I know that ROBS arrangements aren't really all that well thought of around here, and there does seem to be some sleight of hand involved in how the actual plan can be initially started (business valuation, for example), and there are certainly enough on-going potential PT and other (5500, ERISA bond, etc.) compliance issues that it could be problematic,  but it _may_ be that I am actually in a position where a ROBS might make sense.

One issue, though, is that some promoters, such as mysolo401k, claim that you cannot use Roth 401K funds for the initial investment, and other promoters, such as guidant, claim (obviously correctly because of well-known rollover rules) that you can't start with a Roth IRA, but also claim that a Roth 401K account would work as a funding source.

Several articles about the process also parrot mysolo401k's claim.  I'm trying to figure out if they really found a legal issue with buying QES with 401K Roth account funds, or they just don't want to go to the time and expense of modifying their plan documents.

For me, it certainly wouldn't make sense to do this if I couldn't use 401K Roth account funds, because, as some clever commenter (sorry, forgot who!) around here wrote: "Congratulations!  You just converted capital gains into ordinary income!"

But I'm 62, I have skills that I could utilize on my own (no other employees) without any help to bring in some reasonably significant income with very little capital investment, I have savings that I can live off of (including some non-Roth IRAs I could be drawing down if I am showing very little W2 income from a business), and I have a well seasoned Roth IRA.

So, in theory, it seems that if the ROBS 401K plan documents allow partial in-service distributions, I could continuously roll over corporate dividends received by the 401K into the Roth IRA, where they could be reinvested at a brokerage and/or removed and spent at will.  And if the 401K plan documents allow distribution of plan assets without conversion to cash, I could, after 5 years, distribute the company stock to myself with no tax consequences, which would simplify the chicken and egg problem of needing correct valuations to sell the business out of the 401K plan, because, at that point, it would simply be like a zillion other solo 401K plans.

At current corporate tax rates (and Texas's low franchise tax rate), with no further taxation on the dividends, that seems like a pretty good deal.  There are even some other tax planning opportunities, due to the greenfield nature of starting something up.  For example, if valuation is set to par for injected cash, a contemporaneous co-investment could be immediately gifted to a trust, or directly to grandchildren, at well below any valuation that would trigger gift taxes or GST.

But of course, if an idea seems too good to be true, that means it's time to invite others to throw rocks at it.

So thanks in advance for any boulders you can provide.

Was hoping anyone has experienced this before and any thoughts. Am trying to think through all possibilities and with compliance testing for the HCE and NCHE employees also rehired participants. The thought is to merge plans so not one is terminated. 

Vesting Schedule

Plan A - For hires on/after 1/1/2017, 25% after 2 years; 50% after 3 years; 75% after 4 years; 100% for 5 or more years, 100% vested if employed on 12/31/2016 

Plan B - 3-year cliff; 6-year graded vesting for pre amendment of 12/31/2016

Possible Vesting but what happens to rehired participants and compliance testing? are all of these possibilities?

1. Apply the legacy vesting schedules to amounts accrued through 12/31/23 and a new schedule to amounts accrued on/after 1/1/2024.
2. Vest all participants immediately 
3. Vest 25% after 1 year, 50% after 2 years, 100% after 3 years 
4. Changing everyone to 100% after 2 years 
5. Vest everyone 25% after 2 years, 100% after 3 years. 

We have a client that is setting up a deferred compensation arrangement and wants to exclude from the Change in Control benefit any transactions between family since it is a closely held company. I think for 409A purposes this is not problematic because they only further restrict the 409A-acceptable definition of a CIC, rather than expand it.

It seems to me that, within a family, if a person is treated as owning any interest owned by the person’s spouse, children, grandchildren or parents, then (for example) a child who purchases stock from his parent would not trigger a Change in Control, because the child is already deemed to own the interest under the 318 attribution rules. I cannot find any guidance that explicitly states that, though. Has anyone dug into how this works?

Thank you!

Based on the language of SECURE 2.0, it appears that new distributions for those terminally ill can only be made when the person is otherwise eligible for a distribution. But other new distributions (e.g., emergencies and domestic abuse) create new distributable events. In either case, however, allowing any of these new distributions is optional.

Do you all agree, or do you read the law differently?

Hello All-

Our firm is considering changing methods from Accrual to Cash Basis for 5500 and year-end valuation reporting.  Is there anyone out there with experience who can provide any tips on how best to do this?  I have worked on a cash basis previously, but would like to explore any pitfalls of making the switch from accrual to cash. Trying to make the transition go as smoothly as possible. Any advice is greatly appreciated! 

Thank you!

Hello,

We have a participant in a fully insured plan that is past NRA and would like to take a partial distribution. They have 4 annuity contracts in the plan and want to distribute 2 of them to an outside account and continue to pay premiums on the other 2.  I realize we have to amend the formula to make this work, and there are only owners in the plan, so that part should be ok.  I'm wondering if this partial distribution would be allowed?  I had been told in the past that in-service distributions aren't allowed from fully insured plans.  But, this participant is past NRA, so this could be considered a partial distribution of the retirement benefit.

Thoughts?

Thanks,

Austin

For 401(k) plans that decide to allow Roth employer contributions, how, if at all, will the deduction rules change for those contributions? I'm thinking that traditional employers will still get a deduction, but what self-employed plan sponsors? Will it depend on the way the self-employed business is structured?

Thanks for any thoughts.

Suppose you have two non-governmental tax exempt employers, each of whom sponsors a 403(b) plan with, for all practical purposes, identical provisions. Both are calendar year plans. Are there any particular problems with permissively aggregating them for coverage and ACP testing, if one fails, but permissive aggregation would allow them to pass? I'm not seeing any, but perhaps I'm missing something.

It occurs to me that the original post left out the fact that they are a controlled group - a rather important piece of information!

Gracias.

Received a referral on a cash balance as well as a 401(k) plan. Cash balance no eligible employees (presumably), 401(k) remains to be seen.

My first question to him is the 401(k) "handled" by a payroll company as I refuse to takeover any such plan.

Secondly, ADP has no knowledge of the cash balance plan.

Third, the cash balance is on a 10/1-9/30 plan year; the 401(k) is calendar.

Regardless of different plan years, granted they need to be aggregated for deduction purposes; don't the plan need to be tested together for 401(a)(4) ?

Seems like a loss leader.

We use FT Williams for administration and  it's getting me so confused! Or maybe I'm just getting too old for this s$%t! 

This cross-tested plan has passed the rate group test but not the average benefit test. It also passed the ratio percentage test. Does it still have to pass the average benefits test as well? Are deferrals included in the average benefits test?

Someone have mercy on me!

A CPA reached out to me today to tell me that he was amending 2020 and 2021 tax filings for the Employee Retention Credit (under CARES, I think), and how would that affect the employer contributions for those years?

Basically, certain business are getting to amend COVID-era (like it was so long ago) tax returns to claim a tax credit for retaining their employees if they met certain criteria (I don't care what the criteria are since I know my business didn't qualify for it).  This increases the net income for the year - sometimes significantly - and therefore for a sole prop or partnership entity, this affects the net compensation.  Has anyone else been hearing about this?  How are you handling it (ideally with the minimal amount of disruption)?

I'm concerned that if we include it in 2022 (or 2023) based on the deposit date, then it will reduce the amount that can be contributed for the current year (or next year).  And, since the CPA is amending the 2020/2021 tax return, it would be nice (though not required) if things lined up.

Any thoughts are appreciated.  Thanks.

Section 603 ELECTIVE DEFERRALS GENERALLY LIMITED TO REGULAR CONTRIBUTION LIMIT

This is the section that refers to Roth catch ups for those making $145k. This section states the following:

(b) CONFORMING AMENDMENTS.—  (1) Section 402(g)(1) is amended by striking subparagraph (C).

Question: isn't that the subsection that allows catch up beyond the 402(g) limit regardless of compensation? If that section is stricken, what remaining section allows catch up beyond the 402(g) limit? I am curious if this has the unintended consequence of eliminating all catch ups - is that what this does? (If it does, I am sure it will be fixed so this isn't a fire drill question)

Thanks

Client got a letter from DOL about late deposits.  The old version made it clear that no response was required.  This has a little more of the "respond or else we're coming for you" interpreation.  Has anyone else gotten this letter?  This is the first one we have received.  If this is the new version of the old approach it would be tempting to use the same solution (not respond).  Curious to know if this is just a new template to get a higher response rate or they are really coming after clients who do not respond.

I am in a very preliminary discussion with a new plan. Just discovered that they have an employment contract with one HCE employee that states that the HCE will receive X% compensation annually to be contributed to his 401k. The amount is going into his gross pay and then to the plan as employee deferrals. It is not going in as employer contributions. I'm not comfortable but haven't quite worked out how big of an issue, if any, this is. 

On the one hand, they are just giving the HCE funds that he can choose to put into or not put into the plan. But since they clearly labeled it as "pension funds" (they have a 401(k) not a pension) it concerns me as a possibly discriminatory issue. 

I would welcome any input. 

A customer engaged us to prepare a non-SH 401(k) plan document for them in mid-2022 with elective deferrals to begin in the 4th quarter of the year. We prepared the document and they signed it.  We've received word from the advisor that they've never collected or contributed a cent into the plan, and whether or not they ever gave their employees copies of the SPD or had an enrollment meeting is unknown at this time. 

I was wondering what the board feels is appropriate with regarding to formally terminating the plan. I've heard the argument that if the plan is never funded it never really starts, but I don't know if I can get behind that. In my mind, the execution of the plan document creates an obligation on the part of the plan administrator to operate the plan according to its terms, and there's an operational failure resulting in a missed deferral opportunity as a result. I haven't been in the industry that long, so I'm not sure what the commonly accepted practice would be in this situation. Any thoughts?

Plan sponsor failed to timely remit deferrals following multiple payrolls.  We are proceeding with a VFCP filing with the DOL.   Question is whether there is also an "operational failure" under EPCRS.  Plan document only requires deferrals to be deposited into the plan "as soon as administratively feasible."  I have not found any basis to consider this an operational failure since the plan document does not require the deferrals to be deposited by a certain date.  We are trying to avoid an EPCRS VCP filing (we are outside the self-correction window for significant operational failures).  Any thoughts (or real world experience) would be appreciated!

Hi

I have an interesting question/dilemma.

I was provided a plan amendment by another person. The amendment was sent to the client by DocuSign.

It has 2 pages, a resolution and an amendment.

Both pages were signed but only resolution was dated. Amendment's date is left blank.

As they were both sent by DocuSign to be executed, there is proof that all were executed on the same date. There is the summary too.

In your opinion, would the amendment be considered as signed on the same date as the resolution? Or, it will need to be re-executed and dated tomorrow?

If this was not DocuSign related, I would not accept it but because there is no evidence as to when signed.

I am curious on the legality.

Thank you

I received a call today from a client.  They maintain a DB Plan with mandatory employee contributions of 3% of salary.  It appears that HR missed this on a small number of employees and has realized it now.  This has been going on for 3 years on one employee and about a year on a few more.  The total number of employees impacted is less than % of the total population. 
 

Does anyone have thoughts on an appropriate correction?  This isn’t a missed voluntary deferral situation where we have set guidance on the correction.  Does the employer have to make the missed contributions?  Can they work with the employee to “catch up” the amounts that were missed?

Thanks for any thoughts!

Prior to SECURE 2.0 there was the 3-year credit of 50% of plan admin costs up to $5,000 for small employers.  I understand now that credit rate is 100%.  PLUS there is now a new credit of 100% or an employer contribution up to $1000 per employee (phased down after year 2.)

So a small employer starting a new plan gets both credits?  That seems to be what I am reading.  Is it really that good?