Hi all,

I'm having a bit of difficulty thinking through this scenario and could use some help.

Company A (two 50/50 owners) acquires 60% of Company B as of 04/01/24, and B Owner retains 40% ownership. Company B becomes a participating employer in Company A 401(k) Plan as of 04/01/24, and a transfer agreement is executed for Company B 401(k) Plan to be merged into Company A 401(k) Plan as of 01/01/2025. Companies A & B are a brother sister controlled group as of the acquisition. Both Plans pass coverage separately and combined at the time of acquisition (also the EEs of Company B all become employees and participants in Plan A as of 04/01/24).

Company B Plan had a standard SHM and Company A has a SHNE.

Company B consists of 2 employees prior to acquisition, 1 HCE (previously the 100% owner) and 1 NHCE. Company B HCE has >$345k comp from Company B prior to 03/31/24 and earns ~$170k comp from Company A the remainder of the year. Company B NHCE has ~$25k comp from Company B and ~$50k comp from Company A. No compensation is paid from Company B after 03/31/24.

1. I understand that Plan A and Plan B can be tested separately during the transition period for coverage, but are they allowed to be tested separately for other aspects as well (404, 415)? They pass 415 and 404 testing either way, so this isn't a crucial consideration, but I'd like to know how my tests should reflect and for future reference.
2. Does the compensation for 2024 Plan B testing have to include amounts paid by Company A as well, causing a SHM true-up for B NHCE? Both Plans exclude pre-entry compensation, so my thought is that the Plan A SHNE & PS calculations only consider the compensation paid after the B EEs become A Participants on 04/01/24.
3. Both Plans were top-heavy for 2024; Plan A made a discretionary PS allocation - does this cause Plan B to lose its top heavy exemption? If so, B NHCE's Plan B ER contributions are less than 3% of their total (A + B) comp, but B NHCE's total ER contributions (A SHNE + A PS + B SHM) are greater than 3% - does this satisfy the top heavy allocation? The B NHCE SHM/B NHCE Comp is 4%.

Checking a thought/curiosity as never dealt with it before nor have any idea.

Company has an existing 401k/PS plan for many years.

They need to add a second PS plan with better allocation provisions and then merge the new plan into the existing plan.

Upon merging, will the new PS plan's benefits need to be 100% vested, assuming the new plan's vesting service will start with the inception of the plan, assuming that the new PS can even have this provision?

Thank you,

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Thank you, as always, for all the insights.

1 . A Frozen DB Plan, owner and wife only (owner only plan).

2. Plan frozen after 12 31 2017

Avg comp at 12 31 17 was 117,000.

Formula was 10% of avg comp for each year of service. 

3. Had 6 years of service and 2 years of participation at 12 31 17.

4. As of 12 31 2017 the AB based on percent limit was $5,850. As his avg comp was 117,000 and this was reduced by 6/10 (as had 6 years of service at 12 31 17. (10% of avg  comp of 117,000 for each year of service was the formula at 12 31 2017 then frozen)

5. As of 12 31 2017 the AB based on the dollar limit was $3,583, since the 2017 415 dollar limit of 215,000 was reduced by 2/10 to reflect the 2 years of participation as of 12 31 17.

6  . Therefore his benefit at 12 31 17 was limited to 3,583 (lower of the dollar or the percent limit).

7 Question...if this frozen plan allows for increases due to increases in the COLA..

then

A. for 2018 would his AB be 3,666? (As the 415 dollar limit went up in 2018 to 220,000 and 220 reduced by 2/10... as had 2 years of participation as of 12 31 17 when frozen..

B. If the AB for 2018 is indeed 3,666 is this shown as an increase with a TNC or the the AB for the FT ( ie AB as of 1 /1/ 2018,) is simply increased and no TNC?

C. As the dollar limit goes up each year, would the AB keep going up annually until it hits the percent  limit  of $5,850 that he had as of 12 31 2017?

Thank you very much 

Client came to us with a solo 401(k). The client's annual additions to the 401(k) were, in reality, less than the maximum 415(c) limit for years 2019-2023. Unfortunately, the client understated his income on his federal income tax returns during those years. The client's new accountant is planning to file amended returns for those years to accurately report the client's income. Without the amended returns, the client "appears" to have exceeded the limitation in 415(c)(1)(B) (i.e., 100 percent of the participant's compensation) due to the understated amounts on his original tax returns. With the amended returns (which, again, accurately reflect the client's income during the years in question), the client was below the 415(c) limit each year. 

Can this issue be resolved by filing amended returns, or does the client need to use EPCRS to address anything? Because the client did not exceed the 415(c) limit in any year (after giving effect to the amended returns), my initial impression is that there is no need to distribute any excess annual additions. Am I thinking about this correctly? Happy to consider any other issues you may see.

Thank you for your time.

Would severance pay be considered be considered post severance compensation in the definition of 415 Statutory Compensation?  I'm pretty sure it would just want to get someone's confirmation.  Thanks for any help.

Can anyone recommend a legal or otherwise conference for an ESOP newbie? I am interested in expanding my practice. Thanks!

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Brain cramp, and I just want to make sure I'm not crazy. Due to a plan merger, short plan year ends October 10th of 2024. If I'm reading the instructions correctly, for a short plan year, the filing due date is the last day of the 7th CALENDAR month after the end of the short year. This would mean due date is May 31, 2025. Right? Then a 5558 extension would extend the due date to August 15, 2025.

Seems simple, but I'm getting some pushback, and I'm always willing to entertain the possibility that I'm a few cards short of a full deck. 

I have a DB plan where the plan effective date is for 2024, providing a vested benefit accrual as of 12/31/2024, but the plan did not fund until August 2025.   The RBD for the participant/owner was 4/1/2025.   Did she miss her first RMD even though there were no assets in the plan to take an RMD from?   Or maybe I am over thinking it.  This RMD is mute because it is for 2024 which is based on a 2023 accrued balance that did not exist?  Maybe her first RMD is actually due by 12/31/2025 for 2025 plan year based on 2024 accrued balance.

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I have a question about the timing of loan re-amortization to avoid default. I have reviewed Notice 2023-43, but would like to ask for thoughts.

Participant took a loan with a term of 3 years. Employer failed to start loan payments and the employee missed the first 4 payments. The employer found the error and began payments on the 5th scheduled payment. The plan uses the cure period so the loan is not at risk of defaulting assuming all future loan payments are paid timely. However, the employee and employer would like to bring the loan current, but the employee does not want to make a lump sum payment of 4 payments. The idea is to re-amortize the loan keeping it within the 3 year original payoff date and increase the payment amount slightly to still pay off at the original due date.

Do you see a problem with re-amortizing before the loan is in default? EPCRS talks about refinancing after default, but is there a reason why you can't refinance before default? I am getting a lot of push back from the TPA that re-amortization cannot be done unless the loan is in default (we don't want to miss payments on purpose, just to get into default so we can refinance).

Thanks

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The FT William pre-approved document allows us to select whether the Investment Fiduciary will be if not the Trustee.  Has anyone ever seen this used to name someone other than the Trustee (my plan does not have a directed trustee).

It looks like the default investment fiduciary is the plan sponsor. That doesn;t seem normal though because the norm is for the trustee to sign off on investment changes for example.

The new Federal income tax deductions are effective for income earned starting January 1, 2025. This may have an impact on how payroll reports tips and overtime pay when providing 2025 census data. Note that payroll does not yet have full guidance about the new rules.

The new law is much more complicated that one would think.  It creates a Federal deduction for tips that can be taken on a personal income tax form.  It does not exclude tips from all payroll taxes.  The exclusion is solely for Federal income taxes.  Tips are subject to Social Security and Medicare taxes, and any applicable State and Local taxes.

There is a cap of $25,000 on the amount of tips that are deductible, and this phases out as income rises above $150,000 (for single filer) and phases out if income reaches $400,000 (for single filer).

Not all occupations qualify for the tips deduction. The IRS is required to publish a list of occupations eligible for the tips deduction by October 2, 2025.  If you earn tips in an occupation that does not appear on the list (when it is published), you get no tips deduction.

While you are looking at income taxes, also keep in mind that there is a new deduction up to $12,500 (for single filer) available on overtime pay.

*Re-posted from 401(k)/Tips*

About a higher-wage participant’s age-based catch-up, what is an effective opportunity to elect against Roth contributions?

For Internal Revenue Code provisions about a higher-wage participant who must make age-based catch-up deferrals as Roth contribution (or get no such catch-up), a proposed rule lets a plan provide a deemed election for Roth contributions. Among other conditions, the plan must provide a § 414(v)(7)-affected participant an “effective opportunity” to make a different election.

About what is or isn’t an effective opportunity, the proposed rule points to 26 C.F.R. § 1.401(k)-1(e)(2)(ii): “Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including the adequacy of notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections.”

For the audience we seek to reach (age 49 or older, 2025 FICA wages > $150,000) and the choice the election asks, what facts do you think makes an effective opportunity?

For a small plan with not many § 414(v)(7)-affected participants, one might give this notice with lots of “touch” and without needing a heavily programmed plan-administration regime.

But imagine a plan with at least a thousand § 414(v)(7)-affected participants, who specified all deferrals as non-Roth contributions, and didn’t respond before 2026 to 2025’s communications imploring them to make revised deferral elections.

When would you send such a participant a notice of the employer/administrator’s intent to treat a non-Roth election as a Roth election (absent an election for no catch-up deferral)?

In setting a time for a notice, must it relate to when within the year the particular participant would be switched from non-Roth to Roth? Or is a notice given in December 2025 good enough?

Recognize that for some a needed switch from non-Roth to Roth might be as late as summer, and for some it might be as soon as January.

What makes sense?

Client has a plan that excludes the following from eligibility:

highly compensated non-key employees, key employees making less than $100K and non-shareholders making more than $28,000.

Everyone else is eligible and gets a 4% match.

Is this discriminatory on its face?  seems like anyone in the middle wouldn't get the match

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