Leaderboard

The Treasury’s Regulations Governing Practice before the Internal Revenue Service (reprinted as Circular 230) includes this: Requirements for written advice The practitioner must [when giving written advice on a Federal tax matter]— Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit. 31 C.F.R. § 10.37(a)(2)(vi) (emphasis added). If that rule governs a practitioner’s advice-giving, it applies only for written advice, and only for written advice that evaluates a matter. Even if one follows the IRS’s assertions that the Circular 230 rules govern everything a once-recognized practitioner does that, however indirectly, relates to her practice before the Internal Revenue Service, § 10.37(a)(2)(vi) does not restrain one from providing truthful information, not advice, about nondetection or nonenforcement. Beyond those tax-practice rules, whether a lawyer must, may, or must not provide advice or information about nondetection and nonenforcement remains a subject of considerable academic and professional discussion. In summer semesters, I teach a law school’s course on Professional Conduct in Tax Practice. Here’s an edited excerpt from a reading list I give them: Jamie G. Heller, Legal Counseling in the Administrative State: How to Let the Client Decide, 103 Yale L.J. 2503 (1994) (suggesting a lawyer educate her client with full-picture counseling about the law’s provisions, practical application, potential nondetection, potential nonenforcement, and purposes so the client can make fully informed choices). Stephen L. Pepper, Counseling at the Limits of the Law: An Exercise in the Jurisprudence and Ethics of Lawyering, 104 Yale L.J. 1545 (1995) (suggesting modes of reasoning about whether it is appropriate for a lawyer to advise a client about potential nondetection or nonenforcement). Linda Galler, The Tax Lawyer’s Duty to the System, 16 Va. Tax. Rev. 681 (1997). Robert W. Gordon, Why Lawyers Can’t Just Be Hired Guns [chapter 3] in Ethics in Practice: Lawyers’ Roles, Responsibilities, and Regulation (Deborah L. Rhode, ed. 2000) (“Lawyers have to help preserve the commons—to help clients comply with the letter and purpose of the frameworks of law and custom that sustain them all; and their obligation is clearly strongest where there is no adversary with access to the same body of facts to keep them honest, and no umpire or monitor to ensure conformity to legal norms and adequate protection of the interests of third parties and the integrity of the legal system.”). Frank J. Gould, Giving Tax Advice—Some Ethical, Professional, and Legal Considerations, 97 Tax Notes 593 (2002). Michael Hatfield, Legal Ethics and Federal Taxes, 1945-1965: Patriotism, Duties and Advice, 12:1 Fla. Tax Rev. 1-56 (2012). Michael Hatfield, Committee Opinions and Treasury Regulation: Tax Lawyer Ethics, 1965-1985, 15 Fla. Tax Rev. 675 (2014). Milton C. Regan, Tax Advisors and Conflicted Citizens, 16 Legal Ethics 322-349 (2014) (suggesting that ethics or professional-conduct expectations ought to vary with whether a lawyer serves as an advocate or an adviser, and for advisers by the context in which an advisee seeks advice). John S. Dzienkowski & Robert J. Peroni, The Decline in Tax Adviser Professionalism in American Society, 84-6 Fordham L. Rev. 2721 (2016). Heather M. Field, Aggressive Tax Planning & The Ethical Tax Lawyer, 36 Va. Tax Rev. 261 (2017) (suggesting a lawyer “identify and implement her philosophy of lawyering” about tax planning). Michael Blackwell, Conduct Unbefitting: Solicitors, the SRA and Tax Avoidance, 2019-1 British Tax Rev. 31-54 (2019) (criticizing the Solicitors Regulation Authority for wrongly suggesting that a solicitor who facilitates tax avoidance necessarily breaches the SRA Code of Conduct). Rashaud J. Hannah, Betwixt and Between: A Tax Lawyer’s Dual Responsibility, 34 Geo. J. Legal Ethics 991 (2021). ****** I imagine few of us want to coach a client on getting away with the wrong thing. But there are situations in which law is ambiguous, or how the facts relate to law is ambiguous. And even when there is no ambiguity, there are circumstances in which some of us think it’s appropriate to furnish information and let a client decide what the client does or omits.

Luke, you are correct. Circular 230 sec. 10.37(a)(2)(vi) forbids a practitioner from taking into account "the possibility that a tax return will not be audited or that a matter will not be raised on audit." Section 10.37 is titled "Requirements for written advice." Does that imply that you can advise a client on this as long as it is not in writing?

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.

And it walks like a rose

Congrats on your retirement. I'll be following you out the door at the end of this year (and 42 years in the CPA racket.) I'm basically just a lurker here but I try to read the board every day. It's an invaluable resource and I 100% echo your message of deep appreciation.

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.

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

The Senate Finance Committee - Secure 2.0_Section by Section Summary 12-19-22 FINAL describes Section 316: Amendments to increase benefit accruals under plan for previous plan year allowed until employer tax return due date. The SECURE Act permits an employer to adopt a new retirement plan by the due date of the employer’s tax return for the fiscal year in which the plan is effective. Current law, however, provides that plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is effective. This precludes an employer from adding plan provisions that may be beneficial to participants. Section 316 amends these provisions to allow discretionary amendments that increase participants’ benefits to be adopted by the due date of the employer’s tax return. Section 316 is effective for plan years beginning after December 31, 2023. Under this provision, the plan could amend the plan before the due date of the tax return to increase the contribution rate enough to absorb the excess contribution. The description of the effective date in the summary arguably is unclear when can this provision could be used. Is it available in 2024 to amend a 2023 plan? Or, does the amendment have to be applicable to a plan year beginning after December 31, 2023? The language in the statute says "EFFECTIVE DATE.—The amendments made by this section shall apply to plan years beginning after December 31, 2023." This phrasing points to being able to first use this in a 2025 plan year to amend a 2024 plan year. 😢

Has anyone talked to Relius about when the 2024 specimen plan termination amendment is going to be available? I've just spent a very frustrating 1/2 hour trying to navigate their "ticket" system and telephone support when I couldn't get the ticket system to work. And the telephone option didn't work either... I miss the old days.

Haha I know you can handle it! Not sure if I told you, but it took me a while to figure out who "Bri" was and that he (not she as I thought) actually worked with me. But I was always impressed with your comments lol. You're one of the current and future Benefitslink stars! That's good because lots of the old ones are gone or getting quiet these days. But not all of them.....

Thanks Tom you've been very much missed here! I hope you are enjoying your retirement. Not sure if you ever increased your church going (probably) and bread baking (probably not) like you said you were going to, but I do know we don't have any new pension songs from you, so time to get back in the studio😁

Thanks to the guy that always claims to have minimal DB knowledge but who's comments I almost always (if not always) agree with! And thanks for all the humor and entertaining comments over the years!

See Notice 98-92 Example 5 (copy attached). The first plan uses the formula of 100% on the 1st 3% deferred and 50% on the next 2%. The second plan uses the formula of 100% on the 1st 4%. An HCE in the second plan deferring 4% will have a higher match rate than an NHCE in the first plan deferring at the same 4% rate. This is not allowed. not98-52.pdf

Note that in the case I worked on we interpleaded the benefit into court, and we felt that was as closing as we could come to distributing the benefit for purposes of the plan's obligation to make an RMD. Note that in addition to addressing this in the final regulations, as Peter suggests, the IRS might want to change the 1099-R Form and instructions to include interpleader.

Jakyasar: I am not an attorney but are you opining on this from an employment arrangement or for Qualified Plan purposes. The final rule, which takes effect March 11, 2024, only revises the Department’s interpretation under the Fair Labor Standards Act (FLSA). It has no effect on other laws—federal, state, or local—that use different standards for employee classification. For example, the Internal Revenue Code and the National Labor Relations Act have different statutory language and judicial precedent governing the distinction between employees and independent contractors, and those laws are interpreted and enforced by different federal agencies. The FLSA does not preempt any other laws that protect workers, so businesses must comply with all federal, state, and local laws that apply and ensure that they are meeting whichever standard provides workers with the greatest protection. For Qualified Plan purposes the FLSA doe not impact what we have know to be employee versus independent contract under Common Law Rules. The facts that provide evidence of the degree of control and independence fall into three categories: (i) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? (ii) Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) (iii) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

I think you need to consider the intent of the rule, which is to avoid issues relating to valuation and capital gains taxes. So I don't think it is a problem. Frankly, it's probably harder to transfer shares than it is to redeem them and send a check, so it's a bit puzzling why someone would bother. It raises a small red flag about the titling. (I don't believe you can ACAT shares to and from accounts that are titled differently, at least not without a lot of paperwork.) [edit for typo]

It depends. If the express rule provides for the necessary flexibility, and the provisions that we want, then I'd vote for an express rule. The problem is, the express rule may not be what we want, or provide sufficient flexibility in all situations, in which case we might be better off leaving it to "good" judgment. The IRS has historically, in my experience, been very reasonable about waiving RMD penalties. Perhaps with the reduced 10% penalty, they may be less inclined to waive penalties - only time will tell. Now there's a useless noncommittal response for you...

On whether an employment-based plan’s administrator fails to administer the plan according to its governing documents (including a § 401(a)(9) provision) so that the IRS would tax-disqualify a plan on that ground, a fair reading of relevant tax law ought to allow some tolerance for situations in which the beneficiary is not yet decided. As Luke Bailey points out, we’ve not found a regulation, or even nonrule published guidance, that describes such a tolerance. A rulemaking project on § 401(a)(9) remains open. Further, the Treasury might revise its proposed rule to follow and interpret SECURE 2022 changes, and might invite another round of comments. For situations in which an administrator delays a distribution while deciding (or waiting for a court to decide) which person is the rightful beneficiary, would it be helpful or harmful for Treasury to put something in the regulations to recognize those situations? For example, a rule might say a plan is not tax-disqualified for failing to pay a beneficiary’s distribution when the plan’s administrator uses a claims procedure—with periods no longer than those permitted under ERISA § 503—to decide who is the beneficiary, or when a court proceeding to decide which person is the beneficiary is pending. BenefitsLink mavens, do we want an express rule? Or are we better off leaving this to good judgment?

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.

Again I would be shocked beyond belief if the IRS took the position that a transfer of Money Market shares was not considered a contribution "in cash" as once again money markets are considered cash equivalents and designed to have a fixed 1.00 share equivalent. I suppose if we get to a point where "breaking the buck" becomes somewhat commonplace, then money markets will no longer be considered cash equivalents, until that day comes though I personally would not give it a second thought. Though if you are super concerned then I would recommend you advise your clients to sell money markets for cash, transfer the cash to the Plan, and then buy whatever investments they want in the Plan, including perhaps repurchasing the money market. It's not like they are transferring bitcion, bars of silver or some other form on floating value currency.

If an excise tax would apply and no other remedy or accounting fits, the employer, the plan’s administrator, and the plan’s trustee each might want advice to evaluate whether a contribution was made “by a mistake of fact” so that, if within one year after the payment of the mistaken contribution, the trustee might return the mistaken amount to the employer.

If no one is hurt, that is, the minor children get the money from the IRA someway/somehow, does it make sense to ignore the error and let it play out?

I am not really sure what you are asking, but I think you are asking about the immediate annuity that needs to be offered because the plan is now paying a lump sum? The 417(e) lump sum needs to be the present value of the accrued benefit payable at NRD. It is not required to include any early retirement subsidies. However, the value of those subsidies needs to be disclosed in the relative value disclosures given to the participant with their election form. You must at least offer an immediate QPSA and QOSA, and any other options they are eligible for at the time of lump sum payment. If the plan does not contain any early retirement provisions for ages below ERD, you will need to add them. IOW, if the plan allows early retirement at 55/10, but the participant is 45, you need to know how to determine the immediate annuity at age 45. Typically, we would use the standard early retirement factors until Early Retirement Age (if otherwise eligible), then use the plan's actuarial equivalents (not 417(e) for ages below that, but that should be part of the window amendment. Then, for relative value disclosures you would compare the value of the immediate benefit using 417(e) factors to the value of the actual lump sum and disclose the difference to the participant. You have lots of options with this, but that is the way we typically do it. I believe you could also determine the lump sum based on the annuity at NRD, then divide it by the immediate QPSA factor using 417(e) rates and offer that as the immediate annuity, but you need to be careful about those who might otherwise be eligible for early retirement and your participant disclosures would need to explain that if they waited until they were eligible for an early retirement benefit that their monthly benefit might be significantly higher. We generally don't do it that way because of the inconsistencies, but if your plan doesn't have any early retirement provisions, that may be a simple solution. No matter what you do, you need to follow plan provisions.

Congrats Andy. Thanks for all the sharing of info. And putting up with my very dry humor over the years I only look in once and a rare while but at least I was inspired to look in at a good time. God bless on your retirement.

I was driven out by the (In)secure Act 2.0. I still lurk every day. It confirms my decision to hang up my ghosts. I got many a piece of good advice on these boards. Dave and Lois, you've provided an invaluable service and I'm eternally grateful for it.

Congrats Andy, enjoy for yourself what you've spent a career helping others attain - I'm jealous!

Thank you, AndyH, and thanks for reminding us all to recognize the amazing resource that Dave and Lois Baker have created for all of us. As I have moved between HR and TDA and back again I have benefitted from BenefitsLink and especially the forums to refresh my memory or to get up-to-speed on a new facet of retirement administration. Best wishes, AndyH, on your retirement, and gratitude to the Dave and Lois!

Congratulations! And we'd like to extend this Laurel, and Hardy handshake (sorry, my so-called sense of humor again). I have appreciated your commentary over the years. As with all such announcements, I'm very jealous, but nevertheless I very sincerely wish you a very long, healthy, and happy retirement! Take care.

Amen!

In case anyone is interested in seeing the messages @justanotheradmin references, they are: Note that the Last Updated dates are respectively from 15 and 6 years before the 2023 form was made available to software developers. The P-230 tests a 5500 and should (but doesn't) check against Line 6a(1) for defined contribution plans as determined by the pension codes on Line 8a, and Line 5 for other plans. The P-230SF tests a 5500-SF and should (but doesn't) check against Line 5c(1) for defined contribution plans as determined by the pension codes on Line 9a, and Line 5a for other plans.

@justanotheradmin thanks for the update. This makes a lot more sense.

justanotheradmin has the details correct. All employer contributions are pre-tax by default. IF the plan allows under SECURE 2.0 for the participant to elect the Employer contributed to be deposited as ROTH and the participant makes an election for the employer contribution to be deposited as ROTH then the contributions would be deposited to the ROTH account. And yes those contributions are taxable to the participant in the year they are contributed. Perhaps there is some recent IRS guidance that I missed as to how such contributions are reported to the the employee as taxable in that year - W-2?, 1099-R?, 1099-Misc? don't know. Which is why I'm not really aware of any providers yet offering ROTH employer contribution elections until we have clear IRS guidance. EDIT - oops, I see I did miss the IRS guidance. Guess I have some weekend reading.

This is correct. Starting 2023, it changes from eligible participants to participants with an account balance to determine the count for the audit trigger. Other than that, no changes.

The only other exception is with respect to employees who have not met the maximum eligbility provisions. So 3 months of service for 401(k) and 1 YOS for match is allowable, BUT you would lose your top-heavy exemption (if you needed it)...

A valid point. As a TPA, however, I find it hard to care. Owner-only plans aren't much of a money-maker - we do a very few as a favor for a good broker referral source for example. Since they don't have to make any contributions for such employees, then if they are maxing out the contribution for themselves, an extra (x) amount for "full" admin fees seems like a pretty reasonable price to pay. Depends upon fee structure, I suppose.

Yes, to all the above advice. It might be prudent to do a little due diligence (and documentation) to make sure the plan was formally (and correctly) terminated. It cannot be both a merger and a termination. If the latter, then you know to step aside.

They are clearly incorrect. The instructions to the 2023 5500-SF states that participant includes those ELIGIBLE TO DEFER It also differentiates total participants and participants with a balance. If the instructions say that participant with a balance in 5(c) are those participants from 5(a) with a balance, it also follows that 5(a) includes those WITHOUT a balance, because otherwise 5(c) isn't needed. This isn't rocket surgery, I would push for answers from someone higher up. If they are only counting Ps with balances for 5(a), they are clearly wrong.

Only if the plan allow and the participant elects it that way. Employer contributions, including safe harbor match, are contributed on a pre-tax basis. They only go in as Roth, in this case Roth Safe Harbor, unless the plan allows for employer contributions as Roth (new with SECURE 2.0) and the participant has chosen for them to be done that way.

Does the software provider’s license agreement include a warranty that using the software as specified results in legally correct reporting? And if so, does the provider have enough financial strength to pay on breaches of its warranty?

You might get some help by using the Search feature above, with the search phrase "mistake of fact".

For me, the "why not bring them in", aside from the politics of placing the retirement responsibility on the small business owner, is the pricing by TPAs (and rightfully so) of the Owner Only Plan to full pricing. The TPAs I work with generally have a discounted fee for Plans that have only an owner or owners. I fear this may be counter productive by that small business owner terminating or not starting, their Profit Sharing 401(k) Plan due to the increased costs to have this category of employee as a participant in the Plan for deferrals only.

There is a difference in the instructions for the Form 5500 between Line 5 Total number of participants at the beginning of the plan year Line 6g(1) Number of participants with account balances as of the beginning of the plan year (only defined contribution plans complete this item) The 2023 instructions for the 5500 line 5 [lightly edited] say: " For pension benefit plans, “alternate payees” entitled to benefits under a qualified domestic relations order are not to be counted as participants for this line. For pension benefit plans, “participant” for this line means any individual who is included in one of the categories below: 1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. 2. Retired or separated participants receiving benefits 3. Other retired or separated participants entitled to future benefits 4. Deceased individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan. " The 2023 instructions for the 5500 line 6g(1) say: "Line 6g. Enter in line 6g(1) the total number of participants included on line 5 (total participants at the beginning of the plan year) who have account balances at the beginning of the plan year. Enter in line 6g(2) the total number of participants included on line 6f (total participants at the end of the plan year) who have account balances at the end of the plan year. " Clearly Line 6g(1) is counts either a subset or all of the participants reported on Line 5. Participants who are eligible to defer but who do not have a balance at the beginning of the plan year are NOT included on Line 6g(1), but they ARE included on Line 5. The Form 5500-SF instructions are the same where Line 5a is the same as the Form 5500 Line 5 and Line 5c(1) is the same as the Form 5500 Line 6g(1). Note there is an EFAST2 edit check which may be contributing to the confusion: "Z-007 - WARNING - Fail when the total participant BOY count on Line 5 of the Form 5500, Line 5a of the Form 5500-SF, or Line 5a(1) of the Form 5500-EZ of the current submission does not match the total participant EOY count on Line 6f of the Form 5500, Line 5b of the Form 5500-SF, or Line 5b(1) of the Form 5500-EZ from the previous year's submission."

Ha, thanks for teeing me up here Bill. Good news is you're fine, Bri. You can still be HSA-eligible if your spouse is in non-HDHP coverage. HSA eligibility is on an individual-by-individual basis. You just need to be in an HDHP and have no disqualifying coverage to be HSA-eligible. A few things- You can't just drop employer coverage for the spouse whenever you want. Is your OE for 2/1? If not, you'll need a permitted election change event because otherwise your election is irrevocable under the Section 125 cafeteria plan rules for the rest of the plan year. Make sure you have that in order before the spouse moves to the exchange. You can always use your HSA for your spouse's medical expenses. It doesn't matter if the spouse isn't on your health plan, and it doesn't matter if the spouse is HSA-eligible. HSA eligibility is exclusively about putting money into the HSA. Tax-free medical distributions are always available for you and your spouse. If you're in family HDHP coverage for one month and individual HDHP coverage for the remaining months in 2024, you will have a proportional contribution limit. ($8,300 + (($4,150 x 11) / 12) ) = $4,495. If your spouse enrolls in an individual HDHP for Feb-Dec, she can contribute up to 11/12 of the individual limit to her own HSA. So 11/12 x $4,150 = $3,804. (Subject to the last month rule exception, I won't go into that). You'll each need separate HSAs at this point. You won't have the special rule for spouses that allows you to combine the family limit for Feb - Dec, so you each have to contribute to your own HSAs for those months. The special rule requires that at least one of you be in family HDHP coverage. There's also a proportional amount of the $1,000 catch-up contribution amount available for each period to your respective HSAs if either of you is 55 (or will be by the end of 2024). Here's some info walking through all of this in more detail if you're interested: 2024 Newfront Go All the Way with HSA Guide https://www.newfront.com/blog/hsas-and-family-members https://www.newfront.com/blog/the-hsa-proportional-contribution-limit https://www.newfront.com/blog/special-hsa-contribution-limit-for-spouses https://www.newfront.com/blog/hsa-catch-up-contributions

Are those 5 people HCEs? If so they could be excluded from the safe harbor. Otherwise, they could adopt a separate plan for those 5 people, as long as both plans pass coverage separately. But you couldn't do it within a single plan.

Here are the 2023 Instructions for Forms 1099-R. https://www.irs.gov/pub/irs-pdf/i1099r.pdf The line-by-line instructions are consistent with where you suggest reporting each of the numbers in their respective boxes, and the Table 1. Guide to Distribution Codes starting on page 15 shows that you can pair Code 1 and Code B in Box 7. Looks like you are good to go.

I'm not sure why people would bring in their LTPTs for anything else beyond what they're being forced to bring them in for. If you want them in for more, change your regular eligibility.

No employer contribution required if they are eligible to defer SOLELY as an LTPT. No safe harbor required, no match required.

I don't think it is that simple. The proposed regs say that the class exclusion can't be a "proxy for imposing an age or service requirement." I suspect it might be generally playing with fire to use this exclusion, if the purpose is to exclude LTPT employees. Other than the PIA for determining who is or isn't an LTPT, and having the hassle of offering them the deferral opportunity, it isn't otherwise a big deal as far as I'm concerned. No employer contributions required, exclude them for testing, top heavy, whatever. I'm oversimplifying, of course, and the PIA/hassle is potentially very substantial!

https://www.colonialsurety.com/insurance/

The penalty does not apply if “it is shown that [the] failure is due to reasonable cause[.]” But Congress set the amount.