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Assuming your post is accurate, the w-2 comp from the s corp is the only earned income for the docs and the person saying otherwise is wrong and needs to start over in pension school.

Garnishment of a participant's account outside of a QDRO is allowed under ERISA only for federal tax debts or court-ordered criminal restitution. If it doesn't say it's for one of those things, I'd respond that this is a qualified plan which is forbidden from complying except in those situations.

The 415 regs address this issue. Have you reviewed the reg? The 100% pay limit is what it is, and the actuarial increases cannot exceed it. Therefore, you will have to determine (as best you can) the precise point in time at which the increases reached that limit and create an immediate benefit commencement date. A BCD means you must offer the retiree all the payment form options available under the terms of the plan. This means some determination of retroactive payments. No comment about how you determine a J&S benefit if that is chosen, because there are some other facts needed for that discussion. Also not opining on whether there is any issue w/r/t late payment under RMD requirements.

A plan can allow the use of any definition of compensation defined under 1.414(s)-1 Definition of Compensation to perform the ADP test. Assuming that the plan document does not restrict the definition of compensation, you can use any of the available definitions in this section regardless of the definition of compensation used to calculate elective deferrals or for other plan purposes.

Your W2 from each firm should have the amount of deferrals you made while employed by each firm (Box 12). That should be sufficient proof for all parties.

I think you are missing the point here - the question/issue is severance pay not post-severance compensation. The person is no longer employed and severance pay (per IRS) is never plan compensation.

Thank you! And I'd love to have BenefitsLink take over that page. I've e-mailed you with information. Thanks, Bill! This is definitely bittersweet for me. I've been practicing employee benefits law for 46 years now, and maintaining my site for 28, and it's hard to walk away from all that. But I am 72, and it's time for a new chapter in my life. I've been accepted as a volunteer EMT trainee with a local fire department. That will be about a year of classes, practical training, and helping out the EMTs, after which I'll be certified as an EMT myself. Some questions have been raised as to whether I actually understand the meaning of "retire," which I hear is supposed to mean relaxing and playing golf or something. But I'm excited about the new challenges.

Hi Carol -- We'd love to have the database and create a page on BenefitsLink, with credit to you. Let me know how I can get it and make it easy for you. What is this retirement thing of which you speak? I thought it was only mythology 🙂 CONGRATULATIONS!

Well on its face it is a true statement. Once you adopt the plan, simply not adopting it again is not enough to end your participation. With that being said I think you just do a new one today and have them execute it. All of their original information regarding the effective date of their participation is unchanged. Then you will have a participation agreement that more perfectly aligns with the new format of the plan document.

Divorced in 2016, but terminating the plan now? Why is J's former spouse relevant?

It's a game accountants like to have their clients play to minimize their FICA and Medicare payroll taxes, which often screws them out of the ability to make maximum retirement contributions (not to mention limiting their ultimate Social Security benefit if below the SSWB). If W2 is already over the SSWB then it's only 2.9% Medicare taxes they are saving, which is not smart when the retirement contribution percentages missed out on are typically much higher. S-corp plan comp is W2, K1 is not included, that is not an item open to plan administrator interpretation and if they insist on doing so I would likely resign from that engagement.

You only need to test them all together as one big group. Under 414(b), members of a controlled group are treated as a single employer for testing purposes. So if A, B, and C are all the same employer, and C, D, and E are all the same employer, then logically all of A, B, C, D and E must be the same employer.

I have now retired, and will no longer be updating my site. So for all of you who have been relying on my maximum benefits and contributions page for historical limits, it is unlikely I will be updating it and I may take it down at some point. However, I do have the database with all the limits back to 1996. If anyone wants it so that they can develop their own page, let me know.

Ta-da, now on BenefitsLink (with Carol's consent): Inflation-Adjusted Limits on Retirement Plans, Including Maximum Benefits and Contributions (1996-Present)

No can do - as @Bri states - company contribution/check, as that is where any deduction occurs and where an IRS auditor would be looking to substantiate. Beyond that, plan sponsor and his accountant can figure out the details to make that happen.

I would approach it as, that should be a company check for the deposit. Where the company got the money from, I don't mind hearing/seeing/speaking no evil as to how. So that I can at least apply a standard of reasonableness

Thanks @WCC - I agree that if the intent is not to match separately elected catch up, then the document should state that but just the standard "catch up contributions are not matched" provision, my opinion is that you must follow the term in regulations and catch ups are defined as deferrals that exceed either an plan or statutory limit (not verbatim obviously).

The new 401(b)(3) rule doesn't require the post-year-end new benefits to separately pass 401a4 in and of themselves, unlike the way an -11g amendment used to.

If the accountant is a member of the American Institute of Certified Public Accountants or is a licensee of a State that adopts the AICPA professional-conduct rules and standards as the State’s rules: “[A] member [or a licensee] should not advise a taxpayer to take a tax position unless the [CPA] has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits, if challenged.” The standard is not about whether the IRS would fail to detect the pushy position. Rather, the standard looks toward the merits (and pretends the decision-maker would find facts and law fairly and justly). If a shareholder-employee is 49 or older and has two decades’ (or more) business or professional experience, how likely could she defend that the fair-market value of her personal services was only $150,000? This is not advice to anyone.

The definition of HPI stands as is, and the plan should follow the rules. It is between the accountant and the owner on how the owner's income is characterized as W-2 or dividends. You don't want to hear later that the IRS is challenging the reporting of income as tax avoidance and the client and accountant say they did what you told them to do.

Those not eligible by age/service for PS and CB would not be included in your rate group testing. Good luck if you have to navigate a 6% DC limit to avoid combined plan deduction limit with a SHM.

When it comes to state taxation of contributions, Pennsylvania is like New Jersey but PA also taxes 401(k) deferrals. Tennessee used to be like PA but made a change in 2021. Here is a relatively up to date chart that summarizes all of the states (hint: most follow Federal rules or don't tax deferred income). https://www.ici.org/system/files/2022-12/state_tax_2022_survey4_red.pdf To complicate matters even further, there are many local taxing authorities that also have rules that include deferred contributions. The flip side of the coin is which states tax distributions from retirement plans. Many do at some level of taxation with rules that range from taxing all distributions to thresholds when taxation starts and graduated schedules. One thing that most retirees who worked in PA or NJ and then want to live in another state that taxes distributions. Effectively, they will be double taxed at the state level - once when making the contributions into the plan and again when taking the distributions. It is very rare for a plan to get into the details of state and local taxation from the perspective that it is not their responsibility or that they do not want to be deemed to have provided tax advice.

@susieQ it is fairly common for the ESOP document to be structured so that the plan was a profit sharing plan and the ESOP was a stock bonus component embedded in that plan. The plan may already be a profit sharing plan and there is no need for a restatement. If the plan is a profit sharing (either by default or by restating the ESOP into a profit sharing plan) be mindful that the plan must follow all of the rules regarding the investment of the assets. @CuseFan is correct that adding a 401(k) feature to the plan now (post the SECURE 2.0 mandate) is subject to auto enrollment rules.

My understanding is this would be Code G only. The Form 1099-R instructions say to use Code G for a direct rollover to a designated Roth account, including in-plan Roth rollovers (IRRs). I’m not seeing anything in the instructions that allows Code 2 to be used with G, and it’s not listed as a valid combination in Table 1. Also, the attached IRS In-Plan Roth Rollover Phone Forum transcript (page 13, paragraph 2), while a bit older and from when these rules were first introduced, indicates reporting the amount in Box 1 and 2a with Code G, without mentioning any additional distribution codes. It seems like Code G already communicates that this is a direct rollover and not subject to the 10% early distribution penalty, so adding Code 2 doesn’t appear necessary or supported by the instructions. Happy to be corrected if there’s specific IRS guidance that allows 2G here, but I haven’t come across anything that does. inplan_roth_phoneforum_transcript.pdf

Perfect and thank you both

yes, if Owner is the only HCE and the rank and file are NHCE, that fails 414(s). HCE has 100% of compensation included, NHCE only have 83.3%. That spread is too far apart.

Jak, First - it would have to be in the document before the start of the plan year. Second - all depends on the numbers and we didn’t get any. Third - if the owner has w-2 in excess of the comp limit even after the bonus is excluded, the answer is very likely that it would fail.

415 limit is 100% of pay, not to be confused with the 25% 404 limit. None of this needs to be "employer" money. Every dollar of "profit sharing" reduces his Earned Income by the same dollar he could have done more deferral from.

We still give the notice even using the Brief Exclusion rule. I did not go back and look for authority...not time right now... perhaps it is just a best practice principle. I mean how does a plan sponsor provide an excluded participant an "opportunity" to make up the missed contributions without providing them notice that something happened.

Beyond tax law, consider whether a suggested plan provision would result in participant loans that “[a]re available to all . . . participants and beneficiaries on a reasonably equivalent basis[.]” 29 C.F.R. § 2550.408b-1(a)(1)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1. That’s a condition of the statutory prohibited-transaction exemption.

To allow a $0 correction, then the employer should provide the 45-day special notice after the correction begins. If the employer wants to give the 50% QNEC as part of the correction, then no notice is necessary. Look at Rev Proc 2021-30.

I continue to be drawn to the divorce proceeding, including the domestic relations order (NOT the qualification of the order by the plan), in which B does not seem to have participated in the identification, valuation, or terms of division of the plan interest in the context of the larger division of property between A and B in the divorce proceeding. That is a state court matter in which there may have been ignorance, inattention, unfairness, deception, omission, or other skulduggery, or not. There is nothing* about federal QDRO rules that relates to what B “should” or could get from the plan in consequence of divorce. In fact, the plan is generally not supposed to have any concern for what happened in the state court and may/should look only at whether the proposed QDRO appears to be an actual domestic relations order. The alarm about A’s position and behavior relating to the plan (other than refusal to provide (1) benefit information necessary for fairly adjudicating or settling rights in the state court divorce proceeding, and (2) information about plan procedures) seems misguided, despite the bad optics relating to A. The bad things that may have happened — or things that should have happened and did not — probably happened (or not) in the state court. Which brings me back to, “What does B think B should be getting from the plan by way of benefits that B is not getting under the terms of the QDRO?” The answer probably relates to the terms of the domestic relation order — the product of the state court — not the qualification of the domestic relations order by the plan. *Well, almost nothing.

Congrats on retirement. I would assume most people on a forum like this know about this IRS table with all the limits going back 1989. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.irs.gov/pub/irs-tege/cola-table.pdf

The answer to your question is YES.

I agree with you. The separate election is just a cosmetic box used for "convenience". I am not a fan, but I know some sponsors have their reason why they think it is advantageous. I have seen this many times and those dollars should be matched. I have seen one or two documents written in a way that says "...we don't match contributions made under the separate catch-up election box". If your plan just says "we don't match catch-up", then those dollars should be matched.

Ok. That is my understanding as well @Nichol C. And yes, please chime in if we are missing something here! Thanks everyone.

Perhaps? I don't have access to data from other TPAs around the country, but I'd venture that we're not alone in our situation here. We use FTWilliam documents, and not long after SECURE 2.0 was effective, they provided a SECURE 2.0 checklist for us to use to monitor the elections our clients made. Only a small percentage have actually elected to use some of the new optional provisions, and I suppose we're not alone in that either. In my experience, which is decidedly less than many other users, sponsors are opposed to making any optional changes, preferring to leave well-enough alone when able.

It is allowed under certain circumstances. That is why I mentioned IRS Notice 2016-16, Section D4.

If an individual gets § 403(b) distributions while she remains subject to New Jersey’s income tax, there is some recovery for previously taxed amounts. But if an individual becomes a domiciliary or resident of another State and subject to its income tax, the other State may tax § 403(b) distributions, and need not provide any relief regarding amounts previously taxed by sister States. See 4 U.S.C. § 114 https://www.govinfo.gov/content/pkg/USCODE-2024-title4/pdf/USCODE-2024-title4-chap4-sec114.pdf. New Jersey is not alone in setting up a “double-taxation” risk for someone who retires elsewhere. A participant contribution—whether § 401(k), § 403(b), § 457(b), or something else—is not any exclusion from compensation for Pennsylvania’s income tax (and Philadelphia’s wage tax).

OH, OH, OH!!! NY 3329 (February of 2026!) is a new bill which would extend the state (New Jersey) income tax exclusion to employees of non-profits with 403(b) deferrals! The Bill is in Committee in New Jersey. "Specifically, it excludes elective contributions made by these employees to their retirement plans from New Jersey's gross income tax. This includes contributions to plans authorized under section 401(k) of the federal Internal Revenue Code for private sector workers, and now extends similar tax deferrals to employees of governments and non-profits who contribute to elective deferred compensation systems allowed under federal law, such as those established under section 403(b) for charitable, educational, and religious organizations,"

For the calculation, no. For understanding the calculation and not screwing it up that one year the w-2 IS lower? Yes.

I'd be treating this as a short-term impermissible loan and expect the appropriate interest returned to the plan as well to fully correct it as a prohibited transaction.

The most important thing to no about deemed 125 compensation is that it is not any kind of "real" Compensation. It is not taxable. It is not cash. That is where the term "DEEMED" comes in. Really no one would ever want to include it. So many people think it has to do with pre-tax health insurance payments, or with cash payments in lieu of benefits. It is neither of those things. Relius put together this write-up a long long time ago and its the best explanation I have seen from a trusted source (it was 24 years ago) 🙄 I have attached it below. I see document providers included Deemed 125 all the time based on this misunderstanding. I think it is dangerous because, as I mentioned, it is not cash, and it is not taxable - meaning it is never captured on payroll. Meaning it will never be taken into account. Based on the description in this pdf, I have a feeling it is also exceedingly rare. Comp - Deemed 125 Explanation.pdf

Got it - thx again

No worries, no one is 100% here and we respectfully correct or disagree with each other when appropriate - that is what's great about this forum, it makes us all better.

Carol, thanks for all your contributions, on your webpage and on these Message Boards, as well as your standards of excellence. You will enjoy retirement!

I am not an expert on UBIT but what I know is if there is leverage used in a plan you need to seek expert advice to see if UBIT will be due. If they have to pay a type of income tax on income inside the plan my guess is this idea will be less popular. I would add finding a CPA that knows how to file a UBIT return of a 401(a) plan is not easy. Because of that it isn't always cheap. One has to really watch out for any idea that makes it look like they are trying to run a taxable business in a qualified plan and if they get clever and try to use Roth dollars so they never pay taxes on the income ever gets the IRS' upset and they can be aggressive. Too many people try to get too clever. If it was real simple to never pay taxes on your business' income more people would be doing it.

Just to add a note regarding this issue of merging plans (while sympathizing with everyone's frustration in M&A situations when the M&A attorneys ignore retirement plan implications): when you are trying to merge two 401(k) plans mid-year, you have to consider that the merger acts as an amendment to the plans. So, if you have a SH nonelective plan and a SH match plan and want to merge them mid-year, you must realize that the impact of that is to change one of the plans mid-year from one type of SH to another type of SH, which is expressly prohibited under Notice 2016-16. Similarly, if you have a non-SH plan and a SH plan and you merge them mid-year, either the non-SH plan is being amended mid-year to add a SH provision OR the SH plan is being merged mid-year to terminate a SH provision. Either way, you must conform to the rules of Notice 2016-16, as augmented by the SECURE ability to do a mid-year adoption of a SH plan under certain circumstances. So, beware of mid-year mergers. Better to wait until year end, freeze the acquired plan as of year-end, have the acquired employees enter the buyer's plan as of the beginning of the year, and merge the plans either concurrently or ASAP after that takes place. Also, in re the coverage issue raised, remember that you likely have the transition period under 410(b) unless you amend the plans in the meantime.

I'll never understand why M&A attorneys aren't sued for ignoring retirement plan issues prior to the transaction date.

I should know better than to argue w/ attorneys (and/or former attorneys), but: 415(c)(3): (I left out disability and two more items as they aren't relevant to my thinking ro the discussion) I don't believe this person is a participant, therefore they cannot have "participant's compensation." Is there a different definition of "participant" that I'm missing? Is a participant anyone who, rightly or not, has an account under the plan?