John Feldt ERPA CPC QPA

Peter’s suggestion is sound. Amend the existing plan to exclude the owner. Provide the SMM to the employee. The employee only plan files 5500-SF and provides SAR. Start a new owner only plan for the owner written identically as the first plan, except it excludes all employees other than the owner. Same investment options. Files 5500EZ which is not publicly available. Test the two plans together for coverage and nondiscrimination. i recall the “Larry Starr” special which I think takes it even further and does this with 13 plans for one ASG with 12 Form 5500EZ filings (one for each S Corp) and one 5500-SF (for the staff). Plus, to avoid even more disclosures, all the plans are trustee-directed investments. You can guess who the trustees are for each of the 12 S Corp plans that each file Form 5500EZ.

DOL regulations indicate that hours are based on the date worked (or the day for which pay was earned). Thus, hours worked in 2025 count in 2025, regardless of the payroll dates. Compensation differs and has an optional provision. Compensation is based on the date paid, unless the plan is written to use the “first few weeks” rule or “post year-end compensation” provision to pull in comp after year end and push out comp paid right after the plan year began.

Perhaps the 401(k) plan is an old grandfathered governmental 401(k) plan, and that’s how the 5-year cliff vesting can apply to the match.

Isn’t the good-faith interim amendment due 12/31/2026 for the language that brings in the exception for top heavy for OEEs? And the plan merely operationally complies with whatever language they will adopt until then? If so, I would believe the amendment can retroactively state how the plan operated regarding this new exclusion and say OEEs aren’t entitled to any DC-only plan top-heavy minimums starting 1/1/24. If so, and someone is not accruing a DB benefit and they are an OEE, then their top-heavy minimum is zero in 2024, 2025, and 2026 assuming that is the language that they adopt by the end of this year.

It’s tracked as a rollover, but that assumes the prior plan actually terminated and the completed benefit election form indicated a lump sum rollover to this new plan. If not, that should be addressed first. Regardless, sure to offset the 415 limits in the new plan by the adjusted value of the old plan benefit based on the date paid, amount paid, and years of participation (a multiple annuity start date calc is needed for that).

If the plan preserves the 100% schedule for all participant at the top me of the amendment, and if all the HCEs have six years of vesting service anyway, perhaps you can argue the change from immediate vesting to a six year schedule results in no discrimination when comparing employees with the same number of years of vesting service?

The refunded deferrals and earnings are both reported on Form 1099-R, no changes are needed on the W-2. I don’t see any reason to provide a W-2c.

Ah, thank you!

To allow a $0 correction, then the employer should provide the 45-day special notice after the correction begins. If the employer wants to give the 50% QNEC as part of the correction, then no notice is necessary. Look at Rev Proc 2021-30.

My understanding is that you can amend to exclude them prospectively and that the document probably requires a 30-day advance notice to do so, even though they are HCEs. But check IRS Notice 2016-16 to see if you agree.

Jakyasar, a reasonable classification is only necessary for passing coverage when the 70% ratio test for coverage is not satisfied. If there are only two employees and both are HCEs, then coverage is deemed to pass, so the exclusion can be done by name without creating any issues.

Take a look at Treasury Regulation section 1.401(a)(4)-12 and see if that helps. Keep in mind that in the reg, the term “plan” is actually the tested “plan”, which is the combined employer DC contributions and DB benefit amounts (other than match) from both the CB and the 401(k).

Must track separately also because, unlike 457(b) distributions, it will generally remain subject to the 10% excise tax if distributed as taxable before age 59.5.

Ditto.

They can only defer from W-2 wages not yet paid. They can only defer from wages paid once the 401(k) plan document and trust agreement is executed (signed). They have to be eligible under the terms of the plan. A deferral election is also required. Other than noting today’s date on the calendar, and the other 50 requests coming in today for a plan document to allow deferrals in 2025, that all sounds easy, right?

Peter, you asked: Is there another reason why a plan’s sponsor might prefer not to allow nonhighly-compensated employees to make an employee (after-tax) contribution? Yes, there is. When you run an ACP test, you only include the employees eligible for the match. So, if the match allocation has conditions, like last day or 1000 hours, then those employees aren’t in the ACP test. Yay. BUT, as soon as you allow after-tax, everyone eligible to contribute after-tax is now in your ACP test, even those that did not meet the conditions for the match. That could add a whole lot of NHCEs with zeros to the ACP test.

Right, it can be funded as after tax only up to the lesser of 100% of compensation or the $70,000 dollar limit. The extra $7,500 catch-up is only available as a deferral.

Meaning, you evaluate the plan as a whole for determining if all the NHCEs got a gateway. Keep in mind if the OEE group itself is not included with the others in testing, then no gateway applies to the OEE group - unless for some very strange reason the OEE group had an HCE getting more as a percent of pay than the younger NHCEs in that OEE group and you cross-tested the OEEs - but I’ve never seen that happen.

Am I understanding this correctly? Yes. Is there any way to bypass the testing for mega roth backdoor after tax contributions? Have zero eligible nonhighly compensated employees, no testing needed. In other words, employing only highly compensated employees who meet the age/service/entry requirements = no testing needed.

And the plan must have the safe harbor provisions. It is not considered safe harbor if the plan does not say it is safe harbor.

Tangentially related, perhaps: my understanding that a housing allowance paid is not counted for 415 compensation purposes and a deferral cannot be withheld from such a payment (it’s already not subject to income tax). Deferrals are withheld from income. My preference is to have the section 107 “minister of the gospel” elect a fixed dollar deferral amount. And because the eventual retirement payment from the plan can also be counted as housing allowance (up to the limits allowed) and thus not subject to income tax, perhaps they be especially careful about electing Roth, as that could result in paying unnecessary income taxes.

That’s correct.

Regardless, the plan document likely needs to add some interim good-faith language by the end of 2026 to comply with the law in written form. Thus, the written plan would comply with the possibility that an employee could have have deferred a catchup and their prior W-2 Box 3 FICA wages exceeded the limit that would require such catchup be treated as Roth.

My understanding is that it is cumulative, that the preservation of capital requirement applies upon distribution unless the terms of the plan dictate otherwise, such as a zero percent annual floor. Using actual ROR can cause high 401(a)(26) minimums when there are low or negative investment returns and can cause low 415 lump sum payout limits when there are high investment returns, so be careful out there!

The IRS just said it will be $11,250 for the super de duper catchup.