Leaderboard

I'll guess and say ahasan is looking at the top heavy rule where a more-than-1% owner with compensation over $150,000 is a key employee. Section 416(i)(1)(B) says to use section 318 ownership rules. Put another way, use the same rules that are used to determine a more-than-5% owner and also to determine HCEs.

Well you can have in-service distributions with some restrictions (age, service, etc) as well as different requirements based on the source of money (deferrals, match, ps, etc). But the OP question was related to money the participant rolled into the plan from an IRA or another plan. We generally design the plans to allow those funds to be distributed whenever the participant desires.

Here are two IRS publications that discuss fringe benefits and neither mentions employer compensation for jury duty: https://www.irs.gov/pub/irs-pdf/p15b.pdf https://www.irs.gov/pub/irs-pdf/p5137.pdf The publications discuss fringe benefits that are not included in income and say everything else is not excluded. From the perspective of the plan, amounts paid for jury duty by someone other than the employer are not employer compensation and are not considered by the plan. Interestingly, many plans talk about jury duty in the definition of Hours of Service. For example: "Hour of Service" means (a) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period (these hours will be credited to the Employee for the computation period in which the duties are performed); (b) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, incapacity (including disability), jury duty, lay-off, military duty or leave of absence) during the applicable computation period (these hours will be calculated and credited pursuant to Department of Labor regulation §2530.200b-2" While the above is not clearly dispositive, if the employer pays the employee for time the employee is on jury duty, it is not a fringe benefit.

(And of course, thanks for leaving me a bunch of plans to have to take over on! 😁)

The end of December marked the end (at least for now) of my 41+ years in this business, starting as a part time DC system programmer (before I knew what a "forfeiture" was) and ending as an Enrolled Actuary with all the ASPPA exams completed as well. I have also been a Benefitslink Board participant for more than 23 years. Here, as well as through the exams, is where I learned my stuff. I am grateful for the learning, teaching and helping opportunities (and more than a little fun) created by Dave and Lois Baker through this awesome system. Their efforts aren't appreciated enough. Thanks also to the countless Board participants that have educated and helped me over the years; and I hope I've been able able to help others as well. I still plan to linger now and then but goodbye and Happy New Year for now! Thanks again Dave and Lois.

I recently had a situation like this with a qualified plan. I could not find any guidance that would indicate that in this circumstance the IRS would waive the RMD requirement until the situation was resolved. I would think that the person who ultimately is awarded the amount could get the penalty waived under the circumstances, but that's just speculation on my part.

I was told by someone who is an expert in this area of the law and whom I trust that it is against the ethical rules that apply to lawyers to counsel a client on the odds of getting caught. That may be in Circular 230. I have not had a lot of experience with this issue's being audited, but I tend to agree with CuseFan and I think a couple of key facts are (a) did the small employer that terminated the plan need the cash for some personal reason, e.g. to pay a debt or buy a house, and (b) did they start a new plan soon thereafter when their financial position improved? Those two facts would tend to cast doubt on the bona fides of what otherwise might seem a decent termination excuse.

I never make that determination or negotiate nor attempt to, not my place as I have no clue about the biz structure. I know about the 20 step rule and also know enough for pass/fail smell test and also enough to make noise about it. At the end of the day, it is between the sponsor and the CPA. I can only either warn them about the dangers or not accept as a client. nothing else to do.

At risk of telling you something you already know but I would stress to your client while sending the new rules that the determination of who is an employee or independent contractor is (and always been) an objective determination. It isn't always easy to make the determination but it is always been about objective tests. It isn't something you get to decide or negotiate with the people who you do business with.

The Department of Labor just released its final rule (January 9th) on determining who is an independent contractor. Attached is a good summary of the rule. You are correct that the burden of proof is on the employer, and you may want to send Joe a copy as a courtesy FYI. At an opportune time before setting up any plans, consider having a conversation with Joe about the severe consequences of setting up the plans should the DOL decide that Mary and Jane are in fact employees and the IRS discovers that they are not included in the plans. If Joe still wants to move forward, you will need to give some very serious thought about whether you want to do business with Joe. Personally, unless Joe can provide documentation that Mary and Jane truly are independent contractors, I would not do business with Joe. DOL final rule adopts 'economic realities' test for independent contractors.pdf

It takes the IRS a long time to process under normal circumstances. They are still very backlogged, so I would expect a few months minimum. The penalty/interest letters are autogenerated, so they will continue until resolved in the IRS system. If you want to make sure your stuff has been received and is in line for processing, call the IRS number on the late notice and speak to an IRS rep. Be prepared to donate a kidney for ID verification... Just kidding of course, but they may ask you questions like a number from your last tax return to prove that you are you.

Money Markets are considered cash equivalents. I doubt there is any IRS auditor who would raise even one eyebrow at the contribution being made in the form of a money market transfer to the Plan.

IRC 3405(e)(10)(B)(i)(III)

The 1/3 test uses 414(s) compensation. The 5% test uses 415(c) compensation. For purposes of the gateway, BOTH may be measured either over just the period of plan participation, or over the plan year. This is because the option to use participation compensation for testing does not come from 414(s); it is found in the definition of "plan year compensation" in 1.401(a)(4)-12. If your system is excluding the pre-entry compensation for the 5% test, you may have it coded incorrectly.

It depends. Are you talking about IRC 318 attribution, or IRC 1563 attribution? What is the situation, specifically, and for what purpose(s) are you attempting to determine the attribution? And for 1563, the ages may matter in some situations.

Depends upon the specific provisions of your document. The 5% test is based on 415 compensation, but your document CAN limit that 415 compensation to the period of eligibility. So you may be able to exclude 415 compensation prior to the date of participation, or you may need to use full year compensation. You'll need to check the specific document provisions.

Whichever person is the plan’s administrator or, even if not so appointed, acts for those functions, directs the plan’s trustee, and instructs the administrator’s recordkeeper, third-party administrator, and other service providers. Your description suggests such an administrator or other fiduciary might need some lawyering to rewrite the directions and instructions. One practical suggestion to you 401 Chaos, don’t take on new or incremental work until you get a fresh (and carefully written) engagement and collect an advance payment of your fee. Beyond managing a risk of nonpayment, it’s a way to test whether a person has authority.

This may help: Page 441 of General Explanation of Tax Legislation Enacted in the 117th Congress (December 2023) 17. Retroactive first year elective deferrals for sole proprietors (sec. 317 of the Act and sec. 401(b) of the Code) Present Law Present law provides a remedial amendment period during which, under certain circumstances, a retirement plan may be amended retroactively in order to comply with the tax qualification requirements.2030 Plan amendments to reflect changes in the law generally must be made by the time prescribed by law for filing the income tax return of the employer for the employer’s taxable year in which the change in law occurs (including extensions). The Secretary may extend the time by which plan amendments need to be made. Section 201 of the SECURE Act 2031 provides that if an employer adopts a qualified retirement plan after the close of a taxable year but before the time prescribed by law for filing the return of tax of the employer for the taxable year (including extensions thereof), the employer may elect to treat the plan as having been adopted as of the last day of the taxable year. That provision permits employers to establish and fund a qualified plan by the due date for filing the employer’s return for the preceding plan year. However, that provision does not override rules requiring certain plan provisions to be in effect during a plan year, such as the provision for elective deferrals under a qualified cash or deferral arrangement (generally referred to as a ‘‘section 401(k) plan’’). Under present law, if a section 401(k) plan is established by a sole proprietor after the end of the individual’s taxable year, then the plan can be funded with employer contributions as of the due date for the business’s return (including extensions), However, any election to make an elective deferral must be made by the end of the individual’s taxable year (i.e., generally by December 31 of the prior year). In contrast, an individual who contributes to an IRA is deemed to have made a contribution to the IRA for a taxable year if it is contributed after the taxable year has ended but is made ‘‘on account of’’ that year and before the due date for filing the IRA owner’s tax return for that year without extensions (generally, April 15). Explanation of Provision Under the provision, in the case of an individual who owns the entire interest in an unincorporated trade or business, and who is the only employee of such trade or business, any elective deferral 2034 under a section 401(k) plan to which the election under section 201 of the SECURE Act applies which is made by such individual is treated as having been made before the end of the plan’s first plan year if the election to make the elective deferral is made before the time for filing the return of such individual (determined without regard to any extensions) for the taxable year ending after or with the end of the plan’s first plan year. This extension of time would only apply to the first plan year the section 401(k) plan is established. Effective Date The provision is effective for plan years beginning after the date of enactment (December 29, 2022).

Whatever responsibility (if any) one might have for providing advice or information, the advisee or information recipient is responsible for what it decides or does. Many practitioners consider it professionally permissible to provide truthful information about nonenforcement. Others suggest omitting information that might lead an advisee or information recipient to noncompliance. A caution: If the information is nowhere published and instead is based only on anecdote or perception, it might be difficult to defend what one said about nonenforcement. Unless one warned the information had only that grounding, and can prove she said it.

Agree with Bird, we rarely see small plan clients on pre-approved documents submit for plan termination determination letters. On permanency, I think you can craft an early termination excuse out of just about anything.

I have too much time on my hands and will rant a bit here. My thoughts on doing the 5310 are completely contrary. My viewpoint is that of someone who works mostly on micro plans. I've been doing this long enough to remember when there was no fee for the 5310, and you got an FDL within a few months. Then they started charging for it, and taking longer and longer. It used to be something that we insisted on, then gradually became a client option, and now we barely mention it. The main thing that triggered my policy change was that we had a plan that was audited, after we received a FDL. I said "but but but but we have an FDL" and the agent said "yeah but we "just" need to review some operational things, and the FDL doesn't cover that." So they did the audit, and it was a major PITA because the company had shut down; fortunately they had some stuff in a warehouse. Of course they found nothing. Unless you have an individually designed plan and need the FDL to cover the document, I do not think it is worth it. Basically you have a choice of 1) getting the FDL and spending a decent amount of money and waiting an interminably long time for an answer, and still being subject to an audit of the plan's operation, or 2) not getting the FDL and being subject to an audit of the plan's operation. You really should not have a document issue if you are using a pre-approved document. I don't believe the ADPs and Paychex of the world are submitting 5310s, and they have way more plans.

The IRS does not have the resources to check everything every year. Each year, they will announce special projects or initiatives to take an in-depth look at a specific topic. For example, they had a project to look at plans that had a discontinuance in contributions. The found about 1/3 of their sampling of plans had a deficiency in how the discontinuance was handled (mostly due to vesting, and they found some plan terminations, too). The IRS has an expectation that a plan will operate in compliance with the rules, and we cannot assume that they don't care about early terminations. Any client who is cavalier about an early termination at least should be informed of the potential consequences of their decision.

Unlike some employment-based retirement plans for which a § 401(a)(9) minimum-distribution provision might apply regarding the particular plan, for Individual Retirement Accounts tax law’s minimum-distribution condition applies to an individual, and applies regarding the aggregate of the IRAs an individual holds. A typical IRA custodial account agreement does not obligate (and might not permit) a custodian to pay a distribution the holder has not requested. And an IRA custodial account agreement might provide the custodian a right to delay payment if there are competing claims or other circumstances that raise a reasonable doubt about which person is the proper distributee. A custodian might have a right to wait until the custodian receives a court order or a settlement agreement that protects the custodian.

I have had the IRS challenge early terminations, but that was a very long time ago. Sale of company and new owners would seem like a legit reason for termination due to material change in circumstances. I'd have no problem arguing that. 5310 is not required, but certainly the best practice. I would not bless a termination without one.

And notice that the TRS Guide linked above does not refer to the participant and/or spouse signing anything. It does use the phrase "signed DRO", which refers to the proper court signatory.

A person who seeks a New York State court’s order that the Teachers’ Retirement System of the City of New York (NYCTRS) would administer will want one’s lawyers’ advice about New York State law and the Retirement System’s law and procedures. NYCTRS publishes its TRS Guide to Domestic Relations Orders: https://www.trsnyc.org/memberportal/WebContent/publications/TRSGuidetoDRO.

1 - as others have already addressed proficiently, yes they check but they may not press the termination. 2 - yes... I actually had a 100% ESOP established in 2021, company was acquired in 2023 and plan terminated... 2½ years for an ESOP is crazy short, but the sale was in the best interest of the shareholders (the plan participants). We will have a few more years of administration waiting for the FDL from the IRS and for the escrow hold out, but selling your business can most certainly fall under the change in ownership category. 3 - the 5310 is not required to terminate the plan. It's only necessary if you want the IRS' blessing on the termination of the plan. In an acquisition situation like I describe above, the buyer may REQUIRE the plan sponsor request the FDL so they know the plan has no issues, or there may be language written into the transaction that if the IRS finds errors requiring correction the onus is on the company being acquired to absorb the cost for corrections.

I agree that the IRS has the permanency requirement and that it takes it seriously, as pointed out by Paul I. Regarding whether or not the IRS still cares, there are a lot of IRS policies and positions taken regarding qualified plans that can be fairly old and seem inapplicable, but do not fool yourself into believing that they have become obsolete and that they no longer apply. For example, there is a 1956 regulation governing the times when certain types of qualified plans can make distributions, including in-service distributions. This regulation is still frequently cited as the reason why a distribution can or cannot be made from that type of plan. See 26 CFR Section 1.401-1(b)(1)(i) - (iii). Regarding permanency, the IRS does not regularly cite that as a policy and none of its rulings or other guidance have relied upon it. The reason is that primarily under defined benefit plans, there was more of a potential for abuse by the top echelon of companies to terminate their plans and obtain substantial fully funded pensions upon plan termination and, if the plan were fully funded, to recover the reversions. When this was a factor, even before ERISA, generally employees were not vested at all until they were at or substantially near normal retirement age. The numerous legislative and regulatory changes that have been put into place in the intervening years, such as 415 limits, compensation limits, stricter nondiscrimination regulations, benefit accrual rules, top-heavy rules, etc. have tended to greatly curb the potential for abuses, at least to the extent of calculating benefits and providing for more meaningful benefits for rank and file employees. In today's defined contribution plan environment, the potential for such substantial disparities in favor of owners and upper echelon management is substantially attenuated. So, while it is still on the books and considered by the IRS, its prominence as a substantial arrow in the IRS' quiver of controlling abuses is greatly diminished. Responding to your question regarding the Form 5310, an employer may but is not required to file for a determination letter from the IRS stating that the plan's termination will not adversely impact its qualification. Although it is optional, it is widely considered to be prudent to apply for such a determination letter. If the employer merely adopts a resolution stating the plan is terminated, distributes all of its assets and files a final Form 5500 for its final year of operation, there is always the risk that the IRS might conduct an audit on the plan's termination.

I have not seen an IRS challenge to any client's early termination, but that doesn't mean there is little to no risk for an unsubstantiated early termination.

The IRS presumption is that 10 or more years is deemed permanent and won't be questioned. I suggest anything less than that have a reason other than "changed our mind." I use the 3-5 year period for changes, so as not to have a pattern of frequent amendments that create a discretionary arrangement that is not a "defined" benefit. That said, there are a lot of business reasons that could substantiate earlier termination, just be careful you do not have a blatant short-term tax deferral.

Your goal should be compliance. See Paul I's comments, especially about making sure they are aware of the rules before they establish the plan. Having said that, I don't think the IRS cares. We generally tell folks they need 3-5 years, and maybe that is enough because we have never ever been challenged on the permanency issue. I'm not aware of any enforcement in this area, and frankly, think that's a shame.

Millions for a 2-3 year plan sounds more like a 415 issue than it does a permanency issue!

While it should be something the IRS looks at, I don't see that the IRS actually cares. I see many small qualified plans set up for 2 or 3 years, paying the Dentist or the Doctor who sponsored the plan millions of dollars, and the rest of the employees get a few thousand dollars. The plans even submit the termination to the IRS for the final determination letter and I don't see the IRS question it.

Plan permanency is a "thing". It is best discussed with an employer BEFORE the plan is adopted. This takes away the first excuse an employers makes is "no one ever told me so". Is the IRS serious about it? Yes, it's in the regulations and the IRS Manual. See https://www.law.cornell.edu/cfr/text/26/1.401-1 and 1.401-1(b)(2) in particular. Also see the IRS Manual Section 7.12.1.13 Permanency Requirements/Reasons for Termination https://www.irs.gov/irm/part7/irm_07-012-001#idm139730249437392 . This latter link provides a lot of details on what is considered by the IRS in reviewing a plan's permanency, and you will find the answers to your questions and a lot more information. Is this something the IRS even checks? Yes. One way the IRS can learn about the issue is during a review of a company's tax returns. Seeing a deduction for a contribution in one year but not in subsequent years likely will trigger a question. Another way depends in part on whether to plan has filed a Form 5500-EZ, 5500-SF or 5500. The IRS has a formal Entity Control Check that it uses to keep track of filings made year over year. See page 24 of the IFILE User Guide https://www.efast.dol.gov/fip/pubs/EFAST2_IFILE_User_Guide.pdf . The IRS can track filings for the pairing of the employer's EIN and Plan Number. If there are too few or an abrupt end with no designated final filing, this may trigger an inquiry. Keep in mind that a discontinuance of contributions also can lead to a plan being considered terminated. Take a peek at IRM 7.12.1.14. If you convince a plan to delay terminating but the employer makes no contributions, you potentially are making the situation more complicated. Consider cutting your losses with these clients, and focusing your time and resources on educating employers before they sign up.