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"true up" for self employed


JButtrick

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The company is an LLC taxed as a partnership. The plan has a 100% of 4% Safe Harbor match.



There are two owners participating in the plan. They both contribute to the 401(k) plan during the year out of a monthly draw, but we don't know what their actual compensation will be until after the end of the year (I realize this could be risky in the case of a loss for the year, but that is another question and it hasn't been an issue so far). During the year, their deferrals are in excess of 4% of the draw, so their match is limited. Historically, we calculate the match for the owners once their K-1s are done after the end of the year.



All the other participants get their match with each payroll and the preference is not do a "true up" for them at year end.



I am now doing the PPA restatement and have been pondering the "true-up" option.



I would like rationalize that the year end match calculation for the owners is something different from a "true-up", but my gut tells me that it is NOT (added from initial posting) and we should be doing the true-up for everyone.



Thoughts?

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If the owners' matching contributions are made without respect to their actual compensation, then a true-up is required for them, but it's more of a correction due to an improper calculation (since you didn't have the actual comp). In my understanding, if you have to correct for one, then you correct for all. In essence, it's a true-up and it's for everyone.

It may be semantics but I see this as more of a correction.

R. Alexander

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401king,

To clarify, are you saying that if I need to "correct" for the 2 owners because I didn't have actual comp, then I need to "true up" for the W-2 employees for whom I did have correct comp.

I guess this exactly where I am hung up - is there a difference between a "correction" and a "True-up" (which is an option in the adoption agreement).

I'm thinking I should check the "true-up" and tell the client we need to look at everyone.

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In my opinion, there is a difference between True-Up and a Correction, and I would view your situation with the owners as a Correction because the formula wasn't being accurately applied during the year (and nor could it have been).

True-up is a plan provision, normally, and should be in the document as a Yes or No.

Corrections are a separate in definition, but similar in process. If you find a match formula was improperly applied during the year then it needs to be corrected for all participants. Corrections are not optional; not a provision.

This is what I recall reading years back in the ASPPA books and have stuck with it as our policy.

R. Alexander

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ok, let's for example, assume the owner's comp ends up negative , so he can have no deferrals

would you say that removing a match is a 'true up' or a correction, as 401king suggests?

I assume he has a deferral agreement in place at 4% (or at least the IRS has indicated he should have one in place) an amount for match was deposited throughout the year. Suppose the comp wasn't negative, but that 4% was less than deposited. again you would correct, but I wouldn't call that true up.

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In Tom's second example, the senario is closer to there being a 10% of the draw deferral election, but the match maxed out at 4% of the draw. When the Net Income is determined, the actual deferral percentage end up being 3%, so the 100% of the deferral should been matched instead of 40%.

I assume that doesn't change the view that it is a correction. So far it seems like the consesns is that the adjustment for the owners is a "correction", not a true up.

But 401King seems to be saying if there is a correction for one then "it needs to be corrected for all participants" which would suggest that if I need to correct an owner using correct net income, then I need to correct the W-2 employees at year end as well - i.e. a "True-up". If that's what I'm reading, then I might as well check the "True up" box and eliminate any confusion. But given the distinction being drawn between "correction" and "True up" I want to make sure that y'all think that either way, I end up in the same place.

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I think I would lean toward this being a "correction," as well. My understanding is that draws are not compensation, they are simply advances on what may become compensation. For self-employed individuals, payday is the last day of the year. In other words, self-employed folks have only one payroll per year. Unlike the rest of the employees.

If you calculated the wrong employee match for just one payroll, you would go fix that ONE payroll. You would not go back and do a true-up.

I think the same is true for the owners. If the wrong Match was calculated for their ONE (annual) payroll, you would go back and fix that ONE payroll.

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