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We have a small k/cb plan that was once administered by a small local TPA/actuary that was bought by a very large TPA/RK. The new TPA did fine the first year (2017) however we started having problems in 2018 when they kept failing to respond to inquiries or making promises to deliver requests but not getting the work done. 

The client, a sole owner firm with just a couple EEs, had the k/cb plan in place since 2015 and most of the CB contributions go to him (well over 90%). The client found out in early 2018 that his key EE (NOT "key" by ERISA definition, but key to business revenues) was planning to set up shop across town since he had no non-compete, and by Sept he was off the payroll but much of his revenue contributions had long since dried up, so the business saw a profitability shift downwards between by well over 60% through 2018, this after many years of consecutive growth.  

We were trying to get a plan amendment in place for 2018 but the TPA kept dragging feet. Shortly thereafter we were notified the TPA did not file the 2017 5500 in time, no excuse offered. They offered to pay the DFVCP amount and kept promising to complete work in the next couples of weeks. This went on for several months until we terminated the old TPA and hired a new one.

After having the new TPA/actuary working on incompleted valuations going back to 2017, we finally got the contribution requirements which would have been fine when the company was more profitable but it cannot afford it now. Despite our efforts to get the old TPA's act in gear, they never got us those amendments because they never completed the previous work to make the necessary calculations. Now the client has a funding requirement he can't afford and is facing a 10% excise tax of whatever he can't contribute. 

We have frozen the plan in 2019, but is there any recourse, or any action that can be taken in lieu of the fact that the previous TPA failed to complete work in time preventing us from amending the plan to get his 2018 funding requirement down based on the fundamental change in his business by the loss of the only non-owner key EE?  I know it's a stretch, but I'm just wondering if anyone has any specific experience like this and found some option that worked without creating more headache for the business owner?

Thanks

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Sounds like you need legal advice specific to your situation.  Sort of beyond the scope of a public message board to delve into these issues.

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58 minutes ago, shERPA said:

Sounds like you need legal advice specific to your situation.  Sort of beyond the scope of a public message board to delve into these issues.

 

I wasn't specifically asking about legal action against the old TPA (that, indeed, would be a question for an attorney) but rather about an administrative course of action that can be made, maybe a PLR or some other FAB/AO from the DOL on a similar issue, or even someone's personal experience with a similar situation and how/if it was handled...anything that might be useful. Legal action against the old TPA is probably cost prohibitive anyway...David vs Goliath situation.

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Short of reviewing the 2018 valuation to see if the required minimum contribution is correct?

You are too late for a funding waiver which probably would have been cost prohibitive anyway.

Is borrowing funds to make the contribution for 2018 an option?

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Yeah, what Lou said.  Not gonna find any retroactive relief from 3-letter agencies.  Really need to make that contribution, if not, things just get worse from there on out. 

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5 hours ago, Lou S. said:

Short of reviewing the 2018 valuation to see if the required minimum contribution is correct?

You are too late for a funding waiver which probably would have been cost prohibitive anyway.

Is borrowing funds to make the contribution for 2018 an option?

Not likely able to borrow that much this year.  Is it possible to fund the EE contributions to the PS/SH and the CB plan for 2018 (the only other eligible EE other than the owner would have been the EE that left in 2018), then have the owner waive his benefits for the underfunded portions?

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IRS does not recognize benefit waivers for plan funding purposes - even for owners. This is a long-standing position, unlikely you will find an actuary who would sign the Schedule SB with the funding requirements calculated on the basis of a waiver.  

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Is the shortfall much more than $50,000?  Start with a participant loan.  Then he's gonna have to take the money ouyt of the 401k plan as a taxable distribution.

What's that you say? The contribution to the Cash Balance plan is tax deductible?  In that case, perhaps it will all net to zero (perhaps a 10% penalty tax would apply, no mention of age).   You might even be able to take the deduction for the funding in 2019 to make sure the two offset each other more precisely.  Sounds like he doesn;t need the deduction in 2018 anyway.

AmIRightPeople?

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1 hour ago, austin3515 said:

Is the shortfall much more than $50,000?  Start with a participant loan.  Then he's gonna have to take the money ouyt of the 401k plan as a taxable distribution.

What's that you say? The contribution to the Cash Balance plan is tax deductible?  In that case, perhaps it will all net to zero (perhaps a 10% penalty tax would apply, no mention of age).   You might even be able to take the deduction for the funding in 2019 to make sure the two offset each other more precisely.  Sounds like he doesn;t need the deduction in 2018 anyway.

AmIRightPeople?

Nothing in  our business is that easy.  If he is under 59 and 1/2 how does he get a distribution of any kind, taxable or not?

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He could default on the loan, no?

But it's still not that easy.  Form of business entity, amount of profit/loss after taking plan contribution deduction, any basis limitations on recognizing the loss and offsetting the plan distribution might mean that it's not a wash.

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5 minutes ago, shERPA said:

He could default on the loan, no?

How does that generate cash to make the contribution?

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Well that is true but presumably he has some profit sharing and as you know that would be quite accessible. I mean if the plan were amended obviously.

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2 minutes ago, Mike Preston said:

How does that generate cash to make the contribution?

Borrow $50K personally as a participant.  Contributes the $50K to the corporation (???) as additional paid-in capital.  Corp makes/deducts the contribution.  Owner never makes a loan payment, gets $50K in taxable income due to default.  Corp gets $50K greater loss or lesser taxable profit (due to deduction of plan contribution), which passes thru to the owner sheltering the $50K income from the default.   All good if everything (basis, timing, etc.) aligns perfectly. 

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I view them separate but I get where you are going. 

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Surely you wouldn’t advise a client to take a loan and advise them as part of the transaction they can just not repay it?

 

too cute by half means of circumventing distribution restrictions on 401k

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Of course I would tell them they need to repay the loan, they are signing a legally binding promissory note.  I would also tell them the consequences of not repaying it, both the definite (plan benefit offset and taxable income) and the theoretically possible (if IRS thought the owner/trustee took the loan with no intent of repaying it they could try to impose further consequences even up to plan disqualification (is it a violation of plan terms to take a loan with no intent of repaying?)). 

But the reality is under examination I've never seen anything other than taxation of a defaulted loan, and sometimes not even that. 

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Yes but not even one single payment?  And isn't my idea "better" since they can amend the plan to allow for an in-service distribution from profit sharing after 5 years of participation?  That seems like a zero risk alternative.

I mean take the loan for $50K if you can make the payments of course.  But if you need more, or if cash flow won;t support the payments, then I vote for an in-service from the currently distributable sources.

I just add that pretty much every cash balance plan I ever started began with a client who had a LOT of money in profit sharing.  That's generally the chronology - they are maxing out in profit sharing and want to contribute more...

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20 hours ago, austin3515 said:

Yes but not even one single payment?  And isn't my idea "better" since they can amend the plan to allow for an in-service distribution from profit sharing after 5 years of participation?  That seems like a zero risk alternative.

I mean take the loan for $50K if you can make the payments of course.  But if you need more, or if cash flow won;t support the payments, then I vote for an in-service from the currently distributable sources.

I just add that pretty much every cash balance plan I ever started began with a client who had a LOT of money in profit sharing.  That's generally the chronology - they are maxing out in profit sharing and want to contribute more...

Unless it's one of those "limited to deferrals plus 6% in K plan" deals...

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The owner actually just hit RMD age this year. Min funding requirement is in excess of 200k. We were planning to reallocate RMDs back to the plan for funding,  but we'd still have a significant shortfall.  Thank for the loan idea, that will help.

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If he is 70.5 then all balances are distributable.  You don;t have to restrain yourself to the RMD.  I agree with taking the loan first becaus it is not taxable, if you make payments.  But the balance can be taken as an In-Service Distribution.  And again you should be able to deduct the DB payments in 2019 even though they are being made on account of 2018.  In this way really all you are doing is funding the DB from the 401k plan. 

Will someone please tell me if I'm missing something here? 

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Yes, the defaulted loan was a way around not being eligible for a distribution.  If 70.5, then eligible for a distribution of any amount, even if still employed not retired (plan might need an amendment for this but it is permissible).

So take the loan if the intent is to pay it back (to avoid immediate taxation).  If the loan would end up defaulting and being taxable anyway, just take a distribution. 

Of course if the distribution would come from the DB plan, then it's possible the DB is under a top 25 or 436 distribution limitation that might throw a monkey wrench in the works.  If there is a companion DC plan, it would not have such distribution issues. 

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On audit could this end-around be considered an extension of credit and deemed a PT?

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