AKconsult

Employer has 401k and 457b plan. An HCE will terminate 1/1/19. He thinks he can take a distribution from the 457b plan, and have that count as compensation for the 401k plan (which he could defer on and get matched.) I don't work on 457b plans but this doesn't seem right (?) The document says compensation excludes payments received by a nonqualified unfunded deferred compensation plan, only if the payment would have been paid to the employee at the same time if the employee had continued in employment. How do the 457b and 401k rules integrate with respect to compensation? Thank you!

I have a CPA who is telling me he wants a "sophisticated" plan design option for a doctor who is an employee of a practice and also has his own business on the side with self-employment income. The side business has a net loss, so I told him there is no income to take a deduction on for the SEP, therefore no way to fund a SEP. The CPA thinks he can use some of the doctor's W2 income to fund a SEP contribution (?) This is not permissible, right? I am just questioning it because the person asking about this is a CPA so...

Thank you CuseFan!

Plan definition of pay is 3401(a) wages, excludes excess GTL, ALL fringe benefits, expense allowances, etc and commissions. We need to run a 414(s) test due to the commission exclusion. When calculating each participant's compensation percentage, I will put commissions in the numerator but what is in the denominator? Specifically, must the denominator include the excess GTL and fringe benefits or can those be excluded from the denominator? I am thinking I would exclude them since they are not part of plan compensation and are allowable safe harbor compensation adjustments. Is that correct? Thanks!

QJSA notice and consent requirements do not apply to RMDs, even when taken from a MP plan. See https://www.irs.gov/retirement-plans/qualified-joint-survivor-annuities-in-money-purchase-plans

I agree with Austin3515 except I am going to add a few more things to the list, just because I know from nearly 30 years of experience where the errors typically occur: who are the Trustees? How is compensation defined - particularly how are bonuses/commission payments being treated? timing of termination distributions? MOST IMPORTANT - who owns the business; are there family members; do owners own any other businesses, etc.

Retirement Management Services, LLC. Sole owner is a woman; 85% of employees are women :) www.consultRMS.com We provide documents and TPA services for 403b plans.

I would strongly push for merging at the end of the plan year. If the plans are merged mid-year, how do you handle the testing? There is not good guidance on how to run nondiscrimination tests when 2 plans are separate for part of the year, then merged for part of the year. Particularly in an instance where one is safe harbor. OR, I am wondering if it would be possible to freeze the non-safe harbor plan as of the merger date, amend the safe harbor plan A to count service for the Employer B employees so that they can possibly enter Plan A immediately at the time of merger. Then at year-end prepare a formal resolution to merge the frozen Plan B into Plan A. That way the plans are separate for the entire year, but the employer gets the benefit of all employees being under the safe harbor plan as of the merger. Just a thought ..

Thank you Bird. That is what I am trying to determine, can contributions be made to both plans in the same year? I have seen a lot of opinions to that effect, but I can't actually find anything on the IRS website that specifically says that. I, too, think that is the intent, but I am speaking with an advisor who is questioning that, and I think he has a valid point The IRS website just says you can't set up a 5305 SEP if you maintain another plan. So, to the advisor's point, why couldn't the employer have a SEP for part of the year and make contributions to it, then terminate it and start up a 401k and make contributions to that? The employer would not be "maintaining" both plans in that case.

There seems to be a consensus, based on various Q&As on this forum, that an employer cannot maintain a 5305-SEP and a 401k in the same year. I am not sure I agree with that. Can someone please provide a source for this? I see on the IRS website that an employer may not use a Form 5305--SEP if it maintains any other qualified plan -"maintained" means even if no contributions are made - but if an employer terminated the SEP as of 2/28/18 and then started up a 401(k) plan on 3/1/18, wouldn't that be acceptable? In that instance, the employer is not "maintaining" both plans. Yes, it would have had both plans in 2018, but they weren't maintained at the same time. I can't find anything from the IRS that would prohibit this fact pattern. Any thoughts? Thanks!

I believe that just because the employees have not had a severance from employment, that does not mean that Employer X has to grant them past service with Y (or Z) for purposes of the Employer X plan. The fact that they have not had a severance has to do more with whether or not the employees have had a distributable event from a plan sponsored by Y or Z (if Y or Z had a plan). I have notes from Ilene Ferenczy that indicate that in a stock deal, the law is not clear as to whether or not service prior to the acquisition must be counted for eligibility or vesting. She states that many people believe it does not, but that it is probably better to explicitly state in the plan document before the acquisition.

If you are applying for an EIN for a trust so you can use it for reporting purposes, you should be using the instructions for creating a pension plan. You only need to complete lines 1,3,4a-5b, 9a, 10 and 18.

Yes, as long as the document allows the distribution to come only from Roth, that is fine. The proration language has to do with distributions that aren't "qualified" (ie., the participant is not over 59 1/2 and/or the Roth account has not existed for 5 years). In that case, the distribution has to be taken pro-rata from the basis (which is tax free) and from the earnings (which are taxable). However, in your example, the distribution is "qualified" and therefore all tax-free, so no proration applies.

I would be inclined to calculate each person's hours based on the equivalency method up through the date of the amendment, then start counting actual hours after that point, and add that to the equivalency hours to determine the total hours for the year.

I also must say that this proposed plan sounds like an error(s) waiting to happen, assuming that BRF is not already a problem with the vesting. If an employee switches from nonHCE status to HCE status in the first 18 mos, now he is suddenly ineligible for the matching. You'll have to monitor that each year and shut off the match for anyone who has "crossed over". Same issue with vesting. You will have to bifurcate everyone's matching accounts to track what portion is subject to immediate vesting vs. what is subject to the 3-year cliff. NonHCEs currently have 100% vesting in their match, and going forward they will have a 3-year cliff. The recordkeeping system is not going to be able to track that, unless you set up a 2nd matching source for new match and apply the 3-year cliff only to that money. Someone who switches from nonHCE to HCE will have 2 different schedules, as well. This is going to require quite a bit of manual intervention. Of course, vesting only really becomes an issue when you pay someone out, I suppose, but I would be inclined to just leave everyone at 100% vesting, regardless of their HCE/nonHCE status. For your coverage testing, aren't you using the otherwise excludable rule? That would eliminate anyone with less than 12 months service from the testing. So if that is the case, I can't see that bringing people into the testing 6 months sooner would have that much impact (?)

If this is a pay period match, then I am not sure how you make it retroactive to 1/1/17, unless you are planning to do some sort of true up at year-end. If it is a year-end match, then I don't see an issue with making the match change retroactive to 1/1/17. I agree, the idea that "they might have deferred more had they known about the matching" shouldn't be an issue if you aren't safe harbor.

it sounds like the vendor's issue is that they were not given enough time to amend the notice to state that the match would be calculated on a pay period basis, rather than annually. However, in looking at the various Internal Revenue Notices that address the notice requirement, I don't see a requirement for the safe harbor notice to describe the timing of the contribution (pay period or annual), only the contribution formula. At any rate, I am in agreement with everyone here that this vendor is being unreasonable. If the vendor could not change the notice timely, and the client retyped it for the change, then the vendor should have subsequently amended the plan by 12/31 to make the change the client requested. They had plenty of time to do that. I would consider the handwritten amendment as valid. Sometimes there is a need to tell a vendor "I am not asking your opinion. I am TELLING you that this is what you will do ...". :)

I spoke to an IRS agent about this same question (Paul Hogan), since I do think the Rev Proc is confusing on this point. He response was that if the plan document is a prototype document with an opinion letter, then a retroactive amendment can be done without having to submit for a determination letter as long as the amendment is that you are choosing something that would be otherwise permissible on the adoption agreement. In other words, the client could have had that provision in the plan based on the plan's selections, so it can be amended retroactively and no need to file. If the retroactive amendment to conform the document to what was done in practice would require the employer to add language that doesn't fit on the model document or requires some sort of unique language that throws the plan out of prototype status, then you need to get a determination letter. Don't forget that retroactive amendments done as self correction (without a filing) are only permitted for certain operational errors: contribution calculated on pay over the compensation limit; employees allowed into the plan too soon; and hardship or loan failures. Thanks!

I personally tend to err on the conservative side when this comes up and take the position that once an employee has worked 500 hours he has earned a right to the allocation under the formula in place at the time. That is the general "rule" that I learned years ago when I was first starting in this industry. However, I think the key language quoted above from the TAM is just referencing the fact that the sponsor cannot add additional allocation requirements once the person has satisfied the plan's current requirements. I don't believe it is prohibiting changing the plan's contribution formula. Our firm has informally discussed this exact scenario with several attorneys and have gotten a pretty consistent answer that they believe that because the employer could always opt to contribute -0-, the employer can amend the formula up until 12/31 to utilize individual classes and put some employees into a -0- class. But, again, it is not something I like to do. I will typically try to convince the employer to wait and make the amendment effective for the next year.

I have an article from BNA Tax and Accounting that states that "403(b) contracts are aggregated under 415(k)(4) with plans of other employers that are controlled by the employee. For example, if a doctor made contributions to the hospital's 403b contract, and also to a Keogh plan maintained with respect to the doctor's private practice, the 2 plans would be aggregated for purposes of applying the limit on annual contributions". So I don't believe that applies in your case with your non-HCE who happens to work for 2 unrelated employers that sponsor 403bs, but thought I would throw it in for consideration.

I agree with Luke. Assuming this person is a nonHCE, just leave it there. The Employer will have to fund it, but it is reasonable to take the position that the cost to correct far outweighs the significance of the mistake.

Hello, yes, I think you should definitely consider using an outside consultant for your recordkeeper search. Gathering information from several potential recordkeepers and digging through their fees and operating capacities can be complex and time consuming and it is easy to overlook or misunderstand the service if you aren't well versed in the industry. We regularly conduct vendor searches for firms your size, so feel free to contact us if you would like to discuss further or get a quote for our services. www.consultRMS.com Thanks and good luck!

How do we correct the situation where the plan sent out QDIA notices, but people were not defaulted to the QDIA. Instead, people were defaulted to a fixed fund. What do we have to do to correct this? Thanks!!

I must be missing something, please let me know. What would prevent an owner with 2 businesses from having a plan for each business, with identical plan provisions, both of them safe harbor matching plans. Then paying himself $225,000 from each company, contributing $9,000 in deferrals to each plan and getting a $9,000 SH match from each plan? It doesn't seem like he should be able to get more than $10,600 total match ($265,000 * 4%), but I don't know what is stopping him in this scenario. The plans could be combined for coverage and ADP testing and would pass. top heavy wouldn't be an issue if there are no additional employer contributions. So is this permissible? Obviously you could argue why go to all this trouble and expense of 2 plans just to get an extra $7,400 matching contribution... and maybe that is the answer (?)

We provide recordkeeping services to 2 companies that are related, but not in a control group. They each recognize service with the other company for purposes of vesting and eligibility in their respective plans. If an Employee leaves Company A to go to work for Company B, and his 7 years of service with Company A is recognized by Company B, when will he be able to enter Company B's plan? It seems like he should be able to enter immediately on his employment at B, but I can't find anything in the document that would substantiate that. Does he have to wait until the next semi-annual entry date? The plan allows quarterly deferral changes, not sure if that makes a difference? Thanks!