Bird

OK, so an accountant wants to set up a 401(k) for a client who already has contributed to a SIMPLE. I told him the same thing I've said here, that it's not that easy and I just wouldn't bother. But he's bound and determined (with good reason, there's a substantial deduction at stake). So here's the question - if someone (W-2 employee) has contributed, say, $5000 to the SIMPLE already, and wants to max on the 401(k), how do they do it? I think they should contribute another $17,500, and then report the $5000 as an excess deferral. (Interestingly, the payroll company is willing to recharacterize the $5000 as 401(k) contributions.) Then I think they go back to the SIMPLE custodian and request the money back as excess deferrals. Any thoughts?

Probably not. I don't think they can do much more than say "you should have an SMM" because it's not their jurisdiction. The SPD is just something they want to check off on their checklist anyway.

Well, I'm not quite sure why there would be a distinction for catch-up contributions if you are going to match them anyway (and you don't necessarily know what are catch-up when they go in* - sounds like a payroll company mentality), but I would say that any deferrals made before the match was suspended should be trued up (and it doesn't need an amendment). *In fact it's likely that they are misclassified - if someone elects to contribute $23,000 in 2013, spread throughout the year, 24% of each contribution is not catch-up. All are regular until the $17,500 limit is reached.

You don't have to. We probably would, though...everything goes into our system and then it's just pressing another button to spit out a statement.

I'm not sure about the answer ("maybe") but if you want to accomplish the same thing, just put everyone in their own group and have no allocation requirements. Then you can do whatever you want.

But they are discretionary. I'm having a hard time understanding how a document could say that contributions are made on a payroll basis and there is a true up; the two are mutually exclusive to me. I guess it means that they are deposited on a payroll basis and not calculated on a payroll basis. I would think the document should be clarified (amended) if the answers are not evident from reading it.

We only record them when paid.

I think the issue is more about partial termination and vesting. You're not going to get a definitive answer...I would do it. Why not include a 401(k) feature from the get-go?

I agree that the election must be in place by the end of the year. Editorial - seriously, someone doesn't know how much they want to contribute, in dollar terms, on Dec 31? I just tell my self-employed clients that they need to pick a dollar amount, not a percent, so that we don't have that variable hanging over us until 10/15. "I need to know my income before I decide how much to contribute" is not a valid reason to give self-employeds an advantage over everyone else when it comes to making 401(k) elections.

You do not deduct deferrals. You do deduct the 179 expenses, unreimbursed partnership expenses the partner paid individually and deducted from Schedule E, and 1/2 of the self-employment tax, and profit sharing contributions for employees (but this should already be factored in on the K-1...we often get "profits before any contributions" and have to provide this), and the profit sharing contribution for the partner(s). If each partner was at $409K, then you'd likely be well over $250K.

Are you saying that you could take pre-tax earnings on deferrals out because you'd theoretically be using the basis from another source? I don't think so...$1000 would be the limit, IMO. It's not like a loan.

Just invest on an after-tax basis in mutual funds or individual stocks. I'm in the business, but the benefits of 401(k)s are oversold, IMO. Remember that you are deferring taxation to a later date, ultimately at ordinary income tax rates. If you invest in stock funds or stocks directly, you won't get an up-front deduction, but some of the gains will be deferred, and eventually taxed at capital gains rates (generally lower than ordinary income rates - or 0% if held until death).

Sorry, I wasn't reading the cite all that carefully and had it mixed up with the rules for acquisitions. I was chasing my own red herring. But - I agree with you 100%.

I think that reg is meant for a situation where a company wants to keep an old plan and its population of participants that it acquires in a purchase transaction separate from its other plan(s). I just don't see a problem whatsoever and see the site as irrelevant.

Not without creating an enormous liability for additional PS for the remaining employees. I agree that it's not an excess by definition...but am curious about what you're planning to do with the money.

Maybe I'm missing something, but is(n't) 410(b)(6) a red herring? A and B aren't part of a controlled group are they? I'm not understanding the issue.

We prepare a balance sheet including the defaulted loans and show an adustment to reconcile it to the 5500.

I thought I responded to this last week but maybe forgot to "post." Anyway, I thought then that WH was not required, and still think so, but guess I need to prove it...here are (I think) the two key Q&As from the reg cited below, with my emphasis. The only problem I have with this is the underlined phrase "...property that is not includible in a designated distribution." "Not part of" I guess...it's separate so I think it's not "part" of it. Anyway, I believe this says WH is not required when everything except the annuity (or insurance) is rolled over. Sec. 35.3405-1T Questions and answers relating to withholding on pensions, annuities, and certain other deferred income (temporary regulations) a–4. Q. What is a commercial annuity for purposes of the new withholding rules? A. A commercial annuity is an annuity, endowment, or life insurance contract issued by an insurance company licensed to do business under the laws of any State. See, also, question f–21. f–2. Q. How is withholding accomplished if a payee receives only property other than employer securities? A. A payor or plan administrator must satisfy the obligation to withhold on distributions of property other than employer securities even if this requires selling all or part of the property and distributing the cash remaining after Federal income tax is withheld. However, the payor or plan administrator may instead permit the payee to remit to the payor or plan administrator sufficient cash to satisfy the withholding obligation. Additionally, if a distribution of property other than cash includes property that is not includible in a designated distribution, such as the distribution of U.S. Savings Bonds or an annuity contract, such property need not be sold or redeemed to meet any withholding obligation.

Settlor functions include establishing and terminating the plan, and they're supposed to be paid by the sponsor (not the plan). Administrative stuff can be paid by the plan. I'd consider any kind of ongoing admin/maintenance fee to be payable by the plan.

Yup. I think if it is fixed right away it's not a disaster...of course, I'm sure the client needed the money and can't pay it back, but Kevin's commentary above might help him find some way to pay it back.

Plus your own additional time researching, and the $100 (+) is a 100% probability, whereas the $800 is a tiny probability, at best. I'm saying pay it to the mother effectively as the executrix, not as the beneficiary. (It's not eligible for rollover since there is not a named beneficiary; she can waive the WH.) Suppose there's another estate beneficiary...we know that there were funeral expenses that are costs to the estate that would eat this money up, so nobody is netting anything out of it anyway. Ask me tomorrow and I might have another opinion, but today it seems silly to do otherwise. P.S. I don't like the plan language naming the estate as the default; it's basically not making a decision which in turn makes things harder when you wind up here.

If I had evidence that the mother was effectively the beneficiary of the estate I'd just pay her. What's the downside? Can't be much worse than...well, $800 that someone else might try to lay claim to.

I believe that is correct.

I've seen many investment companies doing 408(b)(2) annually; I think it is easier for them to just do it annually and thereby include any changes. But I agree; once is enough until the info changes.

I agree, but wonder how the income that the trust receives is passed through to the husband. If it is subject to payroll taxes, either as W-2 income or self-employment income, then the trust could be an adopting employer and I think it all makes sense. If not, then the trust could be an adopting employer, but the husband wouldn't have any plan income. (I also wonder if the payments to the grantor trust are subject to payroll taxes at that level...if so, then I think that perhaps the grantor trust is effectively a proxy for the husband and doesn't need to be an adopting employer; that is, the S corp is effectively the employer for both. I barely know enough about this to be dangerous but wonder if a grantor trust can even receive "wages"...)