I hope I'm on the right message board here.  I had a client ask me about taking his RMD and directing it straight to a charity tax free (and still have it count as his RMD).  I have a couple questions on this topic and any input would be appreciated:

• Can the RMD be taken from a Profit Sharing Plan or 401-k or must it come from an IRA?
• If the answer is just IRA than can the client accomplish this by rolling funds from the Profit Sharing to an IRA and then directing it to the charity tax free?
• Does it have to be an RMD or can any distribution directed straight to a charity receive the favorable tax treatment?
• Obviously if the transaction is tax free (and still counts as RMD) then the funds going to the charity aren't eligible to be deducted since they are already tax free?
• Does it have to be the whole RMD or can you direct a portion to a charity tax free and take the balance as a taxable distribution?

Any clarity on the matter would be greatly appreciated.  Thanks!

A self-funded plan is under audit from DOL. The investigator alleges the plan lost grandfathered status a decade ago when switching networks. The rationale is that the schedule of benefits under the old network arrangement offered an incentive for participants to seek care from certain high-quality providers. In other words, the copayment for office visits for certain specialty physicians has always been $30, but under the old network agreement, participants benefitted from a $15 copayment when using certain highly-qualified providers. This program was proprietary and designed to ensure participants were receiving the highest level of care for certain conditions. The incentive program stopped when a network change was made and participants could no longer benefit from a lower copay when using the specialty network. The DOL argues this was a change in cost-sharing that cost the plan its grandfathered status. However, the plan had no access to the specialty program when the network change was made. Any input is appreciated. 

I have acquired a client that has an existing plan participant that took a hardship distribution for $20,000 in calendar year 2023. Rather than paying this participant the net amount after 20% withholding of $16,000, he had the entire gross amount $20,000 distributed to him. When the 1099-R was prepared, It showed that the distribution made to him was the entire $20,000 with all of it being taxable and no taxes being paid in calendar year 2023. What are the implications of distributing the gross amount and not the net amount? Not trying to make excuses, but the participant paid the taxes on the entire amount of $20,000 and it is basically a timing matter.

I sent a 5500-SF to a client for signature.  I suspect the client will sign and send it back to me after 7/31 even though I instructed otherwise.  I plan on filing an extension.  If the client signs the 5500SF that doesn't have the 5558 box X'd in by the software, can I manually fill in the 5558 box on the 5500-SF that he signed?  Or do I need to go back to him and have him sign a new 5500-SF with an X in the 5588 box generated by the software?

Thanks!

Question for the team: My client is a small business. The father started the company and transferred 100% of ownership to his two sons in 2016, splitting the ownership 50/50. In 2016, the Father was 68 years old. In 2018 (or 2019), the Father started his RMDs, even though he is still employed and no longer a 5% owner.  The Father is still getting RMDs but doesn't want them since he doesn't need the money.

Would someone be able to help me with this situation?  Can we stop the RMDs since he is still employed but no longer a 5% owner?  I believe he was erroneously left as an owner on the year-end questionnaire in 2016 because the previous plan admin did not understand the ramifications of not updating the ownership.  I'm not sure if you can stop an RMD, once it has started, even though it was a mistake to begin with.  I'm also unsure of attribution rules since his sons are now the owners.

I would appreciate any help!  Thank you!

IRS Notice 2024-2, Section G, Q&A-7 re Section 332 of SECURE 2.0, provides the following:

When the SIMPLE IRA plan is replaced by the safe harbor section 401(k) plan mid-year, the total amount that may be contributed as salary reduction contributions under the terminated SIMPLE IRA plan and as elective contributions under the safe harbor section 401(k) plan may not exceed the weighted average of the salary reduction contribution and elective contribution limits for each of those plans (weighted by how many of the 365 days in the transition year each plan was in effect). Thus, the total amount that may be contributed as elective contributions to the safe harbor section 401(k) plan is equal to:

(1) The annual limit on salary reduction contributions under a SIMPLE IRA plan for the year (taking into account catch-up contributions described in section 414(v)), multiplied by a fraction equal to the number of days the SIMPLE IRA plan was in effect for that year divided by 365, plus

(2) The annual limit on elective contributions under a section 401(k) plan for the year, under section 402(g), multiplied by a fraction equal to the number of days the safe harbor plan was in effect for that year divided by 365, minus

(3) Any salary reduction contributions under the SIMPLE IRA plan for the year.

(1) above specifically includes catch-up contributions under 414(v) in the calculation, whereas (2) does not. Does this mean the fraction in (2) is only taking into account the $23,000 limit, and not including the $7,500 catch-up? That's how I read it, although it doesn't make sense to me... 

Interesting situation. An ERISA 403(b) plan - large plan, audited - was treated as a controlled group/affiliated services group for several years, when in fact, it was not - it was a MEP. 5500 forms did NOT have the MEP attachment.

If amended forms are filed with the MEP attachment, would that require a new audit? It seems unreasonable, as nothing changes except the attachment detailing the breakdown of the assets between the participating employers - total assets, participant counts, etc., remain the same.

Anyone ever encountered this?

>There is no question that, except for defined benefit plan payments made to a spouse or former spouse for child support, the amount paid to a spouse or former spouse via a QDRO (as alimony or as an allocation of property) is taxable income to the alternate payee.  But I cannot find the section of the IRC or the Regs that say that.  It is set forth in IRS Publ. 504 and 575, but the source is not stated. 

Whoops. I just found https://www.law.cornell.edu/cfr/text/26/1.61-11#:~:text=CFR-,§ 1.61-11 Pensions.,income unless excluded by law.

Any other citations?    

>For the first time is 38 years of preparing QDROs I have an attorney for the Participant insisting that the allocation of a defined benefit  plan be computed with respect to the "net" (not the gross) annuity payments paid to the participant, that is, net of the participants state and federal tax  withholding, Social Security and Medicare taxes, health insurance and life insurance premiums, and the cost of the survivor annuity.

I pointed out that we NEVER use "net" since the amount is subject to manipulation by the participant and because is forces the alternate payee to pay part of the participant's taxes (what the hell?), but I have been looking for a learned treatise, or law review article, or even  caselaw, that sets forth a better and more authoritative argument. 

Anybody?

Thanks, 

David  

My understanding is that we do not have to report Independent Contractor NQDC deferrals (Form 1099-Misc, line 12 -- the instructions say this is not required).  However, payments to Independent Contractors under a NQDC Plan are to be reported in Box 1 in the year paid.  This is how we've been handling this.

The problem is we have an Independent Contractor who we paid NQDC to, and reported the payment on Form 1099.  The SSA is now saying the reported payment disqualifies the Independent Contractor from Social Security Retirement Benefits.  They are asking we correct this using Social Security Form SSA-131, but that form only appears to apply to employees (not independent contractors).

I'm having a bit of trouble determining how to correct this.  I'm also not finding straight forward information on whether we reported the payment correctly in the first place. 

• Should Independent Contractor distributions from a NQDC plan be paid using Form 1099-Misc?  The instructions are unclear, unless the payment violates 409A (in which case you use Box 15), but that is not the case here.
• I found some guidance that suggests we use Form 1099-NEC, Box 1, but the instructions for that form don't seem to support this, and I'm not sure it would have helped.

Please help!

We unfortunately file 2 WB 5500s for large clients - out of necessity from years ago.  They have pretax cafeteria insurances covered under the 5500.  We file the 5500 as one filing covering all the benefits.  We provided a cafeteria plan document listing the insurance benefits. 

Their new benefits broker is taking this over (thankfully) and are asking for a wrap document.  One does not exist that we can see.  There is an Summary that looks like a SPD that someone produced some years ago but they tell me that is not an SPD.  It has a summary of each benefit structure, eligibility, benefits, etc.  That led us to believe they had a wrap document.

 The issue now is for them to draft the wrap document now and move on, or amend past 5500s and file for each benefit structure since there was no wrap document.  Problem there of course is - filing 5500s as "new" for 3 years ago will be late and DFVC will apply.  Going forward without amendment/filing separate they say carries risk of not being in compliance by not having a wrap document.  

Comments? Thank you.

I've used a triple stack match and have had sponsors happy to be able to tie some vesting to the stated and disc. amounts.

I've got a sponsor who wants to encourage lower earning participants. Is it possible to run it to put dollar limit caps on the stated and discretionary components, and still keep the plan SH?

My proposal:

SH Enhanced 4% Match

Stated Match 100% on 6% (with a $3000 cap)

Disc Match 2/3 on 6% (with $2,000 cap)

Are the caps allowed on dollars separate from the SH enhanced portion?

Interestingly, never had a late 8955-SSA alongside late 5500's filed under DFVC.

Plan in question never filed a 5500 for 3 years.  Last 2 years of that there were 8955-SSA's that needed to be filed. 

File them late? Or file one consolidated 8955-SSA along with current year?

Once an employee has satisfied the initial eligibility computation period what if he goes under the 1,000 hours for the next plan year? Do you have to do a corrective distribution of his deferrals? Or is it, that if an employee was eligible to defer at one time they they will always be eligible to defer? All I see in the plan document is that "An employee is eligible to participate if he satisfies the following requirement during the Eligibility computation period". It says that you must meet the 1,000-hour requirement to be able to defer but it doesn't mention after you've met eligibility requirements you must have 1,000 hours in the plan year to be able to defer. 

I appreciate anyone's thoughts!

Hello -

I understand that the IRS has a one-year rule where all assets in a terminating plan must be distributed within one year following termination. Is there flexibility here - for example, we have a plan that technically has made all distributions, but now we have received a few uncashed checks. We are getting close to the one year period - do uncashed checks count against this one-year rule and we could have a failed termination. It seems more administrative - now we have to search for the participants, and then decide what to do if the search fails. So again, we may go past one year. An attorney told me once that the IRS does not really take action against a plan if there is good faith efforts applied. Any thoughts?

403(b) Plan allows for installment payments to terminated participants. No other partial withdrawals are allowed.

Participant started installments two years ago and wants to stop.

What are his options?  Must he now take the entire amount?  He can't just stop right?  Otherwise that would be a loophole around no partial withdrawals.

Document is silent on stopping installments.

An employee was improperly excluded from participation in the employer's EACA 401(k) plan. In a matter of first impression (to me), the employee does NOT want to participate in the plan and does NOT want a QNEC for their own reasons; they are not being improperly influenced by the employer. I can hardly believe it myself.

SCP is available, and if the plan sponsor does nothing, it risks penalties. That said, what are your thoughts regarding allowing the employee to retroactively opt out of the plan? The SCP correction would be to document the employee's voluntary opt-out. 

Company buys another smaller company and keeps its operations separate with its own EIN.

But all employees are in the owner company's medical and benefit plans. No specific joinder agreement was signed.

Two options of how to treat:

• Continue filing as Single ER
• Make them sign a joinder agreement and identify as multiple ER plan, with the understanding that prior year is being signed as Multiple ER based on currently signed Joinder agreement

I don’t know if you’ve run across this, but we had 4 instances of this happening in the last month.

We timely mailed extensions with the IRS. Sent them certified return receipt to IRS, Ogden, UT.

We have documentation of the postage paid:

USPS First class Mail

Certified Mail

Return Receipt

We also have documentation when it left our office and reached IRS office in Ogden.

A month after the extensions were mailed, they were returned to us (unopened).  “Return to Sender. Refused. Unable to Forward” sticker was on the envelope.

Unfortunately, the extensions are now late.

Now what??

Sometimes we don't know if there is anyone to report on Form 8955 by July 31 and so we file for extension of 5500 and 8955.  Is there a problem if we file for extension and then the IRS does not receive an 8955 filing?  I'm wondering if we can file 8955 with no participants listed, but I'm guessing the software might block the filing.

Thank you.

The employer changed payroll providers at the beginning of 2023 and for some unknown reason the deferral election of one participant was not properly implemented and for 8 months no deferral was withheld from the participant's weekly payroll.  The employer, however, continued to deposit the participant's elected amount.  We are working on how to properly correct.  My questions are this:

1.  Am I correct that this would meet the definition of Failure to implement an employee election found in Appendix A of the EPCRS Rev Proc 2021-30?

2.  If this does meet EPCRS definition above, then correction would be QNEC equal to 50% of the amount provided by the employee on the deferral election.   Since the employer has actually deposited an amount greater than 50% of the required QNEC, is it permissible to leave the excess in the Plan for this participant?

Thanks