David D

@truphao Same here. We often are forced to set up a new PS just to accommodate what the client desires for the current year (which is almost always after the year end). We typically then merge the new plan we created into the existing one in the following year. The client then pays administrative fees for 3 plans for 2 years, but the benefit of the combined plan testing results outweigh the cost, especially when running the disaggregated testing if the existing plan has earlier entry dates than we prefer for the CB plan.

@Peter Gulia I imagine it runs from one extreme to another with what a TPA tells their client on the plan(s) they have designed. For me I am mostly working with DB/DC combo's and I have found it is best to explain to the client as much as possible how the Cash Balance plan works - who gets a meaningful benefit, who gets a flat dollar amount or percentage, who gets nothing, etc.. Of course, if I ever take what I feel is an aggressive position on something I do bring that to their attention and give them the choice on which way they want to go, but not sure what others do.

@John Feldt ERPA CPC QPA I definitely see more of the adoption of a PS only plan in the last few years as many more employers have 401k plans than they did back when I first encountered this. So it seems the position you are taking is that while you are granting service for vesting based on the predecessor plan rules, you can use a different vesting schedule in the new plan to count that service towards. I have not seen this approach personally. As I said, I didn't realize I and others were taking the conservative approach.

@John Feldt ERPA CPC QPA@truphao My apologies, I never saw notifications that either of you had replied to me. This issue first came up for me more than 15 years ago when I was working with a firm that would often get CB plan referrals from an ERISA counsel firm that was hired to “correct” many DC plans that had been administered by a “bundled” provider. From what I remember their opinion was that if essentially the only change from the existing plan to the new plan was the allocation method, then it in effect was an “amendment” to the “Plan” and that the vested percentages were protected until IRC 411(a)(10). Obviously, any new participants going forward could have the new vesting schedule, but those already vested in the existing plan would be grandfathered. I have not worked for that firm since 2017, but the 3 actuarial firms I currently work with have taken the same position. In reading the comments now it seems that this is a very conservative position and perhaps not the norm in the business? For me I think I will continue in the approach I have been accustomed to so that in the event of audit, I don’t have to defend the vesting position. It was also their opinion that a new plan of a different type does not need to protect vested percentages as the new plan type does not have anybody previously vested in that plan type.

Keep in mind the law as it was written says FICA wages, and self employed individuals will not have FICA wages, so they are not subject to the mandatory ROTH catch up.

Most docs I have seen reference the predecessor plan rule and the 5 years before and after the adoption of the second plan.

John, I don't believe that you can start a new DC plan when you have an existing DC plan and not mirror the vesting in the existing plan. You can obviously add a DB plan with service for vesting excluded prior to the start of that plan, but not two like plans. IRS or DOL would not be ok with the participant being 100% vested if we made the contribution to this PS plan, so we made it to this other plan we adopted and 0% vested the participant.

@KaJay@Artie M Good morning! I thought about this some more. On a PLAN LEVEL, I believe the 415 limit is $12,633 so on a plan level no issue. On a PERSONAL level, I agree with the tax professional, you can't have a deferral in excess of your income for determining your deferral.

@Artie M Thanks for the additional research. I am still wondering though if the $10,000 excess that can exceed the 415 limit now would mean $10,000 plus the regular 415 limit of$2,633 for a total allowable amount of $12,633. Then the amounts contributed would be below that.

@KaJay Sorry, I missed that on your update. @Artie M Has been years for me as well. I don't believe it is ever a 402g failure, but a 415 failure. As to whether the special $10,000 can be a combination of EE deferral and ER contributions I do not know. If it can, then there is no 415 violation. If it cannot, then the excess 415 limit is the roth deferral over $2,633 as the tax person suggested. I believe 415 limit excess must be refunded by the December 31 following the plan year, so you would have until December 31, 2025.

@KaJay Thanks for the clarification. So it sounds like the tax professional has determined this individual is an an employee and not a self employed individual. Again, for 415 purposes the plan limit is 100% of plan compensation. If there was no other income other than the housing allowance, this is a 415 violation of 100% of compensation. IRC Section 402(g) limits the amount of retirement plan elective deferrals you may exclude from taxable income in your taxable year, which is generally the calendar year. Your 402(g) limit for 2024 is $23,000 (2023 is $22,500; 2022 is $20,500; etc.). If the only compensation for plan purposes is zero, then there is no compensation to defer any money into roth or pre tax Since they are allowing up to an additional $10,000 in EMPLOYER contributions, the employer contribution can stay, but the entire deferral and earnings are disallowed. This remains roth as you cannot change roth contributions to pre-tax contributions after the fact. It's been a while since I encountered this, but I think the $10,000 amount you are referring to is a lifetime limit, not a per plan year limit.

My first question would be were not the Roth Deferrals withheld from the wages? How would they withhold more than wages paid? Secondly, IF those deferrals exceeded 100% of compensation, then it would be a 415 violation, not a 402g unless the person had large deferrals elsewhere in 2024.

FWIW, I have heard some actuaries argue that if you are bringing someone in early that has not met the age/service requirements for 401a26 purposes, you need to expand the number in your 401a26 count to include those similarly situated ees you are not bringing in. Also, if top heavy you would want to bring them into both plans unless you want to give the TH Minimum in the DB, which is probably not want you would want to do.

Doesn't the SEP say everyone gets the same percentage of compensation?