Leaderboard

Since the 3% SHNEC is required to use a 414(s) compliant compensation definition, it will need to be amended. An -11(g) amendment is treated as if it were adopted and effective as of the first day of the plan year [1.401(a)(4)-11(g)(1)], so it works if the amendment is adopted by the 15th day of the 10th month following the end of the plan year [(1.401(a)(4)-11(g)(3)(iv)]. If you have access to the IRS Q&A session handout from the 2012 ASPPA annual conference, this situation was question 39.

Sure. You had participants, I'd guess. So file it with all zeroes except the participant account.

I think your plan document could foreclose it, but generally I'm of the opinion that it's fine as long as the contribution is made with respect to compensation earned before the date of termination. Otherwise, you would be required to calculate all contributions (including final payroll, match, SH nonelective, etc.) and actually deposit them before the proposed termination date. Unless the document explicitly says otherwise, I don't think you would be that constrained. This is the relevant language from the standard FIS Relius termination amendment: Cessation of contributions. No employees shall enter the Plan after the Effective Date of Plan Termination, and there will be no contributions for periods after such date. Furthermore, in determining any contributions prior to the Effective Date of Plan Termination, the Plan will not take into account Compensation paid after such Effective Date. I don't think depositing a payroll deduction (due solely to paycheck timing) for compensation earned prior to the termination date is a "contribution for periods after such date."

Yes.

I generally ask if they are paying self-employment taxes on that income. If so it should be fair game. It's mildly eyebrow-raising that they would be getting both a 1099 and a K-1 from the same employer.

I agree with the other commenters that there is no way this is ok. The excise tax under IRC 4972 is on non-deductible contributions, defined as contributions made in excess of the limit under IRC 404. Choosing not to take a deduction for a contribution does not make it a nondeductible contribution, if it does not exceed the 404 limit. Furthermore, even if you did actually make a nondeductible contribution, you still have to allocate it to the extent possible. You could carry forward an allocation if, for example, all participants were at their 415 limits.

Not a mistake in fact

Employer should find a way to help this employee outside the plan.

Mistake of fact is usually a minor typographical or arithmetic error. If they meant to put in $10,000 and but typed an extra zero by accident, that would be one thing. But I would have a hard time believing they didn't notice $90,000 missing for over 8 months! Check the plan document. I bet it says that the contributions will be allocated to participants.

Distribution out, Rollover in