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Are the earnings taxable to the beneficiary? . No Can the beneficiary rollover to an Inherited ROTH-IRA? Yes. But for a spouse beneficiary, it is better to roll to her own Roth IRA ( no RMDs while she is alive) if yes how quickly must the beneficiary exhaust the ROTH? Do you mean 'what are the RMD requirements? If yes, see No 2. Does the answer change if the beneficiary is a spouse v non spouse? Yes. The only option for a non-spouse is an Inherited Roth IRA. Also , must be a designated beneficiary to be eligible for the rollover. Beneficiary is spouse and is over age 73. Can she roll to regular ROTH IRA and treat as her own thus escaping all RMD requirements while alive? Yes Beneficiary and Participant were married less than 1 year at time of death but she was beneficiary for many years before they were married and I assume for IRS purposes the fact that they were married at time of death is the only relevant piece to the tax questions and ability or inability to stretch the distribution as long as possible. Yes.

solo401kperson, off the top of my head I can't think of a case or IRS guidance that addresses this little detail. The regulation that establishes the rule you're trying to comply with, Treas. Reg. 1.401(k)-1(d)(4), uses the term "exists" to state what the new plan cannot do within the 12-month period following the complete distribution of the old, terminated plan's assets. Most people would say that your new plan didn't "exist" before you signed the adoption agreement. On the other hand, some of the limits that will apply to your plan will be higher (although you may not need them to be higher) based on the 1/1/2023 effective date, so arguably the plan existed as of 1/1/2023 retroactively. The first argument (i.e., that the plan did not exist until you adopted it) seems much stronger, because no direct transfer vehicle for the distributed balance(s) from the old plan existed until the new plan's trust was actually established. But absent specific guidance, it might be possible for an IRS EP agent to take the other view, or for another service provider to question this. I would review the specifics (e.g., whether you are getting any benefit from the retro effective date) with my adviser based on the specific facts of your plan and the situation of your business and workforce before 1/1/2024.

Operational error only, assuming all amounts actually withheld from paychecks were deposited timely. So no prohibited transaction, as Kenneth stated above. The correction should include missed earnings, of course, but there is no employer use of withheld amounts to create a PT, assuming there isn’t some other fiduciary breach here.

That's basically the idea, although the intricacies of the guidance are going to have some of the what-ifs..... And the new guidance also reflects what happens to FLTPT (former LTPT) when they meet the plan's normal eligibility. They'd be "normal" enough but still get to stay on the 500 hour vesting schedule. That's the part that kinda....sucks?

Certainly an operational defect (OD) and it has been corrected. Not all ODs give rise to a prohibited transaction (PT). To the extent you have deferrals deposited late you have a PT - but your correction was an ER contribution, there were no salary deferrals withheld for which the employer had prohibited use that would create a PT, in my opinion, so I think you are OK on that front.

I apologize for my ambiguity in my description of the facts. That the bank had notice of the payee’s death was not separately stated as a fact. Rather, I mentioned it only in my query about whether the payer should demand a return of the amounts the payee’s bank collected after that bank had notice of the payee’s death. In the real-life situation on which I wrote the description, the bank had actual written notice of the payee’s (the participant’s) death. Soon after the death, the decedent’s child presented to the bank the death certificate and the probate court’s appointment of the decedent’s child as the decedent’s estate’s executor and personal representative. Thank you for your observation that a bank might not know the duration for the recurring payments. But the payee was ‘Pamela Smith’, not ‘Pamela Smith or Samuel Smith’. Does a bank have a duty not to collect a payment made to a payee the bank knows is dead? When I was inside counsel to a recordkeeper and an affiliated trust company, they demanded returns of payments a bank collected after the payee’s death. In my experience, the banks paid on those demands. But it’s many years since I was in-house to retirement-services operations. When I posted, I had hoped someone with experience more recent, and more direct, than mine would describe what is done in current operations.

Austin 3515, maybe there's a DOL reg, but certainly that's what Treas. Reg. 1.414(l)-1(b) says.

Peter, I don't think there's anything in your description of the facts that would indicate that the bank should have known that the incoming amounts should have been stopped. Even if the data accompanying the funds could have led them to conclude the money was coming from a retirement plan, did the bank have a duty to do anything with that information? And if they did, could the bank have not assumed there was a survivor benefit? The plan administrator (presumably deceased's former employer) should certainly demand a return of funds from surviving spouse, but I'm not sure at all about the bank that has the account the money went into. Maybe I've misunderstood.

I find myself wasting too much time explaining to the owner of a firm with a 50 life plan why Mega Back Door Roth won't even work for that plan due to ACP Testing (among other issues), because the client's broker read some article that this is the ultimate way to save for retirement. Oh, and that owner often tends to be close to retirement already.

Also, if you allow new benefits to accrue based on COLA limit increases, does that create a 401(a)(26) issue in that you don't truly have a frozen plan?

Spun off as in a new employer with a new EIN and now that new company is responsible for those NQ benefits? I would say yes as it is a new plan established by a new employer.

APPLEBY: No one knew anything about this plan but the shareholder. The employees were not told and therefore had no opportunity to participate in either tax year. The financial planner didn't even know he had employees. The employer had a 3% match. There was no handling of the 14,000 on the tax return. There was no payroll withholding for the SIMPLE. He simply gave his financial planner 14,000 of personal money and this financial planner gave it to his guy handling the SIMPLE IRA. The SIMPLE was filed with the IRS because the shareholder got Form 5498 saying he had deposited 14,000 into his SIMPLE IRA for 2022. The SIMPLE only came to light when the shareholder asked how much he could contribute in 2023 because his financial planner wanted to know. PETER GULIA It was a SIMPLE because the IRS received forms saying 14,000 had been deposited into the SIMPLE on behalf of the shareholder. I just don't know what to do when the money deposited was after tax money belonging to the shareholder. Nothing went through payroll for either year. The question now is how to fix this. If he takes the money out it will be a taxable distribution on the 14,000 which has already been taxed. There will be plan penalties, early withdrawal penalties and the plan will need to be closed out. I think it's flawed and was never a real SIMPLE regardless of the fact after tax money was deposited into it. Still, I have no idea what exactly to do. Thanks.

Beyond using Appleby’s suggestions for fact-checking: The shareholder-employee might want his lawyers’ and accountants’ advice about whether the ostensible Form 5304 or other document was a false document and about whether the account someone imagined might be a SIMPLE IRA never was a SIMPLE IRA (and might never have been any kind of IRA). If the account never was an IRA, what tax consequences result from so amending the holder’s 2022 tax returns (removing mistaken exclusions and deductions, and recognizing whatever capital gains, dividends, and interest the taxable brokerage account paid or otherwise distributed)? Nothing here is tax or legal advice; it’s time for each person involved or affected to get his, her, or its professionals’ advice.

In a hyper-technical sense, he is supposed to be able to have documentation either back to the last individual favorable determination letter issued to his own plan, or all the way back if he was using prototypes. In practicality, the IRS won't go back more than the current document and the last restatement, so he is ok. I commend him for his diligence but it is way, way way over the top.

The biggest obstacle to these is that the plan sponsor and the broker never realized that VAT is subject to ACP testing. So while the owner might have the extra bucks to contribute as VAT, the employees likely won't (and there's no reason for them to 'defer' as VAT as opposed to Roth) and therefore the testing fails. Even including SHM in the ACP test may not be enough to pass. I only use this with one-person plans; I have yet to encounter a situation where it will work otherwise. I'm sure they exist somewhere, just not that I've seen. And for a one-person plan, depending on the compensation it might just be easier to do it as profit sharing and then convert it.

Going back to the beginning when the plan started seems necessary here- to ensure all compliance requirements are met. Questions that need to be answered include the following: Were employees notified and given an opportunity to make/change salary deferral elections during the 60-day period (for 2022)? Were employees notified and given an opportunity to make/change salary deferral elections during the 60-day period (for 2023)? Did the employer elect the matching or non-elective contributions? This would determine if employees were required to receive employer contributions. How was the $14,000 handled by the accountant who filed the tax return?

And the daylight hours start s l o w l y getting longer again. Woohoo!

The answer will be found in the amendment that froze the Plan. If it is silent, the answer is probably "no".

5 year clock can be bypassed by opening a Roth IRA in advance with a nomianl $100, no?

To be honest I had not given it much thought. I suppose the rollout to IRA approach has some planning benefits with respect to the 5 year clock and basis recovery first should the funds be required before 59.5 where as in the plan a future in-service that's not qualified would be be prorated between basis and earnings.

Just taking a stab at this without looking it up or thinking too hard...I think what you have, essentially, is an overcontribution. I think the rules for a SIMPLE would be the same as a regular IRA, i.e. you can take it out before April 15 without penalty. After April 15, there is a 6% (??) penalty. So that's where he is now, and 6% per year thereafter. That beats having the whole thing taxed. The other stuff about not enrolling employees is a different matter. Just trying to get the ball rolling and see if anyone corrects me or otherwise picks it up.

The TPA acts on behalf of the cafeteria plan, which is sponsored by the employer. The employer plan sponsor is required to substantiate all claims. That responsibility is delegated to the FSA TPA. This is not something that is ultimately on the employee. It's the plan's responsibility to maintain its tax-advantaged status. Claims must be substantiated by an independent third-party. The plan's failure to properly substantiate claims could result in loss of the safe harbor from constructive receipt, causing all contributions to be taxable for all employees. Here's a short summary from a recent IRS memorandum-- https://www.irs.gov/pub/irs-wd/202317020.pdf If a section 125 cafeteria plan does not require an independent third party to fully substantiate reimbursements for medical expenses (for example, by permitting self-certification of expenses, “sampling” of expenses, or certification by favored providers), does not require substantiation for medical expenses below certain dollar amounts, or does not substantiate reimbursements for dependent care assistance expenses, then the plan fails to operate in accordance with the substantiation requirements of Prop. Reg. § 1.125–6(b) and is not a cafeteria plan within the meaning of section 125. Therefore, the amount of any benefits that any employee elects under the cafeteria plan must be included in gross income and is wages for Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) purposes subject to withholding. Here are the relevant cites-- Prop. Treas. Reg. §1.125-6: (b) Rules for claims substantiation for cafeteria plans. (1) Substantiation required before reimbursing expenses for qualified benefits. This paragraph (b) sets forth the substantiation requirements that a cafeteria plan must satisfy before paying or reimbursing any expense for a qualified benefit. (2) All claims must be substantiated. As a precondition of payment or reimbursement of expenses for qualified benefits, a cafeteria plan must require substantiation in accordance with this section. Substantiating only a percentage of claims, or substantiating only claims above a certain dollar amount, fails to comply with the substantiation requirements in §1.125-1 and this section. (3) Substantiation by independent third-party. (i) In general. All expenses must be substantiated by information from a third-party that is independent of the employee and the employee's spouse and dependents. The independent third-party must provide information describing the service or product, the date of the service or sale, and the amount. Self-substantiation or self-certification of an expense by an employee does not satisfy the substantiation requirements of this paragraph (b). The specific requirements in sections 105(b), 129, and 137 must also be satisfied as a condition of reimbursing expenses for qualified benefits. For example, a health FSA does not satisfy the requirements of section 105(b) if it reimburses employees for expenses where the employees only submit information describing medical expenses, the amount of the expenses and the date of the expenses but fail to provide a statement from an independent third-party (either automatically or subsequent to the transaction) verifying the expenses. Under §1.105-2, all amounts paid under a plan that permits self-substantiation or self-certification are includible in gross income, including amounts reimbursed for medical expenses, whether or not substantiated. See paragraph (m) in §1.125-5 for additional substantiation rules for limited-purpose and post-deductible health FSAs. Prop. Treas. Reg. §1.125-1: (7) Operational failure. (i) In general. If the cafeteria plan fails to operate according to its written plan or otherwise fails to operate in compliance with section 125 and the regulations, the plan is not a cafeteria plan and employees' elections between taxable and nontaxable benefits result in gross income to the employees. (ii) Failure to operate according to written cafeteria plan or section 125. Examples of failures resulting in section 125 not applying to a plan include the following— (A) Paying or reimbursing expenses for qualified benefits incurred before the later of the adoption date or effective date of the cafeteria plan, before the beginning of a period of coverage or before the later of the date of adoption or effective date of a plan amendment adding a new benefit; (B) Offering benefits other than permitted taxable benefits and qualified benefits; (C) Operating to defer compensation (except as permitted in paragraph (o) of this section); (D) Failing to comply with the uniform coverage rule in paragraph (d) in §1.125-5; (E) Failing to comply with the use-or-lose rule in paragraph (c) in §1.125-5; (F) Allowing employees to revoke elections or make new elections, except as provided in §1.125-4 and paragraph (a) in §1.125-2; (G) Failing to comply with the substantiation requirements of § 1.125-6; (H) Paying or reimbursing expenses in an FSA other than expenses expressly permitted in paragraph (h) in §1.125-5; (I) Allocating experience gains other than as expressly permitted in paragraph (o) in §1.125-5; (J) Failing to comply with the grace period rules in paragraph (e) of this section; or (K) Failing to comply with the qualified HSA distribution rules in paragraph (n) in §1.125-5.

Someone probably copied the prior payroll without checking the current one.

Well the SEP failed to meet the coverage requirements, so it's not deductible. Not being an ERISA plan I don't know that the employees have any claim for benefits. There is no provision for any offset between qualified plans and SEPs, maybe something could be negotiated with the IRS. In my experience clients and their advisors tend to let sleeping SEPs lie. Seems like a good time to repost this, I wrote it years ago (back when the 415 limit was $40K): Ode to SEPs At the ripe old age of 42, My CPA said this won't do, He told me I'm out of step, To cut my taxes, go start a SEP. Sent me to a TPA, he said Yep A SEP might work, but first let's see. Lo and behold, we have an ASG! He told me we could work around the ASG; But there would be attorneys fees, Determination letters and trustees, Not only that, I'd have to contribute for employees! But, wait, I have no employees, they work for XYZ, But the lawyer said the ASG Means those employees work for me! We'll design a plan, that will conform, Of course you'll have to file the 5500 form. I said OK, let's kill some trees, But before we do, please explain the fees. When he was done, I had to pee, Surely I could find simplicity. So I went online to explore Found SEPs, 401(k)s, and more, They needed my name and address and EIN But had no pesky questions about 414(b), (c) or (m). What about the IRS, would they find my SEP? They audited my return, said I did misstep, About my SEP they did not complain, But disallowed my green fees, oh the pain! My SEP grew and grew and I paid no fees Wrote a check every year for my 40 Gs. As for my employees, they did not know, For their retirement, they have nothing to show.