Below Ground

I will indeed check further on this.

Nate, I see from the thread you included that an issue might be related to fringe or non-cash compensation? I don't think this is would work since the tips are W-2 Wages. I would note that we do see plans with policies on deferrals where a special election can be applied for certain compensation forms, like bonus pay. That is, the employee can specifically state that their deferral is not on bonus pay, or conversely, this election only applies to bonus pay. I stress this is processed as a choice of the employee, and is not subject to administrator discretion.

Nate, yes. The document uses W-2 Compensation, which of course includes tip income. The Plan is Safe Harbor so employees can defer tip income per the Plan. I assume that is the focus of your question. If it is another topic, let me know. As practice we always go to the Plan document first.

I am pretty sure that the client follows the "Hyatt Method", paying all tips from credit cards in cash, since the client has stated that these employees all need to do quarterly filings to account for withholding on those tips. The more I look into this, the more I find that no one seems to have a solution, and the IRS and/or DOL is providing no relevant guidance. I am beginning to think I should resign from this case, but I hate the thought of leaving parties involved with unresolved issues. I have a serious problem with that. Again, your insights are greatly appreciated.

Thanks for your long answer. I recently had a battle with cancer, which I was not expected to survive. In fact, the surgeons have all expressed that they are amazed by not only my survival, but my level of recovery. Regardless, given the severity of the illness and certain permanent "effects", I am thinking I should at least look into the sale of my firm. This is not something I really want to do, but feel it is the responsible thing for both my family, staff and clients. Your detailed overview was very helpful. Thanks again!

Thank you both Peter and Lou. I really appreciate your replies. Anyway... No, I was not thinking I could pretend they don't exist. I can see how my post could be interpreted that way, but that was my not having the right words. Beyond using an excluded class that passes 401(b), which I don't, I was wondering if there was any special rule for this type of employee with respect to coverage. I don't believe there is any but, I asked just in case. Peter, was there any resolution to the issue or does it remain something where there is still no guidance? I assume that a "strategy" of having the employee reimburse the employer is not workable? I believe they do that with health premiums. If I am reading your post correctly, it seems that there is no solution for these employees. Basically, they are covered just in case they make enough money to actually have enough money to defer, otherwise they are just a participant who can never defer to the plan? That just sounds wrong. Again, thank you for your comments.

Client is a high end restaurant where employees are paid a minimal wage, with income primarily from tips. (They get very good tips.) While these tips are actually reported on on Form W-2, they are not paid through the firm. Instead, the employees declare tip values to the employer, who then includes in records for taxes and such. When taxes, health premiums, etc... are applied, many of these employees actually owe the firm money and must pay back the firm these costs with a check they provide to the employer. My first question is are these employees required to be covered? Looking purely from an IRC 410(b) Ratio Percentage, the answer would be yes. (They are a big chunk of the workforce.) Another concern is that these employees have no monies paid under the payroll system that could be deferred, outside of a personal check the person writes and gives to the firm to pay back any deferral processed through the payroll system. From a "paycheck perspective", these employees have zero income (no check) but do show W-2 Wages from the tips they declare to the employer. So how can such a person make a deferral? My guess is that they make the election against the "W-2 Wage Amount" (base pay plus declared tips) which the firm contributes, which they employee must then repay to the firm with a personal check. In summary, my 2 questions are how do you handle coverage and deferrals of these types of employees?

Perfect! Since the threshold is $100, what would you do for an over payment of $150. I see validity in the argument that it is over $100 so it has to be collected and redeposited. I could also see a reasonable argument that $150 is not much over $100, so treat it the same. The former is of course a much stronger position. Thanks for the reply CB.

Mid-size 401(k) Plan (773 Participants) had ADP and ACP Testing done in late February 2020 for 2019 calendar year. Plan did fail testing and remedial distributions were paid timely to correct failure. Subsequent review of participant accounts found that Compensation and Deferrals Values provided by the Client's payroll system were wrong! Corrected values were finally provided (August 2020, delays were related to "COVID impact" at Client), so testing was rerun. End result is that testing results were improved for both ADP and ACP; therefore, remedial distributions paid were in excess of amounts defined by corrected testing. It is my understanding that the Plan Sponsor is expect to collect the over payments, and return those monies to the accounts of the impacted people. (Amounts range from $2 to $100.) Questions are (1) is this correct, (2) how would this be done, and (3) how are taxes impacted/addressed by these refunds to the Plan? Any assistance is most gratefully appreciated!

Thanks Mr. Zeller.

Client uses a "Phantom Stock Program". This type of program does not involve an actual exchange of equity, but does result in periodic payments which coordinate with actual dividends paid to actual stock holders. These payment are processed through payroll, and are shown on W-2 as taxable income (payroll taxation does apply). These monies are only paid to a select group of HCE. The question is, can these monies be excluded for purposes of 401(k) Safe Harbor Match calculations? Finally, would such exclusion violate the requirement to use Total Compensation under a 401(k) Safe Harbor Plan?

Hmmmmm. I guess my post was poorly worded? My actual intent was more like "is there any reason to think this type of relief will be provided". (In my personal opinion I would think not.) Knowing that many others are more plugged into the political side of our business, I thought that maybe something was in the works that I was unaware of. As a side remark, I have found posts by Luke Bailey to always be thoughtful with exceptional insight. On several occasions I have listed posters whom I believe are people who can be counted on to make posts which are always worth reading. That list has always included Mr. Bill Presson; and Mr. Bailey for that matter. So if you do run across any inside information, please let us know. As I am sure you would do without my 2 cents.

Mr. Presson, is it fair to say that this relief is doubtful? Or are there any signs that suggest this might happen? I have seen none. Just rumors and such.... Thanks!

Suggest that the OP review page 33 and 94 as found in Revenue Procedure 2019-19. Here's a link to that Rev. Proc. https://www.irs.gov/pub/irs-drop/rp-19-19.pdf Then, if that explanation doesn't fit your situation, explore other sections to see if they fit. Finally, obtain counsel that is knowledgeable with this type of issue. If you really want to have this issue addressed then do your research and get qualified professional help. Good luck.

Thanks C.B.. That has been my take on it too, but I was getting "push back" about the new changes should allow home improvements. I looked quite extensively before making this post and could find nothing that would justify home improvements as being allowed. But, since no one (especially me) is perfect I thought a post on the issue was a good idea.

The Plan uses the safe harbor definition of hardship. Participant submits receipts for repair of flooring to primary residence. Does this qualify under repair of damage to primary residence for loss qualifies for casualty deduction? There was no reference to a cause of damage, such as a fire, flood or storm. I think this is actually a home improvement project. If that is the case, would it still qualify since the IRS website says that under the Bipartisan Budget Act of 2018 a plan can permit hardship distributions for repair of the participant's primary residence, even though it would not qualify for as a casualty deduction (see "Changes Coming for 2019" https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions). Is that reference only provided to remove the need for the damage to be related to a federal disaster zone, or are rules being relax to even allow for home improvement projects on a person's primary residence? Thanks in advance for any insights!

Every plan applies some form of the phrase "administrative feasibility" toward the processing of benefit distributions. The idea that a qualified retirement plan is like a bank saving account is not correct. You don't come in with your withdrawal ticket and walk out with money. Anyway, my point is intended to supplement the comments of Mr. Starr in that the application of "days after it is scheduled" does not fit "real life". Consider the fact the most plans will have a 90 period for the administrator to issue a written denial of a claim for benefits, which suggests that there is potentially a 90 period to review the benefit (which can even be automatically extended by another 30 days). With this provision alone, I think you are pretty safe to take Mr. Starr's suggestion to "tell him to go pound sand". Perhaps if you were talking about a long period of time, but 70 days? I don't see this as being anything beyond a nuisance claim.

Chrome also. Let's just chalk it up to mysteries of the internet.

Rev. Proc. 2019 explains everything you have to do, including providing a notice to affected participants. Also, there are 3 classes which require different actions. Within 3 Months, More Than 3 Month, and After the Close of the Following Year. Since JackS was kind enough to provide you with a copy, I leave out additional details.

Thanks for the clarification Larry. BTW, the smile face shows up as a "?" in a box.

Another issue to review is does the Plan characterize the PW as a QNEC? That may answer your question on use under ACP.

I don't believe you can withhold a person's paycheck or threaten termination because that person failed to return a completed election. (We do recommend that clients try to get back zero elections.) I am pretty sure the former would violate employment law. While I am not an attorney, a person is entitled to payment for working as agreed, for the compensation paid. Unless you have something in an employment contract, I just don't see how you could do this without violating something in labor laws. For the latter, the same logic would also apply, plus we all know that a participant's participation under a plan is not a guarantee of employment, I suggest that a person's participation under a plan (including completion of elections) shouldn't have an impact on the person's on-going employed. Again, I am not a lawyer, but common sense suggests that taking those position would also have some negative repercussions, including employee moral. What I do think should be done is documenting with a follow-up to the person. Or, for a large group, have an area manager sign off on a statement saying election forms were provided to the person. The old adage of you can lead a horse to water but can't make it drink seems appropriate. Protection lies in some form of documentation showing the person was offered the election sounds like the answer to me. Having a third party (manager?) witness should be sufficient. Another suggestion, would dovetail into the practice of include the SPD in any "new employee paperwork". We use a small form that has the person acknowledge receipt of the SPD. Perhaps add to this "SPD Receipt" a statement that election forms must be completed and returned, getting something signed by the employee where they agree to returning elections. Then, when the person refuses to return an election, this signed statement could be produced, demonstrating that a zero election does need to be returned by that person. Clearly not a perfect solution, but at minimum it does demonstrate that the employer does believe elections by employees are important.

My post above was not clear because I failed to mention one factor. My earlier comment saying a MEP could be created was because a husband and wife with unrelated firms do not aggregate the ownership of corporations for controlled group rules. (Specifically, there are 4 conditions listed that define when spousal attribution does not apply for determination of controlled groups under Section 1563.) Since you were talking about Schedule C and/or K-1 Income Entities, you were obviously talking about businesses that are not incorporated; making the "Section 1563 Exceptions" not applicable. I should have been more careful and noted the distinction of firm types. Sorry about that.

Funny thing is that I had the exact same call. I had the advisor send me the last Schedule C's of the husband and wife. (I would not be surprised if it was the same guy.) I need to say I agree entirely with Mr. Starr, BUT be careful with using one plan to cover both proprietors (husband and wife), since this might require that you have the Plan operate as a multiple employer plan. While this might not be a big deal, you do need to be aware of how the program is being used.

You can't do this. It would be a violation of the non-assignment anti-alienation clause. I believe this must be in every plan document. For example, FT Williams has this language under Section 14.01 of their DCP Master Document... "Except as provided in Section 14.01(b), the Trust Fund shall not be subject to any form of attachment, garnishment, sequestration or other actions of collection afforded creditors of the Company, Participants or Beneficiaries under the Plan and all payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Company, Participant or Beneficiary. Except as provided in Section 14.01(b), no Participant or Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under the Plan, except the right to designate a Beneficiary." Please note "no Participant or Beneficiary" is also included, thus this prohibition impacts not only the Employer. Hope this helps.