Leaderboard

I think it's pretty simple. You need to ask whether they are going to (or should) treat the 5% as self-employment income under IRC sec. 1402, which determines whether it's subject to SECA. If yes, then check the plan document, which will probably say that a person with SECA (a self-employed person or individual (SEI)) is covered and their 1402 self-employment income is their compensation for plan purposes. Whether what the individual earns is self-employment income will depend in part on the type of partnership (general, limited, LLC taxable as partnership) and the terms of the partnership agreement.

For EZ it's technically the IRS penalty relief program not the DOL DVFC program but yes you essentially have it correct. https://www.irs.gov/retirement-plans/penalty-relief-program-for-form-5500-ez-late-filers For PBGC see instruction when to file. https://www.pbgc.gov/sites/default/files/documents/2022-premium-payment-instructions.pdf It's typically the later of the normal dead line or 90 days after the adoption.

EZ. Both are 2% S Corp shareholders so you treat them as partners.

I'll also add that there are long articles and whitepapers out there on this issue, which goes back to the 1930s. These usually include situations far more complicated than we normally see in our practice, which are usually a pretty easy to decipher. For those of us with a taste for the finer things in life like the Code, ambiguous court rulings, and guidance that prompts more questions than it answers, its a gold mine!

It's done - a lot. I agree it is not supposed to be that way. Accountants and clients like it since withholding is easier than quarterly tax payments, I think. We always add (or net) the W-2 and net SEI.

You're talking about 2 different things, I believe. Yes, your 401k deduction, etc. will be withheld from your final paycheck, but the Plan's legal document dictates when you can actually take a distribution. In other words, if you want to take a distribution of your 401k account, it's not going to be processed on your last day of employement. As you show in your plan's legal document, your distribution cannot be processed prior to 30 days after your date of termination.

It's not truly disaggregation, where you would treat it as two separate plans as you might be used to with 410(b) and 401(a)(4). Rather, what the new law says is that employees who have not met age 21/1 year of service can be disregarded when determining if a DC plan has satisfied the top heavy minimum. So it doesn't matter if there are any otherwise excludable key employees, you just ignore all of the under 21/under 1 year employees when determining who is entitled to a top heavy minimum. Where it gets weird is with the safe harbor match. The IRS ruled (in rev. rul. 2004-13) that a plan which different eligibility for deferrals and safe harbor does not consist "solely" of deferrals and match meeting the safe harbor requirements, which is the rule to be treated as not top heavy under IRC 416(g)(4)(H). That clause wasn't affected by the new law. So presumably a plan with different eligibility for deferrals and match is still treated as top heavy, and subject to the top heavy minimum. The fact that they don't have to give the top heavy minimum to otherwise excludable employees doesn't change this, it just means that employees who are not otherwise excludable (over 21/1 year of service) will have to get the top heavy minimum. The top heavy minimum for these people could be satisfied by their safe harbor match contribution, or if they don't get any safe harbor (or enough safe harbor, because they didn't defer enough or not at all), then by an additional employer contribution.

Larry, in your example, a 2022 5500 would not be required, it could file its first return on the 2023 from 5500. I take your point that a 5500 is still required, but the timing requirements would change with the addition of a retroactive adoption.

I don't think state has anything to do with it, and agree with Just. Below are excerpts from IRS website. I have seen people use W2 inappropriately as an easy avenue for payroll taxes and income tax withholding because they don't want the hassle of doing correctly. Also agree you should "punt" to accountant to give you plan compensation. Reporting Partnership Income A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" profits or losses to its partners. Each partner reports their share of the partnership's income or loss on their personal tax return. Partners are not employees and shouldn't be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partner. For deadlines, see About Form 1065, U.S. Return of Partnership Income. Is a partner considered an employee? Are partners considered employees of a partnership or are they considered self-employed? Partners in a partnership (including certain members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership. (Jun 15, 2023)

As justanotheradmin noted, the only situation where we expect to see an individual with W2 and K1 income in the same year is when the individual's status changes between a common law employee and a self-employed employee. When we see a W2 and K1 in the same year under other than these circumstances, we push back on the client and the accountant. We have been successful in getting revised reporting from them. One topic of particular interest and is fairly common is when an individual who becomes a partner during the year has Guaranteed Income for their services performed during the year and are treated much like a salary. We familiarized ourselves with Schedule K-1s and it made the conversations with the client and accountants is easier by speaking their language. We also educate them on retirement plans assuming all earnings from self-employment are considered earned as of the last day of the plan year and use the 415 definition of compensation. Yes, it can be messy. See https://www.irs.gov/retirement-plans/calculation-of-plan-compensation-for-partnerships . In the end almost always results on a mutual agreement and understanding of plan compensation, and the conversation rarely has to be repeated from year to year.

I agree it's a very rare occurrence for a small business owner not to provide some service to their business, but there are people who simply own businesses they let someone else run. The better example, and more relevant to initial question, is where a minor daughter is given a partnership ownership share but provides no services for the entity.

Definitely appropriate to do it that way.

To clarify, are you saying no one - including participants who were offered 401k enrollment - made any salary deferrals or received a match for multiple years? If there are participants who are actively deferring and being matched, does the plan have an ADP and ACP test? If it is a safe harbor plan, what is the safe harbor design? What is the vesting schedule applicable to the match? Additional information will be helpful.

The problem with trying to use 25% is the failure to provide a timely notice. To use the 25%, the notice must be provided within 45 days of the start of the correct deferrals, which in this case admittedly did not happen. The notice deadline is not related to when the MDO occurred during the plan year

I'm a bit split on this one, but I tend to disagree. Opportunity is a key part of this correction. If you have a missed deferral but the employee still maximized their contributions, you don't have to correct. Why? Because the participant took full advantage of the opportunity to contribute, even with the failure. The timely notice makes sure that the participant knows that a reduced QNEC will be provided, so if the participant wants to maximize contributions or reach a pre-established goal, they will need to increase contributions. If we delay the notice, the participant has less time to make up for the missed opportunity, making it more difficult to reach the intended amount. I know we often find out when its too late to provide notice, but should the participant pay for that? Just my two cents. Like I said, I'm split on the issue but this how I try to make sense of it.

No it doesn't sound familiar because LLCs with pass through SE taxation are not supposed to issue W-2s. Period. The only time I see that is when an existing employee is becoming a partner mid-year. See Revenue Rulings 69-184, 81-300, and 81-301. An individual cannot be both an employee and a partner for employment tax purposes. I would confirm with the CPA that the LLC does not have an S-Corp election. If they confirm then have them tell you want to use as compensation. It's their issue.

100% agree, but I think its a terminology issue. In this case I believe it means that the bookstore entity is a sole prop rather than the Janice performing "operational services". The example was probably better explained during the webcast than how it is written. The normal functions of a small business owner are usually needed to pay the bills, which is certainly a material income producing factor...

Does the plan’s administrator have a written claims procedure? 29 C.F.R. § 2560.503-1(b) https://www.ecfr.gov/current/title-29/part-2560/section-2560.503-1#p-2560.503-1(b). If so, what does that procedure provide about whether a claim for a principal-residence loan requires evidence beyond the participant’s statements on the claim form? If the written procedure grants the administrator discretion about whether to require or excuse supporting evidence, what has the administrator done regarding similarly situated claimants? If the claims procedure calls for evidence beyond the claimant’s statement that the participant loan is used to buy the participant’s principal residence, consider these points from the Treasury department’s rule: “The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan.” 26 C.F.R. § 1.72(p)-1/Q&A-7 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1. I.R.C. (26 U.S.C.) § 163(h)(3)(B)(i): “The term ‘acquisition indebtedness’ means any indebtedness which— (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.” http://uscode.house.gov/view.xhtml?req=(title:26%20section:163%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section163)&f=treesort&edition=prelim&num=0&jumpTo=true. And back to the § 72(p) rule: “[A] loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence plan loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party. (b) Example. The following example illustrates the rules in paragraph (a) of this Q&A–8 and is based upon the assumptions described in the introductory text of this section: Example. (i) On July 1, 2003, a participant requests a $50,000 plan loan to be repaid in level monthly installments over 15 years. On August 1, 2003, the participant acquires a principal residence and pays a portion of the purchase price with a $50,000 bank loan. On September 1, 2003, the plan loans $50,000 to the participant, which the participant uses to pay the bank loan. (ii) Because the plan loan satisfies the requirements to qualify as a principal residence plan loan (taking into account the tracing rules of section 163(h)(3)(B)), the plan loan qualifies for the exception in section 72(p)(2)(B)(ii). 26 C.F.R. § 1.72(p)-1/Q&A-8 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72(p)-1.

And these are not wages, they are retirement benefit accounts, subject to ERISA and IRS rules (law) and must follow the formal plan document provisions (legal obligation) as noted above. FYI, I suspect that delay in paying out 401(k) accounts is to avoid someone quitting Monday, getting their 401(k) by Friday and wanting their job back Monday. Finally, if you're not planning to roll over your 401(k), 20% will be withheld for Federal tax liability, and your ultimate taxes will include Federal, CA state and if you are not age 55 there is an additional 10% Federal tax.

This is the law change coming from SECURE 2.0, that you can completely disaggregate for 416 (top heavy) purposes. Soon, the same people you're testing separately for 401(k) purposes will be able to be tested separately for TH purposes. And so since their separate test very very likely will have no Keys, their subgroup will be not top heavy, and so folks in that situation can be skipped for the 3%. (Even if the "statutory" employees are in a top heavy plan for their population.)