I find I am having trouble with the benefit accrual rules in 430(d). A client started a pension year in year X. Unit benefit formula is High 3 x5% per year of service ( including prior service). High 3 is computed based over all years of service. In year X there are 7 years of prior service and high 3 is $8000/month. Accrued benefit follows method under 430(d)-1(C)(1))ii)(C);

 at beginning of year X accrued benefit  is 5% x 7 x $8000=$2800 for the FT, and $400 for TNC. We are now in year x+2 and due to a huge bonus of $500000, High 3 is now $22,000. Accrued benefit for FT is then determined as 5% x 8* $22,000=$8800 and benefit for TNC is only $1100. Thus the big change in average comp is being spread over all years of service rather than applied in year X+1. Is this correct? And if the benefit accrual method were changed to where the increase in pay is fully applied in year X+1, is that a change in funding method?  My old brain is having trouble understanding if this is correct. Also, is there a way to change the benefit accrual method that doesn't require a change in the funding method. Appreciate any help understanding this rule.

I have a brand new start-up plan that started 1/1/19. The owner is just now calling me 12/11/2019 wanting to amend the plan to a SH plan because the company did well and he has extra funds to put to work (and not get taxed on). Obviously it is too late for that. And it is too late to change to SH for 2020. BUT... the owner is saying that his accountant, other attorneys and colleagues of his are saying we should be able to back date this and be able change the plan to SH for 1/1/2020 plan year. I can tell you that my Trust Co. and our TPA partner would never go for ever doing something like that. But since the feedback he is getting is that should be okay he thinks there should be no problem doing that, especially if each employee signs off that they received their SH notice. Thoughts/opinions on how to handle?

His other question is something I do not know the answer to. He asked if he terminated his plan and went to another company and started a new Safe Harbor plan elsewhere - that would be effective for 2020 - would be allowed to do that??? OR if decided to terminate services with us and convert the plan to a new provider and changing it to a SH Plan - what are the dates and deadlines for that? Could he in fact do that and have it be effective some time in 2020??

Any feedback will helpful!

TIA!

Either my math or my senses is failing me (maybe both!) here.  Participant is partially vested in a source.  She takes a partial distribution.  The BPD gives this formula to determine what her vested account balance will be after the distribution.

Quote

X = P(AB + (R x D)) - (R x D)

For purposes of applying the formula: P is the nonforfeitable percentage at the relevant time; AB is the Account balance at the relevant time; D is the amount of the distribution; and R is the ratio of the Account balance at the relevant time to the Account balance after distribution ( AB(1)/AB(2) ).

So I have:

P = 50%

AB(1) = 10,000

D = 1,000

AB(2) = 9,000

R = 1.111 (10/9)

So, the math according to the formula is:  .5 (10,000 + (1.111 * 1000)) - (1.111*1000) = 4,444.44

Shouldn't the vested balance be merely $4,000?  She had $5,000 vested, took 1,000 of it and so should only have 4,000 vested.

Where did I go wrong?

We have a participant who is terminated, wants to take a full distribution and she also has a loan outstanding. However, she does not want the loan to be offset at the time of the distribution. Rather, she wants to send a check to pay off the loan after the distribution is done. Is this allowed? My understanding is that it's not and the loan offset must be done when taking a full distribution. Is that correct?

Thanks.

the plan sponsor went from a basic safe harbor match in 2018 to a safe harbor non-elective in 2019.  unfortunately, the basic safe harbor match deposits were still being made during all of 2019.  Can we do a self-correction?  If so, I'd like to just reclassify the funds as SHNEC but some participants may have overages if they were deferring over 3% of pay.  Can I just forfeit the overages?  Do I have to calculate earnings on the overages to be forfeited?

Is there a regulation that requires the recordkeeper to follow the client/employer instruction to liquidate and supply all the necessary information to another service provider when there are unpaid invoices, including the most recent plan year end work and data conversion work?

Can a plan have a provision in its loan program that loans are only available from sources that are 100% vested for the participant?

I am retiring from my firm and the active practice of law at the end of this month.  The BenefitsLink daily news feed has been a very important practice tool for me, and the message boards have provided a diversion that has been both educational and a lot of fun.  I expect to continue to lurk and maybe participate occasionally, so this is au revoir and not goodbye.  Best wishes to all for a healthy and happy 2020.  

So I have a client that thru a clerical error, did not deduct 401k deferrals for the 11/29/19 paycheck.  We discovered this yesterday.  If they give notification letters out to the affected participants, do they still have to do a QNEC, since it has been such a short period of time and just one payroll?

They apparently only do medical deductions 2x per month, but are paid bi weekly, and this was the 3rd pay check for November, so no medical deductions, but someone accidently cleared out the 401k deductions...

President of a Chamber of Commerce currently has a Simple IRA.  They are staring a 401(k) Plan in 2020.

He will turn 70.5 in 2020.

He want's to avoid an RMD.  My reading of the rules says that for any IRA, there is no "if still employed" rule, and an RMD must be made.

But what if they liquidate the account on December 28, 2019, and don't deposit the check in the 401(k) plan until Jan 15, 2020?

This way the IRA has zero balance on 12/31/19.  The 401(k) plan won't have any balances until 2020.

As always, your thoughts are appreciated.

I was wondering if anyone knew if changing from an integrated formula to a cross-tested formula requires a Summary of Material Modifications? 

Thanks!

Dental benefit is provided for management, under 100 persons.

It is offered as a fully voluntary benefit for staff.

So total covered persons are over 100.

I'm trying to figure out if this makes it an ERISA covered benefit, among other things requiring a Form 5500 be filed.

Good afternoon to all,

I have been asked to research a question presented by a referral source.  I do not have any more information that what is presented below:

"I have a client who was a W2 employee January - September of this year. His employer did not have a 401(k) plan and he made no contributions to other plans. As of October 1, he changed his status to 1099 contractor for the same company. When he changed his status it triggered deferred compensation, a lump sum of $400,000 which he will receive at the end of this year. For October - end of the year, he will receive approximately $60,000 of 1099 income from the new consulting business.

Both the owner and the spouse are over 50 years old.

He wants to max out his Owner K to help defer some of this very large tax bill. Can he use some of the deferred comp? Or can only the 1099 income go into the Owner K? Same question for the wife. It was previously stated that she could receive a contribution, but is her limit subject to the 1099 income, or can the deferred comp dollars count?"

This is not my area of expertise and while I have a general notion that deferred compensation is not able to be used in retirement plan contribution calculations, someone out there may know of exceptions to this.

Any help will be appreciated.

Barber operates a barber shop as a Sch C.

He has another barber also working in his shop and pays her as contract employee (for past two years).  She has reported her income on her own Sch C, and contributed to her personal IRA.

Barber owner marries barber contract employee, but working arrangement remains the same.

Barber contract employee is considering starting her own SIMPLE IRA for her Sch C.

Can they really maintain two Sch C's when she's working in his shop?  And are there any controlled group issues that would affect a SIMPLE IRA due to attribution?

Thanks!

Scenario - A pension plan was joined to a divorce back on June of 2016; after the case was filed back on July of 2015 .

In August of 2016, alternate payee receives an audit letter from the plan , to put up her community share in an interest-bearing account, until the divorce is final.

The plan received a certified QDRO in July of 2018. 

Do the plan hold the funds that were set- up in the interest-bearing account mentioned in the  audit letter, back in 2016, in a 18-month segregation period, required by erisa , or when they are joined to the divorce ??

If so, 18- months will expire soon ... under ERISA when are they required to release the retroactive benefit to the alternate payee ?

Thanks kindly,

Destiny 

Sole proprietor adopts SEP, contributes in compliant manner for a few  years. Has no employees. Later ceases to operate as a sole proprietor and becomes member of partnership and gets K-1. Keeps contributing to SEP as if K-1 were Schedule C income for several years. His only business income after joining the partnership is from the partnership, reported on the K-1 (i.e., individual does not have any non-partnership related Schedule C income after joins partnership). Assume partnership had no qualified plan and no non-5% owner employees. Partnership (i.e., other partners in their capacity as such) had no knowledge of SEP or that sole proprietor turned partner had continued to contribute to it. Assume also that SEP documents show individual's sole proprietorship as only adopting employer.

A couple of other practitioners have looked at this and opined that the contributions based on the K-1 income are simply excess contributions to an IRA (i.e., they exceed the individual's contribution limit), IRC sec. 4973 6% excise tax is owed, contributions must be withdrawn to stop further excise tax, individual will owe ordinary income tax on distributions reportable on 1099-R, and will be subject to 10% premature distributions tax under IRC sec. 72(t) because under 59-1/2, and IRC sec. 4972 tax on nondeductible contributions also applies.

However, EPCRS seems generally to treat SEPs analogously to qualified plans, and it seems that there has been a violation of 415(c) and we have excess amounts that under EPCRS need to be distributed to employer (which, admittedly, is the same individual) as a return of an excess amount, and that the returns for prior years should be amended to reflect nondeductibility, and the 1099-R will show "$0" as the distribution amount to individual. The IRC sec. 4972 tax would still need to be paid. See Section 6.11(5) of Rev. Proc. 2019-19. I don't see why the rule would apply differently just because a single participant sole proprietor SEP is involved. VCP would be required, since SEPs qualify for SCP only for insignificant failures, and anyway this is more than two full plan years old.

Anyone ever dealt with IRS on this or a very similar issue? Any other thoughts?

A sponsor wants to amend their plan to require employees who defer to defer at least 4%. Employees cannot elect a lower percentage unless it is zero. 

Other than needing to be tested under 401(a)(4) - how would we even do this?

Is this permissible? It seems like it would flagrantly disfavor NHCE. 

Complicating matters is the plan presently has a Safe Harbor match, and plans to keep it for the foreseeable future. 

Thoughts? 

Plan uses Prime + 1% normally.  We made a boo boo where we did a loan for someone but just forgot to add 1% to Prime (Prim was 5.25%).  I've never run into this before.  What would the correction look like?  OR I am also floating a threory that Prime is not an unreasonable rate so maybe there is no correction at all.

Or maybe we need to pay him 50% of the additional interest he would have accrued from inception to date?  What about going forward?  Why should he agree to a refinancing to "fix" the rate if his promissory note says 5.25%?

Fascinating topic!

Hello, Employer A owned 100% of 3 other companies.  Employer A sponsors a 401(k) plan in which the 3 companies signed Participating Employer Agreements.  I found out today that Employer A sold the 3 companies a few years through an Asset sale. 

1. Can I amend plan now to indicate that a controlled group no longer exists?
2. Should cessation agreements have been generated for each Particpating Employer?  Or does the type of sale negate the PEA?

Plan suspended their safe harbor match as of 9/1/2019.   PY is 12/31.  There was no other match made for the year. Do I need to do both the ADP test, and the ACP test for the safe harbor that was made during 2019 prior to suspension?