Below Ground

So we need a Delorean?

Early in 2022 person requested in-service distribution. Distribution was processed before we as TPA even received 2021 Compensation, and person's compensation for pre-2021 was not even close to HCE Threshhold Amount. Data for 2021 was received shortly after processing distribution and turns out person's 2021 compensation is over the Threshhold, making this person HCE for 2022. ADP Testing for 2022 results in the need to payout Excess Contribution. Problem is that the in-service basically zeroed out the person's deferral account, so there is nothing left under the Plan to payout the Excess. Monies for the in-service were rolled into an IRA. We notified the IRA of the Excess in February 2023, but the IRA did not get back to us until now. They gave us a form to pay out the Excess as an Excess Contribution, but now they say they can't do that for some undeclared reason. The IRA wants to pay money back to the Plan which would then pay out the Excess now. Of course, the IRA was subject a investment loss, so the amount won't even cover the Excess. A bigger concern is that the Excess was around $5K, so if paid back to the trust and then paid out now, there will be an excise penalty tax of around $500. The question is what is the best way to deal with this Excess Contribution?

Thanks for the replies. You have confirmed what I believed to be the case, but as you know, when someone acts like they know the answer, it gives one pause. Specifically, am I missing something? As to why the investment advisor thinks this would be a benefit, I have no idea. When I pressed on why the answer I got was that the client deserves to have the option. In fact, the response was delivered in a manner that suggested that I have no right to ask such a question! A real pleasure to work with I must say.

Client wants to retroactively change plan year to calendar year for the 2023 Year. Previously plan used a 7/1 to 6/30 year, so we would need to amend plan to have a short year of 7/1/2022 to 12/31/2022, making the plan year be the calendar year for 2023. I am recommending that the plan year be changed for 7/1/2023 to end 12/31/2023 but investment advisor is pushing to do the change retroactive as noted above for 2022. Any comments will be appreciated.

I just turned 60. My fistulating Crohns turned into rectal cancer which took my entire rectum/colon, prostate and bladder. Since I am a "double bagger" (Colostomy and Urostomy) I am told that getting full SS Disability is practically assured. With that said, I DON'T WANT TO RETIRE. I want to work. I want to continue taking care of my clients. However, the insanity of SECURE 2.0 may be the final straw. I know I am not alone in this type of thinking. Time will tell.

Well, I hope they hurry up with the guidance since this is a huge reprogramming job. Of course any hope that this will be provided promptly is pure foolish thinking on my part.

Peter, You are welcome. I feel compelled to note that comments you have made in the past have helped me, so I am glad that I was able to help you. Dave

The big concern we have is recharacterizing deferrals as catch-up to pass a failed ADP test. This far, I have heard zero on this topic in every seminar on Secure 2.0. To clarify, in the past if a plan failed ADP testing you could reduce or eliminate the payout of excess contributions by recharacterizing as catch-up. Does this mean that the recharacterized deferrals must be classified as Roth? If yes, what tax year would be impacted. Say you failed testing for 2023. Does this mean that the deferral is recharacterized as Roth which requires payment of income taxes for 2023 (year of deferral) or 2024 (year of "recharacterization")? I note that the latter reflects the imposition of taxation in year of receipt for returned deferrals. I had one person comment that requiring catch-up to be Roth does not apply to recharacterization under a failed test. Not sure what the logic for that is. Beyond the "guidance needs to be issued comment", does anyone have any idea of what is expected to happen with this concern? Thanks in advance for your feedback!

IMHO, you should never combine union and nonunion plans. There are a number of reasons for this position, but I focus on one. Union plans are frequently subject to review and adjustment to reflect the collective bargaining. You would be putting a program, the plan as applied to nonunion employees, within the negotiations with the union. This can cause several problems, not just related to levels of benefits which of course would be subject to scrutiny. I suggest the better question is why would you want to combine these plans, putting your nonunion benefits in the middle of what might be adversarial negotiations. You have different populations, with different agendas. Combining plans seems to just be asking for trouble.

We can only hope at this time that it will be corrected in a timely logical fashion. Unfortunately, this particular law is so full of "silly" errors, that it makes one gag. Consider that "Roth Treatment" is generally agreed to be better for the young, but it is now being imposed upon catch-up contributions which are by definition for the older participants. I am personally waiting to see how this "Forced Roth Characterization" will be applied to recharacterized deferrals under a failed ADP Test. Or is that just a tool we used for testing that is going away. Anyway, I hope this does get fixed, and assume that in some fashion it will be, but I must admit that I am very pessimistic about the final result.

You are 100% correct in that the term "Solo" is a marketing gimmick. It is is just a 401(k) Plan that covers the owners and spouses. Any restriction, such as only one person and no spouses, is imposed by the institution offering the program, and not regulations. With a "Solo 401(k) Plan" you simply have one plan that covers the owners and spouses of a given firm, that just happens to not have any eligible employees. Your closing statement would make no sense since you could design a single plan to basically achieve that same result if that is the goal, assuming there are no employees beyond owners and spouses. It all comes back to the label "Solo" being a marketing gimmick.

Thank you CuseFan and Lou S. As you can tell from my original post, I really don't think there is any way to exclude her. Your input validates to me that we are stuck with including her. It's not that the client is just trying to exclude her. It is more an issue of looking at her pay for 2023, and how they should factor in her coverage under this Plan. I honestly don't see it as that big a deal, but they do and they are the client. Again, thanks for your input. Very much appreciated!

Setting up a new 401(k) Plan effective 1/1/2023. The Plan covers a workforce that is entirely HCE, with one exception. There is an employee who had 10 years of service but was terminated in April 2022. She was then rehired in mid-January of 2023. It also appears that she did not have a Break in Service in 2022 as she did have over 500 Hours. This person would NOT be HCE for 2023 since her pay doesn't reach the pay threshold given her termination. (She will be HCE in later years by pay level.) It is hoped that she can be excluded from the Plan in 2023 for testing purposes. Since we have to include past service for eligibility, the only way we see where exclusion might be possible is using the fact that she was not in the employ of the firm on an Entry Date. This could be achieved if we use a single Entry Date of January 1 following 6 months of service. I don't believe this will work since she did not have a Break in Service as she had over 500 Hours in 2022, so she must be allowed entry on her date or reemployment. Is this wrong, or does anyone see a method where she could be excluded? Would using a 2 year wait for profit sharing entry limit her to only the Gateway, for example?

Another link showing just how bad SECURE 2.0 really is... https://www.napa-net.org/news-info/daily-news/major-secure-20-error-puts-catch-ups-jeopardy-ara’s-graff?utm_source=MagnetMail&utm_medium=email&utm_term=dseals@ebspension.com&utm_content=COM_NAPA_eNews_1.27.2022_WIR&utm_campaign=Catch-Up ‘Muster%2C’ Markets Timing%2C %26 Grandfathered ‘Clock’

Given that it appears that SECURE 2.0 now seems to have eliminated the ability to even do Catch-Up Contributions, perhaps the cheering sections will be subdued. I am referring to Bloomberg New below at: https://news.bloomberglaw.com/daily-labor-report/secure-2-0-error-would-prohibit-401k-catch-up-contributions. This, among many other sites, are exposing the truth of this law. Yeah, we have all been through changes and have all needed to see our clients through. That still doesn't eliminate the need for concern or the characterization of this "gem" as pure garbage. Part of the SECURE 2.0 Act (Pub.L. 117–328) legislation President Joe Biden signed into law in December was intended to require the contributions workers nearing retirement make to their accounts to be post-tax Roth deferrals. The elimination of a key paragraph in the bill during the drafting process inadvertently eliminated catch-up contributions entirely.

MoJo, first, yes a plan did exist. As I understand, there was a document and 5500 filings. There was just never any statements distributed to employees by the employer. Second, numbers 1 and 2 have been done, it is #3 that is the question. I believe your comment on he DOL website is relevant.

Hypothetical situation: Trustee terminates plan and takes all money, including monies due to employees. Takes this money and transfers into a personal IRA for this trustee. Believes he/she can get away with it since no reporting of benefits was ever done to participants. What is the TPA or actuary's obligation in this situation?

I have a client that I have serviced for years who we have "trained" to always call us before letting a person make deferrals. During this call we review that person specifically and define that person's entry date. This is in addition to reports we issue that define when people's expected date of entry will be, which we send to all clients. Returning to the client I opened this comment with, she has 7 employees and usually has one termination and one new hire each year, so review of new entries is no big deal. Would you believe she hired a person and before she called us, told the person she could enter the Plan on a date that was prior to her actual entry date under plan terms. I suggest that this indicates that thinking universal auto enrollment is a good idea, is not in fact short sighted thinking. Some client just can't handle it, no matter what you do to help them. What you get is a frustrated client who dumps the plan leaving people with no plan at all.

That's my read of it.

Austin, let me first say that I typically enjoy and agree with many of your comments. Quite frankly, I am thinking of retiring early given some of the garbage in this law. I would also note that I often find people who are primarily in the sale of assets love this law, while many of us on the operations side hate it. Excluding states that are expected to mandate having a plan, I see many plan terminations will be the result. Do we exaggerate? Time will tell.

It sounds as if there will no longer the ability to recharacterize deferrals under a failed ADP Test unless they were originally contributed as Roth Deferrals. For many plans this will basically mean the plan has no value and should be terminated since it is only by recharacterizing deferrals that the HCE can make a reasonable deferral.

First, I need to say that I am still working on what this means, so this comment is very "preliminary". My understanding is that is your discretionary Match is not being allocated as a simple uniform percentage or dollar formula, you must have written documentation defining the formula used and classes getting what formula. My understanding also holds that within 60 days of making the last deposit of the match for a given year, a written notice must be provided to participants. If that is correct, your notice would be after the plan year end, assuming that a portion, if not all, of the match is deposits at year end or post year end.

It is my understanding that a PEP can not use a Form 5500-SF, but a "Closed MEP" (all firms have a "common nexus") can use the SF if under 100/120 lives rule. PEPs must use the "Full 5500" regardless of participant count, but may be exempt from the Accountant's Opinion based upon the count of covered employees (see Pmacduff Post). For Business Code I would suggest that you use the Code for the primary sponsoring entity of the program.

Luke, I find that I agree with almost everything you post, including back several years. Just as an FYI, I have always believed that (1) these people must be included (unless some special rule I don't know about exists), and (2) the Plan says Compensation is W-2 Compensation which includes tips. I would be careful with the "agent position" since that could be expanded to allow for the employee reimbursing the employer for deferrals from tips which I don't think would be allowed. I KNOW that some firms do this with with health insurance, even with 125. No, I don't recommend that. Just have seen that used. Anyway, it seems that the post by Nate S. for looking at "deferral application" might lead to something of value, but I am not yet at a point where I can comment there. We do have the 10/15 Deadline to worry about, so time is limited for this concern. Regardless, I value your opinions and comments and wish you well.

Luke, being a simple man, the thought I get from your post is that the Employer should be able to apply deferrals to the "pay-out of tips" given the improvement of technology. Sort of like the payroll system should have the deferral election in the system, so the payout from the shift payout should be able to (1) reduce the payout, and (2) record the deferral amount fro deposit in a timely fashion. Am I reading this right? I would also say that with respect to cash tips the waiter picks up off the table, my simple mind see no way this can be included in normal deferral processing.