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If you can somehow get those excess PS reclassified, maybe you're OK, but I would not tell anyone that I think such strategy would hold up under audit. I'd say we can try but you're playing audit roulette for three years on this, at least that's my opinion. In these cases, I'll usually present limiting total deduction to the 31% and then carry forward remaining CB deduction to the next year properly limiting the PS to 6%. Depending on CB contribution and deduction funding cushion, sometimes it even takes a second year to catch up. This just follows the fact pattern, I don't see a legitimate basis for being able to reclassify a contribution that was made as a deductible profit sharing contribution as something different - and certainly not as VAT contribution when no such designation was made when contributed.

My favorite Benefitslink quote of all time. I saved this for 16 years now!!

Until the Treasury department’s or its Internal Revenue Service’s guidance: Consider Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(25): When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— The terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the taxable income is computed under subtitle A. Consider I.R.C. § 446. Consider the regulations interpreting and implementing § 446. Consider logical consistency with I.R.C. § 404, and with the regulations interpreting and implementing § 404. To the extent that “incurred” is relevant, consider what incurred means under generally accepted accounting principles.

These are good points. I didn't mean to be too cavalier about the approach; it does require a caveat. And we would typically take the approach of limiting the deduction to 31% and catching up in future years.

From in-person interaction with IRS and DOL reps, I have the impression there is a lot of concern about a classification that looks like, smells like or acts like a service based classification. From experience with large medical services employers and with large staffing services employers, they seem to be resigned to considering per diem/ad hoc/on call employees as LTPT employees if the 500 hours/consecutive years requirements are met. They do intend to exclude LTPT employees from match and nonelective employer contributions, and from all coverage and nondiscrimination tests. Several companies do not track in their HR/payroll systems hire dates and termination dates for these workers. Rather, the systems track an original hire date and a last day worked. This is a PITA for their retirement plans where regulations rely on service definitions based on periods of active employment or hours worked. These companies are implementing in the employment agreements and in company policies definitely determinable definitions of a termination date to help fix the time periods. For example, if an employee does not provide services for a period of 6 months, that employee is considered terminated as of the end of the 6 month period. We have been promised guidance by the end of this year, so it should not be too much longer before we get the big reveal. Sentiment seems to be leaning towards we will be underwhelmed.

If it's eligible for rollover, it's subject to the 20% mandatory withholding.

A resolution/record of action declaring the decision to make such a contribution for that plan year?

I don't think there is any doubt, nor need for IRS clarification. I read "incurred" as "accrued" (not just because of the similarity in letters!) so it would generally be considered a 2023 contribution. Interestingly though, I guess it could be used for 2024 if desired, as long as that does not mess with 2024 limitations (e.g. 415).

You can (generally) retroactively add provisions to a document after they are used but before the end of the year. We did exactly (or close to it) this for someone a couple of years ago. There might be a bit of an issue of them being "designated" as employer when they were contributed (and that was obviously the intent, but with a sole proprietor, there is never (?) any paperwork to codify this) but...yeah, I say go for it; good thinking.

Get out of here with this common sense nonsense!

I guess it would be nice of the IRS to just tell us that logic is their position. And then what if you flip flop positions, is that ok? Can you claim 2 credits in 1 year, one based on cash basis and once based on accrual? I just think the timing of the credits needs to be explained.

How about this logic? You can't take a deduction for a contribution you also receive a credit for You can deduct the contribution in the allocation year or contribution year (if different and if timely) The credit belongs to the same tax year as the contribution, whether that is year of allocation (incurred) or year of contribution (paid)

I think a per diem classification exclusion may be possible depending on facts and circumstances. These can be very different, in my opinion, than the typical part-time, seasonal or temporary employee that may be routinely/regularly scheduled to work X hours a week, or X full weeks over a summer, or just for the holiday season. Usually, PDs in my experience are on-call for ad hoc employment assignments as needed to fill in various gaps on an as needed basis, covering sick/disability leaves, maternity leaves, vacations or whatever. A PD on a longer term assignment could even work 1000+ hours, and I've seen others that show up with 8 hours worked and still others that may not work at all for a year or two (but not be terminated in payroll). I think this is very prevalent in larger medical services employers, which do not usually like to extend benefits to this group. Depending the size and scope of your situation, a larger environment may need further analysis of facts and circumstances as well as legal counsel input but a with a smaller company and a less significant PD population it might be easiest and safest to err conservatively and include as LTPT.

Paul, thank you for the clarification of terms. It is a Relius document which states that the loan becomes due and payable upon termination of employment. The default date is as you mentioned, the following calendar quarter. He was rehired before the default date so it does seem possible to let him make up the missed payments and continue repayment.

This situation may be very nuanced, and you should read the plan very carefully as well as having a conversation with the recordkeeper about any tax reporting that will occur. The IRS has FAQs that can be helpful in sorting out the possibilities. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans There are two technical terms - "default" and "offset" - that too often are used casually and interchangeably, and they are not the same. You should get clarification on the plan provisions describing the treatment of the loan upon termination. If it is truly defaulted, check to see if the date of default is specified in the plan document. For example, if the loan is considered in default as of the end of the calendar quarter following the calendar quarter in which the last loan repayment was made, this default date may be later than the date the rehired participant returned to active status (and restarted repayments and made up missed repayments). If the plan truly says there was an immediate default, then IRS FAQ #6 says "[A] deemed distribution is treated as an actual distribution for purposes of determining the tax on the distribution, including any early distribution tax. A deemed distribution is not treated as an actual distribution for purposes of determining whether a plan satisfies the restrictions on in-service distributions applicable to certain plans. In addition, a deemed distribution is not eligible to be rolled over into an eligible retirement plan. " That is pretty harsh news for a rehire to pay taxes on the loan and possibly pay an early withdrawal penalty. Should the plan language supports characterizing the loan as being offset, the IRS FAQ #7 says it can be rolled over to an eligible retirement plan by "the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs." This is the rule you referred to in your last question. If your plan allows for rollovers of loans into the plan and this loan was an offset (not a default), then the rehired participant could rollover the loan back into the plan. Document, document, document all of the details surrounding how this ultimately is handled to protect the plan, to protect the participant and to memorialize the precedent it will set for future situations that may occur under these circumstances.

I believe the DOL equivalency options are all pretty generous for the employee 10 hours per day 45 hours per week 95 hours semi-monthy 190 hours monthly. So per diem - 51 days would would put them over 500.

And if they don't track hours, there is typically a provision in the plan to allocate hours to those people via an equivalency.

If they work between 500-999 hours in each of 21,22,23 or 23,24 (S2.0) I think yes, at least for 401(k) only. But I think there is some discussion about whether or not they can still be completely excluded by "job classification" even under the LTPT rules.

If they are Directors and getting paid fees for that but aren't employees, they should be getting 1099 income and could do their own plans off of that.

Don't overlook the possible explanation that the W-2 was issued because someone did not know the correct process. That might be the first problem to solve.