RELUCTANT_LAWYER

Yes, the definition of "Key Employee" requires attribution under the Section 318 rules under which an individual is attributed the ownership of his/her parents in the same entity. The 1% owner with the mother who is the 98% owner is deemed to own 99% of the shares of the entity.

Just to be clear, the employer contributed an employee's 401(k) deferrals into the employer/ owner's personal IRA or the employee's IRA? If it's the former, wow...

Yes, the $17,000 should never have been placed in the qualified trust. It has a full taxable basis of $17,000 and returning it plus earnings to the personal account is not an income tax transaction by itself. The "earnings" on the $17,000 would be subject to the normal income tax rules and would be appropriately reported on the 1099-INT, etc...

I assume the $2,000 is the Schedule C tenative P/L prior to the $19,000 deferral, which is why the accountant is requiring her to distribute the funds. Assuming so, then the Excess Allocation would be $17,000 plus earnings/losses. Both the 415 and 402(g) limits would be $2,000. I don't understand why Fidelity states that the $17,000 plus earnings/losses is not taxable income for 2024.

I cannot emphasize enough the point made by Lou above--check with the actuaries as well. If this is PBGC covered, you may have other issues as well.

This is good advice. Let the client/PE tell you how they wish to be treated. OP is a TPA (I assume) and therefore, should follow directions of the "Plan Administrator."

Vesting has its own non-discrimination testing under 1.401(a)(4)-11. This is technically not a 1.401(a)4-4 BRF issue.

As pointed out above, but worth repeating, this appears to be a classic A-Org type of ASG with the partnership as the FSO and the PA's as the A-Orgs. If so, there are 4 separate ASGs with each A-Org being an ASG with the FSO. Coverage and non-discrimination testing will follow based on the 4 separate combinations of common control under 414.

QDROphile: Out of curiosity, have you seen cases where the MEP could not be characterized as an ammalgomation of separate underlying plans, and could not avail itself of Federal and (state law) exemptions for 33 Act registration?

If you think about it, the PE firm has hundreds, if not thousands of different operating companies. If each of those companies is part of a "controlled group" with the PE firm, then you can see how one controlled group could potentially have thousands of plans. So, the position taken by PE is that the relationship between the PE and the operating company is not one of a trade or business, and therefore, no 414 controlled group exists. Each operating company continues with its plan. When I have dealt with PE counsel, this is the position they normally take (at least in my practice experience).

KevinMc: If the two companies have the same five or fewer owners (which is likely the case) then this would be a "brother-sister" controlled group under Section 414 of the Code. The other company may (and should) adopt the current plan. Having a separate plan for the other company in the same controlled group complicates coverage and non-discrimination testing, and the hassle/cost of testing is generally not worth it.

Albany Consultant: The 401(k) plan is now an issue that the PE firm has to deal with. However, PE firms are notorious for their position that their is no Section 414 "controlled group" between the operating company (your client) and the Private Equity Entity because Private Equity is not really a "trade or business." That is, for retirement plan purposes, nothing should hcange with respect to the administration of your client's retirement plan (other than having a new boss).

Hi Khn: Corporate transaction agreements generally contain provisions dealing with the treatment of employee benefits plans. I would first look at the reps and warranties dealing with employee benefits in the transaction agreement to determine if the parties have already decided on what actions they wish to take with respect to the seller's 401(k) plan. In general, post-transaction, the employees of the seller are deemed to have "terminated" from the controlled group that sponsored the 401(k) plan. This results in a distribution event under the 401(k) plan. Those participants may receive their account balances in any form that is otherwise available to them under the plan, as if they had terminated employment. The important point here is that the parties cannot require the participant to roll over their account balance to the buyer's 401(k) plan. On the other hand, the parties could decide in the corporate transaction agreement to "spin-off" the account balances of those employees of the selling company that is to be acquired, and have those spun-off assets merged into the buying company's 401(k) plan. In such event, the participant's are not really given a choice--their account balances are now part of the buyer's 401(k) plan (i.e., no distribution event). Hope this helps.,