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I am looking for the IRS requirement that the formula has to be stated in the plan document rather than just referenced? Here is an example below - Contributions under collective bargaining agreement, employment contract or equivalent arrangement. The Employer will make an Employer Contribution based on a collective bargaining agreement, employment agreement or equivalent arrangement as follows: [Note: Insert the appropriate contribution formula (and allocation formula, if applicable) from the collective bargaining agreement, employment agreement or equivalent arrangement. The formula must be definitely determinable. Alternatively, the Employer may attach an addendum incorporating the collective bargaining agreement, employment agreement or equivalent arrangement. ]

I believe the answers are (1) after-tax (unless it came from a an IRA or another plan, which should have been communicated at the time) and not a rollover; and (2) if after-tax, that $4,000 should have been treated as basis and the taxable portion limited to $16,000.

Thanks for the feedback! No audit was required. The Form 5500 was in process but awaiting the new DCGs to be issued by the IRS and a 5500-SF was inadvertently omitted electronically.

Is this for a 2023 plan year filing where it's not actually late yet?

If an audit was required, I would file under DFVC (when the new audit was completed) as well, with $2,000 penalty. If an audit was NOT required, I would just amend the 5500-SF onto a long Form 5500, and include the additional schedules/information.

I don't think you need 6 pages 🙂. After 1/1/2023, audits are generally required for plans with more than 100 participants with account balances on the first day of the plan year. The 80/120 rule still applies. Same concept as before, just now applies to number of account balances at the beginning of the plan year. https://www.dol.gov/agencies/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/changes-for-the-2023-form-5500-and-form-5500-sf-annual-return-reports?trk=article-ssr-frontend-pulse_little-text-block

This has been very helpful. I appreciate all of your responses as we navigated through some tougher questions.

I may be conservative on this, but I always advised clients that if a business owner took a loan from the plan with the intention of loaning those funds back to the plan sponsor, and then immediately did loan the money to the company, the IRS would have a very strong case to claim that this was an indirect loan to the plan sponsor which is a prohibited transaction. At a minimum, the business owner (after taking the loan from the plan) should loan a different amount at a different time and under different repayment terms if trying to establish that these two transactions were independent and totally separate.

The root cause for this scheme seems to be that the plan lacks cash available to give to the participant to make the loan. If so, then the scenario should start with the business making a cash contribution the plan sufficient to cover the MRC which would put the plan in the position to issue a loan check. That would provide a documented trail of the sequence of events. The idea of writing a check to himself is a stretch in an attempt to circumvent the lack of availability of cash in the plan. This supposes that there is $50,000 in the business checking account (for the contribution) that would cover a check to his personal bank account (for the loan). If there are not separate checking accounts, would a bank even cash a check from an account payable to the account upon which it is written? If the bank will not honor the check, is it a valid financial transaction? Trying to net the contribution and loan into a single transaction is vulnerable to an interpretation of events, and the IRS likely will have its own view of what transpired. Consider that the IRS could view the result of the net transaction as if the business funded the contribution by the having participant give the plan a promissory loan note secured by his vested balance in the plan, and then consider the potential consequences. @Lou S.'s suggestion to have a clear paper trail is on point. If the plan has the cash to make the loan, the paper trail should methodically step through the participant takes the loan, the participant makes the proceeds of the loan available to the business, and the business funds the MRC. If the plan does not have the cash to make the loan, the paper trail should include methodically step through the business funds the MRC, the participant takes the loan, and if necessary, the participant makes the proceeds of the loan available to the business. This is not advice of an kind, nor a recommendation. Frankly, this whole scenario has a whiff of a business in trouble and possibly with a plan that it cannot afford. Prudence would add taking steps to evaluate how assure the business and the plan can function within common norms.

Look for the term "Forfeiture Break in Service" in your plan document. That's what ours uses. After 5 Breaks in Service the non-vested funds are forfeited. I'd guess the first Break in Service was 2019. Forfeiture in 2024 is right on track.