Kattdogg12

Hi, we have a client with a Simple plan that is considering replacing with a safe harbor 401(k) plan. We *think* that's not possible for 2025, because we would've needed to terminate and replace by 10/1 - and it's too late for a 30 day notice. Are we thinking correctly? Alternate option we were thinking is to open a profit sharing only for 2025. We are getting conflicting information on whether you can have a PS only at the same time as the simple. We searched online and came up with this, but aren't sure of the accuracy: Yes — allowed, but operationally awkward. Carefully decide whether to (A) keep the SIMPLE and add a separate profit‑sharing plan (two plans to administer) or (B) terminate the SIMPLE mid‑year and adopt a consolidated 401(k)+profit‑sharing plan (requires 30‑day SIMPLE termination notice and adherence to SECURE 2.0/IRS Notice 2024‑02 procedures). thanks!

We are running a projection for a plan with permitted disparity and trying to max out the owners. Is it possible to max out two owners if one maxes out before the other? One's deferrals are less than the other, so they can receive a larger profit sharing. HCE #1 $350,000 comp $23,500 Roth $21,000 6% SH Match - if we give $25,500 PS - this is 7.29% HCE #2 $350,000 comp $18,500 Roth $18,500 6% SH Match - if we give $33,000 PS - this is 9.43% I ran this through chat(k) and the response was below: By sizing profit-sharing so that HCE #1 reaches $70,000, you establish a uniform 7.2857% profit-sharing rate. Participant #2 therefore also receives $25,500 of profit-sharing, bringing his total contributions to $62,500. He cannot reach the $70,000 cap under the same allocation formula. Under a four-step permitted-disparity profit-sharing formula, both owners’ allocations derive from one uniform banded schedule. Once we max out #1 at 7.29%, is that what HCE #2 must receive? There are also two NHCEs - so this also affects what they get - if we can give #2 up to $70,000, then I assume their % is based off the higher number.

I have an email that I saved from Charles Lockwood (RIP) from 2013 where I asked a silver support question about waiving for a participant by name due to being let in early. His reponse: "There is no limit on the ability to retroactively amend the plan to waive the eligibility requirements based on the intent on the ER. As long as the EE is an NHCE, you can amend the plan to waive participation for the specific individual, regardless if the ER intentionally allowed the EE into the plan". I always took his word as gospel to be honest.

Hi Lou! Yes, it is top heavy, but everyone is deferring, so receiving a safe harbor match that covers that. I reread my post and I guess I wasn't entirely clear - sorry about that. The example I gave above is what was calculated. I think the owner should only be receiving $5,313, which is 1.54% of $345,000. They gave the owner $8,548, which is 1.54% of comp + excess comp. I think if they don't give at least 3% in that first step, then they don't get to bring in the excess comp yet. Am I wrong thinking that?

Hi, I am reviewing a profit sharing allocation and I have a question with regard to the four step SSI formula. This allocation is not enough to go beyond step 1. I feel it should just be pro-rata based on compensation, which is step 1 (3% of comp). But the person who performed the calculation gave the owner pro-rata x comp + excess comp. Ex: comp 345,000 x 2.48% = 8,548 (excess comp is 210,119 (168,600 x .80 = 134,880 next dollar, then 345,000-134,881 = 210,119), so 345,000 + 210,119 = 555,119 x 1.54% = 8,548) EEs: 27,000 x 1.54% = 415.80 etc I have an excerpt from the ERISA outline book but it only covers when you don't go past step 2 or 3, not 1. But the example they give with not going past step 3 is you do pro-rata based on the comp for that step (which is comp + excess comp). Step 1 is just comp. Thanks!

I cannot believe this - but I have TWO more clients that have had this happen. One informed their payroll company and asked for the W-2 to be corrected and they told her it was too late. So I sent the link to the IRS website for the second option to correct for 2025. I just have a couple of questions operationally: I assume I count the deferrals as Roth as they were intended to be although the 2024 W-2 shows as pretax (this throws off my balancing to the W-2s, which drives my OCD crazy). When the payroll company adds to the 2025 W-2, I assume it's only added to Box 1 because it's already in Box 3 and 5 for 2024, correct? Otherwise, they would be paying SS and Medicare twice. This will throw my numbers off for 2025, so I guess I just have to make notes that Box 1 will be overstated by the Roth amount. Any suggestions? Thanks!

Thanks Artie, I guess the IRA custodian is requiring all of it to be returned, but you are right the Roth should have been the only portion that would have to be returned. And I agree with the Roth not being factored in but because it's all in a traditional IRA, to the custodian it's all pretax (we know how hard it is to work with IRA custodians to correct issues). I did misspeak above - the 401(k) did not have a 12/31/2024 balance because all of it was rolled to the IRA during 2024!

We have a terminated plan that had a rollover go from the 401(k) to a traditional IRA. Some of this money was pretax, some was Roth. The FA (who did this incorrectly) was told she had to roll the entire balance back to the plan, open a Roth IRA and try again. The brokerage firm is stating that now that the participant is age 73, she must take her RMD first. One issue is that they are using all $$ to determine even though some is Roth because frankly, to them it is. My question is does the participant need to take an RMD from the 401(k) as well before it's rolled back out to the correct IRA(s)? The original occurred in 2024 so both accounts have 12/31/2024 balances. Thanks!

Hi, I am working on a profit sharing projection for a safe harbor match plan with prevailing wage (ugh). The eligibility for sources other than PW is 21/1 YOS/semi-annual. There are 4 employees receiving PW - one is HCE (another ugh) and one never met YOS. I was able to disaggregate those not meeting the YOS so the OEE that has PW doesn't need to receive the gateway. The employer gave specific $ amount for several participants and I backed into the HCE $$ by giving them 3x so it passes gateway. Not all NHCEs (6 don't) receive a PS - it's SH Match and this passes. My question is related to the those in the main test - if the document states that PW offset PS, SHM and Match - I am struggling to get ASC to run how I think it should be run. If I click on PW to include in gateway, then it uses PW eligibility and includes ALL employees and is saying it fails gateway because those 6 participants are not receiving a PS. My understanding (and I could very well be wrong), I thought PW would offset PS and would be counted in ABPT but NOT in ABT. The lowest NHCE was 2.65%, so I gave HCES 7.95%. However, the HCE that has PW only shows .21% on the gateway test because most of his ER is coming from PW - the rest is PW. I messaged ASC to see if there is a work around but figured I'd check with you gurus as well.

Hi, Our client contacted us to let us know that a participant completed a deferral election form November 2023 and they've been making deposits into her brokerage account. However, the deductions were never set up with payroll. She just noticed a year later. The client spoke with their payroll company and their labor lawyer and both said as long as they don't tell her it's required, she can sign something and can have deductions for the next 3 payrolls to make up for it. The payroll person even mentioned her writing the company a check (I explained that the money shouldn't be from her, if would need to come from her SDBA if she were to pay it back). I explained to her they have two issues going on: 1. failure to implement and because of that 2. excess deposits. I calculated a QNEC, g/l and the full safe harbor match and then figured out the difference between that and what was deposited. I guess I'm just looking for guidance because even with the deposits being made erroneously, I feel like this is still a MDO that needs to be corrected.

Hi Paul, Question- we have an EZ filer that came to us for assistance - their prior TPA did not let them know about the IRS program, so they just filed their form late. Then received the CP283. Based on the instructions, once you receive that, there's no hope. What do you think the chances are of them filing anyway and paying the $500 fee?

The instructions are a little confusing, but they kind of do say not to report: For line 8e, also include in the total amount a participant loan included in line 7a, column (a) that has been deemed distributed during the plan year under the provisions of Code section 72(p) and Treasury Regulations section 1.72(p)-1 only if both of the following circumstances apply: 1. Under the plan, the participant loan is treated as a directed investment solely of the participant’s individual account; and 2. As of the end of the plan year, the participant is not continuing repayment under the loan. If either of these circumstances does not apply, a deemed distribution of a participant loan should not be included in the total on line 8e. Instead, the current value of the participant loan (including interest accruing thereon after the deemed distribution) should be included on lines 7a, column (b) (plan assets – end of year), and 10g (participant loans – end of year), without regard to the occurrence of a deemed distribution. Note. The amount to be reported on line 8e must be reduced if, during the plan year, a participant resumes repayment under a participant loan reported as a deemed distribution on line 2g of Schedule H or Schedule I of a prior Form 5500 or line 8e of a prior Form 5500-SF for any earlier year. The amount of the required reduction is the amount of the participant loan that was reported as a deemed distribution on such line for any earlier year. If entering a negative number, enter a minus sign (“–”) to the left of the number. The current value of the participant loan must then be included on line 7a, column (b) (plan assets – end of year). Although certain participant loans deemed distributed are to be reported on line 8e, and are not to be reported on the Form 5500-SF or on the Schedule H or Schedule I of the Form 5500 as an asset thereafter (unless the participant resumes repayment under the loan in a later year), they are still considered outstanding loans and are not treated as actual distributions for certain purposes It says if either DO NOT apply (underlined above), then you add with 10g. Most likely, both DO apply (that's why we are here because the participant is not paying on the loan), so you would show as a deemed distribution on 8e, and not include on 10g. Also, if you have Empower clients, on their annual admin report, they break it out and it shows like this: The 5500 entries ties to the Active Loans column. Hope this helps.

there was another discussion on this about a year ago and the match can be made so that it is subject to a vesting schedule.

Both answers are No because it has been taxed, so no longer reported on the 5500 (unless it starts to get repaid). But you keep track of them separately on your financials. So, for our val reports, we have two asset/income statements, one that ties to our participant statements, one that ties to the 5500. I couldn't find something more current, but this explains a little:

Thanks for clarifying! I guess I misinterpreted the IRS correction. As you said, no transfers need to occur, since the employer did deposit the $$ to the Roth as the participants requested. Thanks for your help!

Thanks for your insight, Paul. The employer is not able to amend the W-2s - the payroll company they used wouldn't allow them to, so option 1 of the IRS corrections is not available. The second method (underlined below) - Since the deposits were actually made into the Roth source in 2022 and 2023, the only way I can see to include this in their income in the year it was transferred (2022 and 2023) would be to issue Form 1099-Rs (since the payroll company will not amend the W-2s). That still leads back to the participants forced to amend their taxes for 2022 and 2023. The employer includes the amount transferred from the pre-tax to the Roth account in Marcie’s compensation in the year it’s transferred (2014). If the employer elects, it may compensate Marcie for the additional amount she owes in income tax in 2014. This must be included in Marcie’s 2014 income.

Thank you! I think this a great idea. The payroll company I client used said it was too late to amend the W-2s for 2022 when this first came up in April 2023. So, it kind of got left...then of course I'm working on 2023 and I realize it continued and 2022 was still left uncorrected.

This issue started in 2022 (before my time at my company and is still lingering through 2023) and I just wanted to get some opinions on how to correct: Employer deducted several participants Roth as pretax (2022 W-2s reported as pretax) but deposited as Roth with recordkeeper. We discovered while working on 2022. On annual admin report, we reported as all Roth (tying to RK, but differing from W-2s). We gave them these options to correct 2022: · Employees can choose to maintain their Roth election. The employer has two options to report the mistake: o Issue corrected W-2s and the amount will be considered taxable to the employees for year 2022. o Include the amount that was incorrectly designated as a Pre-Tax deferral in each employee’s compensation in year 2023. Given it was an employer mistake, you may elect as the employer to compensate these employees for the additional amount owed in income tax (treated as current year income). This would be a complicated process, requiring an estimate of how much each employee would owe in taxes. You would need to reach out to your accountant for this. They have not amended the W-2s and do not intend to at this point, nor have they made up the taxable amount. This lingered into 2023, so they first few payrolls were also incorrect. The employer does not intend to amend the 2023 W-2s either and had indicated to use what was reported on the W-2s and make adjustments at the RK to match the W-2s (i.e. move money between sources). When we sent a correction to the RK to make these adjustments, they indicated since 2022 was not done this way, they didn't think 2023 should be either. We aren't sure how to handle - the IRS would surely be upset they are missing out on the taxes and the DOL would surely be upset the deferral elections were not processed correctly. Any insights on how you would handle?

sorry this is super late, but i think you can stop SHNEC as long as you have the language in your notice. It doesn't have to be for an economic loss. This is what ours says: Notwithstanding any language in this Notice to the contrary, we reserve the right to amend the Plan at any time during the Plan Year to reduce or suspend the safe harbor contribution. If we decide to reduce or suspend the safe harbor contribution, we will provide you with a supplemental notice at least 30 days prior to the effective date of such reduction or suspension describing the consequences of the amendment. Any amendment to reduce or suspend safe harbor contributions will not affect any contributions earned prior to the effective date of such amendment. Below is from Lord Abbett: Employer must have included in their safe harbor notice, which is required to be delivered annually to plan participants, a statement that the plan may be amended in the upcoming year to suspend or reduce safe harbor contributions and that the suspension or reduction will not apply until at least 30 days after all eligible employees receive an additional notice of the suspension or reduction. If this statement is included, the safe harbor contribution may be reduced or suspended for any reason.

ahhh I didn't catch that. For some reason when I searched component and 401(a)(4) testing, this thread came up. Thanks for your knowledge! I appreciate it. I started to question everything I ever learned. haha

Hi John, sorry for bringing this up several weeks later as I was just researching this subject for a plan of mine. I used component testing and ASC required the gateway to those in component 2 (run on contributions basis). It's a top heavy plan, so I figured I could just give those in C2 3% but the testing showed it failed gateway. While I was researching, I saw the below post from 2013 and you commented that those being tested on contributions basis DID need to get the gateway. There was also a post from 2012 where both you and Tome Poje both quoted from the regs: "In addition, the minimum allocation gateway of §1.401(a)(4)-8(b)(1)(vi) and the minimum aggregate allocation gateway of paragraph (b)(2)(v)(D) of this section cannot be satisfied on the basis of component plans." Am I missing something? Thanks!

3 software developers worked 10 years as independent contractors for “Business Software Company” that was 100% owned by “Investment company”. There were no Employees of Business Software company or “Investment company”. In 2022 the 3 developers, as a new partnership “Partnership” purchased 75% ownership of Business Software Company, each partner now owns 25% and the remaining 25% still owned by Investment Company. The Software company appears to be unrelated to Investment Company. The 3 independent contractors may/may not have had individual 401(k) Plan (we were told one possibly has one). One of the partners of the new partnership came to us looking to start a new plan. Should we be concerned about the successor plan rule? Thanks in advance!