John Feldt ERPA CPC QPA

The employer contribution limit for a calendar year plan for 2023 for each individual is the lesser of: A) 100% of Compensation, or B) $66,000. The overall deduction limit for employer contributions is 25% of Compensation (exclude Compensation over $330,000 in 2023). Compensation is defined in your plan document, but if the business is taxed as a sole proprietorship, then the term Compensation is the net earned income from self-employment (NESE), which is a simple circular calculation. For example, if your spouse is self-employed and has $1,000 on line 31 of her Form 1040 Schedule C, then you subtract 1/2 of the 164(f) deduction (normally that would be a subtraction of $1,000 x .9235 x .0765), then you subtract your spouse’s employer contribution to the plan to get your spouse’s NESE. That NESE is the limit under section 415 for the total allocation your spouse can have under the plan, excluding any catchup deferrals. 401(k) salary deferrals, other than catch-ups, are also included as counting toward that limit. Keep in mind, deferrals can only be withheld from Compensation, so if your spouse only has $1,000 of income, then the 401(k) deferral and any catchup deferral for you spouse has to limited to fit under the Compensation limit. Just a reminder: once you have the NESE you yourself and your spouse, to multiply that by 25% since that gives you the maximum deductible contribution that the company can contribute for the year.

Safety in numbers.

If the employee is really that important to the employer, give them a bonus, forget about the plan, and get everyone back to work?

The son of the owner is attributed the same ownership of the owner. If that’s over 5%, then the son is an HCE. If the son was not coded as an HCE and because of that miscoding, the plan passes, then try other testing options or provide the amounts needed to the true NHCE so it will pass, or do both.

Meaning the sole proprietor cannot deduct the premium anyway, as 404(e) explains - is that right? So there is no need to issue them a taxable PS58 cost.

If they amend to retroactively adopt the 4% safe harbor nonelective, then there is no ADP test, and therefore no refund and thus no late refund penalty.

Assuming more than 5% owner, the payment of the 12/31/2021 vested accrued benefit should have commenced once the document was signed, or shortly thereafter in 2022.

Yes, follow the instructions and next time when an employer adopts a plan that has a retroactive effective date that starts in the prior year, don’t file a Form 5500 for that retroactive year. Keep the executed SB on file though to include it with the first filed Form 5500 (year #2).

Okay, so the LTPT employees don’t get the top-heavy, I get that. What about the rest of the normal employees? Where does the law or regs say this “plan” still consists of only SH an deferrals? I haven’t done that research yet.

I guess I took the post as two questions and only answered one of them. So for the second question, when to think about top-heavy, how about: every year.

Tomato, tomahto

No, but check the plan document. Normally if the plan has only deferrals and safe harbor allocated, then it is exempt from top-heavy. Meaning no allocation is necessary for the NonKey HCEs who aren’t getting the safe harbor contribution.

How about Profit Sharing only, no deferrals? If that’s not enough, add a DB or cash balance plan? To reduce notices, perhaps hire a professional to invest and don’t offer participant direction of investments?

No. The design itself matters more. If you have a small employer and the owners hope to maximize their own benefits/contributions and minimize all others, the top paid group election can change non-owner HCEs into NHCEs. The NHCEs generally have minumum gateway requirements that can cost much more than a mere top-heavy minimum that they would get as an HCE. Applying the TPG election here could add a lot of non-owner benefit costs and/or cause the employer to not adopt the plan at all. However, other design scenarios might benefit when the TPG election is applied. Such as a 401(k) plan that is not providing safe harbor and has some highly paid employees deferring at a high rate. In that case, changing those non-owner HCEs into NHCEs can result in a higher ADP for the NHCE group. So look at the census (usually TPG is irrelevant), review the employer goals, run the design, and that should help with how the election should be made. Also, pretty sure the HCE definition must be the same if they have multiple plans. So if a new plan is to be established now for 2022 for an employer that already had a plan in place for 2022, then they have no choice; they cannot just default the TPG election. It must be the same as the TPG election in that existing plan.

No. The 11(g) amendment must also pass by itself regarding the benefits that it provides without regard to any existing benefits. I didn’t see the part about giving the NHCEs anything.

Just be careful that it’s earned income. For example, my understanding is that when a cattle farmer sells cattle, that is usually a capital gain, not subject to SE tax, so not earned income. Getting their CPA involved is a good recommendation.

You know the ACP test, run that as usual. The rate of match itself is a BRF (benefit, right, or feature). See Treasury Regulation 1.401(a)(4)-4. The plan’s BRFs pass 401(a)(4) if they are available to nondiscriminatory groups. There’s both current availability and effective availability to satisfy. To satisfy current availability, look at the ratio of NHCEs available to receive that rate of match (or better) divided by all NHCEs who can get any match, regardless of what they deferred. Do the same for the HCEs at that same rate of match. Now divide the NHCE fraction by the HCE fraction. Look up the safe harbor percent that would apply from 1.410(b)-4 (don’t worry about the average benefits test for BRF testing, that does not apply here). Now do it again for the next rate of match for the HCEs and NHCEs. For example, suppose all the HCEs have over ten years of service so the higher rate is available to all of them, whether they defer or not. The HCE ratio is 100%. Suppose only 1 of ten of the NHCEs have ten years so their fraction at this rate of match is only 10%. You have a test result of 10%/100%, or 10%. There is no safe harbor rate under 20.75% under 1.410(b)-4, so the higher match rate fails. If you’re within 9.5 months after the plan year end, look at 1.401(a)(4)-11(g)(3)(vi) and (vii) to fix the failure. For effective availability, subjectively decide if you think it’s nondiscriminatory and if the IRS would agree with you. No test of numbers. Good luck there. Alright, alright, if you pass current availability for multiple rates of match, then I would say it sure points us to a passing effective availability result as well. Hopefully that helps.

Right, you’d have to modify the plan’s written terms to do it this way. After doing that, you should submit the plan document to the IRS for a determination letter.

Why not try out the idea first with a small plan of your own? A test run where no one else is at risk? When audited, explain that no RMD was needed because you intended to contribute, etc., etc. Then post the results here once the audit is closed to let us know how much billable time was spent, if the arguments were successful, how much excise tax was paid and any interest and/or penalties. Maybe it would be worth it?

Yes, agree.

And if self-employed, take a look at what code section 404(e) says about the deduction. Also discussed in the EOB.

Okay. Then I’m confident there is no deadline spelled out. But, using a deadline of 12 months after the end of the year as the latest “deadline” is probably a good practice, or using a deadline that is no later than 30 days after the tax return deadline (to count 415 limit purposes) is perhaps a better practice? And allocating after 12 months maybe should include missed earnings.

I agree with 12/31/2024, but where is that deadline in the regs?

Aren't you working with an actuary on this? It is not likely that your suggestion works. It depends on the present value of the cash balance plan accruals for the NHCEs when those amounts are converted using the required factors. The cash balance credits are not equal to the values that get counted toward the gateway. The amounts must be converted to their actuarial value. See 1.401(a)(4)-9(b)(2)(v)(D)(3) if you want to average this for the NHCEs. Also, if you are trying to avoid the combined pan deduction limit by keeping the DC plan's employer contributions at 6% or less, then you must count all match and all PS toward that 6% limit. And all employer contributions to the DC plan are counted to trigger the combined plan deduction limit, so if the match is about 2% of eligible pay and the PS is 5% of eligible pay, then the DB plan has a very low deduction limit because the overall employer contributions to the DC plan are over 6% and that triggers IRC 404(a)(7), limiting the DB plan deduction. Of course, we are assuming the cash balance plan is not subject to PBGC coverage. edit: typo

Once you reach the 6% limit, and if it is still not passing, you could consider increasing the DB accruals or CB credits for the NHCEs. If you’re looking at 2022, then that would be a retroactive increase under 1.401(a)(4)-11(g).