John Feldt ERPA CPC QPA

(a) AND (b) both. You say (a) is not met. So that plan, plan X, is not required to provide top-heavy in that plan, unless Plan X is used to help any other plans pass coverage or nondiscrimination. Thus, if plan X covers only a nonkey HCE, you are golden. Plan X is not used to help the other plans pass coverage or nondiscrimination.

The timing of the contribution is subject to the Benefits, Rights, and Features requirements described under 1.401(a)(4). Easy to determine if it passes “current availability”. When audited, you’ll find out if it passes “effective availability”.

By definition, it’s not an excess if it’s simply more than the minimum they were required to provide. What limit did it exceed?

Then why is “gateway” mentioned in the original post?

Of course, if compliance with SECURE 2.0 is the only thing upon audit that the IRS can find wrong with a plan, then they’re not looking hard enough.

Check bounced? Insufficient funds? Or was it deposited, but perhaps with no allocation instructions, and after getting no response for how to allocate/invest, they sent a check for the trustee to transfer to another trust account for the plan to be held somewhere outside of the R/K platform? Some other reason? The reason it was returned may help for guiding them.

"As a result the 410(b) average benefits percentage test has failed." So we assume the ratio percent test is under 70%. Bri is correct that the plan document might restrict what you can do to make the plan pass testing, so follow that first. Otherwise, if the document gives you flexibility, you can pick the least expensive NHCE or two as needed to make it pass. But read the Carol Gold memo first about giving nominal benefits to short service low paid NHCEs, and its reference to 1.401(a)(4)-1(c)(2). And what Zeller said.

They don’t meet the last day requirement to get the full amount of nonelective needed automatically pass. So to make the nonelective pass, if the plan allows, pick how you want to test and maybe the cross-testing is less expensive. But if so, why did the document have integration anyway - that’s the question.

Was she attributed more than 5% ownership at any time during the 2 years ending 12/31/2024? That’s your answer. In 2025 that changes, and now you look at her wages in 2024 and the document for its TPG election, and if TPG applies, you look at all the census data from 2024 to determine if she’s an HCE in 2025.

Just 1 NHCE in the plan along with some HCEs? We’ll, you don’t have to cross-test, but if you decide that’s best, assuming the document does not require you to pass some other way, then yes, the gateway is applied to the NHCE regardless of any allocation requirements that normally apply to profit sharing contributions. Providing the gateway does not mean the nondiscrimination test passes, of course, but if the NHCE is enough years younger than the HCEs, it can be enough to pass overall.

And has no allocation conditions (no last day or minimum hours requirements). Runs concurrently. So a deferral of 6% of pay gets both matches in full.

1. It’s our understanding that the increased deferral limit of $17,600 in the SIMPLE is automatically in place for 2025. Is that right? If they have 25 or fewer employees paid over $5000 in FICA wages in the prior year, then it would be automatic. If they have over 25, then it applies if the 3% nonelective or the 4% match is elected to be provided instead of the lower 2%/3% amounts. I think it also needs to be disclosed in the notice provided to participants in the SIMPLE regarding amounts they can defer. And, in your calcs, don’t forget about the super catchup limits for age 60-63. 2. Is Compensation from 1-1-2025 to 6-30-2025 for purposes of calculating the 3% match in the SIMPLE, if any salary deferrals are made? Yes. 3. Is Compensation from 7-1-2025 to 12-31-2025 for purposes of calculating the Employer contributions (Safe Harbor, Profit Sharing, Discretionary Match) in the 401(k) plan, or could the 401(k) plan be written to use full-year (1-1-2025 to 12-31-2025) compensation for allocation purposes for the first plan year? Yes, absent guidance to the contrary, the plan could be written either way. The terms of the 401(k) plan document will dictate that. 4. Can the new Safe Harbor plan use the Match approach, or does it have to use the Non-Elective approach? Yes, either one, or a QACA match or QACA 3% safe harbor would satisfy the requirement. I haven’t checked, but maybe a starter safe harbor 401(k) might be possible too - you’ll have to look that up for me. 5. Is the SIMPLE match (if any) completely disregarded in the 401(a)(4) test in the 401(k) plan? Yes. SIMPLE IRA contributions are not subject to nondiscrimination testing and, my favorite, they are also not annual additions.

Perhaps suggest a solution to the IRS under Rev Proc 2021-30, with a VCP filing? Maybe start with a suggestion that the deferral percent using the comp without commission would be the deferral percent to apply to the definition of comp that does satisfy 414(s) for purposes of calculating the safe harbor match and, if the employer is willing to do that, under VCP you find out if the IRS agrees. Maybe the IRS won’t require QNECs for the deferrals as well.

Under SECURE 2.0, employers can do a retroactive amendment to improve benefits starting with the 2024 plan year if adopted by the due date of the employer’s tax return. Whether or not that can be applied to a full restatement may be a stretch, I would not push it that far without counsel weighing in. If needed, they can still use 1.401(a)(4)-11(g) to make a retroactive change.

Yes, as Paul noted, first you run coverage testing, 410(b), for each qualified plan, the numerator is those non-excludables who benefit in the plan and the denominator is all nonexcludables for the entire controlled group. When you see the coverage test fail for some plans, look to aggregate some of the “plans”, but you cannot aggregate a safe harbor 401(k) plan with an ADP tested 401(k) plan, you can’t aggregate a current year tested non-safe harbor 401(k) plan with a prior year tested 401(k) plan, and you can’t aggregate a basic safe harbor match 401(k) plan with a safe harbor QACA match or with safe harbor nonelective 401(k) plan, etc. Keep in mind, a 401(k) plan is really 3 plans for purposes of running a coverage test, 1) deferrals, 2) match, and 3) nonelectives. Thus, if you apply the OEE rule to help the testing, you end up with 6 coverage tests but hopefully 3 of them have only NHCEs and those 3 would automatically pass. If there are cash balance plans and/or defined benefit plans as well, the benefits that are accrued can aggregated with the nonelectives in defined contribution plan that share the same beginning and ending of the plan year with the DB or CB plan. Also, any plans that get aggregated for coverage MUST also be aggregated for nondiscrimination testing. Which explains why you can’t aggregate a safe harbor 401(k) plan with a non-safe harbor 401(k) plan for the deferral coverage test and for the match coverage test. This also explains why you can’t aggregate a current year tested non-safe harbor 401(k) plan with a prior year tested non-safe harbor 401(k) plan for the deferral coverage test and for the match coverage test, and so on. Does that help?

Maybe look at restructuring, 1.401(a)(4)-9, if you have enough NHCEs. Otherwise known as component plan testing. Amend the plan prospectively to exclude HCEs from safe harbor. An amendment to exclude HCEs from something would not be a discriminatory amendment.

Seems okay, if the document allows, and again, “if” no one else new works any hours in 2025. You could allocate a full $50,000 if you’re not over the deduction limit. If they would turn age 50-59, or age 64 or more this year, then you could allocate $57,500 between deferrals and ER PS if they deferred at least $7,500 (again watch the ER contribution deduction limit. And if turning age 60-63 this year, and deferring at least $11,250, then you could allocate $61,250. Again, watch the deduction limit overall. If hired before 7/2/2025, then next year the honeymoon is over, and safe harbor would be in order. But really, the owner will likely want to defer in 2025, so just do the 3% safe harbor for 2025. Then talk about doing SH match for 2026 if the 3% is so costly that they just cant stand it.

Now that you have that, how much were her gross wages from the company in the prior year? And, if the plan says the top paid group election applies, is she in the top paid 20%?

If it’s a prototype formatted ftwilliam document, it’s a “Note” in the adoption agreement. These “notes” are generally not reminders or FYI’s, but are plan provisions that must be followed.

And just a reminder, the HCE determination for the year is not based on what they earned that year, it’s based on what they were paid in the previous year. And check the document to see how the top paid group election is defined.

Can you find the reg for that? Meaning, if a SH is NOT ending mid-year, but is ending exactly at year end, a reg says you have to issue a 30 day advance notice to stop the safe harbor from continuing into next year?

If your document does not allow an exclusion, like a standardized document? Then I would look around for a nonstandardized document to use instead.

If 2023 will be included as a year of service, then the actuary will likely take the NESE from 2023 plus the $193,565 for 2024 and divide by 2 years. I assume the $150,000 contribution is achievable based on your age, service, your average NESE, and the currently applicable funding interest rates published by the iRS. We will leave that determination to the enrolled actuary and the terms of your DB plan document.

A cash balance plan is a defined benefit plan. The maximum benefit that can be paid out from a defined benefit plan is limited by Internal Revenue Code Section 415. This is a very important distinction when comparing how this plan gets handled when compared to a defined contribution plan, like a 401(k) profit sharing plan, where a participant just gets their account with investment returns. A defined benefit plan cannot pay the participant more than the maximum allowed, even if investments do great, and even if the amount defined in the plan’s formula is higher than the payout maximum. One of the two main factors that limits the maximum benefit payable from the plan to a participant is the participant’s highest consecutive 3-year average compensation (wages). As I’m sure you can guess, an extremely low consecutive 3-year average compensation for the participant will result in an extremely low maximum benefit that can actually be paid to them from the plan. And when they reach that maximum, it is very likely the lump sum they can be paid after that will begin to decrease with time. Yes, decrease. Your favorite local enrolled actuary can tell you if this will work for employee A and tell you how long (or short) of a period it will be before they hit their ultimate lump sum 415 limit and can’t be paid out any higher amounts from the plan without establishing a higher consecutive 3-year average compensation.

If you’re just going to do Roth or convert to Roth in the solo profit sharing plan, just set it up to allow voluntary after tax contributions, contribute that, and convert to Roth. No 6% calc. needed. You just can’t contribute more than your Net Earnings from Self-Employment (NESE). Otherwise, you take line 31 of your Form 1040 schedule C, subtract 1/2 of your SE tax, subtract the employer contribution and then limit that result to the comp limit under 401(a)(17) to get the “what” that you asked about, which is your NESE. Multiply this by 6% to get the contribution limit (and you of course noticed it was a circular equation as the contribution itself affects the contribution limit. If you add a DB plan, the contribution to that plan is also included in the equation used to determine the NESE which in turn is used to determine the 6% limit. Now that you have this, review your calc again. You almost got it - close but no cigar. Keep in mind that your max DB contribution is limited as well. Its based on your highest consecutive 3-year average NESE. Thus, contributing any deductible amount to the PS plan is hurting the DB limit affecting the DB contribution that the actuary is calculating for you. It’s not uncommon for owner-only combo plans to blow up due to being impatient when waiting for these calcs to be done - to give the owners the amounts that can actually be contributed and deducted.