John Feldt ERPA CPC QPA

And add missed earnings as part of that correction.

1. No, that deadline was not extended. 2. The IRS will notice the excess deferral and when it is distributed after the deadline, my understanding is that it will be treated as taxable, including its earnings, and not rollover eligible, regardless of having been deferred as Roth. So, double taxation is still the “penalty”.

If so, could/would the 403(b) plan be a “deferral only” plan, exempt from 5500 filing, is that also your question?

I think we’ll just apply a reasonable interpretation, since it does appear to require months to be used for averaging. Thanks for the responses.

Company has a traditional DB plan (X% x Years of Participation x 3-year Average Annual Comp) and hires "Guy" 9-1-2017. Wages paid for 4 months in 2017 are $195,000. Paid $500,000 in 2018. After 8 months in 2019, Guy terminates. 2019 wages were $300,000. Vesting is 2-20, so Guy is 20% vested. Comp before entry is not excluded and comp in the year of termination is not excluded. Document says if Guy has less than the 3 years of compensation, the average annual compensation will be the average of "whole and partial years (whole months) of compensation." I think that means we sum the compensation and divide by Guy's 24 months. That produces a higher average for short service employees, but after limiting each year by 401(a)(17) comp limit, the result here is essentially ($195,000 + $275,000 + $280,000) / 24 = $31,250. Well, $31,250 is an annual compensation of $375,000, which exceeds the 2019 comp limit. What is Guy's Average Compensation? The plan has has no prior employee with this fact pattern. 1. We limit Guy to the comp limit in the year of termination ($280,000 annual or $23,333.33 monthly average) 2. We prorate the comp limit for each year for periods of employment (4/12 x $270,000 + $275,000 + 8/12 x $280,000) / 24 = $22,986.11 I read treasury regulation section 1.401(a)(17)-1(b)(3)(iii)(A) and (B), "if compensation for a period less than 12 months is used for a plan year, then the otherwise applicable annual compensation limit is reduced in the same proportion as the reduction in the 12-month period" and "a plan is not treated as using compensation for less than 12 months for a plan year merely because the plan formula provides that the allocation or accrual for each employee is based on compensation for the portion of the plan year during which the employee is a participant in the plan." Based on that, I think #2 above is incorrect as a "plan year" is defined in the document, not by the participant's service. Would #1 be your choice? If so, someone with over 36 months at the comp limit each year who terminates in 2019 would have a lower average compensation, since the 2017 and 2018 limits drag down the average: $270,000 + $275,000 + $280,000) / 36 = $22,916.66 or $275,000 annual. The plan document lacks the detail I'd like to see to clarify this. Any comments are welcome.

QSLOB also has a minimum 50 employee requirement for each QSLOB. If the purchase was recent, use the transition rule under IRC section 410(b)(6)(C) - also check the plan documents. Also, with no HCEs, why provide safe harbor? Your minimum safe harbor percentage will probably be fairly low - based on the high concentration percent you likely have of NHCEs overall - have you tried running the average benefit percent test, assuming your document allows? if none of the above can produce a passing result, you can give employer N an amendment under treasury regulation 1.401(a)(4)-11(g) to provide QNECs and QMACs to enough wisely chosen NHCEs from either N or R to make it pass. But run The average benefits test first and if you have enough NHCEs that are benefiting and younger than the HCEs, perhaps run it on a benefits-basis rather than on a contributions basis.

Yes, "solo-k" is a marketing term. Beware of using certain "solo-k" documents if you might ever add any employee to the business. In your case, with an owner's child in the plan, the plan is now subject to ERISA. A fidelity bond applies, certain notices and disclosures apply, and the 5500-SF applies. Usually a "solo-k" is thought of as an owner-only plan that is exempt from ERISA. It files 5500-EZ only when the assets of all the employer's solo plans are over $250,000. They are not required to provide ERISA 404(a)(5) fee disclosures or blackout notices. SPDs are not required. ERISA 204(h) notices are not applicable, no fidelity bond, the ERISA fiduciary requirements do not apply, etc.). But, IRS tax-qualification rules do apply: you have a qualified written plan document (including good-faith interim amendments and timely periodic restatements), you must operate according to the terms of the plan, etc. So, I think of a solo-k as an owner-only plan: a plan that only covers the 100% owner (and spouse), or if the business is taxed as a partnership, it is a plan that only covers the partners (and spouses). Go beyond that, and you are not an owner-only plan and you are subject to ERISA.

Yes, trying to avoid that aggregation. This plan will pass coverage an nondiscrimination on its own - without aggregation. We just won't offset any gateway required in this plan by any amounts provided in the other plan. In this case, it will still reduce NHCE allocation costs considerably.

Here are the relevant code sections for this question: 401(k)(12)(C) Nonelective contributions - The requirements of this subparagraph are met if, under the arrangement, the employer is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation. 401(k)(12)(F) Timing of plan amendment for employer making nonelective contributions (i) In general Except as provided in clause (ii), a plan may be amended after the beginning of a plan year to provide that the requirements of subparagraph (C) shall apply to the arrangement for the plan year, but only if the amendment is adopted— (I) at any time before the 30th day before the close of the plan year, or (II) at any time before the last day under paragraph (8)(A) for distributing excess contributions for the plan year. (ii) Exception where plan provided for matching contributions - Clause (i) shall not apply to any plan year if the plan provided at any time during the plan year that the requirements of subparagraph (B) or paragraph (13)(D)(i)(I) applied to the plan year. (iii) 4-percent contribution requirement - Clause (i)(II) shall not apply to an arrangement unless the amount of the contributions described in subparagraph (C) which the employer is required to make under the arrangement for the plan year with respect to any employee is an amount equal to at least 4 percent of the employee’s compensation.

Suppose a plan had 3% safe harbor nonelective provisions in place for the plan year ending 12-31-2020 and it was a brand new 401(k) plan. Deferrals were allowed right away upon hire, but to be eligible for the 3% safe harbor nonelective, a year of service was required. Assume they only have deferrals and safe harbor in the plan for 2020. Also, they excluded the non-key HCEs from the safe harbor (a lot of people). Also suppose they are now "enjoying" the top-heavy surprise since not enough non-key employees deferred in 2020 to keep the plan out of top-heavy status (not even close, even with the eligible NHCEs all getting 3%). Based on the language under IRC 401(k)(12) after its changes for the SECURE Act, do you believe they could amend the plan now to adopt a 4% safe harbor nonelective for 2020, making it's eligibility the same as the deferral eligibility, thus making the plan exempt from top-heavy for 2020?

You can’t elect a lump sum without waiving an annuity form of payment, one that would be payable now instead of the lump sum. So yes, you show the options and yes, offer the annuity. I’d check the document again on the forms actually available for payment.

No. They are aggregated for 415 limit purposes however.

4%

For plan purposes, the partnership income is considered as zero. You do not net the compensation from one entity with a self-employment loss at another entity.

Suppose an employer had a 3% safe harbor nonelective 401(k) plan in 2020 with pro-rata profit sharing. In 2021 they adopt a scond plan, a new PS plan, retroactively to 1-1-2020 and it has each person in their own rate group. Can this new plan offset the minimum gateway by the 3% safe harbor nonelective provided to those same participants in the 401(k) plan?

Official figures: https://www.irs.gov/pub/irs-drop/n-20-79.pdf

Agreed. Yes, it's 45 days from the date on the letter, but that might be a week or so before you even get a copy of that letter in your hands.

If the auditors aren’t done shortly after the 5500 was “filed”, the DOL sends a letter saying it really wasn’t filed because the accountant’s opinion was not attached. The letter gives the sponsor 30 days or so to send that opinion to the DOL, after which they intend to collect their $50,000 penalty if the report is not received. After that short deadline in the DOL letter expires, the DOL begins their process to collect $50,000 (or more) from the plan sponsor. The plan sponsor now realizes the DOL wasn’t kidding, so they finally engage legal counsel. Their legal counsel thinks this to themselves: “Why did they file without the attachment? Why didn’t they call me when the first DOL letter was received? Don’t they know the DOL generally isn’t looking for returns that aren’t filed, that the IRS does that? And, when the IRS finds them, the IRS would still let them use the much less costly delinquent filer program? If I can convince the DOL to only fine them $15,000 and my billing is $10,000 then they’ll save 50%, but they really paid more than 1,000% over the DFVCP cost. What is my billing rate for this again?” Years ago I noticed a 5500 where the prior year’s opinion was attached again for the current filing, but I never found out how things turned out for that employer.

Taxable wage base for 2021 should be $142,800. https://www.ssa.gov/news/press/releases/2020/#10-2020-1

Just for reference, the unrounded figures are: Compensation Limit: $292,260 Annual Addition Limit: $58,452 Deferral limit: $19,792.50 Catchup: $6,597.50 DB Limit: $233,808 Key Employee: $189,969 HCE: $132,056

Give credit to Tom. CPI-U for September was 260.280. Based on Tom's spreadsheet, the projections for 2021: Increased: Compensation Limit: $290,000 (was $285,000) Annual Addition Limit: $58,000 (was $57,000) Unchanged: Deferral limit: $19,500 Catchup: $6,500 DB Limit: $230,000 Key Employee: $185,000 HCE: $130,000

The CPI-U for September is scheduled to be released tomorrow morning at 8:30am. I have a copy of Tom's file from days of yore and can provide the updated figures shortly after the release based on his file.

If it is required under the terms of the plan, explain the potential consequences for failing to follow the plan’s terms. Recommend they obtain advice from their own legal counsel.

Exactly.

Yes, we’ve seen IRS approval of similar issues for retroactive amendments. The IRS will likely ask for copies of the communications provided to participants. They might ask to see how many HCEs vs NHCEs are negatively impacted.