Our client just filed their 2019 1095-Cs with the IRS.  They were overlooked back in the spring (an extension to May 1 was filed) due to COVID/PPP things, and we just realized they  hadn't been filed last week.  No letter has been received from the IRS.  Technically, a penalty of $270 per record could be charged.  But do any of you know if the IRS is actually assessing the penalty when the taxpayer files them on their own, without the IRS having to get involved?  Please give us some good news!  And yes, the forms were distributed to the employees timely.

Fact pattern:

In April 2018, sole proprietor sends in $18,000 as a head start on her 401(k) for the 2018 year.  After the 2018 taxes are prepared by the CPA, the Schedule C shows a loss from self-employment earnings.

In April 2019, a distribution is processed from the plan for the 18,000 plus earnings, as a correction of excess annual additions.  No income = no contributions.

The CPA doesn't understand why the 18,327.15 is considered taxable income for 2019.  (At least, not the 18,000 part.)

Should the CPA have reflected the 18,000 as a deduction on the 2018 Form 1040 as self-employed retirement plan contributions?  Typically with refunds of excess like this, the amount is taxable in the year of distribution.  If there had been an 18,000 deduction on the 2018 return, then the 18,327.15 in income for 2019 make sense - just with the suckiness of her tax rate for 2018 being lower than 2019 will be.  That's the typical explanation I'd give for an ADP test refund - the 2019 refund income offsets the deduction for 2018 - but in this case, it's a 415 issue. 

I'm suspecting the solution is either (1) Review the 2018 return to see if an 18,000 deduction is appropriate, OR (2) Change the taxable amount on the 1099-R issued in January so that only the 327.15 gets listed as the taxable amount.

But which is right?   (realizing there could also be a door #3)

Thanks.... --bri

DC plan paid someone out at 100% vested when they should have been only 20%.  About an $8,000 difference.

So start in EPCRS, Appendix B, Section 2, part .05 Correction of Other Overpayment Failures

An Overpayment from a defined contribution plan is corrected in accordance with the rules in section 2.04(2)(a)(iii).

section 2.04(2)(a)(iii)

(iii) Return of Overpayment Correction Method. A failure to satisfy § 415(c) that includes a distribution of the § 415(c) excess attributable to nonelective contributions and matching contributions may be corrected using the return of Overpayment correction method set forth in section 6.06(3) of this revenue procedure.

But, 6.06(3) is Correction of Overpayment (defined benefit plans).

Shouldn't I be using 6.06(4), Correction of Overpayment (defined contribution plans and 403(b) Plans.)? 

Widowed male (age 81) put pre-tax money in a 401(k) plan during employment; on retirement at age 62 he began receiving a monthly distribution.  The plan accounts are now managed by T Rowe Price.  The monthly payments have never increased.  The individual is concerned that the required minimum amount for 2021 (based on his age and account balance) will be more than the annual total of monthly payments.  What is his best option for determining whether the payments must be increased? (The original plan was sponsored by Westinghouse).

Thanks!

Wondering if any other plan has received an approval notice for a 5558 filed for a 6/30/19 plan year, but the notice approves it for the 12/31/19 plan year?

Nothing new that the approval notice arrived 7 months after filing 5558 and 4 months after filing 5500.

On July 30th, the Internal Revenue Service updated the retirement plan COVID Q&A on their website to clarify that an individual terminated and rehired in 2020 due to COVID is not considered to have an employer initiated severance from employment. It is unclear to me whether this guidance is only applicable for for COVID related severance and rehire in 2020, or is this the ongoing general interpretation for future years and other terminations/rehires (ie - due to sale of a business; closing of a plant; etc)?

Q15. Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred? (added July 30, 2020)

A15. Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employer-initiated severance from employment for purposes of calculating the turnover rate used to help determine whether a partial termination has occurred during an applicable period, if they’re rehired by the end of that period. That means participating employees terminated due to the COVID-19 pandemic and rehired by the end of 2020 generally would not be treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the retirement plan occurred during the 2020 plan year.

See Revenue Ruling 2007-43 for more information on partial terminations, including vesting rules, how to calculate the turnover rate for employer-initiated severances, the presumption that a turnover rate of at least 20 percent during an applicable period results in a partial termination, and how to determine the applicable period.

 https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers#:~:text=In general%2C section 2202 of,to qualified individuals%2C as well

We have a client who was a sole prop that told us late last year they were forming a C corp and the plan needed to  be amended effective 1/1/2020 to make the C corp the plan sponsor.  The plan was amended and the amendment was signed.  Now the CPA is asking if the fact that they are still paying payroll, etc. through the sole prop is a problem.  We didn't make the sole prop a participating ER because we were told it was going away effective 1/1/2020 and now they are stating it will be 1/1/2021.   I can't find anything that supports revoking the amendment.  Is VCP the only option for correcting this?

Hello everyone,

Hope you all and your loved ones are safe. My three questions pertain to the extent to which contributions to a defined benefit plan are deductible by individuals with earned income from a sole proprietorship, partnership or LLC taxed as a partnership. In my situation, I have a defined benefit plan for which the members want the maximum contribution. The plan was effective in 2015 and the definition of average compensation is the highest average of three consecutive years.

Year                 Member 1      Member 2

2015                 $265k             $104k

2016                 $160k             $35k

2017                 $230k            $130k

2018                 $5k                 $99k

High-3 Avg      $218,333       $89,667

Each of the two members of the LLC have equal ownership and have earned income (K-1 ,Line 14A) of $276k. When I run the valuation using zero compensation for the members, I'm getting minimum and maximum contributions of $216k and $620k, respectively. Intuitively, however, I don't think the members can contribute $620k because their earned income isn't sufficient. I believe the maximum db contribution is $528,618:

Earned Income: $276,134

- SE Tax Deduction: $11,825

- 50% of Staff Cost: $8,394

= $255,925

$255,915 x 2 = $511,830

$511,830 + $16,788 = $528,618

Am I correct that the maximum deductible contribution cannot exceed $528,618? My actuary says that we shouldn't opine about the whether the $620k is deductible because there may be circumstances where the deduction could be higher than the net K-1. Whether the $620k is deductible is a question for the client's accountant. However, the accountant is asking me to verfity whether or not the $620k is deductible. I'm stuck in the middle, so that's why I'm reaching out to you.

My second question is if the members were to increase their earned income to $322k each, could they then contribute $620k?

 Earned Income: $322,000

- SE Tax Deduction: $12,439

- 50% of Staff Cost: $8,394

= $301,167

$301,167 x 2 = $602,334

$602,334 + $16,788 = $619,122

My last question is if the client wants a contribution greater than $620k, then wouldn't the earned income have to be significantly higher to increase the average compensation to generate a higher benefit?

If a participant has reached their Required Begining Date, is still employed and is not a 5% owner are they still able to request that an RMD be processed for them for the tax year?

Extra wrinkle ~ What if the plan does not allow for 59 1/2 Inservice distributions.

Thanks for everyone's insights and knowledge on all of the topics that have been posted. It is a great jumping point for extra learning.

hi,

In my ERISA LTD plan, the insurer is adding about 7 days to the documented date the claim was faxed to them for "processing time". Obviously this then gives them 52 days to respond rather than 45. Is this legal? The SPD does not seem to address this.

Hi,

First let me apologize. I am a newbie to 401K plans and I am just beginning to understand the basics.

If this question has been asked already please direct me to the related thread.

My scenario:

I have a 401K with Wells Fargo through my employer.

Employer matches 100% for the first 3% and 50% for the next 2%.

100% of my account balance is allocated to State Street Target Retirement 2050 P.

Question:

I understand how the contribution part works, but I am confused about the fund (State Street Target Retirement 2050 P SSDLX).  Wells Fargo lets me choose which fund to invest in. But I am not sure if I understand the "investing" part.  My 401K plan does not give me any dividends so why does it matter which fund I choose?  Does my 401K  increase or decrease based on the performance of the SSDLX?  If yes how and where would I be able to see those earnings or losses in my statement?  Is there a minimum balance in my account that is protected no matter how the SSDLX performs?

Help & advise is much appreciated.

If an IRA or QP participant is under 59 1/2 and takes a COVID distribution.  Should the trustee report on 1099-R distribution code 1 or 2?

Odd situation - We did 2018 valuation and now when we get data for 2019 we find out that the sponsor did not actually deposit the full Profit Sharing contribution/deduction.  We could amend 5500 filing and tell him to amend tax return, but plan is aggregated with DB so this would cause serious problems.

If he makes up the money now (it was due by 09/15/19), how do we make that work? 

Is it possible to amend the Plan to stop the safe-harbor nonelective contribution in accordance with Section IV. of Notice 2020-52, but then amend the Plan 30 days before the end of the same plan year to reinstate the safe-harbor nonelective contribution?

Our client maintains a safe-harbor 401(k) plan to which the safe-harbor nonelective contribution is made. The safe-harbor nonelective contribution is funded on a payroll-period basis. The plan year is the calendar year. The client is concerned about its ability to continue to fund this contribution for the rest of this year since Covid-19 has started now to affect its business.

Under Notice 2020-52, the Plan would be amended to suspend the safe-harbor nonelective contribution for payroll periods after August 31, 2020. The amendment would be signed by August 31, 2020 and the notice to participants given no later than August 31, 2020.

If this client is able to find the funds to make the safe-harbor nonelective contribution for payroll periods after August 31, 2020,  is there anything that would prevent the Plan from being amended by December 1, 2020 to provide for the safe-harbor nonelective contribution? The participants would receive notice by December 1, 2020 of the safe-harbor nonelective contribution (this Plan has a discretionary matching contribution which might need the safe-harbor nonelective contribution to satisfy the ACP test, so the notice would be needed.) I don't see any provision in Section 103 of the SECURE Act that would prevent this subsequent amendment. Am I missing anything?

Deleted.

401k plan is going into blackout and cannot process a deposit until after blackout is over.  Therefore one payroll will be a week late.

Will that deposit be considered late, or is there a facts and circumstances component to this?   My thought is late is late but I have come across differing opinions out there, so curious to see what others thing.  I have a feeling the DOL would agree with me FWIW..  Thoughts?

With the new Secure Act provisions for 3% non-elective plans, is a new 3% safe harbor non-elective plan still required to be adopted by October 1 (assuming a calendar year end).  

Could the plan be adopted for December 1, 2020 as a 3% non-elective?

What if the plan was adopted on December 1, 2020 as a non-safe harbor plan with a calendar year end, but amended in 2021 to be a 4% safe harbor? 

I guess what I'm really asking is, if the plan is a non-elective safe harbor, must the first year still be at least 3 months long?

Thanks very much.

ok -manufacturing client added COVID withdrawals to their 401k Plan but only up to $3,500 of the participant's vested balance.  Employees have been back to work full time for months.  (Furloughs were very brief for this particular client.) Can the Employer put an "end date" on these withdrawals so long as participants are properly notified?  They are seeing a dramatic increase in requests "all of a sudden" and surmise that word is getting around from those who took distributions early on and fear now it's just being used to get funds out. 

I'm thinking the answer is "no" and that they must keep this in place until 12/31/20.....  

For obscure reasons, an employer provides health insurance through a funded welfare plan arrangement (i.e., through an ERISA trust).

The employer inadvertently used plan assets to pay non-health plan expenses and therefore engaged in a prohibited transaction.  The employer repaid the amounts to the plan plus appropriate interest within the same plan year as the prohibited transaction.

The employer disclosed the prohibited transaction on Schedule G to Form 5500. 

In addition to repaying the amounts, does the employer also owe an excise tax to the IRS for the prohibited transaction?  If so, is the mechanism for paying the excise tax through Form 5330?  Even if there is no excise tax to pay, should the employer file a Form 5330?

The instructions to Form 5330 seem to indicate that the Form is inapplicable to this situation and Schedule G's instructions provide that Form 5330 should be completed if the filer is a pension plan. 

I do not have any experience and wonder if anyone else has come across this. 

Thanks!

We had to go back and amend a 2015 filing for a Plan.  FT automatically:

1) Converted the filing to the 2019 form (per the DOL's requirements).

2) Converted the 2015 Schedule R to a pdf and added it as an attachment (again the per DOL's requirements).

Myself and another consultant were absolutely in shock that they did that.  We thought we were going to spend an hour rekeying everyhing.

I'm telling you, FT William is one of my favorite companies to work with.  OK maybe other vendors software would do the same thing, I don't know. If they do, then kudos to them as well.