> When a plan becomes top-heavy, fast vesting under one of the two schedules generally must be applied to all benefits accrued under the plan for the current plan year and all prior plan years (including benefits accrued in years before the plan became top-heavy and benefits accrued before the effective date of the top-heavy rules). The accrued benefit of any employee who does not have an hour of service after the plan became top-heavy, and any accrued benefits that were forfeited before the plan became top-heavy, need not be covered by the fast vesting<br /> schedule.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Although the IRC does not require that fast vesting be applied to benefits accrued in future plan years in which a plan is not top-heavy, a return to the plan&rsquo;s slower vesting when the plan ceases to be top-heavy in many cases may be impractical or impossible. For example, IRC Section&nbsp;411(a)(10) requires that a change in vesting schedules not reduce a participant&rsquo;s non-forfeitable percentage in his or her accrued benefit and that participants with at least three years of service be allowed to elect to be covered by the previous vesting schedule<br /> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3869">3869</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <p style="text-align: center;"><strong>Integration</strong></p><br /> Although the IRC does not prohibit integration in a top-heavy plan, the fast vesting and minimum benefit (and contribution) requirements must be satisfied without considering employer payments of FICA taxes or contributions or benefits made or received under any other federal or state law.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;416(b)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;416(b)(1)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;416(b)(2); <em><em>see</em> </em>Treas. Reg. &sect;&sect;&nbsp;1.416-1, V-1; 1.416-1, V-2.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.416-1, V-3.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; <em><em>See</em> </em>IRC &sect;&nbsp;411(a)(10)(b) and Treas. Reg. &sect;&nbsp;1.416-1, V-7. For additional rules regarding vesting in a top-heavy plan, <em><em>see</em> </em>Treas. Reg. &sect;&sect;&nbsp;1.416-1, V-5 and 1.416-1, V-6.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;416(e).<br /> <br /> </div></div><br />

<p> A. <em>Permanence.</em> A qualified plan must be a permanent program. Thus, although an employer may reserve the right to amend or terminate the plan, the abandonment of the plan for any reason other than business necessity within a few years after its establishment will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. This will especially be true if, for example, a pension plan is abandoned soon after pensions have been funded for the highly-paid or stockholder employees. The permanency of a plan will be indicated by all of the surrounding facts and circumstances, including the likelihood of the employer's ability to continue contributions as provided under the plan. In the case of a profit-sharing plan, other than a profit-sharing plan which covers employees and owner-employees (<em><em>see</em> </em>section 401(d)(2)(B)), it is not necessary that the employer contribute every year or that he contribute the same amount or contribute in accordance with the same ratio every year. However, merely making a single or occasional contribution out of profits for employees does not establish a plan of profit-sharing. Since 1985, plan sponsors no longer must have profits to make contributions to profit-sharing plans.<a href="#_ftn1">¹</a> In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan. <a href="#_ftn2">²</a></p><p> B. <em>Benefits after merger.</em> The plan must provide that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated).<a href="#_ftn3">³</a> (This requirement does not apply to certain multiemployer plans.) Shifting assets between funding media used for a single plan (e.g., between trusts and annuity contracts) is not a transfer of assets or liabilities.<a href="#_ftn4">⁴</a></p><p> C. <em>Early retirement benefit.</em> If a plan provides for payment of an early retirement benefit, a vested participant who terminates employment after having satisfied the service requirements, but not the age requirement for the early benefit, must be entitled, upon satisfaction of the age requirement, to receive a benefit not less than the benefit to which the participant would be entitled at normal retirement age, actuarially reduced in accordance with reasonable actuarial assumptions.<a href="#_ftn5">⁵</a> In the case of a defined contribution plan, the employee, upon reaching early retirement age following termination after having satisfied service requirements, must be entitled to receive a benefit equal in value to the vested portion of his account balance at early retirement age.<a href="#_ftn6">⁶</a></p><p> D. <em>Social Security offset.</em> The plan must not permit benefits to be reduced by reason of any increase in Social Security benefit levels or wage base occurring (1) after separation from service, in the case of a participant who has separated from service with nonforfeitable rights to benefits, or (if earlier) (2) after first receipt of benefits, in the case of a participant or beneficiary who is receiving benefits under the plan.<a href="#_ftn7">⁷</a> This requirement also applies to plans that supplement benefits provided under state or federal laws other than the Social Security Act, such as the Railroad Retirement Act of 1937.<a href="#_ftn8">⁸</a></p><p> E. <em>Withdrawal of employee contributions.</em> The plan must preclude forfeitures of accrued benefits derived from employer contributions (whether forfeitable or nonforfeitable) solely because a benefit derived from the participant's contributions is voluntarily withdrawn by him after the participant has a nonforfeitable right to 50 percent of the accrued benefit derived from employer contributions.<a href="#_ftn9">⁹</a></p><p> F. <em>Compensation.</em> Generally, a plan will not be qualified unless (for the purpose of any of the qualification rules) not more than $360,000 (for 2026) of annual compensation of any employee is taken into account under the plan for any plan year.<a href="#_ftn10">¹⁰</a> This amount is indexed for inflation in increments of $5,000.<a href="#_ftn11">¹¹</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 401(a)(27), added by P.L.99-514. </p><p> <a href="#_ftnref2">2</a>. Treas. Reg. § 1.401-1(b)(2). This regulation has not been amended to reflect the addition of section 401(a)(27), eliminating the requirement that contributions be made from profits. </p><p> <a href="#_ftnref3">3</a>. IRC § 401(a)(12). </p><p> <a href="#_ftnref4">4</a>. Treas. Reg. § 1.414(l)-1. </p><p> <a href="#_ftnref5">5</a>. IRC § 401(a)(14); Treas. Reg. § 1.401(a)-14(c). </p><p> <a href="#_ftnref6">6</a>. TIR 1334 (1/8/75), M-3. </p><p> <a href="#_ftnref7">7</a>. IRC § 401(a)(15). </p><p> <a href="#_ftnref8">8</a>. Treas. Reg. § 1.401(a)-15(b). </p><p> <a href="#_ftnref9">9</a>. IRC § 401(a)(19); Treas. Reg. § 1.401(a)-19(b). </p><p> <a href="#_ftnref10">10</a>. IRC § 401(a)(17)(A). </p><p> <a href="#_ftnref11">11</a>. IRC § 401(a)(17)(B); Treas. Reg. § 1.401(a)(17)-1(a). </p>

<p> A key employee for purposes of the top-heavy rules is any employee or, in some cases, a former or deceased employee who, at any time during the plan year containing the determination date for the plan year to be tested, is: </p><p>(1) an officer of the employer whose annual compensation from the employer exceeds $230,000 for 2025, $220,000 for 2024, $215,000 for 2023, $200,000 for 2022, $185,000 for 2020-2021,<a href="#_ftn1">¹</a> this amount is indexed for inflation in increments of $5,000);</p><p>(2) a more-than-5 percent owner of the employer; or</p><p>(3) a more-than-1 percent owner of the employer having annual compensation from the employer for a plan year in excess of $155,000; this amount is not indexed for inflation.<a href="#_ftn2">²</a> (As to when the determination date occurs, <em><em>see</em></em> Q <a href="javascript:void(0)">3917</a>.)</p><p> The determination as to whether an individual is an officer is made on the basis of all facts and circumstances; job titles are disregarded. An officer is an administrative executive who is in regular and continuous service, not a nominal officer whose administrative duties are limited to special and single transactions. A partner of a partnership will not be treated as an officer for purposes of the key employee test merely because he owns a capital or profits interest in the partnership, exercises his voting rights as a partner, and may, for limited purposes, be authorized and does in fact act as an agent of the partnership.<a href="#_ftn3">³</a> Unincorporated associations, including partnerships and sole proprietorships, may have officers.<a href="#_ftn4">⁴</a></p><p> In any case, the number of individuals treated as key employees because of their officer status is limited to the greater of three individuals or 10 percent of all employees, but in any event, not more than 50.<a href="#_ftn5">⁵</a></p><p> Those employees who can be excluded when determining the number of employees in the top-paid group for purposes of identifying an employer's highly compensated employees ( Q <a href="javascript:void(0)">3930</a>) also can be disregarded in determining the number of officers to be taken into account in identifying key employees.<a href="#_ftn6">⁶</a> It is unclear how ties in compensation should be resolved. Whether an individual is a key employee because of his or her officer status is determined without regard to whether the individual is a key employee for any other reason.<a href="#_ftn7">⁷</a></p><p> An individual owns more than 5 percent of a corporate employer if the individual owns more than 5 percent of the outstanding stock of the corporation by value or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation. In determining stock ownership, the attribution rules of IRC Section 318 apply, but stock is attributed from a corporation if a 5 percent rather than 50 percent ownership test is met. Only ownership in the particular employer is considered; the controlled group, common control, and affiliated service group aggregation rules of IRC Section 414 are disregarded. An individual owns more than 5 percent of a noncorporate employer if he or she owns more than 5 percent of the capital or profits interest in that employer. Rules similar to the attribution rules of IRC Section 318 apply for purposes of determining ownership in a noncorporate employer.<a href="#_ftn8">⁸</a> The aggregation rules of IRC Section 414 are disregarded.<a href="#_ftn9">⁹</a></p><p> The rules discussed in the previous paragraph also apply to determine whether an individual is a more-than-1-percent owner of the employer.<a href="#_ftn10">¹⁰</a> All employers who are under common control or who are members of a controlled or affiliated service group ( Q <a href="javascript:void(0)">8964</a>, Q <a href="javascript:void(0)">3935</a>) are treated as one employer for the purpose of determining whether a more-than-1-percent owner has annual compensation from the employer in excess of $230,000 (as indexed for 2025 projected). </p><p> Compensation, for purposes of identifying key employees generally, is the compensation considered for purposes of the IRC Section 415 limits on contributions and benefits. Any elective or salary reductions contributions made on behalf of an employee to a 401(k) cash or deferred plan, simplified employee pension, 403(b) tax sheltered annuity, or cafeteria plan are included as compensation for purposes of IRC Section 415.<a href="#_ftn11">¹¹</a></p><p> For purposes of determining an employee's ownership in the employer, the attribution rules of IRC Section 318 and the aggregation rules of IRC Section 414 apply. If two employees have the same ownership interest in the employer, the employee who has the greater annual compensation from that employer will be treated as owning the larger interest.<a href="#_ftn12">¹²</a></p><p> The terms employee and key employee include their respective beneficiaries.<a href="#_ftn13">¹³</a></p><p> The term key employee is applied under various provisions of the IRC (e.g., IRC Sections 401(h), 415(l), and 419A). For these purposes, the term does not include any officer or employee covered by a governmental plan.<a href="#_ftn14">¹⁴</a> Thus, the separate accounting and nondiscrimination rules under those provisions do not apply to employees covered by governmental plans. </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-34. </p><p> <a href="#_ftnref2">2</a>. IRC § 416(i); Notice 2012-67 (Dec. 10, 2012); Treas. Reg. § 1.416-1, T-12. </p><p> <a href="#_ftnref3">3</a>. Treas. Reg. § 1.416-1, T-13; Rev. Rul. 80-314, 1980-2 CB 152. </p><p> <a href="#_ftnref4">4</a>. Treas. Reg. § 1.416-1, T-15. </p><p> <a href="#_ftnref5">5</a>. IRC § 416(i), flush language. </p><p> <a href="#_ftnref6">6</a>. IRC §§ 416(i)(1), 414(q)(5). </p><p> <a href="#_ftnref7">7</a>. Treas. Reg. § 1.416-1, T-14. </p><p> <a href="#_ftnref8">8</a>. IRC § 416(i)(1)(C). </p><p> <a href="#_ftnref9">9</a>. IRC § 416(i)(1)(B); Treas. Reg. §§ 1.416-1, T-17; 1.416-1, T-8. </p><p> <a href="#_ftnref10">10</a>. Treas. Reg. § 1.416-1, T-16. </p><p> <a href="#_ftnref11">11</a>. IRC §§ 416(i)(1)(D), 414(q)(4), 415(c)(3). </p><p> <a href="#_ftnref12">12</a>. Treas. Reg. § 1.416-1, T-19. </p><p> <a href="#_ftnref13">13</a>. IRC § 416(i)(5). Treas. Reg. § 1.416-1, T-12. </p><p> <a href="#_ftnref14">14</a>. IRC § 416(i). </p>

<div class="Section1"><br /> <br /> For the IRC&rsquo;s qualification requirements, an employer generally treats any individual who is a leased employee as though that individual were the employer&rsquo;s own employee. To the extent that contributions or benefits provided for a leased employee by the organization from which the employee is leased are attributable to services performed for the employer, these contributions or benefits are treated as if they were provided by the employer under a qualified plan.<a href="#_ftn1" name="_ftnref1">¹</a> These two requirements have the effect of requiring most leased employees who have met a recipient plan&rsquo;s eligibility provisions to be included in the recipient&rsquo;s plan as an employee of the recipient.<br /> <br /> A leased employee is an individual who is not an employee of the recipient employer and who performs services for a recipient employer, if (1) the individual&rsquo;s services are provided to the recipient under one or more agreements with a leasing organization, (2) the individual has performed services for the recipient or related employer on a substantially full-time basis for a period of at least one year, and (3) the services are performed under the primary direction or control of the recipient employer.<a href="#_ftn2" name="_ftnref2">²</a> For purposes of this definition, the term employee means a common law employee as determined under the generally applicable standard for determining worker classification (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8723">8723</a>).<a href="#_ftn3" name="_ftnref3">3</a><br /> <br /> The fact that an individual is a leased employee does not automatically mean he or she must be a participant in a plan maintained by the employer. A plan may exclude a leased employee from participation in the plan when the plan can satisfy coverage and nondiscrimination testing by including the leased employee with no benefits or the benefits provided by the leasing company plan. At least two circuit courts have held that ERISA does not <em>per se</em> require the inclusion of leased employees in an employer&rsquo;s plan.<a href="#_ftn4" name="_ftnref4">4</a> In addition, the IRS addressed this issue in Notice 84-11,<a href="#_ftn5" name="_ftnref5">5</a> stating that leased employees should be treated as employees, but the plan&rsquo;s failure to include them as participants in the plan does not result in disqualification of the plan. Despite its issuance prior to TRA &rsquo;86, Notice 84-11 was cited favorably in <em>Bronk v. Mountain States Tel. &amp; Tel., Inc.</em>,<a href="#_ftn6" name="_ftnref6">6</a> as controlling authority on this issue.<br /> <br /> The determination of whether services are performed under the primary direction or control of the recipient is based on the facts and circumstances. A finding will be made if the service recipient exercises the majority of direction and control over the individual; for example, whether the individual is required to comply with the recipient&rsquo;s instructions as to when, where, and how the services are to be performed; whether the services will be performed by a particular person; whether the individual is subject to the recipient&rsquo;s supervision; and whether the services must be performed in a particular order or sequence set by the recipient.<br /> <br /> The recipient may be a single employer or a group consisting of employers required to be aggregated under the controlled group, common control, or affiliated service group rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8964">8964</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3935">3935</a>).<a href="#_ftn7" name="_ftnref7">7</a> Employers are related if a loss on a sale of property between them would be disallowed as a deduction under IRC Sections 267 or 707(b) or they are members of the same controlled group of corporations, using a 50 percent rather than 80 percent ownership test.<a href="#_ftn8" name="_ftnref8">8</a><br /> <p style="text-align: center;"><strong>Safe Harbor</strong></p><br /> Even though an individual is a leased employee, he or she may be disregarded by the employer for purposes of determining qualification if the individual is covered by a qualified money purchase pension plan maintained by the leasing organization and the following requirements are satisfied:<br /> <p style="padding-left: 40px;">(1)&nbsp; The plan provides for employer contributions by the leasing organization at a nonintegrated rate which is not less than 10 percent.</p><br /> <p style="padding-left: 40px;">(2)&nbsp; The plan provides for immediate participation on the first day an individual becomes an employee of the leasing organization unless (x) the individual&rsquo;s compensation from the leasing organization in each plan year during the four year period ending with the plan year is less than $1,000, or (y) the individual performs substantially all of his or her services for the leasing organization.</p><br /> <p style="padding-left: 40px;">(3)&nbsp; The plan provides for full and immediate vesting of all contributions under the plan.</p><br /> <p style="padding-left: 40px;">(4)&nbsp; Leased employees do not constitute more than 20 percent of the recipient&rsquo;s nonhighly compensated work force. <a href="#_ftn9" name="_ftnref9">9</a></p><br /> This safe harbor applies only for purposes of the leased employee provision; it does not permit an employer to disregard a common law employee who otherwise meets the definition of a leased employee. <a href="#_ftn10" name="_ftnref10">10</a><br /> <br /> A recipient&rsquo;s nonhighly compensated work force is the aggregate number of individuals who are not highly compensated ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3930">3930</a>) but who are common law employees of the recipient and have performed services for the recipient on a substantially full-time period of at least one year or who are leased employees with respect to the recipient. <a href="#_ftn11" name="_ftnref11">11</a><br /> <br /> A money purchase pension plan of a leasing organization is not qualified if it covers any individuals who are leased by the leasing organization to the recipient but who are not themselves employees of the leasing organization. That is because the plan would not meet the &ldquo;exclusive benefit&rdquo; rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3839">3839</a>).<a href="#_ftn12" name="_ftnref12">12</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;414(n)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;414(n)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a> <em>Burrey v. Pacific Gas &amp; Elec. Co.</em>, 1998 U.S. App. Lexis 26594 (9th Cir. 1998); General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), p.&nbsp;173 (the 1996 Blue Book).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a> See <em>Abraham v. Exxon Corp.</em>, 85 F.3d 1126 (5th Cir. 1996); <em>Bronk v. Mountain States Tel. &amp; Tel., Inc.</em>, 140 F.3d 1335 (10th Cir. 1998), <em>aff&rsquo;d</em>, 2000 U.S. App. LEXIS 14677 (10th Cir. 2000).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a> 1984-2 CB 469, A-14.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a> 140 F.3d 1335 (10th Cir. 1998).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a> IRC &sect;&nbsp;414(n)(6)(B).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a> IRC &sect;&sect;&nbsp;414(n)(6)(A), 414(a)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a> IRC &sect;&nbsp;414(n)(5).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a> IRC &sect;&nbsp;414(n)(2). See <em>Burnetta v. Comm.</em>, 68 TC 387 (1977), <em>acq</em>. 1978-2 C.B. 1.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a> &nbsp; IRC &sect;&nbsp;414(n)(5)(C)(ii).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a> See <em>Professional &amp; Executive Leasing, Inc. v. Comm.</em>, 89 TC 225 (1987), <em>aff&rsquo;d,</em> 862 F.2d 751 (9th Cir. 1988).<br /> <br /> </div></div><br />