Leaderboard

Great question! The EOB says in Chapter 8 Coveage Testing Part C., Average benefit percentage test, 2. Computing benefit percentages, 2.i. Certain distributed amounts must be included in benefit percentage: 2.i.2) Corrective distributions of excess deferrals under IRC §402(g). Whether to apply the rule described in 2.i.1) to excess deferrals under IRC §402(g) is less clear. Treas. Reg. §1.415(c)-1(b)(2)(ii)(D) provides that excess deferrals which are distributed by the April 15th deadline under IRC §402(g)(2) are not treated as annual additions for §415 purposes. However, Treas. Reg. §1.402(g)-1(e)(1)(ii) provides that the excess deferrals of nonhighly compensated employees (NHCs) are excluded from the nondiscrimination test (i.e., the ADP test) under §401(k), but the excess deferrals of the highly compensated employees (HCEs) are included in the ADP test. With the difference in treatment between HCEs and NHCs for nondiscrimination testing purposes, it is recommended that excess deferrals made by HCEs be included in the benefit percentage, even if they are distributed by the April 15th deadline. The short version of the logic that leads to this conclusion is it the excess is included in the ADP test, the excess should be included in the ABT. Note that the analysis admits that this is "less clear" and the conclusion is "recommended" which will leave up to the plan and the practitioner to decide if they embrace this interpretation. The most conservative approach is to include the excess deferrals.

The thought process the IRS used to develop the rules applicable to the Roth Match and Roth Nonelective Contribution was to treat the contributions as if they were put in a participant's account as a regular contribution and then reclassified as Roth through an in-plan Roth rollover. This approach would make the year of taxation the year in which the rollover occurred and reportable on Form 1099R. The IRS also uses similar logic in the recently released rules for corrections applicable to Roth Catch-Up contributions. In these rules, there is a pre-tax catch-up in a High Paid participant's account, it can be corrected by treating it as an in-plan Roth rollover in the year in which the rollover occurs and reportable on Form 1099R. So I agree that the taxable event occurs when the dollars are deposited into the participant's account.

Devil's advocate - What if the error had been a million dollars? (Wrong omnibus account number on the transmittal to the custodian or something)

The same broad statutory exception to the anti-cutback rule is also found in ERISA. Based on the premise that the corresponding Treasury regulations attempt to narrow the broad scope of the statute, it seems unlikely that a court would find unacceptable an action that was acceptable to the IRS in this context. The larger risk would be to change distribution options beyond the scope of the regulations relying on the statutory language alone. Also, the plan amendment language might not allow the contemplated change if it prohibits plan amendments restricting distribution options without mentioning the broad statutory ESOP exception. All qualified retirement plans are supposed to contain language prohibiting such plan amendments, and this is an instance where careful drafting of ESOP plan documents is productive. Again, best to confer with legal counsel.

For distinctions between Form 990, Form 990-EZ, and Form 990-N, there are two dividing lines about an amount: “Form 990 must be filed by an organization exempt from income tax under section 501(a) . . . if it has EITHER (1) gross receipts greater than or equal to $200,000, OR (2) total assets greater than or equal to $500,000 at the end of the [organization’s] tax year[.]” . . . . “If an organization has gross receipts less than $200,000 AND total assets at the end of the tax year less than $500,000, it can choose to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, instead of Form 990. See the Instructions for Form 990-EZ for more information.” Instead of Form 990 or Form 990-EZ, a tax-exempt organization may file Form 990-N if it is “[a]n organization whose gross receipts are normally $50,000 or less.” 2024 Instructions for Form 990 Return of Organization Exempt From Income Tax (released January 8, 2025) https://www.irs.gov/pub/irs-pdf/i990.pdf, at pages 2, 3, 4. Other rules apply if the organization has income from an unrelated trade or business. Despite circumstances that permit an organization to choose Form 990-EZ or Form 990-N, one must file Form 990 to change an accounting period. Internal Revenue Code of 1986 (26 U.S.C.) § 6033(n) generally requires electronic filing. For some practical details, see E-file for charities and nonprofits https://www.irs.gov/e-file-providers/e-file-for-charities-and-nonprofits. This is not advice to anyone.

IRS Notice 2024-2 provides some guidance on this. Specifically, I want to see if you disagree with my reading of Q&A L-2: Q. L-2: If an employee designates a matching contribution or nonelective contribution as a Roth contribution, for which taxable year is that designated Roth matching contribution or designated Roth nonelective contribution includible in the individual’s gross income? A. L-2: A designated Roth matching contribution or designated Roth nonelective contribution is includible in an individual’s gross income for the taxable year in which the contribution is allocated to the individual’s account. The preceding sentence applies even if the designated Roth matching contribution or designated Roth nonelective contribution is deemed to have been made on the last day of the prior taxable year of the employer under section 404(a)(6) of the Code. It seems clear to me that the meaning of this is that "allocated" in this context means "contributed." So if in July of 2025, a profit sharing contribution is made on a Roth basis, even though it is "allocated" for 415 purposes to the 2024 plan year, it is nevertheless TAXABLE to the employee in 2025. Any agreement/disagreement/other thoughts? Thanks.

Q&A L-9 in that Notice calls for Form 1099-R information reporting on a Roth nonelective or matching contribution “for the year in which the contributions are allocated to the individual’s account.” Recognizing that most humans use the calendar year as one’s tax year and that Form 1099-R is on calendar years—no matter which other measurement years and measures for other purposes might be involved, the Notice’s measure for tax-information reporting make sense. Saying a designated Roth nonelective or matching contribution counts in an individual’s gross income for her tax year in which the contribution is allocated to her account enables, regarding most people, using the Form 1099-R reports to information-match income tax returns.

agreed. I dislike that the guidance uses the term "allocated" because like you, I use it to refer to the year to which is accrued, which is not always the same as the year in which it is actually deposited. So when reading and discussing with others I try to remember to point out that the usage of "allocated" in this guidance is not the same as what I use with my close peers in the industry. So I agree, when the dollars are deposited - that is when the taxable event occurs.

If she legally adopted you then I think she is. If she's "just married to your dad" then no double attribution.

No double attribution

Right, look to the statute. §4980(d)(2)(C) states: (C) Allocation requirements (i) In general. In the case of any defined contribution plan, the portion of the amount transferred to the replacement plan under subparagraph (B)(i) is (I) allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or (II) credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer.