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I agree with Bird that you need to be sensitive to the plan language, but given that the draws are not actually self-employment income, but rather estimates, or in some cases in effect loans, and given the language of 1.401(k)-1(a)(6)(iii) and (iv), I'd be inclined to think that simply calculating a partner's match based on the number that ends up being his/her self-employment income is not really a true-up. I mean, match formulas usually have two components, a rate (e.g. 50 cents on dollar) and a cap (e.g., 3% of compensation). A true-up is usually more important for the rate (e.g., participant did $0 deferrals for first 6 months, $2,000 per month for second 6 months), than for the cap. You're not giving the partners a break on the rate part, just the comp part, and that seems arguably OK under the cited reg provisions.

At what point is it appropriate to start this question with "Robert has blurb..."? ?‍♂️ Joking aside, isn't the point of the section you are referring to that if you have a successor plan you no longer have a distributable event due to plan termination? If a successor plan exists, assets with distribution restrictions (elective deferrals and SH) are not distributable due to plan termination if a successor plan exists, while other contributions like profit sharing and non safe harbor match would be distributable even with a successor plan in place. So any participant who does not otherwise have a distributable event, would have to have their restricted contributions transferred to the successor plan or stay in terminated plan until a there is a distributable event. This is assuming you have the successor plan in place at termination. If you distribute all assets and then establish a new plan within the 12 month period following distribution, you have a big problem with the distributions you already did...

I think these document provisions that add so much flexibility are sometimes problematic. For me, I'd rather know that matches are or are not payroll-based and act accordingly. (And for a partnership they shouldn't be payroll based - actually just about all of the time I'd prefer that they not be payroll based.) Having said that, it would appear to me to be discriminatory in operation to give a "full" match to partners and potentially not to others, so I'd do the true ups. But I'd much prefer that the plan design be that matches are based on full annual comp, and yeah they can go ahead and "pre-fund" for the W-2 employees each pay period but then do an annual calc and do true-ups as needed. Which circles back to what the plan actually says - you say they are "funding" each pay period but does the plan say they are calculated on a payroll basis? If not then I'd argue that the language about true-ups being optional is not applicable to this situation (i.e. they are required).

We use ASC documents. While this provision would prevent the document from violating 410(a), I'm not sure it prevents you from losing reliance on the opinion letter because the adoption agreement was completed incorrectly. (Rev. Proc. 2017-41, Section 7.03 (3) & (4)) Most TPA's include a recommendation that plan documents be reviewed by counsel before signing. That might make it more difficult to pin the blame on them in court. Would a TPA claiming that the plan document is in compliance be considered practicing law? If the TPA has people with credentials, every professional organization should have in their by-laws that you will not do work you are not qualified to do. I know in practice that gets ignored as much as the speed limit signs in Texas, but it should be in the by-laws. One of our local competitors had their receptionist prepare their restatements and amendments. In our office, I either prepare or review every amendment and restatement. Most employers probably wouldn't appreciate the difference. Our clients do. I would place the blame on those involved in the document preparation, regardless of how many documents they prepare. If you are going to do it, do it right.

I'm with Austin on Peter's scenario: I'd say the TPA is to blame. If they want to try to shift some blame downhill to their doc software for not properly validating input, I guess they can give it a shot. I don't think a general warning covers them in any sense here from a "who's to blame" point of view. The TPA should have and should follow documented procedures (senior level review of all plan documents for possible compliance issues) to ensure things like that are caught. If nobody even looked at what the employee entered before it went to the sponsor, that's a big problem. As a sponsor I'd be very wary of a "general warning" like that in a provider's service agreement... if I'm not paying you to provide me with a compliant document, why am I paying you to draft the document at all? I could just as well Google "401(k) adoption agreement" and fill in the blanks randomly by myself for free. My answer doesn't change if the recordkeeper is also the document provider, whether they're doing documents for 10 plans or 100,000. If your QA processes don't scale with the volume of work you're doing, that's not the customers' problem. (I believe there probably IS a significant gap between what the document says and what the plan administrator thinks it says, on a lot of the plans of the kind you're talking about, Peter... but of course that's a separate issue!)

The TPA is done. There is no defense. If the TPA added the language they lose in court 10 out of 10. Just settle.

So, here’s a related question: How much responsibility ought a third-party administrator, recordkeeper, or other service provider that’s not a law, accounting, or actuarial firm have for guiding a preapproved document’s user to adopt a plan that meets tax-qualification conditions and meets ERISA title I required provisions? Imagine this hypothetical situation. A TPA licenses from an unaffiliated business preapproved-documents software. The TPA’s employee drafts, for a user’s approval, an adoption agreement. The TPA’s employee fills-in information from the user, including about its intent to exclude an employee who works less than 1,600 hours. The software does not flag that exclusion as even a potential error. The customer asks no question, and the TPA says nothing, about whether the filled-in text might be inconsistent with IRC § 410(a) or ERISA § 202(a). (Assume the TPA knows the user has not asked any lawyer, accountant, or actuary to review anything.) Even if a user doesn’t ask, ought the TPA to have some responsibility for warning the user that its desired provision might be legally ineffective under ERISA sections 202(a) and 404(a)(1)(D), or might tax-disqualify the plan. Imagine there is a general warning—perhaps in the TPA’s service agreement, and usually on the preapproved document itself—that no one gives any assurance that the user has properly used the preapproved document to state a tax-qualified plan. Is such a general warning enough? Or ought a TPA be responsible to call attention to the specific point? Most important, what’s your reasoning for how much or how little responsibility the TPA ought to have? BenefitsLink mavens, what do you think?

Not disagreeing with Lou - just mentioning that the terminology of the Notice is different for different for different people. Many people refer to the "maybe" notice as the notice one gives when a plan utilizes the "maybe" election - that is, the plan is NOT a safe harbor UNLESS the plan is amended into safe harbor status for the year. In your situation with a 3% SH contribution, we would refer to this as a "maybe not" notice, which as discussed previously allows you to amend out of SH status. Sample wording contained in the annual Safe Harbor Notice - we use the FIS/Relius document system. IV. Suspension or reduction of safe harbor nonelective contribution. The Employer retains the right to reduce or suspend the safe harbor nonelective contribution under the Plan. If the Employer chooses to do so, you will receive a supplemental notice explaining the reduction or suspension of the safe harbor nonelective contribution at least 30 days before the change is effective. The Employer will contribute any safe harbor nonelective contribution you have earned up to that point. At this time, the Employer has no such intention to suspend or reduce the safe harbor nonelective contribution.

Regrettably, if the employer picks up the tab, it's not really picking up the whole tab because the employee owes taxes on the amount which the employer gives him to "pick up the tab." A full gross up would be necessary which could be in the neighborhood of 150% of the back taxes plus interest. Nevertheless, far be it from me to advise an employer not to be generous if it feels like it's the right thing to do.

Agree with both Fiduciary Guidance Counsel and QP_Guy. My firm has over 4000 DC clients, however, and we have opted to wait until we get pre-approved language from our document providers to make or recommend amendments across the board. We would, of course, be responsive to an individual request (have yet to hear from a client on this subject), but to handle this in a cost effective way (and not drive the Consultants actually administering the plans crazy!), we will wait until we have the pre-approved language and then recommend amending to all of our clients.

If the client balks at this simple request, I'd hate to be in your shoes for harder "asks". Establish the importance of doing things right. It's what you're paid for, after all.

The reason you have not seen anything specifically addressing this is because a one-participant 401k is still first and foremost a 401k plan. There is nothing to address. Contributions by or on behalf of a one-participant 401k participant make them an active participant for the tax year of those contributions. As do SEP IRA contributions for the calendar year of those contributions. Self-employment and the lack of W-2 reporting is irrelevant.