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Because the law says it does. There is a specific rule - IRC 402A(c)(4)(E) - that says amounts transferred from a pre-tax account to a Roth account will be "treated as a distribution" which is why you can do this. There is no rule that says you can net your RMD against your planned contributions for the year and avoid taking a distribution if you contribute less. "Seems to" is not the same thing as "is." The main thing you're missing is that qualified plans have to have their assets in a trust, under the control of a trustee. Under your method, the trust never has control of the amount, so it can't be considered to be plan assets, so it can't be used to satisfy the RMD requirements. Your chart also seems to be saying that the $10,000 will simply remain in the business account. The RMD doesn't get paid to the business, it gets paid to the participant. The business would have to pay it out to the participant in that case, and there might be questions why a payment directly from the business to an employee isn't being treated as wages. If the goal is just to avoid making a payment out of the main plan account, what you might be able to do is to open a checking account in the name of the plan. Then deposit the $15,000 to that account, transfer $5,000 of it to the main plan account, and pay out the remaining $10,000 to the owner. That seems unnecessarily complicated to me, but maybe it will accomplish your aims.

You can do what you want, but just remember you have to be comfortable defending your position on IRS Audit and I'm not sure the IRS would agree with your phantom contribution and phantom distribution approach even if from a tax perspective it comes out just the same.

No virtual contribution is worth the paper it is written on. Must have proper paper trail

No. What would justify the 1099? There was no distribution.

Notice 2016-16 prohibits a mid-year change to reduce or narrow the group of employees eligible to receive safe harbor contributions. I think you could do either: 1. Amend the plan effective 1/1/2024 to change the eligibility requirements for everyone, or 2. Amend the plan effective immediately to set a 1 year of service requirement for employees hired after the date of the amendment, and retain the existing service requirement for current employees.

Right, you’d have to modify the plan’s written terms to do it this way. After doing that, you should submit the plan document to the IRS for a determination letter.

Matt - please take heed of the advice in previous comments - they have you and your client's best interests at heart. Among other things, a requirement for plan qualification is that a plan MUST BE OPERATED ACCORDING TO ITS TERMS. If you don't, it is an operational error, and the plan is subject to penalties and potential disqualification. I'll bet the farm that you can't find a valid document out there that doesn't specify that a distribution must be made from the PLAN. There's no IRS approval of a document that says, "Oh, it is ok for the EMPLOYER to just write a check directly to the participant and count it as a distribution FROM the PLAN." If you were to attempt this in your own practice, make sure your E&O is ironclad. Echoing the prior comments, it just ain't worth it. I don't disagree with you that it would be convenient, but that's not the issue when it comes to compliance.

1) No one here doesn't understand what you are saying. 2) We are saying we understand and we think it is a bad idea for the reasons listed. 3) I will add you are being too clever. Whatever savings you think is being gotten it is too little for the risk. Don't net like this. If an audit comes you have to spend a ton of tome explaining it and if they don't get it for some reason the client is in trouble. I mean how much can the saving be? You have most likely spent more time arguing for the idea here than it would take to do the two transactions. I am all for labor savings just not dumb labor savings and this one is dumb.

The math works out but you can't simply net implied transactions - you don't have deposit to match contribution deduction and don't have a distribution to demonstrate RMD and justify a 1099R. I would not want to try to convince an IRS auditor that this is all OK because we get to the same place despite skipping the intermediate steps.

It's unclear from the prior comments, but if this is a "qualified plan distribution annuity" (QPDA) then no 1099-R reporting is required. It's not a rollover distribution. There is no reporting requirement in the 1099-R instructions or the Regs for transfers of assets from a retirement plan trust to an insurance company. The insurance company must report distributions from the annuity on Form 1099-R. Also, the Schedule H (form 5500) reporting for QDPAs also differs from rollovers and other distributions. 2e(1) is benefit payments to participants, including direct rollovers. 2e(2) is to insurance carriers for the provision of benefits. Hope this is helpful.

Agreed. The fact that they said it IS a rollover and therefore no 1099 is required is pretty scary.

Presentation-Variable-Benefit-Plans-in-Depth.pdfPresentation-Variable-Benefit-Plans-in-Depth.pdfPresentation-Variable-Benefit-Plans-in-Depth.pdfHere is the presentation from a few years back. Hope I was allowed to post.

If they want them in then I'd likely do 21/1 dual entry with eligibility waived for anyone employed on X date where X equals some date that brings in the 3 NHCEs.

Just went through an IRS audit for a client. Had to point out (more than once) that the amount of the contributions for the year matched the Form 5500, matched the trust deposit, and matched the company's deduction, etc. Two years down the road when this client gets audited, you will not be able to just give copies of the contribution check, contribution deposit, and shoe corresponding amounts on the Form 5500 and business tax return. As others have pointed out, it's not worth the time to explain this later. If everything matches up, no explanation is needed. (And I might add that the agent we had seemed to not be familiar with some basic retirement plan knowledge despite working as an IRS auditor for 15 years. I would not have wanted to explain this situation.)

Why not try out the idea first with a small plan of your own? A test run where no one else is at risk? When audited, explain that no RMD was needed because you intended to contribute, etc., etc. Then post the results here once the audit is closed to let us know how much billable time was spent, if the arguments were successful, how much excise tax was paid and any interest and/or penalties. Maybe it would be worth it?

A. Logic has no place in retirement plan discussions B. Your logic is flawed anyway as noted by CuseFan

And PS contributions are discretionary, so what you are proposing is also equivalent to being able to avoid actual RMD and just say "I made a contribution for the same amount" and then book corresponding deduction and 1099R. These are separate and distinct transactions, not interrelated recordkeeping actions like Roth conversions. Would you directly deposit $30,000 into a Roth IRA and call it a rollover of voluntary after tax and generate a 1099 to substantiate without actually contributing to the plan, then withdrawing/rolling? I wouldn't.

Try Revenue Ruling 66-144. And I agree with you and Bird, you should be all set in the situation you describe. P.S. here's the text of the RR: Pension Rulings and Other Documents,Rev. Rul. 66-144, 1966-1 CB 91. [Amplified by Rev. Rul. 84-18 at ¶19,651.],Internal Revenue Service, (Jan. 1, 1966) Where a corporation on the accrual method of accounting has obtaining an extension of time for filing its income tax return, a contribution paid to its qualified employees' trust within such extended period for filing will be deemed to be timely regardless of when the return is actually filed. Advice has been requested concerning the time allowable for a corporation on the accrual method of accounting to make a contribution to its qualified employees' trust for a taxable year for which the corporation has obtained an extension of time filing its income tax return. A corporation, on an accrual method of accounting, established an employees' trust which is qualified under section 401(a) of the Internal Revenue Code of 1954. Following the close of its calendar taxable year, the corporation obtained an automatic extension of 3 months for filing its income tax return as provided by section 6081(b) of the Code. Subsequently, but before March 15, the corporation filed its income tax return and paid all tax due thereon. Its contribution to the employees' trust was made on June 1. Section 404(a)(6) of the Code provides that for purposes of deductions for contributions under qualified stock bonus, pension, profit-sharing, or annuity plans, a taxpayer using the accrual method of accounting shall be deemed to have made payment on the last day of the year of accrual, if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year, including extensions thereof. Section 404(a)(6) of the Code provides that a contribution for a taxable year made by a taxpayer reporting on the accrual basis shall be deemed to be made within such taxable year if paid within the time prescribed for filing its return plus any extension of time in which to file. Therefore, a contribution paid within an extended filing period is deemed to have been made during the taxable year. Thus, a contribution made during such extended period, as provided for under section 6081(b) of the Code, is deemed to have been made during the taxable year regardless of when the return is filed. Accordingly, the contribution made by the taxpayer in the instant case will be deemed to have been timely made for purposes of section 404(a)(6) of the Code.