A company with an existing 401(k) plan is preparing to create a wholly owned subsidiary.  The subsidiary doesn't yet exist.

The company wishes to create a separate 401(k) plan for the subsidiary. 

In the first year the subsidiary is being set up, it may consist of HCEs only.  In time they will have rank-and-file employees and combined plan testing should be fine.  The first year is my concern.

If the subsidiary and its plan do not currently exist, can we take advantage of the transition rule in the first year of the new plan?

401(k) client has an issue with its welfare benefits and is asking me to point them in the right direction.  I don't do welfare benefits at all so I figured id see with you guys if this sounds like "standard practice".  I have a feeling there is fault on more than one party here, but it sounds like everyone involved are just pointing fingers at others.

Company offers several different welfare options in addition to health insurance, such as FSA, dental, short term disability , etc.

Starting in mid 2018 (at least) through March 2019, some payroll deductions were never made.  For example, one participant did not have their dental and FSA deducted from their paycheck starting in October 2018.  It was discovered in March of 2019.  Dental benefits were paid for and participant was credited with the elected FSA amount, so I assume that those were paid with company assets since payments exceed deductions.    

The proposed solution is to just double up deductions each payroll starting in April 2019 until the participants have "paid" for the benefits they were credited with.  Is this a common solution when you are talking about 5-6 months of deductions spread over more than one plan year?  It sounds "fair" that the participants should pay for the benefits they received, but the participants also have a higher taxable income in 2018 than they should had everything been done right. 

Any input would be appreciated.

Thanks.

Has anyone run into a situation where a client's accountant demands that a 100% owner of a company be allowed to take a distribution of moneys because the client fired himself? They also revealed that the owner is in dire financial straights. This is a SH plan with no hardships allowed. I'm calling BS, and told them to hire an attorney to write us a letter telling us that the termination would allow the owner to take a distribution of plan money.

They could also terminate the plan.

Is there another way I should be thinking about this?

Have a 3 participant DB that terminated and has excess assets (about $40k).

Our document indicates that the excess can be allocated in any non-discriminatory manner.

In this case it is a husband and wife plan with one younger employee. The husband and wife are each 70.

The wife has participated for over 10 years but has had very small accruals (I think 1% of pay for the past 10 years).

The business owner would like to be able to allocate most of the excess to his wife. 

Would there be any problem with attempting to do that and using accrued to date for 401(a)4?

I would think accrued to date would have the effect of spreading out the excess as though it were additional accrued benefits over all the past years. Perhaps making it so it would have the effect of her earning 2% of pay rather than 1%.

Thanks.    

A 401(k) Safe Harbor Non-Elective, with New Comparability PS has different eligibility for the 401(k)/Safe Harbor portion and the PS portion. If someone enters the Plan mid- Plan Year for PS purposes, do I use full year compensation or PS Participation Date compensation for (a)(4) testing purposes?

401(k) plan was terminated in 2018. Due to a recordkeeping error, assets were incorrectly distributed to Employee A instead of Employee B.  Plan sponsor needs to correct the overpayment to Employee A and the incorrect distribution (i.e. underpayment) to Employee B.  

How is this done if the 401(k) plan and trust have been terminated?  They can recover the overpayment from Employee A, but how is it formally returned to the plan and distributed to Employee B if the plan has been terminated? Do they need to rescind the termination?  

Employer currently has a Model 5305-SEP and wants to add a CB plan - they cannot use a 5305-SEP with a CB plan, so they will need to establish a new SEP. 

Once they are able to find a provider to prepare the new SEP, will the new SEP be an amendment to the original 5305-SEP or a brand new employer plan? 

If it is a new employer plan, will the current participants in the Model 5305-SEP be allowed to roll their money into the new employer SEP plan?

We have an existing SEP (20 HCEs and 1 NHCEs) with 25% employer contribution each year for each participant.  Employer wants to add a Cash Balance plan but does not want to leave the SEP arrangement and go with a PS/401(k) plan.  So we will have a SEP (not a 5305-SEP) with each participant continuing to receive 25% each year and then certain of the HCEs receiving some amount of allocation/funding into the CB plan.  The NHCE will be allocated whatever is necessary.

Is this a viable arrangement?  What is the tax deduction limits for a set up like this?  Can we allocate 25% in the SEP and also what is necessary in the CB and not exceed the tax deduction limits?

Are we allowed to consider what is allocated in the SEP for the NHCE when determining what the NHCE must receive in the CB plan just like we normally do when we have a PS/401(k) arrangement alongside a CB plan?

A terminated participant has a vested account balance of less than $1,000.

Per the terms of the plan will make a mandatory distribution of account balances that are $1,000 or less. The distribution will be made as soon as administratively feasible.

The vested amount is >$200, must the participant sign an election form?

Cross-posting from 457 plans:

Quick question on reporting 457(f) distributions. Say you have a 457(f) plan that vests in a fixed amount (say $500,000) in one year but is paid in installments (say 5 years at $100,000 starting the year after vesting).

Setting aside for the moment the issue of present value, the employer would report all $500,000 as taxable wages on a W-2 in the first year. Later distributions would be subject to tax under section 72, which would require no further taxation upon distribution.

In the installment years, do the $100,000 non-taxable distributions get reported anywhere?

Section 4.72.19.27 of the IRM says the following, but it's not clear what the employer reporting requirements are (if any):

For any amounts previously taxed, but not distributed from a 457(b) or 457(f) plan, the participant will have "basis" on that amount and is not required to pay tax again at the time of distribution. It is the individual’s responsibility to report this on Form 1040 for the year distributed. See IRC 72 for additional guidance on basis. 

Thanks in advance.

Quick question on reporting 457(f) distributions. Say you have a 457(f) plan that vests in a fixed amount (say $500,000) in one year but is paid in installments (say 5 years at $100,000 starting the year after vesting).

Setting aside for the moment the issue of present value, the employer would report all $500,000 as taxable wages on a W-2 in the first year. Later distributions would be subject to tax under section 72, which would require no further taxation upon distribution.

In the installment years, do the $100,000 non-taxable distributions get reported anywhere?

Section 4.72.19.27 of the IRM says the following, but it's not clear what the employer reporting requirements are (if any):

For any amounts previously taxed, but not distributed from a 457(b) or 457(f) plan, the participant will have "basis" on that amount and is not required to pay tax again at the time of distribution. It is the individual’s responsibility to report this on Form 1040 for the year distributed. See IRC 72 for additional guidance on basis. 

Thanks in advance.

Hypothetical planning scenario:  SEP IRA, Simple IRA, and a potential 401(k) plan…?  Lions, tigers, and bears… Oh, my!

A financial advisor who I work with quite a bit called looking for some help.  He indicated that his clients [Drs. Husband & Wife] are trying to maximize their pre-tax retirement savings due to the fact that their combined income is in excess of $1M annually.  The advisor has asked for some informal input.  I disclaimed this one is beyond my scope.  Since he understands not to rely on hypothetical musings, he is still grateful for any input.  We’re trying to jump-start our brains to think this through.  As such, crowd-sourcing this could help us think outside the box.  J  Here are the facts, as we know them:

Husband

• Physician – ER

• Paid as 1099 independent contractor (no employees)

• SEP IRA in place, currently registered under Husabnd’s name (Sole Prop) and maxed to IRS limit annually.

Wife

• Physician - General Surgery

• Owns practice (and has employees)

• Receives W-2 compensation from the practice (so, I am assuming tax entity is a form of corporation or files as one.)

• SIMPLE IRA in place for her & her employees with a 3% elective match.

LLC

• Financial advisor recently became aware that his clients established an LLC (no other employees, likely only the husband & wife);

• The clients’ tax advisor (an EA, not CPA – not that it matters, just more info) is suggesting the husband continues to fund his SEP IRA, BUT through this LLC.  (FYI: Per financial advisor, Husband’s SEP is currently registered under Husband’s name as a Sole Prop.) 

• Further, EA is suggesting Husband pays Wife a salary through the LLC so she may also fund SEP IRA contributions to herself… Again, her practice currently maintains a SIMPLE IRA for the benefit of her employees and herself with a 3% elective match.  This was the EA’s suggestion - NOT currently in practice. >> The advisor is concerned about the EA’s suggestion to do this.  He understands that any comp paid to Husband and/or Wife by LLC is a result of actual services performed for the LLC.  The advisor is committed to making sure everything is on the up and up here.

If the LLC were to sponsor a 401(k) plan (and we assume the LLC will have bona fide earnings/comp to Drs. Husband & Wife), then per this IRS FAQ about SEP plans, I believe Husband might be able to continue his SEP for self-employment income and also contribute as an employee to a 401(k).  However, I believe Wife cannot contribute to her SIMPLE IRA and to a 401(k) in the same year if the two plans’ sponsors are under common control, correct?  Regardless, I am sure there is a whole host of potential nondiscrimination concerns to navigate RE: shared ownership w/ the LLC and her practice.

The big question:  What are the optimal circumstances for his clients in order for both Husband & Wife to save the most advantageous IRS maximum permitted each year?  For this hypothetical, let us assume the clients are willing to make any necessary changes to meet the optimum. 

Plan Document says compensation used only when a participant.  For a calendar year plan, the participant enters plan on 7/1.  They are 3% non-elective safe harbor and profit sharing.  Do you use compensation from 7/1 to 12/31 for both sources to determine contribution? Thank you.

IRA owner dies at age 64, beneficiary is his older brother, age 69-70; brother dies at age 73 (presume he was taking RMDs), his beneficiary is his wife, age 67.  Does she treat the IRA the same as if it had originally belonged to her late husband or are there special rules because she is the second beneficiary of the same IRA?  What are her options?

Thanks!

Good morning, 

My wife has large percentage of her portfolio in her company/employer stock and we are trying to re-balance the portfolio. We are planning to sell a portion of company stock and transfer the cash to existing self-directed brokerage account within 401(k) and account is with Fidelity. 

The company’s share price is increasing, excellent management, and is a growth stock.  My question is, does 401(k) plans allow “Equity collars?” An equity collar consists of the simultaneous purchase of a "put option" and the writing of a "call option."

Most of the 401(k) administrators don’t know the nuts and bolts of finances. What is the best way to ask the administrator about “Equity Collars?” Could we transfer the shares to 401(k) self-directed brokerage account and use equity collar?

My wife doesn’t want to send a wrong signal to her employer by selling a large portion of company stock. Any suggestions and comments will be appreciated.  Thanks, Dabu.

if a business is an s-corp and the owner has 2% shareholder health insurance, is this part of their compensation that can be used for calculation purposes?  I don't think so since not subject to SS or Medicare?

Parties divorced and QDRO, prepared, qualified and signed by court. Sent to pension administrator. When distribution is made to Participant, nothing was sent to AP.

Who is wrong?

Company A and Company D are an Affiliated Service Group

Company B and Company D are an Affiliated Service Group

There is no common ownership between Company A and Company B

I understand Company D is included in the testing for Company A and also for Company B. Here is my question, does Company A and Company B need to be tested together? Does the ASG between D and these to entities require them to be tested together?

Is there an  issue if  eligibility/benefits under A and B are different?

If I read one more thing about ASGs I think I will scream. Having a root canal is better than figuring out ASG rules!!!

I am the CPA for a group of Doctor's who have a Cross Tested 401(k) & Profit Sharing Plan. In reviewing the Plan valuation report / Form 5500, I am not 100% sure that the TPA is doing this right, based on my limited understanding.

3 Doctors, all are HCE with income in excess of $275,000

6 NHCEs (Ages anywhere from 20-70, but most younger)

All eligible employees are participating, and the doctor's are contributing the $18,500 plus catch up.

Everyone gets a basic Safe Harbor match - 100% up to first 3% of wages, 50% of the next 2% - for a 4% Safe Harbor Match.

The HCE are getting a profit sharing contribution of $25,500 (9.27%) to get them to the max total contribution of $61,000.00

The NHCE simply get an across the board 3.09% (1/3 of 9.27%) profit sharing contribution.

Is this how the Gateway Allocation test is supposed to work?

My information seems to suggest that the Safe Harbor match goes in to the Gateway Allocation %....so if the HCE's are getting 4.00% + 9.27% = 13.27%, than the NHCE should only get a total of 4.42%.

I have a client who terminated their existing plan and transferred to a PEO.  A final 5500 Form was completed with a short plan year from 1/1/2018 to 6/11/2018 (I'm assuming this is the date all assets were transferred to the PEO plan with the plan number as 001). 

The client now wants to move out of the PEO and start a new plan sponsored by his company (same EIN as the prior plan) under plan number 002.  Since the last distribution date of the  terminated plan of the Plan Sponsor is less than 12 months, is there a successor plan issue, if the effective date of the new plan is 1/1/2019?

FYI - This is not a safe harbor plan.

If this is a successor plan issue, is the resolution to have a short plan from 7/1/2019 to 12/31/2019?

Thank you for any input.