Below Ground

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.

You are most welcome. No sense in you being on hold for hours to get the same answer I got.

Years ago I asked the IRS what value should we put in Line 3b. We were told that you leave 3b blank. If that additional tax is going to be charged, the IRS will contact you on that topic. To be clear, using your numbers from above, the excise tax will be $7.50 which is listed on Line 3a. There will be no entry on Line 3b. I note that over many years this has been our practice, and we have never been contacted about a 4975(b) tax.

I have NOT been involved recently, but have had some experience with firms that I worked for but did not have any ownership stake. Going back 25 to 20 years ago, this is what I saw in position that involved my direct involvement. Price is a very big issue, and typically is based upon the number of clients that remain with the new TPA after a specified period of time. For example, the fee will be based upon clients that are retained after a 1 year period following the buyout. Because of this trait, the "old owner" often stays on with a negotiated salary for a 1 - 2 year period. Time and amount are negotiated. The next item is determination of purchase price will often be 3 - 5 times annual earnings. Again, revenue projects are based off of the number of retained clients after a defined period. I have actually seen this value determined with as low as 2 times earnings, and I heard about a deal that was 7 times earnings. Not sure what caused this variance. Something regarding the typical client, perhaps? A big thing is how clean the caseload. Obviously, a messy caseload will not be as attractive as a cleaned up caseload. Hope that helps. I know it's old and may be dated, but that was my experience for what it is worth.

Yes, you still get the pass on Top heavy. The additional discretionary match is also qualified under Safe Harbor, provide that this extra Match does not exceed 4% of pay, and the formula does not recognize deferrals over 6% of pay. Also, 100% vesting is not needed on the discretionary match.

The benefit of a 401(k) Safe Harbor Plan is avoidance of testing, including testing on deferrals. Since you have created a special eligibility for the HCE, this would be a form of dual eligibility IMHO; especially since you are allowing deferrals by the HCE that are exempt from testing. Yes, it can be said that you are "penalizing the HCE" by excluding them from other structures, but the reverse of allowing them to make deferrals outside of the testing environment, is also true. Regardless, it is the dual eligibility that causes the Plan to be subject to Top Heavy Testing. That is my primary point. Keep in mind that when determining the Top Heavy Minimum you must count deferrals by the Key to determine the minimum allocation; meaning 3% will almost always apply if Top Heavy. Of course, if the Plan is not Top Heavy, this discussion is meaningless unless the Plan is headed to being Top Heavy.

BG5150 go to http://product.ftwilliam.com/wp-content/uploads/2017/09/Safe-Harbor-Webinar-2017_FINAL.pdf.This is an outline for a seminar by FT Williams. On page 26 you will find: "Eligibility may be different for deferrals and safe harbor contributions:  Caveat Emptor! Disaggregated testing will apply and plan will have to test for top heavy status." I added the bold for emphasis. Another is a discussion on Benefits Link and look at reply by JRN. Also, you will find a discussion buried in Rev. Proc. 2014-13. I have several reference texts that state that dual eligibility results in Top Heavy Testing applying. There are quite a few other references, but hopefully these few answer your question.

Different eligibility terms for different contribution structures eliminates the exemption from Top Heavy Minimum. The comment about the one HCE excluded from everything but deferrals is a huge flashing red light IMHO.

This is from the Appendix of 2019-19 which might also help. (9) Safe harbor correction methods for Employee Elective Deferral Failures in § 401(k) plans or 403(b) Plans. (a) Safe harbor correction method for Employee Elective Deferral Failures that do not exceed three months. Under this safe harbor correction method, an Employee Elective Deferral Failure (as defined in section .05(10) of this appendix ) can be corrected without a QNEC for missed elective deferrals if the following conditions are satisfied: Page 84 of 125 (i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification; (ii) Notice of the failure that satisfies the content requirements of section .05(9)(c) of this appendix is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and (iii) If the eligible employee would have been entitled to additional matching contributions had the missed deferrals been made, the Plan Sponsor makes a corrective allocation (adjusted for Earnings, which may be calculated as described in section .05(8)(b) of this appendix) on behalf of the employee equal to the matching contributions that would have been required under the terms of the plan as if the missed deferrals had been contributed to the plan in accordance with the timing requirements under SCP for significant operational failures (described in section 9.02). There is a seminar that says the above correction applies regardless of the exclusion being a failure to implement the initial election or the failure to apply what was an on-going deferral election. This is not just for the initial election. I suggest that the inclusion of "... and a failure to afford an employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan" provides a delineation of failures. That is, if it was just for the initial election, why does the language in (10) define 2 types of failure with deferral elections.

Something I ran across while doing a related review. Basically, yes you avoid the QNEC for the missed deferrals. See - https://www.spencerfane.com/publication/irs-eases-correction-rules-for-missed-elective-deferrals/ Excepted... Rolling Three-Month Exception. The Revenue Procedure converts the existing three-month exception into a rolling three-month provision. So long as elective deferrals commence within three months of when they should have commenced – regardless of where that falls during a plan year – an employer need not make up the missed deferrals. (If the affected employee notifies the employer sooner, the deferrals must commence by the last day of the month following the month in which the employer receives this notice.) This expanded three-month exception does nothing to shield an employer from having to make up any matching contributions that an employee would have received if the missed deferrals had actually been made. Such a corrective match, as adjusted for lost earnings, must be made by the SCP Deadline. And affected employees must be notified of the failure and its correction within the 45-day period described above. Hope that helps!

UR welcome. I seemed to have been having an "off" 2 weeks, I guess.

I knew about the "over 25% limit allowance", since I have had experience with that particular problem; which was prompting my position. Specifically, we had one client that HAD a practice of depositing during the year more than the 25% limit. Luckily, that client would listen (eventually) to guidance provided, so we were able to get that practice to stop. Thinking back I do recall that there are aspects of our argument that support Mr. Preston's position, which was how we got that client to stop the "excess advance funding". Since that time I had an argument with an accountant who insisted that you could carry forward the deduction regardless of the 25% limit, who at that time convinced me that you could. I will need to review notes from those conversations. Unfortunately, I do not have the necessary time, and am unsure exactly were those notes are; otherwise I would refer to them now. Until that time I concede the argument, since I have no cite to support my position. Conversely, Mr. Zeller has provided a cite, which clearly indicate that I am wrong in my position. Unless I provide a contrary cite I suggest that matter is fully resolved, and I accept that I am in error. (If I can I will be sure to provide a supporting cite. Unfortunately, in hind site, after review of what I do have, I am pretty sure it does not exist.) Hopefully Mr. Preston will be satisfied with this mea culpa.

I have a great deal of respect for you Mike, but on this point, we disagree.

Mike, it is my understanding that monies deposited during a specific year must be used for the allocation of either that year or a prior year. In other words, you can't "carry forward" a deposit for a future year allocation. However, I am unaware of any prohibition on carrying a deduction forward to a future year, regardless of the year of allocation. Otherwise, if a company mistakenly omitted a deposit in the deduction for the year of a specific allocation, are you saying they can never deduct that deposit unless they file an amended return? To be clear, I am not saying unused deduction as was done in olden times when the profit sharing deduction was 15%, can be carried forward. I am saying an undeducted deposit that should have been applied in 2018 can be deducted for the 2019 or later year.

My understand concurs with Mr. Poje. The limits for deferrals, including the amount of catch-up is a calendar year limit. Provided that the 100% of pay limit is not violated, the full amount is available.

I read the question. It sounds like they want to deduct a contribution made for a specific year in a following year. The certainly can, but there are ramifications on what can be used for the future year relative to the maximum deduction of that year.

Ooops. 9/15 not 9/30. Gotta get new glasses.

The deadline for deposit for deduction is the due date of the tax return, PLUS all valid extensions. So for 12/31/2018 the deadline would be 9/30/2019; assuming the extension was filed, of course. An important note would be the date the return is actually filed is not relevant, provided that it is done before the extension lapses. With this in mind, why would you not deduct the entire amount on the relevant return, since limits were not exceeded? Also, you can deduct some on the 2018 return with the balance applied to 2019's return. BUT if you do this the limit for 2019's maximum deductible must be determined with this "carry forward"; meaning, the amount available for 2019's contribution is reduced by the amount carried forward.

Bird, I did not see that the OP was about having Hardships for terminations only. After a careful reread, I see how that could a primary focus of the post. Especially after looking carefully at the 2nd paragraph, I see that I definitely overlooked that aspect of the post. Coincidentally, I just had a rather detailed email exchange with Ft. Williams about whether a terminated participant can get a Hardship. I was given an explanation I do not agree with, that basically said that since a terminated participant is not Eligible Employees, and to get a Hardship you must be an Eligible Employee, you must be in service to get a Hardship. (At one point we were debating whether a terminated person with a balance is even a Participant. Yes, in my opinion. No according to the person with whom I was discussing the issue.) Personally I found the logic for the explanation provided to me to be convoluted at best. The last comment to me was that they are already looking at how to clarify the term Participant. BTW, despite my disagreement on this topic, I find Ft. Williams to provide a superior product and service. Even including this current disagreement, they have never let me down, and I am a very satisfied customer.

I think this Client is in for a surprise, especially since the penalty tax was under $10.

The language you reference does not apply to Hardships. That language is for service termination benefits other than death. A Hardship Distribution is not a service termination distribution and is governed by other text. The changes you want to make are totally unnecessary.

So the DOL does indeed have a version of VCP for late deferrals that has no User Fee! Since the DOL and IRS are supposed to (but not required) coordinate on this issue, it sounds like you can avoid the IRS User Fee and get the same results by filing with the DOL. BTW, you hit what happened right on the nail head. That is exactly what happened. Just add to it that the Client called the DOL themselves and decided to do a filing outside of our service; thereby, avoiding all service fees. This does fit the character of this Client, as they hold getting the lowest fee (or no fee) as the most important factor. Service quality, etc... are not a factor to them.

Mr. Bailey, you were writing your post at exactly the same time I was writing mine. Right before I posted my reply, your post was listed. Yes, I would automatically assume you fully understood the issue; of course.