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While a plan’s administrator must read the documents governing the plan, many plans put compensation in the period in which it was or is paid. That often is so even if that’s not the period in which a worker’s service earned the compensation. That often is so even if the retirement plan’s measure is inconsistent with an employer’s accounting for when the compensation is the employer’s expense. If the plan’s provisions for defining compensation and putting it in a period result in compensation in a period in which the participant is not an employee or deemed employee, look to other plan provisions to discern whether a nonelective contribution is allocated. This is not advice to anyone.

We requested ownership information for a client that onboarded with us this year. Most of our plans are fairly simple with ownership as we specialize in small plans (I don't think we have a single plan that's large enough for a large plan audit), so it's nearly always just some split between a few employees. This company sent over a cap table, showing columns for common & preferred stock ownership, outstanding and diluted shares, etc for ~60 lines, some of them being employees holding stock, but also a large number of them (40+ or so) being holding firms or other entities that aren't individuals. A few questions. When calculating ownership for 401(k) purposes, is ownership specifically voting stock? Their preferred shares don't have voting rights, so that would impact how ownership % is calculated (CS / total CS vs common & preferred / all stock). How should we handle the potential of control groups? While unlikely, if a combination of those holding firms all held interest in another company that added up to 80%, couldn't we run into a control group issue that we'd have no way to know about? In this case, I believe the 80% ownership for controlled groups is specifically between 5 or fewer individuals/entities. If the 5 largest stakeholders don't add up to more than 80%, would it be safe to assume we're safe in this regard, as no combination of 5 firms could hit 80% anyways? If someone who held stock at this company also was an owner of any of the holding firms, would they then need attributed ownership from that? E.g if John Doe owned 5% of the shares of this company, but also held 50% of ABC Holdings, which held 10% of this company, would John's ownership be 5% (direct) + 50% * 10% = a total of 10% ownership for plan purposes? While the odds of any of this being particularly relevant is fairly low, especially in the small plan world, I'd prefer to have a solid understanding of their plan ownership; any input would be appreciated. Thanks!

@Peter Gulia is on target with suggesting the plan to start is the plan's definition of compensation. Be aware that some plan documents have separate sections that address post severance compensation for various purposes such as calculating contributions or 415 limitations. Any operational practice must conform to a reasonable and consistent interpretation of the formal plan documentation. Your question, appropriately, asks about what is done in actual practice. When discussing the practicality of determining in which plan year compensation should be recognized, a precursor is understanding the employer's payroll practice and also understanding the accounting method. For example, are employees paid in arrears (after the time when they worked) and, if so, how long past that time? Are employees paid in advance (which is sometimes done for salaried employees)? Is there a mix of payroll practices within the employer (such as hourly versus salaried)? With respect to the accounting method, how is payroll reported for W-2s and for financial reporting? Ideally, how amounts that straddle a plan year are treated will be as consistent as practical for plan purposes (contributions, deferral limits, annual additions, HCE determination...), for employee purposes (W-2, tax withholding, health & welfare benefits, insurance...), and the basis for employer financial reporting (cash, accrual, or on a 5500 - modified cash). Taken together, all of the above doesn't answer your specific question. The answer will be derived from having uniform and consistent payroll and plan accounting practices that do not violate the plan provisions.

Begin by reading, carefully, the plan’s definition of compensation, at least the definition for compensation to determine allocations of the nonelective contribution. Next, if relevant, consider when the check was drawn and when it was sent. If the distributee received the paycheck on Saturday, January 3, might the employer have paid that money in December? (Thursday, January 1, was likely not a business day, and Wednesday, December 31, was still 2025.)

I have a situation with an application for 5500-EZ penalty relief program and I would very greatly appreciate any comments, suggestions, or advice from anyone who can help: My wife and I both opened separate solo 401(k) accounts for our respective sole proprietorship businesses. Mine in 2011, hers in 2016. We were each the only participants ever in the respective 401(k) plans. We were each the only participants in the respective businesses. There was no overlap and no involvement of one spouse in the other spouse's business or 401(k) plan. We both recently terminated our sole proprietorships, terminated our respective 401(k) plans, and zeroed out the balanced. My wife took a distribution of about $16,000 (she is over 65) and I rolled my 401(k) balance into my individual rollover IRA. My wife had a total of about $16,000.00 and I had a total of about $760,000.00. We both terminated our respective plans prior to the rollovers and we both have recently filed Final Form 5500-EZs in early 2026 on a short plan year. It was my wife's first-ever ("first and final") 5500-EZ filing because she always had a low balance, but I have been filing them since 2018, since I have been over $250,000 since then. · Only after the closures did we learn that we may have run afoul of IRS regulations because for several years while we were operating our 401(k) plans, we had minor children under the age of 21. Therefore, we were actually part of a "controlled group" and my wife was obligated to file 5500-EZs for her plan for 2018, 2019, 2020, 2021, and 2022. (I have filed every year as required once over $250,000 from 2018 through to my final short year return zeroing the plan out in 2026.) · As soon as we realized this, we also learned of the Rev. Proc. 2015-32 Penalty Relief program and put together a package including the $1,500 check to the U.S. treasury; transmittal form 14704; and her delinquent 5500-EZ returns for those years. · She also included returns for 2023 and 2024 due to an oversight/fatigue as we no longer had minor children under 21 as of 2023, so neither 2023 nor 2024 were actually necessary. But she included "3H" in the plan characteristics section, "controlled group," even though for those years, we were no longer a "controlled group." · My wife's first and final 5500-EZ short year filing was filed on Efast on February 10, 2026. The penalty relief application was sent by certified mail return receipt requested to the Ogden Utah location on Feb. 13, expected delivery date February 17 2026. · She has never been contacted by the IRS about any delinquent returns--no CP 403, no CP 406, definitely no CP 283. · So, after reviewing copies of the submission dozens of times, over the past couple of days, everything looks properly completed, all forms signed, the red ink legend prominently displayed over the form title on each of the EZ-5500 forms. · But then today I noticed for the first time that the $1500 check was post dated 3/13/2026 rather than 2/13/2026. Again, fatigure, stress, and just a mistake. ·Our questions are: · 1. What is the implication or possible impact, including any penalties or disqualifications, of including returns for 2023 and 2024 which were not actually required, and incorrectly including the 3H controlled group description code? · 2. Will the IRS reject her application due to inadvertently post dating the check? She has plenty of funds in her checking account and the check will not bounce IF it is deposited by the IRS. Also, her checking account is with Chase and the internet indicates they don't care what the date is on the check, they will honor it even if post-dated. · 3. What is the likely timeline on getting a CP 283? Will we at least get the CP 406 and 403 first? About how long will the penalty relief process take? · 4. If the application is sent back to her for having a post-dated check and she has to re-submit, what are the odds an intervening CP 283 will be generated based on her filing of a first and final return and/or the penalty relief request? I.E. will that trigger an automatic, quick CP 283 before her penalty relief application can be processed and approved, skipping the 403 and 406? · 5. Is there anything we should do about the post-dated check? Should we try to call the IRS office in Ogden Utah and explain the check is good and should be deposited and that the post-dating was a mistake? · 6. Anything else she/we should be doing, or just sit tight for now? Any other advice or suggestions any of you have will be greatly appreciated.

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Attribution for HCE status is under IRC 318. Attribution for controlled group status is under IRC 1563. Just based on the information you provided, I don’t see any way the adult children aren’t treated as HCEs.

After all this time, we should know answer. Takeover PSP, one company only. Husband owns 100%, two adult children and spouse no ownership. Previous TPA says the adult children not treated as owners and he got 401(a)(4) to pass. Not sure if correct.

I would test the plans together again, but now rather than using the credits in your val you use the credits plus the excess you are allocating to see that it passes. It seems to me that you would need to give something to the other in the CB plan as you will be amending after the plan term date and the amended credit would not pass on it's own as only the owner would get anything.

Participant wants taxes withheld on a 2025 excess deferral. The excess will be Code P. Is tax withholding applied to 2025 or 2026 tax return? Any citation would be helpful.

This issue is the bane of my existence. A plan participant terminates on 12/26/2025 and receives a final paycheck on 1/3/2026. The paycheck is for hours worked in 2025. They don't work any hours in 2026. The plan is a safe harbor 3% non-elective plan. Are they an employee in 2026 who is includable and should receive contributions or because they aren't actively employed in 2026, do you treat them as not existing in 2026 for Plan purposes? The paycheck is $50. Do you allocate the $1.50 or do you just ignore it? What if the plan doesn't allocate contributions until into the next plan year (2027) and the participant already took their distribution. Do you actually have the Plan Sponsor fund that $1.50? Do you ask your plan sponsors to provide you any compensation someone in this scenario earned and pick it up in 2025? I believe the technically correct to the penny answer is they get the $1.50 in 2026, but what are you doing in actual practice? Do you have a threshold for what you pass on providing? Same scenario, but the plan is an ADP testing plan. Would you pull that person into your testing? I realize that common sense isn't all that common, but this is an area where it should be applied, IMO. This is just such a pain to administer and am curious what others do.

Thank you for your response, Paul. The ADP test passes because a good number of HCEs have catch-up contributions.

You only mention the ACP test. It's not often that a plan fails the ACP test but passes the ADP test. Are there also ADP refunds, or is there something funky about the match formula? You are correct to note that under-funding the match for a select group of individuals is not following the plan document. It's important to keep in mind that, even though a plan seemingly indiscriminately discriminate against HCEs, HCEs are participants who rights must be protected. Keep in mind that the amount of refunds to be made from the plan is calculated based on each individual's deferrals and match, but the actual refunds are determined by starting with the highest percentages being refunded first. This second step can shift the refund amount from one HCE to another. This likely is the reason for the TPA's position.

A Treasury rule includes this: Q-13 Does a transaction or accounting methodology involving an employee’s designated Roth account and any other accounts under the plan or plans of an employer that has the effect of transferring value from the other accounts into the designated Roth account violate the separate accounting requirement of section 402A? A-13. (a) Yes. Any transaction or accounting methodology involving an employee’s designated Roth account and any other accounts under the plan or plans of an employer that has the effect of directly or indirectly transferring value from another account into the designated Roth account violates the separate[-]accounting requirement under section 402A. However, any transaction that merely exchanges investments between accounts at fair market value will not violate the separate[-]accounting requirement. 26 C.F.R. § 1.402A-1 https://www.ecfr.gov/current/title-26/section-1.402A-1.

You must have an accounting process that tracks individuals' accounts for different type of contributions. This individual's Roth Catch-up is just one more account type to add to your collection of types of contributions. If this causes a problem with having to alter programs or even spreadsheets, then create an account for a participant named "Owner Roth" and, if needed, the owner's account number/ssn with one digit added or changed.

It sure sounds like the HCE HPI would have an advantage being the only participant with an SDA.

Yeah, I'm not sure you need to separate the funds, since you should be separating the recordkeeping behind the scenes. The gains on the Roth are computed the same way as they are on pre-tax accounts in a pooled setting.

My pooled 401k plans are run on a recordkeeping system, ASC. I have multiple sources, including Roth, while using one pooled investment trust. The recordkeeping system tracks the sources, contributions, and earnings.

Although an employer makes matching contributions during the plan year pursuant to the plan document's formula, they only contribute half of the prescribed amount to the HCEs because the plan usually fails the ACP test and it's how the employer attempts to prevent refunds of the HCEs' match. The ACP test, though, still usually fails, even with such small allocations to the HCEs. Historically, they have corrected the failed test by making refunds just based on the small HCE matches. However, the new TPA is suggesting that the correction method must be based on the HCEs receiving enough additional matching allocations to satisfy the plan's formula before calculating the appropriate refunds. I know it's always a good idea to follow the provisions of the doc, but because this seems somewhat counterintuitive and perhaps may yield different results, I just wanted to double check that what the TPA is saying is the correct way to handle the failed test. What do you all think?

Under 2nd, I meant to remove procedural QRP setup and just give this back to participant upon plan termination. For one person plan you just need to be sure that the total payout is under the 415 limit.

possibly a second "pooled" account invested the same was as the pre-tax pool?

Yuck. The plan is a pooled 401k (yes, they still exist!) and now the owner needs do to Roth catchup deferrals. I really don't want to commingle the pre-tax and Roth in the same account. Is there a discrimination issue if only the HCE HPI has a self-directed account? I have been suggesting that they move to a participant-directed model for years and I was hoping that this would be the thing that clinched the decision... but the owner says that he's retiring in 2-3 years and doesn't want to go through all the changes for a short term, so I'm looking for a different solution. Part of me hopes there isn't one... Any other suggestions (other than "you can't always get what you want, even if you are a doctor")?

Another potential client who screwed up, must be me. This one has employees. CB cover owner/non-HCE where all others are excluded and DC plan. All others are HCEs. Non PBGC covered. As I just found out, client made a deposit during the final plan year without checking with me and also had 20% return. So now have roughly 200k excess over the account balances. Same situation as before, terminated 12/31/2025, excess to be reverted to corporation with administrative procedure stating excess goes to QRP. Simply amending the formula will eat up almost all of the excess as the owner is far away from 415 limits. The problem here is I may have discrimination issues. Let's say I amend the formula just to increase the owner under the new law and test the plans and I pass (it does), is this a BRF/discrimination issue? How about I increase the owner and also provide a small increase to the non-HCE and re-test all plans again, would that be ok and better? Any other solutions that I am not seeing? Never had this issue before.

The moral of this story is: Folks make sure your beneficiary elections are complete and up to date as you aren't doing your heirs any favors if you don't. I can't tell you how many times I have said that sentence to someone of the job.