I am brooding over the interaction between the exemption from top heavy for safe harbor plans and a mid-year suspension of safe harbor contributions.   I am thinking about three issues.  For all three issues below, assume the plan would be top heavy but for the safe harbor exemption.  

Issue 1. 

The first is an old issue, but in re-reading Revenue Ruling 2004-13, I am having doubts now about Situation 4 in that ruling. 

Under Situation 4, the sponsor has a safe harbor match, but employees who at hire are eligible to make elective contributions have a 1 year of service requirement for the safe harbor match.

The IRS responds as follows: 

In Situation 4, under the plan, newly hired nonhighly compensated employees who make elective contributions will not be eligible to receive any matching contributions until they have completed 1 year of service. Since this will result in a greater rate of matching contributions for highly compensated employees than for nonhighly compensated employees, the matching contributions do not satisfy the requirements of § 401(k)(12) (or  § 401(m)(11)). Further, since all eligible nonhighly compensated employees under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the requirements of § 401(k)(12). However, certain plans that provide for early participation may satisfy the requirements of § 401(k)(12) with respect to the portion of the plan that covers employees who have completed the minimum age and service requirements of § 410(a)(1), while satisfying the ADP test of § 401(k)(3)(A)(ii) for the eligible employees who have not completed the minimum age and service requirements. Unless a plan (within the meaning of § 414(l)) meets the requirements of § 416(g)(4)(H), no portion of the plan will satisfy § 416(g)(4)(H). (See Notice 2000-3, 2000-1 C.B. 413, Q&A-10.)

I added the bold. 

Is this saying everyone in the plan has to receive the top heavy contribution (minus any match), or just the otherwise excludible employees?  I thought for both 414(l) and top heavy purposes, the otherwise excludible employees were treated as one plan with the other participants.  But I also thought you only had to give the top heavy in this situation to otherwise excludible employees.  This is what has created my doubt.

Issue 2.  

What happens if the employer only makes safe harbor contributions during a year, but in the middle of that year suspends the SH contribution?  Up until the date of the suspension, the only contributions that were made were safe harbor contributions.  After the suspension, the plan is required to fall back on the ADP/ACP test.  Is it reasonable to take the position that the plan only received SH contributions for the year, and thus under 2004-13 the plan is still exempt from top heavy?  

I think the answer is no.  I think once the plan is amended mid-year to suspend the SH contribution, the contributions that were previously made are no longer considered SH contributions for purposes of the safe harbor exemption from top heavy status.  I could see, however, that one could argue that during the year the plan only received safe harbor contributions, and nothing else, and thus under 2004-13 the safe harbor exemption still applies.  I could also see an argument that the top heavy contribution is only required for compensation paid for the portion of the year the plan is no longer safe harbor.  Nonetheless, I think the best answer is that once the plan is amended mid-year to suspend the safe harbor, the plan is top heavy for the entire year.  

Issue 3.

We know that a plan that does not give the SH contribution to HCEs nonetheless qualifies as a SH plan (provided all other requirements are met).  In an ASPPA Q&A, the IRS said the HCEs who do not receive the safe harbor and who are not key employees are not eligible for the top heavy contribution.

What if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs?  Would the analysis here be different from the analysis in Issue 2?  

I think the answer here is yes, meaning the plan remains a safe harbor plan for purposes of the top heavy exemption even if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs.  If the plan can give the HCEs nothing for the entire year and still be safe harbor, it should be able to give the HCEs a safe harbor contribution for part of the year and still be safe harbor.  

I have a potential client what's to start a 401k plan. He is open to giving the employees the Safe Harbor 3% (discretionary) but is not sure he will be able to/want do it each year. He plans to only give SH 3% when he decides to participate since the plan will be Top-Heavy. The company is a partnership so I suggested he not contribute anything (including 401k) until after year end when he knows the income of the partnership. The obvious issue is he needs to decide if he will participate, thereby electing safe harbor for the year on Dec. 1, but really won't know his final income until March or so. He was adamant that he really wont be able to decide until after year end.

Is it possible to have a plan year from 5/1/18 - 4/30/19 (giving him until 4/1/19 to elect safe harbor), with a limitation year of 1/1/18 - 12/31/18. This way the employees will still be based on W-2 and not some 2018 wages and some 2019 wages. I'm also not sure how deductions would work. Would he have to Pro-rate his deduction 5/12 and 7/12?

Are there other solutions that I'm not thinking of?

In preparing a health and welfare Form 5500, I only include a Stop Loss Schedule A if the plan is under a trust since the stop loss benefit supports the Plan. For a Plan not under a trust I do not include a Schedule A since Stop loss is an employer benefit, not an employee benefit.

However, would a Stop Loss Schedule A be included in a 5500 that is not under a Trust, with the funding from employee contributions.  The Stop loss benefit is included in the Plan Sponsor's Wrap Plan Document and SPD. I have never heard of this scenario in the past. I am inclined to include in the Form 5500; however I am not confident.

Thank you for your help!

Had a first time request today - an intended future client of a one-time compliance project has asked if we can accept a Purchase Order from them in lieu of our signed service agreement. Not even sure how to react...

If an employer fails to deposit a top heavy minimum contribution for a prior year, should form 5330 be filed and an excise tax paid.  If so, it appears it would be shown as a prohibited transaction similar to late deposit of employee deferrals rather than a late required employer contribution under minimum funding standards.

A client maintains an employee stock option plan which reads in relevant part as follows: 

Regular Termination.  If an Optionee ceases to be employed by the Corporation, or by a corporation (or a parent or subsidiary of any such corporation) issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies, for any reason other than death, disability or termination of his employment by the Corporation other than for Cause, his option shall immediately terminate; provided, however, that the Committee may, in its discretion, allow such option to be exercised (to the extent otherwise exercisable on the date of termination of employment) at any time within three months after the date of termination of employment, unless the option terminates by its original terms (or the Plan otherwise provides for earlier termination) prior to such exercise. 

NOTE: the error above.  It should read "other than death, disability or termination for Cause" (not "other than for Cause").  Essentially the language excepts regular termination, but is meant to address regular termination so it doesn't say what happens on regular termination.

Company wants to amend the plan to correct this typo but afraid employee will take position his option doesn't terminate and doesn't have to exercise within 3 months.  Agreement with employee says option is a non-statutory stock option, not an ISO so presumably even if Company allows him to exercise, he may not want to for he would have to pay tax on the spread.

Suggestions on how to handle? Can the company allow this employee to hold on to his options post-termination?  Per terms of the Plan, option terminates upon the earlier of 10 yrs from grant date or the last date for exercising the option following termination of employment (presumably not addressed by the paragraph above due to the typo).  

I'm pretty new on here. It's a great resource, but I do have a question.  Does everyone work alone?  I work for a TPA and we ask our manager or other plan administrators when we have a question. It seems like no one else does that from all the questions I see.

Employer fell on hard times and suspended their match but informally promised participants that when their financial situation improved they would make up the missed matching contributions.

Employer is now ready to make up the missed matching contributions and several participants are no longer employed.

Is there a 415 problem with making contributions for participants who have no current compensation so long as the employer designates the contributions as relating to prior years when compensation would fully support the contributions?

This is a tax exempt employer so there's no 404 deduction issue.

With the DB prototypes finally getting approval letters - what dates should be used for effective date of restatement? 

2 scenarios -  1) Employee Doctor who is an officer of the medical practice in which he works wants to use IRA funds to purchase closely held REIT (owned by other doctors in the practice.  Practice would rent office space from the REIT.

2) is a 2% owner of the medical practice wants to do the same as the non-owner.  

Are these Prohibited Transactions? 

I think they are conflict of interest PT's as they clearly benefit from the transactions as officer and owner of the medical practice. I do not believe the practice is a disqualified person under 4975.  

A non-publicly traded company that is owned 30% by the ESOP and 70% by the founder is being sold. According to the Plan, Participants are entitled to direct the Trustee to vote their share of company stock in the case of a sale of substantially all assets of the business, so it would seem that the sale must be disclosed sooner rather than later.  What does that disclosure consist of? At this stage, we are reluctant to provide more detail than we need to. 

A plan sponsor starts a plan and makes contributions which turn out to be non-deductible because they turn out to have no earned income.  This goes on for two years.

Year three and four, they have earned income and can deduct part of the contributions made.

IRS audit of personal and business returns results in denial of deduction for years one and two.  The letter arrives in year five. 

How do you determine the refunds, given that the non-deductible amounts have now earned substantial investment returns in the trust?  Do you attribute interest to the non-deductible funds?  How and where would that interest be reflected?

a. One theory is that the funds were invested in a trust that was not tax exempt during the first two years, so the trust should file taxes for that period only.

b. Another theory is that the trust was tax exempt in intent and did hold tax-deferred assets.  So the non-deductible contributions are the only amounts refunded.

c. Another theory is that the refund includes income attributed to the non-deductible portion and should be refunded as well, and treated as taxable investment return.

Since the IRS denial of deduction letter does not instruct how this is to be treated, I look for opinions and precedents.

How do you advise clients to design their CB formula when they don't know their earnings until after year end?  I am looking particularly at clients that are not corporations, such as partnerships and LLCs taxed as partnerships.  It is a problem because they need to adopt their plan or amend their formula by the end of the year, but they don't really know their earnings until after year end. 

I'm looking at an S-corp ESOP and a 401(k) - two separate plans, handled by two separate TPA's. The ESOP TPA is saying that there's a 415 violation, and refunds of "X" must be made.

I think it is partially true, but I want to make sure I'm not all wet. The allocations under the ESOP, for 415 purposes, are showing as (pick a number - say $800,000) but the repayment of principal and interest on the loan, which is the total contribution, is, say, $700,000. As I read 1.415(c)-1(f)(2), for 415 purposes only, the allocations under the ESOP should be based on the $700,000, not the $800,000. This would reduce, but not eliminate, the 415 violations.

As an aside, share prices are higher than before, so can't use the special exception for using devalued shares.

Am I missing anything on this?

Consideration of a payout by May 31, 18 or delay until June.

Looking for the April 2018 published rates for 417(e), to see if there is interest rate arbitrage issues.

Does anyone know the published April 2018 rates?

For a S Corp owner making $300k per year, what is his best option in saving money for himself and getting a tax advantage?  Is it a qualified plan that involves profit sharing or can there be a NQ plan that gets funded thru a bonus he gives himself?  I am looking for answers that include examples using numbers.

This subject always gives me fits. Suppose a plan is utilizing a basic safe harbor match, and in addition wants to provide a discretionary 100%  match on deferrals in excess of 5% up to no more than 8%. So 8% deferral gets you a 7% match.

Since deferrals in excess of 6% are being matched, it blows the ACP safe harbor. But do you have to test the ENTIRE match for ACP, or just the match in excess of 4%? I've heard and read different opinions, and it seems that 1.401(m)-2(a)(5)(iv) allows you to choose? The subject ain't as clear as I would like. Would be interested in any opinions. Thanks. (P.S. - this is actually a 403(b) plan, but I put this question in the 401(k) forum, since this is where it always seems to come up)

When I do a search, it comes up with a bunch of results. So I click on one of those results, and read it. When I'm done, how do I get back to the search results? When I hit the "back" button it takes me all the way back to the Forum, and I have to re-enter the search parameter. I'm sure there is a simpler way! Thanks.

I need some ideas...

Have a lawyer practice 401k plan that is starting to have retirees.  I think the ownership group would like to NOT give the safe harbor and profit sharing to the retirees.  It sounds like the retirees will be doing some work, just not a lot of work and will be paid via the Employer in normal fashion.  I suggested maybe considering the retirees as 1099 employees. But, ER is not sure.

I am just starting the brain storm stage.

Any ideas? 

Can the plan exclude the retirees the plan year after "retiring"?  I hate to use the word termination, because they are not terminated, they just work way less now.

I don't think the plan could exclude by name... could be wrong.  I don't see where a class would work, but maybe....

Thanks

Can a 412e3 plan be terminated and the annuity contract distributed to the participant without giving that participant any other distribution option available under the plan?  The advisor is saying the contract has all the distribution options built into it and the participant can just take a distribution later.  This is a PBGC cover plan and will fill for termination with them.