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New Plan Effective 1/1/2020 to be adopted by due date of business return, as per SECURE Act. For 2020 it will be a cross tested Profit Sharing with individual allocation rates; 2021 will include 401k with Safe Harbor in addition to the Profit Sharing. NRA is 65+5 Participation, The Plan will exclude service prior to its Effective Date for Vesting credit purposes (actual hours credited basis).

Owner wants to waive the eligibility waiting period as of the Plan's effective date (1/1/2020) for any employees actively employed on that date to enable his son to be a Participant (otherwise eligible 1/1/2021).  This will make for three (3) HCEs for 2020.  In doing so, there are four (4) NHCEs who will also be eligible as a result of this provision (note 1 of the 4 would otherwise be eligible as of 7/1/2020).  Concerns are as follows:

  1. The owner is 79 years old and will of course be subject to Required Minimum Distributions. Though the entire contribution is receivable for 2020, would the owner be required to receive a 2021 Minimum Distribution based on his "12/31/2020 valance" including the receivables (up to his vested account balance, note NRA is 65+5P to avoid 100% vesting)?
  2. The owner is able to maximize his Profit Sharing allocation (allocation rate is 100% of eligible pay) with a 5% Gateway to all NHCE staff.  This same 5% Gateway to all NHCE staff affords the son a PS allocation rate of about 18% and the third HCE (unrelated) a PS allocation rate of 3%. Total PS contribution is well within the deduction limitation, all rate groups and Average Benefits Test pass. Concern here is two (2) of the four (4) NHCEs that come in under the "eligibility waiver" are terminated during the 2020 Plan Year - since the Plan excludes service prior to the Plan Effective Date all Participants are zero vested. Is this a concern, or not since all receiving same 5% allocation rate?  One of the two who terminated is counted in the owner's and his son's Rate Group testing -does this impact the answer?  Both, of course, are in the ABT. Finally, I will add, even if past service is counted (actual hours 2019 and 2018), the referenced two who terminated would still be zero vested due to short service/insufficient hours.

Thank you.

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1. You can determine the account balance either on a cash basis, or on an accrual basis. If you use a cash basis, his account balance on 12/31/2020 would be zero, so his 2021 RMD would be zero.

Has the business been around for a while? For RMD purposes, you are only a 5% owner if you owned 5% during the year you attained age 70½ (or 72, post-2019). If he started the business at age 72, for example, then he would have been a 0% owner in the year he turned 70½ (because the business didn't exist) and therefore would not be a 5% owner and would not be required to commence RMDs until actual termination of employment.

2. I don't see any problems.

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The rmd for the owner is zero because of zero vesting for the first two years anyway, right?

How confident are you that the triggering age for 5% owner automatically changes to 72? I haven't seen anything that formally addresses the issue. Of course because 72 is greater than 70 and a half you can't really go wrong with your interpretation because the IRS won't care.

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Pretty confident. 401(a)(9)(C) as amended by SECURE reads

Quote

(C) Required beginning date.-For purposes of this paragraph-

(i) In general.-The term "required beginning date" means April 1 of the calendar year following the later of-

(I) the calendar year in which the employee attains age 72, or

(II) the calendar year in which the employee retires.


(ii) Exception.-Subclause (II) of clause (i) shall not apply-

(I) except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 72, or

(II) for purposes of section 408(a)(6) or (b)(3).

The owner will have an RMD for 2022 if he defers in 2021.

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15 hours ago, C. B. Zeller said:

Pretty confident. 401(a)(9)(C) as amended by SECURE reads

The owner will have an RMD for 2022 if he defers in 2021.

Thank you, C B Zeller.

Question, regarding RMD -- if use cash basis I understand his 2021 will be zero because 12/31/2020 bal is zero cash basis (also happens to be 0% vested). He will definitely have a balance 12/31/2021 even if does not defer and it will be 20% vested, because the 2020 deposit will be in the account. Based on this, is 2022 his 1st RMD therefore due by 4/1/2023 or must it be paid in 2022?

The owner started the business as Self-Employed 2 mos prior to his 70th birthday - would it matter if never showed a profit till 2020? FYI, he formed LLC in 2018... elected tax as S-Corp 2020.

 

17 hours ago, Mike Preston said:

The rmd for the owner is zero because of zero vesting for the first two years anyway, right?

 

Thank you, Mike. He is zero vested 2020 Plan Year, but would be 20% vested in 2021 Plan Year.

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18 hours ago, C. B. Zeller said:

Pretty confident. 401(a)(9)(C) as amended by SECURE reads

The owner will have an RMD for 2022 if he defers in 2021.

So you're saying look at the law? How innovative! Thanks.

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  • 2 weeks later...

Question, regarding RMD -- if use cash basis I understand his 2021 will be zero because 12/31/2020 bal is zero cash basis (also happens to be 0% vested). He will definitely have a balance 12/31/2021 even if does not defer and it will be 20% vested, because the 2020 deposit will be in the account. Based on this, is 2022 his 1st RMD therefore due by 4/1/2023 or must it be paid in 2022?

The owner started the business as Self-Employed 2 mos prior to his 70th birthday - would it matter if never showed a profit till 2020? FYI, he formed LLC in 2018... elected tax as S-Corp 2020.

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