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When you have a Controlled Group or Affiliated Service Group, there is a sponsoring employer and adopting employer(s). The 5500 is prepared under the name of the Sponsoring Employer, and the filing is treated as a single employer filing, even though it may be covering more than one employer. This goes for EZs as well. If there are no common-law employees in either entity and the only employees are spouses or partners, you can file an EZ. Code 3H in the Characteristics codes identifies this as a Controlled Group or Affiliated Service Group. If combined assets are under $250K, there is no filing requirement.

The policy can be distributed to the participant. The value of policy can be determined by using one of the methods available as defined in Rev. Proc. 2005-25. (They are a little complicated to go into detail here, but the insurance company that issued the policy likely can do the calculation.) For purposes of determining the taxable value of the policy distribution, 1.72-16(b)(4) does not permit owner-employees to exclude an basis attributable to PS 58 costs previously taxes while the policy was held within the plan.

A common tactic for getting a policy out of a plan without a big buyout or tax consequences is to have the plan borrow from the policy, thereby reducing the net CSV (FMV to be precise as noted above). Then you have a stripped-down policy with little or no value which can be bought or distributed more easily. Now the policyholder will own the policy, but will have to pay more outside the plan in interest to keep it going. And the cash value will be reduced because of the borrowing.

The State of Confusion?

Also see rev. Proc. 2005-25 which defines fair market value of the policy for this purpose. It may be more than the cash surrender value.

Paul I, you raise a nice point on which Pennsylvania law might be unclear. But if Pennsylvania law counts in compensation income any portion of the Federal income that results from a non-Roth to Roth rollover within an employer-sponsored plan, the distributee gets cost recovery up to the sum of her previously Pennsylvania-taxed contributions. Further, there might be an interpretation that nothing of the Federal income that results from a non-Roth to Roth rollover within an employer-sponsored plan counts in Pennsylvania compensation income if the whole of that rollover is allocable to previously Pennsylvania-taxed contributions. Pennsylvania’s Revenue department has unofficially communicated an explanation: “If a distribution from an IRA was received before age 59½ and retiring, and [the distributee] rolled the entire distribution (100 percent) into a Roth IRA directly or within 60 days, the [rolled-over] distribution is not taxable income for Pennsylvania purposes. If the entire distribution was not rolled into another IRA, Pennsylvania-taxable income must be reported to the extent the distribution exceeds your contributions.” https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx Such an interpretation might be logically consistent with recognizing that such a conversion-to-Roth rollover, even if it results in income for Federal income tax purposes, is not for Pennsylvania personal income tax purposes an early distribution that pays or delivers compensation income to the continuing participant. And Pennsylvania should treat a conversion-to-Roth rollover within an employer-sponsored plan no less favorably than Pennsylvania treats a conversion-to-Roth rollover within an individual’s IRAs. https://revenue-pa.custhelp.com/app/answers/detail/a_id/1470/kw/rollover%20AND%20Roth

I think the term describing the actual CV to be distributed is interpolated terminal reserve (if my memory serves me right) and yes it has to be done under RP 2005-25 - written to avoid springing cash values, ahhh the good old days. Remember that, it is a distribution and subject to whateevr the plan states like spousal consent, any QJSA requirements etc etc etc. Assuming that this is a DC plan, right? If a DB, far more complicated.

Frankly, it doesn't matter if any of us are concerned or not. It's all a lottery (and I kinda mean the short story version). We had a 5558 for calendar year 2021 that was filed timely and received by the service in Ogden before July 31, 2022 (certified mail return receipt signed and dated). The IRS sent a CP216H rejection to our client dated July 31, 2023. Not the only silly thing to happen in the past 12 months with 5558s. Thank goodness electronic filing is just around the corner.

If it wasn't withheld from payroll then it isn't a deferral. It should be returned to the owner, adjusted for earnings. The earnings would be taxable.

I am not aware of any state that would treat a federal-tax-free rollover as state-taxable. A nuance to consider is a rollover distribution from non-Roth sources to a Roth source or Roth IRA could have a taxable amount reported in Box 2a on a 1099R with a rollover code. I expect that if there is an amount reported as taxable, many if not all states would also consider it taxable. I think - but haven't confirmed - that if this occurs in Pennsylvania and the individual is not over 59 1/2, PA will tax it.

Yea I think so... Mine have been super slow this year as well, but since I have proof of mailing I'm really not concerned.

Most likely, you are being overly concerned, but that is an indication you care and are looking out for your clients best interests. Sometimes stuff does happen, so keep all of documentation you can in case there is a need to show you made a good faith effort and get the forms in the mail before the deadline. This could include screenshots from the USPS tracking site. If the status is "moving through network", that is an acknowledgement that the certified mail is in fact in the hands of the post office. If your clients start getting letters that they filed an extension and the 5500 is due by October 16th, you will have another form of proof that the forms were received.

Addendum, permissively disaggregated may not require gateway, just remembered. All my plans I work on are all top heavy and require to be aggregated for testing, no option there. So my posting applies to my plans specifically. Just FYI

A prohibited-transaction exemption (which is available regarding both ERISA §§ 406-408 and Internal Revenue Code § 4975) sets a playbook for a plan’s sale of its life insurance contract to the participant/insured. Prohibited Transaction Exemption 92-6 (PTE 92-6) Involving the Transfer of Individual Life Insurance Contracts and Annuities from Employee Benefit Plans to Plan Participants, Certain Beneficiaries of Plan Participants, Personal Trusts, Employers and Other Employee Benefit Plans amended, 67 Federal Register 56313 (Sept. 3, 2002) https://www.govinfo.gov/content/pkg/FR-2002-09-03/pdf/02-22376.pdf Here’s the key condition: “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had it retained the contract, surrendered it, and made any distribution owing to the participant on his vested interest under the plan[.]” Or, if the plan provides (or at least does not preclude) a distribution of property other than money and the insured participant is entitled (perhaps by having reached a specified age) to a distribution, the participant might claim his distribution. The plan’s trustee would tax-report the distribution on Form 1099-R.

The transaction you described is basically what needs to happen. What I would recommend is that the insurance guy contact his home office’s advanced consulting office and get the exact instructions on what to do. If he refuses, tell the client to hire an ERISA attorney. Lots of possible liability sitting here. wcp

If you're testing together, then the fact that they get safe harbor means they're going to need to get gateway. So if your plan document won't automatically provide gateway for anyone who fails under its normal allocation provisions, you may need an -11g amendment to increase their benefits. Fun to tell the sponsor, surprise, your one-year wait provision is basically moot.

There is no need to split a payroll period that saddles a plan year ending in the middle of the period. Include the entire payroll in the plan year or not. Be consistent. If you include it, you are using accrual accounting. If you don't, you are using cash or modified cash accounting.