All Activity

You're overthinking it. Nothing in SECURE 2 says that top heavy is "tested separately" and to be honest I don't know where this common misunderstanding is coming from. The top heavy determination is still done based on all participants in the plan. There is no disaggreation for determining the top heavy ratio. What section 310 of SECURE 2 says is that, for plan years starting in 2024 and later, otherwise excludable employees no longer have to receive the defined contribution top heavy minimum. That's it.

I am having a hard time finding how Secure 2.0 will actually impact Top Heavy. I know Top Heavy Rules were changed so now non-excludable and excludable can be tested separately and the Top Heavy minimum can also be allocated to just the non-excludable. I know the provision applies to plans starting after 12/31/2023, but we have differing thoughts on when these options will actually start affecting plans. The prevailing thought is that in order to allocate the Top Heavy minimum to just the non-excludable, the actual Top Heavy must be disagg as well. Since the determination date is the last day of the prior plan year, the consensus is we cannot use the non-excludable option for the minimum allocation until 2025. Another thought is that they are independent of each other, that you can run test with all employees but then allocate the Top Heavy minimum to just the non-excludable employees. I am of the former opinion as I do not see the benefit of using disagg for Top Heavy Test since the more Non-Key balances the better for the percentage. My thoughts are the only way it makes sense to split the test is so you can get the benefit of allocating the top heavy minimum to the non-excludable, since more likely than not there are no excludable key employees which makes the test 0%. Basically I think you have to allocate the Top Heavy Minimum in the same manner as you ran the test. Thoughts? Another thought that is confusing the issue, is what if there is a Key employee who is in the excludable test, so that test is actually top heavy? With ADP/ACP and Coverage, we know there is the option to disregard the excludable employees from the test. I haven't see that spelled out for Top Heavy as yet, and if my previous observation is accurate and there is a Key employee who is excludable and that test is technically "top heavy" does that mean that those excludable employees now need a top heavy minimum?

I would argue that in the asset deal scenario it's no different than going on a hiring spree. Employees of the seller are first termed then (if continuing) rehired by the buyer, and the buyer does not acquire the corporate entity (stock) itself. Under that approach, you stick to the standard rule that ALE status is always based on prior-year headcount. So the influx of new employees wouldn't potentially make the buyer an ALE until the next calendar year--and even then only if it averaged 50+ full-time employees (including full-time equivalents) over the course of the whole preceding year. More details: https://www.newfront.com/blog/becoming-an-ale-subject-to-the-aca-employer-mandate-2 Slide summary: 2024 Newfront ACA Employer Mandate & ACA Reporting Guide

when I started work in this area, the rule was that if no contribution was made by the due date of the corporate tax return plus extensions, there was no valid trust and therefore no plan byoperation of law. The IRS approved of that position. In spite of all the legislative and regulatory changes made since then, I am not aware of anything that would have changed this principle. Since there is no plan ortrust in existence, there is nothing to correct. That employer should simply adopt the 401(k) plan of one of its affiliates.

CuseFan, I agree with you. They would take separate deductions, just that there was an issue with banking and making the deposit from sole-prop and that is why sole-prop wanted to give the corp the monies and corp making the deposit. Makes no sense but I am curious if anyone has seen done this way.

is this a one person plan? DC? DB? Are there going to be any future contributions, benefit accruals, deposits? If no, then eventually will be deemed terminated whether the person likes it or not. If the business has closed because the owner retired - is there even a sponsor? is it an abandoned/orphan plan? If its an active plan, other than one retired person doesn't want to take their money - is it a big deal to let them leave it in? In additional to possible better protections, some plans have better investment options, pricing, etc than an individual would get themselves with a retail IRA.

Any thoughts on how and whether this analysis would change in an asset sale, where the assets of a non-ALE are acquired by another non-ALE, and, upon closing, the purchaser exceeds the 50 FTE threshold. I think in a stock sale, the obligation to offer coverage commences in the month of closing but I am not sure if that is true in an asset deal. I've read conflicting things on it, none of which are particularly convincing. Thanks.

My understanding - and I thought this came up not that long ago and I opined similarly - is that you can only do that if the CG files a consolidated return, which is clearly not the case here. So for CG AB, A cannot make contributions and take deduction for B's employees on A's tax return, or vice versa, but either can contribute whatever toward A's and B's employees if AB deducts on a consolidated tax return.

They can be, but not necessarily, and such should be closely examined in the person's state of residence (bankruptcy laws). The administrative burden - continuing restatements, interim amendments, 5500 filings - and associated costs should be weighed against any real (not perceived) difference in levels of protection.

There seems to be pushback by a recently retired sponsor of their own DC plan who has an unusually large account balance and does not want to terminate as recommended. They believe the funds and investments are safer under a retirement plan than an IRA.

I agree but I am curious if anyone had this issue.

Because when it gets complicated, it's always the actuary who should know, no matter the subject . However, this one clearly falls under the purview of a CPA.

Boy sure would be nice if the IRS had clear guidance on M&A and how it affects plans and testing wouldn't it? I think the approach taken is reasonable and would not be challenged by the IRS assuming A now owns all of B or at least enough for a CG to exist in the testing year. I also think testing them separately would be acceptable as well.

First thought is, why ask the actuary's office rather than the accountant's?

Plan 001 effective date was 01/01/2017, and the Plan merged into a MEP on 02/12/2021. This Plan spun-off from the MEP on 11/06/2023 into a newly established standalone plan. We have some conflicting views on the effective date of the newly established standalone Plan. I believe the original effective date should be 11/06/2023, but others believe it should be 02/12/2021. Plan 001 Original Effective Date was 01/01/2017. This Plan did not file 2017, 2020 or the final 2021 5500 prior to joining the MEP. The 2021 5500 for Plan 001 should have shown the assets as a “transfer out”; listed the receiving Plan Name; marked as a short plan year, and final 5500. Even though the assets were not distributed, this would have essentially terminated the Plan, because 001 no longer ceases to exist, and the remaining assets were absorbed into another Plan. The only difference is that when filing the 5500, the plan merging into a MEP would answer “No” to whether there has been a resolution to terminate the Plan; whereas, a Plan Termination would have answered “Yes” and shown the assets as distributed instead of a rollover. The Plan joined the MEP (Plan 333) effective 02/12/2021. The Plan spun out of the MEP into a “newly established” standalone plan on 11/06/2023, but we are using the MEP joinder effective date of 02/12/2021 as the effective date of the newly established Plan and under Plan 001. When preparing the 5500, it will show that the Plan has a 01/01/2023 beginning balance of zero, which is true because the assets were under a MEP (Plan 333), and then a transfer/rollover was processed during the year from the MEP. It is being suggested that we file the 5500 using Plan Year 11/06/2023 through 12/31/2023 under Plan 001 as a short plan year, but I am arguing that we can't do that if the original effective date on the 5500 is 02/12/2021. If we file the Plan like this, I feel as though it will trigger the IRS, and they will want to know what happened to all the other 5500 filings. Regardless of missed filings, I believe this Plan should be 002 with an effective date of 11/06/2023. Filing under 001 is going to trigger a bunch of activity from the DOL and IRS that we don’t want, and potentially the correction of 2023’s 5500 (along with all other missed filings) if filed as-is under 001 with effective date 02/12/2021. Thoughts?

You need to go to an experienced ERISA attorney for advice.

Here are Mercer's projections.

Business A and business B are related, but their plans are not part of a controlled group. Business B is purchased by business A in November and the TPA included all income/contributions from both entities in the testing for business A's plan (SHNE was paid to plan A after the merge). However, each business was operating separate plans before that. I don't believe this is an issue because the plan's benefits are identical. Would testing need to be completed separately for plan B? Would both 5500s be marked as yes for permissive aggregation?

I don't know how the companies are set up or related and it matters for your analysis. That being said it sounds like there could possibly be a non-exempt prohibited transaction in there? A lot depends on your specific facts and circumstances. Here are some thoughts: Generally, paying fees to any service provider is a prohibited transaction under ERISA section 404(a)(1). However, there is an exemption 408(b)(2) for reasonable and necessary services for establishment and operation of a plan, so long as no more than reasonable compensation is paid. Reasonable compensation has a specific definition and requires disclosures. If there is certain types of common ownership between the LLC and LLP, there may be an issue with even just hiring the affiliated provider and paying a fee. Regardless of that no fiduciary should be able to exercise discretionary authority to hire itself or increase its own compensation unilaterally. ERISA section 406(b) prevents self-dealing by a fiduciary. You should see an ERISA attorney so your actual facts and circumstances can be considered in light of the rules.

My favorite answer to most questions, read the plan document.

Hi Joe owns 100% of corporation and 100% sole-prop - separate lines of bizs with separate income sources. Corporation has employees and sole-prop does not. Both entities adopted the plan Joe's 2023 DB contribution is 200k split 50/50 between the 2 entities (his w2 from corporation was 165k and had 500k net c from sole-prop so 50/50 of the 401a17 limit). Joe asked if he could pay the full 200k from the corporation which was not the original agreement. Joe also asked if he could transfer 100k from sole-prop to the corporation and have the corporation put in the 200k but still deduct separately from each entity. Any thoughts/comments?

That rule—26 C.F.R. § 1.414(c)-5—refers to an 80% overlap in the governing bodies of exempt organizations, which the rule describes as “an organization that is exempt from tax under [Internal Revenue Code] section 501(a)[.]” https://www.ecfr.gov/current/title-26/section-1.414(c)-5. Although a public-school district is not subject to Federal income tax, that results from law other than I.R.C. § 501(a). Further, even if one were to interpret I.R.C. § 414 to treat a public-school district and a foundation as one employer, that might not necessarily answer questions about whether a governmental plan may cover the foundation’s employees without losing ERISA’s governmental-plan exemption.

It's a stretch but it might work. If no contributions at all were made for 2023 then the TH determination date for 2023 and 2024 would be 12/31/2023 and not TH for 23 or 24. terminate the plan for 24 and refund 100% deferral as failed ADP (unless some could be recharterized as catch-up?) assuming no employer money and deferral only so far. Don't know if that would work or not.

My recollection is that the regs regarding non-profit entities (501(c)(3) ?) suggest a controlled group concept involving shared Board members and control by one entity over the other. That's my recollection without looking it up. But Peter is right, Carol is the person to ask and I have worked with her firm in the past.

I'm wondering if there's a way to claim MDO as 0% for the NHCEs and just take it all back as an ADP test failure.