I have been presented with a 457(f) plan that relies on a noncompete provision to satisfy the SROF requirement.  I understand that unlike the 409A rules, the 457(f) rules do permit the use of a non-compete as a SROF.  This particular plan's SROF restricts the participant from working for a competing business while employed with the sponsor of the 47(f) plan.  But the participant vests upon a separation from service for any reason.  The participant is  not subject to a post-employment non-compete obligation.  As such, the participant is only subject to a forfeiture if they work for a competing business prior to separating from service from the sponsor of the 457(f) plan.  I am also troubled by the fact that the payment is to be made "within 3 months after separation from service and the appropriate distribution paperwork is submitted to the employer."  This would not appear to be exempt from Section 409A as a short term deferral and it lacks the required specified time for distribution.   

I just wanted to share a WTF moment that I think many of you can understand. Mostly rhetorical - but feel free to chime in, especially if you think my indignation is unfounded. 

This week in reviewing an existing 401(k) plan document there was a written in class exclusion for Non-Highly Compensated Employees. In the Other line option in the adoption agreement. I could not believe a service provider, and and large national one at that, would let a sponsor include it. But it is a lower cost one, so I really shouldn't be surprised. It is a small plan, likely owner only, but still. 

A few weeks earlier I saw a similar exclusion in a defined benefit plan for a small employer. Though that class exclusion did not use the term Non-Highly Compensated Employee. It was something like 'everyone except two of the owners, Jack Smith and Jill Smith are excluded'  that employer definitely had plenty of employees that are NHCE that have plenty of service and cause the testing to fail. And no, there did not seem to be any other plan with this one combined for testing and benefits. 

Setting up a plan that on its face fails non-discrimination before any benefit accruals or contributions are even considered is terrible! Even if those exclusions are ultimately considered void, there were document providers, service providers, financial advisors, and probably a TPA or recordkeeper involved in setting those plans up! They never should be there in the first place! 

Two in such a short time, from two different places, I just felt like was worth sharing. Maybe these exclusions are written in more than I realize and I've just been fortunate enough to not see them up until now. 

Hello everyone,

I have a case in which the Wife had a 401K account.  Husband was awarded a 50% interest in the 401K in the divorce decree entered on 2/26/21.  Husband then died on 10/5/21 before a QDRO was entered.  The state court then entered a DRO on 1/5/24 designating the Husband's estate as the alternate payee.  The plan administrator determined that the DRO was not qualified, because a spouse's estate is not among the list of acceptable alternate payees under IRC § 414(p)(8).  A second DRO was then entered by the state court on 2/29/24, this time designating the parties' adult daughter as the alternate payee.  (The adult daughter was appointed as administrator of Husband's estate on 3/24/23 and is the sole heir).  The plan administrator again found that the DRO was not qualified, because the DRO indicated that the child could not be listed as alternate payee based on marital property rights, only based on child support obligations.

I have seen posts here indicating that a DRO is not unqualified merely because the Participant died before entry of the DRO, but I cannot find any information on whether a DRO entered after the alternate payee's death is qualified.

I suppose I could just get an order from the state court requiring Wife to liquidate the portion of the 401K awarded to the Husband and pay the proceeds net of taxes to the adult daughter, but the daughter would rather not liquidate the entire account at one time, to reduce tax liability.

Any thoughts would be greatly appreciated!

Roger Madison

Olympia, Washington

start-up Combo (CB and PS) Plans with 1/1/2023 effective date.  Owner started his business back in 2017.  Employees have been hired in 2021 and 2022.  Whar are the issues to rely on Accrued-To-Date testing method for this situation to pass 2023 tests?

Hi

The answer is most likely yes but I want to double check (brain is fried)

Joe and Mary are 50/50 owners of a partnership, both attorneys. They sponsor a DB plan

They are splitting and each will have their own new firms in 2024, again law firms and each will own 100% of their new companies.

They are also terminating the existing DB plan and will take their distributions.

Due to state legislation, they need to keep the old partnership open due to some shared client issues (let's leave it at that)

Mary wants to start a new DB under her new company.

I think the old DB plan distribution will offset the 415 limits under the new company, agree?

The subsidiary of a public company offers stock of the parent as an investment option in a 401(k) plan.  The subsidiary is sold to another company, but plan participants are allowed to keep their stock in the parent after the acquisition.  At what point in time does the stock of the former parent company no longer qualify as “company stock”?  Asking for a friend, of course.  Thanks!

Hi

Joe owns Company ABC

Mary is an IC and gets 1099 paid to Mary's Company XYZ from Joe's ABC

No relationship between Joe and Mary other than being siblings.

Mary has a 401k plan under XYZ and defers max - she gets a w-2 from her company XYZ

Joe has a 401k plan under ABC

Joe makes a contribution under ABC 401k plan for Mary and takes a deduction. Mary has no w-2 from ABC nor an employee.

How can this be corrected as Mary has w-2 income from ABC?

Thanks

This is the first time since we've been doing this MEP that a new company is joining mid-year.

MEP has the same eligibility for all member companies: immediate for deferrals, YOS/semi for SH/PS (I know - I've tried to get them to change).

New member company (company just created last week) is joining effective 6/1/24.  We expect them to be top heavy, so all those non-keys active on 12/31/24 will get 3% for TH minimum even though they are not eligible for any employer contributions... well, now that it's 2024, we can actually not do that per SECURE 2.0 (all employees will be otherwise excludable for 2024 since they were all hired in 2024).

But they want to be able to give the participants (including themselves) profit sharing for 2024.  As long as it is stated in the plan document and/or adopting resolution, is it OK to waive the eligibility requirements for anyone employed on 6/1/24?

Bonus question: since there is no short plan year, there would be no pro rating the limits for 2024 for this member company, right?

Thanks.

BenefitsLink neighbors, what do you think about this not-repaid loan story?

On February 13, 2023, the participant took a $10,000 loan.

The participant received the check and the promissory note, showing that her first payment was due on April 7, 2023.

The recordkeeper sent the loan file. The employer admits it erred in not uploading the loan file to payroll’s systems.

No loan repayment was taken from the participant’s wages.

On August 14, 2023, the recordkeeper sent the participant a letter informing her that, if she does not pay, her loan will default. The participant does not admit she received this letter. Yet, the address is the same address to which the $10,000 check was sent, and, one assumes, received—because the check was deposited.

The recordkeeper’s record shows the participant loan defaulted on September 29, 2023.

In early 2024, the participant received a Form 1099-R, reporting the unpaid loan.

The participant is 62, and works part-time. The plan treats the participant as not severed from employment. The plan does not provide a distribution on age 59½. The plan provides none of the SECURE 2019 or SECURE 2022 early distributions. The participant is ineligible for any further loan.

The participant asserts she has no computer. That includes lacking a mobile device beyond an old flip phone.

The participant asserts that she never looks at her pay confirmations.

The participant asserts that she was unaware of any problem about the loan until she received the Form 1099-R report.

The participant complains that she lacks money to pay even her Federal income tax (there is no State income tax) on the extra $10,000 income.

If the plan’s administrator (a committee of the employer) believes the participant’s statement that she did not notice any problem about the loan until she received the Form 1099-R, should the administrator direct the recordkeeper and trustee to reverse the loan default?

An individual owned his own business as a sole prop for 5+ years.  No employees.  No retirement plan.

Within the past year, he switched to an LLC.  I'm not sure if he has a new EIN or not.

He also hired an employee after the LLC was created.

He would like to start a SEP, but would like to keep the new employee out, at least for a few years per SEP eligibility.  

But can he be immediately eligible taking account of his sole prop service?  Can a SEP count prior service with, in this case, the predecessor business entity?

Thank you

Hello- Looking for some guidance here as i cannot seem to find the answer. If an ineligible employee (NHCE) defers for a Plan year and the Plan Sponsor  allows them to keep deferrals in Plan via a retroactive amendment - would this ineligible employee ( an NHCE) also receive the Safe Harbor 3% and/or profit sharing?  Or would they essentially only be allowed to defer and receive a Top Heavy? 

I just applied for a TIN for a 401k plan than with an effective date of 1/1/2020.  The plan did not previously have a TIN.  There was one participant, the owner, with a brokerage account.  They plan will have 2 more owner participants in 2024.  I took over the plan from a prior TPA and applied for the TIN online. 

The confirmation letter says "Based on the information received from you, you must file the following forms by the dates shown:  Form 945, 3/19/2024. After our review of your information, we have determined that you have not filed tax returns for the above mentioned tax period(s) dating as far back as 2021.  Please file your returns(s) by 4/3/2024."

WHAT?!?!  This plan has never had a distribution and no withholding required.  What did I do wrong?  Did I get this guy in trouble?  His personal and business taxes are all ok.  Help please!!!

Let’s say company A is a related and participating employer in Plan X which is a safe harbor plan with the basic match formula.  Company A is purchased mid 2024 in an asset sale so all employees will be terminated from Company A. They have a distributable event. If the buyer has their own 401k plan that is not safe harbor, are there any spin off options mid year for that portion of Company X plan that is attributable to employees of A? Do we have safe harbor  concerns where we should suggest a spin off as of end of plan year in order to not violate 2024 safe harbor status.
Thank you for any comments!

We have a Cash Balance Plan that is terminating in 2024.  I believe we still need to complete the Cycle 3 restatement document, since we are already in the window, but I just wanted to confirm.

Thanks in advance!

Hello all, 

Thank you in advance for reading my post and sharing any thoughts on what seems like a strange situation we find ourselves in.  We have a small S-Corp with a 50+ year history and have offered a SIMPLE plan to our employees for over 10 years.  This was at Fidelity for most of that time, but mid-2023 they cancelled our plan and would not accept any additional deposits.  We asked what we did wrong or why we would be cancelled and got no answer. 

During the 5 months it took to setup an account at Schwab, the business withheld the funds for employees that were earmarked for Simple contributions.  This was done with each employee's written approval.

In Feb-2024 we finally got Schwab all setup and employees established accounts.  We were able to send the 5 months of back contributions, and current payroll cycle, and now we have received another plan-cancellation letter.  In reaching to Schwab, again no reason provided.  

We are at a loss about what the issue is, but we appear to be on some type of "black-list" that plan administrators don't want as customers, but we have no idea how to move forward.

Does anyone have any suggestions on what could be causing this?  

Is there any other way our business can help our employees fund their retirement.  We went the Simple route since it was low cost to setup and manage.  Are there other types of plans we should explore, or are their retirement consultant agencies that might be retained to get answers from Fidelity / Schwab on what this issue is.

Thank you again for your thoughts,

Rick

If a client is paying out of pocket (not from plan assets) for a whole life policy, but for some reason has named the plan as primary beneficiary of the policy, is the plan entitled to the cash surrender value?  Do any loans from the policy need to be reported?  I've seen plans buy life insurance before but never have seen someone buy life insurance and name the plan so I'm not sure what the reporting requirements are.  

This has probably been asked previously, but I can not locate.

This concerns a sole proprietor that maintains a 401(k)/PSP for the benefit of his company.

Of the net income derived from the sole proprietorship, stepping aside the calculation of any profit sharing for the non-owners, how can one determine what the owner's deferrals are (if there are any), vs if the contribution is to be considered an employer contribution (profit sharing)?

Why am I thinking that unless the sole proprietor makes an election, prior to 12/31, the contribution must be considered an employer contribution??

Any other references or thoughts on this subject?

In the past 2 weeks 2 clients have received plan audit notices.  Thankfully they are only PS plans, nothing more. But get this....I just received a call from the 2nd client who got the audit notice.   He is in the hospital following a blind fall down the stairs in the dark in the middle of the night.  He is in rehab with a concussion, 2 fractured vertebrae, and cracked ribs.  Poor guy, he just retired last month! 80 years old! 

So he called the agent conducting the audit explained the situation and  requested the audit be postponed and the agent said no!  He said to give someone power of attorney.  Is it unreasonable to request the audit be postponed?  Is this normal that the IRS would not grant a postponement based on these circumstances?

Is there a reason we have to abide by the 25% DC Comp deductibility limit when the plan is a 403(b) and the sponsor is a church which does not pay taxes?

Thanks!

Patricia Neal Jensen, JD, SME

FuturePlan by Ascensus

Patricia.Jensen@FuturePlan.com

We have a business with only one eligible employee other than the owner. . For 2022 this employees was fully covered by the 3% nonelective safe harbor and profit sharing.  For 2023, the person worked about 50 hours and earned $1,000 and terminated before the end of 2023.  So the employee will get the safe harbor.  What about the rule - if terminated and less than 501 hours can be excluded from coverage testing?   The question is profit sharing.  The owner is getting high PS%.  I know PS for this employee is miniscule.  Still for my own knowledge, what is the rule here?  I know if  I put this into our admin system it will say fail 401(a)(4).  So the term with <501 hours apparently does not apply to 401(a)(4).  That's fine.  I just wanted to nail down this rule.  It could be more meaningful rule in a larger plan to exempt this one person from 401(b) but still be able to pass 401(a)(4) due to all the other employees receiving PS.

Thanks